Ladies and gentlemen, welcome to the Rockwool Interim Report Q3 2018. Today, I am pleased to present CEO Jens Birgersson and CFO Kim Junge Andersen. For the first part of the call, all participants will be in listen-only mode. Afterwards, there will be a question and answer session. As a reminder, this conference call is being recorded. I will now turn the presentation over to your hosts. Please begin.
Yes. Good morning. This is Kim Andersen 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 there are forward-looking statements and they contain uncertainties. That was the formality of it. Now I will hand over to Jens to go through the Q3 results.
Yeah. Kim, move straight to Q3. The next one. We skipped the year-to-date Q3, we jump straight into the three months. What we see there is what I'm quite happy with. We see a top line of 15% like-for-like, that is the same two-year growth of around 22% that we've seen in the previous two quarters. Last year, we ramped up a little bit in the second half of the year, with about a percentage point more. We have kept this level of 21%, 22% over two years. 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 I'm satisfied with.
The reason I'm satisfied with it is that on this loading level that we have been in the quarter, we have 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. We are using our whole network to make sure that lead times don't go overboard in customer deliveries, that we ship in products from supporting market. There we, as I've said before, had the policy that a customer in Germany that is one of our steady customers, they pay the local logistic cost. 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 stone wool, especially to the big projects, the flat roof projects we have had several.
We have executed on that. We have honored our word. We have also had a very good price development in the month. We have continued on this compensating, I will say, all the inflation, and a bit more with price. We have suffered due to the shipping distances that we have shipped far, 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 and increase the productivity. That has also helped to compensate. Compared to the previous quarter with this volume increase, you have seen a slightly lower leverage on the extra volume due to that this extra volume largely doesn't come out of the sweet spot for each region. There's a lot of shipping going on. That has been working quite well.
Other aspect I will say on the cost in the quarter, we have kept investing in digital melting tech development. We have had some extra costs also in the U.S. project on the public relations side. We are 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 the investment level up and kept the margin up. On the CapEx side, we just kept on working on U.K., Romania, Poland, and Ranson. It's all progressing. Then I come back a little bit to the system division later. 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, does a very good operational EBIT margin, we felt the time was right now to acquire about the equally sized plant. That means we can, over one to two year, develop this plant into EUR 30 million revenue. It's two lines. One is just being commissioned now. Before we kind of launch the Rockwool brand, we're going to do a couple of upgrades. We are not bringing in our international technologies there. We take the local ones and we adapt them, then we bring the product up to Rockwool quality, Rockwool brand, and then we will raise the price. We have done that. Move on to the next slide. We come to the region a little bit later, I just want to remind that here we still have about 3% from Flumroc.
When we now move into the fourth quarter, we had already two months of Flumroc, 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 re-regulation of the horticultural business in the U.S., we are taking a beating there, and it hasn't turned around yet. 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. I don't want to go too far to say that have we turned a corner on EBIT margin or are we stepping out? It's going to be like this for a while now until we see that we get some pull from growth on again.
We do smaller improvements, but there are no major changes in the business.
Beacons?
So I-
The quarter itself.
The quarter in itself. Here you see that the system had slightly lower growth than the previous quarter. In my mind, not significant. It's just flickering. The fundamental here is that we are not up to a real growth machine because we are just growing in the other businesses to compensate what we are not growing in Grodan. We need to see that big business step up. If you look then at the markets, it's maybe changed the previous quarters. If you start from the bottom of the slide, that is that we are on 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 constrained. We could grow even more, but we have grown very nicely.
We have been able to find new tons. CEE, I try 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.
Also in the quarter itself, Russia also contributed.
Yeah.
Healthy growth.
