Rockwool A/S (OTCPK:RKWBF) Q2 2022 Earnings Conference Call August 24, 2022 8:00 AM ET
Company Participants
Thomas Harder – Director, Group Treasury & IR
Jens Birgersson – President and CEO
Conference Call Participants
Cedar Ekblom – Morgan Stanley
Kristian Johansen – SEB
Brijesh Kumar – HSBC
Claus Almer – Nordea
Yuri Serov – Redburn
Arnold Clemente – Bank of America Merrill Lynch
Yves Bromehead – Exane
Manish Beria – Societe Generale
Operator
Ladies and gentlemen, welcome to the Rockwool Reports First Half Year 2022. Today I’m pleased to present CEO, Jens Birgersson; CFO Kim Junge Andersen and IR, Thomas Harder.
Through the first part of this call all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. As a reminder, this conference call is being recorded.
I will now turn the presentation over to your host. Please begin.
Thomas Harder
Ladies and gentlemen, welcome to the Rockwool A/S conference call regarding the results for the first half year of 2022.
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.
For the first part of this call, all participants will be in a listen-only mode. As a reminder, this conference call is being recorded.
First, Jens Birgersson will go through our presentation and give you an update on the results for the first half year and second quarter of 2022. Afterwards, we’ll be ready to answer all your good questions.
Before I hand over the words to Jens Birgersson, I must ask you to notice Slide number 2, which is the forward-looking statement. Please be aware that this presentation contains uncertainties.
Now we can go to the next slide, which is Slide number 3. Jens Birgersson, I’ll now hand over the words to you.
Jens Birgersson
Thank you, Thomas. Jens Birgersson, here. So I assume you see Slide 3 in front of you, so before we start with the numbers on the quarter marked here, go through an update on our sustainability goals and the progress we do there.
Starting in the top, generally I would say we are progressing quite well. We are implementing the project moving forward with our technology development. Starting on the emission intensity that’s the CO2 emission per tonne produced stone wool. We have always a science-based target in absolute values but we have this metric back from 2016 where we measured per tonne produced.
We had a goal for 2022 of reducing this 10% and we reached 16% reduction across the board in the group already last year. So satisfactory progress. The next goal in the top row reclaimed material. Our goal was to reduce it by — this is the Rockcycle offering, countries that we offer to take back both product. There are many more countries that take back non-value material but it’s a matter of taking back and having a comprehensive stitch of taking back our own product and put it back into production.
We have a goal of achieving 15 countries by the end of this year. We just launched Romania and Finland. We are now — we have launched and we are now 17 countries already in 2021. So we are ahead of that also.
Energy efficiency, on the right this is their energy efficiency of our own offices measured in kilowatt hour per square meter. And here we wanted to drop 75% by 2030 and 35% by 2022. We have just completed Hungary and France. We are 19%. Before yearend we need to reduce the run rate on to 35%. I would say these projects go well. They progress well but we lost a little bit of pace during Corona.
My crews [indiscernible] is built on meeting our goals, it’s a little bit — we might be a little bit ahead of it but it’s progressing well and they’re facing the building renovations we do the deciding factor more. That’s good, but it looks like it’s a bit of a gap so far. But I’m not too worried about this because we kind of develop the model for how to develop further on that. That’s good. And we have done it in a very evolving approach. We actually use our own management team, there quite a bit of conceptual plan,
Water consumption, saving fresh water. We get water very cheaply on, free almost everywhere. But the analysis that with so many areas of the world running dry on drinking water, fresh water, we have an obligation to do that. We have a goal of 10% reduction by 2022. We have achieved 15% already in ‘2021. We have our own goal is 20% by 2030.
So we’re progressing well on that and trying to do it in a way that it doesn’t cost too much. Some of these projects are close circuit. And the factory is on that actually quite expensive to make up once you’ve done your switch system. So that’s good. And often it is also housekeeping to make sure it’s complete and we are generally careful.
Landfill waste, goal 2030, reducing by 85%, 40% by 2022. We reached 50%, 51% already last year, so that’s well.
Safety, health and wellbeing, this is lost time incident frequency ratio. So that’s number of days per million man hours. Did have quite challenges here last year. Then we started off and started to ramp up. We have some ideas why that happened. It wasn’t very bad. It’s just started in the crew. This year has started well. And we see good improvement and we hope to hang on to that. And should say that on that safety LTI ratio of 3.2, 3.5 that we have now is quite tough to get down. But we are working on it, on this progressive. As long as we don’t have really serious incidents and fatalities it is a little bit better but more work needed. But we are pleased with the progress.
I’m now shifting to slide 4, H1, first six months, and topline just below EUR2 billion or EUR60 million below EUR2 billion, growth in local currency is 31%. And that — the majority of that is surprise but it’s also quite good volume growth in the first six months. It’s double digit volume growth, but the majority of the growth is surprise due to this cost inflation.
