Hello, ladies and gentlemen, welcome to the Rockwool Group report for the first half of 2019. Today, I'm pleased to present CEO, Jens Birgersson, CFO, Kim Junge Andersen, and from IR, Thomas Harder. For the first part of this, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. As a reminder, this is being recorded. I'll now turn the presentation over to your hosts. Please begin.
Welcome to the conference call regarding Rockwool International's results for the first half year of 2019. My name is Thomas Harder. I'm Director of Group Treasury and Investor Relations of Rockwool International. I'm here together with CEO Jens Birgersson and CFO Kim Junge Andersen. First, Jens Birgersson will go through our presentation and give you an update on the results for the second quarter and for the first half year of 2019. Afterwards, we'll be ready to answer all your good questions. Before I hand over the words to Jens Birgersson, I must ask you to notice slide number 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'll now hand over the words to you.
Thank you, Thomas. Hello, everyone. As usual, we go through the deck, then we get on with the Q&A. Please turn to the slide called Highlights H1, please. The third slide. When we look at this quarter, we came in on 4.4% growth, a little bit better in nominal currencies. If I were to look at all those numbers, it has a relatively strong logic. Looking to the margins, both on EBIT margin and EBITDA margin, if you isolate the IPC, the profit in inventory, the Alnskog one-off depreciation reductions that makes the result margin a bit better and the start-up cost, both the EBITDA margin and the EBIT margin has increased like for like. That's something I look for, and I like that that happened. On this IPC, 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 had all the machines up and running to build up seasonal stock. We had a little bit of a slow closing of the year. That meant we stepped, when you look into the balance sheet, we stepped into 2019 with almost EUR 40 million more finished good stock. 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 started already mid of January to take off certain shifts. For example, the shift in Norway and some in Denmark, those long shipping shifts, we took decisions to take them out. They take a while.
If you take a shift out in Netherlands, for example, it's a longer delay before we can do it compared to Denmark and some other countries. Anyhow, we took those decisions already then, that has also led to that we've taken out about EUR 30 million of that finished goods stock during this period to get down closer or on the target level where we are now. That has then cost in the profit inventory. That's covered in the results you see. I just wanted, because the impact here was EUR 8 million, that you know about it. In a normal year, if you start on roughly the same net working capital and you just keep up, work up to your seasonal stock level, you normally don't see that difference, that's why we never spoken about it before. We move on to highlights on 42.
First thing I want to say about Q2, that even if you have the profit and inventory effect and all the rest, but even if we take out the Alnskog one-off, that one alone, this is the best top line and the best bottom line in the history of Rockwool. It's not a bad quarter. It's in fact a very strong quarter. The workday index, we saw that very much in June. Q2 have a shorter workday index, it ended up so that June got impacted. We had a pretty good start of the quarter, in June, net result of that was very low activity towards the end of June. Overall, okay, 3.3% plus 1.5%, around the 5% mark, the first quarter around the 5% mark. Not a big difference. Let me move on to slide five.
Here, you can say that something that happened, I refer to more the. I come back to that. In H1, you see the continuing uptick in system division. We talked about that end of last year, that some of the restructuring we did in Rockfon, some of the work, we also waited for this regulation issue in the retail business for GrodanPlus that the other businesses have done a good job. Rockpanel has developed nicely. All the businesses, maybe with one exception for the piece of our business going into automotive, that's a relatively small business. It has all developed very nicely. You have seen an uptick in the growth rates of the systems divisions on both Rockfon and Grodan has developed well.
Some of the Grodan growth was a reawakening of the retail business in the U.S., and we will not have a reawakening all the time. I see that we have 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. On the insulation business, Western Europe has really driven the growth. I get back to the more regional effects on the other side. Let's move to quarter two. Here you see again that systems have continued to grow even higher growth rate than in the first quarter of the year. Very nice.
Then in insulation, when you look at it, and that goes for the quarter and also the first half year, France, U.K., 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. They have had that for a while. When China then, and the trade war effect continued, that very quickly spread into the whole South Asia region. South Asia is negative, with the exception of India. It seems that India is not so closely linked to China. All the other markets, we could see immediately that it spread, and that's the Asia effect. The really strong development we have had here is Western Europe excluding Germany. Let's move into the regional sales development, and more or less this holds for H1 too.
It has just diverged more as the year has progressed. U.K., France. France, phenomenal development. 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. We have had a very good development in France, Q2, very strong. I think it has to do that they have the nuclear power, they have a lot of electrical heating, quick heating in the houses, and it pays off to insulate because that means all the equipment gets smaller, can work with small radiators. Really it's encouraging to see what's happening there, but we don't see the renovation trend in so many other markets yet.