Yeah. Russia has really stepped up. There again, we are operating at high capacity. That's what you see there. 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. I would say good picture in many places, and the two-year growth, so to say, seems to be remaining, but especially France and Germany that kept going. Profitability, I've commented that already on the EBIT. Obviously, the improvement is driven, the 28% up on the bottom line is driven by insulation, and that's also where we have the whole shipping issue. 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 cost. I can also say that we are gaining in market share. We have put a very clear priority of delivering. Customer has provided the pay, our price, and I think we struck a good balance because in spite of healthy price increases, we have not received customer complaints or anything. We have really worked and done our best 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 Grodan, 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. As we have done a few, I think almost every year in the last years, we don't quite keep up with actually placing the orders for equipment and getting the invoices, but we haven't run into any delays or anything on the plan. I should say, though, that with this, with so many plans, Neuburg, Southern Germany, the expansion in the U.K. is not that big from a CapEx perspective. With all these actions, you see that we are quite loaded on the engineering side. It's a strain to the organization, and we have to add some engineering to keep up with this. It's a lot of CapEx we are churning out here and a lot of design work, construction work, et cetera.
That doesn't matter. Outlook. We move on to outlook. What I can say is that the quarter, what we see from the normal months, that is up to December, confirms our forecast. It's going good. We have the December shorter month. 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%. EBIT margin around 13%. We are also on track for that. We delivered on 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. Again, relatively small amount for the capacity we get. You talk about the CapEx output rate ratio that is probably a third for some of our new bids. It's a good way of getting capacity. I think with that, I hand over to you for questions.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad now. We ask you kindly to limit your questions to two at a time. The first question is from the line of Claus Almer from Nordea. Please go ahead. Your line is open.
Implicit Q4 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? In other words, should we expect a flattish gross margin versus Q3? That would be the first question.
Okay. Gross margin. Okay.
For Q4.
For Q4. Okay. Do you have another question?
Yeah. Can you take one by one or?
Okay. Yeah. Okay. We didn't see the quarter as a miss. It improved the EBIT margin compared to Q3, so it was actually part of exactly what we expected. What we saw, though, in the quarter was that when we stepped up on that growth rate, or we kept on that growth rate, which is a growth rate on a higher level, we ran into slightly higher logistic cost plus that we have the bunker or the oil and the petrol price is higher. We took more on that side, which lost a bit of leverage. We could, of course, have said, let's take less growth and kept the margin higher, but that's not what we wanted to do. For Q4, the gross margin with the current loading will be under strain.
I think how we improve the result, we do that versus others through price, operational efficiency, we have inflation that I don't think will be higher in Q4 than Q3, but it's on a higher level than Q1. We have this auto network logistic and distance cost. It's basically the same picture, but again, December, a couple of DKK million on EBIT back and forth will move the needle either way. Just two days more work, we earn several DKK millions on that. If that happens, that's the main impact. October, November are two good months.
Sure. The price increases, I guess you still expect to raise prices by 5% this point in this year, right?
Yeah.
That will not have real impact on your gross margin. It's more or less you're only compensating for cost inflation.
Some of it does, of course. You see it on the top line that you have a price increase, but it's quite a lot of cost we are taking for our network logistics, and you have inflation, and you have some inflation also.
One-off cost in the report is mentioned within the system division that there is some one-off cost, at least in 9M. Has there been any impact in Q3?
You know we don't sit and count the millions, but yes, we have a legal case that is progressing. We have the Ranson, the West Virginia plant.
The Rockwool startup in U.S.
We have the Rockwool startup in the U.S. We are investing a lot in our new melting technology. We do digital, but I see that as a run rate on some quarters is a bit more. I don't want you to say, okay, now you have all this extra cost. They will disappear in the coming quarters. There will be something else. I kind of assume we keep spending, and we are not holding back on digital and the melting tech and also our spinning technology. We are going really in there, and we probably have increased even a bit amount to invest.
Sure. Did you say some legal cost, Jens?
I mentioned that in the previous. We have fired a lawsuit, that's a long while back in the ceiling tiles in the U.S. against some practices. That has cost a little bit, again, it's not extreme. It's not worth worrying about. That's something running also.
Okay, thanks.
Next question is from the line of Yves Bonnod 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 energy costs, which are likely to be a subject for the stone wool 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-
Yeah
into the market share gain.
