Rockwool A/S (ROCKB) Earnings Call Transcript

Ladies and gentlemen, welcome to the ROCKWOOL Report on the First 9 Months of 2020. Today, I am pleased to present, CEO, Jens Birgersson; CFO, Kim Junge Andersen; and IR, Thomas Harder. [Operator Instructions] As a reminder, this conference call is being recorded. As a reminder, this conference call is being recorded. I will now turn the presentation over to your host. Please begin your meeting.

Thank you. Welcome to the conference call regarding ROCKWOOL International's results for the first 9 months of 2020. My name is Thomas Harder, I'm Director of Group Treasury and Investor Relations of ROCKWOOL International. I am here together with the CEO, Jens Birgersson; and CFO, Kim Junge Andersen. First, Jens Birgersson will go through our presentation and give you an update on the results for the first 9 months and the third quarter of 2020. Afterwards, we will be ready to answer all your good questions. Before I hand over the word to Jens Birgersson, I must ask you to notice Slide #2, which contains our forward-looking statements. Please be aware that this presentation contains uncertainties. But now we can go to the next slide, which is Slide #3. Jens Birgersson, I will now hand over the rest to you.

Okay. Thank you. Good morning, everyone. So if we start on Slide 3. So I would just like to say -- I mean, more important is Q3. But year to date, when I look at that, I want to reflect a little bit on the guidance. So we are now, year-to-date, at 12.5 points, and we have the guidance on 12% to 13%. So we just need to hang on to this. There is not so much left of the year. So we are well positioned there. And then the top line, mid-, single-digit growth with improving quarters, but also that is well in hand. And on the CapEx, also reflected a little bit on that guidance, we took it below, when I come back to the CapEx later. It has been quite a challenge to keep the investments going. In these times, we have had to go through all sorts of actions to get people to site and keep construction going. So we have suffered some delays due to that and also some increased costs for some of this. But nevertheless, the overall is that we have is a bit less CapEx than we expect. If we then turn to Slide 4. We came in about 2% down the like-for-like on the top line and -- but there was a dramatic improvement of the top line compared to Q2, up 17%. We, obviously, normally never talk in that way. But in this case, we did because it was a good proof point for having navigated Q2 and Q3 combined. And we got into Q2, and we saw the very rapid decline of the top line. We didn't take any rash actions. We took shifts off, we kept delivering, we kept people safe. Yes, we had the government lockdown also, but we kept operating. And that helped us, of course, now when the business came back up. But we have the ability also to deliver 70% higher output, so that was good. And then on the margin, it's not very much less top line. But what we saw there, obviously, travel and entertainment is down. We kept working on factory improvements, cost reductions that we normally do every year. And then on top, we have kind of the natural hedge of the energy prices and incoming materials that we have hedged, because of other sectors, other industries where demand went very low. And that also, we benefited a bit from that on our price, income and price. So that helped us to deliver really good margin. And in spite of the lower revenue, we had a flat EBIT. If we look at cash flow, nothing dramatic on it, but I would say, I'm very happy with our organization's ability to keep making sure we get paid. We did that and we haven't done any of this nonsense of holding back payments to small sub-suppliers. So it's not our way of doing it. We don't believe that it's better for us to make their life difficult to be paid. We're very diligent on paying on time to make sure that our sub-suppliers don't crash, because they typically crash. And no improvement due to that was maybe rather the opposite. And we go into Slide 5. And there, we basically can see that the Insulation business is still down. It hasn't come up to the same extent, while they had quite a good development on the System division. So I think we can move on to Slide 6 instead. So what you see here is that the Insulation division is still down. And when you look across the countries, we have all different customers in different regions. And I will come back to countries, but we have double-digit growth in some countries. For example, in the U.S., we have a U.S. growth while Canada is still in decline. So it's very patchy, and we see very different patching. On the Systems business, we see that Rockpanel, Rockfon Europe and Grodan, they go through this, relatively untouched. And