Ladies and gentlemen, welcome to the Rockwool Q1 Report 2018. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there will be a question-and-answer session. I will now hand you over to Jens Kjær Kaarsgaard to begin the call. Please go ahead.
Good morning or good day, everyone, and thanks for joining Rockwool's Q1 conference call. My name is, as you just heard, Jens Kjær Kaarsgaard , and I'm here together with CEO Jens Birgersson and CFO Kim Junge Andersen. First, Jens Birgersson will, as always, go through our presentation today, also talk about our new sustainability report, and give you a quick update. Afterwards, we will be ready to answer all your good questions. Before I hand over the virtual to Jens Birgersson, I must ask you to note slide number two, our forward-looking statement. Please, as always, be aware that this presentation contains uncertainties. Then we can go to the next slide, that is slide number three, and I will hand over the virtual device to Mr. Jens Birgersson.
Good morning, everyone. Since we did a pre-announcement already on the 30th of April, and we did a call in conjunction with that, I'm starting with the news, which is the sustainability report, just so that I make sure that you stay on that for a little bit. I think for us, this is quite an important work we are doing. There is an increasing interest in sustainability, and we have this feeling that with our positioning on sustainability, what's good for the business is good for the world. You have a couple of drivers in here. One is this whole aspect of sustainable cities, non-combustibility. We have seen the Grenfell development and a voluntary preference for that. The other is the whole climate change and at the end of that, reaching the energy efficiency goals.
If you look at that slide 4, not all of this is governmental initiatives. Sub-national players, and in particular the C40, the 100 top cities of the world, that's where we are driving and trying to go with the move that we see there. If you take one of the C40 cities. In a city, more than 50% of the greenhouse gas derives from the buildings. We fit in there together with the non-combustibility for high-rises and other sensitive buildings like hospitals. Therefore, we put a little bit of extra work in this. If you go over to slide 5, you see a little bit what we have done is on the one hand, the message on the outside, the other is the internal work.
We have managed, thanks to improved productivity, to get CO2 emissions, the gray CO2, so to say, from our production, down by 4% during 2017. We also reduced the landfill, didn't have any fatalities. That's on the keep ourselves healthy and work towards our own goals to stay fit. To the right, you see some of the payback of the gray CO2 and the gray energy, so to say, during this timeline. Finally, and maybe the piece that you are more interested in for the share, we have received quite a bit of recognition externally for the work we are doing on the sustainability side, and I would say, on slide six, you see some of the ratings we have, and I think this one to the right, ESG Invest, where they screened 65,000 companies and picked 100, and we are in there.
It's quite pleasing to see that with this communication and the work we do, we get picked up sometimes without having actively done anything other than doing the sustainability report and setting some goals. With that, I'll move on to the financials. The top line on the EBIT margin, we had already announced, and we had a really good quarter, but we also compared, in some respect, we had a low comparable because Q1 in 2017 was tough. Towards the end of Q1, we saw these inflationary pressures, but nevertheless, good quarter. Very good growth in the insulation business. Insulation business, I move to slide nine. The insulation business grew 20%. Systems only logged 4.1% or 4%. If we take the Grodan business out, you have much better growth in there.
The other businesses had a pretty good Q1, but Grodan has this one segment in the U.S. where the market has slowed down considerably. Compared to what I said, say, last year this time, we didn't see that. We had some challenges on Rockwool, but now this Grodan, which is quite a healthy business, will slow down, and you can see that in the numbers. Regional developments, move on to slide 10. Western Europe, Central Eastern Europe, North America, I would say it's all quite strong. Western Europe, very pleasing with the growth in the U.K. that is really high now, France, Germany, and also some of the incentive initiatives the government have issued for energy efficiency. France have announced, sometimes they call it DKK 12 billion, sometimes DKK 20 billion, but we use the number 12.
We haven't started to see that, but there is a true focus on energy efficiency. Germany has also pledged money, and Poland has come out with money for energy efficiency. This awareness we feel start to come that you need to do energy efficiency to meet climate goals. Again, I'm not sure we see much in the numbers yet. The general market perception is good. I think that some of the growth we see now is on the one hand work towards our own goals to stay fit. To the right, you see some of the payback of the gray CO2 and the gray energy, so to say, during this timeline.
