Rockwool A/S

CSE:ROCK B

Earnings Call Transcript

[Thomas Harder, executive]

Good day to everyone. Welcome to the Rockwool A/S conference call regarding the results for the first quarter 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. 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 quarter of 2023. Afterwards, we will be ready to answer all your good questions. Before I hand over the words to Jens Bergen, 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 will now hand over to host to you.

[Jens Birgersson, executive]

Good morning, everyone. I'll try again over the mic on. If we look at the last quarter, we are obviously not satisfied with how the market developed in several segments. We predicted it, and I will come back to some of the capacity adoptions we have done. So it was predicted as we expected. But what we are quite satisfied with is how we have now recovered margins after the price increases that we did last year. We have seen in the quarter that we have gotten a balance up all the way from the contribution margin and down to the EBIT margin. So that's positive. Let's go to the next slide. Looking into our 2 different businesses and how the top line developed last year, Q1 was an incredibly high comparable. In terms of production is one of the best production quarters we have had in the history of Rockwool, and we were a little bit surprised by how strong Q1 was last year. And so if we compare the sales versus that benchmark, 7% is not too bad because that's almost on par with the year before 2021. That was more of a normal quarter. If we compare the businesses, the insulation business and the System division business, we see that we reached a slight growth, plus 4% on Systems division, and that was mainly driven by Grodan mainly driven by Rockwool that overall had a very good quarter. Also, some of the growth on businesses had a good quarter. And the other System division businesses had a little bit tougher times. On the Insulation business, apart from North America, parts of Asia, we basically saw a decline in most markets, there were exceptions. But generally, it was a little bit slow quarter declining quarter. Move to the next slide. Regional development on Slide 5. In Western Europe, to our surprise, a little bit, United Kingdom came up and started to grow again. So mid last year or third quarter, we saw the U.K. market slowed down quite a lot. I don't know if it's the Sunak effect or what precisely caused it. But then when we enter this year, the market recovered, and we actually ended up in a situation where we have taken down a little bit too much capacity. So we delivered everything we produced in Q1, but we have seen a market that is backing growth territory. I think the big reason or one of the reasons for that is that noncombustible installation is very sought after now in the U.K. and the market is really shifting over. We also saw single-digit growth in France and in Spain, even double-digit growth. If you look at the rest of Europe, you basically saw a weaker top line than the previous year. Eastern Europe and also some of the Nordic markets, if you take Denmark and Sweden, where you have quite a high content of residential in our top line. There, we saw quite a dramatic decline. We are quite used to that in Eastern Europe when it booms. It booms. And when it goes the other way, it stops very quickly, and it was quite broad-based in those markets. North America, U.S. double-digit growth, Canada, good growth, some markets in Asia, good growth. China's moderately growing, but I just want to remind you that less than 1% of our business is in China. So it doesn't have a big effect on us. So what happened actually in these markets. If we look at building permits, new building starts et cetera. It's all down quite low. You see a big decline in building permits in Germany and also building starts the same pattern in, for example, Denmark, where residential construction single-family houses has come to down to very low levels, and we feel that. On the more industrial side, it varies per market, but there are a fair amount of canceled or postponed projects. And for example, in Poland, the project pipeline has probably halved in Q1. Again, that could change as we move into the year. But generally, I think the interest rate and the cost increases in building materials have started to impact the market. Let's go to Slide 6, profitability. We had a goal last year to kind of bridge the gap and get back to healthy contribution margins. We have taken a number of steps to do that. We still have inflation. So Q1 versus Q1, we have on average per unit produced a higher cost than before, but now the prices have catched up. We only did very, very moderate price increases in Q1, and that is an aggregate of the whole world. So there were many markets where we didn't increase prices at all. And then we had like North America, some places in Asia and the U.K. where the prices continue up. But overall, flat or a little bit increase in prices, but market by market, segment by segment, we have adjusted a fair amount. Looking at another contributor, we have reset the business. Our goal is to maintain market share but to adapt the business to the current market size. So if you compare quarter-to-quarter, you cannot see that in our press release because we show kind of our own contracted workers that we have on permanent contracts in our report, you see a reduction of about 230 jobs quarter-to-quarter there. But the real picture is that we have adjusted with about 800 jobs compared to Q1 last year, but we were on record output to now. And that, as we have explained a couple of times is because we have a high proportion of contingent workers with short-term contracts so that we can ramp up production in line with the season and also like we had to do now to draw down capacity. So basically, we have reduced the manpower roughly the percentage just top line drop decline. So that has been done and that safeguard that we didn't sit with too much under-absorption where we have the lower revenue. Move on to Slide 7. I guess the interesting aspect here is the margin. Again, if you look at the diagram that insulation has come back up in double-digit margin where we want it after a few quarters where we've been below 10%. And also the system division has recovered. So that's good. And this, as I said, a combination of pricing and that the energy costs are down and that we have an overall better price balance. Investments, we continue with the green investments, thus continuing. We have still start a little bit with the project in France. And just to explain how that -- how I expect that to play out. And we haven't started to break ground. The status today is that we have an approved operating and environmental permit that is -- comes from the state. And we have, in a way, an approved building permit that is local. But the building permit has provision in it where it says that we need an approval to build on a site that we need an endangered species approval. The industrial area where we are building doesn't require that, but there is a dispute between the state and an NGO that we are not involved with, but they argue that the industrial area should require endangered species authorization. This is quite common in France as this happen. And over the next 2 months, we expect that, that will be resolved and the state will win that legal dispute because industrial areas normally don't have this. And this is an industrial area, what has been built there before, didn't need it. Once that is cleared, the last obstacle in the building permit can also be cleared and then towards the autumn, we should start construction. So that's the status of France. Free cash flow, Slide 9 Normally, we build seasonal stock this time of the year. Last year, we didn't really manage that because we sold it all because we had such a high demand. And that is the main reason why you see an improvement here in the cash flow in Q1 last year versus this year. But as expected, in Q1 when we build seasonal stock, we do draw some -- the tie up some cash in inventory. That's the main reason. Going to the outlook, top line, very dynamic construction market. We have seen, for example, ethics in Germany start to grow, so external wall installation due to subsidies. But overall, we see quite depressed construction market in Europe. We haven't seen many signs of that energy and energy efficiency stimulus and other measures take effect. And we have reflected that in our top line guidance at up to 10% top line decline. That's the best we can say today. Obviously, we -- this is quite different in different countries. U.S., for example, is looking to have a very good year. But again, we have seen the bank, bank challenges now lately in the U.S., will that come back and impact the economy to a wider extent. I was in the U.S. earlier this week and the signals I pick up is that it's not going to impact the economy to a big extent in the U.S. And if that's the case, we believe that we could have a very good year in the U.S. Asia, we have seen some signs of China working up, but maybe not as quickly as we expected. So we had a couple of good months. So now it's down again. So it's -- we don't see the broad-based improvement at least not in our business. Investments we have left unchanged. And then on the EBIT, we have guided reflecting that there are risks in the market, and we have also included EUR 27 million deduction in EBIT for the Ukraine -- our donation to the Ukraine reconstruction funds. So that's in there. Here in the autumn, we have some uncertainties on energy pricing, how the business cycle will go. It could be better than that if the market holds up or improve slightly. And as usual, our goal is to be in the double-digit EBIT margin area. But we simply at this stage, don't have visibility into Q3 and Q4. And therefore, we have guided around 10%, but our goal is clearly to be in the double-digit territory. With that, I hand over for questions.