I don't know if you have read up on it, on the renovation or the Energy Efficiency Directive, how the European Investment Bank are pledging something like EUR 100 billion until 2030 for energy efficiency improvements. I think potentially we have seen the first of energy renovation, energy efficiency improvements in France, then will it take two, three, four years before that starts to become serious in the other markets. I see that as a very encouraging trend. Germany, high level of building permits, almost record level, high order stock in the construction sector, but just stuck somehow. Some people talk about labor shortages. Obviously, there are not many car factories built in Germany at the moment, and you could see that into Eastern Europe, that quite a few projects with flat roof and facade factory projects got postponed.
We have seen that into Eastern Europe, but Germany basically stuck and not great. 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 don't count on that. It looks a little bit depressed, even though the backlog is very good. We go into Eastern Europe, and I would say the whole of Eastern Europe, Czech Republic leading the way, Poland probably flat, but a little bit less confidence in the future from the local distributors and construction companies. 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 that's flat roof, facade, bigger projects.
We have seen price pressure there. We have taken the approach that we'd rather cut capacity and we keep our pricing, and we have, across Rockwool, with exception of a few segments, kept our price increases and kept up. We are monitoring them in the big, heavy segments, what's happening. We see a tougher environment on bigger projects now. Russia had a very good development up into Q2, good price development. Romania has also been good. Here in Russia, we have not a 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 will be impacted, not the market volume, but our success in it, depending on how much export volumes will stay in Russia now instead of going out.
I'm a little bit less positive about Russia in the second half, not as a market, but the competitive environment, and again, our priority will be to keep the pricing. North America, Asia, and others. Asia, I said, it's down, and in the U.S., it's slower. Some segments extremely buoyant, but you see the same trend, flat roof, big project, logistics center, little bit lower activity, we have noticed. Also competition, a little bit 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. Of course, some presidential concerns about the market. Let's see how that develops. Profitability, as I said, underlying margins have improved, even if you take out the depreciation effect. We are pleased about that.
You should be clear that you have the one-off in Q2 from the Armstrong settlement, like for like, it's still improved in the businesses. In the segments, we move to slide nine. You see that 21.2% margin in system division without the Armstrong settlement, you have 16% growth in profit instead. About EUR 24 something million, which is a good development because we also have an inflation picture impacting that business. They have passed on inflation and improved the margin with improved volume, and we also have a better mix. What you see on the insulation side is that the lion's share of the inventories that we built down, it all impacts the insulation business as we keep the stock there for most of it. That underlying the profitability is good, and pricing has improved.
On the investment activities, we are accelerating a little bit or keeping the same pace in Q1. Then there are some periodization issues. Basically now we are getting ready to start up Neuburg in Germany already in Q1, end of Q1, which is a bit faster than we expected. Again, October, November, we should start shipping product to customers. Then in the U.S., West Virginia, we have progressed with the construction. We lost a bit of time due to weather, not to protests locally, due to weather, but we have had a strong inflationary pressure on steel, this imported material from Europe, and its local civil contract. That's also contributed to some of the increase in the CapEx. Generally, the construction market has been very buoyant 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've 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. The red part is capacity expansion, and the blue part is everything else. Some of the maintenance actions that we wanted to do towards the end of last year, we postponed. We ran the machines instead to keep up with the demand. Some of it is a bit of a catch-up, but you also see that it's on average higher there. There we have reported things like, for example, the Moss electrical melter, new spinning technology, sustainability investment, where we have a program now to meet our sustainability goals.
We have ramped up for example investments in water improvement, energy efficiency improvement. We are renovating a number of offices to higher energy standards. That shows up there because it doesn't give capacity, it gives a greener footprint. 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 % is roughly the same. We have EUR five or 10 million higher finished goods stock than the same period last year. Trade receivables are nothing really drastic. It's investment that is the difference there. Finally on the guidance, the investment guidance I talked about. On EBIT, we continue to be confident on our EBIT margin. On the sales, obviously disappointed you tremendously there. We have talked about the volatile environment. I keep a wide span.
We are about 4%, now shorter time left, so taking it down to 3%. I see continued volatile environment. Is Asia continuing down? Is the trade war continuing? We have the Brexit, Germany, Eastern Europe. It's just a lot of factors. We have factored those things in, and we included then the downside that some of that continue get worse, and we also kept a bit of an upside. 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. With that, I would like to hand over for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please can you press zero and then one on your phone keypad now, and if you wish to cancel that, please press zero and then two. We ask you very kindly to please limit your questions to two at a time, and once you finish, you can go back into the queue by pressing zero and then one again. There'll be a brief pause while the questions are being registered. Our first question is from the line of Claus Almer at Nordea. Please go ahead. Your line is open.