Finally, maybe the piece that you are more interested in for the share, we have received quite a bit of recognition externally for the work we are doing on the sustainability side. I would say, so on slide six, you see some of the ratings we have. I think this one to the right, SGG Invest, where they screened 65,000 companies and picked 100, and we are in there. It's quite pleasing to see that with this communication and the work we do, we get picked up sometimes without having actively done anything other than doing the sustainability report and setting some goals. With that, I'll move on to the financials.
The top line on the EBIT margin, we had already announced. We had a really good quarter, but we also compared, in some respect, we had a low comparable because Q1 in 2017 was tough. Towards the end of Q1, we saw these inflationary pressures. Nevertheless, good quarter. Very good growth in the insulation business. Insulation business. I move to slide nine. The insulation business grew 20%. Systems only logged 4.1% or 4%. If we take the Grodan business out, you have much better growth in there. The other businesses had a pretty good Q1, but Grodan has this one segment in the U.S. where the market has slowed down considerably. Compared to what I said, say, last year at this time, we didn't see that.
We had some challenges on Rockwool, but now this Grodan, which is quite a healthy business, will slow down. You can see that in the numbers. Regional developments, move on to slide 10. Western Europe, Central Eastern Europe, North America, I would say it's all quite strong. Western Europe, very pleasing with the growth in the U.K. that is really high now, France, Germany. Also some of the incentive initiatives the government have issued for energy efficiency. France have announced, sometimes they call it DKK 12 billion, sometimes DKK 20 billion, but we use the number DKK 12 billion. We haven't started to see that, but there is a true focus on energy efficiency. Germany has also pledged money, and Poland has come out with money for energy efficiency. This awareness we feel start to come that you need to do energy efficiency to meet climate goals.
Again, I'm not sure we see much in the numbers yet. The general market perception is good. I think that some of the growth we see now is on the one hand, sound building market. Some of it is actually some of the other insulation materials shifting into stone wool. Just a fraction on the plastic foam side coming over to stone wool will give good growth to us. In the Eastern European countries, everything growing, but Russia not growing much. I don't think that is an economic effect. We grew a bit, but it was a bit lower than the previous quarter. I think there are a few factors. There was extreme winter conditions in Q1, and there could potentially also be a bit of a World Cup effect coming into this.
A lot of building work has been done. Now World Cup is coming up. The rest on the eastern side, really good growth. In North America, U.S., the normal double-digit growth, China doing good. Canada also did really good now. Again, the number we normally look at, U.S. Insulation, strong quarter. Profit then, good improvement both in EBITDA and EBIT, 53% up in EBIT. That's good, three percentage points up. What caused that? Basically, cost reductions over and above inflationary increase. I want to emphasize that the cost increase we saw last year hit us in Q1. We have higher costs this year in Q1. We have adapted the business, we have adapted pricing, and we are raising productivity. That kind of cancels out, and then we have the price and volume on top of that. Hence, healthy development.
You can't expect a 3% EBIT improvement in every quarter because Q1 had a little bit of a lower profitability. Insulation hasn't maybe really been a goal, but double-digit margin in Insulation and a doubling on the EBIT, nice. System Division down due to a little bit of a mix issue that Rockwool and Grodan are not delivering the normal level here, especially Grodan very slowed down. We move on to slide 13, cash flow. We always start with the negative cash flow, as you see from the diagram. Net working capital percentage at the end of the quarter is the same as every year. That means we have built more finished goods stock in relation to the growth, but net working capital percentage roughly unchanged, and that together with earnings give a bit more cash. Still negative though, and that's normal.
Investment activities, West Virginia drives a little bit of CapEx now. We completed the project in Poland. We have started that up. It went extremely well to start up. It was a renovation of a line. Very happy with that we delivered that one on time and could enter into full profit mode from day one. Outlook 2018, stays. Two reasons there. We see very good growth now. I don't see that the market will worsen during the year. The comparables are different, and we don't have a backlog. We see continued healthy business into 2018. We have left that one unchanged. On the margin, to not guide up and down every quarter, around the 13%. Shooting for about a 2% improvement of profitability with price and productivity, most upgrade we did.
