H+H International A/S
CSE:HH
Earnings Call Analysis
Summary
Q3-2023
The company is navigating a sharp decline in customer demand, evident from a 27% drop in sales volumes and 37% comparative annual reduction amid rising interest rates and scant government support. These conditions, likened to the 2008 financial crisis, led to a 24% revenue decrease in the U.K. and 20% in Poland. To bolster cash flow, the company optimized working capital, despite a weaker EBITDA reducing financial leverage. Energy costs spiked due to unfavorable gas hedges from summer 2022, compelling a shift to short-term contracts. Gross margins narrowed from 28% to 20%, with EBITDA margins at 8%, down from 12%. The firm enacted a business improvement program, closing five plants and planning to temporarily shutter four more, targeting a more efficient plant network. Paring down on inventories and stringent CapEx management form part of their strategy. The 2023 outlook has been revised, now forecasting an organic growth of around negative 25% and EBIT before special items between DKK 30 million to DKK 80 million.
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Welcome to H+H Q3 Interim Financial Report for 2023. Today's call is being recorded. [Operator Instructions] I would then like to hand it over to your speakers. Please begin.
Good morning, and welcome to H+H conference call covering the first 9 months of 2023. My name is Niclas Bo Kristensen, responsible for investor relations and treasury. With me on this call is CEO, Jorg Brinkmann; and CFO, Peter Klovgaard-Jorgensen. This morning, we published the interim financial report and related documents, including the presentation for this call on our Investor Relations website. During this call, our management team will present the financial report followed by a Q&A session. Please be aware that this call is being recorded and will be made available on our Investor Relations website after its completion. Before handing the call over to Jorg and Peter, I would like to direct your attention to the disclaimer on Page 2. During this call, the Executive Board might share forward-looking statements regarding various aspects of our business and company that go beyond historical facts. These statements are built on current expectations and assumptions, hence, they're exposed to certain risks and uncertainties. For more details about the risk factors, please see the annual report for 2022. And with that, I will now turn the call over to Jorg.
Yes. Good morning to everyone participating in this call. I will first provide a brief overview of the quarter's financial highlights. So please turn to Page 4. Overall, our third quarter financial outcome is in line with our expectations. Sales volumes dropped by 27% compared to last year, as a consequence of homeowners having challenges to finance their new build projects. The higher interest rates and the absence of effective government support programs make it difficult especially for first-time buyers to realize their projects impacting building activity. Despite this volume decline, we were able to deliver a positive free cash flow of DKK 54 million. This was driven by optimizing working capital. However, our financial leverage goes up as our rolling EBITDA performance is getting weaker. Accordingly, we are carefully managing our cash position, looking into stock decrease, restrictive CapEx spend and potential sale of noncore assets. Operationally, we are driving a group-wide business improvement program, and I'm happy to see first results in our financials. However, our performance is also impacted by higher energy costs resulting from gas hedges, which the company entered in summer 2022. These contracts are currently unfavorable to market prices, which increases production costs and impacts our earnings. As a consequence, we have shifted away from such long-term contracts, focusing more on short-term contracts aligned with commercial considerations. The reported EBITDA margin was 8% compared to 17% for the quarter. Adjusted for the unfavorable gas hedges, EBITDA before special items would be DKK 85 million, corresponding to a margin of 12%, which is demonstrating the effectiveness of our improvement measures. EBIT before special items amounted to DKK 13 million in Q3 2023 corresponding to an EBIT margin before special items of 2%. Now I will provide an update on the market environment on the Page 5. As previously mentioned, very low building activity has resulted in decreased volumes across our markets. Our sales volumes for Q3 2023 have declined by 27% compared to the same period last year. Similarly, for the initial 9 months of 2023, the volumes have shown a 37% reduction compared to the corresponding period in the previous year. The situation is serious and to some extent, worse than 2008 financial crisis. Permits have returned to 2008 levels, but interest rate changes has happened with unprecedented speed affecting the affordability of mortgages and presenting huge challenges for homebuyers. The basic need for housing, however, remains strong in all our markets, but what is needed is meaningful government support programs, which we have seen very little of. The only exception is Poland where the government has launched the 2% safe credit loan program for first-time buyers in July 2023. Since then, we are observing mortgage increasing, which is an early positive sign. However, we need to get an evidence that this effect is translating into higher sales volumes for our company. Looking into the competitive landscape, it is obvious that a market decline of approximately 40% leads to higher competition. Even though we have successfully maintained relatively stable prices throughout our market, we have been observing some price adjustments in Poland, which is our highest competitive market. Also in Germany, we are faced with tougher price competition mainly when it comes to bigger project offers. A positive sign in this regard, however, is that list price increases for the upcoming year in Germany have recently been announced.
