Ladies and gentlemen, welcome to the ROCKWOOL A/S conference call regarding the results for the first quarter of 2022. My name is Thomas Harder. I'm Director of Group Treasury and Investor Relations of ROCKWOOL A/S. Today, I'm pleased to present CEO Jens Birgersson and CFO Kim Junge Andersen. For the first part of this call, all participants will be in a listen only mode. As a reminder, this conference call is being recorded. First, Jens Birgersson will go through our presentation and give you an update on the results for the first quarter of 2022. Afterwards, we will be ready to answer all your good questions. Before I hand over the words to Jens Birgersson, I must ask you to notice slide number two, which is the forward-looking statement. Please be aware that this presentation contains uncertainties.
Now we can go to the next slide, which is slide number three. Jens Birgersson, I will now hand over the words to you.
Good morning, everyone. Just move to the quarter, the highlights. To start with, if I'm summing up the quarter, and this will. Generally, I'm very happy with how our local teams have taken this quarter on. It was quite challenging, and I think the outcome is quite good. Starting with the top line, 36% growth. That should be seen in light of that, there are logistic challenges, supply chain challenges to get people to the factories. On top of that, we had the Russian invasion of Ukraine. That required a lot of attention. All these factors made it a little bit more difficult to produce for many businesses.
We delivered that 36% growth, where half is price, roughly half is price and half is volume. I'm happy with that, I come back later to in what markets, but little bit simplified, I would say it has grown everywhere with the exception maybe of China. China is less than 1% of our business, so it's not very important. We go to the bottom line. It takes us five, six weeks, say six weeks plus minus a couple of weeks in most of our businesses to change the pricing. We have some OEM businesses with longer contracts. We have changed those contracts. If we look at the inflation impact, and inflation here, I say raw material cost of goods sold, energy, all of it, are basically production cost.
It's quite dramatic what happened. From fourth quarter 2021 to Q1, across the board on average it increased 20% and energy increased close to 40%. If we compare Q1 2021 with Q1 2022, it all increased more than 60% and energy is 2.5x up with gas taking the lead at maybe 3.5x up. What we bought for EUR 100 last year in Q1, we paid EUR 250 for today, yeah. When we did our cost forecast, remember we are not very much hedged. When we made our cost forecast for Q1, and we decided on what prices we would have in Q1, we knew there were inflation and we went out with quite significant price increases.
Of course, we didn't predict that there would be a war. We didn't predict that there would be more or less an energy crisis and all of that. We missed a little bit on that. That explains why we slipped down to 11% margin instead of 13% that we would normally have. A miss, but it's a forecast miss. We executed on our pricing plan. We exceeded our pricing plan a little bit. We already have new prices launched for second quarter, and we are halfway through it, and we are executing on those also. That's the background to that quarter. Therefore, obviously we don't have the full operational leverage.
If you look at, you know, more than EUR 100 million of cost increases in a quarter and that we still deliver the 11%, I'm quite happy with that. It's of course bigger than the year before. If we then go into sales on the segments, it's not so much to comment other than that insulation did really well. As I said, only negative growth in China, apart from maybe there are some countries somewhere. Couple of notable things is that Ukraine actually declined less than 10%. We didn't even have an ambition to sell. We told our staff, "You don't need to sell, just keep yourself safe." It's not a big business, but it's a bit surprising. Systems haven't had the same strong quarter.
The reason for that is a couple of items. Basically we have some of the businesses like Rockpanel and Rockfon doing really, really well. We have the business, and that's a small business, into car manufacturing or the automotive business, where we haven't seen much growth. The reason is that they don't grow due to material shortages, chip shortages. Demand is super high, actually, as you all know. We have had one business that is impacted negatively, and thus the growth on business where destocking of the supply chain in North America has impacted us quite a lot. Move to next slide, the regional sales development. Western Europe, you know, 20% and above everywhere. You see the countries that were particularly strong. It was strong everywhere.
In Eastern Europe, Russia is still continuing, but we expect it to deteriorate. The economy is getting worse, but you haven't seen much of that yet in the construction activity. I think that's natural because you finish projects you have started. We expect that business to start declining going forward. Poland, Hungary, some other markets really taking the lead in terms of growth. It's all very strong performance in Eastern Europe. Going into the rest of the business, North America, Asia, both Canada and the U.S., very strong. We see maybe a certain leveling out of the Market Day on the new build.
It's not quite as frantic as it was, but the demand for stone wool is very good, and we are basically selling as much as we can ramp up the capacity. We have capacity left, it's just a matter of getting the shifts on board and the new factory in Ran. We are not on full shifts there yet. It takes time to train and so we can grow more. In Asia, India stands out as a very big, or not very big, but it's very big growth. Also good pricing, actually, there. We have good business. Generally the markets are now back after COVID, except for China, that is singularly negative.
