Welcome to the conference call regarding Rockwool International's results for the first quarter of 2019. My name is Thomas Harder. I am Director of Group Treasury and Investor Relations of Rockwool International. I am 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 first quarter of 2019. Afterwards, we will be ready to answer all your good questions. Before I hand over the words to Jens Birgersson, I must ask you to notice slide number two, which is the forward-looking statement. Please be aware that this presentation contains uncertainties. Now we can go to the next slide, which is slide number three. Jens Birgersson, I will now hand over the words to you.
Thank you, Thomas. Good morning, everyone. I apologize for my voice today. I have a little bit of a cold. Before we get into the financials, I would like to use the fact that I have your attention and talk a little bit about the sustainability report that we issued at the time of the AGM. Normally, we focus a lot on the external world and what the product does for the environment and the climate, et cetera. Today, I will also talk a little what we do internally. First, let's look at the positive impacts, the key driver slide. The next slide, four. Slide four. What you see there is this fortunate situation that Rockwool has that the product does a lot of good. It has a very positive impact on the environment around us. There are basically three fundamental driver.
The one is, it's used to combat climate change, a very relevant topic. The second is that it's circular. A third of the waste on the planet comes from the building and construction industry, and stone wool is one of the few construction materials that can be recycled still down the line. There are many products around that talk about that they have recycled material in. We have that, too. A third of what we use today, we have run up to 80% on virgin material. The fact is, at the end of the day, we can take it back and we can do things with it, and we can use it for a new product. The third driver here is to safeguard people's well-being.
Here, what we increasingly discovered over the last couple of years is that with the urbanization, our safe fire-resilient products with its durability fits extremely well into the dense urban environment. On top of this, if you read this slide, fire safety is always there. On top of this, under, I will say, climate change, comes a new emerging trend that a natural material like stone wool is also a perfect substitution and a viable substitution that is ready today to reduce the amount of plastics in the world. That's a very key theme. We ourselves, for example, we haven't found a way to replace plastics in the wrapping. There are very good applications for plastics, but as a building material, stone wool can replace a lot of plastics in construction, and that's a trend we see coming. Turning to slide five, sustainability goals.
These are the goals we have set ourselves. These are fitness goals that we have set for our organization. The first one up to the left is the CO2 emission today. The benchmark year is 2015, and we have a target for 2022 and 2030. There are people that say we should have even longer targets, but we tend to prefer to see what we can achieve in the next five years, and then we adjust the targets and maybe accelerate it as we move along. On the CO2 emissions, today, since you need a lot of energy when you melt the materials to make a fire-safe stone wool product, we emit 696 kilos of CO2 per ton of stone wool we produce, and we have improved that as we go. We want to reduce that fact as we move forward.
The second one in the upper row is to reclaim waste. The infrastructure to take back the product, we can take back the product and we can repurpose it. We can use it in our production and add it in the production. The value chain is not there yet in the construction industry, but we are increasing the number of countries, and we have targets for that where we offer to take the product back. We just recently launched it in Sweden, and we could see an immediate impact on our top line from that. This is something we are driving, and it will take a while to change the construction industry, but it will happen. Water consumption. We use a fair amount of water in producing stone wool, and also here we said we need to reduce.
I come back on all of these factors, on what actions are we are taking. On energy efficiency, we put ourself a goal to renovate our own offices around the world and cut the kilowatt hour per square meter by 75%. That is basically apply our own product in our offices and to achieve a substantial improvement. On landfill waste, we have also set the target to reduce that by 85%. We are producing millions of tons of stone wool, and we are sending something like 3.5% in terms of tonnage to landfill waste today. We want to drop that by 85%. We have a safety target to improve that, the lost time incident ratio. That is lost time days as a percentage of million hours, by 10% every year. Some years we manage, some years we don't.
We drive this all the time because we are in an inherently quite risky industry. We are dealing with hot materials. It is heavy industry. We will be using a lot of trucks, and we have a lot of people traveling. The level we are at, the benchmark level is 3.5 now. That is what we have in 2017. That is not a bad level, but we have the ambition to improve it. If we flip to the slide six, you will see a little bit on the progress, what we have done. For example, on the CO2, I will start again in the top left upper corner. The CO2 emissions so far, we have reduced by 4%. Fundamentally, the way to drive this is efficiency of the output to not waste material and the melting technology.