then obviously, the business we have in [indiscernible] into automotive suffers a bit more. We also have had regional differences in the Rockfon, for example, North American Rockfon had, had a tougher market, just the way the market reacted. Part of that is explained by the overall U.S. trend. But that residential is in an absolute growth while the commercial side of things is not moving, and that's the segment of North America. And so we have big variance from that perspective. On the Insulation side also, many, many countries in region doing well, but there are some segments that are more challenged. If you look, for example, at Technical Insulation into oil and gas and marine, especially the oil and gas side, it is a challenged segment at the moment. Regional. Western Europe, I would say the further north you come in Europe, the better it is or with one exception, I would say. So the Nordics has performed well again, including Norway. It's not big growth, but in spite of extreme lockdown somehow, the business is holding up. And then we go into -- dipping down also towards the corner of Romania. Russia is doing pretty okay. And a country that really stands out is Italy, where we have super growth due to the super bonus and the scheme we restart. Germany, for us, quite challenged, not only from -- it's both a combination of competitive conditions with people fighting for volume in the heavy segments and also a bit on price. So Germany is still a challenged market. Russia, doing okay. Romania, Hungary, doing good. Poland, Czech, a bit slower in that area. The main currency effect is a bit of Polish zloty, but the main effect is the ruble that was weakened quite a lot. If you look into Asia, North America, U.S. doing well. India doing well. Canada is always a little bit more mellow and not reacting so quick down and up as the U.S., so still in the negative territory in Q3. And South Asia as a whole is quite challenged. Thailand, Malaysia, Singapore, have had quite an impact on construction due to lockdown. Some very, very strong measures. China, doing okay, but not really growing, not really growing, which might be a little bit of a surprise to us. We thought in the previous call that China was out of it, that it would keep growing, but haven't seen that. It's not a big business, so it's not a big impact overall, but would maybe have thought that it would have been up in growth now. Okay. Slide 8. Profitability. And what you see there, obviously, a good recovery in both businesses. EBITDA is up in spite of the lower top line. And I mentioned those factors before. And the EBIT margin is up also. And we have, due to that some of our CapEx project are a little bit delayed due to the challenges for the corona, also some depreciations haven't come in there. But in terms of cash margin, the EBITDA, that's all good and [indiscernible]. Slide -- what was the next one? 9. The Insulation EBIT has come up. And there, you see also some of the material costs coming in and travel and entertainment and all that, that obviously impact both the Systems division and Insulation division, but we typically, during the year, very, very seldom change transfer prices through the divisions. So that means that the under absorption, over absorption and material changes during the year. In most cases, our system will be within the insulation. And then systems score more on price and on overall volumes that we are selling basically in relation to their costs. So good development on both sides. We are happy with that. But just so you know, when you have growth on systems, you get the same leverage because that shows up on the insulation side. Investments activity. We haven't taken actions to slow anything down. We need the capacity in U.S. beyond that, our forecast now is to start up somewhere around mid next year. Several hundred people on sites still and has -- [ production ] side has progressed, but it has been a lot of challenges getting people in and out of U.S. via transit countries and guarantees and on waiting times. We also have in Norway, another project running. We are basically doing the project at the same time as the people is in some sort of quarantine and that they tell you more very [ restrictive ] on time, on sites. So challenging, but our crew is doing well at making sure of that progress. Free cash flow, I wouldn't really -- I've commented on that already. Net working capital, fine. We haven't had any defaults in payments and we are being good with some suppliers and the share buyback is continuing. And we haven't dropped into the debt either. Outlook, I have commented. Nothing dramatic. We just expanded, restricted a little bit around and that the EBIT would be from above, relatively confident there between 12% and 13%. Over to you for questions.