I think also we will see generally in some of these markets in Western and Eastern Europe that, you know, some of the commercial businesses and new build will decline. That's what we predict with all these cost increases or price increases, that will probably impact the market, but that could also be a hope then that there will be a bit more labor available to do renovation and energy efficiency improvement. Yesterday you saw, I'm sure you all read it, but REPowerEU that came out yesterday, they have the first principle and the first goal they put out of four is to save energy. We like that, you know, use less, comes before everything else.
The commission in the document that was issued yesterday then increased the energy efficiency targets to 2030, from 9% to 13%. It's also binding targets. It's a binding energy efficiency target, which we haven't really seen before. They upped the Fit for 55 package. Okay, move on to the cost curve. Yeah, you see the natural gas is the crisis of them all. It's extreme. So energy year on year up 2.5x , but it's everything. Then of course, looking forward, we also see that the inflationary pressures start to reach salaries. We have higher salary increases this year than last year. It's kind of spreading and it's not news to you. But in terms of pricing power, we haven't had problems with putting the prices out.
Actually the dialogue with the customers has been very good because we announced, we have stuck to it, we have explained it, and I think we have been helped by that some other materials started already. They had a different cost structure. They've been impacted by different things, so they increased building material prices already Q2 last year, for example, the foam plastic foam insulation. I think maybe a lot of the work there on realizing something drastic is happening on the cost structures. I think our customers had seen that. On the customer side, I would say that the customers that sit with normal consumer and end customers, some of them sit in a very tight position. Now, obviously, they quote and they don't guarantee prices, and they raise the prices.
Generally in distribution, I think distribution has been relatively strong at passing on the prices. Move to the next. To avoid the discussion about how much is price and mix on that, we will not go too much into the details of the mix, but it's quite a big impact in the system division, the mix effect and the price effect. We did increase prices in Q1 over Q1 last year with about 17% and but margins, obviously, EBITDA leverage has not. It's not enough to compensate there. There, I would say the normal rule would be that you keep gross margins or and preserve EBITDA margins more.
At the moment, we steer a little bit more towards maintaining the EBIT margin because we feel the price increases when we need to pass on basically double to the inflationary increases in absolute terms to protect that. The price increases become so incredibly extreme that we kind of put it somewhere in between there. We are working back the margins, and I think we are back on the 13% EBIT margin relatively soon. Move on to slide eight. Only thing I really wanna comment here is that first of all, more is coming. We're talking a double-digit price increase or something like that already in place above what you've seen in Q1. So that's coming into play. It takes a little bit of transition time coming.
On the system division, where you see that drop, obviously very difficult comparable last year, right after corona, very strong quarter, very good mix, very low cost. The 17.6% is probably not the reference, but I would say we have about 2% on the mix. The rest is missing price on the margin difference. Now, Q1 investment activities, we have kept the green part relatively, so the green part, the green investment, EUR 26, EUR 25. So same number, and there we have, like, melting conversions, building efficiency improvement, health and safety, and then other products like waste handling, emissions, lighting projects, other things. We keep doing that. That's progressing. I guess the big one we are starting up now is really the Flumroc project in Switzerland, where we're talking quite a substantial investment.
We do. We haven't spent an awful lot yet, but it has been launched. Next slide, free cash flow. I really don't have much to say on that because the net working capital percentage is stable. With this extreme growth, it obviously always impacts the seasonal cash flow. We always are negative in Q1. With this extreme growth, obviously, I think we should be happy that we just kept roughly the same net working capital percentage. Next. We have done one partnership here with One Ocean Foundation. This obviously fits into our effort with our SailGP exercise, where we get a very good chance to expose our brand and be in the leading kind of race circuit that really wants to be a sustainable race circuit.
There is also another thought behind this partnership with One Ocean Foundation. You can Google it. It's a very, very serious foundation with quite academic work supported by the Bocconi University and some PhDs. So quite a serious quantitative approach to the ocean, and we are looking into that. The reason we feel this one is important, one of the reasons, is that we feel there is a need to increase the accountability from companies for what happens in the ocean. Today, for example, if you look at all the plastic waste that goes into the ocean is explained by, that is the people around five to seven rivers that needs to be trained to not throw it there.
I think there is a case for that there should be greater accountability in all countries and all companies for the ocean. This shared element of the ocean is clearly seen in the UN SDGs, that very few companies have an ocean SDG that they are driving. We think that needs to change. Now when we have our sports undertaking here, it fits in to have a partnership like this and start to drive that, because if we're gonna save the planet, we also need to save the ocean. To save the ocean, we can't have it as a kind of garbage pool that no one takes responsibility for.
Might be one day that we put, we need to figure out our link to it, that we put a target for ourselves on how we can improve the ocean. We will also launch some progress in that field. Next, outlook. Starting with the investments, or first with the assumptions. We haven't assumed in this that there will be a downturn. I don't exclude the risk. We haven't seen it yet, but with this high material prices, with the war, with the interest going up, you can expect that some sort of reaction will come. We have seen that in the GDP forecast. Now the growth rate has been lowered from maybe 6% to 3.6% global GDP. We see China not coming out of their situation, even though they have maybe GDP forecast of 5%.
