Earnings Call: Q2 2019

Aug 23, 2019

Hello ladies and gentlemen, and welcome to the Rockwall Group for the first half of twenty nineteen. I'm pleased to present CEO, Jens Vurgersen, CFO, King Yower Anderson and from IR Thomas Hader. For the first part of this, all participants will be in listen only mode and after the question and answer session. And as a reminder, this is being recorded. I'll now turn the presentation over to your host. Please begin. Welcome to the conference call regarding Rockwell International's Results. For the first half year twenty nineteen. My name is Thomas Hada. I'm the owner of Group Treasury and Investor Relations of Rockwell International. I'm here together with CEO, Ian Speggerson and CFO, Kim Young Arnerson. First, Ian Speggerson will go through our presentation and give you an update on the results for the second quarter and for the first half year of twenty nineteen. Afterwards, we'll be ready to answer all your good questions. Before I hand over the words to James Pearson, I must ask you to notice slide number 2, which is the forward looking statement. Please be aware that this presentation contains uncertainties. Now we can go to the next slide, which is Slide number 3. Ian Spieben, I'll now hand over the word to you. Thank you. Thank you so much. Hello, everyone. As usual, we go through the deck and then we get on the Q and A. So please turn to the slide called highlights H1, please, the 3rd slide. So when we look at this quarter, we came in on the 4.4% growth, a little bit better in in, nominal currencies. And, if I were to look at all those numbers, it has to relatively strong logic. And looking to the margins, both on EBIT margin and EBITDA margin, If you isolate, the IPC, the profit in inventory, the Armstrong 1 off depreciation reductions that makes the result more than a bit better and the start up costs, both the EBITDA margin and the EBIT margin has increased like for like. So that's something I look for, and I like that that happened. On this side, you see, we never talked about that, before. I just want to explain a little bit of a reason there. At the end of last year, we we had all the machines up and running, to build up seasonal stock. And we had a little bit of a slow, closing of the year. So that means we stepped when you look into the balance sheet, we stepped into 2019 to be almost 1,000,000 or more finished good stock. And that meant that when we then started in the year and we have a targeted stock level Once we saw that some markets had a little bit lower activity, that meant we have we started already mid of January to take off shifts. So for example, the shift in Norway and some in Denmark, those long shipping states, shifts. We took decisions to to take them out. It takes a while if you take a shift out to Netherlands, for example, it's a longer delay before we can do it compared to Denmark and and some other countries. But then we took those decisions already then, and that has also led to that we built We've taken out about $30,000,000 of that finished group stock during this period to get down closer or on the target level, where we are now. And that has same cost in, in the profit and inventory. So that's covered in the results. You see, I just wanted because the impact here was 8,000,000 that you know about it. In a normal year, if you start on roughly the same network and capital, then you just keep up work up to your seasonal stock level, you normally don't see that difference and that's why we never have spoken about it before. We move on to highlights on 42. First thing I want to say about Q2 that even if we you have the profit and inventory effect and all the rest. But even if we take out the Armstrong 1 off, that one alone This is the best top line and the best bottom line in the history of Rockwell. So it's not a bad quarter. It's in fact a very strong quarter. And the Workday index, we saw that very much in June, Q2 have a shorter workday index, and it ended up so that June got impacted. So we had a pretty good start of the quarter. And then in June, net result of that was very low activity towards the end of June. So, but overall, okay. So 3.3% plus 1.5% around the 5% mark, the 1st quarter, around the 5% mark. So not not the big difference. Let me move on to slide 5. And here, you can say that if something that happened and he had referred to more the I'll come back to that. So in, in H1, you see the continued uptick in system division. We talked about that end of last year that some of the restructuring we did in rock form, some of the work, we also waited for this regulation issue in the retail business for growth on plus the other businesses have done a good job rock panel has developed nicely, all the businesses, maybe with one exception for the piece of our business going into automotive, but it's relatively small business. It has all developed very nicely. So you have seen an uptick in the growth rates of the systems divisions. And both Rockfone and Growdon has developed well. I don't see some of the drawdown growth was reawakening of the retail business in the U. S. And we will not have a reawakening all the time. So I see that we have kind of made a step up and that business is up and running again. And I think it will continue to grow, but it will not be a step up every half year. Because it was really low for a while and that. And then on the insulation business, Western Europe, has really driven the growth. And I get back to the more regional effects on the other side. And so Let's move to the to quarter 2. So here, you see again that systems have continued to grow even higher growth rate than in the first quarter of the year. Very nice. And then in insulation, when you look at it and that goes for the quarter and also the first half year, France, UK, Western Europe, very good development, at the beginning of the year, we saw China going into negative territory. And then Singapore at the time had some macroeconomic problems. We have had that for a while, but when China then and the trade war effect continued, that's very quickly spread into the whole South Asia region. So South Asia is is negative. And, with the exception of India, I think that India has not so closely linked to China. But all the other markets we can see immediately that it's spread. And that's the Asia effect. So the really strong development we have had here is Western Europe, excluding Germany. So let's move into the regional sales development. And more or less this holds for H12. It was just kind of diverged more as the year has progressed. So UK, France, France, a nominal development. And what is very pleasing with France, I think the history of France First of all, the Paris agreement was done there, and we see very good renovation activity. And a lot of focus on energy efficiency and getting the value chain to actually do it. So we have had a very good development in France, Q2 very strong. And, and I think it has to do that they have the nuclear power, they have a lot of electrical heating, creak heating in the houses, and it pays off to insulate because that means all the equipment gets smaller can work with small radiators, and really it's encouraging to see what's in there, but we don't see the renovation trend in so many other markets yet. And I don't know if you have read up on it on the the renovation of the energy efficiency director, how the European investment bank are pledging something like EUR 100,000,000,000 of 2030 for any of the efficiency improvements. So I think potentially we have seen the first of energy, renovation, energy efficiency improvements in France. And then we detect 2, 3, 4 years before that starts to become