On the CapEx, we added DKK 30 million. Primarily that is for a debottlenecking, an upgrade, and increased logistics around our factory in Wales, because we are growing in the U.K. This is a very good project because we have three lines installed. They are not fully installed because we did not need to use all of that. Now we are doing top investment to debottleneck it and get everything up to speed so that we can, early next year, run at full capacity. We do this while we are adding shifts already, but this is a very good investment we are doing there. With that, I hand over for questions.
Thank you. Ladies and gentlemen, if you do have an audio question for the speakers, please press 01 on your telephone keypad. We ask you kindly to limit yourself to two questions at a time. Our first question comes from the line of Yves Boumediene from Exane BNP Paribas. Please go ahead, your line is open.
Good morning, everyone. Thanks for taking my questions. I will actually have three, if that is okay, then I will probably jump back in the queue because I probably have a fourth one. The first question is on the system division, where margins continue to be under pressure, and I think this time you quote the Grodan product segment, which has started to slow. Could you maybe help us to understand how much does the Grodan represent in the total system division, and whether the slowdown is purely based on volumes, or if you are seeing any type of pricing pressure with new entrants? Also trying to understand what caused this slowdown, and what your expectations are for margins in the system division for this year.
My second question is on the insulation division, where you mention that you are seeing increasing demand for non-combustible insulation products and that you are gaining market share. I just really wanted to understand whether or not you think that maybe the growth that is driven by mid to high-rise dwellings, where foam insulation tend not to be used, is actually one of the drivers of the higher growth, or if you are actually seeing substitution across your markets. Lastly, on the tax rate, which was at 21% in Q1, should we take that as a good proxy for the rest of the year, or is it going to be a bit higher? Could you give us a bit of color on the tax rate for this year? Thank you very much.
Yeah. Good. Let's start with the system segment. At the end of last year, we talked about the Rockfon business. We did a restructure in Asia. We laid off more than 100 people there. That reset is done, and that means that Rockfon, in terms of growth, has that business missing, but we didn't make money on it. That's there. The proportion of the businesses, I don't provide, but what I can say is that both Grodan and Rockfon are substantial businesses, and the segment we are talking about is the retail segment in the U.S. that have gone into negative territory. The price level is still very much. It's not new entrants, it's just a regulatory change where our customer base, they can't plant at the moment because they are busy with other things.
We think it could take, very hard to say, two, three, four, five quarters to reset and come back up again. The business will come back. We are convinced of that. It's hard to predict how long that is. On the stone wool, where the volume comes from, I would say we see a voluntary shift towards non-combustible, and it's architects, contractors, other people, and it's independent of regulation. Sometimes we see a regulatory change, but we see it across, and it's just a few more projects, hospitals, schools, high-rises, but also flat roof. In some markets where you had foam used on flat roofs, logistic centers, you see a shift. You see it, for example, in the Amazon centers, increasingly in the data centers. In the sandwich panels, people want stone wool in some application instead of foam.
It's coming a little bit here and there, and it's not super dramatic, but remember, stone wool is just 14%, 15% maybe in most markets, of the whole market. Just a little bit of a creep will give a bit of a volume increase for us. That's on the insulation demand. I think it's primarily a voluntary trend that is happening. What else did we have?
I can. This is Kim. I can take the question.
Wasn't it one on substitution across? No, that I commented on.
You commented, yeah.
Yes. I think you responded to my question on the shift.
I hand over the task to Kim then.
Yeah.
Thank you very much.
On the tax rate, there's primarily two things that are influencing this this year. One thing is sort of the overall decrease in corporate tax rates that also, going forward, will lower our sort of expected average effective tax rate. Then this year, we have a few countries where we have unrecognized tax assets that
Due to a, you can say, a significantly improved profitability in those countries, we are recognizing these tax assets this year. I think we can expect the tax rate for the full year to be around the same level as Q1.
Very clear.
21%.
Thank you very much. That's very clear. Thank you.
Thank you. Our next question comes from the line of Kristian Johansen from Danske Bank. Please go ahead, your line is open. Kristian Johansen from Danske Bank, please go ahead, your line is open.
Sorry, I think my headset went off. My first question is around the guidance and the link between growth guidance and margin guidance. Obviously, you have a spread of three percentage point on growth guidance and, say, around 13% on margin. I would assume that there is a notable margin difference whether you make 7% or 10% growth.
Yes.