Next, on Page 6, I will provide an update on our efforts to effectively control our cost structure in light of the reduced demand. As a consequence of the market downturn, we are driving a group-wide business improvement program covering 3 important areas: number one, adjusting our capacity to ensure high plant network efficiency; number two, generating savings from procurement; and finally, number three, adjusting our spend in SG&A costs. Let me talk about factory network efficiency. As a manufacturing company, the efficiency of our plant network continues to be a key focus area for us. We have, during the year, taken measures to consolidate plants and redirect production to larger plants, resulting in cost savings through economies of scale. Earlier in the year, we have announced the closing of 5 of our previous 32 plants. The reason for permanent closure was that these closures will not compromise our overall network capacity as continuous improvement including debottlenecking in existing plants will allow for a more efficient supply in the future and better service for our customers. Meanwhile, all 5 plants are completely closed and we are currently in the process to sell some of those properties as part of our cash management priorities. On top of reducing fixed costs in our plants, we are driving several procurement initiatives to improve our gross margins. We have, therefore, changed the procurement organization and announced the group procurement director who together with the region, drives our efforts in this field much more targeted. Increasing the coordination among our regional procurement allows us to harmonize, spend further and drive savings. Finally, let's talk about SG&A. While we are adjusting our SG&A spend in all regions to current market conditions, the biggest potential for SG&A savings as this in our CWE region. Historically, CWE has operated on a higher SG&A percentage rates compared to U.K. and Poland. Reason for this is that in the recent years, a number of acquisitions have been made in CWE which haven't been fully integrated yet. That is why our focus is to centralize all functions into our new regional office in Dusseldorf and optimized and aligned processes across CWE through a newly implemented ERP system. Overall, I'm very pleased to see how focused the teams are executing our improvement program and how the first results are coming through. However, as we do not expect a short-term recovery of our markets, we have decided to even take further capacity out of our network. Let me be a little bit more specific on Page 7. As you can see from the left, we've identified another 3 AAC plants and 1 CSU plant, which we will temporarily close. In the U.K. we will temporarily close one of our factories in Poland and transfer the volume to our other factory on the same side. Also, our factor in Borough Green will take over some of the volume, especially after completion of the upgrade project next year. which will add 20% more capacity to the network. With that approach, we will keep a very high efficiency in our network and at the same time, reduce our comparably high stock levels. In Poland, 1 of 3 CSU factories in the south of the country will pause production by the end of the year, and supply will shift to other 2 nearby plants, which will then get sufficient capacity to run in an efficient mode. And finally, in Germany, 1 plant in Northern Germany has been temporarily closed with regional supply now will be handled by the 2 other plants in the area. Additionally, our factory in Southern Germany has been temporarily closed for production. However, as Southern Germany is an important strategic market to us, we will use the plant as a logistic hub for the region. Also, we will use the pause to continue optimizing the plant to run more efficient when the markets are recovering. These steps allows us to optimize the efficiency of the running plants. The move will also allow us to reduce our stock levels in line with our cash management priorities and maintain flexible approach to restarting production when market conditions improve. And this concludes my remarks, and I will now turn the call over to Peter for an update on our financials.