serious in the other markets, but I see that as a very encouraging trend. Germany, High level of building permits, almost record level, high order stock of the in the construction sector, but they're stuck somehow. Some people talk about labor shortage as, obviously, there are not many car facts is built in Germany at the moment. And you could see that into Eastern Europe, but quite a few projects with flat roof or stalled factory projects got postponed. So we have seen that into Eastern Europe, but Germany basically stuck and not great. And in my guidance now, I have reflected that, yes, we can wait for Germany, but now with the negative GDP, Germany could surprise positively, but we have it. We don't count on that. It looks a little bit depressed, even though the backlog is very good. And then we go into Eastern Europe, and, I will say the whole of Eastern Europe, Czech Czech Republic, leading the way. Poland probably slapped, but a little bit less confidence in the future from the disputers and construction companies. So even though the activity is quite good, I think that's been the stock build down and we have seen that some of our competitors, have panicked on the pricing on projects. And a flat rule for our bigger projects. We have seen price pressure there, but we have taken the approach that we We'd rather cut capacity and we keep our pricing. And we have, a cross rock for, you know, with exception of a few segments kept our price increases and kept up. And then we are monitoring them in the big heavy segment. What's happening, but we see a tougher environment on projects, bigger projects, Russia had a very good development up into up into Q2, good price development. Here, we, and Romania has also been good. Here in Russia, we have not the question mark about the market activity, but we have the Ukrainian and the supply perspective out of Russia because there are some competitors exporting a lot out of Russia and the market volume build the impact and not the market volume, but our success in it, depending on how much export volume will stay in Russia now instead of going out. So I'm a little bit less positive about Russian in the second half. You're not just a market, but competitive environment. And again, our priority would be to keep the pricing. And North America Asian Others, Asia, I said it's down. And in the US, it's smaller. Some segments extremely buoyant, but you see the same trend, flat roof, big project logistics center, a little bit lower activity. We have noticed and, also competition, a little bit more, more nervous, I think, because the volume is down. We don't have statistics for that. But fundamentally, yes, we are growing, but a little bit lower growth than before. And of course, some presidential concerns about the market. So let's see how that develops. Profitability As I said, underlying margins have improved, even if you take out the depreciation effect, So we are pleased about that. And, but you should be clear that you have the one off in Q2 from the Armstrong settlement, but like for like, it's still improved in the businesses. In the segments, we move to Slide 9. You see that 21.2% margin in, system duration without the Armstrong settlement, you have 16% growth in profit instead. So about 24, 24 something 1,000,000, which is a good development because we also have an inflation picture impacted that business. So they have kind of passed on inflation and improve the margin with improved volume. And we also have a better mix. And then what you see on the insulation side is that all the lion's share of the inventories that we built on, it all impacts the installation business as we keep the stock there for most of it. And that's the bottom line profitability is good and pricing has improved. On the investment activities, we are accelerating a little bit or keeping the same pace in Q1 and then there are some periodic station issues. And basically now we are getting ready to start up Neuberg in Germany already in the Q1 and the Q1, which is a bit faster than we expected. And in October, November, we should start shipping product to customers. Then in the United States, West Virginia, we have progressed with the construction. We lost a bit of time due to weather, not to protest locally due to weather, but we have had a strong inflation or pressure on steel. It's imported material from Europe and its local civil contract. And so that's also contributed to some of the increase in the CapEx. Generally, the construction market has been very buoyant in, in, in North America and therefore expensive to build. I would also like to say there that, and I expect one of you to ask this question. I would have expected it a few quarters now. You haven't asked. So I will answer it before one of you ask us what you see there is that the maintenance has increased. The blue portion of the investment activities. And some of that Yes. So the red part is capacity expansion, and the blue part is everything else. And So some of the maintenance actions that we wanted to do towards the end of last year, we postponed the random machines instead to keep up with the demand. So some of it's a bit of a catch up, but you also see that it's an average higher there. And there we have reported things like, for example, the Moss Electrical MELTO, a new spending technology, sustainability investment where we have a program now to meet our sustainability goals, we have ramped up, for example, investments in water improvement and in efficiency improvement. We are renovating a number of offices to higher energy staff standards. And, and, and that shows up there because it doesn't give capacity. It gives the green and footprint. And so I expect that to stay, over several years. We should keep investing in that. Free cash flow Nothing really to say. It's primarily the net working capital percentage is roughly the same. We have 5 or 10,000,000 higher finished goods stock on the same period last year. Trade receivables are not really drastic is the investment. That is the difference there. And then finally on the guidance, the investment guidance I talked about On EBIT, we continue to be confident on our EBIT margin. And then on the sales, obviously, disappointed you tremendously there We have talked about the volatile environment. I keep a wide span. We have had 4% now, shorter time left, so taking it down to 3. But I see continued volatile environment. It's Asia continuing down is the trade war continuing how the Brexit, Germany, and Europe. It's just a lot of factors. We have factored those things in and we include and the downside that some of that continue a bit worse and we also kept a bit of an upside. But we feel now with Germany where it is, Asia where it is Eastern Europe where it is, it's not possible to get to the 8% anymore. And with that, I would like to hand over for questions. Thank you ladies and And if you wish to cancel that, please press 0 and then 2. And we asked you very kindly to please limit your questions to 2 at a time. And once you finish, you can go back into the queue by pressing 0 and then one again. So there'll be a brief pause while the questions are being Our first question is from the line of Claus Alma with Nordea. Please go ahead. Your line is open. Thank you. Yes, two questions from my side. It's First question goes to your new revenue guidance. How should we think about second half split between the system and installation division would it be insulation being in decline and systems growing or will both be in growth pace? That will be the first question. It's a volatility forecast. And depending on how you calculate that, you can get the combination, you know, they have the