Earnings Call: Q3 2018

Nov 23, 2018

Ladies and gentlemen, welcome to the Rockwall Interim Report Q3 2018. Today, I am pleased to present CEO, Jens Veersen and CFO, Kim Jong Unison, for the 1st part of call, all participants will be in listen only mode and afterwards, there will be a question and answer session. And as a reminder, this conference call is being recorded. I will now turn the presentation over to your host. Please begin. Yes. Good morning. This is Kemenderson here. The CFO. Before I hand over the presentation to Jens, I just want to remind you of the second slide, which is the forward looking statement that in the presentation, they are forward looking statements and they contain these uncertainties. That was the formality of it. And now I will hand over to Jens to go through the we skipped the year to date Q3 and we jumped straight into the 3 months. And so what we see there is what I'm quite happy with. We see top line of 15% like for like And that is the same 2 year growth of around 22% that we've seen in the previous two quarters. Last year, we ran up a little bit in the second half of the year with about the percentage point more. So we have kept this level of 21%, 22% over 2 years. So that's expected, and that's good. If you look at the EBIT, up to 14% EBIT margin or 1.6 percentage point, higher than last year, up from 13.6 in the previous quarter. An overall EBIT up 26%, which is which I'm satisfied with, and And the reason I'm satisfied with it is that with on this loading level that we have been in the quarter, reached several production records here in the months in how much we have delivered. We really had to execute we have executed well on the strategy where using our whole network to make sure that lead times don't go overboard in customer deliveries and that we ship in products from supporting market. And there we, as said before, had the policy that a customer in Germany that is one of our steady customers to buy they pay the local logistic cost. And that's to make sure that we don't come across as predatory because there haven't been so many other companies around that have been able to supply stormfall, especially to the big projects, the flat roof projects we have had. Also. So we have executed on that. We have honored our world. We have also had a very good price development in the month, we have continued on this, compensating. I would say all the inflation and a bit more with price, but we have suffered due to the shipping distances that we have shipped for and we have eaten that cost. I should also say that we have worked quite hard on operational efficiency. We've managed to bring down cost in the factories increase the productivity. So that has also helped to compensate. But compared to the previous quarter with this volume increase, And you have seen a slightly lower leverage on the extra volume due to that this extra volume largely doesn't carve out of the sweet spot of the for each region. There's a lot of shipping going on. So that has been working quite well. Other aspect, I will say, on the costs in the quarter. We have kept divesting, in digital, melt intake development. We have had some extra cost also in the in the U. S. Project on the public relations side. And we're seeing a bit more inflation. I think the oil price is coming down on some of that, but nothing major, but I'm happy we have kept investment level up and kept the margin up. On the CapEx side, we just kept on working on UK, Romania, Poland and Ranson. It's all progressing. And then I come back a little bit to the system division later. So we also made a small acquisition. I'm not sure if that's later in the material, but In China, we have acquired what you would call a half size plant, the plant we have in the south is full. That's a very good operational EBIT margin, and we felt that time was right not to require about the equally sized plant. Plant. That means we can over 1 to 2 year develop this plant into 1,000,000 revenue. It's two lines. 1 is just being commissioned now. And before we kind of launched the Rockwall brand, we're going to do a couple of upgrades, but we are not bringing in, kind of our international technology is there. We take the local ones and we adapt them and then we bring the product up to the Rockwall quality, Rockwall brand, and then we will raise the price when we have done that. And move on to the next slide. Sales growth, I would say we come to the region a little bit later. And I just want to remind that here, we still have about 3% from Plumrock. When we now move into the fourth quarter, we had already 2 months of Flumrock. So that year on year effect will go away On the System Division, when you look at the growth, 3.8%. There are some businesses in there developing nicely. But we still have this regulation or reregulation of the horticultural business in the in the U. S. And so we are taking a beating there and it hasn't turned around yet. So I basically see that the system division will be on this relatively low growth level until we see growth and come up again. That's where it is. And I don't want to go too far to say that have we turned the corner on EBIT margin or obviously if it's going to be like this for a while now until we see that we get some pull from growth and again. Obviously, we do smaller improvements, but there are no major changes on the in the business. Move on to meetings. So I the quarter in itself? The quarter in itself. So here you see that the credit system had slightly lower growth than the