First of all, I think we see some inflation next year. Not extreme, but we will see inflation, and we have factored that in. Our logic is that with our drum beat of price increases, we should compensate that. Then you have in the P&L the MDI prices coming down, and you're going to see that probably make them more competitive on flat roof, for example. Again, 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 is going to be whether the market continues overall construction sector, not that effect as such. We have also seen some plastic foam suppliers that really have lowered prices in spite of the MDI, and tried to take projects.
It hasn't been strictly linked to the MDI price, yes, the MDI prices are down, they have a lower inflation outlook for next year, I assume.
Do you think it could be difficult to pass on higher prices in the mineral wool industry?
I think this year was because we had some catching up to do, but I think we say one to three 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 the growth in the market, that's the drum beat we like to keep.
If you have cost inflation in the sense of 3%-5%, you think that you can get to higher than 3% in a context where your competitors have a cost deflation or not?
We say 1%-3%. That's what we have said, and we are not aiming for more than that.
Thank you. This is just another question. You mentioned just now the construction industry and the construction cycle. 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 kind of turning negative in some of your core markets. 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. Also, can you provide some color on the renovation side of your business?
Yes.
It seems that Eastern Europe is now launching new renovation schemes. I just want to get a view.
Yeah. If we start with maybe the renovation. I think one hope if the market slows down is the renovation. From a climate perspective, you have the renovation or energy efficiency drive from the EU. If we have a downturn, certainly it would 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. That's where we see the business today. You see quite a few markets now starting to talk about renovation, preparing for it.
We need to see if there is a downturn that it happens, at this stage, with the type of activity we see, I almost experience 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. We see the general construction industry. If you look, for example, in the U.K., there are people talking about that that's slowing down. It's a DKK 1 billion insulation market. There again, we play in the stone wool segment. The stone wool 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 flow over to stone wool. That we see, that bolster us a little bit.
I haven't seen really a slowdown, everyone talks about it, we haven't seen it. We just see it continue.
Okay.
If you look. Yeah.
Maybe just one last question on the U.S. plants. There's quite some opposition that you're facing-
Yeah.
-on your new plant. Can you comment on that? I just wanted to get a feel of-
What we have is that we are moving into a county with 56,000 people. There are more than 5,000 people there that really needs jobs in our factory. They really need it. Those people don't have Facebook, they are not vocal. We have a group of people, and we are coming in here with a 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. That's what we see. Our approach to it is that if you look at Facebook, 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 plants.
We have done the groundworks, now we are starting to pile, soon we start to pour concrete and we build it, over time, when we start to hire people, we'll start to pay taxes and we start to contribute to this community. I think a lot of that opposition, the dangers of the plant and all the rest, is just not true. It is very noisy. We live with that. We answer all questions we get, but most of all, we focus on getting the factory built because the U.S. needs our factory. We need it to keep up with demand. Another quarter, double-digit growth in the U.S. The world needs it to fight CO2 and climate change. We just keep on building it, and there is a lot of noise.
You don't think that there's a risk on the delivery of that plant?
No, we have no delays or anything on the plant, but as with all our projects, rain, equipment deliveries, you have all of that, the normal. We don't have a delay because of that.
Okay.
We have the first building permits, and we are progressing on site. It would be nicer if we didn't have the opposition, take it very seriously, but in no way are we stepping away from that plant.
Okay. Well, thank you very much for responding to my questions.
Thanks.
Next question is from Kristian Johansen from Danske Bank. Please go ahead. Your line is open.
Yes, thank you. My first question is regarding 2019, and I actually would like to sort of just run a couple of assumptions by you. The first one would be that price increases should be able to fully compensate for all expected cost inflation. Second assumption would be that volume should go up next year. We can debate how much, but at least it is fair to assume volume growth. Thirdly, your efficiency improvements should continue to increase earnings next year. Obviously those three assumptions should yield a higher margin in 2019 versus 2018. Are there any of these assumptions where you do not agree?