December effect also. So, generally, we I see volatility in the market. So there could be flat insulation businesses. But due to that, it's volatile. So I foresee that the system business will continue to grow And I don't give a specific percentage, but it will be a good and healthy growth. That's what we see. And then we see most of the volatility happening on the installation businesses. And exactly how that spreads, you know, that many scenarios, we just see continued slow growth on the insulation businesses. But again, the volatility of the whole story. So we don't defact on most what will happen in Germany and Eastern Europe, positive stock adjustment, we'll see. Underfully affected it. That obviously, I can understand. But Q3 so far has installation started out in in a decline. Is that a fair assumption? I don't make a comment on, on Q3. Okay. Fair enough. Then my second question, that's coming back to your $8,000,000 inventory adjustment. Can you try to put a bit more color or Kim could put some more color to this, is it a boost to 2018 you're not correcting it? Or how should we think one thing is the Q2 impact? But there will also be there must be some timing the different quarters as the cost has been spent? Yes. Okay. So let me explain it first. So we have a target stock level, at before the high season and the high season starts here. We're getting into the ICs. So now, so we have a target value. And then what happened last year was with all markets basically developing positively, when we had but we had a bit of a blip towards end of Q4, and December could be like that. And the machines were running extremely well. So these are kind of going on maximal machines and then it just went a little bit better than we expected. And when so many machines runs a little bit better than expected. We accumulated tons quickly. So that meant that the EUR 40,000,000 higher than the previous year stock level, that's how we start out January. And then when we get into mid of January, we see that some, regions did not develop as we expect on other regions very well. Then we start to take out the peak shifts in those, what to take a while. And then we start to cut it. And then we we steer our production by taking out the worst shifts and also the shifts in the areas we see slower activity and we sell off the stock. And that's what we've done. And then those 30,000,000 with the overhead absorption of that gives the profit effect. And as I said, the majority of the decisions were made end of January, and then it takes 3, 4 months to get the shifts out. And sometimes it's very quick. The temporary work is mostly temporary. But you need to do it, plan it reset the business. And so the bigger effect is in Q2. K? Yeah. Yes. So as I understand, these 8,000,000, that is IPC cost. So, you'll just produce to inventory, I, you know, your unit cost has been helped when you produce a lot of, units, so to speak, and you produce less in Q2. Is that correctly understood? So it's not about Yeah. Yeah. Exactly. Because we take the stop. Yeah. Yeah. That sounds it's a different pattern. It's that it's a different pattern this year. Compared to the previous years. That's the only reason for mentioning it. Normally, we don't mention it because it's the same pattern every year every quarter. Yeah. That I understand. You're just trying to figure out these 8,000,000 that you want to correct in Q2. Those costs should come in a different. You should be Oh, nothing Q2 and H1. So that will be in so that'll be Q1. So I. E, if you want to to correct in Q2, you need to add it in another quarter. Would that be in last year or in Q1 or Q3 or I don't think you should correct anything. No, you shouldn't do that. This is just the difference between the 2 years that was big in this case. And therefore, we're giving you the numbers so you can see, but you should not be doing that between the years because we run the business seasonality is pretty much the same. And if we are just growing 4%, 5%, 6%, you don't need to worry about that. Here it was, the December combination too high stock and that's on places where the market activity went down where we expected it to go up. For example, Germany, where we had to correct it because we don't want to say we'd stock that we don't sell. We want to have a relatively quick stock. That's why we are on just 11% net working capital. Okay. But maybe just just a 100 percent sure. So these $8,000,000,000, that is a normal ordinary production cost that be split out to units, in your production, right? There's no, extraordinary redundancy or one off costs in your life. We are now over to the line of Yves Gourmet of Exane BNP Paribas. Please go ahead. Sir, your line is now open. Yes, good morning. Thanks for taking my questions. Just coming back to actually discuss, I'm very sorry about that, but just out of, to get more granularity, sorry, you mentioned that you've had an unusual development of this, IPC, but you also mentioned that you had some capitalized overhead costs Now I don't see any mention to the amount of those capitalized overhead costs. So I'd be curious to know how much does that represent? And if we can extrapolate that amount to the next quarters, again, this is an information. You're not gonna start to report on the IPC, you know, going forward. This is an explanation because it's an unusual development in a quarter or a half year. Compared to our normal seasonal buildup of stock. The capitalized overhead costs doesn't mean that you're actually capitalizing some of the extra fixed costs that you're spending on simultaneous and technical engineers. It has nothing to do with that. No. No. No. This is just absorption per unit produced and it ends up in stock. In the stock value. And since we have produced it, and then suddenly we stop producing in a quarter to sell off the stock we just showed the impact of that. Yeah. So, no, we haven't changed any rules. And you know one thing with we write off, we have very tough on our cell phone stock. If we keep it too long, we write it off at a very specific time. So We don't want to sit with too much stock in the business. Okay. So then if I just jump to the other questions, Yes. Can I continue with the question? So just second one, you mentioned that you're doing some more investments on systems. Could you maybe tell us exactly what you're doing there? Are you adding some lines where are you thinking about that? So the main the main investment on this, we have planned. At the beginning of the year, we we started off a growth on the investment in Russia. And that's part of the growth, but you see here now And what we have done now is that even though, there was a downturn in the Gordon business in the U. S, we pushed about on an investment when did we decide? Last year. So in the middle of the deepest, downturn on the retail business, we concluded that when it's coming back, it would be up on a high level. So So we have investors so that that investment is rolling in now during the autumn, and that's to meet the growth on growth in North America. So that we can cope with what we are doing next year. So we have enough now to carry us through and this, extra addition we are doing will be very well timed to keep growing. And sorry, but actually it's quite interesting what's happening with GROWDA and part of it is is due to the cannabis industry. So I just wanted to get an understanding. In Russia, are you building capacity because there's a change in medical cannabis, for example, and and also just as a follow-up to that. No. No. No. No. In Russia, in Russia, in Russia, there is no medical, cannabis business. It's they don't have that. In Russia, you have a