Thank you, Jorg. I will take you through the financials for Q3 2023, starting with the revenue on Page 8. Total revenue decreased by 24% to DKK 699 million for the quarter, compared to DKK 920 million last year. Organic growth was negative DKK 24 million (sic) [ negative 24% ] in the quarter compared to positive 13% last year. Organic growth across the group was driven by 27% lower volumes, offset by 3% price increases compared to Q3 last year. Prices have been relatively stable during the quarter, but on a slightly downward trend. Revenue in the CWE region decreased by 26% to DKK 299 million compared to DKK 406 million last year, mainly driven by lower sales volumes in both AAC and CSU and overall stable pricing. In the quarter, we achieved negative 27% organic growth and a negative 17% organic growth for the first 9 months compared to last year in the CWE region. Revenue in the U.K. decreased by 24% to DKK 226 million compared to DKK 296 million last year. This decline was driven by negative organic growth of 22% due to decreased demand, offset by higher sales prices. Organic growth for the first 9 months was negative 24%. Revenue in Poland decreased by 20% to DKK 174 million compared to DKK 218 million in Q3 2022. Organic growth was negative 21%, driven by a decrease in demand. Of the total revenue in the quarter, AAC and CSU constituted 74% and 26%, respectively, in line with previous quarters. Moving now to a review of our quarterly earnings on Page 9. The earnings for the quarter are influenced by the significant decline in sales volumes across our operations and our ongoing capacity adjustments have resulted in an increased incremental production costs. However, as also mentioned by Jorg, unfavorable gas contracts have led to increased energy costs. These contracts are currently unfavorable to market prices and have impacted our production cost in the quarter by DKK 32 million. Together, these factors are negatively impacting our margins. Gross profit amounted to DKK 138 million compared to DKK 254 million last year, corresponding to gross margins of 20% and 28%, respectively. The decrease in gross profit is driven by overhead costs spread over lower volumes and increased production costs, including energy expenses.
EBITDA before special items amounted to DKK 53 million compared to DKK 160 million last year, corresponding to EBITDA margins of 8% and 12%, respectively. Adjusted for the gas contracts, EBITDA before special items in Q3 would be DKK 85 million, corresponding to a margin of 12%, in line with the first 2 quarters of 2023. EBIT before special items amounted to DKK 13 million in the quarter, down from DKK 38 million last year, corresponding to an EBIT margin before special items of 2%. Again, adjusted for the gas contracts, EBIT before special items would be DKK 45 million, corresponding to a margin of 6%, actually being an improvement over the previous quarters. Next, please turn to Page 10 for an update on special items and the gas impact. The business improvement program Jorg covered includes restructuring of production capacity and SG&A expenses, primarily in the CWE region driven by further centralization of the administrative functions and optimization of processes. In the quarter, DKK 16 million of restructuring costs related to the cost savings programs have been recognized as special items, resulting in a total of DKK 71 million for the first 9 months. Total restructuring cost for the year is expected around DKK 120 million. As previously mentioned, gas contracts entered into summer 2022 negatively impacts our earnings. There are 2 elements to that equation: firstly, in addition, lower volumes have led to unused gas in the market for the quarter, resulted in financial losses classified as special items amounting to net DKK 14 million as the fixed gas prices of the gas being sold off exceeds current market price. Total loss of unused gas year-to-date was DKK 36 million. Secondly, gas used in production impacts our energy cost and the cost of goods sold. In the quarter, DKK 32 million were recognized in expenses related to these contracts. Based on the current market prices and current production volumes, we expect the impact to be around DKK 20 million for the fourth quarter of '23. We have shifted away from such long-term contracts, focusing more on short-term contracts aligned with commercial considerations. Next, please turn to Page 11 for an update on our cash flow and debt position. On 30th of September 2023, net interest-bearing debt totaled DKK 844 million, corresponding to a decrease of DKK 31 million in the quarter. The decrease was driven by positive operating cash flow from reduction in inventories, receivables and payables. We are pleased to see this development. The company's financial gearing was 2.6x net interest-bearing debt to EBITDA. Due to the lower EBITDA, we anticipate that the net debt-to-EBITDA ratio will exceed