Rockwool A/S (ROCKB) Earnings Call Transcript & Summary

Good day to everyone. Welcome to Rockwool A/S conference call regarding the results for the full -- for the first half year of 2023. My name is Thomas Harder, I'm Director of Group Treasury and Investor Relations of Rockwool A/S. Today, I'm pleased to present CEO, Jens Birgersson and CFO, Kim Junge Andersen. [Operator Instructions]. As a reminder, this conference call is being recorded. For first, Jens Birgersson will go through our presentation and give you an update on the results for the first half year and second quarter of 2023. Afterwards, we will be ready to answer all your good questions. Before I hand over the words to Jens Birgersson, I must ask you to notice Slide #2, which is the forward-looking statement. Please be aware that this presentation contains uncertainties. Now we can go to the next slide, which is Slide #3. Jens Birgersson, I'll now hand over the voice to you.

Thank you, Thomas. Good morning, everyone. I think we can move to Slide 4, and we focus on the second quarter. So if we look at the second quarter, it's basically in line with our expectations. We saw a market that declined in volumes, but relative to last year, we saw a smaller decline. We saw a bit of a shift in mix with some of the heavy densities like flat roof declining more than some of our other businesses. We also saw system division do relatively better. Profitability, although salary inflation, core inflation, that is inflation without food and energy continues up. We had a better energy cost position in this quarter, and that led to a healthy EBIT margin and also higher up contribution margin, gross margin that had recovered, so satisfied with the profitability. And then on the free cash flow, we ended up on basically the same net working capital but good cash generation in the quarter and pleased with that. Move to Slide 6, please. Looking at the 2 businesses. Insulation shrank 8%. In Q1, we were down 9%, mostly because of very difficult comparable in Q1 because in 2022, Q1 was very strong. Systems, down 2%, so went through the quarter a little bit better. If we look at pricing, they held relatively steady. Prices didn't go up in Q2 versus Q1, but they are marginally up compared to the end of last year. A bit of a variance to that. So if we look at the markets that are quite strong, like Canada, North America, some places in Asia, also the U.K., France, Spain, there we see prices that have increased a bit. And then overall, we have held prices steady but in project business, larger projects, et cetera, we have adjusted pricing to balance price, profitability and market share. Our assessment of the quarter is that we have maintained market shares. Going into the regional sales development on Slide 7. I mentioned the countries that we're doing good. So if you move Western Europe, France grew in the quarter, Spain, flattish, North America, very good growth in parts of Asia, very good growth. And then as you move east, you come in to, say, Germany there the market is quite depressed. Building permits, housing starts down 30%, 40%, probably closer to 40%. And as you then move east in Eastern Europe, it's not that they are all declining in volumes, 40%, but basically, the whole Eastern Europe is impacted to a greater degree. Up in the Nordics, Denmark probably have the toughest market conditions, but Sweden, Norway, Finland, all double-digit down. And that's a continuation of the trend that we have seen. If we move on to Slide 8, profitability. Satisfied with that one, and it's obviously a result of the price that we increased the prices towards the end of last year, a little bit in this year and then the energy prices have now come back a little bit. Still -- they're still high compared to a few years back and the inflation continues on the other things, even though there could be steel prices and other things that now start to decline. But overall, we've now gotten the business back into balance. In Q1 and Q2, we also contributed altogether EUR 27 million split in half Q1 and Q2 as per this to one EGM and on AGM decision to the reconstruction of Ukrainian Foundation. So that those -- all these numbers are the EBIT after that has been provisioned or transferred out of the company. We move to Slide 9. Profitability in the Insulation segment has climbed up and reestablished. We are happy with that, not yet fully happy with Systems division margin. Still some work needed to get that business up more on high margins. Some of the drivers of the margins apart from the cost that