previous quarter, in my mind, not significant. It's just flickering. The fundamental areas that we are not up to real a growth machine because we are just growing in the other businesses to compensate what we are not growing and grow down. And we need to see that big big step up. If you look then at the markets, it's maybe changed to previous quarters if you start from the bottom of the slide, that is that we own double digit growth in Southeast Asia, Thailand, Malaysia, India, that has improved. Don't know if that's permanent. Singapore is still a bit troubled, but the net is that we've had good growth there. In China, we are a little bit capacity constraint. We could grow even more, but we have grown very nicely have been able to find new tons. CEE, I tried to think of a market that didn't grow double digit. I think it's Slovakia. Apart from that, you have extremely healthy growth across the board. And also in the quarter itself Russia also contributed now close. Russia has really stepped up. And there again, we are operating at high capacity. So that's what you see there. And then in Western Europe, France, U. K. Very strong growth. The whole of Southern Europe, very strong growth, Germany had a couple of weeks during the summer with a little bit slower growth. Apart from that, very good growth and very good outlook. So I would say good picture in many cases. And it stays the 2 year growth, so to say, seems to be remaining, but France and especially France and Germany that kept going. Profitability. I've commented that already on the EBIT obviously the improvement is driven. The 28 percent up on the bottom line is driven by installation and that's also where we have the whole shipping So without that, it would have been better. That means that today we have increased capacity in the sweet spot. You're going to see less burden of logistic costs. But I can also say that We are gaining in market share. We have put a very clear priority of delivering customer has provided they pay our price. And I think this was a good balance because in spite of healthy price increases, we have not received customer complaints or anything. We have really, really worked and done our best on on delivering. Next. Insulation, as I said already, is the big improvement 33%. And 11% of System Division, I don't call that significant because what we would like to see is proper growth. It can move a bit up and a bit down between the quarters. It all depends on growth, I would say. When that grows, you're going to see continuous improvement in the business. Next. Free cash flow investments are progressing as planned, both in terms of time. And the demand in the markets where we are building them feels very good. We as we have done a few, I think, almost every year in the last years, we don't quite keep up with actually place in the orders for equipment and getting the invoices, but we haven't run into any delays or anything on the plan. Should say though that with this, with so many plants, Grand, Southern Germany, the expansion in the UK is not too big from a cap perspective with all these actions, you see that we are quite loaded on the engineering side a strained organization and we also had we have to add some engineering to keep up with this. It's a lot of CapEx. We are churning out there and a lot of design work, construction work, etcetera. And yes, I think we can yes, that outlook than Q1 outlook. We don't like to make a weather forecast for December, but what I can say is that the quarter, what we see from the normal months that is up to December is confirmed. So our forecast has gone good. And then we have the December short, short amount when will the snow come, will the snow come that can impact a little bit up and down? And impossible to forecast. We will know after, but I feel confident about this 14%, 15%. And EBIT margin around 13%. We are also on track for that. We delivered around 14% in Q3. December will impact because it's a short month, so we have lower margins. All the rest looks good. It's not that December is unusual, but it's not possible to draw what happens. It's not a normal month. On the investment then, In addition to this, and it's not part of that. We closed the acquisition in China. It's not a big acquisition. On top of what we paid, we're going to add another about a quarter of the amount we paid for it in upgrades and improvements. But again, relatively small amount for the capacity we talked about CapEx output rate ratio that is probably a third of some of our new bids. So it's a good way of getting capacity. I think with that, I hand over to you for questions. You. The first question is from the line of Claus Elma from Nordea. Please go ahead. Your line is open. Interested to 4 guidance. If we look at what your implicit guidance for revenue in Q4, it seems like it will be close or even higher than the revenue in Q3. Will the mix be the same as we saw in Q3 or in other words, should we expect a flattish gross margin versus Q3? That would be the first question. Okay. Gross margin for Q4. For Q4. Okay. Do you have another question? No. Can you take 1 by 1? Or Oh, okay. Yeah. Okay. We didn't see the quarter as a miss. It improved EBIT margin compared to 2 trees. So it was actually part of what exactly what we expected. What we saw though in the quarter also, when we stepped up on that growth rate or we kept on that growth rate, which is a growth rate on a higher level, they ran into slightly higher logistic costs plus that we have the the debunker or the oil