[Operator Instructions] Our first question comes from the line of Yves Bromehead from Exane BNP Paribas.

I hope you're all well. I heard a few coughing there, so I hope you're all safe and sound. Just a few questions for me. Firstly, I noticed in your report that you made some comments on competitive pressures in Europe. But equally speaking, when we look at your gross margin, I mean they're up quite considerably. So it doesn't really seem to imply that you've suffered from it. So I'm just trying to understand exactly what you're seeing and if you're concerned more on a forward-looking view or whether these pressures were offset by lower raw material prices. So that's my first question. My second one, is looking ahead. And I'm not necessarily trying to get your outlook for 2021, but I think we're all seeing that your raw materials are not necessarily inflating. And the substitute materials, especially on the foam side, the industry has had to raise prices quite significantly. So looking ahead, is there any reason why you wouldn't be able to improve your margins even further ahead than maybe the high range of your guidance of 13% into next year?

Yes. Okay. Let's start with the competitive pressure. And then the margins, I will hand over to Kim. So the net -- we have a slight positive net price improvement in Q3 and we have raw materials down. So from that perspective, the aggregate business is -- did fine. What we have seen, though, is that with the recent trend, if we look, for example -- and U.S. is outside of this, we don't -- the competitive pressures, we have a booming residential market in the U.S. and we are selling everything we are producing and prices are good. So -- but just as an example, in the U.S., we have seen residential really take off and the commercial segment being stuck. So basically, people don't build more car factories. Yes, Amazon is still building, but it's a big scale effect when they do it compared to the smaller player building factories on that. So you see this skewing of the business towards a bit more residential as a trend there. If we then go back to Europe, we have -- and it varies. You have neighboring countries where one is really growing and one is declining. But if you look a little bit, my prediction, without giving a guidance, just an observation, I suspect that we will have residential -- residential renovation, high-rise, multiunit, single unit, that they will have a little bit more of a boost in this because the people staying in these houses will invest in them as do it yourself. But it's also a focus on residential and also residential, energy efficiency. And then on the commercial side, and probably not hospitals, schools, that will still be going on the same. But I think in normal commercial buildings, there might be a bit more pressure. And that's typical as we are selling flat roofs and sandwich panel [ aluminum ], the material for sandwich panel and to some respect, maybe also [indiscernible]. But in that section of the heavy density products, I foresee that we will see fewer big projects. We had a lot of big projects back in '17, '18. We saw a drop-off with the exception in Tesla and Amazon, but fewer -- but more in smaller projects and generally more hesitation. And then at the same time, when I look at that, I then see capacity increase in Russia from -- no, in Poland from the Russian competitor, now have their French factory. We have Paroc coming online in 2020. That puts some capacity in the market. We might have the start-up next year in Hungary of a small competitor. And all of this is more suitable for that segment. And I think this combination means that we have seen some bidding from competitors that are quite low in this segment. So -- and that's what I reflect on that. And we have seen some of it, and we are counteracting some of it and some we haven't. But if this goes on, I will, of course, take action to preserve our market share in those segments. And that's what I'm reflecting. And you should also say the other, in light of all this, stone wool as a material -- you might see the hearings now, the Grenfell hearings in the U.K. As a material, plastics is on fire. And stone wool and glass wall is especially so more circular material. I still think we're going to see a drift over to circular natural materials. So I'm very bullish on stone wools rolling growth as such, but it has attracted our investment, and that comes at the same time where we see a little bit of a slowdown in the market and midterm. Does the renovation rate impact the commercial sector equally quick when people sit and discuss whether we should have smaller offices, that's what I tried to capture with that statement. But -- and my message is that we would have to use our Neuburg capacity and then protect our shares. Over to you.

Yes. And again, it's -- we will not talk obviously about 2021, but there's a reflection on EBIT margin this year. This year, we had anticipated a higher level of depreciation at the start of the year. We had mainly the conversion of the oven in Norway, in Moss, was planned for early this year and also, of course, the completion of the factory [ network ]. The Neuburg factory did not include any depreciation in Q3, and that is only going to take place from Q4. And similar, the Moss factory, due to corona situation has also been delayed. So there are some, you could say, some delayed, postponed depreciation from these assets that, of course, will have a full year impact next year. And next year, as Jens said, when the factory in West Virginia is completed mid next year, of course, in the second half, you also see a higher level of depreciation next year. Then there's always a question of whether the dynamics between, I think, raw material benefit here, especially in the second half of this year, how long will that continue into the new year on one side. And then on the flip side, we have lower travel and entertainment and also lower marketing activities and how will they rebound next year. On the other side, we know we have some initiatives to secure productivity in the year to come. So we'll have to weigh those things out and balance and give you our best view on that in February when we do the announcement of the annual report. That was it, Yves, from our side.

That's really helpful. Maybe if I can just add a quick follow-up. Can you give us just an indication of how much extra D&A we should expect in 2021? Just to have better understanding on the modeling side.

As I said, we will have to -- you have to be patient until February. But I mentioned the assets that is involved.

Our next question comes from the line of Kristian Johansen from Danske Bank.

So first question is along the same line on cost and specifically your raw material cost, which, as you mentioned, the inflation has been lower this year than what you originally expected. So is your fair assumption that as COVID-19 hopefully goes away, that cost inflation will come up next year? And then how does that play into the price pressure you're seeing, which does not seem COVID-19 related to the same degree? So should we expect price pressure to remain while cost inflation to go up next year? So that's the first question. The second question is regarding the EU Taxonomy. So we saw on the draft sent out on Friday that insulation products have been removed from the list. So just your view on why it has been removed. And secondly, what it means for your taxonomy eligibility.

Okay. I'll take those, Kristian. So first of all, we're going to -- we always have that in this call about next year. So last year, we sat here this time of the year, and if I would have said then that we would have COVID-19, clearing the top line for a portion of the year, that we would have all-time higher stock price indices, that we would have the biggest forest fires in Australia and U.S. ever and we would have the highest number of hurricanes, tropical storms from the hurricane season. You would have said, you are crazy. So we have just put ourselves, disciplined ourselves that we give the outlook when we get to February. And I'm really sorry about that. And your assumptions are probably as good as ours, but we'd just like to limit it to when we get there. And last year, February was too early because we didn't really know about COVID-19 even then. And it dramatically changed the year. So I'm not going to comment that very much. Do you want to add something to the material prices?