we have taken down capacity and energy prices down and the price is that we have also benefited a bit from an improved mix. For example, when Eastern Europe where we traditionally have slightly lower margin, go down more than the rest of the Western Europe, for example, U.K. and France that will improve the country mix in terms of profitability. And then generally, we saw less of the big flat roof projects. We got some really, really big orders. We have continued to secure the really big orders, but there's less flat roof business and there we traditionally earn a little bit less margin. So that is also a shift and the fact that system, some of the good System division businesses like Grodan has performed. So that's a favorable mix to what it was. Moving on to Slide 10 and the investment activities. It looks low there of EUR 67 million in CapEx, but if we add back the grants in mainly China, then it's EUR 80 million. So it's kind of on pretty normal level in terms of investments and no particular movements in there on a level that we see around that level going forward, EUR 70 million to EUR 80 million a quarter, depending on periodization of projects. We still haven't started the project in France. They are now recommendations for verdict on the 2 legal cases around the building permit and the environmental permit. And our prediction now is that those verdicts will be decided upon and issued before year-end, which would indicate that we could start the project in the new year. If that doesn't happen, we need to really reassess this project. But at the moment, that looks very likely. I mean we look at the nature of the issues on the air permit there has been a complaint that 2 companies that are in the industrial park are not included in the air permit application, their emissions are not included. The companies are included, but they have changed names. So we need to explain that. Yes, this is the same companies, but they have changed the name. So it's relatively minor, minor things now in those 2. But the legal system in France doesn't work towards defined deadlines, and it takes time to get through. But -- so we are carefully optimistic now that we have the worse behind us there. Moving to the cash flow not much to say. Obviously, we don't want to tie up more net working capital. We landed on about the same net working capital end of Q2 and managing that we don't let the inventories run away or anything. We reduce capacity and we adapt the output to the market. So there are no -- nothing worrying in terms of trade receivables that don't get pay or inventories that are built up because we produce too much. Nothing of that is happening. And I won't expect anything else, but it's good to see that it happens. Outlook slide 13. On the investment, that's a little bit lower. Not -- it's not a strategy to drive it down. It's just the nature of the products and the fact that France, again, we don't start this year. Sales, we are down 7% after 6 months. We see the comparable become a little bit easier, so we kind of put the frame up to a decline up to 8% for that. And we don't see any particular worrying signs on that side and the comparable are slowly getting a little bit easier, but activity level seems to have stabilized. But again, we can't exclude that the country like Germany go even worse or something happens. So therefore, we kept it relatively wide and then we look month by month. But at the moment, no worrying signs on that side. Apart from that, is, of course, is extremely sluggish and for some house suppliers and contractors it is a very critical situation now in the construction market in maybe many countries, and we have seen now some smaller single-family house suppliers that have gone bust. So market is sluggish, no way around that. We also see that although energy efficiency is high on the agenda and while we talk about, we haven't seen that really translate into the real world. Germany now has a draft proposal to increase the subsidy to energy efficiency from this year's EUR 13 billion, decided upon if it's getting spent, I can't assess, to EUR 18 million in 2024. So an ambition to step up. But again, we haven't seen that translate into more business yet. EBIT margin, then we are -- we were on 13.3% after 6 months, and we have said, okay, we -- clearly it's realistic that we should be able to keep that pace for the rest of the year and then around a bit better, a bit worse, but we feel that's relatively safe outlook that we should be able to deliver. With that, I would like to hand over for questions.