Nevertheless, we suspect that something will happen to GDP due to all this. That said, for the construction industry, yes, new build might decline a bit, but there are also very many factors talking for energy efficiency, saving the climate, the 40% CO2 from buildings, the EU directives, and now from yesterday, the REPowerEU with even tougher targets which makes us energy independent. That's all good for us, but we have assumed that we won't have a drop-off this year. It won't be the same growth as now. We see a normalization of the volume growth because we balance, we have a better pricing, and we also see that the activity levels should not be quite as high as what we experienced in terms of demand in Q1. Might also be in a certain level of hoarding in Q1.
That's the basis for the forecast. On the inflation, we have basically said we keep having the inflation, but we fundamentally believe that now with the prices and the fact that it won't jump up with EUR 80 million between one quarter to the next, I feel we have that in hand to bring the margins back, maybe now going forward. We should be able to deliver around 13%. Top line then with these prices, these volumes, and what we've already done, we upped it to 2025, which means it's a bit higher, but it's a combination of the price and what we have seen volumes and certain assumptions second half year.
On the investments, obviously one impact is that we hadn't really started to spend seriously on it, but we had forecast to start spending on the Russian project. We canceled that investment, that impact. The bigger impact on the lower CapEx outlook is that with the very high load that we have on the factories, we have reduced certain upgrades, change of equipment, so we just minimize to make sure we can produce absolutely uninterrupted, if we can avoid those stops. We're postponing some CapEx that we've planned, smaller CapEx. Okay, that was my last comments. With that, I hand over for questions.
Thank you. Just as a reminder to participants, if you do wish to ask a question, please dial zero one on your telephone keypads now. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. Our first question comes from the line of Yves Bromehead from Exane. Please go ahead, your line is open.
Good morning, gentlemen. Thank you for taking my questions. The first one is I just wanted to get a bit of color on the volume story for the rest of the year, given your comments of increased sequential prices going forward. I would imagine that you, as you mentioned, demand is normalizing. Are there any sort of hotspots where you expect that to be more pronounced? Are you seeing any evidence of either cancellation or delays? Also on your comment regarding renovation, I mean, at the end of the day, do you think the consumer still has enough discretionary spending to pursue some of the renovation projects in countries where they need to actually tap into their own wallet? Or do you see a risk here?
My second and last question, on the CapEx front, you pulled the call on the Russian expansion, so can you maybe give us a clearer guidance as to what other projects you're pursuing and also any color on development of the French and Swedish expansion pipeline here? How is that getting along would be really helpful. Thank you.
Tapering off. We have taken down the volume growth. You know, it's positive growth. We have assumed that, but not what we saw in the first quarter. Going down to single-digit and no particular big markets. We have seen, if you take, for example, the Nordics, still very high activity, but obviously you can see now new projects talk about postponing, not doing, canceling. I think there are signs of that. I flagged that new build with this cost level probably will taper off. We look into renovation. I think you're absolutely right. With what's happening now with, you know, gas prices or petrol prices doubling and that, I think discretionary spending gonna be under pressure in large parts of society.
I think to get the renovation going, this is the Italian model. Otherwise it won't really happen in this with food going up and all the rest. I absolutely think that's a risk. Therefore, I wouldn't exclude that you have a dip, a bit of a dip after this happens, and then as a stimulus and in line with the Energy Efficiency Directive and now the REPowerEU, et cetera, that the money is there in the EU, that they push it in and then how countries implement it. I think it needs that to really take off, and therefore definitely a risk that there is a gap between those. Personally, I don't see it as a big problem for us if we have a year or a year and a half with less growth or no growth.
That might likely be the situation. When it comes to capacity expansions, the Swedish one, we haven't taken a go decision on yet, because we had a go decision on Russia, and we have a go decision on Soissons. In France, Soissons, we have been stuck now for a while with some permits, and some hearings and some legal disputes. It has just taken time. I would envision that, say by September, we could start with groundbreaking and then two years after that, so say Q4 2024, we probably should be able to start deliveries. That depends on that we get our clearances and that we get okay to start, and we hope that will come here during July.
Yeah, I think I answered your question, Sir.
Yes, you did. Sorry, just one little specific question on the CapEx in Russia. Did you already commit and spend some CapEx there that is, let's say, lost for the time being? Can you bring cash back to Denmark from Russia?
First of all, if you read our report, you come to an item with exchange rate losses. Deep down there is a comment. We have until the war started run a joint cash pool. Actually we have the cash out of Russia up to that point, and that's. Kim can explain that in more detail. We sit on that cash from all of last year in the central cash pool. But on that project, we have started with some limited work, and kind of the design of the plant, we can take a lot of that engineering and use for the other plants. It's not, you know. You don't need to worry about the write-off or anything.