The EBIT margin reached 12% for the six months. And I’ll come back to that again when we get to the 2Q results. Free cash flow, negative mainly due to network and capital. Trade receivables go up but also the valuations go up. You will see that in a couple of percentage points higher networking capital. There’s financial effects on loss impact there.
And then we also have the non-realized losses, on the fact that we have — we were supposed to have Rubles for Russia in a normal structure around March. That wasn’t possible to have anywhere. So we have the corresponding amount at the time in euros because we couldn’t pay in Rubles anymore and we couldn’t have rubles anymore. And that is also quite a substantial impact, although its — actually most of it is cash impact.
Move to Slide 5, Q2 highlights, mainly on top line in the quarter. Very big quarter for us obviously, the top line 26% growth in local currencies and due to a change in the market. And it’s very, very modest volume growth and the vast majority of that 26% is by — we are seeing this happen that we had quite a strong start of the year. And then we have seen the realities of the high energy prices, interest rates, the war in Ukraine, what’s happening in the U.S. we start to see that impact volumes.
And we then move on to EBIT margin. We did raise prices according to our plan. We haven’t quite reached the point too long and we had in Q2 the price increases were bigger than energy increases. Which meant that we — we managed to claw back some of the margins, but compared to Q1 we improved the margin 1.9 percentage points. We then to have less dilution, so that compensated price more than inflationary pressures we had. So we were pleased with that and I will come back to inflation in energy cost outlook and the pricing in a bit.
We then look at sales, going down the slide 6. Again, about the majority’s price, we say two-thirds price one-third volume in H1. And here is the — in the insulation business we saw strong business across the board, as you can see in the second quarter some markets that slowed down or stopped because of too much inventory or changes in the market, but if you sum up the six months, it’s just strong almost everywhere in insulation business.
Systems operations, they didn’t have a good six months. Here you see business that dropped. Primarily it’s building related having tremendously strong development. We also see how our vegetable is doing good, but Grodan due to North America very, very big comparable last year, and quite a big downturn of that business, where there’s not much going on at the moment and that has a big impact. And LATAM [indiscernible] into cars which was growing. We have seen some constrains from that business. So that’s down. But basically you see that the federal growth businesses outside building that haven’t done so great.
Rockfon had flattish development in Europe and had negative development in 2Q. That’s the picture. So not a great topline.
Then going into the Q2 on Slide 7, here volume loss is less. The price elemental of the top line is almost all of it. And you see in particular systems have had negative developments in several businesses although some of the businesses performed really well. Overall again insulation doing well. Majority of the top line is price.
Move on to Slide 8, Western Europe, generally strong, Germany, UK, Italy, Norway did well but it’s double-digit growth almost everywhere. Eastern Europe and Russia, tremendously strong Eastern Europe. In Russia we see inflation there too. We had warned that now as we are the owners so we are not allowed to operationally control if you are an owner. We do that to make sure our IT and technology base in Rockfon doesn’t end up in the wrong hands. And obviously there you see a volume slowdown as expected is the double digit volume slowdown in particularly the value growth due to inflation, price increases but I would say Eastern Europe is really strong.
Moving on to North America, Asia and others, U.S. took a tumble in Q2. We see before the interest rate increases we saw quite high levels of stocks among the distributors. That been double-digit negative. And then Canada has a fantastic quarter with really high growth numbers. So that kind of evened out.
Asia, double-digit growth, very good development and China still negative. And our view on the U.S. we need to see another couple of quarters. We have had these stop and go quarters before. I don’t think it is quite drastic, quite drastic increases in interest rates and also some of the inflationary pressures, but residential newbuilds really getting back in U.S.
Move to slide 9, and this is the backdrop to our change of guidance, but we have the price plan, and somewhere towards the end of June, the Fed stabilized a bit and we went out with our price increases for Q3 and Q4. We have done most of Q3 already communicated but we upped the targets a bit, and then the launched our Q4 increases. So that was put into play and it seems to be progressing well. Those price increases like the ones before, but then towards the end of June we then saw natural gas basically increased and electricity bumped up, and that’s why the massive impact on our cost base.
And I then concluded that because we still have lead time in pricing we had around a quarter and a half, we brought this ahead. We want to communicate we can change some prices. But we haven’t listened to them. And that increased greater than previous years but it’s not a commodity. We don’t pass on to the price a few months out. We give six weeks’ notice for change of prices. So I came to the conclusion that we’ve just developed and see now gas and electrical prices all over the place. I felt that now with this quite substantial increases we have in the market we don’t really have a base for where this come and this works much better. And we stay on this level.