Please come forward with your question. Operator, please go ahead.

[Operator Instructions]. We'll take our first question from Brijesh Kumar Siya with HSBC.

I have 3 questions, if I may. The first one is on Q2 sales mix, if you could just give the split between volume and price, I assume Q1 had a 20% price increase on a Y-o-Y basis. If you could split that for Q2?

So Brijesh, you read all questions or you want to take one at a time.

Perfect. Okay. The next one is on volume side. You talked about increasing a small improvement happening quarter-on-quarter. And I see that U.S. had a double-digit rise. I was slightly confused within U.S. when you say growth, but at the same time, you're talking about Rockfon and Rockpanel seeing dip there. Then if you could just elaborate which end market in U.S. growing and with the manufacturing and you also getting much more attention. What's your exposure and what you think could be the future growth prospects there? And the third one is on staying within volume. You flagged in the presentation about a potential kind of weakness in those individual residential suppliers could you tell -- I mean, given your products are mostly through distributors, how much you are exposed to that? And what kind of contagion effect or other indirect effect you get it because of those going burst or what are the prospects coming into next -- going into next couple of quarters?

Brijesh, thanks for that. So my team protests widely because you asked 3 questions, and we said 2, but I will answer them because the last one is very easy. This interest rate climate and the single-family housing new build, that's primarily a glass-full market. It's only if it's very much premium housing that we are in and that goes for almost all geographies. So that's a glass full segment. So we don't feel much of that. If we look at the sales mix, it varies with the countries. But I will say the exception in the U.S. In the U.S., the really, really growing segment is data warehouses and all sorts of manufacturing, logistics, they're bringing manufacturing home to the U.S. So that's the main growth driver. In Europe, if we simplify it, the driver down is that exact same segment. So when you look at different manufacturing investment, they hold back on that, so that has slowed down. And then everything residential have slowed down because people battle to finance. So uncertainty on the commercial side in Europe, schools, hospitals, et cetera, that keep going. And then you come to the U.K. where the trend, the market we are growing, but the market is probably down. I would guess it's down in volumes at least double digit. But there, we see growth because in this fire safe insulation, the non-combustibility have now really started to gain traction. And that means that we are almost independent from the market because it's retrofit of taking away the flammable materials from the buildings and also the new bids when it's doubt what standard should be delivered to people, go for rather safe and sorry. So that's on the sales mix and some of the growth element. And then growth going forward, I think the area to worry the most about is basically Germany and east and north up into the Nordics. That's where we see governmental action to -- we still have a housing shortage almost everywhere in Europe. You have a probably a housing shortage in the U.S. too because it hasn't been that much construction going on, even though this decline was not very small before it started to grow again. So it feels to me that to let these companies go bust and to have construction workers without jobs is not a clever strategy at the moment, but the verdict is out will governments step in and do something to try to turn that around. But I think some segments will suffer. From our perspective, if this would go worse -- we haven't seen signs of that, by the way, we don't have signs. I don't have a forecast, then we would have to take more capacity out. And of course, if we can avoid it, we want to avoid it. But the philosophy we drive is pass on inflationary price increases. So we balance the -- our variable cost and the salary cost with the pricing and then adapt capacity and maintain market share. That's the recipe. But at the moment, it feels like we are in a pretty steady-state situation where it's moving that way forward. And we haven't seen extreme market movements. Of course, in some big project business, you see some segments where small project business very fierce competition, but on the big projects, yes, we -- our kind of attributes still are really valid and we get those projects. So we navigate this. I hope that answered the 3 questions and a little bit mix of format.

Not that's helpful. Just on the price and volume mix in Q2, if you could just give a broad number around that.

I don't really have -- I mean, versus the beginning of the year, a couple of percentage points up in aggregate, but it's a dangerous number to look at. So our price versus Q1 pricing has hold basically steady or maybe declined a little bit in Europe. But overall, we are up from the beginning of the year, so 2%. But there, we have some markets like North America, U.K. and other markets were pricing keeps going up in quite big steps. So it's a little bit dangerous without discussing regions. But generally, pricing holding fairly steady with segment differences. But it is a higher pricing compared to December last year, okay, slightly higher, moderately higher, but many segments are a little bit lower, okay?

[Operator Instructions] We will now go to Casper Blom with Danske Bank. Your line is open.

I'll take 2 questions as well, please. And I'd like to start off with pricing again here. Have you seen any signs of any of your competitors starting to lower prices? And secondly, on pricing, you mentioned that some of the smaller house builders, et cetera, are really in a tough position right now. Is there not a pressure from some of your customers that are suffering to start lowering prices. I mean when they look at your underlying EBIT margin of 16%, they must be feeling pretty envy right now. So if you could talk a bit about that pricing dynamic that you're seeing right now? That's the first thing. And then secondly, it would be interesting if you're willing to, if you could sort of add a little flavor to your thinking about 2024 already now. I mean, do you think that this sluggish environment that we're in right now in Eastern and Western Europe can turnaround already next year? Or do you sort of more foresee a flattish situation as things are right now?