Thank you. Yeah, two questions from my side. First question goes to your new revenue guidance. How should we think about second half is split between the system and insulation division? Would it be insulation being in a decline and systems growing? Will both be in growth pace? That would be the first question.
It's a volatility forecast, and depending on how you calculate that, you can get a combination. We have the December effect also. Generally, I see volatility in the market, so there could be flat insulation businesses. Due to that is 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. We see most of the volatility happening on the insulation businesses. Exactly how that spreads, there are many scenarios. We just see continued slow growth on the insulation businesses. Again, the volatility of the whole story is that we don't, de facto knows what will happen in Germany and Eastern Europe, positive stock adjustment, we'll see. That will be reflected in the.
That obviously I can understand. Q3 so far has insulation started out in a decline. Is that a fair assumption?
I don't make a comment on Q3.
Okay, fair enough. My second question, that's coming back to your EUR 8 million inventory adjustment. Can you try to put a bit more color, or Kim can put some more color to this? Is it a boost to 2018, you're now correcting it? How should we think, one thing is the Q2 impact, but there must be some timing between the different quarters as the cost has been spent.
Yeah. Okay, let me explain it first. We have a target stock level before the high season, and the high season starts here. We are getting into the high season now. We have a target value, and then what happened last year was that with all markets basically developing positively, but we had a bit of a blip towards the end of Q4, and December could be like that, and the machines were running extremely well. We were kind of going on max in all 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 accumulate the tons quickly. That meant that the EUR 40 million higher than the previous year stock level, that's how we start out January.
When we get into mid of January, we see that some regions did not develop as we expect, and other regions were well. We start to take out the peak shifts in those, but they take a while, and then we start to cut it. 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. That's what we've done. Those EUR 30 million with the overhead absorption of that gives the profit effect. As I said, the majority of the decisions were made end of January, and then it takes three, four months to get the shifts out. In some places, very quick, the temporary workers, most of them are temporary. You need to do it, plan it, reset the business.
The bigger effect is in Q2. Okay?
As I understand, these EUR 8 million, that is IPC costs. You just produce to inventory, i.e., your unit cost has been helped when you produce a lot of units, so to speak.
Absolutely
in Q2. Is that correctly understood? It's not about-
Yeah, exactly. Because we take the stock.
Yeah.
Yeah.
So-
It's just, 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. Just trying to figure out these EUR 8 million that you want to correct in Q2, those costs should come in a different You should be making-
Oh, not in Q2. In H1.
That would be in Q1. I.e., if you want to correct in Q2, you need to add it in another quarter. Would that be in last year or in Q1 or Q3 or?
No, I don't think you should correct anything.
No, you shouldn't do that. This is just a difference between the two years.
Yeah
That was big in this case. Therefore, we're giving you the numbers so you can see. You should not be doing that between the years, because we run the business. Seasonality is pretty much the same. 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. Then some 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 sit with 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. Maybe just to be 100% sure. These EUR 8 million, that is a normal, ordinary production cost that we split out to units in your production, right? There's no extraordinary redundancy or one-off cost?
No, nothing. Ordinary.
Okay. Thanks.
We are now over to line of Yves Goned 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 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. 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.
Yves, again, this is an information. We are not going to start to report on IPC going forward. This is an explanation because it's an unusual development in a quarter or in a half year compared to our normal seasonal buildup of stock.
Okay.
There's really nothing to it.
The capitalized overhead cost doesn't mean that you're actually capitalizing some of the extra fixed costs that you're spending on.
No
engineers and technical engineers. It has nothing to do with that?
This is just the absorption per unit produced. It ends up in stock, in the stock value. Since we have produced it, suddenly we stop producing in a quarter to sell off the stock, we just show the impact of that. Yeah. No, we haven't changed any rules. You know one thing, we write off. We are very tough on ourself on stock. If we keep it too long, we write it off at a very specific time. We don't want to sit with too much stock in the business.
Okay. If I just jump to the other questions.
if I
Yes. Can I continue with the question? Just second one. You mentioned that you are doing some more investments on systems. Could you maybe tell us exactly what you're doing there? Are you adding some lines?
Yeah.
What are you thinking there?
The main investment, and this we have planned. At the beginning of the year, we started up a Grodan investment in Russia, and that's part of the growth that you see here now. What we have done now is that even though there was a downturn in the Grodan business in the U.S., we pushed the button on an investment. When did we decide?
July.
Last year. In the middle of the deepest downturn on the retail business, we concluded that when it's coming back, it will be up on a high level. We have invested, so that investment is rolling in now during the autumn, and that's to meet growth on growth in North America. That we can cope with what we are doing next year. We have enough now to carry us through, and this extra addition we are doing will be very well timed to keep growing.