our long-term target in the midterm. The company's net interest-bearing debt, excluding leasing totaled around DKK 0.8 billion on 30th September, corresponding to an unused committed bank facility of around DKK 200 million. We are carefully managing our cash position with a particular focus around inventories, which we aim to reduce from around 3 months of sales to 2 months of sales, CapEx where we already have reduced from more than DKK 200 million a year to around DKK 150 million and will continue to keep a reduced low. And finally, review idle land plots after plant closures. Next, please turn to Page 12 for an update on our financial guidance. Based on the current market visibility, we narrowed the previously communicated guidance ranges. For the full year 2023, we now expect organic growth to be around negative 25% compared to the previous guidance of negative 20% to 25%. Further, EBIT before special items is now expected to be in the range of DKK 30 million to DKK 80 million compared to the previous guidance of DKK 30 million to DKK 100 million. Consequently, we anticipate a sales volume decrease of approximately 35% across our markets. Further, we expect foreign exchange rates, primarily the British pound, the euro and the Polish zloty to remain at mid-November levels. This concludes my prepared remarks, and I will now turn the call back to Jorg for closing statements.
Thank you, Peter. And before we take your questions, let me conclude with some final remarks on Page 13. The levels of new build activities across our markets are extremely low and almost 40% volume decline forces us to adjust our way of operating quickly. As the market situation remains challenging, we are driving our business improvement program around plant network efficiency, procurement and SG&A savings with tangible results coming through. However, higher energy costs from unfavorable gas hedges dating back to summer 2022 are also negatively impacting our earnings. We are not seeing a fast recovery of our markets. That is why we have initiated the next efficiency step and decided to temporarily close another 4 plants. We believe this is the right move to ensure high efficiency of our plant network while keeping a flexible approach for when the markets will come back.
And finally, we are carefully managing our cash position, which next to a positive cash flow from operation includes tight CapEx management, meaningful reduction of our stock levels and also the potential sale of land of our closed plants. And with that, we are now ready to take your questions.
[Operator Instructions] The first question will be from the line of Sebastian Grave from Nordea.
So I have a few. I'll just take them one by one. So firstly, you pause to say, 4 factories here and continue to adjust the capacity. Could you maybe talk a bit around what are your competitors doing at this point? And what are you seeing sort of in terms of the overall competition picture and the pricing environment? I noticed that your ASP is slightly down quarter-on-quarter. So any comments there would be helpful.
I think what we are seeing in all markets, I mean, we are looking to 40% volume decline, right? And as a consequence, everyone is adjusting, I'd say, in different ways. The way we have chosen is actually that we are not adjusting across the whole network just by shifts reduction, but we are really trying to optimize the whole network. So that is why when you look into it, actually, we believe that we have closed these 5 plants permanently plus the 4 plants temporarily. So we're taking 9 plants of originally 32 out, but that also allows us to gain high efficiency in the existing plants. So when you look at the network, there is still plants that we are running 24/7, which is the most ideal way to run and operate a plant. So that is at least what we have chosen and others are following their own capacity adjustments. But certainly, everyone has to reduce the output of plants to the one or the other extent.
And how about the pricing environment? Any comments here also in light of the slightly lower ASP on the quarter here?
I think that is what we are describing, right? So when you really look around the market, I mean, we are, on average, we're having higher prices than 2022, which is a good outcome. Given that these markets are going down so much, keeping higher price levels than in 2022, I think that is good and encouraging. But what -- also what is happening actually in a market that is going that way down. But for sure, price -- the competition on price is increasing, right? So what Peter is also referring to. So we see a slight downward trend. But then the recent announcement of list price increases in Germany, that is a positive sign to bring that back on track. So overall, I'd say, given the situation where the industry is in with that volume decline, I think the price development is still on a good track, actually.