Okay. Thank you, Casper. So first of all, with the housing suppliers. I mean the reason houses are not being sold is that financing costs and the overall economy and the real salary decreases that you see in many countries that people simply can can't afford it. There are people that need houses, but they can't afford it or they don't feel it's the right time to take a big debt and build a house. So I think that's the #1 issue there, and it's not our main segment. Of course, multiunit housing, we are involved in where we have a good share. So that's on that side. But when it comes to pricing, how I see it when we build a factory now or we buy the material, it's very high level and building and expanding capacity now, we see our factories becoming more and more expensive to build. So we need to keep up with the inflationary increases. Otherwise, we simply don't have a viable business. So that's how we see that. And then the fact that volumes collapse in some construction segment, that's for me a different matter. And pressure other competitors at lower prices, for sure. You look into Eastern Europe foam suppliers and flat roof, yes, at lower prices. But there is enough market where non-combustibility and where our attributes come to play -- into play and where we can price -- maintain the price. So I think you have a place where some smaller suppliers will desperately do anything to get some volume. And if they go down that track, it's going to be risk for the whole company. But if you sit with a big operation like we do, you see salaries go up, it hasn't normalized. It hasn't dropped, things cost. You need to be very careful with doing that. So therefore, I think our expectation is that people realize in an inflation environment is just not a good strategy to lower the 20% and believe volumes will fix it because it won't. So inflationary environment remains. When you come to the market, our experience in the U.S., we had like 5 months last year, with roughly 50% lower volume in the U.S. and then it jumped up, and now it's up and going well again. I don't -- I haven't seen any signs of things bottoming up or jumping up in Europe. So without making a forecast for next year, I don't see any signs that is going to change. And then, of course, there might be a report out there that say half year next year will be better. There will be prophecies for all sorts of things. But I haven't seen any signs, and I think we need to be ready for that this will remain low. And I think governmental interaction needs to come into play. Then if you look at the GDP outlook for next year, if that would be an indicator. France, Germany, I mean all of them at the moment sit with a GDP forecast of 1% to 1.3% for next year. So Germany this year, a bit of recession, a bit negative, but the others are all next year, 1% to 1.4% in the whole of Europe. And that forecast might be wrong. But at the moment, no one has come and said that it will be any better than that. U.S. still sits with the GDP forecast or OECD and IMF both at around 1% for next year. And there, I think -- I came from the U.S. this morning. I just landed a couple of hours back. There, I think the sentiment is more soft landing, is coming around probably that 1% next year going to improve. That's what you feel when you are in the market. In Europe, that's not what I feel. But again, totally subjective, no facts to this is just my observation. So I think it's not -- there isn't any reason to assume that it will turn around and as always, we don't speculate. We believe housing shortages there. We believe demand going to be great. But when this one comes around, we don't prophesize on that. We just -- when it comes, we adapt to it.

We will go next to Arnaud Lehmann with Bank of America.

So I have 2 questions. My first question is on your revised margin guidance excluding the Ukraine contribution, I think in the first half, your margin was about 15%. And your full year guidance imply something closer to 12% or 13% in the second half. So I guess my first question is are you just building some caution into that? Or are there any specific elements we need to be aware of that could be worse in the second half, either on the pricing, the cost on the volume side? That's my first question. And my second question is on the reduced CapEx guidance. Could you give us a bit of color of what's going on there? Is it related to the French plant that keeps being delayed? Or is it a more cautious view on the medium-term volume outlook for the business?

Yes. So I know we don't have -- I take the margin question, and Kim will take the CapEx one. On the margin, there isn't any particular reason what we said, the market could stop or market could go worse. But fundamentally, we believe this profitability will remain. And then as usual, we have that discussion every year, and we are wrong it's like 2/3 of the time in our concerns and sometimes we are wrong the other way, and that is that we have fourth quarter that is notoriously difficult to forecast because if the winter comes and it turns into a bad quarter. So I would say that's the main factor in our guidance here that we have just said, okay, continues roughly like that, and then we said an average not a disaster Q4 with 1 meter of snow. So that's all there is to that. And the rest is -- but there are no big movements in anything and then weather dependent a little bit. So that's on the margin over to you Kim on the CapEx.

Yes. On the CapEx side is correct. It is mainly the small delay we have in the start-up of the construction in France. Then we also had land purchase in Europe, a place in Europe that was also timing-wise, delayed until next year. There's no reflection of our belief in that we need to add capacity in Europe. So it's mainly just a timing question on these CapEx projects.

And if I can follow up on the French project. I guess the local press has been highlighting that the local residents are talking about the air pollutions and various other environmental issues. Do you feel that you've been able to address these concerns to make the project move forward?

So I mean, I just came from Ranson in West Virginia. I mean, the plant is a jewel. It's beautiful. It's clean is supported by the residents, and we are a good employer. So I mean we have something called minimum requirements for our plants. We build them as clean as we can over and above law, but the law in the U.S. is good, it is tough, it is stringent. But we don't save on factories actually. So what's important to know is that once the plant is there, it will be accepted. We have seen that time after time. And the process up to it, I start to get to a point that I said, there will always be a group, a Facebook group or something. There will be protest when you put manufacturing in Europe back. It's just the way it is. But and then we will communicate about it. But our experience is that these groups, there could be all sorts of motives. Sometimes the motive is someone doesn't want the factory in the whole area, even though the municipalities that we make in industrial so. There could be all sorts of reasons. But -- so you -- I think we need to get used for the greenfield to have those -- that noise and that opposition. And then we also feel very confident and comfortable that we have a clean factory at the end. It doesn't make anyone say and we don't kill animals and it creates good and sustainable long-term jobs and the output is good for the country. And it's all local for local. It's not like we build lots of capital equipment, and then we leave and the money was -- all the money for the investment was spent outside. We stay. We stay. So I think we just expected, and we will have to get ready for a lot of communication and engaging with the local population and explain what it is and also take them to other factories. The end result, I have no doubt they're going to see that it's good, but it might be noise along the way. That's our experience.