and the petrol price is higher. So we took more on that side, which lost a bit of leverage And we could, of course, have said, let's take less growth and kept the margin higher, but that's not not what we wanted to do. And for Q4, the gross margin with the current loading will be on the strain. I think how we improve the result, and we do that versus that is through price. Operational efficiency. And then we have inflation that I don't think will be higher in Q4 than Q3. But it's on a higher level than Q1. And then we have this auto network logistic and distance costs. So is basically the same picture basically the same picture. But again, December a couple of 1,000,000 on EBIT back and forth will move the needle either way. There's 2 days more work we earned several 1,000,000 on that. So if that happens, that's the main impact, October, November 2 good months. Sure. So the price increases, I guess you still expect to raise price by 5 percentage point in this year, right? Yeah. But that will not have a really impact on your gross margin. It's more or less only compensating for cost inflation. Yeah, yeah, yeah. Some of it does, of course. So you see it on the top line that you have a price increase, but it's quite a lot of costs we are taking for the auto network logistics and you have inflation and you have some inflation also. Okay. And then, one off costs, in in the report is mentioned within the system division that there's some one off costs, at least in 9 has there been any impact in Q3? I mean, we have we don't sit and count the millions. But yes, we have a legal case of this progressing We have the brand, the West Virginia plant, the rock foam startup in U. S. So we have the rock foam startup in the U. S. We have We are investing a lot in our new melting technology. We do digital, but I see that as a run rate in some quarters is a bit more I don't want you to say, okay, now you have all this extra cost and they will disappear in the coming quarters. There will be something else So I kind of assume we keep spending, and we are not holding back on digital than, the main in tech and also our spending technology, we are going really in there and probably have increased even a bit amount to invest. Sure. Did you say some legal costs, Jens? We are doing, at all, I mentioned that in the previous. We have, fire the lawsuit, but that's a long while back in the ceiling tiles in the U. S. Again, some practices. So that has cost a little bit, but again, it's not extreme. It's not worth worrying about, but that's something running also. Okay. Thanks. And next question is from the line of Yves Baumhead from Exane BNP Paribas. Please go ahead. Your line is open. Good morning gentlemen. Three questions on my side, if I can. The first one is on the price cost dynamics. In a sector relative context. You mentioned higher input costs and higher logistic costs, which are likely to be a subject for the Stonewall and the general mineral wool industry next year as well, as opposed to some of your competitors in the foam industry, which are seeing variable cost inflation I want to get a sense of your view, sorry, in terms of the perspective that you believe into the market share gain. Yeah. So I don't I don't say first of all, I think we see some inflation next year, not extreme, but we will see inflation and we have factored that in. And our logic is that with our drumbeat or price increases, we should compensate that. And then you have in the period per MDI prices coming down. And you you see, you're going to see that problematic, more competitive on flat roof, for example. But again, I I don't think with this level of activity in the market that that's the main factor next year. I think the main factor next year going to be whether the market continues overall construction sector not that effect as such because we have also seen some plastic form suppliers that really have lowered prices in spite of the MDI and try to take projects. So it hasn't been strictly linked to the MDI price, but yes, the MDI prices are down. So they have a lower, lower inflation outlook for next year as soon. But do you think it could be difficult to pass on higher prices in the mineral wool industry as in No, no, I think this year was because we had some catching up to do, but I think we say 1 to 3 per year and we have already flagged that in the market. 2%, 3% price increase every year with the type of expansion we do and a growth in the market, that's the drum beat we like to keep. And if you have cost inflation in the sense of 3 to 5% you think that you can get to higher than 3% in a in a context where your competitors have a cost inflation or not? No, I we say 1% to 3%. That's what we have said, and we are not aiming for more than that. Okay. Thank you. And on this is just another question. You mentioned that just now the leading from the construction industry and construction cycle. I mean, you're clearly outperforming construction markets with the run rates of organic growth that you're showing. And we're seeing now the leading indicators turning negative in some of your core markets. So I just want to get a feel of your view of the overall construction where we are in the cycle maybe and what you're seeing for 2019? And also can you can you provide some color on the renovation side offshore business because, it seems that Eastern Europe is now launching new, renovation scheme. So I just want to get it down. Yeah. So we start with maybe the renovation. I think one hope if the market slows down, is