And maybe just to add on the average selling price that you are alluding to, there is an element of cost of country mixes in there which you need to...
Okay. Okay. That's fair. Next on the question on the hedges here. So hedges impacting production costs by DKK 32 million in the quarter corresponding to, at least on my estimate -- 5% margin, roughly speaking, now just to be clear here how to read this? Is it that the impact was, so to say, 0 in Q2 and now in Q3, it is DKK 32 million? Is that how I should read it?
That is essentially correct. So these gas contracts came into effect in -- during Q2. But because we have stock on the ground. It means that they do not materialize and crystallize through the P&L until Q2.
And why -- so you say you guide roughly DKK 20 million impact in Q4? And at least, on my estimates, that cannot be solely due to volumes. I mean that implies roughly a 3% margin impact. So could you maybe help just yes, enlighten me on this one here, what is the dynamic and how do you get to the DKK 20 million in Q4?
So the hedges are a number of underlying hedges for different prices for different volumes over time. And therefore, you can't just spread it out on a linear basis. In general, the hedging policy at the time would be of a declining method. So you would hedge more in the beginning and less in the end. And therefore, you will see a decreasing impact overall quarter-by-quarter.
Okay. Okay. And how about -- how should we think of the impact going into 2024 and beyond? I see the note on the -- in the notes that these unfavorable hedges are running into 2026, as I recall. So should we see an incremental less severe impact on margins in 2024 as we are seeing here in H2 2023? Or what -- how should we read this, yes?
I think, first of all, of course, this is compared to an underlying market price. And I think at this time, it's extremely difficult to say what the market price will be going forward. And therefore, of course, it's also extremely difficult to put a firm number on that. And what we can say is that with the current market price that we have, I would assume a similar amount for 2024 in total as we have recognized or expect to recognize in 2023.
Okay. So a total of DKK 50 million impact for 2024?
Under the strict assumption that market prices were at the level or will stay at the level as of 30th of September, which, of course, is in...
Yes. Okay. That's fair. Okay. I will jump back in the queue and see if anyone else has questions.
Next question will be from the line of Peter Sehested from ABG.
Yes. I have also a couple. And the first one is actually on a gas hedge. I sort of understand what you said here before, but I thought that the whole idea with selling off the unused gas was such that impact on the cost of goods sold would sort of be neutralized, so to speak, because if the hedges were made in 2022 when you're operating with those costs right now, the year-on-year impact should sort of fade out, so to speak. So is it that you don't really can sell all those unused gas hedges? Or how should we think of it? Because if you are still running at 2022 levels right now, then impact in '24 on a sort of [indiscernible] should be neutral.
Maybe I'll start commenting on a general level, and then Peter can further elaborate, right? But what the company has done in summer 2022 is as they've historically doing it, actually, continuing their long-term hedging strategy. And at that time, in summer 2022, the company was hedging actually almost all of their production volume or energy for all of their production volume and at a higher price. So I mean what is happening now is that the production we were just talking about, mothballing 1 plant in U.K., right? So -- and that gas actually that is hedged for, that is the unused part, right? And that is the 1 component. And then the other part that we are still using for the 2 running plants, that is actually the price we are paying from these old contracts today is higher than what the market price actually would be today if we were buying on spot. And that is the 2 effects that you see hitting our earnings. Yes, I don't know, maybe you can jump in here.
I think that's it. When we explained our guidance in August -- I mean, these gas impacts were known and was part of our guidance as well. So as such, there is no surprises in the impact on the EBIT for us, but it is as described before.
Okay. That's fair. I understand where you are going -- so the commentary pertaining to going into a more -- I mean, you had -- we actually had a same discussion back in Q2. But when you're saying that you're doing more but I think you said that back in Q2 as well. So when you guide for these DKK 50 million for 2024, is that including that you are going more spot? Or are you basically saying that your spot policy will only enter into effect in 2026 when unused gas hedges or the gas hedges are totally consumed?
