Ladies and gentlemen, welcome to the conference call regarding Rockwool International's results for the first half year of 2021. My name is Thomas Harder. I am Director of Group Treasury and Investor Relations of Rockwool International. Today, I'm pleased to present CEO, Jens Birgersson, and CFO, Kim Junge Andersen. For the first part of this call, all participants will be in a listen-only mode. As a reminder, this conference call is being recorded. First, Jens Birgersson will go through our presentation and give you an update on the results for the first half year and second quarter of 2021. Afterwards, we'll be ready to answer all your good questions. Before I hand over the words to Jens Birgersson, I must ask you to notice slide number two, which is the forward-looking statement. Please be aware that this presentation contains uncertainties.
Now we can go to the next slide, which is slide three. Jens Birgersson, I'll now hand over the words to you.
Thank you, Thomas. Good morning, everyone. Today, we do this slightly differently. I'm sitting in Aarhus, in Denmark, and the reason I do that is that tomorrow we start racing in the SailGP Denmark race. I will be on the boat this afternoon myself, and this is a branding exercise we do become more known, and so far, this effort has worked greatly for us. We have made a couple of videos of the previous events, and for example, the two first videos where we mixed a bit of sustainability message, Rockwool, with some information about the events, we had two million views. I think up to this point, we never had anything that would have more than 100,000 views. That's a great step forward. We also noticed that with this, we expand the brand knowledge among future employees, and our own employees, too, get proud from this.
It's been a very interesting branding investment we have done so far with a very nice return. Very motivating for us to be engaged in this. If you find some time, watch some of this. It will be broadcasted on TV 2, and there is also something on YouTube called the Racing on the Edge, episode 3. It's a similar format to the one some of you might have seen on Formula One, the Formula One drivers. It's a similar series about this series on Netflix and YouTube. Sorry, on YouTube. Okay. With that, I would like to move to slide three and we get into the numbers. We stepped into the year with a little bit of a slow start, and then in Q3, we saw some sort of B-plus shape recovery.
Maybe the surprising element of what happened was that it didn't only recover to pre-pandemic level, but we saw business activity above previous records, which were in 2019. If you start with the top line, half year, 11% up with almost nothing, no growth in Q1, only towards the end. On the EBIT, EUR 201 million year to date. Underlying, if I take the Rockfon settlement that happened in Q2 2019, that's 37% above 2019. Of course, it's 46% above 2020, where 2022 was the worst, most affected, Corona quarter, so to say. EBIT margin up, and again, the 2020 reference is not so relevant. If I take the Rockfon settlement up, it's more than a percentage point higher than in 2019, and that was a very good quarter. Moving into the quarter, you see those growth numbers there, 35% growth, new high quarter for us.
Good margin. Flattish like for like versus 2019, 4% percentage point up versus 2020 in Q2. Simon is on slide four now. Taking the Rockfon U.S. settlement out, we are more than a 1 percentage point up on the EBIT margin. On the top line, what happened in that quarter was that we were quite helped by the System division that grew. All the businesses grew, but especially Grodan had a bit of an exceptional quarter. We saw that competing growth substrates like peat and coco had difficulties being shipped from Asia, and that led to a substitution effect. We also saw after some of the harbor challenges that have been, for example, Los Angeles Harbor, that the Medical cannabis market that the distributors really wanted to restock to have a bit more buffer, and that led to an exceptionally good quarter for Grodan.
When you come to EBIT, that EBIT is maybe surprisingly good because what happened after, in Q1, we had almost no inflation. We had energy prices that were stable. Our material input costs were stable. Logistic costs on a steady level. Then in Q2, we saw this burst of inflation. You may recall that we talked about the moderate pricing strategy with the raw material pressures that we experienced there. We got a gap between price and inflation, but due to cost reductions in the factories, some mix elements, and then fixed cost productivities, the profitability came in quite nicely. Move on to slide five . Good growth. If you go down to the bottom right, the diagram there, we see that on insulation, and again, I go back to 2019. Mentally, I give you a column of about EUR 1 billion for the half year in 2019.
The insulation business is up 5%, and I'm quite happy with that because, at this stage, we only open up the Ranson factory at the end of the quarter, and we had a pretty good 2019 on insulation. On the System division, the comparable number in 2017 was EUR 317 turnover, and we grew 21% above that. There you have the Grodan effect, but also Rockfon, Rockpanel, and all the businesses really had a good quarter. All that when we get into a ramp-up stage that we were because we were running with a certain number of shifts in Q1. We didn't build up that much seasonal stock this year, and we got very drastic ramp-up in demand. In Q2, we had to ramp up, bring in more shifts, go higher up on the capacity utilization.
It takes a few weeks, sometimes months to do that, and we always put priority to System Division, but they get theirs for that. Very pleased with the System Division, but also very pleased with the Insulation step-up because it was not a low comparable. Move on to slide six. There in Q2 specifically, you saw roughly 7% growth over, so the 30% versus 2020 in Insulation is of course good, but you must remember that was a very low quarter. It's about just short of 7% growth for the Insulation Division. The Systems also compared to 2019 is up 30%, and very good, but really good quarter from Grodan, Rockpanel, and Rockfon. All the businesses in the System Division had both good input and double-digit growth. That's nice. Going into the regional development on slide seven.