It's all already in our numbers, as you see now, the small impacts we had of that. I'm not saying there weren't any, but you know, it's just normal operations for us. We have not bought any equipment or anything like that. Should be said also that if we buy equipment, many of this equipment we can just redirect to another plant. No big risk or no risk there. I would say zero risk.
Thank you very much, Jens.
Thank you. Our next question comes from the line of Brijesh Siya of HSBC. Please go ahead. Your line is open.
Hi. Good morning, gents. I have two as well. The first one is on your volume. If you could just give us a little more flavor about how the Q1 stepped up in terms of underlying demand and how much of that is pre-buying or a comp effect. If you could give us how the current order book looks like just to get a flavor of how the Q2 is setting up as we speak. Now the second question is on the pricing. You've done 17% in Q1, and now the comment you made about that, the plastic film pricing did help you.
Looking at this point, how far you are or how much ahead of plastic film you are, or you are at level with them? If you can give a little more color to just understand how much lever you have to raise for the pricing, 'cause before any market recession kind of things comes into the picture.
Okay. On the volumes, I mean, you can calculate the volumes in Q1. I'm not sure. It's very hard to judge so shortly after a quarter what was demand and what was because people started to pre-buy and they were worried about future price increases. It could. We try to avoid that because we don't like to overfill the supply chain. We charge the new price for everything we deliver within the pricing period, so to say. You can't buy today and have a delivery in six months and keep today's price. That's not how we work. I think that underlying demand was lower than this double-digit volume growth we had, and that's because people predict that prices will go up.
I think we are really in a market with a couple of percentage point growth, and then you have the case where the new build done in three quarters, four quarters, who knows, will start to decline if this continues like this. Order book and activity. We don't have a long order book, but we have a visibility on what's happening. It is strong, okay? On the pricing with foam, I mean, I can't sit and say that I have this much room left. We price here and steer towards our margins, and we look at our cost. I can't say, you know, room left. Generally, I don't feel, except for the flat roof segment in some countries, it's not the main competition.
You know, with EPS, of course, they're always cheaper, but they now increase. On the PIR and the PUR, it's often specification work that makes the difference, and big projects might be impacted in the flat roof. At this stage, we don't see that. We actually see that availability of stone wool might be the constraint to that. It could grow even more. We have been able to deliver, but to step up an output this quickly in what is normally low season is a little bit tough to do. We probably could have sold a little bit more if we could deliver more, but we couldn't deliver more because we didn't expect quite this volume growth in Q1. Yeah. Okay?
All right. Thank you.
Thank you. Our next question comes from the line of Arnaud Lehmann of Bank of America. Please go ahead. Your line is open.
Thank you very much. Good morning, gentlemen. Two questions on my side. Firstly, I guess the slightly obvious question on margins. You were at 11% in the first quarter. You still confirm your full year guidance at 13%, which means you were hoping to do more than 13% in the coming quarters. The question is, are you already back at 13% margin following the April or May price increases? Are you confident that you can exceed 13% margin in the second half of the year? That's the first question. The second question is on your Russian operations. I believe you're one of the few companies in the sector that has decided to keep your Russian operations open and under your ownership.
Are you still comfortable with this decision? Do you see any political pressure to change that? Do you see any risk to the ROCKWOOL brand of taking this decision? Thank you very much.
Okay. Good. Good question. Thank you, Arnaud. Are you in the U.S. or are you in Europe?
I am in London.
Okay. In London. Okay. Now, on the margin, I'm not gonna comment on the margins in the months now, but unless something happens in the market, something drastic, then I'm confident on the margins. Okay. The margin we got in Q1 is simply the effect of that's the price we put out there, and then the cost due to the war and the energy crisis just went even higher than we expected. If we would have known that it would have been on this level and put another price, we would have had the margin. Okay.
I don't think that was a good thing we did that way, it ended up that way, because some of our customers, you know, the distribution might find this relatively easy, but some other customer segment really have battled, and we need to have a certain understanding of that side. I think that worked out fine. Unless something else happen, I'm confident about the margin. You are right that, you know, some quarters need to be on a higher margin to get to the 13%, so agree to that. In terms of Russia, just to recap the arguments, your decision for Russia runs very much on what business model you have and what business you have.
You could have me as a CEO for another company where I would absolutely take a decision to step up. It's not a principled decision. It's a decision based on where we are. If you look at ROCKWOOL, we have been in this business now for more than 80 years. We have done a number of in-house developments. We are running plants that we design. We also have third-party plants in a way that no one else can, and we have equipment and proprietary equipment and processes that means that we do this really, really well. We are 4x or 5x bigger than number two in terms of capacity in the world. Let's assume tha 4x . You can't buy. It's not like a beer factory or something. You can't buy a ROCKWOOL plant.