[Operator Instructions]. We will go next to Claus Almer with Nordea.

I will do 2 questions and do them one by one. So the first question, Jens, is about these pricing comments you have given during this call. It sounds like you are seeing more, let's call it, subsegments with lower prices and more fierce competition than we -- you mentioned after Q1. Is that correct? And what is the risk of this spreading to all segments? That would be the first one.

No. Yes. That wasn't probably correct, maybe I expressed myself incorrectly. I think we see quite normal dynamics. And obviously, when volumes go down and you have a small flat roof project, but you just support and there is definitely getting tougher in Eastern Europe, and we are willing to that some of those projects go if the pricing is too low. And that's the normal mechanism in Poland. So it's not abnormal. We've been through it so many times in Eastern Europe. I would say the summary of the pricing situation is that we maintain price quality. They are some price increases, for example, in the U.S., one competitor now not in our segment, but they increased the prices with 8% launched it. So it's all different. But I would say generally that I didn't want to put concern across, but we worry a lot about pricing. But we keep managing this balance between market share and price and navigate price and capacity. And that's so far, so good. And I don't see -- I haven't seen that this is getting more difficult that anything has changed. And then we have the normal dynamics because it's a business, this segment, that segment a bit of that, but nothing extraordinary. But of course, we need all hands on deck out in the sales organization and work with this, but it's pretty standard work, and they need to work a bit harder, but nothing dramatic.

When I checked on prices, and I did some checks in the U.S., and I know you can only check and few surprises. But there in the last couple of months, it seems to with business a negative price trend for your products. But -- yes, but you don't see that on your side?

No, I think the opposite actually. So I don't know where your data comes from, but that's not what we see. It could be a discount in the trade, that destocking or something maybe that.

Yes, that's very difficult to track from the outside. The second question is Russia. So I know you don't give a lot of details. So how big is Russia? Do you see a revenue that is declining or volume that is declining on par with the group? Or is this better or worse? Maybe you're going to give an update from that point of view.

Yes. It's below 10% of the group, and any deviations from the group development is insignificant to the numbers you see. Okay. So it's not -- so without going into details on Russia, it's not like Russia impact us massively in one of the other direction and it's less than 10%. So that is much as I can say.

We will go next to Yuri Serov with Redburn.

Well, I have one question, and then I will think about the second. So the first one is kind of a big question. Previously, on previous communications, you told us that your aspiration margin for the business was 13%. Now this year, you are getting it in a recessionary environment despite payments to Ukraine. Does that mean that your aspiration needs to be upgraded for the future?

Good question, Yuri. I -- we haven't had any normal years for a while, right? So now we talk about the market is slumping and then we had last year the energy shock in a few quarters and Corona. So I think you need to make a lot of assumptions about the business and these years that are just always -- I wouldn't say happening, but the test of our agility and we have agility. So I'm not on the level now in our forward assumption, we assume 10% to 14% margin, it's going to be in there and then this year is low. But clear is that I believe that if energy efficiency initiatives and you start to grow in that segment, I personally feel this business should have better margins. But in the meantime, we tend to go from this year where we navigate through years with huge macros coming from all different directions. So we never get to a steady state. So it's more agile maneuvering every year and making sure we keep profitability in a place where we are sustainable. So it's -- I would love to answer that question where we have a steady state and we start to get few years runway with the margins running. But when you look at the investments we have in greenification all the requirements we have, I certainly would like to have the business on a higher margin without providing a new guidance. We say today we want to be above 10%. I'm not setting a target, but we need a little bit of steady-state business to be able to see if we can get that in place and get on a different trajectory.

Well, I cannot help but think that the margin should be higher because we're talking about '24, which you're talking about the business even now you say that a standard practice pricing, you're managing, volumes are stabilizing at lower levels. So '24 should really be at least not worse. And in that case, the margin should be at least not worse, but more likely higher. Maybe it will be steady state from there on.