[Operator]

[Operator Instructions] And we do have a question from Brijesh Siya with HSBC.

[Brijesh Siya, analyst]

Jens, I'll go one by one. So the first one is on guidance. We have seen the volume if you can confirm what it was in Q1 and [Indiscernible] relating to 30% decline. So if you take that volume as an indication and given that it's going to -- you are talking about market hasn't improved as such. How does that impact your guidance in terms of margin with pricing? If you can just give a little more comment about how the pricing is evolving. So in a note, if you can wrap it up, sink what's really the 13.5% margin you have done in Q1, was all the variables you see to be deteriorating as you go to reach your 10% target?

[Jens Birgersson, executive]

Was that your only question? Or do you want me to answer that?

[Brijesh Siya, analyst]

Yes, if you can answer that.

[Jens Birgersson, executive]

Okay. First of all, last year in terms of volume, we had unusually high volume in Q1 as a percentage of the full year. So the volume decline will kind of improve over the year if the market doesn't deteriorate because we had a very unusual comparable in Q1. We should be catching up to that. And towards the end of the year, we might even get into growth territory because we had a relatively weak Q4. And then it will be a timing issue, how long would this dip be? And will it get worse or not. But statistically, we have historically seen about 18 months of this, but there are so many things that are unusual there. So I don't know if that data put anything. On the price awesome fundamental inflation, inflation is still there. So even though our input cost in Q4, clearly per unit or the unit we purchase of everything, and then we go behind the car, electricity, fleets, melt, raw material, natural gas, pallets, films, other consumables, metals, you name it. Compared to Q4, many more things have improved. But compared to last year, Q1 is still higher, not on the energy types. On energy, many of those have started to come down, but -- and stabilized. But overall, it's double-digit up more expensive. So our ambition going forward is as we see inflation develop. We want to keep that balance. But at the same time, if with the lower market activity, we need to defend market volume, we have allowed a bit of room for that. And then depending on where it plays out, it's very hard to discuss the number for the whole business because the way the business looks now, for example, North America looks strong and inflation, although it's a little bit lower. We never had the big energy price search there. But even though inflation looks to be maybe 1% lower than last year, it continues up. So we have already raised prices more in the U.S., and we have good volume. U.K., we see a similar pattern. Nothing is really getting cheaper in the U.K. So it's a mix of things. So it depends a little bit how the different market plays out. So one should be careful to talk about the price for the overall business. But I would say, we are ready to lower prices in the segments where it's needed to make sure we secure our market share. But at the core of the business, we have cut output to a level where we believe that kind of hits a constant market share. So we have not been sitting on extra capacity that we don't think it's needed and try to push it into the market. We have made capacity adaptations, and those are the roughly 800 fewer jobs in the business compared to a year. So I think we have a year where you need a lot of management attention to balance cost versus price versus market share and then get the capacity right and you navigate and we're going to do this by market, by country, by segment. So it's all hands on deck out in the businesses to do that. On the other hand, if I look at the challenge, we had last year where in Q3, I think we dipped down to 6% to 7% EBIT margin. If I look at the challenge, we had last year to deliver sound profitability. The challenge was, in my mind, a lot bigger because there, if you would have made a mistake, we would have gone into a loss. If we didn't increase prices last year at 30%. This year is more adoption being on top of the market, each segment and be very alert to the situation. Next question...