Okay. Kristian, I do not give an outlook now for next year. From a scenario perspective, there is one homework we have done, and I have said that even with the forecast we have until year-end, we have capacity to deliver a double-digit top line next year. We have the capacity. It does not mean I guide for double digit. It means we have the capacity the year after, there are more plants coming online, additional actions. That is the case, in February we come back with our outlook. That is what I can say on that. On the inflation, that is not a guidance. What I have always said is regular price increases that compensate inflation. I have said that, and I will keep saying that.
Does that also count when you have this issue around extraordinary logistic cost?
Remember, in spite of that, we have compensated it all. It depends how you go. You have a slightly less leverage, but we still improve 1.6% versus last year. When you run through the numbers, you will see that even though the increase is not quite as big, we have compensated compared to the previous year with cost reductions, efficiencies, and price increases. The leverage versus last year is not quite as dramatic. There's a difference there. You see the point? 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.
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. 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 is a little bit hard to see, that is that we have found. 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? That kind of sneaks into all of those numbers. The counting is a bit tricky to refer that effect to the cost.
we keep going next year as we do this year and want to achieve a similar amount.
Okay, sure. my second question is on your personnel cost, I can see that they are actually increasing more than your revenue growth, if you can elaborate a bit on what's going on.
Kim will help me here, the biggest step in there is Flumroc.
That's for sure. Flumroc is in there. We also, as you know, we have increased number of FTEs, which of course is adding to personnel cost. We've had timing differences on some of the accruals for bonuses from last year. I think there's no thematic thing in personnel cost that sort of sticks out. We have, as Jens is also alluding to, invested in a number of areas in digital and also in our engineering group, which are adding on personnel cost.
You're seeing 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&L later, but they are there. Flumroc, you have-
The digital
The digital, you have the new plant engineers who are sitting in there. If you then were to go down and look at the OpCo first, the individual OpCo st, you have a nice development everywhere on that. It's not increasing at the same pace at the top line. 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. That means that the effect of new plant projects will be slightly different to before. Nothing dramatic, but we will try to have the people trained 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.
That's a new approach we're taking, and that will also impact the personnel cost. The payback of the plant will be better because we ramp it up quicker. From an OpEx perspective, it looks worse on the numbers.
Actually, if I just may follow 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 these?
Second half.
Okay. Very clear. That's all for me. Thank you.
Just as a reminder, if you have any questions for the speakers, please press zero one on your telephone keypad now. We do have a follow-up question from the line of Claus Almer from Nordea. Please go ahead, your line is open.
Thank you. Yeah, just to 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. You're still saying you're hiking your selling prices. Can you maybe put a little bit more color to why we don't see an uptick or at least a flatten gross margin or incremental margin? Despite this very strong revenue growth we do see.
You do know that the EBIT margin, Claus, last year had started to improve already in Q3.
Yeah.
Of course, in comparison, that was also price-driven in the second half last year. In comparison, you'll see that of course eats some of the gap or the margin improvements compared to Q2 and Q1.
Sure. That I understand. This is why when you talk about the gross margin for 2018, for Q1, Q2 to Q3, you see a decline Q over Q. That's more what I'm curious about. Why?
I just want to see the numbers you're looking at.
Yeah. I think Claus.
He's calculating
Claus is looking at his own spreadsheet because he's of course taking percentages from this detailed breakup.
Yeah. Yeah. Exactly.
It's the same thing, Claus, with the negative factory mix that we talked about, that you're utilizing factories that has a higher cost per produced tons, and then also part of that package that you're transporting things longer. It's the same impact that Jens has been talking about, that you see reflected in that quarterly development.
The lack of contribution margin improvement, so to say, the price is obviously in there, and that's a big up. We have the inflation that is down.
Yeah.
You have efficiency improvements that hit further down and up there, depending on where they are.
Yeah, this factory mix.
You have the factory mix that the shifts we are shifting on tend to be the ones that where we have a little bit of free capacity, we keep the most expensive ones.
Yeah.