Too early for me to guide Yuri. I'm sorry, I can't help you on that one. And we have learned now in the last years, we sit here in September, and almost every assumption about next year when we sit in September, once we get to January, we just see a different reality. So I think it's good that we keep that guidance until next year when we are a little bit into it. It's just so volatile and that. At the same, I wouldn't like to scare you and say that we worry about not being able to navigate the environment. I think we have a track record, but we feel that we can send capacities up and down. And I mean, one of the challenges would be if growth goes too much to build factories, that's probably one of the bigger challenges. And if you look at last year 2022, we came out of that year relatively well. And we had, I think, in one quarter, EUR 60 million more cost jumping on us in one quarter. And still, we got out of the year quite well. So I feel confident about that we can take it on. But the steady state -- a few years of steady state just growing on a higher level that -- still waiting for that environment happens and the world normalizes a little bit. Question also now what happens with China. You know until now everyone has assumed that if China goes that doesn't pull down the world economy. But China is not doing well. We are incredibly small in China. It doesn't impact us. But will that have a greater economic impact on the world. People have historically assumed it doesn't, but maybe it does this time. Who knows? But I really don't know. We just stay agile and yes, I wouldn't mind higher margins long term.

And the second one, can I just probe a bit more about your numbers in Q2. So when I looked at your Q1 numbers, I somehow came to the conclusion that year-on-year, your volumes dropped by 20% overall. And you're saying that in Q2, they were better, what does that mean? Is it minus 10%, minus 15%, I mean can we have some sort of a parameter for this?

Yes. Kim here. As you know, we will not sort of entertain that allocation between price and volume. But we have said that the price in the second quarter held steady from the first quarter, then you had to do your own sort of modeling around that. I think we will not go into the details of volume, except to say that volume for the second quarter was higher than the first quarter.

And Yuri, there is another aspect here. That country mix and the density mix that it's less heavy density from the flat roof, more facade installation, that actually impact quite a lot and we never talk about it. So when you run this in the model, the fact that flat roof go down and it's replaced for other business, it changes kind of the volume benefit quite drastically. So there is a natural hedge sort to say, when the volume goes down in terms of contribution, but it's not price. It's mix between the product segment. So yes. And also the country mix on top, which you don't see where France is doing well, for example, U.S., we have now, in Canada we have quite good margins better than in Eastern Europe. So that also impact.

We will go next to Yassine Touahri with On Field Investment Research.

So my first question will be on the message that you're giving for the autumn season. You're talking about a higher degree of certainty on earnings, stability in prices and energy cost. Do you have a view of what's happening so far in July and August in terms of like-for-like trend? Is it something close to the 7% that we've seen in H1? Or is it getting a bit better because of the base effect? That would be my first question. Then my second question is that when I look at your gross margin over a long period of time, it was close to 52%. And then it dropped to less than 45% last year. But this quarter, you got back to your historical gross margin of 52%. Do you think that you can keep this gross margin of 52% in the second half of 2023 and in 2024, given the energy cost development in the price development that we've seen so far?

Yassine, Kim here again. I think in sort of indirectly said that we do not see the short term any change in the underlying market drivers. So that in that sense, you sort of have your guidance for the 2 actual months that we have delivered here July and August. But we do have this always uncertainty in Q4 with -- in Europe with the winter. And that's really the major uncertainties, I guess here in the second half of the year. So that was sort of a bit sort of extra forecasting details for you. On the contribution of gross margin recovery. It is true that we have recovered the gross margin, and that's, you can say, the decline, of course, was partly driven by the energy prices last year. And then again, recovery, the opposite way that the energy prices went down this year. And then we have sort of also done cost control at the factories. Aspiration is, of course, not to lower gross margin going forward, but as we know that in the real world, it is not like my perfect Excel world that things are linear. So things will happen in the real world. And then we just have to navigate that and take actions whenever we see that.

So if I understand your message? Does it mean that July and August could be down approximately 7% organically and that the gross margin so far has remained stable versus the second quarter at 52%?

I would say -- what I was saying is the trade has -- the trading -- underlying trading dynamics have not changed in July and August compared to the second quarter.

So it's better than minus 7% because of the base effect, which is easier?

You will have to do your own math. I will not go more into details. Thanks.

We will go next to Kristian Johansen with SEB.

Also two questions from me. I will do them one by one. So first, on energy cost. Can you list out there how much of your energy costs have you hedged for the remainder of the year? And also how much have you hedged for 2024?

Okay. So we have hedged about 50% until the end of the year, and we don't have a number for next year yet. We are looking for opportunities. But when I say hedging there is an indirect hedging happening by making long-term contracts. So it's not hedging, and we are making those. We have some countries where we used a lot of electricity. We have done it. We haven't gotten any long-term contracts on gas, but we are negotiating a few of those, and that will then reduce the amount of free electricity that we need to hedge. So over time, more and more -- it will not happen quickly. We do this very slowly, but we are looking into 3-year contracts, 4-year contracts and we've done a few. We have some on the table, but we are very carefully tying up too much. So we don't mind if you find good deals to get to, say, a 50% level for next year. We have a policy now that we work towards, but we don't want to do deals that freeze it on a high level. So that's how we work. So far, I would say, yes, some factories have their electricity sorted out for next year, but we are not on any near 50% because that's not our policy, but we are working on finding more.