You can't get the knowledge out there. Our plants and the way we run the business is better, okay? That's our market leadership. We look at the business model from a perspective of how we set up where we put the factories. Local material, 95%, 92%. System division, slightly different. The installation business, very local supplies on the incoming material side. Local people, we have no single expat in Russia. We don't run a matrix. A full competence in the local team. On average, we ship, I think the last time we put a number, 300 km, maybe now it's 350 km, but 300-400 km. Local people, local business, but the key thing is that we put in our best IP, our best green technology, our best everything in our factories.
That means that when we get to the conclusion on why we stay fundamental, the three arguments. Today, we get the cash out of Russia still. It could change. Giving away that cash flow locally feels wrong by losing control or giving and nationalizing or selling it for ruble. Second thing is, we feel it's the wrong incentive to take this asset that is worth, you know, depends how you look at it, but if you were to what it cost to build or what you would get for it if you sold it, you know, out in the open market is, you know, billions of Danish kroner . It's very significant value in the asset. Then the third argument is that the IP.
We don't wanna give away the best green tech in stone wool that exists. We don't wanna give that away. Then you could say, "Okay, why don't you shut it?" Our plants in Russia will not be allowed to stop. The people there can run them, it will just be under new ownership. For that reason, we have stayed. That also means that when you look at Saint-Gobain and for example, Knauf, the French and the German competitor, they come to the same conclusion. They, because they probably have the same situation. It's not the case that we don't have competitors all exiting. Finally, we haven't received any political pressure. You know, we adhere to all the sanctions. Every sanction, now we are on sanction package five, six is being discussed, seven is maybe moving.
There could be a sanction either in Russia or the EU sanctions maybe more likely, that says you have to drop it, you have to hand over the key. That could happen, and we live with that. There are many cases where we could be, we have to hand over the key, but it would be wrong as we see it. The political pressure on us is not there. Of course, in Denmark, you have certain newspapers and public opinion that want us to exit, and they write about it. It's relatively calm now, actually. On the other hand, when I sit and discuss it with customers, I explain the situation and then I said, "What decision would you take?" Or I ask an employee. They take the same decision as we have taken.
We are not frozen on it, but we are convinced it's the best thing to do, and our competitors are staying. There are some that are exiting, but you look at them, typically very small. It's not worth the effort to stand up like we have done and explain this whole rationale if you are doing EUR 10 million, EUR 50 million in the country, then just drop it and get out of there. It's much easier and focus on the rest of the business. Okay? Is that an okay answer or no?
Yes, that's excellent. Very helpful. Thank you so much.
Thank you. Our next question comes from the line of Manish Beria of Société Générale. Please go ahead, your line is open.
Yes. Good morning. My first question is in your guidance, what we have built for the remaining nine-month volume growth. This is my first question. The second one is on, what sort of price inflation we see in the COGS, cost of goods sold. In the first quarter, I think it was something like 55%-60%. Do you think in Q2 it moves up little bit, sequentially also Y-o-Y? The third question I will take later.
Okay. On the volume, and the guidance, I've already answered that previously. If you look on the input cost inflation, we had 20% between Q1 and Q4. We are expecting the rate to decline a little bit going forward. We don't believe it will jump 20% every quarter going forward. I think those. You had a third question, Manish?
Yes. In the press release, we have mentioned that the margin recovery is necessary to continue a high level of investment. How should we think about it that due to inflation, maybe our maintenance CapEx, growth CapEx, and working capital needs will be on a higher trajectory versus past in absolute euro? In that sense, I mean, this high inflation of course lift up your EBIT, but doesn't necessarily means higher free cash flow generation because of the higher investment needs. This is how you think about, I mean, this inflation margins and investment needs?
I mean, the higher investment level, just to be clear on that, the drivers, you know, is energy efficiency, reducing the 40% CO2 that comes from buildings, save the climate. Then we have now the REPowerEU on top, energy independency. Then we have, of course, now high energy prices. Long- term, we said that we added now the REPowerEU as an argument. On top of that, we have our Rockcycle or circularity approach where it also drive demand. Medium- term, we believe in good demand growth for our products. That means that we like to sit on about 13% EBIT margin or a bit above that, because we need to invest a lot to build capacity, and now.
That's the reason, but then if you run the spreadsheet, if we have 11%, 12%, 13% or 14%, you probably don't get two different investment decisions. It's not like it's a trigger level, but we feel that with the current climate of very high inflation on steel and all the rest, it's obviously important that we stay on a sound margin. It doesn't work that we operate the business on 5% margin, and then we build factories that now cost 30% more due to inflation. We need to keep the margin on and pass on this. Otherwise, the sustainability is not there. If it's 11%, 13%, 14%, 15%, you know, that's not the key item.
Yeah. Okay. Thank you.
Thank you. Our next question comes from the line of Zaim Beekawa of JP Morgan. Please go ahead. Your line is open.