the renovation, because from a climate perspective, you have the renovation energy efficiency drive from the EU. And if we have a downturn, then then certainly we'll be right to put money into renovation and a lot of the factors are there. If you look at our current business, we see the main driver now being all the workers are over, not all, but it's more on the new build. It's more on the new build. That's where we see the business today. And then you'll see quite a few markets now starting to talk about renovation preparing for it. And then we need to see if there is a downturn that it happens because at this stage with the type of activity we see, I almost experienced that there is a capacity constraint on the amount of installation that can happen in some of these markets. It seems quite hot the construction market. Then we see the yes, then we see the general construction industry. And if you look, for example, in the UK, there are people talking about that that's slowing down. It's a SEK 1,000,000,000 insulation market. But there again, we play in the Stonewall segment and the Stonewall segment, what we see in most places is that we enjoy rough estimate. I mean, these are not perfect. A percentage point extra growth because there is a flow over to Stonewall. And that we see. So that poster us a little bit. So I haven't seen, really a slowdown but everyone talks about it, but we haven't seen it. We just see it continue. Okay. And if you And maybe just one last question on the U. S. Plants. There's quite some opposition that you're facing on new plants. Can you come on that because I just wanted to get Yes. So what we have is that we are moving into a county with 56,000 people. More than 5000 people there that really, really needs jobs in our factory. They really need it. Those people don't have Facebook. They are not vocal. Then we have a group of people, and we are coming in here with the chimney. We are not killing anyone but it's in the backyard. People don't want in all places a factory in their backyard in their county. And that's what we see. And so our approach to it is that if you look at Facebook, we cannot there are a lot of statements that are not true there. We have answered all of that with facts, but our main focus is to build the plan. And we have done the ground works. Now we are starting to pile soon we start to pour concrete and we build it. And then over time, when we start to hire people, we'll start to pay taxes and we start to contribute to this community. And I think a lot of that opposition, the dangers of the plant and all the rest is just not true. It's just not true. But it is very noisy. We live with that. We answer all the questions we get, but most of all, we focus on getting the factory built because the U. S. Needs our factory, we needed to keep up with demand another quarter double digit growth in the U. S. And the world needs it to fight CO2 and climate change. So we just keep on building it. And there is a lot of noise. But you don't think that there's a risk on the delivery of that plant? No, we have no dealers or anything on the plant, but as with all our project, crane equipment deliveries, you have all of that to normal. And And but we don't have a delay because of that. And we have the 1st building permits and we are progressing on-site. But this is, of course, it would be nicer if we didn't have the opposition, take it very seriously. But in no way, obviously, stepping away from that plant. Next question is from Christian Johansen from Danske Bank. Please go ahead. Your line is open. Yes, thank you. So my first question is regarding 2019. And I actually would like to sort of just run a couple of assumptions by you. So the first one would be that I mean, price increases should be able to fully compensate for all expected cost inflation. 2nd assumption would be that volume go up next year? I mean, we can debate how much, but at least it's fair to assume volume growth. And thirdly, your efficiency improvement should continue to increase earnings next year. And obviously, those 3 assumptions should yield a higher margin in 2019 versus 2018. Are there any of the assumptions where you don't agree? Okay. So Christian, I don't give an outlook now for next year. And there but from a scenario perspective, there is one homework we have done. And I've said that even with with the forecast we have until year end, we have capacity to deliver double digit top line. Next year. We have the capacity. Yeah. The capacity doesn't mean our guide for double digit It means we have the capacity. And then the year after, there are more plants coming online additional act So that's the case. And then in February, we come back with our outlook. So that's what I can say on that. And then on the on the inflation, that's not a guidance, but what I've always said is regular price increases that compensate inflation. I've said that And Does that also count when you have this issue around extraordinary logistic cost? Yeah, but remember, in spite of that, we have compensated it all. If you look, it depends how you go, you have a slightly less leverage, but we still improved 1.6% versus last year. And when you run through the numbers, you will see that Even though the increase is not quite as big, we have compensated with compared to the previous year with cost reductions, efficiencies and price increases, but the leverage versus last year, it's not quite as dramatic. There's a difference there. See the point. So the incremental volume doesn't come with