To sum it up, I would say in Q2, you see the normal little bit slowness, not negative, but you see a bit of slowness in Sweden and Norway due to the vacation season and the tradition in the building sector to slow down a bit. There you had single-digit numbers and not so much growth due to the June, July slowdown in building activity and vacations. Fundamentally, all markets in Western Europe, Eastern Europe, Russia, really solid growth. In North America, everything double digits everywhere, and with a particular boom in the U.S., where the residential segment is reaching some sort of all-time high, I think. It's really going. Generally across the businesses, we see the residential segment grow very well. As we discussed at the previous call, office buildings and that type of activities there, we don't see much growth.
We see now, for example, in France and Germany, that that's starting to grow again after a long period of low activity. Of course, things like logistic centers, the Amazon-style type of constructions, they are growing very fast also. Car, electrical car factories, anything logistics, big boxes doing really well. From a segment perspective, in Q2 with such a high demand for stone wool, I guess all insulation materials and with some constraint still on some of the foam products, a lot came over to stone wool. We took a certain, we've seen that increasingly as our competitors in stone wool are leaving the lowest margin segment, which is the flat roof segment. We learned 2007, 2008, that's not a good idea. We are not dropping that from the mix.
We see it as our responsibility to make sure the flat roof suppliers get stone wool. We don't want that market to form, and there we see quite a big increase on the flat roof, and that impact a little bit the insulation mix. That's something we want to do, and we want to maintain that. We do not see long-term benefits with that there is no stone wool for flat roofs. We saw what that caused after a boom last time in 2007 and 2008, we see that forming. We continue with that. The mix slightly skewed towards flat roof and the heavy densities. Profitability, if you move to slide eight, all good, I would say. Going back to Q2 2019, that settlement in North America, that was in the system division in the ceiling business, the Rockfon business. That comparable 20.7% is not quite fair.
There really is some improvement in the System Division on margins and there are a couple of factors. That one factor is that they haven't seen the full inflation yet or the raw material increases because we have a system that we slow that down. We start to adjust the counter prices. Generally, the mix and the pricing and the cost position of the business, all of that work we have done over the last year has paid off. All the businesses have improved the margin. Grodan has a bit of an especially good quarter. They have good margin in that business, and that helps to improve the System Division margin. On the Insulation Business, good 14.3% EBIT margin.
We are happy with that, especially as the mix is a little bit skewed towards a bit more flat roof than we normally do, big growth in flat roof. Of course, we opt on GBI.
Jens, just a clarification. You are commenting on slide nine, with the two insulation system. This is slide eight, where you have EBITDA and EBIT on the graph.
Sorry. Okay, I'm on slide nine. We comment on slide nine. I think generally, the EBIT improvement on System division is very pleasing, and I'm happy also with the margin on the insulation because the big raw material increase that we have seen, most of it has impacted the insulation business. In spite of that, thanks to factory improvements, productivity, fixed cost over absorption, and some of the personnel reductions we did last year, that adds up to this good margin. Okay. We go to the investment activities on page 10. Here, nothing in particular has happened. We've basically progressed a little bit lower compared to last year, and that's because of different pace on the North American factory where they had quite heavy investment last year.
We did do an acquisition in Japan, a small company north of Tokyo, a small size factory, and quite a favorable acquisition price. I should also say that it's not going to be accretive. It's going to take until early next year before we are up and producing a Rockwool product with our quality standards. We're going to upgrade the factory, and we have started that, and we have people coming on the ground now to start to plan that one out. This was an opportunity that come up, and we have been active in Japan for quite some years. Importing materials to the brand is not entirely unknown, but it's nice for us to get a small factory on the ground and start to develop that market. As you know, it's not a small economy, so let's see how that develops.
Don't expect impact that is quick. It takes time in Japan, and we want to do a couple of things on that factory before we really start selling. It should also be said that the government subsidies in Japan in this region are high, it's not going to be a capital-intensive upgrade that you will notice in the numbers. It's a very favorable support to upgrading that factory. We will do that, we have kicked off the construction of the new line in France. No shovels in the ground yet, that work has started off. The investment in more Rockfon capacity in Poland is ongoing, target is that we should start that line up end of first quarter 2022. Slide 11, cash flow. Nothing much to say about that. We have a positive effect.
Inventory is low, so it's a positive effect on cash, but we would have liked to have a bit more inventory if we could. On the other hand, thanks to very good demand, we sold it all. That's one. Due to the ramp-up, quite high level of trade receivables with this slight increase there from the low 10% to above 11%. That's primarily due to the trade receivables. The net debt is still negative, so that's good. Slide 12. We did not discontinue the sustainability calls because we felt we covered a good set of topics. For that reason, we add it in the half year release. We won't do it in every release, but in the half year now, and then when we do the annual release with the sustainability reporting included slides.