Sorry, but actually it's quite interesting what's happening with Grodan and part of it is due to the cannabis industry. I just wanted to get an understanding. In Russia, are you building capacity because there's a change in medical cannabis, for example?
No, in Russia there is no medical cannabis business. They don't have that.
Okay.
In Russia, you have a food security issue, self-sufficiency issue. Russia want to have their own vegetables. They have a very rough climate, they have concluded that precision growing in hot houses rather than importing tomatoes is a better way. It's a very strategic decision from Russia. We knew about it. We have been importing product there, when we saw stability in the business, we put a plant locally and we inaugurated that is absolutely timed with the Russian strategies to be more self-sufficient on food and have tomatoes all year round and cucumbers, paprikas, and the rest of it. It's just normal vegetable business.
How does the European medicinal cannabis kind of industry looks like today? Do you see an evolution towards higher use of this?
It's not the I mean, a little bit simplified, you see Canada and U.S., you see very strong development, legalized all the rest. You see in Europe, countries have done it and more experimental business. Yes, there are probably some customers that use our products, but the main business is the vegetable business. When you go to Russia, it's also only vegetable business.
Okay, thanks very much.
You know, people can buy our substrate and grow many things. There are orchid growers. There are many segments that the product can be used for, and we don't know exactly what they grow on every substrate.
Okay, thanks.
Okay, the next question is from the line of Kristian Johansen 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 has had in Q2, and also in terms of your new growth guidance, what does that reflect in terms of price increases?
Yeah. I don't give a precise number, but we are satisfied with the pricing and we have reached our targeted level of a couple of percentage points around the level, the number I always give. As I was saying, then it varies by product and segments and all the rest. As I said, price pressure on product business.
You previously said you're aiming for 1%-3%. What you're saying now is that you expect.
Yeah
to have 2%-3% fully-
I still aim for 1% to 3%. Yeah.
If I look at the 2%-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 it?
1%-3%.
All right.
It's a range. It's a dynamic environment.
Okay. 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 fifth year we do it, or maybe the fourth year. Now we have segments with lower activity. 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. That's our approach. We will have to navigate pricing the rest of the year, and it's a very good test year.
We have distribution business, we have many segments where it's a very mixed pattern. There certainly are areas and geographies where it's tough with new capacity coming on board. I see that we should be able to deliver 1%-3% on the year.
Okay. My second question now that you sort of flagged this increased volatility, and with your implied H2 guidance, you open a scenario with no growth at all. If we look at the markets where you open new capacity, I mean, specifically Romania and Germany. In a hypothetical scenario where you do not grow revenue, how will the EBIT margin develop? You must obviously be adding some big costs in these markets, but also you should save on transportation. Can you just help me a bit on the balance in a sort of no-growth scenario?
Okay. Let's say like this, Romania, 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 want to fill it in three, four years. A factory in itself, a new factory, is a negative impact on margin to start with. That's the case. These are a factory in the portfolio where some factory is rolling off on depreciation and others coming on board. Typically, a started up factory has a lower margin, and then we guide on the average of the whole thing. We haven't given a guidance yet, but for example, in Romania, yes, we get shorter shipping. We get also some extra business opportunities because we become very competitive also past Romania. There are ups and downs, so it's almost the case for all.
If you look at the German factory, we have had a regional import into Southern Germany for many years, 10, 20 years now. That factory has always run full. Here again, we put more capacity in the place where economic activity is centered. The goal is not to have the factory full in the first year. 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 capacity maybe in Netherlands. It could be that we come to a relatively healthy loading in that asset, and we take a shift off or a couple of shifts off somewhere else. We want some extra capacity. That's why we do it, of course. We don't want to be full when we start the factory off.
Every factory we build, at the beginning, we'll have first during the start-up, the build-up, and once a negative impact on the margin. In the overall picture, we weigh all of this together and we will give a guidance on the margin. For the next year, we haven't given yet.
Okay. You do confirm there should be savings on the cost of transportation in both markets?
There are obviously savings in logistics, and then there's also fixed cost and other depreciation, but other depreciation rolling off. It's many factors. Fundamentally, of course, a factory from a cash perspective to sit with a factory in the middle of a sweet spot, the cash margin immediately once it's built has improved. 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 older factories coming off. What should we expect for depreciation next year? Is that going to increase or is it going to stay at the same level as this year?
Too early to guide, Kristian. We come back to that into next year.
All right. Thank you. That was all.
We know, of course. I mean, we can calculate it, but we don't do that now.
We now go to the line of Brijesh Suri at HSBC. Please go ahead. Your line is now open.