No. So when we talk about the DKK 50 million potential impact for 2024, still, of course, highly uncertain depending on the market pricing -- we essentially are saying that is the impact of these unfavorable gas hedges. But as you also correctly say and what we also discussed around Q2 is that we have changed that hedging regime. So we come from an old regime where there was continuous strong demand, there was continuous price increases happening, and there was certainly a shortage of -- potential shortage of gas. And therefore, in that old regime, it made sense to do longer-term hedging arrangements. But clearly, also, especially the second half of last year and what has also happened this year, has clearly shown that the time is not for having such a link between your energy hedges and your commercial strategies. So therefore, going forward, we are looking into a much shorter forward hedge profiles, if any. And it's really depending on the commercial strategies market by market.
Okay. I just want to get this completely straight. I mean if you covered sort of the volumes back in 2022, those volumes are substantially higher than we are seeing right now. In fact, they could probably cover at least full year's -- next year's full production, so to speak depending on how far you paid until 2026. So I'm just trying to get to how the spot impact if you're buying spots, if any? How that actually impacts your current production cost, how do you think about it?
What you should bear in mind is that we've never had a policy of hedging 100% for 3 years. But the policy was to on the shorter term, do more or less 100% and then gradually reduce the hedging profile over the period. So as previously explained as well, we do have this unused gas part as part of our special items and we expect to have that for another 2 quarters of roughly the same level depending on market price and then effectively out of the unused gas component, of course, all depending on market development.
Perfect. The last comment made perfectly sense. And then just have a couple of another housekeeping questions. In terms of restructuring costs, how much should we expect in Q4? And the last question I have is on the positive impact for pricing that you report mentioned in the report. Could you just give us a ballpark figure? Is it high or low single digits numbers for those respective regions that you mentioned in the report? And I'll jump back in queue.
So for restructuring, what we have incurred year-to-date is DKK 71 million. And what we guide towards is a total of DKK 120 million, including these mothballing and SG&A. So, yes, when you add that together, we're looking at incurring or accruing additional DKK 50 million in the fourth quarter. In terms of pricing, then I would say it's more of the single digit than it is double-digit numbers.
Okay. And just to get everything completely straight, the DKK 50 million just tended to [ instruction ] cost, that is the same line as the DKK 16 million that you reported in the quarter. So that is the same line we're talking about, right?
That is correct.
Next question will be from the line of Kristian Johansen from SEB.
So a question for me. Just firstly, a clarification. Peter, you said the unused gas impact was going to continue for another 2 quarters. So should we expect, I mean, the DKK 14 million you reported for Q3 sort of a similar level in Q4 and Q1? Is that what you're saying?
All depending on the underlying market price. But given the [indiscernible], then approximately that level, which is in line with what we also said last quarter.
Okay. And by Q2 next year, there shouldn't be any, again, assuming current market pricing?
So assuming all depending on the production volumes, which, of course, is dependent on the market drivers. But if we -- we have previously said that what we more or less plan for is a similar volume level going into '24 as what we've seen in '23. And under that assumption, then yes, the unused element would go away.
Okay. That's very clear. Then to the factory closure you announced here, I know that the factory in the northern part of Germany seems to be the Wittenborn factory which you recently made significant investments into to upgrade. So can you just elaborate a bit on your considerations for that exact factor to be closed?
Yes, you are right. Actually, the Wittenborn, on the same plot, there's 2 factors we are operating. So that is actually -- that is also one of the reasons why we are taking 1 plant out. And then when you look at the capabilities of these 2 plants we are operating in that area, they're actually producing different type of products. So the plant we keep up running is the major plant supplying our business in Nordics, and different products this plant can do compared to the other plant. And that is also part of the decision-making why we are keeping that plant up and running and are closing the other one.