food security issue, self sufficiency issue. So Russia want to have their own vegetables, They have a very rough climate, and they have concluded that precision growing in hot houses rather than importing tomatoes, is a better way. So we we so it's a very, very strategic decision from Russia. We knew about it. And we were part of the investment. We have been importing product there. And when we saw stability in the business, we put the plant locally and we inaugurated that. And that is absolutely time. The directions that it is a bit more. So I've sufficient foods and have tomatoes all year round in cucumbers, Papricas and the rest of it. So it's just normal vegetable business. And so how does the European Medicinal cannabis kind of industry looks like, that you see an evolution towards higher use of this and and which It's not the, I mean, a little bit simplified. You can see Canada, and the US, you see very strong development, legal artists, all the rest. And then you see Europe countries have done it. And more experiment experimental business. Yes. They are probably some customers that use our products. But the main business is the vegetable business. And then then when you go to Russia, it's also only vegetable business. Okay. Thanks very much. Rate and buy and grow many things. We don't I mean, they are orchard growers, all sorts of, you know, the many segment of the can be used for. And we don't, you know, we can't, we don't know exactly what they grow on every substrate. Okay. The next question is from the line of Chris Junior Hansen at Danske Bank. Please go ahead. Your line is now open. Yes. Thank you. First on pricing, can you quantify what impact on growth price set in Q2 and also in terms of your new growth guidance. What does that reflect in terms of price increases? Yes. So I don't gave a precise number, but we are satisfied with the pricing and on, and we have reached our targeted level of a couple of percentage points around the level. The number I always gave. So as we're saying, then it varies by product and segments and all the rest. And as I said, price pressure on project business. But you previously said you're aiming for 1% to 3%. So what is you're saying now is that you expect 2% to 3% fully? I still aim for 1% to 3%. So if I look at the 2 to 5, you're guiding, I mean, in the 2 is included 1% from pricing and in the 5%, you have 3% from pricing. Is that how we should look at? 1% to 3%. All right. So it's a range. It's a dynamic environment. Okay. But you can't give any flavor on whether you are more optimistic on reaching the 3 than the 1? I can tell you, it's tougher. Because what we have now is an important moment in this industry. We have gotten regular price increases. We have structured price lists And we have worked in a very disciplined way now. It's the 50,000,000 every day, or maybe the 4th year. And now we have regions with lower, segments with lower activity. And then our approach is generally to be very smart about pricing. Keep passing on the inflation And then in the segments where we see people go too deep on prices that we cut capacity and we don't drive it to the bottom. So that's our approach. So we will have to navigate price in the rest of the year, and it's a very good test year, but then we have distribution business. We have many segments where. So it's a very mixed pattern, but there's certainly our areas in the old group is very tough with new capacity coming aboard. But I see that we should be able to deliver 1% to 3% on the year. Okay. Then my second question now that you sort of flagged this increased volatility and with you applied the H2 guidance, you opened a scenario with no growth at all. If we then look at the markets where you opened your capacity, I mean, specifically Romania and Germany, have a physical scenario where you do not grow revenue, how will the EBIT margin develop because you must obviously be adding some fixed costs in this market, but also you should save on transportation. So can you just help me a bit on the balance sort of a no growth scenario. Okay. So let's say like this, Romania, is we have a lot of business in that neighborhood. And obviously, we don't put in a factory to have it full from the beginning. We wanna fill it in 3, 4 years. So the factory in itself a new factor is a negative impact on margin to start with. So that's the case, but these are a factor in the portfolio where some factories rolling off on depreciation and others coming on board. So typically a startup factory has a lower margin, and then we guide on the average of the whole thing. And we haven't given a guidance yet. But for example, in Romania, yes, we get short to shipping, we get also some extra business opportunity because we've become very competitive also parts, Romania. So so there are ups and downs. So it's almost a case for all. And then if you look at the German factory, We have had a regional import into Southern Germany for many, many years, 10, 20 years now. That's fact for us all this round full. So here again, we put more capacity in place where economic activity is centered. But again, the goal is not to to have the factory full, in the 1st year, but it could mean, of course, that if we can ship in less, from the north of Germany into southern Germany, then we take up the out the capacity maybe Netherlands. So it could be that we come to relatively healthy loading in that asset and we take a shift off or a couple of shift of somewhere else. But we want some extra capacity. That's why we do it, of course. And we, and we don't want to be informed on the stock effectively after. So every factory we build At the beginning, we'll have 1st, during the startup, the buildup, and once it's a negative impact on the margin, in the old road picture, we weigh all of this together and we would give guidance on the margin. And for the next year, we haven't given yet. Okay. But you do confirm there should be savings on the question of transportation in both markets. Obviously, savings in logistics. And then it also takes cost and then other depreciation, but other depreciation rolling off. So it's many factors, but fundamentally, of course, a factory from a cash perspective to state with the factory in the middle of a sweet spot, the cash margin immediately once it's failed, has improved. But then the profit margin is a different thing. Okay. Maybe if I can just sort of follow-up on this because obviously, you mentioned depreciations and the balance of auto factories coming off. What should we expect for depreciations next year? Is that going to increase or is it going to stay at same level as this year? So too early to guide, Christian. So we come back to that. Into next year. All right. Thank you. We know, of course. I mean, we can calculate it, but but we don't do that now. The line of Rajesh Sia at HSBC. Please go ahead. Your line is now open. Hi. I have two questions. So first one is on pricing. So you talk about the price pressure in the market and particularly some market. So can you just kind of elaborate that, is it only, I mean, is it product issue or, I mean, who are the main kind of players who are kind of, is it happening just because there's a less demand or kind of, intentionally, people are kind of driving down the price code there. So what exactly happening on those front, if you can just elaborate a bit And, possibly, coming to the second one is on cost side. Cost side. I just wanted to, kind of get a little more detail about how the cost inflation is evolving. So, the 400 co prices kind of are flattish to down. And, and the power prices across Europe are kind of moving off a bit. And so maybe if you can, talk us through how you