No, no. I think we have touched upon it with the question for me. So again, let's wait until February because there are so many other moving things on it.

Then on the taxonomy, I mean just again to recap for everyone around that. The taxonomy that the EU is working on, they have 6 categories. And the category -- there's one for circular economy, it hasn't been worked out, and then there is one for climate mitigation and adaptation. That means saving the planet from the climate change. If you end up in that category, that will qualify investments in that product for good purpose. So that cannot impact how much money is spent on your product when people spend money and others. So that's just a bit of background. So if you start with the physics argument about this -- so if you don't do insulation of buildings, you cannot meet the Paris goal. So the physics of it is they can't say insulation will not play a role in this. So that's just the physics of it. But then when you get into this whole concept of, I'm reading here from a sheet, I have the 2 delegated acts. The 2 delegated acts are a bunch of documents that describes this. But what has happened in there is that insulation as a specific word, has been taken out at this revision, but has included the whole area of insulation which is including as an industry and a sector. And so this is work in process. So what I -- when people then say, okay, so now we're going to take out the insulation, disqualify the Paris Agreement, I will just ask for some patience. We have people interpreting this. It is actually a good thing that is not mentioned. There is a tactic to that, but I will not go into the finer details. But fundamentally, I'm absolutely convinced that insulation will be eligible, okay? Does that answer the question, Kristian?

Yes, that was quite clear. Yes.

Our next question comes from the line of Claus Almer from Nordea.

Yes, also a question regarding the taxonomy situation. And Jens, you're right that insulation is still part of the draft paper. But I guess, the change is that you are not to meet a certain absolute criteria, but now to prove you're superior to other technologies. And given lambda is better for form this year at the least, that stone wool will be challenged by this change of wording. Is that correctly understood?

Yes. I'm not worried at all. I'm not the least worried. So insulation stacks up fantastically against other measures. It has beat wind mills and solar also from CO2 reductions. So it's super good investment from a CO2 equation. But then when you get into this, you have Scope 1, 2 and 3. And the embedded CO2 of the plastic industry is the whole airline industry, future depth of CO2. So when you start to go into the numbers and take account of circularity, you have the fire argument, longevity, and how it works in real life, stone wool stacks up excellently. And that is without legislation today. We are growing the share of the natural materials, glass wool and stone wool already. And stone wool is attracting more investment because it works, and it does the job. But when you go into this and you start to look into the melting technology of stone wool, yes, you need a little bit to take care, but it lasts, and I has a circularity to it. You see that it's a winner. It doesn't mean it will win every project. It won't win every project. All materials are needed. Personally, I think that plastic form should not be in a house, we should use plastic product things, but it is a big material too. And all of these will play a role, okay?

Right. So the link between taxonomy and the Green Deal and maybe even the Renovation Wave, how do you see that? Is there a link at all? Or...

Yes. I think there will be a link because there's such a big amount of money that you need to deploy whenever they'll start to deploy it. And therefore, I think that on the higher level, the bigger the money is, you need to allocate it by some categorization and then it gets down to hundreds of thousands of small projects. So I think that the taxonomy somehow is linked. And it's good that people understand that if you invest here, it has to follow in benefits. And I'll give an example. The fact is still, in a year, we have a factory 2 within the year of the CO2 reductions for the planet. We do net of our production emissions. So the more we produce, the better. And I think many of those things would become clearer with some of these structures. Because we also look into the whole life cycle of the thing. Products, but at the end of life, emits as much as they emit when you produce them. That's going to be more visible as this progresses.

Right. Okay. It's just coming back -- sorry about all these detailed questions because now you talked about wind turbines and so on. But just looking at insulation as such, given the things you are saying, then isn't there a risk at least that all those money will be favored by form, given the better lambda status?

No. No, I don't think so because you have -- I mean, you just have the hearings and all the high rises, schools, hospitals. You have fire regulation in many countries. Then you have the longevity of the product. And then you see now, for example, in the Nordics, where you start to look into the circularity of the product. There is no circularity in that product. So I think it's actually going the other way. I think it's going the other way, because so you can achieve...

Just continue. Sorry.

So you can achieve the insulation of the building totally, perfectly. You just need to make it a little bit thicker. I think the lambda drag race that was maybe 5, 6, 7 years back, it's not the case. You need to look at installed performance and the whole slate of benefits of the product. And that's one of the reasons why stone wool is growing. So I don't think this will come down to a simple, one-parameter lambda race. You need to look into install lifetime circularity and what it really does for the building.