Hi. I have two questions. The first one is on pricing. You talk about the pricing pressure in the market, in particular some markets. Can you just kind of elaborate that? Is it product issue, or who are the main kind of players who are? Is it happening just because there's less demand or kind of intentionally people are kind of driving down the price through there? What exactly happening on those fronts, if you can just elaborate a bit? Possibly coming to the second one is on cost side. Cost side, I just wanted to kind of get little more detail about how the cost inflation is evolving. The foundry core price is kind of slightly down, and the power prices across Europe are kind of moving up a bit.
Maybe if you can talk us through how you see in second half things are going to evolve. Relates to that probably on carbon, you may just let us know. I know you are a net carbon positive if you look at the products you produce. 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. That'd be helpful. Thank you.
The last question, I don't have in my head. On that topic, on the 10th of September, we start every quarter because we get a lot of these questions. What we do is to put together some themes, ESG themes, and then on the 10th of September, we'll have a ESG call, and we do that every quarter, and we pick a couple of topics, and then we can have a more deep discussion on those strategies. I don't have it in my head now to reflect on it. For example, it's very close to our strategy. We are now investing in this change of a melter in Norway, near Oslo, for an electrical melter, and we're putting a lot of R&D effort into that, and we have a very clear strategy for where we do it and when.
That topic I would like to refer to the 10th of September. When we get to maybe the more easy question on the cost side, cost inflation. With the kind of volatile economic environment, we see compared to at the beginning of the year, when we have an inflation and logistics increase outlook, we saw certain numbers. As we progress through the year, we still see inflation, so we still need price increases to cover that. You're right in your assumption, I assume that's your assumption, you hinted that, is that we see a lower increase than before. Relative on compare with H1 to H2, we will be better off in H2 from an inflation perspective. Okay. On the pricing, basically, okay, so System division is System division, and we are passing on the regular price increases, and varies a little bit between the businesses.
Whatever goes to automotive is a fight, but it's a small business, but we normally succeed. When you get into the insulation business, there are a couple of drivers. First of all, we have certain competitors opening up factories. They have that in Poland, that area. We have one coming on in France, and then they want volume for those. It's capacity driven and the fact that the market is a bit lower. When we look at where the market is lower, the project business, logistics centers, car factories, all of those commercial factory projects, big buildings, they are the ones that we have seen start to slow down first, and they are also the projects where the smaller suppliers can access the bid, they can make a bid, and the price competition is tougher. Flat roof and ETICS.
The whole ETICS market now, quite German-centered big companies in Europe. With the situation you have with increasing capacity of suppliers that can give stone wool to that, you also have the big system integrators. We're talking Sto and Caparol and such companies. They also are under pressure in the market because they fight very hard with each other on price to get to the project. Those are the two main segments where you see increasing pressure. When we then have certain customers that really want us. We keep a reasonable price, we keep the business, we have project business where people undercut us, we rather cut capacity, we stick to our prices. Of course, certain projects we really want. That's the picture.
That means you see a mix improvement because the big project business generally have lower margins.
Okay. If I may have just a follow-up on the pricing front. 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 under pressure to push the volume to the market. 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 strategy for the distribution business has been the same for four years, five years, and that is regular small price increases for stone wool to cover inflation or 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. The market is not absolutely uniform, but our priority is to keep prices stable. Yes.
Okay. Thank you.
Our next question is from the line of Lars Kirkegaard of ABG Sundal Collier. Please go ahead. Your line is open.
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 Kingspan this morning, that especially in sort of Poland, Czech Republic, and is experiencing worse results here. Just to get an idea of what your 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.
Yeah.
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. Exactly what that other company you mentioned see, we know that if we start to play this game and just drive it just spins out because we are just too big. It's right. In those segments, there are certain projects that are ours. Obviously, we take those, but we're not going to sell high-quality service stone wool to a project where we sort out the startup, the supply just in time, and just lower the price by 20% to get an order. We don't do that. That's the dynamic we see.
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. We see some companies behave like that now, and then we just sit steady in the boat, and we see what happens.
Just to follow up there, we've heard in the market from some participants that especially June was very volatile, but then they've already seen maybe a little bit positive drivers going on after that. Can you give some specification on the months of Q2 when it was especially bad, or was it sort of just across the market?
Yeah. In the month, we have just too many countries for me to keep track of it. I think what you say, and if it's June or July or whatever, what you normally see in such a business, I am not making a comment about the case, but what I have seen in this type of business, in our business, that is 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, okay, it is not growing so much, and now they draw down the inventories, and then there are going to be suppliers that believe that now the market is minus 20% in a month or four weeks or six weeks, and they react to that in panic.