see in second half things are going to evolve and relate to that probably, on carbon, you may just let us know. I know, I mean, you are a net carbon positive. If we look at the products, you produce, but if you can just tell us how much carbon certificates available with you and how much shortfall or surplus you have right now on a yearly basis, So that would be helpful. Thank you for now. The last question, I I don't have him. I don't have him in my head. We we we and that topic, on 10th September, we start every quarter because we get a lot of these questions. And so what we do is that we put together some teams ESC teams. And then on 10th September, we'll have a ESC call, and we do that every quarter. And we'll pick it a couple of topics and then we can have a more deep discussion on the, on those strategies. I don't have it in my head now. To reflect on it. But for example, it's very close to a strategy. We are now investing in this change of an elder in Norway near Oslo for an electrical meltdown. We're putting a lot of R and D effort into that, and we have a very clear strategy for where we do it and when. But that topic I would like to refer to 10th September. Then when we get to maybe the more easy question on the cost side, cost inflation. With with, the kind of volatile economic environment, we see compared to at the beginning of the year when we have inflation on logistic increase, outlook resource sector numbers and as we progress through the year, we still see inflation. So we still need price increases to cover that, but you are right in your assumption. I assume that's your assumption. You hinted that is that we see a lower increase. Done before. So relative on compared with H1 through H2, we will be better off in H2 from an inflation perspective. Okay. Then on the pricing, basically, Okay. So system division is system division and we're passing on the regular price increases and there is a little bit between the businesses Whatever goes to automotive is a fight, but it's a small, small, small business, but we normally succeed. Then when you get into the insulation business, there are a couple of drivers. First of all, we have certain competitors opening up factories, may have that in Poland and that the area we have one coming on in France and then they want volume for those. So it's capacity driven and the fact that the market is a bit lower. And when we look at where the market is lower, the project business, logistics centers, car factories, all those commercial fact to report this big bill is they are the ones that we have seen start to slowdown first. And they are also the projects where the smaller suppliers can access the bid. They can make the bid and the price competition is tougher. So flat roof and ethics. And then the whole ethics market now quite German centered big companies in Europe, And now with the situation you have in, in with increasing cash capacity of suppliers that can give Stonewall to that. You also have the big system integrators we're talking store and the, capital on such companies. They, they also are under pressure in the market because fact very hard with each other on price to get to the project. So those are the 2 main segments where you see increasing pressures. So that means that when we then you know, we have certain customers that are 3 to one costs. We keep a reasonable price. We keep the business. And then we have project business where the people on the cuff will suddenly rather cut capacity and we stick to our prices. And of course, certain projects we really want, right? But that's the picture. And that means you see a mix improvement because the big project business generally have lower margin Okay. If I may have as a follow-up on the pricing front. So, I understand there's a mixed picture. And as we move to, second half and next year, assuming the cost inflation moves as it is right now with a slight growth, but still with the carbon, things happening across Europe. Now, you are opening new plants as well, and you will be on the press it, push the volume to the market. So, I mean, even though you cut the imports from other plants, still, how do you see your, price cost evolving, late this year or early next year? I can just say that my My strategy for the distribution business has been the same for, 4 years, 5 years. And that this regular small price increases for stormwater cover inflationary pressures. Okay. Sorry. Does that mean that you are ready to give away some market share to keep your pricing, intact? We do that in certain segments. We want to be a responsible player in the market. And then but then again, the market is not absolutely uniform, but our priority is to keep prices, stable. Yes. Our next question is from the line of Laurence Kiergat of ABG Sundal Collier. Please go ahead. Your line is Thank you, Jens Kim and Thomas for taking my question. Two questions from me, like my former peers here. The first one is sort of on the price discipline in the retail business that we've just been discussing here. What we also heard from King spend this morning that especially in sort of Poland, Czech Republic and is experiencing worse results here. And just to get an idea of what you price discipline that you see in the market here? Because what I understand is that you're actually trying to keep your prices even increasing them in some areas. But then you may be in the risk of delivering less volume. Just to get some idea on the dynamic there could be very helpful. Yeah. The dynamic is that you have, players in the market that believe that the total volume in the pot will increase because you lower prices. You have small guys that believe that will happen and, and exactly what that other company you mentioned see, we know that if we start to play this game and just drive it it just spins out because we adjust too big. So it's right. In those segments, we there are certain projects that are ours. We obviously if we take those. But we're not gonna sell, high quality service, Stonewall, to a project where we sort out the start up, the supply, just in time and just lower the price. With 20% to get an order. We don't do that. And that's the dynamic we see. And from almost any industry I've been to, and I've been to a few and you follow many industries. For some reason, Eastern Europe, is a part of the world, but that commercial approach where the market starts to become weak very quickly turn into a volume craze. And I've seen, behaved like that now and then we really sit steady in the boat and we see what happens. Just a follow-up there. We've heard in the market from some participants that especially June goes very volatile, but then, but then they've already seen maybe some little bit positive drivers going on after that. Can you give some specification on the month of Q2 when they were especially bad, or was it sort of just across the month? Yeah. In the month, we have just too many countries for me to keep track of it. But, I I think what you say, and if it's June or July or whatever, what you normally see in such a business, I'm not make a comment about the case, but what I've seen in this type of business and our business. At least whenever a market slows down a little bit, there is an inventory drawdown, which means that there is an extra effect in the market that even though the market activity might not be shrinking, it might just be that people realize that per K, it's not growing so much. And now they draw down the inventories, and then they're going to be suppliers that believe that now the market is minus 20%. In a month for 4 weeks or 6 weeks, and they react to that in panic. And if you have been through a few cycles, you know