I came to the conclusion that I cannot start to shift the prices again and therefore we more or less think we still have some price increases that are in progress, but on the overall, it is simply too small to compensate another EUR100 million, or EUR150 million of inflationary or any because that’s now came in. So therefore we adjusted the EBIT margin.
It shouldn’t be said but for example gas in Q4, 50% hedged, on the coal we have coverage three, four months out, we go quarter-by-quarter. But it’s what it is and the balance between being in those areas of our business and having to face pricing on all the products and do so much more on pricing and still be incredible with our customers.
We move to slide 10, you see — and I guess the number that is interesting there is EBIT increase of 18% in the quarter and a 25% to 26% top line. Obviously ideally you have a 26% top line you see a 26% or more bottom line improvement, but the fact that you see 18% there is because we managed to increase prices more than the absolute inflationary increase. We have a good progress, still a bit to go, but even with this margins in absolute terms is a good profit, and reported EBITDA.
If we then move over to the margins where you then have the dilution effect, I will say that last year in Q2 we have an incredibly difficult comparable or high comparable due to the Grodan business that had an exceptional quarter. The 12.9% recovery from the 11%, is quite a good one, and good track as I said the conditions change very quickly at the end of I would say in July. So comparables facing difficulty before but the level in Q2 is not too bad. So satisfied with that total.
Move on to Slide 11, and we then going into the businesses. You see, again, when you look at the system division the comparables, also an extraordinarily strong quarter, maybe a EUR30 million would have been a more average comparable if you average out the quarters last year. So that’s a mixed effect. But very pleasing on the insulation business power, the energy price increases and the rest have been actually passed on quite well and they have improved the EBIT margin compared to a year back. And a year back we had also quite high margins because we had we had a very low cost base after the Corona and now it’s more volume than price effect.
And then on the system, lower volume cost absorption effect and also mix effect, the biggest effect on a comparable, so the 20.1% year before is abnormally high and 10% we need to work out because that’s too low.
Moving on to slide 12, we have postponed some things, for example, the growth online because now the demand is not as high in North America. We have some investments in Canada. But apart from that, most of the investment that hasn’t happened is because new projects are little bit stuck in approvals. For example, the ones in France, and the general low capacity utilization of the factories, but we are very highly levered [ph] and we have to choose between delivering and doing some sustainability projects and other projects. But still, in Q2 almost EUR30 million in sustainability investments we are progressing. It’s not like we sit around the table and say let’s cut CapEx. That’s not what we do. This is more a natural outcome of the business direction.
And move on to Slide 13, the operating cash flow is now down, it is down and the story is basically that net working capital is up a bit. But then also this — on the exchange rate loss is impacting on this cash flow. So that’s the majority of the decline is a non-cash item impact.
Moving on to guidance space, compared to first half year we see lower activity. Personally I believe that the risk of recession, both in North America and Europe, is high now. U.S. have had two quarters of negative GDP growth, although employment numbers are good. Purchasing Managers Index is declining, you see all of these signs, but we’re still shooting for 20% to 25% top line growth, but we expect the lower business activity and slower deteriorating. That said, EBIT going down. It’s protected by the EU or the energy efficiency initiatives, laws, targets etc., to meet the climate goals that they are demanding.
And then you get capacity shifts over to energy efficiency action. There is a lot of money for that, Germany, for example, [indiscernible] a year. It’s strong and the year’s target, the binding targets are out on the market there.
And on the EBIT, EUR100 million is substantial, obviously with price, inflation, there’s kind of in energy cost efficiency, mainly electricity and gas is considerably north of EUR150 million — EUR100 million in the remainder of the year. That’s impact our margins and beyond increasing prices compared to say the half year mark, is still 10%. At the end of the year, there’s another 10% on what you pay for the average product.
This continues to climb the rest of the year, so climbs up to another 10% which will progress through the year. But if this level of gas and electricity prices are even worse, it cannot offset pricing. We don’t want to adjust the pricing up and down every month.
Then look at the investment levels, it’s not that we are slowing down investment except for responding — roll down maybe hold back a bit because we have capacity we don’t need more. The rest is more natural reasons and prove those challenges to execute the normal type of thing. And I will say a little bit exaggerated. These challenges have increased the supply chain challenges. People worrying about if they can produce gas, approve and things just go a little bit slower.
Yeah, I think that’s it. So with that, I hand over for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question will come from Cedar Ekblom with Morgan Stanley.
Cedar Ekblom
Thanks, gentlemen. Two questions for me. So obviously, we have been, or you’ve been surprised by the level of energy cost inflation as we roll into the second half of the year. Is there anything that you’re doing on your pricing or sourcing of energy costs? I know that some peers out there in the industry tend to look to secure energy under longer term contracts to have a little bit more visibility on that customer. And I know that that’s not really been something that you guys have done in the past. But are you changing your thought process around that?