If something in particular comes up, we might add in an ad hoc call. Half-yearly pace for this now. Just to give you an update on our SDG-aligned sustainability goals. Here we don't have the Science-Based Targets in. Remember, we had an old goal on CO2 per ton produced, the CO2 efficiency goal that we set back in 2015/16. In addition to this, we have the Science-Based Target goal that is an absolute reduction goal that we also are progressing, and we will report more on that when we issue the sustainability report early next year. If we just go through the progress of these goals, we start with the CO2 emissions. We are ahead of the plan. The biggest moves here were Norway and also the biogas in Denmark, and that's progressing and we're going to keep doing that. We are ahead.
That's nice. Landfill waste. Obviously, a lot of that landfill waste we want to put into it. If it's our own material, put it in and make product out of it. That's also ahead of plan. We are rolling out the circularity scheme also so that we can take external waste material back, the recycling bin, the Rockcycle. That's ahead of plan. That's good. Reclaimed waste linked to the landfill waste but also going good. Water consumption ahead. Water consumption, that's ahead of the goal is the misdetermination because where we produce water it's so cheap that you spend money and you spend energy on saving something that really doesn't cost anything. The way water is priced that you don't pay more for water in the summer when it's running out to tell you to not use it for the lawn.
That's the way it's priced today with municipal water, but maybe someone should think about that. Anyhow, we are doing the work and are good that progresses because we do use water and also being more circular on water is something we do on rainwater. We are investing in that and it's not great payback. Energy efficiency of our buildings, you won't say, "Okay, how can you be behind on that?" We are behind because during COVID, it was difficult to get this with the boom in building activity and not having people in our own offices. The programs are identified. We have set the money aside for it, and we do this in maybe a slightly different way to how you do it.
I want the management team of the operational entity to be really, really involved in the project so that we learn how to renovate with our own products. They are fantastically fun projects, but there is also a lot of work to do it because it is not just handing it over to an architect and have it done. The whole team needs to be involved and understand how we can apply all of our products. The picture on the right is our office in Gladbeck. This building, now we haven't included a before picture, but that building was a really, really awful concrete structure. It would probably win the prize as one of the ugliest buildings in the group. What we have done here is that we have renovated it all with our own products.
We have used Rockpanel, ventilated façade, ETICS, and on the top floor we have added there, you see we have increased the number of workplaces. We have done a Rockzero floor on top because the building was so strong that we could add one floor by doing Rockzero walls. We actually aimed for a German sustainable building council, DGNB Silver certification. When the building was done, we actually got the gold, and that's quite hard to get through the renovation. We have had many politician and municipal people visit this because with the new Fit for 55 new directives or the ambition there with the increased focus on energy renovation first and to not tear buildings down, this project has gotten a lot of attention.
The project ran really smoothly and in retrospect, it cost us a lot less than tearing this down, make a new building. Very proud of that. Just to give you an example, in Denmark, I think there's only one project last year that got this gold in the whole of Denmark, and that was a new build project. I'm happy with that. Nice progress. When we look at that energy efficiency of own footprint, so to say, our buildings, we will progress with that, but we need to complete more projects, and it's quite a lot of work. We will get better at it, but still some work. Slide 13. Really important slide. It's worth a full hour just to discuss this.
What you see now is that in the EU's ambition to be carbon neutral or net zero, get into net zero position by 2050 across the EU, they have put together a program called Fit for 55, where they address energy efficiency. It's a directive for that. Emission trading system and the CO2 quotas, energy taxation directive, and there's also a Climate Action and Social Facility Package. There are a whole slate of things. They all point towards energy efficiency first, increasing the renovation rate of public building, widening the definition of scope of public buildings, raising the efficiency targets per country per year from 0.8% to 1.5%, increasing the cost of CO2 quotas, reducing the free quota. Everything basically speaking for more work in our area. I can say with the new IPCC report, all of that works need to be done.
Otherwise, there's no chance to stop the trend. I would say even if half of it happens, we're going to see a lot of business, and there is a lot of money to it. There's a lot of positive things in that. If you look at the National Recovery and Resilience Facility, EU put together EUR 673 billion assigned, EUR 36 billion of that is already assigned to energy efficiency renovation in 2021-2026. There are a lot of schemes and initiatives and regulation and directives coming here. They are not decided on yet, all of this, but they will come. I think there is one important insight when you look at all of these directives, that it's only the energy taxation directive that need a unified decision, that everyone say yes. The others need a qualified majority vote in the EU.
It's not enough that if two countries, we all know what countries might go against some of these, say no, it doesn't matter because if it's a qualified majority vote, they will go ahead with it. Of course, they might be watered down a bit, but the sheer size of this and the direction is good news for us, and I feel it's moving in the right direction and this will support our business in insulation. We see this big money also in North America focusing on this in addition to the very important residential market. The timing of our factory in West Virginia, we are now moving as fast as we can to ramp up production, and so far so good. It comes at a good time. Okay, outlook. Nothing much to say about that really. Top line, 17%.