If you have been through a few cycles, you know that in the beginning, when the market tapers 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. I think in certain months, you're going to see that more than in other months, especially early in the phase. That's all I'd say. I don't look into months like that, even though we have a monthly follow-up of every price, and we see it, but it's plausible, but I can't confirm.
Fair enough. That's a very good analysis. On my second question, can we talk on sort of the cost side here? 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. Here you've mentioned in previous quarters.
I said, yeah.
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 solutions for revenue growth.
Okay.
Yeah. How would it be able to sort of take out costs if you saw sort of this volume variation?
Yeah. Okay. I just want to clarify, I think the statement I made on I want to protect the top line. I believe that what we see in France, it's not easy to get it in action, but a third of the Paris Agreement needs to be achieved with energy efficiency. One-third of it, improved energy efficiency. That's renovation. What I say, I need to protect the top line at any price in terms of capacity. If I, as the biggest player, when the market grows, people can't get the product, we kill the market for stone wool. We have this increase. Yes, what you see on my EUR 390 million CapEx, I put priority on the top line. I'd rather take a bit of time in the penalty box by having invested a bit too much at the wrong time.
That will happen according to the short-term view. It's critical that we have the capacity for a market that underlying over 30 years, we've grown 5.3%, and if renovation starts, that number could be higher, but in between, there could be volatile periods, there could be recessions, there could be all sorts of things. Underlying, we believe in the market, and I put priority to that, and that's why we have the CapEx. You see the point?
I see.
My priority in a quarter is not to defend volumes. My priority, as I said, for four years, is to get the market where at least the distribution portion of it, and ideally also the project business, every year we can pass on in small portions, reasonable portions, the inflation. 1%-3% every year. That's my thinking. I think I might have expressed myself unclear, but that's how I think about it.
I may have expressed myself unclear, but that's also what I heard. Just to get an idea, you're obviously investing-
Okay.
-in the long-term top line here, that was sort of the case here.
Now we see that you might be able to save some cost in your underlying structure to protect your short-term margins also if volume starts going down. Just to get an idea, if you see volume deterioration, how well can you protect your short-term margin in the current cost structure that you do have?
We have taken out quite a few shifts, and when you take a shift out, as you see, we have no restructuring money or anything in here, but we've taken out quite a few shifts. Of course, we take the worst shifts out. The exact correlation between these, it depends, the magnitude and if we have a decline that is spread out in the one region, we need to look at the case, but we always try to take the shifts out that are the least profitable.
That's fair enough. Thank you so much for taking my questions. I'll see you guys again on Monday.
Thank you. Yeah, I'll see you Monday.
Okay, we now go to the line of Tobias Symon at Morgan Stanley. Please go ahead.
Hi. Thanks for taking the question. The first one on Western Europe, I would say the performance was quite strong. Can you elaborate a little bit what were the key drivers there? If I look at the individual markets, clearly you said Germany was weak, and in U.K., I guess, overall the market was not as strong, but you probably have gained some market share due to the regulatory changes. Maybe you can elaborate a little bit on this, and then could you also remind us roughly the sales split in terms of countries? How big is Germany, France, and U.K. within your Western Europe division?
Okay. In U.K., we have had strong double-digit growth for a while, and regulatory change is a small portion of it, but the perception change is a big portion of it. 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 a very effective investment. That keeps going. Our guess about the U.K. market is, I was in the U.K. yesterday. Some people say it's flat in our segments, some people say it's declining. Since it's a transition away and also renovation of all the buildings that have got the wrong material, it's like a new market also to some extent that is devoted to stone wool. That's the U.K.
France, the driver is that France is really the country, and I think they have 20 years practice with this, to understand how to renovate, how to give the tax credits, and how to sort out the supply chain. I think 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 that since they have electrical heating in many houses, they get a bigger incentive to do something about it. France is going really, really well, and even though the French economy is not running well, I think there is also recognition by renovating all these houses and going for energy efficiency, apart from the climate aspect, supports the economy. We see that. We see Spain doing good, not on France level, but it's good business.
We grow in Italy, that whole area where obviously France and Germany are among our biggest entities in Western Europe, just to be clear. They are the biggest now. You also see Sweden, Norway doing absolutely okay.
Okay. In Germany, just a quick follow-up there as well, because obviously in France you talked a lot about the subsidies for energy efficiency. Seeing similar trends in Germany because I know the government or there have been talks about increased fiscal spending. Could we see this in the field of energy efficiency?