that in the beginning when the market papers off. The inventory effect will be hitting you because the distributors don't want to sit on too much to sell the inventory and go a bit lower when they have a lower expectation. And I think in certain months, you're going to see that more than in other months, especially early in the phase. So that's all I'd say, but I don't look into months, like that, you know, even though we have a monthly follow-up of every price and we see it. But it's it's plausible, but I can't confirm. Fair enough. That's a very, very good analysis. Then on my second question, can we talk on sort of the cost side here because in the position of other costs, that was quite healthy here in the second quarter. And you've previously discussed that you would rather protect the top line of your guidance rather than your earnings and here you mentioned in previous quarters that because we've been on sort of a peak cycle, yes, you have on a peak cycle, you've invested quite heavily in perhaps a non directly revenue growth short term solutions, but more long term solution for giving yourself Oh, okay. Yeah. Yeah. How would it be able to sort of take out costs if you saw sort of this communication? Yeah. Okay. I don't I just wanna clarify, I think, the statement I I made on I wanna protect the top line. So I believe that what we see in France is not easy to get it in action, but a third of, the Paris record needs to be achieved with energy efficiency. One third of it. Improved energy efficiency. And that's renovation. And what I say, I need to protect the top line at any price in terms of capacity because if I, as the biggest player, When the market grows, people can't get the product. We kill the market for stone wall. And we have this increase. So yes, what you see on my $390,000,000 CapEx, I put priority on the top line. I'd rather take a bit of time in the penalty box for having invested a bit too much at the wrong time. That will happen. According to the short term view, but it's critical that we have the capacity for a market that's underlying over 30 as we've grown 5 0.3%. And if renovation starts, that number could be higher, but in between, they could volatile periods, they could be recessions, they could be all sorts of things. But on the line, we believe in the market, and I put priority to that, and that's why we have the CapEx. We see the point It's not my priority. Yeah. And my priority in a quarter is not to defend volumes. My priority as I said, for 4 years is to get the market where at least the distribution portion of it an idea that also the product business every year we can pass on in small portions, reasonable portions to inflation. So 1% to 3% every year. So that's my thinking. So I think I did I I might have expressed myself unclear, but that that's how I think about it. I I may have expressed myself unclear, but that that's also what I heard. But just just to get an idea, you're obviously investing in the long term and top line here. That, that, that was sort of the case here. But now, but now we see that you might be able save some costs and your underlying structure to protect your short term margins also in, if volume starts going down, just to get an idea, if you see volume deterioration, how well can you protect sort of your short term margin in the current cost structure that you do have? So we have taken out quite a few shifts And when you take a shift, but as you see, we have no restructuring money or anything in here, but we've taken out quite a few shifts. Then of course, we take the worst shifts out. So and then the exact correlation between these, it depends, the magnitude. And if we have a decline, that is spread out and in one region, it it we all need we need to look at the case, but we always try to take the ships out that are the least profitable. That's fair enough. Thank you so much for taking my questions. And I'll see you guys on Monday. Okay. We now go to the line of Tobias Viman at Morgan Stanley. Please go ahead. Thanks for taking my question. The first one on Western Europe, I would say the performance was quite strong. Can you elaborate a little are the key drivers there? Because if I look at the individual markets, Katie, is that Germany was weak and in the UK, I guess, overall, the market was not the strong probably have gained some market share due to the regulatory changes. So maybe you can elaborate a little bit on that and then you also remind us roughly the sales split in terms of countries? How big is Germany, France and UK within your Western Europe division? Okay. So in UK, we have had strong double digit growth for a while. And, regular for a change, it's a small portion of it, but the perception change is a big portion of it. So that's happening. It's a good double digit growth and there we have an investment going that we complete this year that increases the capacity there and very effective investment. So that keeps going. Our guess about the UK market is I came I was in the UK yesterday. Some people say it's flat in our segments. Some people say it's declining. But since it's a transition away and also renovation of all the buildings, I've got the wrong material, like the new market also, to some extent, that is devoted to stone. So that's the UK. Then France, the driver is that France is really the country, and I think they have 20 years practice with us to understand how to renovate, how to give the tax credits, and how to sort out the supply chain. And I think it has to go it goes back all the way to the nuclear strategy once upon a time and the fact that they're heavily dependent on electricity, which means since they have electricity, electrical heating, many houses, they get the bigger incentive to do something about it. So France is going really, really well. And even though the French economy is not running well, I think there is also recognition by renalating all these houses and going for energy efficiency, apart from the climate aspect supports the economy. So we see that we see Spain doing good not on France level, but it's good business. We grow in Italy And that whole area where obviously France and Germany are among our biggest entities. In Western Europe, just to be clear, they are the biggest. But you also see Sweden Norway doing absolutely okay. Okay. And then in Germany, just a quick follow-up there as well. Because obviously in France, you talked a lot about subsidies for energy efficiency. Seeing similar trends in Germany because I know the government or I have been there have been talks about increased fiscal spending could receive this in the field of energy efficiency? No, no, I don't I could not see it. And I think the reason that Germany doesn't seem to have a government at the moment. You know, it's not a, you know, who leads Germany now, really. And this requires, I think the conviction behind the scenes there The main very good understanding of it, but I think the market has stalled for other reasons here. The whole of Germany with the car industry and a bit of hesitation, maybe labor shortage is it's a combination of things. I've just I put a bit of hold on the German market. And then I can't say whether all of this building permits will be realized. There are many, many German believe that, but I can say one thing. I think the buildings actually do much better than the economy in general. I think the automotive will do that's very, very tough time. There are already some companies that are bankrupt, but I think the construction industry, there's a fundamental need. And if they get they're act together on the renovation that can take off, but I'm not seeing it. Are you still seeing a negative