[Brijesh Siya, analyst]

[Indiscernible] the next one is on your in comment you made. Have you seen any prices already falling? Or is this that your expectation that things probably volume in the second half?

[Jens Birgersson, executive]

Yes. It's a mixed bag of things. We have had, for example, very good success in large projects in Q1. There were fewer projects around, but the really large project we have successful we have gotten almost all of them and pricing was a bit lower. But since the inflation was lower, the project pricing, it makes sense. So prices is lower because inflation and costs are lower, and these are big projects. And then in the mid-segment, if you go, for example, into Poland, Eastern Europe, there you have seen prices and we have not taken so many projects in those segments, and we are assessing the situation now. You can clearly see the pricing on EPS when EPS competing with us or peer and per compete maybe less of an issue there, but prices have gone down in the market quite a lot. So it varies by segment. But Eastern Europe, for sure, we have seen it. And there are also other markets for certain segments where pricing has been lowered and with a certain logic because energy prices is down and we have a slightly different cost structure. So yes, we see prices go down in Q1 due to the mix of countries we had, we see prices stable or slightly up in the aggregate, but there are several places and segments where prices are down.

[Operator]

And we will take our next question from Casper Blom with Danske Bank.

[Casper Blom, analyst]

I'd actually like to stick a little bit to the price discussion here. You mentioned that, Jens, you have seen certain areas where prices were down significantly. We also see that your local currency growth was hit much harder in Eastern Europe and Russia. If we start seeing that revenue decline spread into Western Europe, where, as you also mentioned that building permits are down quite significantly. Could we not start seeing prices coming down there? And if volumes are really hit hard a potential price war, if you sort of -- your thoughts on that discussion would be really interesting.

[Jens Birgersson, executive]

Yes. I don't think -- did I say prices come down significantly?

[Casper Blom, analyst]

I think you said EPS price is down quite a lot.

[Jens Birgersson, executive]

Yes. So the segments. So first of all, we have a number of segments. And then we have different competitive positions. So I think we don't see it as a good strategy to start to price for in a declining market, right? We have taken the approach, first of all, System division, system business can export from one factory into several markets and in a way that hedges is a bit. But on the Insulation business, it's local for local. So our approach has clearly been and is cut the capacity to the market size and then work within that and lower the price where you need to secure your volume. But you compete with different things in different markets. And what we see is there are also some segments growing like ethics in Germany, which is big segment. And there, we don't see the same situation. So it's not like insulation or insulation. It's different segment, different competition. And it's going to be a lot tougher in segments where we might be competing on a facade stomal against EPS. And the customer doesn't care about 5 properties, that's going to be tough. And we probably can't go all the way there to secure. We might lose a little bit on them. We secured a little bit more share in another segment. So I don't see with the setup we have or our approach to business that in any way, we would like to pursue a price war. But I don't monitor it and just accept that others still their factories, and we just sit there and we do all the capacity adoptions in the market. We -- I want to have our fair share, to be clear on that, right? So it's a balance between how tough you are and et cetera, and every market has a different dynamic. And also a fair amount of markets out of all of this, we don't have the issue. It's about as much as I can say. Otherwise, we need to what sit and go into each market, and I don't really do that normally.But I guess I want to Eastern Europe, we have seen it before. I mean you remember years where we have had 1 quarter where the volume goes away. It's a different dynamic in Eastern Europe. We see product pricing go down very quickly. When that happens, small contractors bidding for medium-sized project. And it is a different dynamics of that market compared to the French market is just different.

[Casper Blom, analyst]

Okay. Just a follow-up then. I think the previous analyst on the call mentioned a volume decline of 30% in Q1. Is that a number that you can confirm?

[Jens Birgersson, executive]

As you know, I never confirm volume and price. We don't do that breakdown of volume, price mix that some companies do because we feel it's a competitive sensitive information. But I can confirm that versus the very, very high volume Q1 we had last year, it was, in many respects, a record because a low season quarter and super strong volumes and a higher proportion, we are down double digit on volumes. Just to be clear on that. But I won't go into any details on exactly how much it is. But the comparable as we move forward on volumes will be improving. So we had a relatively strong first half year last year compared to the second half year because the year was almost to different market conditions, a very strong first half year and a quite challenging second half year in terms of market volumes. If you look at last year from a market share perspective, we came out of that about flat market share.