I totally agree on all of that, Jens, but now only talking about taxonomy, and that seems to be quite single-factor focused. And so if you only look at that one...

Yes. And it's work in progress. Incredibly complex structure. And too early to say, will it hone in on one single factor? I doubt it will.

Okay. And then sorry, my second question, if I qualify for a second question, giving this competitive landscape as mentioned in the report, and there's also been a few questions regarding this. This is not a new message for ROCKWOOL. So the situation you are mentioning in Q3, is that different from what you have talking about in the first half of this year?

No. I've said all the time that when you look at -- first of all, we need more stone wool because it's growing as a segment and we like to at least keep our market share, keep our market share. That has been our message as the segment grows. And we have invested in that. And we have invested enough to keep the capacity share of the whole thing when you look into those investments. My message maybe here is that, when you see the shift maybe over to residential and the type of assets that come on board, you see a regional and if that -- how long that is, is hard to say because I don't know how the market will look next year. I just see it coming up because [ actually ] people switching on their capacity now in the next year, and they are starting to plan for that. And we have seen some price, but this is a regional issue. We are not talking about Russia, U.K., U.S., it's around Central Europe, Poland. That's where we see it. And it's primarily heavy densities.

And then you said you want to protect your share, which [indiscernible] message compared to past quarters, right?

Yes, yes, yes, I think I've always said that. I mean, our pricing strategy, I've said that for 5 years, haven't I?

You have said you want to be disciplined, and you don't want to compete on price at any cost. And now you're saying you want to protect your share. That's a slightly different message than past quarters, I think. Is that correct? That has a different message, right, Jens?

Different -- slightly different message maybe, compared to -- that is a slightly different situation. The assets are here now. Well, not all of them. They are coming. The plant in France has started up. There's one more coming in Poland, one in Hungary. And now we are there. And I have a market situation where in those segments, probably the demand is not growing as we expected, at least not now. So that's the situation we have. So in that respect, it's a different message because we are at a different point in time. Well, still, when you look at that expansion as a percentage capacity over, say, 4 or 5 years, I think all of that is needed. All of that stone wool will be needed.

[Operator Instructions] Our next question comes from the line of Brijesh Siya from HSBC.

I have 2 questions as well. So the first one is on the end market. You were talking about a shift towards residential. Historically, you have been saying about a 50-50 end market exposure. Could you please tell us what does the current end market split looks like? Has that shifted materially towards residential? And in relation to that, when you talk about this market shift and as well as the raw material price evolution, looking ahead into 2021, would you see a scenario like that played out in 2018, wherein you could gain market share from plastic form? That was obviously at the backdrop of Grenfell and combination of these high MDI prices. Are you envisaging any such kind of scenario in 2021, where you could gain market share from the plastic from producers? And my second question is on the Technical Insulation. You've been saying that the market is understandably...

Let's just take the first one because it was quite a -- let's just take the first one because it was quite a lot of things in 1 question, I think. Then you can have the second one. This -- and I know we talked about it before, this -- where do our end markets, where do our products go into residential starts, nonresidential. And we explained that many times, it is quite different region to region and market to market. But as Jens said, we do see sort of a general trend here in the COVID times, that the commercial investments are maybe lower than they were before COVID time, which could indicate that the nonresidential part will not grow as much as expected. But it's, again, very different region to region. So not something structurally different from what we see. And then I cannot think about 2021 right now. We're -- right now, we're just thinking about closing the year and of course, planning for the coming year. But again, Brijesh, let's come back to that in February when we make the first outlook for 2021. And now your second question.

Okay. Just on the Technical Insulation. Could you remind us how big is that in proportion to your group sales?

I'm very sorry, but we don't disclose that, the individual business unit.

I think you also asked about this. We do sort of have not really talk us right now. What we are saying these competitive situations, it's mainly between stone wool players. But as you said, yes, there are certain markets like in U.K., where the -- I think the shift from other materials into stone wool is still taking place. And the U.K. government is recently talking about strengthening the protection of high-rise buildings, lowering, you can say, the level from 18 meters to 11 meters, which, of course, would be a benefit for stone wool being the only noncombustible material that exists in the market. So those things in U.K. specifically are still happening, this shift here.

Our next question comes from the line of Laurits Kjaergaard from ABG.

A few questions from my side. The first one is in terms of Western Europe. I noticed that you don't mention France or the U.K. in either your statement or your presentation or your preliminary remarks. Could you just give a little bit of highlights there? Is it just completely flat relatively to last year? Or what's going on there?