Okay. And then just to clarify, so the 50% you hedged for this year is that on all your energy sources. So is it both electricity, gas and then coke?

Electricity and gas and coke is kind of sorted implicitly where we are due to our contracts.

Sure. Great. So my second question goes to Russia. So we've seen companies like Carlsberg having their Russian asset seized. So just your thoughts on the risk of the same happening to you and in that scenario, what was the book value of your Russian business? I mean what's the impairment risk in such scenario?

Yes. Kristen, we together with our esteemed auditors, PwC, we have assessed that there is no impairment risk for the investments that we have in Russia. And we do that on a continued basis, obviously, also in things like what happened earlier this year with Carlsberg. And then we do an assessment of the risk, but there will be no impairment of the Russian investments this year.

Well, that's not exactly what I was asking because I obviously understand that. I don't think Carlsberg did an impairment before their assets were seized. So I'm more asking in the scenario where your assets were to be seized, I mean, what's really the risk on your balance sheet?

The risk is not going to be substantial. You can say the 4 factories have had a long time operations. Some of them are in that fully written off. And we have also mentioned that we have a financial asset here in the head office because that is mentioned in our quarterly report that in case that there is a seizure of assets, that then we can offset that against the asset value. So it will be minimum on the balance sheet.

We will go next to Marcus Cole with UBS.

Two as well. The first one is just what's the outlook for the cost base in the second half and into next year? And the second one is, could you just clarify on the pricing strategy? Is it to hold market share from here?

Marcus. I think it's first time you are in the call, right?

Correct, yes.

Good welcome. Yes, pricing strategy, we don't want to give how we execute on the pricing strategy for next year. We are looking at inflation, all the rest to firm up our mind on next year. But as a strategy in this time, so the core strategy is to just maintain market share. That's the way and how we worked the last 9 years that I've been around here in normal years we've done kind of done with pricing, but it's a bit too early to do. We need to understand better how the costs are developing into the next year. So that's the question on price. What was the other question?

Outlook on cost base.

Yes. Outlook on cost base is dissimilar. I mean, when you have a big manufacturing operation like we have the absorption cost. I mean the overall cost base with our type of factories, if the volume go down further, we are relatively good at adapting blue collar manufacturing costs, et cetera. But of course, we have maintenance. We have other things that sits more or less fixed costs. So if volumes go down, our relative cost position will worsen. But overall, I think that the cost base in terms of salaries and all the rest will increase. So again, price will be the main issue plus not letting productivity run out of hand. If we look at productivity, in the office compared to where we were EUR 2.2 billion, and now we are EUR 3.6 billion or more than EUR 3 billion, we haven't added an awful lot of resources outside some clear areas with IT, digitalization and capability to build factories. So we have been very, very strict on raising productivity in many, many functions. Finance organization today is, I guess, 1/3 smaller, and we can run the business up with that. But in some of these, we have reached a point where we have like competent core teams. So we don't really want to reduce it for a short blip in top line. And it's not because we are afraid of adjusting it's because we have reached some of these very good cost benchmarks, and we have a functioning organization with very good people. So sure, if volume were to reduce a bit more, we might not be -- and you don't like to hear this, but I think it is slightly different when you have that type of competencies we have and a well-oiled machine, we are a little bit careful with it. So we, for example, reduce costs too much in corona, and that cost us more when the upswing came than the savings we did from the reduction. So we're a little bit more careful now than we have been maybe previously.

We will go next to Zaim Beekawa with JPMorgan.

The first is just on France. You mentioned that this region is doing quite well. Is there anything particular about this market. And then second, on the land purchases, is there any particular regions that you're looking at?

Yes. So on France, we did run some exercise around the Lehman Brothers crash, where we checked how quickly countries came out of the dip in the construction market. And the quickest one to react that did it really, really well was France. Germany was very good at that time. So far, we haven't seen that happen in Germany. So I think on the one hand, you know French labor law is not easy to be flexible. On the other hand, the government is quite quick to react and do something when a downturn comes. So I think that is what we see here. Obviously, also the export dependence, if you compare Germany to France, it's just a less percentage of exports of the GDP. So they're a little bit less dependent on China and other countries when trade goes down. But we have just seen that France in these dips have been quite good at taking action to prevent it to go into the seller, so to say, and take a deep turn. And also this time, we have -- yes. Any comments to that, Kim?