For example, if you melt with electrical melter that is using renewable energy, that will have a lower CO2 impact. On the other hand, melting with the gas melter instead of buying dirty electricity from far away, will also be better. We have a strategy for how to improve this by at least 10% by 2022. It's a lot about melting technology, and we are, I think, the only supplier that can melt with gas, coke, coal, and electricity. We are good at all of those disciplines. We have the reclaimed waste to increase the number of countries where we offer that. I think that trend will accelerate as the years go.
It's a matter of doing it and think through the logistics and also think through the incoming side of a plant, how you deal with the material when it comes in and how you collect it in a market. In some markets, there are small startups that are making a business out of taking this from a building site. In other markets, we have to do it more ourselves. We already do it with several big car companies, that we deliver a new flat roof or the new materials for it, we take back the old material. Volkswagen, for example, is a good example of that. We get to the water consumption. This is a tricky target to get to, because water in the geographies we are is cheap.
We have noticed that if we'd apply our own investment criteria these investments to save water and use less water in our processes, they don't get done. What we have done here is to lower the investment thresholds for water savings so that we get some work done. What are the actions in this area? It's basic water management, stop leaks, putting meters, know where it's going, not wasting, not leave the tap on. It's a lot of water recycling. In many of our plants now, we just take in tap water, we clean it, use it as processed water, and then it evaporates a little bit in the process. What we can recycle water all the time, and that's in place in most places already. We also do rainwater harvesting.
We have big areas on the plants. By just collecting rainwater that would otherwise just pass through our plant and add that to the system, we consume less fresh water from the grid. On the energy efficiency of the buildings, it is just to renovate. This is also a good way for us to showcase how you use Rockpanel, Rockfon, our normal insulation in a building project and how you renovate effectively and quickly. We are, for example, doing a project now in Gladbeck. It's a really old '70s building that is not pretty, that we are now uplifting with the renovation and making it top in terms of energy efficiency. Very interesting to take that project on. We use it a little bit also to train our own managers in understanding how you do renovate.
It's good as the manager for an OpCo to have operational company, to have a renovation project, and have to live with your product, renovating your own office. On the landfill waste, that looks like we have gone back, and that's true. We have gone from 94,000 tons to 95,000 tons of landfill waste. It's still a small % of the total production. That is a function of that we grew so much last year. The investment plans are approved here, the trick to not send things to landfills is to have a way to feed the waste, the product that doesn't pass the final quality test, back into the process. We do that, but there are fragments that we don't manage today. We have a couple of ways of doing that.
Depending on the melting technology, you need a special process to be able to get the last bits and pieces and some of the bulk pieces into it. We have approved a number of briquetting plants in some places, so I'm very confident to meet that goal and bring that down to less than a % of the total production going into landfill and including other materials, too. That's an overview of those. If we look today at the external environment, there are many rating agencies around, and there are ESG money around. A little bit depending on the emphasis of the rating authorities, what they focus on. You have environmental, social, and governance. Depending a bit where they slant it, we will score differently well. For example, we don't have a female board member today.
If that is a high rating, we simply can't score well today. If I were to emphasize a few of the heavy ones, the MSCI, and the Trucost and the SDG Invest, I'll take those two. We start with the New York-based Morgan Stanley Capital International, MSCI. This is the biggest one in the world, as far as I know, and we are top-rated on that one. We are very proud of that. Let me take Trucost. This is the Standard & Poor's, Dow Jones. This is London based. They acquired a controlling stake in this. We are the only company in their rating, so they address the 3,000 biggest companies is in their scope. They are not through with all companies, but that's their goal.
We are the only company of the companies they now evaluated, every product has a score of 100% positive impact on the environment. They are very much focused on the environmental aspect of things. Proud of that record. The Danish SDG Invest, they analyze 65,000 companies and they pick 100 to say that these are environmentally sound, doing things in the right direction, and we are one of the 100. Again, very proud of that. We have a lot of work left. We never score perfect in all of these. Directionally, we are very well-positioned. Okay. With that, I move on to the numbers. Slide eight. Let me write down the numbers here. Okay. Slide eight. To just summarize the quarter. The quarter is what we expected it to be. The top line had a few starts and stops.