Should we read this, that if you make 7% growth, you're at 12.5% margin and 10% will take you to 13.5% margin? Is that how you read this?
Depends a little bit how it plays out. As you know, and you know this really well, Kristian, that average shipping distance is about 300 km, 350 km. If we grow more, we have bigger volumes. I can deliver more volumes if the market takes off in more volumes. As the volume increase, we will pay with higher logistics costs. The factory leverage is eaten up a bit of that. It's right that if we grow more, the more we grow, the more negative effect I have on the incremental volumes of the logistics. For example, today what we do, if we have a big flat roof project in car factory, Southern Germany or Southern Poland, and we can't supply it from there, we take it from Denmark because the top priority is the customer.
Remember, that will always give more money bottom line, the EBIT, but the margin on those tons will be worse. You're right, higher the growth, the lower the implicit EBIT margin. We are not fully pricing in the longer shipment. We are doing good on the gradual price increases with our customers, but we don't want to sit and recalculate with our partners and customers, if we suddenly take it from another place, then we want to increase the price with 40%. That's not how we want to work with them. We want to be a good partner with a decent price on the product, then we try to sort them out. The numbers I don't comment on versus the guidance, but the mechanism to logistics is working as you suspected.
Okay. That's very clear. Thank you very much. My second question on the U.K. The Hackitt Review came out yesterday. I just wanted to get your thought on that then how it potentially impacts your U.K. business.
Yeah. Our view is that in high-rises and sensitive buildings, hospitals, schools, it should be banned. Everything that is not non-combustible. However, well, I didn't have time to read it, but some of my very good people read it and summed it up for me. I think there is a glimmer of hope in that report because there are a couple of important elements in it. One is that it make it clear that the safe and easiest route to a safe building of those buildings I mentioned is to use non-combustible materials. You don't need approvals, you don't need anything, you just build it. That came out clear. The other thing that the report hints towards is that if you go another route in those buildings, the accountable should be pinned to someone.
How I interpret the report, it's still only 24 hours, is that the report hints towards that the contractor, the builder, is accountable for the test results and the application of those other materials. That's a fundamental difference. That's only a recommendation. If that comes into play, it means that someone takes the accountability for the building, and that puts risk on a tangible thing. We have already seen insurance premiums change for buildings of those types with combustible material. I think we are carefully optimistic about it. Again, stone wool today is just 2%, 3%, 4% of the U.K. Just a voluntary change is enough for us to have a healthy business in the U.K. That's a little bit the picture. Then we will see how it plays out.
I've also heard that there are some voices in government that want to have a discussion into the issue of banning non-combustible. We have seen it, we don't know what the outcome is, but you can read on the web that voices are heard in that direction. Generally, I think some very important items in that report.
Okay. Very clear. Can you just remind us when is it expected to become actual law? These recommendations?
That's impossible to say. We just know that the report came out yesterday. How the consultation and the recommendations then turn into something or doesn't turn into something, that we don't know. We know that the consultation goes into towards the end of July. That's what we know. After that, I cannot predict the U.K. political system.
Fair enough. That was all for me. Thank you.
Yeah. Then after that, you know that they have a recess in the U.K. I don't know if they disappear for one month or two or three, but they disappear. I don't think we should expect anything, for sure not before end of August.
All right.
Thank you. Our next question comes from the line of Claus Almer from Nordea. Please go ahead, your line is open.
Thank you. Also a few questions from my side.
Should be banned everything that is not non-combustible. However, having read Well, I didn't have time to read it, but some of my very good people read it and summed it up for me. I think there is a glimmer of hope in that report because there are a couple of important elements in it. One is that it make it clear that the safe and easiest route to a safe building of those buildings I mentioned is to use non-combustible materials. You don't need approvals, you don't need anything, you just build it. That came out clear. The other thing that the report hints towards is that if you go another route in those buildings, the accountable should be pinned to someone.
How I interpret the report is still only 24 hours, is that the report hints towards that the contractor, the builder, is accountable for the test results and the application of those other materials. That's a fundamental different, that's only a recommendation. If that comes into play, it means that someone takes the accountability for the building, and that puts risk on a tangible thing. We have already seen insurance premiums change for buildings of those types with combustible material. I think we are carefully optimistic about it. Again, stone wool today is just 2%, 3%, 4% of the U.K. Just a voluntary change is enough for us to have a healthy business in the U.K. That's a little bit the picture, and then we will see how it plays out.