Morning, Jens. Thank you for taking my question. Just coming back to the decrease in the CapEx guidance, can you talk about how you think about that postponement may impact growth in H2 and indeed 2023? Second question, just on sort of the Russian natural gas supplies, if that were to stop, how much of your business would see a direct impact? What sort of mitigating measures could you take? How easy would they be to implement? Thank you.
Zaim, I hand that over to CFO because he has worked more actively with our CapEx breakdown. Kim, take that one.
Yeah. Thank you very much, Zaim. We have in the annual report mentioned a little bit about our CapEx expectations for the coming sort of midterm without sort of disclosing the specific number of years. There is, as Jens said, an expectation that demand will continue to grow for our products, and we do need to invest in more capacity. Our business model is fueled by organic growth primarily, yes, and we need the available capacity in order to grow. We will see a CapEx amount going up in the coming years. Previously, and in the annual report, we have said it will go up to a CapEx ratio of up to 13%.
Of course, that was before these very significant price increases, but it will be higher than the EUR 300 million, EUR 400 million that we have spent in the last few years. That's for sure. Next year, I'm sure there will be capacity projects next year that we will announce that will keep up a high CapEx level.
Thank you. On the natural gas impact?
What was the question there, Zaim?
Just if the Russian natural gas supply were to stop, how much of your business would see a direct impact? What are the mitigating measures you can take within your plants, and how easy are they to implement?
Absolutely a direct impact. We use gas in some of the places in melting. We use it in abatement. Abatement is a fancy word for cleaning filters and things like that. Then we use it quite a lot for curing. When you look at those processes, if the gas stops, first of all, it's obviously not all countries. If the Russian gas was to be shut off now, there are about five countries that will be very severely impacted. There is this gas-sharing law across Europe. We have analyzed that. There are also some assumptions on whether you belong to the industries that are being cut off or not. For example, in one country, we are not on the list.
We're on the list of the people, of the companies that will be cut off because we are not a hospital, this and that. At the same time, they say us cutting off wouldn't be good because it leads to unemployment, so you will get 50%, but we can't put that in writing. You have this type of deliberation. If you take the worst case of that, we have about five countries where basically production would stop. It wouldn't bankrupt us, but it will stop. We are busy investing in a mitigation plan, because we don't believe if the gas is being shut down, we believe you would go into technical recession across the whole of Europe.
We don't believe we need the demand, and therefore, we are working on a mitigation plan that is relatively CapEx effective, where we can keep the level of production up that market demand we have estimated in that situation. The reason we don't invest in a mitigation factor to be able to deliver on this level is that we simply don't believe the demand will be there. We also don't believe that, for example, replacement processes like LPG is relatively cheap to invest. When we speak to three, four suppliers on that, it's obvious that they cannot replace all the natural gas. We have to make assumption on what is realistic that they can supply. We work on that. I would just sum it up.
It will have an impact, but I think the biggest impact of switching off the gas will be a very severe recession. Okay?
Great. Thank you.
Thank you. Our next question comes from the line of Claus Almer of Nordea. Please go ahead. Your line is open.
Thanks. Also a few questions from my side. Yes, the first question goes to the very strong performance you had in Eastern Europe. Can you put more color to what was actually the main drivers behind the 70%+ growth in Q1?
Yeah, if I just look at the countries, I mean, the growth rates are super high everywhere with Poland leading, Czech Republic also very high, but it's high everywhere. And it's light industry, sandwich panels, flat roofs, this whole logistics, that segment, maybe some manufacturing, but it's basically light industry buildings that is driving it.
It's more in business segment and not private houses renovation of houses?
That's right.
And compared to- Sorry.
Yeah, that's right.
Okay. You know, compared to Q4, for instance, have you seen any, yeah, why this drastic change from last year?
We have seen this happen in Eastern Europe all the time, basically. That it was very good activity in Q4. It was not bad. It has been growing all the time. We see this in Eastern Europe. It fluctuates a bit up and down. When it's good, then it's good all over, so to say. Then the next quarter can be a little bit lower. Let's see what happens in the next. My prediction is that we're gonna see strong development going forward too, and then the question is how long this wave of this extreme growth in Eastern Europe will continue.
Okay. The second question goes to Russia. You said that you expect a more activity level, I guess, at one point into the future. As the world looks today, how much lower do you expect, or where do you see Russia to stabilize?
I can't say. I mean, Russia, from a top line perspective, is less than 10% of our turnover. I just look at it. I mean, the GDP is down. They're totally isolated. It's just getting worse and worse. I would just predict it will start to decline. We have seen some of it, but it's still too early, you know. The war started in the end of February sometime, and it's not so many weeks into it, actually. I think it takes a while to get through. I also think there is a certain effect of in uncertain times, if you sit on cash, put it in something real. Putting it also into a residential house for normal people, not business, but residential also makes sense.