a nice gross margin improvement as you have if you have it in the sweet spot, but we have compensated all the costs and we have improved the margin. And then on the efficiency improvements, if you can elaborate a bit, what we should expect next year compared to what you have booked this year? We continue at the rate, the number of projects we run, So we kind of keep on that run rate and we want to do that for a couple of years, keep improving the business. The effect though that we have been incredibly successful with this year that lands between these two areas and a little bit hard to see that is that we have found And I'm talking multiple of plants within the plants we have freeing up bottlenecks and that kind of jumps into both sides. How do you count the fact that you have a plant that is rated for 40,000 tons? And you can sell 55. And that kind of sneaks into all of those numbers. So the accounting is a bit tricky to refer that effect to to the cost. But we keep going next year as we do this year and want to achieve a similar amount. Okay, sure. Then my second question is on your personal cost. I can see that they are actually increasing more than your the revenue growth, if you can elaborate a bit on what's going on? Yes. So, so Kim will help me here, but the biggest step in there is Flomrock. Yes, that's what's sure Flomock is in there. And we also, as you know, we have increased number of FTEs, which, of course, is adding to personnel costs. We've had timing differences on some of the accruals for bonuses from last year. And so I think there's no dramatic thing in personnel costs that sort of sticks out. We have, as you know, those are alluding to invested in a number of areas in digital and also in our engineering group without adding on personnel cost. So you'll see in the personnel cost, the fact that we have 100 or more engineers on the capacity plans. It will show up there. It might not be the right way when you balance the cost in the P and L later about and put it on. But they are there, so a plume rock you have all that to digital and you have the new plant engineers who are sitting in there. But if you then were to go down and look at the op coppers, the individual op costs, you have a nice development everywhere on that. It's not increasing at the same pace at the top line. And And next year, if you look at it, when we start up some plants, going forward, we will take a slightly different approach to try to ramp them up quicker by hiring the people earlier. So that means that the the effect of new plant projects will be slightly different to before. Nothing dramatic, but we will try to have the people train and up and ready on the day we switch on the plant. So we don't have this terribly long learning curve that we've had historically. So that's the new approach we're taking. And that will also impact the personnel costs. The payback of the plant would be better because we ramp it up quicker. But from an OpEx perspective, it looks worse on the numbers. Okay. And then actually, if I just may follow-up on that point, your expansions in Romania and Poland, which will come on stream next year, when during the year will we start to see production on this? Okay, fair enough. Thank you. We do have a follow-up question from the line of Krausz Ella from Nordea. Please go ahead. Your line is open. Thank you. Yes, just a follow-up. Coming back to this gross margin or your incremental EBIT margin, In Q3, the incremental margin declined from what we have seen for the last couple of quarters and also your gross margin is down versus what we have seen in 2018. So maybe and you're still saying you're hiking, you're selling price Can you maybe put a little bit more color to why we don't see a uptick or at least a flattened gross margin or incremental margin? Despite this very strong revenue growth, we do see. You do know that the EBIT margin close last year had started to improve already in Q3. And of course, so in comparison, that was also price driven in the second half last year. So in comparison, you'll see that, that, of course, each some of the gap or the margin improvements compared to Q2 and Q1. Sure. That answer. That is why when you talk about the gross mark, for 2018 for Q1, Q2 to Q3, but you see a decline, Q over So that's more what I'm curious about. I just want to see the numbers you're looking at. Yeah. But I think Claus is looking at his own spreadsheet because he is, of course, taking percentages from this detailed breakout Yes, exactly. But it's the same, it's the same thing, Claus, with the negative factory mix, talked about that you're utilizing factories that has a higher cost per produced tons and then also part of that package due transporting things longer. So it's the same impact that Jens has been talking about. That you see reflected in that quarterly development? So the lack of contribution margin improvement, so to say the price obviously in there. And that's a big up. Then we have the inflation that is down. Then you have efficiency improvements that hit further down and up there depending on where they are. So you have the factory mix that the shifts we are shifting on are tend to be the ones that in where we have a little bit of free capacity, we keep the most expensive ones. We park those. And And that also adds that the factory mix of these extra 10,000,000 dollars, $20,000,000 revenue tend to come from the least cost effective factories. So for example, Poland is running absolutely flat out they even import a little bit in