No, I could not see it. I think the reason that Germany doesn't seem to have a government at the moment. Who leads Germany now, really? This requires, I think, a conviction behind the scenes there. A very good understanding of it, but I think the market has stalled for other reasons there, the whole of Germany with the car industry and a bit of hesitation, maybe labor shortages. It's a combination of things that just have put a bit of hold on the German market. I can't say whether all of these building permits will be realized. There are many Germans that believe that. I can say one thing, I think the building sector will do much better than the economy in general. I think the automotive will do. They're in for tough time.
There are already some companies that are bankrupt. I think the construction industry, there is a fundamental need, and if they get their 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 automotive? I think you mentioned earlier that you have seen a bit of big projects being canceled which were related to the automotive sector.
Yeah. We see that in Eastern Europe. Yes.
That's in Eastern Europe only, not in Germany?
No, not in Germany because the other business we have, we're selling stone wool fibers to brake pads, for example, but that's a relatively limited business, a lot of OEM business. There you see exactly how the car industry is doing. We can see that, but again, in the big scheme of things, it's not huge business.
Okay, fair enough. My second question is in relation to your margins. I remember 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 basis points 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. 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 margins? Could lower volumes translate into higher margins for you?
Let's say it like this, if you look at the margins, they had underlying, when I clean away all the effects, like for like, the margins are up. We have seen a bit of inflation. Obviously, the price has impacted, but we are having less of the long-distance logistic cost, that's for sure, with the other footprint. It's such small money if you end up having to take out a shift and then pay money for it, then that can compensate that quickly. Within the quarter, it's not over sure you see it. Yes, we are shipping shorter distances now.
Okay, that makes sense. Just as a last follow-up on this, 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. If we see similar trends in the second half and we have more, I would say, raw material tailwinds, shouldn't we expect a positive margin development? Shouldn't we be able hence to be up for the full year, even excluding the one-off gain versus last year?
We kept the guidance around. If you have to restructure somewhere or something happens around, we follow it every month. How it looks now with the current price development, that we are comfortable with that guidance.
Okay, there's no reason why we should expect lower margins in H2 year-on-year.
No, there's nothing structurally that is going to affect the gross margin.
Okay. That's it. Thank you very much.
Okay, we are now over to the line of Michael Rasmussen at SEB. Please go ahead. Your line is now open.
Hi, thanks for taking my questions. I want to quite touch the same subject as was just asked in relation to cross-border shipments. As you see 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?
Yeah. Some businesses, you look at the Rockwool business, obviously, we produce a lot in Netherlands and Poland, and we cross-border ship almost all of it. That business will continue and also in technical insulation, Core Solutions, many of these businesses we ship because we have OEM products, one product that goes to an OEM that have five production places. That shipping will continue, and then the extra support shipments, say, Norway into Germany, Denmark into Germany, U.K. into France will continue. There will be places that continues, but it will be on a lower level. For example, depending on the product and the portfolio, there are some products going on, but it's not on that high level that we had before.
Okay, thank you. My last question, in terms of Grodan 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 larger market demands?
It's back to the regulation. A big portion of the market was regulated. You have the elections, they legalize it, confusion between federal and state law. There's been all sorts of terms, most of all, it was regulated. The market was regulated and legalized, that put the confusion on the whole market. The medical players up in Canada, they kept going strong. 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. 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.
I see a long runway for growth, that business, otherwise we wouldn't be able to expand our capacity.
Okay, thank you very much.
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. That's also growing in the U.S., the capacity we are expanding is not only for the medical and the recreational, it's for the vegetable business too, of course.
Okay, we now go to the line of Marcela Klang at Handelsbanken. Please go ahead, Marcella, your line is open.
Hi, thank you for taking my question.
Sorry, Marcella, you're very quiet. Sorry, Marcella, 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. 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?
Our backlog, Marcela, 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. You have certain bigger projects where you have a backlog, and we are not so many of those projects where you then plan it out with the building site, and we pre-produce on that. The majority of the business is a very quick turn business.
Speaking of backlog being good, does this mean now?
No, this is the construction industry backlog.
Okay. It's not your backlog now at the end of August, which would basically mean that July and August were fine.
Yeah. No.
Yeah.
We more or less, as you know, with our net working capital, inventory is single digit, finished goods and incoming material. We are single digit. We are very low on that. We produce, and then we have some seasonal stock. What I was talking about is the order backlog of the construction industry.
In Germany.
In Germany.
Yes. Maybe a clarification, the increase in guidance when it comes to investments. You mentioned that it's both, that you are pushing, was it the German factory earlier and that the project is going well, but also the U.S. got a little bit more expensive. Is it the major part of the EUR 60 million increase is because you are pushing your investment earlier and the smaller part is because it basically got more expensive than you expected? Approximately how big is it here?