No. I would say, I mean, compared to Germany, of course, France is in a more favorable situation with the nuclear plants that they have available energy. And that, in a sense, creates a competitive advantage.

That's a good point. If you look at EDF's production numbers now last year, you had all these nuclear plants. You had corrosion. You have problem finding welders, you have all of that. But their underlying nuclear output has come up. And of course, that is massive competitive advantage compared to, for example, Germany that sits with all the energy challenges. Land purchases. I mean, we are -- we are looking for land in a number of places. It doesn't mean we -- I mean we are always on the lookout, but we would need long-term in several places in Europe. So I won't reveal countries. U.S., for example, we will have to expand. And if that happens, how soon it happens, but with the growth we have we basically need to keep the pace. We have kept the last couple of years, if nothing dramatic happened with the market. So North America, for sure, we are looking for expansion because once you stepped into the market and taken the leadership, you need to supply the market. So that would keep going. In Europe, the immediate one is obviously to get the French one built. And then there are a couple of places. We need more capacity, not at the moment because we have capacity, but in a few years' time, we will need more in Europe if this energy efficiency come. And it doesn't matter so much where it happens. You know already that we have bought a piece of land in Italy. But when you look at those purchases of land, it's often a case of where is a suitable piece of the land and how does it fit into our production network. So it's not only about the country, it's also flows elsewhere, it can offload within the network. But Italy is the one we have purchased and announced. But again, we have not set a deadline for where we would put a plant there.

We will take our last question from Yves Bromehead with Societe Generale.

Two quick ones. First, just coming back on the systems, I think you mentioned that you wanted to address the margin. You think you can bring that upwards. I just wanted to know the timing of that. Should we expect some degree of improvement already in the second half of the year? That would be my first question. And then my second question regarding the capacity point that you just raised with Italy. I mean looking at sort of what has happened in France and the difficulty of setting up a plant with regards to permits, with regards to the public, would you not think that it could be easier to set up plants, for example, in LatAm for the U.S. or even in neighboring Eastern Europe in countries like Croatia or Italy, just to speed up the process in countries that don't seem to be regarding stone wool in the same way as other Western European countries, for example.

Yes. I think the French plant, if you look the Iberian Peninsula and France and the appreciation of stone wool and also the support we have for that factory, I mean if you go on federal level, state level in France, there's a massive support for that plant. They have visited us. They have been pushing to put. So I think that there are 2 streams. So I think that this local aspect almost everywhere, you will have it. Remember, when we built Croatia, we had massive protests. And today, we are -- so I don't think it's easy to predict where you will -- there isn't a fairly safe place. We know, though, that when we expand with one more line, so we did one in Neuburg, Southern Germany, then everyone welcome us because we've been there for 50 years and they know exactly that all these adverse effects don't happen. So I think in the French case, in today's world with the nature of the shipping, remember, we still only ship on average, 400-kilometer because it's a fluffy product. It makes such massive -- it's a massively good industrial logic to have the plant in France. So we're just going to go through it. And we have never felt, if we felt from the French government, we don't want you here. Then, of course, it wouldn't be worth the effort. We have many places we can build the plant. But that's not at all what we feel. We have great support. And also if you look outside that protest group from the region he's engaged in every detail. He wants the factory. He wants the job, and then you have this. So we feel this will need to go ahead and it's worth the pain. And you say you get the quick deliveries, you get the local jobs. It's just better for France than everyone if we build it there because it's local for local and a big and important market. So that's on the manufacturing. And yes, that's how we think because the permanent competitive advantage of sitting in the market close to the customers is permanent, it's worth the pain. Then on the SD margins. We haven't forecast -- our forecast is kind of a rolling forecast on profitability. We have assumed roughly the same, the rest of the year. And it could go both ways on System division, depending on which business rakes and what slows off. So in the immediate short term, I haven't predicted that the margin will be better. But again, we don't have much -- we don't have much at the moment, a pull in the business in the market. So we are still adapting and then after that, we want to get back to this 15-plus percent EBIT margin profitability of System division. If we don't keep that basically not happy. So we need to get back to that, and we are aiming for that.

Ladies and gentlemen, we will now close the Q&A session. I will now turn over to your host for the final remarks. Please begin.

Thank you. Jens; Kim, and I, Thomas Harder, thank you for joining today's earnings call. We would like to thank you for all your good questions and the audience for listening in on today's call. We appreciate your interest in Rockwool A/S. If you have further questions, please feel free to reach out to me. You know my contact details or you may find them in the Investors section on our corporate website. Have a great day.