Some places we have had a heavy winter. We saw some markets grow tremendously. We saw others not grow at all, and this is what we predicted. The top line is price and mix driven, primarily. We look at the CapEx. We have invested what we expected to invest. It should also be said on the top line that it's the biggest sales we ever achieved in the history of the company in Q1, so should be happy about that. I think that's another sign that this fundamental demand for the product, I'm talking fire-safe materials, natural materials, are not made of plastics. It confirms it again, the interest in stone wool is high, and we keep selling. If you look at the numbers as you can read them yourself.
Moving to the sales growth on slide nine, we see that we had a US dollar effect. The US dollar strengthened, that is the only currency effect basically that we had in the quarter. What you see here is that we had a very pleasing development in residential, and we are happy about that. We talked about when a system coming back. I haven't promised when it's happening, but you saw across all the businesses, good growth and particular good growth in Grodan in North America. We are pleased about that, and it's of course nice. We have that type of growth at the bottom line also follows along. This is slide 10. Regional sales development. Overall, we saw a slower growth on project business.
We have also seen some car companies coming with very big contract business that we won today. German car companies, we won't need a flat roof anymore because we're not going to build a plant. We saw that on the project business. We saw across the geographies, bigger ups and downs. Last, we had a broad base, almost everywhere up. Now we saw ups and flats and some downs. If we then start, U.K., France, Sweden, all very strong in Q1. Germany, slight growth, Denmark flat-ish. Also a mixed picture, but underlying fine and much better outside flat roof business. The GBI and the rest were performing better than flat roof. We move into C, including Russia. Russia, big single-digit growth. Poland, Hungary, single-digit growth. Ukraine down by a mile. We are just exporting into Ukraine.
I assume elections and local supply conditions have changed there. Also some other Eastern European countries that had declined sales. The mix of that led to that we grew only 4%, but that's still acceptable level. North America, Canada turns south. We don't know if that's permanent, but that went down and we saw double-digit growth in the U.S. Asia, basically China had their New Year's a bit earlier, but you also saw a decline in China that was quite big, and also Southeast Asia, Malaysia, Singapore, weak markets at the beginning of the year. I don't know if that's the trade war impacting the whole region or what it is, but we are still making very good money there. We expected it to be weak, and it is weak, and it's going to be interesting to see if it picks up.
Some of the Q1 development also lost. We expected inflation to pick up, we have gone out with price increases in many markets. End of last year, that starts in January this year. We had maybe some pre-buying also. It's hard for me to estimate the effect of that. In the U.S., we saw some of that. That could also have impacted in some markets, but not every market have a new price increase on 1st of January, it's hard to generalize. Move to slide 11, profit margin. EBITDA up 7.3%, EBIT up 9.4%. You see the numbers and basically, to just anticipate the question, if you look at the EBITDA margin, it went from 18.6% to 18.8%. That's one way of looking, it improved.
When you then take the change of the IFRS 16, where you made a shift and reduced fixed cost and increased depreciation, if you add that back and you do the real decimal count, you find that we have lost 0.4% EBITDA margin. Digging into that, I'll just take one single factor. Basically, what we have seen in Q1 is that we have a 0.7 negative percentage point EBITDA impact on EBITDA from the logistics and other items line. If I just take the warehousing for our new projects in Grodan, we're doing expansion in Canada, the U.K. expansion in Wales, and the German one in Neuburg, those alone add up to more than the 0.4%. It has a natural expectation.
These numbers we have here, we still have quite a lot of shipments that were planned in Q1 from more northern factories to more southern factories due to the high demand that it was already produced. We have shipped that. That effect, we expect to improve the rest of the year. But the warehouse in this warehouse, and we expect to keep until those projects are completed. Move to slide 12. Here, you have insulation EBIT and you have systems EBIT, it's not much to comment here. It's pleasing to see the improvement in system division, that's good. If you see the slight decline of 10.5% to 10% on EBIT in insulation, that's the same explanation as you heard on EBITDA, but it's a bit aggravated here because the whole of that impact put on an EBIT.
There were a lot of improvements in insulation, that logistic effect, since the total EBIT is smaller, had an impact there of half a percent. We kind of improved the rest of the business, we have that logistics and that will come right when we look into next year. Investment activities in Q1. I would say it's all going. We are, of course, fighting the inflation on steel and other things. If you look at the plants, Romania is on track to start up in Q4. Germany Neuburg towards the end of H1 next year, West Virginia end of next year, and Małkinia in Poland, with the current situation, we probably start to switch that one on Q4, Q1, something like that. Projects going all okay. Seasonal impact on free cash flow. It looks like it's a lot down. DKK 49 million down.