I have put in a small beware in my outlook. You have strong demand for many materials. The one thing we need to be careful about is we need to get pallets, we need to get binder, we need to get stone, we can always get. We need to be active on the incoming side, the material into the factories. I don't see that threatening the top line. There might be the odd interruption somewhere between now and Christmas, maybe in a factory because of a material short stop. That could happen, but that won't impact the number.
A little bit what I warn for is that potentially in the construction market, if you have other construction materials going to a site, it doesn't come, and we have a heavy winter, might decide to pause the project for a longer period and then wait for all the material to arrive, and then restart off in the new year. I see a slight risk for that, and haven't really experienced this situation before, so I don't know how likely it is, but I don't exclude it. Then on the EBIT margin, we did get through, although we haven't yet priced in the market so that we fully match the inflation. We didn't do that in Q1 with mix and productivity and other improvements, we got to a good margin.
I foresee that the beginning of the second half year, pricing will improve gradually, and then when we get to Q4, we're going to be in balance between inflation and price. That's a transition we are doing. We don't have the full price increase in place yet due to our pricing strategy for the year, which was not doing so much in Q1, and then the inflation came, and then we had to raise our pricing ambition. That's on the way, but it's all in hand. It's coming with some timing issues, so it's not all on track.
On the CapEx, I would think that on the EUR 370, the challenge you have when you go up on full capacity, five shifts, is that some of the CapEx to get the outage to put it in can be difficult because we might rather produce, so it's a bit hard to say. I would say we shouldn't exceed the CapEx because the machines are running so hard that it's actually hard to get access and do some of the maintenance CapEx. Okay, I think that's what I had to say about the slides. With that, I would like to hand over to questions.
Thank you. Our first question comes from the line of Yves Bromehead from Exane BNP Paribas.
Good morning, everyone. Thank you for taking my question, and good luck for the exciting boat race this afternoon. Three questions, if I could. Number one is on the price cost. Can you maybe help us to understand what are your expectations regarding the cost inflation in H2 and what magnitude of price hike you've introduced in the summer? That'd be helpful. My second question is on the shortages that you're mentioning. Can you just be a bit more specific? Are there any countries where you anticipate higher risk than other countries? Also, have you included the risk of those shortages in your top line and margin guidance? My final question is, looking more medium term, you seem to be excited by the renovation wave and the stimulus with what that can bring as a tailwind for the insulation industry.
I think it's quite clear the money seems to be here. On the ground, can the craftsmen actually increase the amount of jobs that they can do from current levels, or are they just running completely flat out, and it all depends on the hiring potential, which also looks quite difficult given where unemployment rate is today, which is quite low already. What's your view on that? Is it feasible or not? Thank you.
I'll do two and three, and then Kim will do one. I start with the shortages and what I put into my forecast. I have not put into the forecast that we would have an early closure of projects because of shortages of other building materials on the site. Some of it is in, we see some of it today, but I haven't put in my forecast, a broad base. Germany decides to shut down first of December, all projects, and go home for a month. I haven't put that in, but normal ups and down, we have a little bit of risks up and down as normal. It needs to be something quite big. I just want to flag it. Shortages on the incoming material side, I think more or less we are able to manage that across all countries.
We run it weekly, every material, green, red, yellow. We are very used to doing that, and we find a solution, and sometimes if you have a particular Let's assume you have a customer saying, "I want a certain type of pallet," and we don't have the pallet, then often we can just produce another product and use. We can work around it, working a bit with the mix and the portfolio. I don't see that be a big thing. That leads into your third question. I think. The car industry is booming. It's a bit slower to get people, blue collars in, factory workers, but that's still a manageable amount. We got them in. By the way, I should have commented that I'm missing the safety target.
I missed the safety target. I should have said that. We have this target where we improve every year. What we see now that we bring people in, is that with this flexibility we have, trips, falls, fingers, bringing new people in and getting used to moving shifts up and down more, we also have a little bit more challenges to not have these slips and falls, and that is reflected in the safety target. It might be that a rate of three lost time accident is a very ambitious level with this flexibility we have. That's just a comment on that goal, and that's one of the reasons we missed it. I think exactly what you say, evidently, the construction industry is able to build and do what we are at now.
Will the installers and builders, will we be able to create additional ones to have the whole industry grow more? What happens if it moves away? With the focus on also now embedded carbon, with 75% of the carbon in a building sits embedded in the material when you build it, the EU will probably, and many countries, will probably steer any deficiency to renovating and try to get it away from new build, and then the efficiency might be reduced, even though there are not clear numbers on that, but that's what most of us believe. You sit dependent on construction workers. There, it's very hard for me to foresee whether countries will be capable of getting more construction workers. I'm cautious about that.
I worried about that for years, and I think that's going to be a constraint we're going to hit at some stage. I can't say how much more we can grow. I mean, the construction market can grow before it hits that constraint. Are we already there, or is there another 10%, or are there ways of adding more people to the industry? We will have to see how that goes. Over to you, Kim, on price and cost.