And then the second — sorry, go ahead. And then I’ll ask my second question.
Jens Birgersson
No, go ahead. Next question.
Cedar Ekblom
So on the top line guidance, you maintain that, but you are talking about incremental price increases coming through in the second half. So would it be fair to say that your outlook on volumes has actually deteriorated? And so while you’ve seen an increase in your pricing outcome, you’re actually expecting to give that back in lower volumes. And if that’s the case, can you talk about which regions you’ve seen the greatest change in the volume trends as we move into the second half? Thank you.
Jens Birgersson
Yeah. Okay, let’s start with the first one than. We have had — I don’t know, 40x, 50x [ph] whatever, forever this quite short hedging and all. We hedge a quarter and it makes sense. Pre-buy, so coke, for example, we have a frame agreement we negotiate quarter by quarter according to some rule. So generally we line short and here some quarters we have taken hedge, yes when it’s really obvious that it’s a good one. But we haven’t had any distraction we try to disconnect from the market forces, with power purchasing agreements or anything like that.
So the spirit thing about June has been that we can find a sensible hedge, we had done it, but quite frankly, even during the Spring and Q2 we benefited by not hedging because the spot market was better. So we haven’t gotten around this. So I don’t think we can solve this with hedging. That’s not possible. So we need to take a bigger grip around us and have a look at the way we source in particular electricity, and gas. And that’s the homework, we have to look into a different strategy on that. And we are not done with that work. But we are working on it to see how we can get a bit less exposed from this when we have volatile. So that’s the homework and yes, we are looking at it.
Then on the top line, yes, we predicted actually, from the beginning of the year, quite low top line growth. We have never been — we have never seen this year as a double top line growth, but low single digit volume growth. But it’s correct that we keep raising the prices and we expect volumes to go down. But I’m not saying that volumes going down only because of price. I think that the real impact into the market due to what’s going on is recession getting uncertain, building material generally has gone up. The projects are canceled, postponed. And there is a lot of uncertainty in the market. And you also see lower activity. And I think we’ll see that progress as we move through the year.
Operator
Thank you. Our next question will come from Kristian Johansen with SEB.
Kristian Johansen
Yes, thank you. I have two questions as well. So first one, just some clarification on pricing, if I understand correctly. So it sounds like you’ve sort of reached a point where you feel you cannot continue to increase prices. Is that how we should interpret this? So I mean, if inflation stays at this level, are you not going to be able to raise prices further next year?
Jens Birgersson
No, I’m not saying that. I mean, compared to the beginning of the year, Q4 will become — at the end of the year we are going to be up about 35%. What that feel is that within the scope, where we — we were a bit on the back foot from Q1 into Q2, because inflation happened. So to be honest in the lag with our entities, honestly, or the way we buy energy we have a lag on this side when it transpires.
And but here what has happened is that we have already launched our price increases. I mean, we are into Q3 now. And we had already launched an increase for Q4. And along with the increase we have launched and we cannot come back two weeks after that, or three weeks after that and do another one for the same period. So that’s what’s happened. Does that answer your question?
Kristian Johansen
It does. So I guess my follow-up would be this, so even in a market where it’s increasingly likely volumes will go down, you see still see possibility to continue to increase pricing when you do your pricing?
Jens Birgersson
I think it would be very dangerous. As we evolve in the markets overall, and we head into some sort of recession. And then the recession would kick in, I don’t know how many months off, we have fairly big demand that needs to be fulfilled. I probably will say we will be surprised to keep the margins hold. And so to protect that and then take, to get to the decent volume, because really this cost level you need the price level to stay up because the cost level is extremely inflative. And it’s not that it’s our cost and we can’t frankly are things we can control these energy costs.
Kristian Johansen
That’s very clear. Then my second question, given the margin pressure you’re seeing, have you considered to take any actions on your fixed cost?
Jens Birgersson
We are — I mean, obviously, on the one hand, we need to keep expanding the business. We need more capacity, even if there is a dip now. We need more capacity, because we have been so incredibly low the last one and a half year. We need more capacity, and we need engineers, and we need that fast. On the fixed costs we have a very good team. In most markets, we have our arms around attrition quite well even though it’s up a bit.
So how we look at it is I guess the really core things, we keep adding excellent resources, but generally over the company, we are more restrictive. I mean, it’s much more restrictive on hiring, and you have attrition in the company. So that means you’re working on fixed costs. And then things like [indiscernible] and other things we are 25% or more below the year before and have held on to the new travel pack. So yes we are starting to manage fixed costs already, preparing so that you will have a period that is to be the toughest. So we don’t want to hurt us.