If you look at the factors, we had a positive one-off last year of DKK 50 million for the Flumroc shares that we sold when we integrated Flumroc, we have DKK 30 million more CapEx this year, that explains the change in cash flow. Finally, on the outlook, starting from sales. Net sales, I have not changed my view on the volatility of the soft line. Trump took a new hit on China now. That was re-energy. Brexit is still in front of us. Things are happening. There are some macroeconomic forecasts that have kind of postponed the worries, we see a volatile year. If I can end up between 4% and 8%, I am very happy. That is what we aim for. On the EBIT margin. Why do we upgrade already after Q1?
Here, compared to what we knew before, we kept this around 12% based on startup costs and a more uncertain environment, the fact that we had increasing inflation. When we close the settlement early April with Armstrong for Rockwool North America, that is around EUR 10 million. We had better market conditions for System Division. Those two effects make me feel that we are starting to approach last year's margin mathematically from below, I shift it up already now to say, let us start at around last year's margin level. We still have those costs for the startups and the rest, I feel with these two effects, we should be fine to deliver similar EBIT margin. With that, I hand over for questions. I will take some extra help from Kim today to answer those questions. Over to you.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. We ask you to kindly limit your questions to 2 at a time. Our first question comes to the line of Cedar Ekblom from Exane BNP Paribas. Please go ahead.
Good morning. Thanks for taking my questions. I will have 3 if I can. The first is just I wanted to get a better explanation of the guidance and maybe if you could provide a bridge to understand where the upgrade comes from. You mentioned that it is based on a strong performance of the System Division, I also wanted to know if you have factored in some tailwind from the recent decline in energy prices, including coking coal, gas and electricity. It would be really helpful actually, if you could remind us what is the energy bill for the company as a whole. My second is on the Insulation Division, where margins were weaker by 50 basis points. Could you help us understand how we should think about margins in this division going forward, especially with the ramp-up costs that you are facing?
Lastly, on the system division, also trying to understand there what really fueled the growth, a mixture of volumes and prices. If you could provide a range that would be helpful. Margins are also now back to 2016 levels. Just trying to get a sense of how we should think about margins from the rest of the year in this division. Thank you.
Thank you. Let me just start with the EBIT guidance. As Jens rightfully says, we have really not changed our look at the sort of the external factors in the market. It is still a volatile picture we see. That goes both for sales price, our ability to pass sales prices in the market where more competitors are coming online later this year, and also for that matter for inflation. Even though we know that the inflationary comparison to last year was more favorable in H1, we still see that there could be some inflationary pressure in the second half. It is still a volatile market. The guidance is really based on the same underlying fundamental assumptions that we have expressed in our annual report. With those two exceptions, as Jens was saying, that we have this settlement from Armstrong, take that apart, that is a one-off settlement.
Then we did see in the start of the year a much better performance by many of the system divisions businesses. That carries a higher profitability in general. That for the group it matters. Those are sort of the easy bridge. As you know, we are not sort of giving a lot of details on our energy bill and these things in detail. You just have to take that as cost of goods sold in totality.
Just a comment there. You are right in that we don't
See that the energy pricing would get worse the rest of the year. You're right on that point. That's true. You had an Insulation division. I think it's the same, again, scenario we talked about before, and many of the things we see on a group level on the price assumptions, on inflationary assumptions, is identical for the Insulation segment. We do have the ramp-up cost. They are part of the Q1 results. They are part of the guidelines we set, and they will be ramp-up cost for most of the year that we have included. There's not a lot of changes in the underlying assumption from ramp-up cost that hits Insulation business this year in our guidance. I think System division.
Yeah. The System division we restructured last year. We also made a couple of management changes a year back, and you start to see that that is taking effect. It's relatively broad-based. The big trigger point, of course, for Grodan business was that the U.S. retail market from a decline turnaround and visibility is that we at least believe we can see the nation. Yeah. The Russian new factory startup worked really well. The other businesses are all on healthy growth.