[Operator]

And we will take our next question from Claus Almer with Nordea.

[Claus Almer, analyst]

Also a few questions from my side. And sorry about going back to these market shares and your strategy. But in the report, you're writing, you want to safeguard market shares. And that always looks good. But to what extent are you sticking to that statement if [Indiscernible] if the Eastern European decline was spread to other markets. It is actually more important to get the market share than staying away and [Indiscernible] more stable pricing environment. That will be the first question.

[Jens Birgersson, executive]

So what's important market share or price is that the question?

[Claus Almer, analyst]

Yes.

[Jens Birgersson, executive]

And you never have that answer for a whole business. So obviously, there could be segments where you don't really care. You don't want to raise down to the bottom. You lose a few projects. And when the business comes up, you have it back. On the other hand, there are businesses where if you let a competitor in, they never go away, and there you might go very hard on it. So it all depends on the segment and an your position. And then you have segments where you talk about noncombustible materials, but our competition is other stronghold players, and there you have different competitive dynamics. I should also say that market share, there isn't like a master report where you see the market perfect. We have a good feeling for it. So you navigate this and then you make sure that the overall works out about right. And that probably means we're a little bit up and down compared to last year in almost every segment, some segments being much tougher. What doesn't make sense to hold them. If you have 52 EPS competitors in the segment, you might not want if so hard here and in another place, you want if it. So I'm not -- I don't see it as I said, last year, to me, was a much bigger challenge. This requires many, many local decisions and to stay close to the customers. And our team is quite good at that, but it's not easy when volumes go down, but I feel confident that we're going to navigate that.

[Claus Almer, analyst]

Sure. That makes a lot of sense.

[Jens Birgersson, executive]

One comment, Claus, on the spreading. Eastern European spreading to Western Europe. Remember, our factories and the nature of our product is the factory that sits in Eastern Europe doesn't really sell to France or the U.K. So it's not a normal mechanism you end up with a lower capacity in a factory in Eastern Europe, and now you're going to sell Stonewall from [Indiscernible] to Paris. It's too far. So it's a slightly different dynamics compared to if you have European focus factories in the business where now the market here is not nice, so then you go further away and everyone ships a business. It's a bit self-regulating due to the very bulky nature of the goods in the installation business.

[Claus Almer, analyst]

Sure. It was not about the [Indiscernible], but I hear what you're saying. You mentioned in that U.S. has had a double-digit growth in Q1. And you also expect this year could actually be a good year. Can you separate, let's call it, your current market from the old factory and how much growth is coming from the new factory. So in the old factory, is that also seeing a material volume decline? Or is it actually across the U.S., you're seeing solid growth?

[Jens Birgersson, executive]

Yes. So just recap what has happened. So I go back to kind of the last 2 quarters' comments on North America. So what we saw in Q3 and Q4 was U.S. and slightly delayed also Canada that went into quite a big volume decline. I mean we're talking 40% drop down in volumes. And that happened last autumn. And we went month-to-month, we took down capacity. It didn't impact pricing in the market because the inflation was still there. And people think our take was this looks like we have, at least the construction market recession because permits and all the rest was down. We saw the quite brutal interest rate hikes and people worried. So we thought, okay, U.S. will go into recession. That was our prediction. When we now look at it, I don't think you have recovered in every respect. But at least our business jumped up to the level we have before that decline. So we went down in capacity. And then now in the beginning of this year, jumped up again and now we are busy ramping up even more capacity. We had double-digit growth in the U.S. So that's nice. Yes, we see these banks break. But I met a policymaker in the U.S. last week, and she said, well, when you do something like that with the interest rates, something will break, it's not a problem that a couple of banks break. That's a small price to pay and we sorted out. Those were words. And we certainly see it in the business. So what we say now is we might not understand perfectly how all that works. But last week, I think people -- when I was in the U.S. on this week and last week that people are cautious, but slightly more optimistic and believe that it might not be a record year, but it's sound business going on and that they kind of avoided the recession. But again, this can change in a minute, but that's what we see. And we haven't seen that just for a month or 2. We have seen it since it started, and it looks to hold at this stage. So that's where we stand.

[Claus Almer, analyst]

Sure. And remember that you talked about stopping last year. But maybe coming back to the first factor, you have both, I guess, in Canada and the U.S.

[Jens Birgersson, executive]

Yes, the factories. Yes, there is quite simple. You have the Eastern Seaboard. We have good loading and we balanced the factories and optimized logistics has basically how we do. So the Toronto factories, the new factories obviously excellently located to cover a lot of areas. So we have pretty good loading on all of them and the new factories up and running. The old act, the semi old or the newest factory in the south is running quite well and the old factories in the north are running well. So it's -- we kind of spread out the law. They are all running fine, and we still have capacity left to grow. And that is always a challenge in the U.S. that we must never run into full capacity in the U.S. So we can't let the market grow. So we will just keep expanding, but it's looking good at this moment. But again, anything can happen in a moment, but the fundamentals looks much better than, say, 5 months back.