this quarter to Poland. And that will impact it, but as a total, of course, if it gives more money, more profit for us, but the margin of those tons is not the same because it's a worst factory and it's a longer distance cost that we don't charge for. Then you can discuss that strategy, but that's the strategy we care And with this type of development, I feel it's a sound 1, and I intend to continue that. Sure. I was just more curious about this the price increases you've talked about. But nevertheless, looking forward, should we expect a further, adverse product mix or factory mix or is it more a more new split between the different factories and end markets? We are pretty high up. I mean, they're not going to be dramatic shifts now on this level because we only have campuses that more to step up. And we have some new capacity coming on. And we have debottlenecking coming in some of the good factories too. So I think the step up from Q2 to Q3 was 1, but it's going to be hard to prove the contribution margin when you are on this loading level. I can say that. Until you have those new lines? The lines coming in. Yeah. Okay. Sure. Okay. Thank you so much. Thank you. The next question is an additional follow-up from the line of Eve from Exane BNP Paribas. Please go ahead. Your line is open. Yes. Sorry, just a follow-up on the small M and A that you announced in China. I just wanted to get a sense of whether or not you're now looking at further increasing your exposure to emerging market or if that's just because your plot is loaded in China and you need spare capacity? Thank you. It's kind of the self self funded, we do great in Thailand, Malaysia, terrific business. And then we have China where we are. And we are earning good money, self funding, more than 15% margin. It's all good. When you are in that position and customers appreciate your quality of your pricing, it's very hard to stand still. So the only thing we do here is kind of redeploy the cash flow and build the footprint in a very attractive way with local technology with some tweaks to it. So it doesn't change our strategy for emerging markets. Our strategy is if we are the market and we have a position and we do good business, we know the risks that might not do it. It doesn't mean that I'm looking for plants in Brazil, for example. I'm not we are very careful with opening up new markets. At the moment, I feel the priorities still go with the growth in the U. S. And obviously go with the growth in high, high profitable business growth in China and then keep building our European, including Russia and all that Eastern Europe based in our network that are stronger. So it's not a strategic shift. And why don't you want to increase your presence in emerging markets? No, but it's not emerging market per se. I'm happy to increase in China. China and emerging market Is it? Yes, hello. Yeah. It's China an emerging market now. Oh, no, sorry. It was a question, so I didn't get that at all. I guess you can categorize it in there, but you mentioned I don't think China is an emerging market anymore. I think we mentioned this before. I think for Stonewall, U. S. Is an emerging market. This is a category that is. So we are increasing the exposure there, but for Stonewall, China is also an emerging market. I think it's a huge. So we have no problem with China. And remember, We are also different in the exposure that A, here we have made a technology decision for how we do it and B, less than 10% of our volume cross any border where you can have custom beauty. So we have we play like a different game. So yes, but that means we source everything locally. We sell everything locally. So we have the exchange rate exposure only on the profit. Okay. Thank you very much. Gen Johansen from Danske Bank. Please go ahead. Your line is open. Yeah. Just two follow ups. Just you mentioned that you have capacity to grow or talk about next year. Just to clarify, do you have capacity to grow volumes 10% next year as well? We work on this all the time. Is the pricing or not? It depends a little bit where the volume comes. If it all grows in the U. S, we have free capacity in Asia. If it all comes in China. It depends where it comes. It's hard to but we should be able to do double digit growth. I mean, I say double digit. I don't say 10 or 12 or what we are in that region and then it depends how it plays out basically. All right. Sure. I understand what you're saying. And then just on this Chinese acquisition, I mean, can you just repeat, I mean, how much are you paying for this? And is that you said it was not included in your CapEx guidance or? No, since we did the guidance without acquisitions, I've not been there. But I guess, Clayton, you just have to wait and see because when you, I guess, when you look at the annual report, you'll get you'll get the information because unless we managed to do another acquisition in Q4, then we lump it together. So we all recouped in Q4? Yes, because then the amount, we have to do, as Ian said, a little bit of extra investment So I think you'll get close to around $25,000,000 altogether as a commitment as capital commitment. So that's very small. Yes. So it's relatively small. All right. Excellent. Thank you. And there are currently no further questions registered. So I'll hand the call back to the speakers. Please go ahead. But that was the end of the Q3. And so thank you very much. And then So thank you. Thank you. Have a good weekend. Bye. This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.