Okay. That makes sense. And along this line, so again, on your restructuring measures, what should we assume this will drive in terms of savings? So SG&A costs before special items in 2024, all things equal, how much lower will that be as a consequence of your restructuring measures?
Good question. However, we are not really in a position where we go in and guide on 2024. I would say that the remaining DKK 50 million that we are incurring for the rest of the year is a mix between these mothballing activities and our SG&As. And across the board, all our restructuring activities are having less than 1-year payback. And so of course, some of them were started earlier this year and thereby it was more or less fully paid back. Some would have a carryover effect [indiscernible]. But at the same time, when it comes to the production cost, in particular, a lot of this is, of course, to drive further efficiencies. So even though that there is a positive payback, be careful in just adding all the numbers together because you really need to tie in increased effectiveness and not only adjusting the cost base.
So what you're saying is that part of the restructuring will benefit your cost of goods sold and part will benefit the SG&A line. But obviously, what I'm looking for is not guidance for next year, it's really what the financial impact of this DKK 120 million in the restructuring costs. So I mean, if you say 1 year payback, the effect should be roughly the same level, so that all in all, a cost of goods sold and SG&A will save your DKK 120 million, but that you have already incurred part of this during '23, so it's not the delta. Is that how I should understand what you're saying?
That is exactly correct.
And how much have you then incurred or expect to incur in '23?
Of course, you have our quarterly reports. You can see roughly how much we've incurred quarter-by-quarter. So there was a rather big bulk in Q2, which was happening in the beginning of the quarter when we shut down the 5 initial factories, then we had a smaller portion here during Q3, and then another DKK 50 million in Q4, and then you can probably add out the numbers.
Yes. But that's the cost, I'm talking about the savings.
And I agree. But with a payback of less than 1 year -- more or less there.
Okay. So okay, understand. Not easy to put into a spreadsheet, but I guess I'll have to do. Then just another clarification on the comments about list price increases in Germany. Just to be clear who are raising list prices? Is it yourself who've raised list price? Or is it also your competitors? Or just a bit on exactly who you're referring to?
It's across the market. We've published list prices being effective 1st of January -- 1st of February, sorry. And then competitors are out different timing, but we see it across the markets.
Okay. And then just my last question here. You repeat that you do not expect to breach any covenants in 2023. But obviously, you also illustrate how your financial leverage now is going up, given the decline in the run rate of EBITDA. So I mean can you make the same comment for '24 without expecting any market improvement?
So, of course, we already now work with different scenarios going into 2024, some more prudent than others, as you would normally expect. And we are in a full dialogue with our bank around that. They are aware of these and not to speed, and we do not foresee covenant issues based on that.
So you don't expect any covenant breaches in 2024 as things are looking now?
Based on our various scenarios, that would be correct.
Next question will be from the line of Alexander Borreskov from Carnegie.
Just circling back on the mothballing of the 4 factories. Could you maybe put a few words on how much capacity does that take out of your network, given that 3 of the factories are aircrete, which tend to be a bit larger than the CSU factory, should we expect sort of 15%, 20% temporary capacity reduction? And once you see the markets start to improve, how long would it take you to get these factories up and running again? What will you do with the factory employees? Will some of them be moved to other factories? Or what's sort of the thoughts here on that?
Yes. So when you look at the measures we have taken throughout the year. So in total, we're talking 9 plants, right? And that 9 plants roughly corresponds to capacity of 20% to 25% of our network capacity wise. And if you want a number on that, it's literally half-half actually. So half comes from the first then the second half now from the new step of the mothballing of the plant. So that is what the capacity effect is. And then your next question is what does it take actually to get these plants up and running? Really depends a little bit on which plant and which location. If you think about in the 1 plant we're closing in England -- there is actually 2 plants on the same site, right? That means there is people on the ground actually knowing how to operate that plant. So that is a rather quick route actually to bring that back into the market. So there's maintenance people, plant management on that. So we can really leverage the resources we have on ground. Same actually for the Northern Germany Wittenborn factory. So we can bring them back to speed quite quickly, actually. To give you a little bit of timing, I'd say this recruiting is something between 3 and 6 months to bring them back in operation.