We park those. That also adds. The factory mix of these extra DKK 10 million, DKK 20 million revenue tend to come from the least cost-effective factories. For example, Poland is running absolutely flat out. We even import a little bit in this quarter to Poland, and that will impact it, but as a total, of course, it gives more money, more profit for us, but the margin of those tons is not the same, because it's a worse factory, and it's a longer distance cost that we don't charge for. You can discuss that strategy, but that's the strategy we kept, and with this type of development, I feel it's a sound one, and I intend to continue that.
Sure. Just more curious about this, the price increases you just talked about. Nevertheless, looking forward, should we expect a further adverse product mix or factory mix, or is it a more new split between the different factories and markets?
We are pretty high up. There are not going to be dramatic shifts now on this level because we only have 10% more to step up, and we have some new capacity coming on, and we have debottlenecking coming in some of the good factories too. I think the step up from Q2 to Q3 was one, but it's going to be hard to improve the contribution margin when you're on this loading level, I can say that.
Until you have those new lines.
New lines coming in. Yeah.
Okay. Sure. Okay. Thank you so much.
Thank you.
Next question is an additional follow-up from the line of Yves Bonnod from Exane BNP Paribas. Please go ahead. Your line is open.
Yes. Sorry, just a follow-up on the small M&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 plant is loaded in China and you need spare capacity. Thank you.
Yeah. It's kind of the self-funded. We do great in Thailand, Malaysia, terrific business. 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, your pricing, it's very hard to stand still. The only thing we do here is redeploy the cash flow and build the footprint in a very attractive way with local technology, with some tweaks to it. It doesn't change our strategy for emerging markets. Our strategy is if we are in the market, and we have a position, and we do good business, we know the risks, then why not do it? It doesn't mean that I'm looking for plants in Brazil, for example. We are very careful with opening up new markets.
At the moment, I feel the priority is still COVID growth in the U.S., obviously COVID growth in high profitable business growth in China, and then keep building our European, including Russia and all that Eastern Europe base and our network there stronger. It's not a strategic shift.
Why don't you want to increase your presence in emerging markets?
No, it's not emerging market per se. I'm happy to increase in China. Is China an emerging market? Is it? Yves?
Yes. Hello.
Yeah. Is China an emerging market now?
Oh, no, sorry. I didn't get that. Well, I guess you can categorize it in there, you mentioned that you-
I don't think China is an emerging market anymore.
For some, Yves, I think we mentioned this before, I think for stone wool, U.S. is an emerging market. This is a category that is-
We are increasing the exposure there, but for stone wool, China is not an emerging market.
Okay.
I think it's a huge We have no problem with China, remember, we are also different in the exposure that, A, here we have made a technology decision for how we do it, B, less than 10% of our volume cross any border where you can have custom duties. We play like a different game. Yes, but that means we source everything locally, we sell everything locally. We have the exchange rate exposure only on the profit.
Okay. Thank you very much.
Next question is an additional follow-up from the line of Kristian 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 at about next year. Just to clarify, do you have capacity to grow volume to 10% next year as well?
We work on this all the time. Is the price in 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. It depends where it comes. We should be able to do double-digit growth. When I say double digit, I don't say 10 or 12, but we are in that region, and then it depends how it plays out, basically.
All right. Sure. I understand what you're saying. Just on this Chinese acquisition, can you just repeat, how much are you paying for this? You said it was not included in your CapEx guidance, or?
No, since we give the guidance without acquisitions, it's not in there.
I guess, Kristian, you will just have to wait and see because I guess when you look at the annual report, you'll get the information because unless we manage to do another acquisition in Q4, then we lump it together.
All right. It will all be booked in Q4?
Because we have to do, as Jens said, a little bit of extra investment. I think you'll get close to around DKK 25 million altogether as a capital commitment.
It's very small.
Yeah. It's relatively small.
All right. Yeah. Excellent. Thank you.
There are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.
That was the end of the Q3, so thank you very much.
We'll see some of you on Monday.
Some of you on Monday.
Yeah.
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.