I've also heard that there are some voices in government that want to have a discussion into the issue of banning non-combustible. We have seen it, we don't know what the outcome is, but you can read on the web that voices are heard in that direction. Generally, I think some very important items in that report.
Okay. Can you just remind us when is it expected to become actual law, these recommendations?
That's impossible to say. We just know that the report came out yesterday. How the consultation and the recommendations then turn into something or doesn't turn into something, that we don't know. We know that the consultation goes into towards the end of July. That's what we know. After that, I cannot predict the U.K. political system.
Fair enough. That was all for me. Thank you.
Yeah. After that, you know that they have a recess in the U.K. I don't know if they disappear for one month or two or three, but they disappear. I don't think we should expect anything, for sure not before end of August.
All right.
Thank you. Our next question comes from the line of Claus Almer from Nordea. Please go ahead, your line is open.
Thank you. Also a few questions from my side. This impressive performance in Q1, Jens, could you split it between pricing and volumes? That would be the first question.
Can say like this. As I said that cost reduction compensated inflation, pure cost reductions, and then volumes and price, together roughly 50/50 gave the improvement.
Okay. Coming to your new guidance, you're sticking to this 7%-10% revenue growth. Should we expect that to be the performance already from Q2 or a softer second half of the year? How should we try to correlate guidance?
Exactly as I say, H1, I say higher growth rates in the first half year. Now we've delivered Q1 with a higher growth rate, and we still insert that statement. I have to say Q2, by deduction of what we said, higher growth rate.
Higher growth than the 10% high end of the guidance range. Is that what you're saying?
It's higher growth than the 7%-10% range.
Okay. Just want to be sure.
Yeah. Good. Thanks, Claus.
May I just insert the final question? Going to this incremental margin, if you end up in the higher end of the range
It sounds like the incremental margin will be eaten by higher transportation costs. Does that mean that you will only have incremental margin around the 13%? That sounds pretty low, I would say.
Yeah. It's hard to say because some orders, if you ship very far, the logistics is really, really high. You have incremental margins in the base. As I answered Kristian, the mechanism you have is right, but you must remember that the price and all the rest in the base of the business, there you have the incremental margin. It's the volumes on top that makes life more complicated. In terms of debottlenecking, we are working across the plants, but unfortunately there are some plants where we don't find so much, and then there are other plants where we find more. We do ship further, we don't have the full leverage, but we have a leverage on the growth, and then it kind of tapers off a bit when you get higher up there.
Okay. It sounds as your normal guidance philosophy, Jens, I have to say. That's okay.
I'm still a beginner, Claus, I'm still a beginner in this game. We deliver, many things we say play out right, but we don't have a backlog. We need to see it in real life along the way, but the trends are pointing in the right direction.
That's what I thought. Thank you so much.
Thank you. Our next question comes from the line of Mikael Petersen from Handelsbanken Capital Markets. Please go ahead. Your line is open.
Hi. Thank you for taking my question. I have a question regarding your CapEx. You recently increased your investments from DKK 230 to DKK 260. Going forward in 2018, could we see additional increases due to a higher demand, or how should we see this?
I think in the base we did now, we covered some assumption on debottlenecking all the rest. The U.K. case is a specific one where we had prepared. We have three lines installed in the U.K., and two of them are kind of interconnected, and there were some deficiencies on logistics. It was never completed 20 years back because it was not needed. We had an investment case ready, and then we had defined. We have mapped out all the equipment, all the rest, we knew what to do. It also involves some expansion of the area we are on. We had that ready, and then we had set a trigger point for if we get to this growth and this loading, we trigger it, and we trigger that now. Then we know that in these many months, we start to see the capacity.
It's a very favorable investment in relation to the CapEx we spend and the tons we get, because a lot of the equipment and the things are there, we just need to debottleneck and put some things in. 90% of what you see of the upgrade is just pure to that decision, and the rest of the normal investments are covered. On the other hand, you could have, in today's supply situation, inflationary pressures that comes on products we have. Steel prices, other things can happen. There we will adjust as we go if something hits this year. Fundamentally, we try to time this right for the plants we have announced this year, and the normal debottlenecking we have this year. That's in there. Of course, no acquisitions or anything.