We don't see a reason why that will change, even though we don't believe that the type of step-up, since the retail market in the U.S. started from almost declining to now coming back, it's a higher growth rate around this time, and then it will settle down and we envision that that will be a sound growing market, but not really the % as we see now because it's kind of reestablishing itself.
Okay. Thank you very much.
Thank you. Our next question comes on the line of [Larry Shergad] from SEB. Please go ahead.
Hello, Jens, Kim, and Thomas. Thank you for taking my question. Since you started with ESG perspective, Jens, which is appreciated, let me just ask a question in regards to that. First of all, on a high level perspective, what we're hearing from a political side is that there's so much of a shortage of housing that it seems that housing renovation is sort of putting a plaster on a larger issue, where politicians are now focusing on more housing. Could you give a point of that from your perspective?
Yeah
read yesterday that sort of the larger companies, Rockwool and what other Danish company, doesn't really have women on the board of directors. Now that you're mentioning objectives, do you have any objectives here?
Yeah. Let's start with the housing. MIT has a lot of interesting long-term studies on housing. One of the topics is that the productivity is not there. It's just a theory of productivity development. The more you build, the lower the productivity. You have that cannibalization between renovation, difficult unplanned projects to the new build. When you need housing and you start to build new houses, you then see more new build and then it cannibalizes renovation. No one wants a renovation project. That is a trend we see. What we are trying to do is to show how you renovate more effectively, and we are working with people how to figure this out. We have the Bedre Bolig, for example, in Denmark, where we are promoting the idea.
The fact remains, if you cannot renovate the existing housing stock, there is no way you meet the climate goals. The EU are pushing forward and putting goals on that, and the countries have realized it, and people have realized that renovating the existing buildings and not tearing them down and getting the massive carbon footprint of a new build and all the waste is the way to go. That, I would say, is a good news trend that is still there, and some countries will figure it out, but we don't see much in the numbers. When it comes to renovation, stone wool is a fantastic material to use due to its properties. We have a very good share where renovation comes. Yeah. That's on that side. Big new build.
On the other hand, the big new build projects today are primarily not the single-family houses. Single-family houses is an area where fire regulation is not so strong. We use a lot of glass wool. It's not our sweet spot. The urban new build in multi-unit houses, we have a lot to offer. We have more problem with the new build, but of course, if we could see the renovation trend kick off, and we should monitor that very carefully. When that one kicks off, we have a real macro growth trend that we can sail on for many years. You have this all hands on deck, shortage of labor, and you require more skill to renovate than building new, less repeatable tasks. You have this whole dilemma. Quite frankly, we haven't seen a step change.
We haven't factored in a step change in our numbers, but we see the interest and the understanding of the fact that renovation is the best thing. It beats PV, it beats wind farms, it beats anything in terms of climate impact. Yeah, starting a bit in France. Young women on the board. I control my own team. I have two super women in the team. In the company, we are hiring for mid-management positions. We get a lot of applications for management positions in Rockwool, and we are hiring three women for every two men into a mid-management position, if you look at the percentage. Over the years, that will translate into more people in the executive team, more OpCom managers, et cetera. Among the best OpCom managers we have, without insulting all the men, is our Russian team. Our whole Russian team is basically only women.
We have one man in the team, and they're doing great. We have no reason to not do that. I like the concept of people growing up through the business when they take the board position. You have the issue of the board of Rockwool, and that of course, we like to see more women there. We have a target, but it's really up to the board and the nomination committee to get it done. It's out of my control. Okay, Lars.
That's very clear, Jens. One other question is just on your personnel costs, which are up by 8% this quarter. Is this any of these pre-hirings that you're talking about?
Yeah.
Would you take into account seasonality-wise for these pre-hirings?
We kind of add them on at increasing rate throughout the year. I think we talked about DKK 10 million on the year or something like that. We are expensing that. The old way was to do the CapEx and then add the people when you have the plant. In Neuburg, for example, what we do is we hire the people now, we put them in working parallel on shifts we have, and when we have the new plant up, we take a mix of all the experienced people and newcomers and put them on the new line. That was one of the reasons why I said around 12% last time, because I saw this basically DKK 10 million over the year, and we had a couple of DKK millions in Q1.
It will remain the rest of the year and get a little bit worse. As you know, we work with other improvements too. It's there, and that's the magnitude.