Thank you very much, Yves . I think it's fair to say that the pricing impact in the first half has not been anything to speak of. We also didn't mention this as one of our, you can say, drivers for profitability in the first half. Clearly in the second half, with the price adjustments we have made in the market, we do expect, as Jens said, a growing impact from pricing, leading into, hopefully, an expected balance between impact from sales price and cost inflation of input material in the fourth quarter. We are still talking single-digit price increases in aggregate. It is something that is not outrageously in the market. My expectation is that you will hopefully see a slightly improved insulation market leading into at least in Q4.
Okay. Thank you very much to both of you.
Thank you. Our next question comes from the line of Brijesh Siya of HSBC. Please go ahead. Your line is open.
Thank you. Congratulations on a good set of numbers. I have two questions, if I may. The first one is on the capacity constraints you talked about in the press release, having many countries at full capacity. Could you please talk a little more about what are those countries with capacity constraints, and in that regard, if you can give us what is the current utilization at the group level previously that will be slightly lower in the U.S.?
Okay. I don't give the utilization level. Sorry, we never do that. I can just say one thing. We have free capacity.
Yeah.
We can grow next year. What I'm more worried about is labor capacity on the construction side. I will be able to grow next year substantially. Okay? We need to start the year with building seasonal stock. We can't have a quarter where we're running on three shifts and things like that. We need to run at a higher level. We have more capacity, and we started up a machine in Neuburg. We have still shifts to put on and run the whole year and freeze less capacity, and we have the Ranson line coming up, we can grow.
And-
The growth worry I have for next year would be if the labor is not there to install and keep the construction market going.
Yeah, Jens, the constraint that we talk about in our report is sort of the general constraint in the construction market because there are other materials, of course, that the construction market is depending upon, and thereby we also become sort of constrained. That is if you are short of wood, for instance.
When you say substantial, would it be fair to assume that as you see right now, it's looking like at least 10% growth is possible next year?
I cannot say what the market is. I'm not forecasting for next year 10% growth. We will come with a forecast later. What I want to say is, if the market grows 10%, I can deliver 10% growth. I'm not making a forecast for next year. It's not going to be my capacity preventing me from delivering the market next year. Okay?
Understood. Yeah. Now coming to the guidance on the 17% like-for-like sales growth or local currency growth, how much of that you think is driven by this market share shift, both in insulation and in the Grodan business? Any kind of ballpark you think is kind of driving that and rest all are underlying market improvement?
Come again on that question. I didn't quite get it.
Sure. This 17% local currency growth for 2021, in that, how much you think is being driven by a market share shift from plastic foam as well as the Grodan market share you got it in Q2? I mean, is that a quarter of that you think is coming from those two shifts and rest are underlying market improvement?
I don't have a percentage for it, but when I look at the organic growth numbers, I think that a bit comes from that side and that glass wool and stone wool benefits a bit from that. The percentage number, I can't say. Our experience with Grodan, I don't expect all the coco and peat substitution to go back. What we found before is that some would go back because they're a cheaper product. When you look at the total productivity output in relation to the cost, our substrate is better. That's what we argue. You would expect that from me. We tend to see that when quite a few farmers that go from coco peat and try our material, once they've seen that, many of them will stay.
I think you have some of that element that is a permanent substitution, but not all. It's very hard to judge how much that will be, that will remain. At the same time, we do benefit from the substitution from EPS with the high pricing they have. They have increased prices quite high, I'm sure today. We have benefited. To get numbers on that versus the total market size in the middle of the year, it's very hard. I can say one thing, though, that some of our growth we have had, some of it, is that we are growing well in flat roof because we have competition that decide, okay, flat roof is too low margin. We go on Etex, or we go on some other heavy segment, we don't go so hard on the flat roof.
There we had to step in and take more of, so to say, an unfavorable mix to prevent the segments from getting substituted into plastic form. You have a little bit of effects both ways, I would say, though. There we have an internal substitution with others, former supplier. Okay.
Can I ask one more question on capacity? You announced this France plant, which is obviously a large size electrical melter, which is probably a first one for you. We haven't got the kind of investment you are doing. Is there any government subsidy involved in that? If you could give a little more details on it and how you see this success about having a large electric melter in place by 2024, and how does that kind of evolve your plan.
Before you answer, Jens, just jumping in here. Analyst, please respect that we have 2 questions only. We have quite a long queue list today. I will let this one go, but next, please stick to two questions only. Thank you.
Okay. The large scale melter, I was up in Norway yesterday and the day before, and I looked at our melter. It runs really well. I think we understand the parameters. Fantastic kit. This step to do the French one, I see the big step was to make the one in Norway. This step here with the design parameters, we know them quite well now, I think. I see that as low risk. I could be wrong, but that's what I see, and we are producing really well up in Norway on that one. That's on the melter. Normally in these times when you do that, when you put electrical meltering, you get some subsidy. We normally don't talk about how much, but a project you might have EUR 5 million-EUR 10 million, EUR 15 million subsidy.
The Norway case was exceptional that we get EUR 10 million. It's not decisive where we go with the melter. It doesn't impact the calculation that much. Of course, we appreciate it, and we go after it, but we don't declare how much that is. We don't give the CapEx value per plant. The reason we don't do that, I'm just going to give you some parameters that are good to know, that if you make, for example, the stonewool plant and you go heavy density, the whole cold end of such a plant can be small. It's easy to pack the heavy density product. If you go build a plant that is designed for residential and light densities, the downstream end of the plant looks entirely different with much, much more equipment.