[Claus Almer, analyst]

That makes sense. And then just the last question, yes. The production or the revenue you did in Q1, those products you were selling. How was the input cost? Was that hedged at a higher or lower level? Is that the same cost base next year in Q2?

[Jens Birgersson, executive]

Yes. So you're talking about the input cost, right? Yes. So we don't hedge an awful lot, but we have secured a bit of gas. We have a mechanism of Coke that goes like 3 months at a time. We have started to make deals and electricity; we made a 2-year deal in France. We have made a deal in Norway since we consume a lot for the electrical [ melters ]. So we have secured good electricity pricing in France and Norway. So it's kind of a mix of things. But the fact is still that the cost level per unit produced, I mean, if I equalize to the same output, then the cost in Q1 is lower than Q4 because the energy is better. But the creeping inflation on most other materials are there. So we are still double digit up from Q1 a year back. And I don't see that pallets and fill and these things with methods we just drop now. That's not what we expect. We believe that all the -- and salaries, of course, the new salary increase is bigger than we had the previous year. So that keeps rolling underneath even though if you look at the inflation curves, both the base inflation in North America and Europe has improved a little bit, but is still there, still there.

[Operator]

And we will take our next question from Kristian Johansen with SEB.

[Kristian Tornøe Johansen, analyst]

So my first question is on your margin guidance. So yes, to get to the 10% EBIT margin, are you assuming the contribution margin to go down versus the Q1 [Indiscernible].

[Jens Birgersson, executive]

Yes. We have this guidance, I would say, to say around 10. We clearly want to be above 10%. And we have made some allowance in that guidance for price reductions. We have made some allowances for that energy could jump up again, and we miss a little bit in the pricing because the difference -- I mean, we did an effective job last year, even though Q3 was a harder quarter in terms of margin, but we got the price right. So here, we factored in a little bit that if the energy pricing, gas, et cetera, even though we hedged a little bit more would come up and the volumes in the market are -- if something drastic happened, it will be a bit more tricky to pass on the prices quickly and we have lead times. So we factored in a couple of bad news like that, and the [Indiscernible] this. But our ambition for the year is that we want to, of course, stay on the same gross margin or contribution margin, whichever one of you look and keep it sound on that level. Then also you have the other aspect that if volumes -- at the moment, we have the 800 jobs out. That is an adoption of primarily production resources, we haven't touched the white collar employees. And then you could say, you don't do your homework, but we are slow on that here because we see that if the market comes back, I mean, the relatively challenging -- challenging to hire people at this stage, that might change. We have been a little bit slower on that. And there, we should also say that if we need to go into capacity adjustments, reach deeper into the manufacturing or deeper into the white collar, that would also cost a little bit of money. So we factor a few of these things in on the negative side, but -- and then we link that uncertainty. So you that's the reason. But the goal is to maintain contribution margins straight through and have a sound business on that level, but we allowed ourselves to fail a little bit in case it would be needed.

[Kristian Tornøe Johansen, analyst]

And then my second question, you gave an update on the new factory in France. Obviously, this project has been delayed quite a bit. And in one of your other comments, you also talked about you can't just ship from your Eastern European factories to France. So how big a problem is this delay in France? Because obviously, you also report continued growth brands. So if renovation really picks up in France, are we at risk of seeing you run out of capacity with this delay? Or how should we think about that?

[Jens Birgersson, executive]

Yes. So first of all, -- my observation is when you look at expanding, we talk in Europe about bringing back manufacturing from China put in region for region have more robust supply chain. And then you run into these type of things where it's very likely that you build a factory like in Ranson in the U.S. now straight through those protects people walked into the supermarket in the Red Rockwell jackets and caps, we never got the negative comments, but there was a lot of noise all the time. Here, we have noise. We have NGOs against the state because you have this culture that there's always going to be some on protesting. And that's frustrating. And we can think about that if we -- to meet the climate goals, we're going to need many factories more in Europe. And it seems that at the moment, at least, every time we build outside an existing brownfield, we have this process. In terms of problem for the business, due to the -- if this downturn wouldn't have come, then this would have been a problem for us, right? Because at those times are missing on that delay we won't have been selling them. If we would have had another growth year where we grow 10%, 20% of volumes, that's tough. But at the moment, with the market decline and the improvements we make on other factories, we have started the Romania project. We have some other projects we do to increase output. We should be fine. But it's based on what we basically can start to break ground here early autumn. So it's not big problem now, but we really need to get going here in the autumn with this project. Otherwise, we need to, I think, consider a different plan. And we have already land prepared in other places, and then we need to build something else in Europe or accelerate one of the other products we have in the pipeline. But when I look at it, it is an attempt by an NGO to put the requirement on an industrial sold area to need an authorization for endangers species. Cleary is this is just a flat field. There are no ended species there. We have checked. But if you get to that point, you're going to be entangled in bureaucracy and approvals takes years and this site is not right. But when I look at it, there are already industrial activities on this site in this area that didn't need this authorization and the state argue that is not needed. So I'm quite hopeful that this will work out. What we may be underestimated in this is that the French legal system probably have been impacted by corona a little bit, but it doesn't have very fast response times. So some countries, you have a certain number of days to respond to something here, we have found that many things have taken a lot longer. Even simple things has taken a lot longer to get the court decision on. And -- but now I feel we are coming towards the end when we get to a final decision so that we can start.