That's very clear. Just one last question here on your guidance upgrade. You mentioned in Q1 that you have tailwinds of 0.5 percentage points on revenue for Q1 here. Did you expect this when you made your guidance in Q4? My central question is that you're guiding on organic top line, but consolidated EBITDA margin. Is there any effects adjustment in this EBITDA guidance upgrade?
I would ask the Q1, you can say margin improvements primarily comes from the mix, i.e., higher system sales and thereby a higher sort of mix on an impact on the margin. There's no Forex impact.
Yeah. No Forex. There is another mix effect also. You see the flat roof has a lower % of the total.
Yes.
That adds to an improved profitability.
Okay. That's very clear. That's it from me. Thank you for your clear answers. I wish you a great extended weekend, and see you on Monday.
Yeah. Thank you. Same to you.
Thank you. Our next question comes on the line of Kristian Johansen from DNB Bank. Please go ahead.
Thank you. On the systems first, the margin improvement you deliver year-on-year, is that entirely driven by Grodan? I understand you say you have growth in all businesses, but you also have improved margins in the other businesses than Grodan.
You see, the two flagship without insulting the other business, the two biggest businesses are Rockwool and Grodan, and they are both growing. That's the mix effect of that. There are some of the smaller businesses that have a high margin too, so they are all improving. Of course, Grodan is a high margin business, so you have a mix effect of the retail business, but they are all improving.
Okay. That's clear. On your Southeast Asian and Chinese businesses. This weakness, what's your expectation going forward?
Yeah, I mean, China is
this mean term for margins, how are margins compared to group average in this region?
It's fine. We are double digits in all those markets now. We battled a while in India, but India hasn't really had a big line in small business for us. All the others are, Southeast Asia is above group average, and then China is double-digit healthy business. From a margin perspective, it's no giveaway businesses there. It's good profitable businesses. When I check with peers that are doing business there in related segments, this China effect is seen pretty broad based, I must say. It seems to be in also the other big Danish companies that are active there. It's not a big problem for us. We were running at such an incredible load last year. We quickly adapted to it, and let's see what happens in the rest of the year.
I've been doing business in China for many years, and I can recollect a couple of bad starts previously. Then you get to May, June, August, and you think it's a flat year, and then something happens, and at the end, you see quick growth. Let's not exclude that that will happen, but it's too early to say.
How is this reflected in your guidance? Have you included a cautious growth assumption for this region in your guidance?
Yeah. We have a high volatility in the market. Kim and I sit and look into this and take a realistic look at the assumptions. Has something drastically changed that can crash our top-line guidance? We haven't seen such changes.
All right. That's all from me. Thank you very much.
Okay. Thanks, Kristian.
Thank you. Our next question comes on the line of Claus Almer from the
Thank you. Yeah, also a few questions from my side. First question goes to the ASP. How much did you benefit from higher prices in the first quarter, and what should we expect from rest of 2019? That will be the first question.
A second question?
Let me just do one by one, if that's okay.
We had a good pricing performance in Q1. I always say 2% to 3% price, two comments on price. Absolute price is slightly higher than absolute inflation. That's the first comment. I'm satisfied with it in the light of my 2% to 3%. Of course, it depends if you compare quarter-on-quarter versus average last year. We are on track to deliver the 2% to 3% over the year.
It isn't that in the first half, you will be maybe slightly behind the cost inflation, both for transportation or input cost, and that will then reverse in the second half of 2019.
Behind when?
In the first half versus Yeah. Sorry. Yeah.
No, I don't think so. I think that the relative price improvement will be, you always have an upward curve, not always, but lots of the upward curve during the year of the price. That means that I think transportation inflation will continue the whole year. I don't think there is a reason to be pessimistic about other inflation. Then I think warehousing will stay for the new builds, but then the distance shipping element, Denmark to Germany, et cetera, Norway to Germany, that will go away and improve over the years. I think that we will keep a constant small positive gap to those factors. Yeah. It shouldn't get any worse. Again, you're dealing with guesstimates here.
That's what I feel because we have a better pricing performance now than we would have maybe in the last quarter, due to the slope of the curve, and that we have gone out quite hard on price now to make sure we didn't end up behind the game again to you now and said, "Oh, we missed on price, and now the margin is down. It will improve the rest of the year.