Therefore, we have come to the conclusion that we should not reveal how much we invest CapEx in each plant, but you will see the total numbers. You will see how much our capacity investments, what is sustainability investments, and what the maintenance.
Right. Thank you very much.
Okay, thank you. Next question.
Thank you. The next question comes from the line of Kristian Tornøe Johansen of Danske Bank. Please go ahead, your line is open.
Yes, thank you. Two questions from my side. Firstly, on pricing in systems. You said, as a general remark, that there's very little impact from pricing in the first half. Does that cover systems as well, or have you actually managed to get through pricing?
There you have slightly different, because they haven't seen much inflation. We do price increases. The inflation really took off. Inflation might be the wrong word. Raw material cost increase and logistic increases. The System division have benefited more from the moderate price increases that we already had in full swing, because they made those, and they didn't have so much material cost increases. They should be basically balanced the whole year, inflation versus price.
Understood. Second question along the same lines here. On this transfer pricing, correct me if I'm wrong, as I understand it, Systems is buying the stone wool from Insulation at, you can say, prices which doesn't reflect the increase you've seen in raw materials.
We have.
Can you quantify how much that boosts earnings in Systems?
I hand that one over soon to Kim. These are things we adjust, but we don't adjust in the system, in the ERP system every month. We like to keep it steady. We prefer to have comparable numbers for a little bit longer, and still we need to do it from a tax perspective and all the rest, in the right way. It means that we prefer to let volatility move out of it, but to have the direction right. Of course, it should be right over time. It's just that when things happen so swiftly, what we worry when we see that type of inflation, it's not that we put the controllers on doing transfer pricing change internally. We put the salespeople on getting the prices in the market to compensate. Kim can put some more accurate words on that. Kim?
Yeah. It is correct, Kristian. We normally try to keep transfer prices stable. System Division also, you can say, buy some of their own raw materials like steel, fleece, et cetera, so they have a direct, say, impact there on market prices. We have decided this year, because of the cost increases, to do a mid-year price adjustment on our transfer prices between Insulation and System. The impact in the first half has been very small. In overall scheme of things, less than a percentage points impact on Insulation margin.
Okay. We should expect all things equal to 1 percentage point lower margin in Systems then in the second half.
Less than a percentage point.
Percentage point. Yes. Fair enough. Thank you. That was all for me.
Thank you. Our next question comes from the line of Yassine Touahri of On Field Research. Please go ahead, your line is open.
Yes, I would have two questions. One question on Grodan. Do you see the strong trends continuing in July and August? Grodan has very strong fourth quarter usually. Is the market share gain that you get in Q2 sustainable, or do you see you could give it back later this year if the shipping situation out of Asia is normalizing? The second question is just on the energy efficiency of buildings. You're saying that you are late on improving your building. Do you see that happening with your client as well? Do you see a good backlog because a lot of your clients were not able to improve their buildings because of the COVID restriction?
Yeah. Okay. Good question. I don't comment on Grodan, but I think Q2 was a lot of growth for Grodan also versus 2019, and those three factors I mentioned, or two factors, but two different other substrate, that and the stock filling. That's one exception, but the underlying sustainable food production, increased productivity, vegetable growing, and medical cannabis, it's all growing, and I see that will continue. What happened in Q2 was a bit exceptional, but I don't see that Grodan will not continue grow, and we keep investing in capacity. They are a bit below the radar investments, but we do it all the time, and we improve investments, more slabs, more blocks, because it just keeps growing. We have seen this growth now for what is it, five years?
Then you have a regulatory impact in the U.S. for a while, when they regulated them and they legalized more. That actually slowed the market down because it became a bit confused how these new growers would act. I think growth will continue, but then not quite the same pace, but it's a positive outlook. On the renovation slowdown, I think generally renovation from the nature now that you see Italy, they really boosted it. You see it picking up. In a heated construction market on residential, it is a challenge, but it's hard to say what to compare with, because it's not like we had a plan down to the quarter when we would do it. It's a conceptual phase. We do it, and we are doing enough product to meet our goal in 2030, and we know we are on track for that.
The mid-year point, we are a little bit behind the straight curve. I think generally renovations are that way. They take a bit longer time and the conceptual stage is harder, and in a labor-constrained construction market, it's even harder to do it because you need a certain quality to the work you do. It's actually easier to do a new build. I think you could have seen more renovation if it wasn't COVID and all the rest, but it's still a good level, so we are happy.
Is it fair to say that you've got a good backlog when you're looking at your project business?
We don't really have much of a backlog. We don't like to have a backlog. We have some frame agreements, and then there are some customers, Skanska, Amazon, others that want to deal directly. We quote, we win an order, Tesla, huge project for us. You have a backlog, but it's still a relatively small segment of what the normal business we have is you bid for a project, you win it. That's the project segment, and the vast majority of business is the other business, just bread and butter, day to day to day, no backlog.
Thank you very much.