[Operator]

And we will take our next question from Yuri Serov with Redburn.

[Yuri Serov, analyst]

Yes. Can I ask you about Russia? I understand that you are not managing that business closely, but obviously, it's an important country for you. So you're paying attention towards there on. Why are the volumes falling so much in installation in Russia? What explains that? I mean if I look at other building materials, that's not happening.

[Jens Birgersson, executive]

Yes. So a very cold winter.

[Yuri Serov, analyst]

Okay. Volume declined -- double-digit volume declines [Indiscernible]in Russia.

[Jens Birgersson, executive]

Yes. So you have -- the Russian economy is impacted by the sanctions but to a lot smaller extent than people believed. And I -- when I -- and I think we shouldn't go into the effect of the sanctions, but that's not the primary reason for that decline. The primary reason is that this winter was -- remember, this is also a low season. The season starts after the winter resolver. This is was a very cold, cold, cold winter. So the season hasn't started in last year was the opposite. So that's really the reason the main reason. And then, of course, we will look at next quarter, again, we are not managing it. We see the numbers and see what plays out.

[Yuri Serov, analyst]

Okay. So the double-digit decline you're expecting that to stop at some point.

[Jens Birgersson, executive]

And also remember, the whole of Eastern Europe has seen that it's Eastern Europe is impacted negative.

[Yuri Serov, analyst]

You said that in Eastern Europe at the beginning of your issue said Eastern Europe, you have a higher exposed to residential, and that was one of the big reasons why the take was figure. Is that the same in Russia?

[Jens Birgersson, executive]

I don't think higher exposure, maybe I'll express it on. But for example, if you look in Poland, a lot of these midsize semi-industrial projects, small factories, logistics center, warehouses, all of these activities. So it's residential impacted, but also these commercial projects have been impacted because of the uncertainty. So if you look at the project pipeline for Q1 in some of these markets where you have commercial industrial projects was awarded in the quarter is down with plus/minus but roughly 50%.

[Yuri Serov, analyst]

The other thing that I wanted to ask you is about your Romanian factory. You said that you announced it in February, I must have missed that, but can you just tell us a bit more what's going on? Is this going to be a full-fledged new [ flucture ] for you?

[Jens Birgersson, executive]

Yes. It's a brownfield. So we don't announce -- we tend to announce greenfields in new markets. When we just expand with an extra line, we tend not to make big announcements.

[Yuri Serov, analyst]

Great. Will it double capacity?

[Jens Birgersson, executive]

So I talk about we share it. It's not secret, but what's the big deal, we're just expanding the capacity on the site we already have. But let's say, if we were to build a factory in entirely -- let's say, we build a factory in Australia, we have no plans for that. But if we -- then we announce it because we feel a significant change to what we are doing. The rest is just adding capacity to meet kind of our growth projection, which is not a change of strategy as such.

[Yuri Serov, analyst]

Yes, I understand that. But you say new line, I mean it doesn't mean that the capacity is going to be doubled in Romania.

[Jens Birgersson, executive]

I couldn't hear that could someone [Indiscernible]. Can you repeat that question?

[Kim Andersen, executive]

Maybe you could just repeat the question because the line is not so clear.

[Yuri Serov, analyst]

Yes, I'm saying you say new line in Romania, does that mean that capacity will be doubled or not?

[Jens Birgersson, executive]

More than double.

[Yuri Serov, analyst]

Okay. Can I just ask one clarification? You said that your prices overall across the business in Q1 was very expected. I presume you mean sequentially. So I don't know, 1% or something like that, right?

[Jens Birgersson, executive]

I don't want to go into the details of that, but obviously, no big price increases. It's just that with a mix of things, relatively stable prices slightly up because remember, we announced price increases for Q1 based on very different energy assumptions. And then we had -- we rolled back some of that because the cost situation was different. And in some countries, we stuck to it. So -- and that the net of that is due to lead times in the process slight up. So not a big number.

[Operator]

We will take our next question from Arnaud Lehmann with Bank of America.

[Arnaud Lehmann, analyst]

My first question is regarding your donations to Ukraine. I think it was another EUR 13 million in the first quarter and more or less the same number in Q4. Have we reached now the upper end of what was approved by your shareholders for this donation. Do you expect more donations going forward?

[Jens Birgersson, executive]

We have now in our forecast included all the approved money. So that's done. And we have reflected it in our forecast. And we don't have any new Board decisions and giving more. So that's where we stand today.

[Arnaud Lehmann, analyst]

And my second question is Russia. It's been about a year since the conflict with Ukraine started. Do you still stand with your decision to stay in Russia? Are you still reviewing it? And I guess, day-to-day, have you found that you can still operate in the country without -- I don't know how to phrase it, but compromising yourself with either the local authorities or the recent states? And do you think it still were sold, let's say, bad press that you're getting. And obviously, you've been clear from the investigation with the Danish business authority but that created some negative headlines around the company and the brand.