Operator
Thank you. Our next question will come from Brijesh Kumar Siya with HSBC. Please go ahead.
Brijesh Kumar
Hi, good afternoon. The first one is on gas situation. You have — the prices have kind of obviously moved up since July as — and as we look at the overall European energy prices, up further 20% Does that mean that gives additional risk to your 10% to 12% EBIT margin guidance for this year?
And a supplementary — yeah, sorry, carry on.
Jens Birgersson
Brijesh, come up. Repeat the question to make sure I understand.
Brijesh Kumar
No, see the question is the energy prices since the end of July on an average has moved up 20% in August. Now considering that you are saying that you are not going to raise further prices for Q4 which you have already communicated in end of June. So that means are we looking at a margin more like for the full year at 10% rather than upper end of the range?
Jens Birgersson
I see it like this. We are quite — we’ve been reasonably good at pricing and executing them, reasonably good at running the business in difficult circumstances and also ramp up capacity. What I see is that when you have these super erratic processes where geopolitical — geopolitics come in and can change just between one month to the next, one energy price is EUR20 million run rate and yes, you have a little bit more hedging.
So therefore, I increased this span to 10% to 12% to reflect that there is — the biggest element in what’s happening now obviously we have some volume impact to this. But the big issue right we have that where we — that’s the energy prices jump up by a factor of 2, factor 1.5, factor 1, this is the variability we see. And therefore, I want to tell you that it could be 10%, it could be 11%, could be 12%. It depends how these energy prices move.
Brijesh Kumar
Okay. Understood. And my second question is slightly on the longer term basis. And now the energy prices are in a different league altogether, including cash. And as I understand with your SBTI-based targeted 2034, you are more banking on sifting your coal-based plants to gas. But with this kind of prices it suddenly it’s not viable now to move to gas? And with your electric melter technology still evolving, and are you are you finding a way to count how to move to electric fast track or any other kind of strategy which you are kind of going to adopt to–?
Jens Birgersson
I mean the main strategy Brijesh is to move to electricity. So the gas solution is the selected one. So the really important question is the electrical market. And I will see where are those kind of back to back for us, and people ignoring — I mean we talk about starting up coal-fired plants in German, and for reasons I don’t understand, Germany is very strict on shutting down the three nuclear plants at the end of the year, instead of sitting down and say let’s extend them for a year.
So we don’t know — this can be very important, electrical price with our strategy. On the gas. I am — I mean, I’ve been in gas businesses before, the mining around most upon the time. My experience with gas is that gas prices normally sort themselves out. They are volatile for a bit, but at the end, the gas is there. But now our main strategy is not gas.
Our main strategy is electricity. So that’s the key question. And that we need to work on, and there you have our purchasing agreement, trying to move away from market, more long term deals, because what we actually know quite well, we want to do it. And we know, roughly our demand last month was quite well. So this is the key strategy. Our key strategy, we haven’t because — ending the crisis that occurred some has been very elastic, some of it’s been sound in the demand, say okay, they’re not going to do the electrical transmission.
We’re going to say, of course, that’s not what they’re saying. We’re still holding on to our strategy. But of course, we need to make a check how we can somehow if we can find a way to get out of this price. But if electricity pricing doesn’t become reasonable, I will say the whole — the whole climate action agenda does not work. All of Europe so somehow that needs to be fixed.
Brijesh Kumar
Okay. Sorry my question was more around whether you have the technology now to kind of retrofit your existing melters with electrical connections.
Jens Birgersson
A little bit. We are working on it. But we’re making good progress. So I will say we are — we have done some really good trials for that and now want to prove it a little bit more. But I want to have several technologies is as much as I would say today. But we still have some more proof points, but I keep repeating myself. My ambition is to find some good solutions.
Operator
Thank you. Our next question will come from Claus Almer with Nordea. Please go ahead.
Claus Almer
Thank you. We also have a few questions on my side and we’ll do them one by one. Yes, in the past, you’ve been really good in the optimizing or timing your CapEx spend and you said you need to add new capacity given the very high utilization rate you have at the moment. But what about the maintenance and sustainability linked CapEx? Will you be more cautious on those investments in a possible recession scenario? That will be the first one.
Jens Birgersson
I always say that if you analyze the type of downturn, you also see now — find steel prices may be easing a bit. If you get a little bit more unemployment, and if you look at the financial crisis, we have the decline for 18 months, and then it starts to grow. And there you have the default on housing that triggered it all. Earlier kind of downtime have been shorter for us. So I will probably say that good management will be to keep doing it so that we can keep an even smooth runway so maybe get some of them a bit cheap.