Yeah.
Thank you. Our next question comes from the line of Claus Almer of Nordea. Please go ahead, your line is open.
Thank you. Also two questions from my side. I will take them one by one. Yes, moving to the System division, you talked about this transfer pricing impact. Should we expect that the EBIT margin that we have seen in the first half or second Q2 is a new level of the company? That would be the first one.
We don't forecast margin by business. We did do a work. We did a lot of work on System Division to put it in shape. We have done a lot, and we get the benefit. As you know, when you have set up a business and you grow and you get the productivity improvements, it pays off. I personally don't forecast. I don't make a forecast. We make a forecast for all of it. We know what's happening, but I don't sit and do a forecast for the businesses. Then you have a mix element, and then the mix, since we don't have so much backlog, can move around. I would expect the margin to be a bit lower, set aside the price, because of the mix was extremely rich in Q2. It was a very favorable mix.
Again, I've been wrong a couple of quarters, and I give myself that. I'm okay to be wrong on that because I don't want to sit and forecast margins, but it could be a little bit lower, and then you have a transfer price effect, but you also have more pricing coming out still. You shouldn't expect it to keep going up like this.
Okay. broadly saying more stable, plus minus. I guess that's what you are hinting. Okay. The second question goes to the Insulation business, where as your slide showed that the EBIT margin is down versus Q2 2019. You also mentioned, I think Kim mentioned that the pricing impact was quite limited in Q2, and you have solid volume growth and favorable pricing environment.
Yeah.
Why is it actually down?
Yeah. It's exactly what we said. That you have a couple of things. You have inflation that went from zero to terrible in a matter of a few weeks for us in Q2, and they carry that. We have productivity improvements, fixed cost improvements, and our lean cost reductions in the factory that compensate a fair amount, but not all of it. The net is that we have compensated a lot of the inflation through other actions, but not all of it, and that's why you see it down.
Sure. Yes, that I can understand. Just giving this significant volume growth should give you better possibility in the-
Yeah. There is also another factor. When we sell more to system division, we see lower margin.
Okay. That's also part of the reason?
That's a transfer price cost plus scheme. We are super happy to do it, and we put priority to it because the total margin is fantastic. Some of our operational entities have had a very big growth on internal supply, so they look a little bit worse on the margin. The way we look at it's a mix issue in the insulation business. We separate it and we see, how did we do on the external business? How did we do on the internal? We judge the managers on that, because we still really want all the internal tons to go to system division, so they turn it into system. That's what you see. My view is we are on track with the pricing. It takes two quarters to get up.
Q4, we should be perfectly balanced to have worked that out of the way. We should be, in my mind, quite proud of what we delivered on the bottom line in Q4 in spite of all these cost increases and challenges. I'm happy with that future.
Yeah. One thing is obviously the margin, but also in the absolute number, the growth is not that substantial given the volume growth. I guess I have asked my two questions now.
Yeah. Okay. Thanks, Claus.
Thank you. Our next question comes from the line of Manish Beria of Societe Generale. Please go ahead. Your line is open.
Hi there. I have two question. I will ask the question one by one. The first question is that you said pricing is up moderately. I calculate, it seems to me the pricing is only up half percentage point into Q21. First, is this correct? Also within your guidance of 17%, the comment that you made, more pricing in second half, it seems to me in the 17% guidance, something like 13% will be volume and 4% is price. Is this the right way to look at it?
I would love to answer, but we don't answer to that granularity. Kim has the spreadsheet, of course, but we don't comment to that level. There will be more pricing in the second half-year than in the first half-year. In Q4, inflation raw material increases, I want that balanced out with the pricing.
Mm-hmm. Okay. The pricing that is 0.5%, if you just quantify instead of moderately up, is it half percentage point in Q21, the pricing impact?
Kim?
Yeah, Manish, as Jens rightly says, we do not comment on that type of granularity. When we say that pricing has had very limited impact in the first half, it's limited both negative and positive. You can do your own assessment.
Okay. I see your point. The second one is, at the start of the year, you talked about something like EUR 15 million of startup cost. How much has this manifested in the first half of this year? Also you have talked about. Yeah?
How many questions now, Manish?
This is the second one, yeah.
Yeah, startup cost. Tim, take it from the startup. There wasn't much startup cost. The main thing is coming now in second half. Tim, say something about it.
Exactly. That's absolutely true. The main difference to last year will be the startup of Ranson. That was only starting operating here in the early part of 2nd half, i.e., in July. You will only see OpEx and depreciation coming in the 2nd half. That, of course, will have an impact. We previously talked about that the startup of Ranson and Neuburg would have slightly less than a percentage point impact, and I think it's the same thing with Ranson. You will see that clearly on depreciation coming in, and also fixed cost by just running the factory, that it does have an impact in the 2nd half on margins compared to the 1st half. We will not quantify specifically, but it's something that is between half and 1 percentage point.
Okay. If I can just squeeze in one more, like the depreciation you said will have an impact of one percentage point on margin. Of course, we have upgraded our sales number so much. If you can just quantify this one percentage point in absolute terms. Because last time when you said it implied like EUR 40 million higher depreciation cost versus last year, from EUR 180 million to EUR 220 million-EUR 225 million depreciation. Can you just confirm how much in absolute terms the depreciation will rise this year?