Okay. That sounds good. Is there any markets where you have been, let's just say, surprised on the upside about the ability to raise prices and maybe also the other way around markets where it has proved difficult to raise prices?
I think there are no particular market exceptions. What you see in these times is that smallish projects, with people that might sit with a little extra capacity. One-off bids, there you have a tougher price competition. On the distribution, on the drumbeat bread-and-butter business, we have been able to do what we normally do. On the smallish project business, we are market leaders, and we have stepped away from some deals, and we have gotten quite a few deals too, and we do this in a measured way.
Okay. My second question regarding the growth within systems and insulation. Insulation in Q1 was below your full-year growth guidance. How should we think about the growth in rest of the year? Will insulation come back to, let's just say, in the middle of your growth guidance, or will it be the system division that will be the main growth driver?
It's hard to say. We look at overall forecast, and we also look into country activities as such, how is the country doing. It's hard to say where that would go. What's clear is, in insulation business, the weather dependency is bigger in Q1. You need to look into the stability of the business more based on Q2 and Q3, because that is a more underlying activity. Q1 is a lot of snow to the starter progress and others. I will not make an estimate on the insulation business per se, but I think we should have an absolutely okay year for the insulation, unless of course, something happens, something macro in the market that we move out of the 4%-8% guidance, which I don't see now. I still stick to that. Yeah.
maybe you choose some color how Q2 has started. Will installation, according to your expectations, be within the bands already in Q2?
Claus, I can't comment on the Q2 now. I'm sorry. Yeah.
It was worth trying.
Yeah. The guidance for the full year, of course, includes also what we know on the market.
Yeah.
I think that's fair to say.
Yeah. We didn't exclude information after.
No.
The world would have crashed from end of March, and we don't include it. We would be stupid.
Yeah.
We don't do that.
Okay. Thanks so much.
Okay. Thank you.
Thank you. Our next question comes to the line of Pierre Rousseau from Barclays . Please go ahead.
Hello, gentlemen. Thank you for taking my questions.
Hello.
The first one is on the difference between your EBIT and the EBITDA. That number is going down in Q1. Presumably, you have some capacity expansion, so your depreciation should increase. Firstly, is there any one-off to be aware of in that number in Q1? Secondly, what would be your guidance for the full year? The second question is on the one-off costs and the pre-hiring relating to your capacity expansions. I'm curious to know how we should think about those one-off costs, in 2020. Will the cost base remain more or less flattish because most of your expansion will be behind, or if not, what kind of exceptional one-off costs would you expect in 2020? The last question is on the settlement in North America. Do you have any other significant ongoing litigations for which you will expect some resolution in the coming quarters?
Thank you.
Thank you very much, Pierre. Let me just take the bridge between EBITDA and EBIT. One of the things that happens is that the ongoing projects that we have in Romania, Neuburg, and U.S., and a few others, they will not have any impact on depreciation this year. Hardly. I think Romania will be the one that is coming online in the end of the year, and the same with Małkinia in Poland. The underlying depreciation, if you correct from IFRS 16, is slightly lower this year simply because of, you can say, the historical pattern of investments and one of our major factories had a depreciation at a 10-year period that ended last year in 2018. It was the U.K. factory where we had a difference in the depreciation. That will carry forward for the remaining part of this year.
As we get these new investments on board, of course, depreciation will start to increase again. That's the bridge. All the things that Jens is talking about in EBITDA is operating differences mainly coming from logistics. You had the one-off cost pre-hirings. As I said, most of this will prevail this year. They are, of course, also one-off or pre-hirings stretching into next year as we are working towards getting online with Neuburg and Ranson. You should also expect something next year. The last thing, whether we have any other legal legislation going on, no, we don't have.
No. Just to correct that.
Yeah.
We don't have any litigations or anything about money.
No.
Yeah. In this case, we went after to correct what we felt was a market imperfection. We have legal cases in the group, but I don't see a monetary impact in terms of a settlement on the north side of any significance compared to this.
Okay.
Understood. Thank you very much.
Thank you. Our next question is a follow-up from Kristian Johansen from Danske Bank. Please go ahead.
Yes, just a follow-up on prices. Has the price increases you have done had any negative impact on your volumes in the quarter? Also, what is your competitors doing on pricing?