Claus Almer
Okay. Then the second question goes to the pricing. And I noticed that a lot of questions already about this. But one thing, maybe that stands out is the expanding margin in Q2 in the insulation business. You also said you will raise prices more than cost inflation. As I recall, in the past, you said, not to repeat what was happening in the financial crisis. And I know the price increases at that time was significantly more than this year. But nevertheless, you have right raised prices more than cost inflation in a maybe slightly difficult starting environment. So isn’t it a dangerous journey you have started on this?
Jens Birgersson
That’s right. If you go into this, and you raise — let’s say inflation is 10% and you’ve raised prices with 10%, the margins will stay the same. But we haven’t managed to do that. So we have raised, as the percentage price is less than the cost inflation we have seen. But due to the way the P&L is structured, our goal is of course, if you have steady inflation, we will like to maintain our profit margin.
Now we haven’t managed that, we guide 10% to 12%, this historic stream and it’s the timing but I will say we are somewhere in between. But to be honest, the percentage increase of our price is less than the percentage increase of the cost.
Claus Almer
Okay, then so this hedging you mentioned you have started to do, when was that? Was that in July or here at the very high level in August?
Jens Birgersson
Come again, Claus.
Claus Almer
Yes, sorry, so I think you said you started —
Jens Birgersson
It started in June, and then we used that as the basis for our Q3 and Q4 pricing. Then it looked to stable. It even started to decline a bit. And then it started to spike again, according into that chart. So you had a tightening there and then it eased off. And it looks like the assumptions would hold. And then it just went crazy, in July, primarily end of June, and July, just skyrocket.
Operator
Thank you. Our next question will come from Yuri Serov with Redburn. Please go ahead.
Yuri Serov
Yeah, hi, good afternoon. I have one big question of course a few branches from it, I suppose. So looking at your prices and your pricing strategy, you’re trying to be kind to your customers to try not to jerk their prices up too much and make their life more difficult. So the customers are supposed to pay you back somehow. So I’m thinking how will you strategy? And maybe just speak and give you two illustrations that I’m thinking about. And one possibility is that next year, let’s suppose costs go down. But your customers will not push you to reduce the prices because you were good to them this year. And you will be able to get a better margin.
Or alternatively, because you’re behaving this way you will be able to get more volume from your competitors and your volumes grow better than the market because the customers are willing to give you more volume. What do you think?
Jens Birgersson
First of all, we have been able to deliver on the shortened delivery time, so there really for us to make sure we don’t stop projects. And that we have been good to them. But obviously, when you raise prices 35% in the year, there’s very few purchasing managers who say you have been good. So I don’t think we have plus points in that. What we do here is –we’ve been very clear that this — well founded. We are not exploiting the situation on this announcement, we do here, which shows that. And it’s also, it’s not that — the issue is that we have launched the prices for Q3 and Q4.
And that’s what we said, it’s a surprise we are going to have, and then sort of step back from your work, and then come back again two, three weeks after, analysis. It’s just not the way we work with our customers. So I will say that is.
And then, and in Q1 next year, we haven’t commented that. First, we need to understand what is the basis for this properly what we’re trying to do with our customers, it’s probably better for everyone. But we’ll wait and see how creative this get before we get into pricing for Q1?
Yuri Serov
Yeah, I understand. But what sort of reciprocity do you expect from your customers? I mean, you are not exploiting the situation, and you hope that they will appreciate it, I presume.
Jens Birgersson
I don’t really need the whole — I mean they won’t remind me I’m sure that we want to have a good market price. And obviously, with our investments, we need to keep margin up. It’s not the problem for the businesses, if we make 10% EBIT margin. But I mean, I like to get back to this 13% so that we have a good basis for investment, more capacity. And that’s what we tell our customers because we have certain tenets. And then if the cost goes down, the back end, if you have a bit of more profit than is — I mean, it’s purely contractual. We have to price this best, and then maybe the costs go down quickly.
If you change the way we buy energy you might not have that protect. So I don’t think that would be much of a discussion. The main challenge we have now been fighting is of course, the ramp up in cost, energy cost is happening now. And the prices are gradually improving. So Q3 is going to be a tough quarter.
That’s probably my main focus to make the best of Q3. Than Q1 next year, I hope we have a little bit more stable energy markets, little bit more upfront.
Yuri Serov
Okay, and can I ask you what are your competitors doing? Are they following the same strategy? Or are they actually more aggressive increasing prices?
Jens Birgersson
It varies. You have some people that have covered on — had a different policy for energy prices, and they have been very well-off in this situation and then there are others that very similar to us, So you basically see that the policy, the underlying policy you have, I mean, one would have said, okay, everyone price market minus, but in reality, when you have this type of volatility on the cost base, you see that the ones that have different policy on any — it’s a lower energy they go with a bit lower price.
That’s what I see. And then I see some competitors that are in the same situation as us and they really push price. Then if the volume slowed down generally in the market, which we predicted would do for a while then of course, all different parameters would happen.