No, if you have in the second half between a half and 1%, then you have anywhere between, you can say seven to.
I would say EUR 15 million. Around a EUR 10 million plus minus impact, Manish.
In the second half?
In the second half.
Okay. Thank you.
Thank you. Our last question comes from the line of Laurits Kjaergaard of ABG. Please go ahead, your line is open.
Hi, Jens. Best of luck on the BOZ later. A question from my side, which we've spoken to quite a lot of times before, is the penetration of stone wool versus your competitors. You mentioned in your report that there's competing insulation materials, where they're converting to stone wool in the market. Could you share the delta, so the price difference between, for example, the plastic competitors who's had a really difficult first half year with oil and plastic prices being extremely volatile and increasing, and then the difference to, let's say, your offering to the market?
I say it like this, before we had EPS really cheap. I don't think it's the price that drives the sub-- They have increased their prices, it's availability, I think, that has impacted a bit, and that has given more volumes. On the PIR and PUR, we have seen very significant price increases from that part. Also shortages. I think that has impacted. If they have increased their prices 10% or 20% or 25%, I don't specifically know. Clear is that from a cost competitiveness, I think we have been in a quite good position versus them. They normally come a bit cheaper than us. Now that has evened out. There is a substitution.
I think also the general shortage situation might have impacted what they focus on, and since that's 50% of the market or more, exactly what they have gone for. When I go through the numbers of those, I don't see an awful amount of organic growth. You don't see 30%, 40% organic growth. I think the shortage situation might have been the bigger impact, although price have made some impact on the progress we see. I have a feeling that most of the extra growth we have in the heavy segments are actually because stone wool competitors have not been keen to go into those projects. For example, the flat roof growth has been because other stone wool suppliers have not been keen to take scarce capacity and put into that segment. We don't have an assessment at this stage.
It's project by project, and it's just flat roof growing quite a lot. It's not extreme. I mean, ETICS is also growing really well. Very hard to quantify specifically, but they have raised prices.
Number one , wouldn't you assume that this has been very favorable for your business and perhaps?
Yeah
There's a normalization kicking in.
Yeah
perhaps already in the second half, but also next year
Yeah
where this very favorable situation is not apparent.
Yeah
Therefore that might have a little bit of pressure on your business?
Maybe if it stays on this level, that would spring back a bit, it's not a big impact on the business. We have many segments in the business, let's say flat roof would go down with 30,000 tons. It doesn't make a big difference. We would maybe go after some other business instead or keep the business. It's not so dramatic. We certainly see it on the mix, there are two factors in the flat roof segment, as you said, two segments that are a bit extraordinary. On the other hand, I think in today's market, if we wouldn't have had that business, we would have sold it somewhere else, in a richer, with a higher price, maybe in DBI, sold a bit more, pushed a little bit harder, pushed a little bit more in renovation.
What happens in a situation in this, you look at Italy, I think you can decide how hard you push in the market because you have a certain capacity in the quarter. We are ramping up, we have certain stock, it's more need to push sales in a certain segment if you don't have the tons around, that will be a delivery in December. There's still quite a lot you can do. I think that if the market activity stays on this level, I think both the volume and the pricing environment are going to be pretty good in the market. Yeah.
Just in terms of the competitive prices, you've previously said that you would rather have competitive prices versus other materials and competitors in order to increase penetration of stone wool rather than.
Yeah
perhaps just increasing your margins and increasing your earnings and cash flow.
Yeah.
Is there a tipping point somewhere where you've taken enough market share to say, "Okay, we will increase our prices and have better margins in our business"?
It's more about being in Rockwool. You see us do these things all the time. Short-term, you could have increased prices more. I could have shifted the mix, but I think it's not smart that flat roof suppliers can't get flat roof from stone wool and open up some segments to foam where they haven't been in certain markets. We take that responsibility, and you know my view on margins is I want good margins, but I honestly don't care too much about whether it's 13, 14, or 12.5%. I want to have good margin and ability to grow the business and have a sustainable progress in the business. I'm not interested in getting 15% margin and exploit the situation two quarters to get some extra money there, and then I upset every customer in the segment. We can do that.
My guys can do that if we want to do that, but we don't want to do that. We want to look at it and try to tune it so it works for our customers over quarter, year, year, and it keeps working. We don't do what we did 2007, 2008, because the recall of that was awful, and it took us years to fix. I've said that many times. That's how we like to do. It might not swing as much up, but it doesn't swing so much down either. That's what we manifest here.
Super. Thank you very much, and best of luck later. Stay safe.
Okay, thanks. The real races start tomorrow, and the final is on Saturday. Tomorrow is just practice races.
Good luck.
Okay, thanks. We look forward.
Thank you. As we have no further questions, I'll hand back to our speakers for the closing comments.
Thank you, and thank you all for joining today's earnings call. Hope to see you next week or speak to you. Bye.
Thank you very much. Bye.