Marcela, we have a history of having had tough factory projects, and we are working very much on improving our approach, how to execute projects. It will take another two, three years, I think, before I'm happy with it. We have a very serious approach to improve how we execute projects. What you have here is that we have new leadership in our CapEx organization. We have also very high load. You see smaller projects going better, but for example, we are not pushing for Neuburg 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 the team can handle it. Romania is going fine too, but there are also many smaller projects.
You have that acceleration happening. It's not the majority of the portion in the second half that is cost increases, but it is worth mentioning. We're talking one of these plants cost a lot, and steel or civils on that is more expensive. It's not a majority of it, but it's a big portion also. It's a significant portion, therefore we mention it.
So it's more-
It's not 50% of that.
Yeah. Thank you. Those were my two questions. I will see you on Monday.
Thank you, Marcela. Okay, I understand we have how many questions in the queue? Three or four, huh?
Two questions left in the queue. Do you wish to take them?
Okay, we close the incoming queue now and we finish these last two questions.
Thank you very much, sir. In that case, the penultimate question is over the line of Tobias Werner at MainFirst. Please go ahead, sir. Your line is open.
Yes, thank you for taking the questions. Three, if I may. Number one, just looking at some data here in front of me, which I get on a monthly basis, in Germany. If you could maybe share with us what the market share development is in Germany between glass wool and stone wool since that period. That's question number one. Number two 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 wool, and on the glass wool side, a 4% decrease. Does that tie in with the trends you see, or is that data not sort of applicable? 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 construction market have talked about a rainy May and June having an impact as well. I just like to get a little bit of clarity what the weather had in terms of impact on you.
Okay. Let's take those, and I can't be precise because these reports on market share and all the rest are very inaccurate. Let's look at the market share development of stone wool. We are convinced that stone wool over those years have increased its share, and probably last year we increased extra much because there was a shortage and we could deliver, and we are really leading brand in Germany. I think that trend has been going on. I also believe that on the price development, you have had a long-standing battle between a couple of glass wool players, and we keep track of it, and I think you are right that they have not raised prices, and I don't think that is because they see a very different inflationary picture. I think it's because they have been fighting, and they keep fighting.
I think the same thing has been going on in France for I don't know how many years. I think it's the right magnitude because one thing is for sure, since I came to Rockwool, we have increased prices a couple of percent every year and those are the years you talk about. I don't have the statistics here, but rough magnitude, inflation increases every year. I think that, and we are one of the biggest player in stone wool. I agree with that. In Germany, the thing with the rain in May and June, it is right that when you meet, for example, your outdoor 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. 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. We have these heat records. The rain, I can't remember, but maybe it rained. Generally, I'm not too keen on using weather excuses in the business. What I look at is every week what we are shipping out, and I see how competitors react. There are fundamentals that could mean Germany is better, but when I dig through what my conclusion is, my best expectation is that it continues roughly where it is, but it could happen, but I don't know what the weather effect is. I haven't quantified it, and I haven't used it as a reason.
Thank you very much. Very helpful.
Is that all? Okay, thanks. Okay. Last question.
The last question. Thank you very much, sir. The last question for today is over the line of Pierre Rousseau at Barclays. Please go ahead. Your line is now open.
Hello. Thank you for taking my question. I'll be very quick, I promise. 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 failings. What would be the implication for your CapEx expectations in 2020? Second question is on capacity additions in the industry. Could you remind us what the timing of the capacity additions of your main competitor is? 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.
Yeah. CapEx guidance for next year, we haven't made one, and we don't say that now, but we have 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. In what year we announce them as one. We have said that we need to catch up on capacity, and we do a big step now, and we come back to the guidance for next year. 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. We have in France, the German competitor coming on with the stone wool factory.
I don't quite know what reality will be, but I would expect in Q4 we will start to see something. Again, we wait until we see it.
Understood. Thank you. That's very kind.
In Ukraine, one more capacity, one I forgotten. In Ukraine, there is also a new line, unknown player probably to you that has come along. You have a terrible price competition in Ukraine between a Russian local manufacturer and this Ukrainian manufacturer. We have just concluded that we are not interested in playing on that level. It's a very big overcapacity. Ukraine is not our biggest market, but there you see overcapacity, and you see a tough situation between these two. Did I miss something? No. Those are the main ones.
Understood. Thank you.
Okay. That was the final question for today. Can I please pass it back to yourselves for any closing comments at this stage?
Yeah. Okay. Thank you for your time today. I just want to remind you of the call on the 10th of September, where we dig solely into the ESG aspect of the business. Not so much the governance part, but more the sustainability and environmental part, environmental. You're all welcome there. We will do that every quarter. I look forward to see some of you on Monday in Copenhagen. Have a good weekend until then.
This now concludes today's call. Thank you all very much for attending, and you can now disconnect.