[Jens Birgersson, executive]

So if you put it in perspective, how -- and I won't go through all the arguments, but when we fundamentally look at the assets, the 4 factors we have in Russia, one of the arguments, I'm not saying it's the main arm. And one of the arguments has been to take something that is state-of-the-art technology that would cost EUR 1 billion to build, if you could build it if you had our knowledge. And if you put that 1 billion, it would cost to build there, the absolute top-class factories run with local people. As to get to a conclusion that it's good to give that away for free because divesting is basically giving it away for free or behave in a way that it got nationalized. And anyway, ending up with some sort of competitors for definition, a competitor if someone else gets it because it will keep running because it's not dependent of imports. If you contrast that to, for example, Denmark's complete contribution, arms, aid, whatever to a crane so far, that donation to Russia would dwarf the whatever has been given so far. So my very rational approach to businesses that have a fiduciary duty to not do it, but they also have a more obligation not to do it. And once the dust has settled in the choice between creating that competitor and making a bigger gift to Russia, then the whole of all companies in Denmark, including the Danish State give to Ukraine, it just doesn't make sense to me. So we stand by that, but we obviously review it. If you then look at the pain of it, if you look at the Santaland study, 93% of the companies in Europe that were active in Russia, they haven't changed. They do compliance with the sanctions. And those are my competitors. So we are in a bucket with that is 93% of the companies in Europe. And if you speak to politicians, I mean I met several politicians, and I said, do you demand that I do more than the EU sanctions, they all say, no, it's fine. That's what you should do like all other EU companies. And that's exactly what we've done. So we are actually in a group with a vast, vast majority of other companies in Europe. So that's where we stand, and that's the motivation. And we monitor that all the time. And we are trying to prevent. So we're doing the lease we prevented over as a gift or a EUR 1 divestment where we create a competitor in 10 years if we come back and bite this company. So that's where we stand. Then if you look at the pain of it, there are 2 aspects to it. One is the 95-plus percent of the business or 98% outside, there this pain and debate is not there because companies do what we do. In Denmark, there are several hundreds of companies to do the same as we do. And I would personally -- if I was just doing a trading business export into Russia. I would, for sure, not do what I do here because the logic is not the same. But remember, there are still 300, 400, 500 companies in Denmark that are in the same situation to us. And then we have become the one that everyone talked about. But when we look internationally, where our business is, we don't get the critics. So you could say it like this. And yes, I get criticized, Kim get criticized, but we still feel that we have the obligation to stick and being logical and rational in what we do. And it's a debate in Denmark, and we need to acknowledge it, and we just need to accept that our rationale makes sense. It is in line with the vast, vast majority of European companies. And we feel we are doing the right thing, even though people criticize here in Denmark.

[Operator]

We will take our next question from Yassine Touahri with On Field Investment Research.

[Yassine Touahri, analyst]

Yes. Maybe a question on the long-term outlook for Rockwool. You got this directive in Europe that has been implemented. How do you see the impact on the European market? I think that Europe wants the renovation rate to be doubled or more in the next 10 years? Do you think it's achievable? And what will it mean for the Rockwool in terms of size? So question is like a look of Rockwool 2030. When you look at the business? Could you say building size? In Europe?I mean the second question is on hedging. Could you -- I understand that you didn't hedge much for the second part of the year and for the third quarter? Is that correct? That when we are modeling, we should assume that you will pay mostly the spot price for gas and electricity.

[Jens Birgersson, executive]

Okay. So I will do the outlook and then Kim will do the hedging. So on the outlook, I think we are blessed with a very good -- the macro -- the macros speaks for us. And then we have now a dip -- a temporary dip in the market, and I've said it a million times that you cannot meet the climate goals without delivering on those EU goals and reduce energy consumption, thus reducing CO2 equivalent emissions. So -- and also when you do that, you speed up the transition to greenfication because if you don't use energy, you can use the solar PV and the win to replace other things and to make the all grid green. I -- we have calculations where we've gone down to square meters, a number of houses how many energy classes and the energy class definition vary by country, and we've run that for our markets in great detail. But I see -- and then you have the goals and there you have the upper envelope of something incredibly good for Rockwool. And of course, there are going to be other insulation material, incredibly good for them, too. But you have trends on top, for example, that circularity going to increasingly come as a requirement. And there you have the whole discussion about PFAS, forever chemicals and to be forbidden and we don't have that. We have a circular product. So -- and on top of that, you have the trend of PV roof that you need PV solar panels on a very flat roof and to be fire or noncombustible under really makes sense an insurance company. So a huge amount of macros that then gives a mind boggling volume growth. But then the reality is that you are stepping into people's life, you need to fund this. It's not fun to do. You need works you need all the rest. So they're going to come in a whole lot of constraints on doing this. And probably also delays that we have seen because it's easier to push things forward nowadays. If you're a politician, you wait. But at some stage, it has to start. So I think those macros are there. So my approach to it is that, yes, we have done the calculations. And yes, we will need a lot more factories. But at the moment, we kind of turned that around and say that we have 2 jobs to do on capacity. So rather than me giving our 10-year guidance, what the size is of Rockwool. When this gets started, maybe Kim and I will go out and give a number. But I don't feel we should go out and give a number before we've seen that this gets real traction. And until we've seen what the constraints are in labor market, maybe we get more efficient in doing this and all the rest. So the homework as I see it, I do now is, on the one hand, we keep knocking off the greenification of existing plants like the project we do in Switzerland. Very expensive. We have the technology, but we keep doing that, so we get the greener footprint towards the signs base target. And on the other side, we build factories also in a downturn, like we do in Romania, we hope to start now in France, and we have some other sites that we have planned. We keep billing, so we stay ahead of the capacity game. And then we can accelerate that when we see the real thing. But I don't give a 10-year guidance because I wouldn't like to see some more traction. But if all of this happens, then of course, there is a tremendous top line for Rockwool, where the constraint is how many factories we can cope building, right? But often something else will break along the way and the value chain. We've seen that in every little small bit, we all try to buy privately. There's always some constraint and there will be constraints. So we need to understand that better. before we say exactly what the number is. Does that make sense?