impact from the slowdown in in automotive? Because I think you mentioned, earlier that you have seen a bit of big projects being canceled, which were related to the automotive sector. Yeah. Yeah. Yeah. We see we see that in Eastern Europe. Yes. That's in Eastern Europe only, not in not in Germany? No, not in Germany, because the other business we have, we're selling small fibers to break pads, for example, But that's that's a relatively limited business, a lot of OEM business. There you see exactly how the car industry is doing. So we can see that. But again, in the big scheme of things, it's not huge business. Okay, fair enough. And then my second question is in relation to your trading margins. I remember, last year, earlier this year, when you gave the first outlook on 2019, which obviously implied a bit of the slowdown versus last year's margins. And I think I remember you said the slowdown is sort of 80 bps decline was for some reason due to the fact that you have higher transportation costs, which I think was linked to your high utilization rates Now I'm just wondering given that volumes seem to be a bit lower than what you have expected at the beginning of the year, could this actually be a positive for margin? So could lower volume translate into a higher margin for you? Let's say like this, if you look at the margins, they had underlying when I clean away all the effects. Like for like, the margins are off. So we have seen a bit of inflation. Obviously, the price has impacted, but we are having less of the long distance logistics costs. That's what you are with the other footprint. But then it starts small money, if you take if you end up having to take out a shift and then pay money for it, then that can compensate that quickly. So within the quarter, it's not always sure you see it, but yes, we are shipping short to distance is not. Okay, that makes sense. So that's as a last follow-up on this. So if you say like for like margins are up and I think your new guidance for the full year implies that we are remaining flat for the full year, including the one off gain. Actually, if you see similar trends in the second half and we have more, I would say, raw material tailwinds, shouldn't we expect the positive margin development? It shouldn't be be able and to be up for the full year, even excluding the one off gain versus last year. We kept the guidance around, and then if you have to restructure somewhere or thing happens around and then we follow it every month. But how it looks now with the current price development of that, we are comfortable with that guidance. Okay. But there's no reason why we should expect lower margins in H2 year on year. No, there's nothing structurally that's for the lower margin. Okay, that's good. Thank you very much. Okay. We are now over to the line of Michael Peterson at SEB. Please go ahead. Your line is now open. Hi, thanks for taking my questions. I want to quite start the same subject as was just asked in relation to cross border shipments SSC volumes coming down in Germany, can we expect no cross border shipments in the second half of the year or will there still be some? I mean, some businesses, you look at the Rockform business, obviously, we produce a lot in Netherlands and Poland and we cross border ship almost all of it. So, so that business will continue and also in technical installation, or solutions, many of these businesses we ship because we have OEM products. I am one product that goes to an OEM.5 production basis. So that shipping will continue. And then the, the extra support shipments, they move into Germany, Denmark, into Germany, UK into the UK into France will continue. So there will be places that continuous, but it will be on a lower level. But for example, we'd be, depending on the product and the portfolio, there are closed around, but it's not from that high level that we had before. Okay, thank you. Then my last question, in terms in the U. S. Market, it seems that the growth opportunities are quite well progressing. What actions have you been doing in order to increase the sale in North America? Have you done anything actively or is it typically just coming from a larger market demand It's back to the regulation. A big portion of the market was regulated And, so that these people in this segment could, you know, you have the elections and then the legalized confusion between federal and state law. There's been all sorts of terms, but most of all, it was regulated. The market was regulated and legalized. And that put the confusion on the whole market. So the medical players up in Canada, they kept going strong. But in the U. S, big confusion started everywhere, how to get these licenses and which one had to get it. And that was a stop. So I think the fundamental underlying growth of the segment is there, it's not as explosive as you see now because now you see the fact that the business is coming back up again. But I see a long run rate of growth that business out of our 2 wouldn't be able to expand our capacity. Okay. Thank you very much. And I should also say, our business in the U. S, we talk about this business the other business is growing too, the vegetable business because that's solving a lot of sustainability problems. And it So that's also growing in the U. S. So the capacity we are expanding is not only for the medical and the recreational. It's for the vegetable business. Through of course. Okay. We now go to the line of Marcela Clang at handles Banken. Please go ahead Marcelo. Your line is open. Sorry, Marcelo. You're very, very quiet. Can you please, Marcela? You're very quiet. Sorry, Marcela. Can you please get closer to the phone, or pick up the handset as we cannot hear what you're saying? Sorry. I'm going to repeat. You mentioned Germany getting worse in the second half. But you also said that the backlog in Germany looks good. How long is your backlog in Germany? Is it a couple of weeks or months? Oh, backlog. And Marcella, couple of days. We are very short on the backlog. We basically get orders and we ship within 24 hours. That's how we run the business. And then you have certain bigger projects where you have the backlog, and we are not so many of those projects, but you then plan it out with the building site and we pre produce on that. But the majority of the business is a very quick turn business. And speaking of backlog being good, does this mean No. This is the construction industry backlog. Okay. So it's not your backlog now at the end of August, which would basically mean that July and August are fine. Yes. No, we more or less, as you know, with our net working capital, you know, inventory is single digit, finished goods and incoming material. So we are single digit. We are very low on that. We produce and then we have some seasonal stock. But what I was talking about is the order backlog of the construction industry. In Germany, in Germany. Yes. And then maybe a clarification, the increase in guidance when it comes to investments, you mentioned that it's both that you are pushing, was that the German factory earlier and as the project is going well, but also the U. S. Got a little bit more expensive. Is that the major part of the $60,000,000 increase is because you are pushing your investment earlier and the smaller part because it basically got more expensive than you expected or approximately how big is the issue? So we have we have a history of, so Marcela, we we have a history of, having had tough factory projects. And we are working very much on improving approach how to execute projects. And, and it would take another 2, 3 years, I think, before I'm happy with it. But we have a very serious approach