That's very clear. Maybe 1 more question on net working capital. So you underline working on your cash position and inventories improved a little bit here in Q3. But given that you're now mothballing factories and we'll sell off, I assume some of the inventory in those factories -- first of all, what level of underlying improvement do you expect to achieve in inventories and in net working capital? And how fast can you get that done given current market conditions?
So just to start with the last part, if we really wanted to reduce inventories, we would do it extremely quickly, but it would come with a very high costs so what we're trying to do is actually managing the inventories down. And of course, the mothballing initiatives that we're doing is also enforcing that. So we are currently having around 3 months of sales in our stock levels, more or less. And our aim is to get down to 2 months of current sales and then you can say, over time, maybe that's then around 1 to 2 months depending on the sales volumes. But with the current demand that we're seeing, our aim is to get to around 2 months in terms of numbers, that would be more or less around DKK 100 million to DKK 150 million in inventories reductions. But of course, over a period of time, given that we want to manage it all.
Next question will be a follow-up from the line of Sebastian from Nordea.
So usually, Q4 is negative cash flow. Will it be the same this time around?
Of course, a lot of that, to be honest, of course, depending on the market situation. With the current guidance, you are right that then we expect to follow the normal seasonality there would be a slight pickup in the inventories towards the year-end.
Okay. And getting back to your comment, Peter, on sort of your main scenario for 2024, which implies no covenant breach at this point. So what is the assumption, sort of the market development assumption on that scenario? Does it imply a sort of a sequential improvement in market volumes or what is put into that comment?
So like any other company, we operate with various scenarios, some would be more prudent than others, and that is also the way we operate.
Okay. Okay. And then just on your focus on preserving cash. So you say you're trying to optimizing working capital, limiting CapEx. And then you had this comment of sale of noncore assets. So what is it -- what is in that bucket, so to say? And what could be the potential impact from selling these noncore assets? Could you help me elaborate here?
Yes, it's basically selling the land. And now we're closing these 5 plants permanently. So we are looking in opportunities actually to sell them off. It really depends on the location, how close there are to bigger cities? Some have value, some not. So we're investigating that as part of cash management priorities.
We've really also done it in the past, to be honest. So over the last couple of years, we've been divesting certain land plots in Poland, for example. So it's the similar exercise.
But you're not giving a number on sort of the potential impact here?
Not at this point. There is still, of course, uncertainty related to. So that would be too premature.
Next question will be a follow-up too from the line of Peter from ABG.
Yes. Just 2. I'll take the first one. It's basically in line with the prior question to get sort of a preview into what you're expecting for 2024? And my angle on that question would be that your temporary capacity adjustments at least suggest that you expect negative volume decline again in 2024. So that was number one. Number two, pertaining to cost of goods sold, even adjusted for the DKK 32 million that you also kindly provided here. The decline in COGS is still not as fast as a decline in volume. So what is underlying driving manufacturing cost there?
So Peter, we can tell you deeply into the excel sheet there. I think overall, what we've said previously and what we also have reiterated this time is that our normal -- when we talk about our capacity adjustments, what we are aiming towards is a similar sales volume levels as what we've seen in 2023. So I guess the way of putting that is probably that, that is a base case nonetheless. But there are huge uncertainties around 2024 and it's really too early to say anything specifically. And that's, of course, also why we're not out with the guidance for next year. Similarly, the pricing components for next year is also highly uncertain. So it's really difficult to gauge at this point. When we are ready with our guidance for 2024, we will, of course, issue that as normal.
As there are no more questions, I will hand it back to the speakers for any closing remarks.
Yes. Thank you for participating in this call this morning, the interest in our company. Looking forward to seeing one or the other during the next days and have a nice weekend. Thank you. Bye-bye.