[Yassine Touahri, analyst]

Yes, makes a lot of sense. The question would be just, can you do something to address some of those constraints. For example, the labor. Can you -- would you consider investing to prefabricated modules or invest in the training of roofer or [ utilition ] companies? Is there something that you can do to address the question.

[Jens Birgersson, executive]

We do training. We are promoting that people that politicians realize that we don't need all the people from universities that have studied things that will not be needed in the future. So that debate, I think, is going, but it's going slowly. It's going slowly. Yes, but we do work on that, but I can't say that we can -- we have any results to show on that but we are working on it. And I guess a lot of other companies do too.

[Yassine Touahri, analyst]

The question I think on regime, which is more short term.

[Kim Andersen, executive]

Yes, Yassine I'll just take that. I just want to repeat again what Jan said before. We have 2 markets where we have green factories, i.e., melters that are using electricity in Norway and France. And here, we have this year, entered into sort of in France as a 2-year in alert agreements with attractive cost of sourcing electricity. So that lease for me was a good sort of hedge we did that also helps us midterm. We have also decided this year, now prices have come down. Premiums on forward contracts are also more reasonable. So we have in Europe, we decided to cover 50% of the gas consumption for the remaining part of the year. So those are the 2 sort of major hedge areas we have done. We are still in talks, as we have mentioned before, more long term, still in talks with especially on the electricity side, how we secure long-term competitive electricity sourcing to some of our future sites that will be running on green electricity.

[Yassine Touahri, analyst]

Maybe a very last question. Have you seen the bulk of the impact of the drop in residential living and cater? Or is it still to come in the second part of the year or next year?

[Jens Birgersson, executive]

Hard to say. It varies. For example, the Danish market is down to a very, very low level. And in some other markets, you've seen building permits go down and building stocks. So I think you're going to -- I don't have a simple answer to that. I think you will see some market worsening and then other markets improving. But I can't sum it up in a simple we've seen the worst or not. Our normally pessimistic approaches is that are realistic is that we factor in that if we get a little bit worse until we really see it turning up, we don't speculate too much because they can also be quite a disconnect between building starts and building permits and all the rest to the real market. So it's very hard to predict.

[Operator]

We will take our final question from Zaim Beekawa with JPMorgan.

[Zaim Beekawa, analyst]

Two for me. The first just to come back on hedging. I appreciate you sort of mentioned it in detail that you've covered 50% of your gas consumption. Can you provide some details at the level at which you've hedged compared to the current spot rates? And then my second question is you pointed out France and Spain seeing some growth. Really what's driving this? Is it better impact from energy efficiency regulation in these regions compared to others?

[Kim Andersen, executive]

Thank you. Yes, Zaim I will not give you the details of the hedge. But obviously, when you do the hedging, there's always a premium to pay compared to the spot rate. That's what prevented us last year from entering into these short-term hedges because it was simply prohibitively expensive to do. I think why -- the reason why we decided to do this year is that the scale of that premium came down to a reasonable amount. So I think we are comfortable with the hedges we have done in gas this year, also taking the fact that we are still operating still with a 50% spot market. So we still have a little bit of in case the prices go further down, we still have some upside. But the premium was not privity too high, so that's why we decided to enter into the hedges for this year.

[Jens Birgersson, executive]

Then on the markets, I don't -- it's just a quarter, but my reflection on France is normally when the market turns south. The French government are quite good at incentives to get it going. We saw it during the Lehman Brothers decline. France kind of didn't drop as much and it started to grow quicker. So in France, the market has been supported by incentives, energy efficiency measures, et cetera. In Spain, what we see is a lot of PV roof projects, really a lot of it. So that's the main driver that we see at the moment in Spain.

[Operator]

And there are no further questions at this time. I'll turn the call back over to the host for closing remarks.

[Thomas Harder, executive]

Thank you. Jens, Kim and I, Thomas. 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. 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.