Yuri Serov
So there are people who are actually pushing up prices more aggressively.
Jens Birgersson
There are some pushing prices a lot, and there are some doing less. Whenever you have an infection point when things change, you’re going to see a whole array of things, some be kind of — be quite stable. Some of which is dilutive [ph] because what we need to be relatively steady in what we do every country on top of that.
Yuri Serov
Okay. All right. Thank you for that. I just want the second question on the U.S., did you say that volumes were down double digits? I’m really surprised to hear that. All the peers, other building materials companies are all telling us how strong the U.S. market is. And then suddenly you say that it’s such a big drop.
Jens Birgersson
We have definitely competitors will see the same thing. It’s set on being great draw for the construction market. But if you read through some of the other materials that go into similar segments you definitely see that Q2, Q3 is down on volume. That is a tremendously strong market. And here, I would say, in the U.S. things that can start to the uptrend of pure demand, we the same thing is happening. And then the question is, how will the market go when the U.S. steps in into more of a recession or not. I guess they will but we are not [indiscernible] than that.
And the U.S. have the decline but it should also be said and they are spreading money around. So that might compensate. But this now it’s more stock adjustment, of the stock in the distribution channels all over was quite high. And they are kind of working this. But I believe there is the decline. But there are many people that say I’m wrong on that.
Yuri Serov
Okay, and you say stock in the distribution channel. If you look beyond that, is the weakness coming? I mean, we know about residential, but what about non-residential part that we see.
Thomas Harder
Sorry to jump in Jens and Yuri. But we have to go to the next analyst. Thank you for two questions up, Yuri. And please present the next.
Operator
Thank you. Our next question will come from Arnold Clemente with Bank of America. Please go ahead.
Arnold Clemente
Thank you very much. Good afternoon, gentlemen. Two questions on my side. The first one is could you please provide an update on your operation in Russia? Have you seen a meaningful decline there? And are you still happy with your decision earlier in the year to keep the business in scope?
And my second question is more of a kind of a more general outlook question on the European demand. You mentioned there is a macro slowdown, the risk of recession that’s going to have — at the same time, the reason for this recession is higher energy price, and that is an incentive for households to invest in energy efficiency. So how do you balance the downside risk from the macro to the upside risk from energy efficiency of European housing? Thanks.
Jens Birgersson
Good questions, Arnold. So on Russia, you know, I get three, four letters a week from people that want to take over the plant. So I guess, much more push from Russian investors that want to have our access for rubles [ph]. And so we are now due to sanctions we’re owners of the business. We are not in operation. I’m satisfied with that. Because if you look at the difference with many others, they say they’re going to divest, they’re going to do this and that but fundamentally they are in the same situation.
What we have is these four factories we have in Russia, they are top notch, world class, propriety IP, and I don’t want to fall in any other hands. And that’s all has meant, the market has declined. The market has not declined as much as the EU, which I think accounts for the double digit decline in volumes. The factory is also sort of self-sufficient around local for local, local people running it. And I’m very convinced if we in any way would back out to those factories that another great, the most formidable competitor there is and we will clearly have a lead.
So those assumptions are intact. It doesn’t mean not I believe we will have great business in Russia. I notice of course that now China and India are taking all the oil Russia is selling. So how bad will it be in Russia? I don’t know. Probably not as bad as we thought. But again, that’s not the main strategy for us. We are not investing in Russia, we are protecting our IP and some royalty and dividends which come out of that that we can use elsewhere. But it’s not enough.
Obviously not the main strategy other than protecting our intellectual property and make sure that no more money falls in the hands of the wrong people.
Okay, then on the macro slowdown, and personally, I think this whole trend back to black just to get energy that’s really bad for the climate change, starting coal-fired plants and public investments to keep running. That will have tremendous effect on other gains of climate change and counteraction. But I would also say, that for the sake of energy efficiency, the downturn with lower unit volume, shifting over the people to renovation and retrofit divide is a good thing. And there will be a bit of a time delay, but it’s a very, very good thing for us if that happens. I will say though recession was triggered even more than this in a sense, a stimuli to increase renovation, but it’s also absolutely necessary step. So some of its good.
So I’m not — I’m actually not worried about the recession, of course, we like to run business without the recession. But I think it’s actually a good thing for our business fundamentals.
Arnold Clemente
Thank you very much.
Operator
Thank you. Our next question will come from Yves Bromehead with Exane BNP Paribas. Please go ahead.
Yves Bromehead
Good afternoon. Thank you for taking my questions. Two follow on and one I wanted to come back on the inventory situation. I think you’ve mentioned stocking inventories in the U.S. Can I ask a similar question in Europe? What’s the stocking inventory level at the wholesale channel? Are you seeing any risk here of the stocking? How should we think about that?