to improve how we execute progress. So what you have here is that we have new leadership in our CapEx organization. We have also very high load. So you see smaller projects going better But for example, we are not pushing for Noriber going better. We have a way of scheduling projects And this project goes well and it's accelerating. And when we see that opportunity, we do it, because that normally, it's a good thing to just keep with the pace. If team can handle it. And, and, Romania is going fine too, but there are also many smaller products. So you have that acceleration happening, And then you have, and it's not the majority of the portion in the second half, but this cost increases, but it is worth mentioning. We're talking that one of these plants costs a lot and steel or fables on that is more expensive, but it's not the majority of it, but it's a big portion also. It's a significant part. And therefore, we mentioned it. So smaller It's not 50% of that. Yes. Thank you. Those were my two questions, and I'll see you on Monday. Thank you, Marsha. Okay. I understand we have how many questions in the queue, 3 or 4, 2 questions left in the queue. Do you wish to take them? Okay. So we closed the income in Q and the army finishes 2 last two questions. Thank you very much. So in that case, The penultimate question is over the line of Debs Werner at MainFirst. Please go ahead, sir. Your line is open. Yes, thank you for taking the questions. 3, if I may. Number 1, just looking at some data here in front of me. I get on a monthly basis, in Germany. And if you could maybe share with us what the market share development is in Germany between glass and stone wall since that period. That's question number 1. Number 2 is, the pricing development I see here in Germany in front of me sort of indicates a 8% increase since the end of 2015 in stone wall. And on the glass wall side, a 4% decrease. Does that tie in with the trends you see or is that data not sort of applicable? And then just lastly, Germany, you're talking about a slowdown here. I'm not quite sure whether this is related to market movements between you and other participants or whether this is the underlying market. Other participants in the market, in the construction market have talked about a rainy May in June having an impact as well. So I'd just like to get a little bit of clarity what the weather had in terms of impact on you. So, okay. So let's take those and I can't be precise because these reports on market share and all the rest. Are, very inaccurate. But but let's look at the market share development of Stonewall. We are convinced that Stonewall over those years have increased its share And probably last year, we increased extra much because there was a shortage that we could deliver and we are really leading brand in Germany. So I think that trend has been going on. And I also believe that on the price development, You have had a long standing battle between a couple of Glasswood players, and they keep track of it, and I I think you are right that they have not raised prices. And I don't think that is because they see a diff a very different inflationary picture, I think it's because they have been fighting and they keep fighting. And I think the same thing has been going on in France for, I don't know how many years. So I I think it's the right magnitude because one thing is for sure, Since I came to Rockford, we have increased prices, you know, a couple of percent every year and also the years you talk about. So I don't have the statistics here, but crop magnitude, inflationary increases every year. So I think that and we are one of the big player or the biggest player in Stonewall. So I agree with that. Denny German is the same with the rain in May in June? It is it is right. When you meet, for example, you're a vouch star for any of these people, they all say Germany will not be a problem. Look at the backlog. Look at the building permissions. Look at this and that. So I agree. They say that they have maybe lost a bit of confidence compared to what they said in June, but they say it will be fine. It's right because it was very hot, which makes the roofing business difficult when it's too hot to have these heat records. The rain, I can't remember, but maybe it rain. But generally, I'm not too keen on using weather excuses in the business, because what I look at is every week what we are shipping out, and I see how competitors react. So you know, there are fundamentals that could mean a German is better, but then my dig through my conclusion is my best expectation is it continues roughly where it is, but it could happen, but I don't know what the weather effect is. I don't have I haven't quantified it and I haven't used it as a reason. Thanks. Okay. Last question. The last question. Thank you very much, sir. The last question for today is over the line of Pierre Russo at Barclays. Please go ahead. Your line is now open. Hello. Thank you for taking my question. I'll be very quick here from it. The first one is a follow-up on CapEx guidance. You said that the minority of the guidance increase was relating to inflation in the cost So I guess it's mainly savings. What would be the implication for your CapEx expectations in 2020? 2nd question is on capacity additions in the industry. Could you remind us what the timing of the capacity additions of your main competitor is? And have you already seen some downward pressure on pricing from these or do you expect it to get worse in the second half of the year? Thank you. Yes. So, CapEx guidance for next year, we haven't We haven't made one and we don't say that now, but we had said that with the size of the company right now, we do these investments to create some room and we will keep with the maintenance investment and we also will need some additional factory projects as we always do. And then in what year we announced them as well. So we'll we'll, we have said that we need to catch up on capacity and we do a big up now and we come back to the guidance for next year. And then on the capacity that was coming online, what we see now that we have one competitor in Poland that have come online and they push volume and the lower prices. And then we have in France, German competitor coming on with the thermal factory. And I I don't quite know what reality will be, what I would expect in Q4. It was like to see something, but again, I, we wait until we see it. Then in Ukraine, yeah, one more one more capacity one I forgot on. In Ukraine, there is also a new line, an unknown player probably to you. That's coming on. So you have a terrible price competition in Ukraine between a Russian local manufacturer and this Ukrainian manufacturer. So we have just concluded that we cannot we are not interested in playing on that level, and it's a very big overcapacity. Ukraine is not our biggest market, but there you'll see overcapacity and you'll see a top situation between these two. Did I miss something here? No. Those are the main ones. Okay. That was the final question for today. Can I please pass it back to yourselves for any closing comments at this stage? Okay. So thank you for your time today. I just wanna remind you of the call on 10th September where we dig in solely into the UC, the UC aspect of the business, not so much the governance part, but more the sustainability and environmental part, and, the social, no environmental And then, so you're all welcome there, and we will do that every quarter. And then I look forward to see some of you on Monday in Copenhagen. So have a good weekend on to them. This now concludes today's call. So thank you all very much for attending, and you can now disconnect.