Yeah. I think we haven't seen any major effects, with the exception of some of the project businesses where we just said we're not going to take certain projects or certain prices. In the distribution business, it has been fine. I've seen, the inflationary picture is the same in the competitors. We have seen others raise the prices too. Again, it's, as I said, a test, depending on how the volume develops for the full year, some new capacity is coming on. It's tough to prove it this year, but we have been disciplined, and we don't see any significant losses. I saw that there was one competitor on a plastic material that said that they have grown tremendously against traditional materials. I assume that's glass wool and stone wool. We went through our markets. We couldn't see any signs of that.
We saw projects being postponed, we didn't see major losses anywhere. I'm carefully optimistic, again, since I came to Rockwool, it's a new situation, a more volatile market. What will happen? We have come a long way on price, you need to navigate every new year, we will do that and see what happens.
in terms of
Far, so good.
Yeah. In terms of the project business you referred to, how big a portion of sales is this?
You know, Kristian, we don't give it, but it's a relatively big segment for us, flat roof insulation, for sure. It's also a lower margin business.
The lower prices you don't want to take, is that a reflection of the foam producers being more price-aggressive, or what's driving this?
No. We took PIR directly. We know that XPS and EPS, our conclusion is they can price as they wish. It doesn't matter. The PIR and PUR are back on the MDI, lower cost. We are seeing lower prices and maybe we have lost a few projects here and there for that, but that's not a major thing. When we lose projects, it's mostly to stone wool, obviously. Glass wool is not really on the flat roof player. It's in some very few markets they manage to make a product that can compete in that segment, but it's just an exception.
Okay. It's clear. Thank you.
Thanks.
Thank you. Our next question is a follow-up from Claus Almer from Nordea Markets. Please go ahead.
Thank you. A few follow-up questions from my side. The first is more to Kristian's question, the flat roof segment. You're losing to stone wool producers. Is this a change to what we have seen in 2018, where my impression was that there was lack of available capacity, i.e., a very good pricing environment?
Yeah. It's a big conclusion to say we lose to stone wool. What we see in the flat roof segment is what you saw now, Volkswagen and Daimler. We see project postponement. What happens when you see project postponement is that the salespeople say it's only postponed. In my world, when the big guys don't invest in new factories, the project is gone. It doesn't materialize. I think the biggest impact is not project losses. The biggest impact is that the projects disappear. Yeah. When we lose a project, and we're talking smallish, mid-size project, when I poll the organization, it's mostly to other stone wool suppliers. Yeah. That is to people that have capacity and now they want to fill a few months, and it doesn't change the market position in a way. It's short-term actions to load up a plant.
Where our approach is keep a steady price level and adapt capacity. We are good loading level. We have been disciplined about that, we have also in Q1 been successful with reducing capacity in Northern Europe, over the coming quarters, you see a slight impact of that. We are not shipping from Norway and Denmark into Germany, et cetera. We are getting out of that. In Q1, you still saw it, but the debottlenecking effort. We rebalance capacity, and we are on a good and sound capacity utilization level.
Okay. Just be sure. You do not see a changed pricing dynamic versus last year. It's more maybe a few projects here and there. Overall.
Yeah
it's, you know
Yeah. Maybe the difference last year was that when you had a very tight market, they really comes to us because they know that we'll mix in Danish, Norwegian, German, whatever, to make sure they get the delivery and they can count on us. We probably get the overshare in such a year because people trust us to deliver, and we did deliver every time. In a year like this, where someone gets a bit more extra capacity, you have more normal competitive dynamics. You had the bit abnormal aspect on some of the projects last year, and now it's back to normal that if someone has capacity, they are small and they have excess, they go for it. That's fine, and we don't want to play that game.
Sure. Just my second question regarding the settlement. How is this EUR 10 million being calculated? Is it based on lost market possibilities or can you give any flavor to that?
We settled this a few days before the opening jury. One of the parts we need to sign when you do such a settlement in the U.S. is to say, "No one did any wrong, but we're gonna write this to the customers." I cannot comment that for legal reason, but I can say that there are certain behaviors in the distribution that will change. That I can say.
Fair enough. Thank you.
Yeah.
Yeah. That's all.
It's the way the legal system works, and to make a settlement, you basically agree to that.
Sure. Fair. Thanks.
Yeah.
Thank you. As there are no further questions at this point, I will hand the word back to the speakers.
Okay. Yeah.