And then second question yes, second question. Sorry.
Jens Birgersson
Let’s now — tell me the next question also.
Yves Bromehead
Okay. So the second question is on the economics of the electric chain. You’ve given a bit of color on your views. In light of what’s happening can you actually design to completely postpone some of your investments on Greenfields, especially in France and Sweden? Has that actually changed your way of thinking about the returns you can generate on the French plant and also Sweden? Thank you very much.
Jens Birgersson
Okay, thanks. So certain events, whichever way we look at it, when you see the slowdown in construction market, there is going to be some stock in the channel. I guess the VLC [ph] traditionally has been due to all those varied stream and has happened and go very low, very quickly. Then we have seen that happen in Eastern Europe, in previous corrections. We haven’t seen any of that so far, that this is very strong. And we can expect to see some in the rest of Europe outside the U.S. But it could happen anywhere if the end use or the construction activity goes down.
And that’s uncertainty is there so it’s kind of similar to say think about recession or that it causes then you are going to see it. My expectation is such a combination of both is the fabric of that.
Then the electricity I mean, you’re you have a couple of ways you can reduce CO2 footprint with gas. You can do it excellently with biogas as we did in Denmark. But natural gas is better but not for anything. Then you need electricity and complete green electricity. I will say we need to understand this a little bit better.
We know though that when this downturn happens we need more capacity later on. We want to expand, and we haven’t yet changed in any way our capacity to install for electricity. We will have to think about the pace. Because if you look, for example, in Germany at the moment, if you run an electrical melter, than you have the choice between running on coal, and electricity is a massive cost to your stack. It’s often a massive cost but nowadays electric device has obviously huge costs implied.
So we need to think about that. But again, I don’t have the comprehensive plan, but we slow everything down to meet our finances, as far as we need to do a whole lot of translation, and we need green electricity supply, but otherwise the rough plan continues. But there could be some of the absence of this data because we are in such a different situation with the energy pricing.
Yves Bromehead
So you won’t expect to delay or cancel France and Sweden. Is that correct? Just to control.
Jens Birgersson
I mean the France factory is an approval issue to just go on with that one. So I don’t want to delay that one. But at the moment it’s the matter of getting an approval we are waiting for that’s in the building department.
Yves Bromehead
Understood. Thank you very much.
Jens Birgersson
Thank you.
Operator
Thank you. Our next question will come from Manish Beria with Society Generale. Your line is open.
Manish Beria
So hi there. So you said steel cost, maybe natural gas also. So can you tell us in the second half how much of your natural gas as well as electricity is hedged? This is the number one question. My second question will be in your guidance, what are you building for the volumes for the cost of goods sold inflation and the distribution cost inflation in the second half?
Jens Birgersson
Okay, so just to be clear on the gas hedge, in Europe we had 50%, coal, we have 100%. Electricity we more or less have some target hedge for Q4. And then on the volume, we have obviously built in softer volume scenario in our outlook.
Manish Beria
And how much inflation you have raw material as well as –?
Jens Birgersson
If you look at my cost in excess of EUR100 million, but obviously we also do it in price. So we have put very big number in there. But if you look on Monday, and you will keep those prices, the number would be too small. But then we have seen these prices go up and down. So it’s just sort of attic and therefore I put a bigger span on the 25% because you’re talking another EUR50 million, and you’re dealing with a percentage point margin. So EUR50 million in this came now with what’s happening even though we are hedged on many of these things. Most of it really has big impacts on there for the spread.
So we just have to monitor because simply, obviously we have assumptions, but we simply don’t know. We can’t predict.
Manish Beria
Okay, thank you.
Jens Birgersson
Thanks you Manish. I think that’s the last question. Thomas we have one more?
Thomas Harder
There was one more hit through the filter.
Operator
Yes, we do have one question from Ron McKellar [ph] with JP Morgan.
Jens Birgersson
Okay. We do that. Ron?
Operator
Ron, your line is open. Please make sure you’re unmuted.
Thomas Harder
Otherwise that go let’s go to find remarks
Jens Birgersson
Sorry, Ron. We can’t hear you. Thomas you can close this off then.
Thomas Harder
We will speak after with Ron.
Jens Birgersson
We will speak after with you Ron and answer your question. We comes to your question.
Thomas Harder
Thank you. Ladies and gentlemen, we would like to thank you and thank the equity analysts for your good questions and the audience for listening in on today’s call. We appreciate your interest in Rockwool A/S. If you have any further questions, please feel free to reach out to me, Thomas Harder. You know my contact details or you may find them in the investor session on the corporate website. Jens, Kim and I, thank you for joining today’s earnings call. Have a great day.
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