Mike, I think we have already guided slightly on CapEx also for the coming year because the investments that we have announced will already mean that the level will be slightly higher than this year.
Yes, understood. I just wanted to see if you would experience higher demand than you rely on, could force some extra investments. If I can just quickly follow up on that. Since you're on a debt-free level now in net cash, what is your plan going forward in terms of M&A and so on? Are you actively looking for something, or is the Flumroc still being-
Definitely actively looking. If you look at the Flumroc acquisition, it has been great.
Exactly.
A fantastic acquisition. Integration great, performance great, the fit into the culture great, and we are increasing capacity. Prices are up in Switzerland. Many good things. Those type of acquisitions we look at all the time. If I find one, and it makes sense, we'll do it. We don't find many. We keep looking, and we can act very quickly when we find one.
Okay. Thank you.
Welcome.
Thank you. Ladies and gentlemen, as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. We have another question coming from the line of Yves Bromehead from Exane BNP Paribas. Please go ahead, your line is open.
Thank you for taking a follow-up question from my side. I just want to know, we've been talking quite a lot during this call on the shift with non-combustible, especially in residential. You've mentioned that you're seeing it also in flat roof in logistic centers. Do you believe that there is also a potential for regulations to change in the non-residential segments? As of now, we're only talking about resi, but is there another opportunity there in the non-res if the regulation does change, and are you seeing that happening, or do you expect it?
I think you have regulation in many places through the fire code in non-residential, actually. You have it in many countries, and then in some places it's a creeping increase. You see some of the insurance companies driving it indirectly. I must admit, when I think of any major regulatory changes, nothing that I count on, and I can't remember a case where there is a significant change now. It's more that this voluntary direction that such, we see it in sandwich panels where we are a sub-supplier. We see it in the facades in all segments in Germany, where the penetration of non-combustible happens month by month by month. It's not regulatory.
Do you have an idea of how much you increased your penetration rate in stone wool, for example, in the last 24 months, given that it seems that it's been quite recent, the move towards stone wool?
I don't know, I see that if you compare, I guess you probably can do a better deduction than me than looking at the growth rates of the different materials. I think there is a slight penetration, and we hear it from customers. We have contractors saying, "Look, I did this and this, now I only want to do that." "I did mixed facades with foam, and then stone wool that's fire barrier. Complicated. I want to do all the stone wool." We see a few of those, we have many customers that just do it in the old way. I don't dare to say what percentage, but there is a creep, and we benefit from that. Sorry about not being able to give any more accurate numbers.
That's fine. Very helpful. Thank you very much.
Thank you. Our next question comes from the line of Claus Almer from Nordea. Please go ahead. Your line is open.
Yeah. Just a follow-up on the tax rate question. Kim, you said 21 for this year, which is including some tax assets. What should we expect beyond 2018? What is the more normalized tax rate?
I think the more normalized tax rates going forward would be around 23%, 24%.
Okay. A question regarding working capital. You're keeping your percentage of revenue despite building to inventory. How should we think about working capital going forward?
Yeah, no, we are building. For us, it is a battle in Q1 to build inventory for the high season. If we get to the same percentage of revenue, if the year is not crazy in terms of growth between quarters, if it's very uneven, that means we were successful because it's not sitting in all the trade receivables. That meant we were successful in building the seasonal stock that is a bit higher than the previous year, which it should be, because we have guided growth. I think due to that, the product is very bulky. There are two aspects of it. When we raise prices, it's difficult to pre-buy a lot. You can buy a bit, but you don't have space, and then that net working capital, we don't see fundamental shifts in the percentage of revenue.
Of course, if we have five new plants, where you do inventory on those plants and you're just selling at 40% of turnover, then you have a negative net working capital. Since we are high up in the loading now, the percentages should be pretty unchanged. We have no intention to give longer credits to customer or anything like that. We shouldn't get higher net working capital because we don't get paid, or we have longer trade receivables. We don't want to do that.
Okay, thanks.
Thank you very much. As there are no further questions, I'll hand back the conference to our speakers.
Okay. Thanks a lot for participating in this conference call, and for many of you, we can also wish you a good long weekend. Thank you.