You see. We have seen that happen also. I'm pretty sure that we will see a decline in Russia.
Okay. Just a final question about the ASP or the price increases you have done or the industry you have to implement. Do you see a cap to how much you can actually raise prices? Is there a cap where you will start to get concerned to what extent the end users will actually be accepting these price increases?
The end user's gonna be a result of all materials, the whole cost for the project, not the insulation standalone. I think you will see that. I think you just looking at yourself, you know, buying a new house and suddenly pay 30% more, that will change the mind in some segments. I think we are there, and we will see it. I think it is very high. Again, I have never lived in anything like this, you know. I've never seen this type of increases before. It could maybe also have the opposite effect, that if people believe this will continue, they will invest more. If it tapers off now and normalize, that some people say, maybe we get through it.
Because I don't think as such that 30% or 25% or whatever it is on building material will make all this project unviable, because also salaries will follow along now. We will see salary inflation. So maybe it keeps going. I don't think it's only the stone wool, but I don't think for stone wool that the 30% price increase will be impossible to build because it costs 30% more, I don't believe that.
Yeah. Okay. Okay, yes, thank you so much for your answers.
Thank you. Our next question comes from the line of Yassine Touahri of On Field Investment Research . Please go ahead, your line is open.
Yes, good morning. A couple of questions. Firstly, could you give us an update of your sales breakdown between residential construction, non-residential construction, renovation and new builds? That would be very helpful. Second, if it's possible, could you give us a little bit of color on what you've seen in terms of volume in April and May? Have you seen the same kind of growth as in the first quarter or is it a little bit slower? Then last question on, have you seen any new measures since the beginning of the war? Like new tangible measure that will boost energy renovation, for example, like a tax cuts in countries like Germany, Poland, Benelux, France.
Do you expect any of those measures to have a meaningful impact on that in the next six to 12 months?
The last question we need to recap, but if we come at renovation and new, at the moment certainly more new. We don't give these details, but I say something at least. There's more new than renovation. There is a little bit more. This varies by market. There's some markets that absolutely are the opposite. There is a bit more non-residential than residential. If you go from 50/50, it's slanted towards more new build and especially multi-unit and industrial, and then more non-residential if you make the four-by-four matrix. Okay. The second question, what was that, Yassine ?
Could you please give us a little bit of color on your volume growth in April and May versus what you've experienced in the first quarter?
Okay. We don't comment on the current quarter volume, but I said in the previous question that obviously we published our outlook yesterday. We see continued sound volumes, but we have told you that with the price increases we do, we believe and we forecast that volume growth will be, you know, single-digit and that for the rest of the year. I'm not saying April. April might be different. We see an activity where you're talking single-digit growth. We had this Q1 effect, and whether that is in April also, I don't wanna talk about that. We see over time that it should go down to lower single-digit volume growth going forward. You know, it's still very high activities. Okay.
Last question was about the subsidies that you see for insulation. Are you seeing any new schemes in your key countries coming in the next 6-12 months? Are you seeing, for example, any new tax cuts going for you know in France, in Germany, in the U.K., in Benelux, in Poland?
You're very hard to hear, Yassine , but I think you talk about governmental subsidy schemes for renovation.
Yes.
Okay. We, I mean, we see some things going, we see some things progressing. Nothing dramatic has been launched like in Italy. You have in the Recovery and Resilience Facility, EUR 225 billion that is for renovation and other measures to recover. That's already going. Many countries have something. We have now the REPowerEU on top that I just talked about today. We don't see any dramatic changes, but the activity is not bad, but it's certainly with the announcement yesterday from the EU, needs to be higher. Okay.
Thank you very much.
Thank you. Our next question comes from the line of Yuri Serov of Redburn. Please go ahead, your line is open.
Hi. I have just one question, please. You talked about the fact that your utilization is very high and you're actually trying not to disrupt the production with CapEx projects because of that. Does that suggest that we cannot really grow if your utilization is very high? I mean, all your comments about the underlying market growth are interesting, but when we model ROCKWOOL, should we just assume that your volume growth is going to progress in line with your plant launches into the future? Thank you.
We are running at very high capacity utilization today, but we have the seasonality of the market, so the full capacity is very much determined by how much we produce during the low season. Yes, we can grow more.
Grow more, is that 3% or 15%?
Depends with or without price, but we can grow more, let's say that, and it's more than 3%, that's for sure. One more comment on that. You know, we started up Ranson in North America, the Ranson factory in West Virginia. We are not on full capacity on that one yet. We still have some more capacity there. We started up the one in Southern Germany last year, it's not on full capacity.
We have several factories where we can put on more shifts, but we can also do a lot by producing more during the low season. It's not single- digit. I mean, we can grow definitely more than 3%, right? Okay. Our forecast for this year on volume growth, even though Q1 is big, we don't expect this year to be a super big volume growth year. We saw that Q1 came in a little bit different for various reasons.
We think a single-digit growth of the absolute number of stone wool will be delivered. That's what we forecast for the year. Okay?
Yeah, I understand. Q1 is the low season, and you're talking single-digit growth for the rest of the year.
That's right.
The way that it sounds is that, and you're saying that you can grow by more than 3%, well, that means that you're gonna do all of that during this year, and next year you can't grow anymore.
Oh, we can grow next year also. Yes.
A little bit?
No, we can grow next year.
Okay.
Okay.
Thank you. Our next question comes from the line of Cedar Ekblom at Morgan Stanley. Please go ahead. Your line is open.
Thanks very much. Two follow-up questions please, gentlemen. Can you give us the percentage of revenues that are generated at assets which explicitly run on Russian gas, so we can get an understanding of where the imminent revenue risk could be if there was a shutoff, unlikely as that may be? And then secondly, do we need to worry about production stability on your assets? And I ask that because you have delayed what we would call more of the sort of maintenance, standard upgrade CapEx now for two years. These are big capital intensive assets. Do we need to worry about unexpected outages? Thank you.
We start with the last question. No, we don't mismanage our plants. You know, some of these investments is to change a filter. It can run three years, or the lining of an oven. It can run another two years. No, you shouldn't see it on that. We take care of our plants. You know, some of the investments are just you schedule and you bundle a few from the future, and now you might take a shorter stop and you do the important things and others you save for the next year. No, it's not abusing the plants in any way. That doesn't exclude with our plants. We have probably once a year, once every second year, something breaks, even though it's according to the maintenance schedule. That can happen.
You know, we have more capacity and it's so far has never been a problem, so don't worry about that. The percentage of Russian gas is not, you know, the mitigation efforts are very complicated, country schemes. It is just not possible to give that number. I can say the following, there are about five countries out of the countries that we believe will be impacted if it happens. Okay?
The question isn't what do you think will be impacted? The question is, what percentage of your revenues today are assets or generated at assets that run on Russian gas? I appreciate all the comments around mitigation, which can make the real world impact if we get a shutoff to be very different from the assets just being turned off. It's useful to understand what your exposure is, what percentage of revenue potentially needs to get mitigated.
I don't have a percentage for you, Cedar, sorry.
Okay. Thank you.
Thank you. Our next question comes from the line of Joe George at Berenberg. Please go ahead, your line is open.
Yeah. Hi, gents. Thanks for taking my question. Just one from me. On the insulation division specifically, some of your peers are seeing this flat volume growth year-on-year throughout Q1, and you guys are saying you've experienced good volumes at the group level, roughly half of the 36% growth was volume. There's a big difference there. My question is, what is the price volume split within the insulation division specifically, and is there a feel across any certain regions that you're taking market share at all?
Yeah. I think it goes back to a little bit how we were pretty good last year after corona, so I need to go back to 2021. We went into last year and thought we would have a lower year, and then we had low capacity, and then somewhere February, March, it was mid-March, the craze started, and we were very quick to ramp up. Even though it was a battle, we went up on very high volumes. When you see this volume growth, it has to do with what your comparable is. I don't think our competitors have a very different perspective. It's just that we had a low quarter last year, but if you look at Q4 and Q1 this year, we have kept running. We have kept running.
I take it mostly a comparable game, and some of them might be out of capacity because they have one factory. We are fundamentally just keep going, Q4 is normally a good quarter, now we've got a Q1 that is like Q4. That's the only thing that has happened. It just keeps running. Okay?
Perfect. Thanks.
Thank you. Our final question comes from the line of Yves Bromehead at Exane. Please go ahead, your line is open.
Thanks. Just a quick follow-up. Assuming the costs actually come back down at some point towards more normal and sustainable levels, what would be the strategy, is it to hold prices constant or would you actually be giving back some of those, let's say, lower costs back to the customer?
Yeah, it's a question that, you know, we haven't done surcharges. We haven't done much of that at all. We have put real prices in place and the normal situation would probably be that when it ramps up this quickly at the beginning, you get that back at the end if it goes back. Right? I should also say that we have quite a way to go before we have preserved our gross margins. If prices go down, it's probably because the volume in the market go down, and we will probably aim to try to then get our gross margins up again when we have less overabsorption and protect the bottom line margin.
We wouldn't like to, you know, just pass this down immediately because we still need to recover gross margin, and especially if the volume goes down, we need to get back up on the gross margin.
Very clear. Thank you, Jens. Have a good day. Bye.
As we've run out of time for questions, I'll hand back to our speakers for the closing comments.
Thank you. Ladies and gentlemen, we would like to thank the equity analysts for all your good questions and the audience for listening in on today's call. We appreciate your interest in ROCKWOOL A/S. If you have further questions, please feel free to reach out to me, Thomas Harder. You know my contact details, or you may find them in the investor section on our corporate website. Jens, Kim, and I thank you for joining today's earnings call. Have a great day.