Rockwool A/S (ROCK-B.CO) Earnings Call Transcript & Summary

Good day to everyone. Welcome to ROCKWOOL A/S Conference Call regarding the results for the first 9 months of 2025. My name is Kim Junge Andersen. I'm the CFO of ROCKWOOL A/S. Today, I'm pleased to present CEO, Jes Munk Hansen. [Operator Instructions] As a reminder, this conference call is being recorded. First, Jes will go through our presentation and give you an update of the results for the first 9 months and third quarter of 2025. Afterwards, we'll be ready to answer all your questions. Before I hand over to the word to Jes, I must ask you to notice Slide #2, which is a forward-looking statement. Please be aware that this presentation contains uncertainties. Now we can go to the next slide, which is Slide #3. Jes, I now hand over the word to you.

Good morning, everyone. And I'll start on Slide #3. As you all know, the construction industry is still challenged in the macro context, owing to uncertainty, geopolitical turmoil and continued hesitations in the market. We don't expect this to change in the near term. Revenue in the first 9 months increased 1% in local currencies. And acquisitions we made in October '24 contributed with a 2% increase in local currencies. So excluding acquisitions, group revenue decreased slightly. Pricing had a 1% impact in the first 9 months, an impact from inflation was thus offset by the sales price increases. The EBIT margin declined 2.1 percentage points. Overall, we think the result is acceptable given the very difficult market circumstances. Next slide is our Q3 highlights. Revenue in Q3 increased 2% in local currencies. Excluding acquisitions, group revenue growth was flat. In Q3, sales and earnings were negatively affected by a short-term sales decrease in the U.K., where large flat roof projects were canceled or postponed. In addition, a longer-than-planned production stopped, reduced available capacity in the U.K. market. At the beginning of Q4, U.K. sales were back to normal levels. In Canada, which has been hard hit by the tariff situation, the construction market is in a challenging period. Here, we don't foresee any quick recovery. On the EBIT margin, the Q3 result was affected by three main factors: the lower performance in the important and profitable U.K. market, reduced efficiency in several factories as well as a decline in operating cost leverage, and last but not least, a continued decline in the Russian business. All-in-all and in short, it was a challenging environment in Q3, but I believe we navigated it well. I will jump Slide 5 and go directly to Q3 revenue. So, Slide 6. The continued decrease in Russia had a negative impact of 2 percentage points in Q3. Excluding Russia and acquisitions, the group revenue increased 2 percentage points in the quarter, hence, 2% organic growth ex Russia. On the Insulation segment, revenue increased 3% in local currency, with strong sales performance, notably in Poland, in Romania, in Spain, in Italy and importantly, also in France. Excluding Russia, the Insulation segment revenue increased 5%. Just to repeat, acquisitions contributed with a 2% revenue growth. In the Systems segment, the 1% revenue decrease in the quarter was driven primarily by challenges in the Grodan business. Slide 7, where we'll talk about our regional revenue for the quarter. In Western Europe, there was a double-digit growth in Italy, a double-digit growth in Spain in the quarter. On the negative side, Germany declined as did U.K., as I just previously noted on the previous slide. In France, importantly, the revenue is back to a growth -- a slight growth, but a growth after several quarters with declines. And in Eastern Europe, many countries are back to real growth, including Poland and Romania. Russia continues with double-digit revenue decrease. Year-to-date, Q3, Russia accounted for around 7% of the total group revenue in reported figures. In the United States, we are also back to good growth. While, as I said before, the Canadian market is facing headwinds from the trade tensions ongoing. In Asia, revenue excluding the '24 acquisition increased slightly. However, sales in China decreased double digit. Slide #8, a few comments to our Q3 profitability. In short, EBITDA is down 11% from EUR 241 million to EUR 215 million. This results in a 2.9 percentage point lower EBITDA margin due to unfavorable country and product mix. Reduced efficiency in several factories as well as a decline in operating cost leverage also contributed to the lower EBITDA margin. The lower -- sorry, the longer-than-planned shutdown of our factory in Wales and the slowdown in the market had a EUR 5 million impact in the quarter compared to the previous forecast. And the lower sales in Canada, obviously also reduced earnings. The continued decrease in Russia had around a 1 percentage point impact on the group EBIT margin. So EBIT margins are at 15.5%, down 2.6 percentage points. Considering the global situation, again, we believe these results are acceptable, although from a very mixed performance in very different market situations. Slide #9, a little bit about the profitability by business segments. We'll talk about Insulation segment first. Looking at profitability here, EBIT margin in Insulation segment was down 2.2 percentage points compared to last year. In the Systems segment, EBIT margin decreased 1 percentage point from lower earnings in Grodan. And the Grodan business is challenged by lower volumes in the medical cannabis market and an unfavorable product mix coming from the lower-margin vegetable business. Slide #10 on our investment activities. And just in short, our biggest investments in Q3 related to the electrification of production lines in the Netherlands and in France, and what we previously have talked about the capacity expansion in Romania, as well as the large factory project in the United States. A few comments to our cash flow on Slide 11. Our net cash position we landed at EUR 100 million, of which EUR 230 million was restricted cash in Russia. Net book value of the investment in the Russian business as per the third quarter was EUR 425 million. Free cash flow decreased EUR 92 million compared to the same quarter last year, mainly from the lower earnings, a less favorable working capital development and higher investments. The negative development in working capital was mainly due to softer demand and therefore, higher inventory, including in U.K. and Russia as well as in Germany and Canada. Now let's turn our attention to the outlook for the remaining of the year. Slide #13. Q4 started as expected with a small sales growth in October. And so based on that, an underperformance in the first 9 months of '25, we maintain our full year revenue outlook that will be at level with last year in local currencies. The production-related incident in the factory in Flums, Switzerland in October will have a reported impact on EBIT of around EUR 15 million in quarter 4. And as we see it now, we expect production to be up and running again in the beginning of the first quarter, which is important to us because we need to be ready for the important Spring season. In the U.K. pipeline and quoting activities now suggest that we'll be back on track from the start of 2026. In Canada, however, we anticipate that both the Insulation and Grodan businesses will continue to be challenged. As previously announced, we forecast an EBIT margin between 14% and 15%, due to the incidents in Flumroc and the softness, especially in Canada and Russia. Our large investment projects are on track and the investment level around EUR 450 million, excluding acquisitions, for the year is maintained. We believe in the long-term demand for our products, and we remain optimistic about the future. In Europe, we continue to work at the member state level on implementation of the energy performance of buildings directive. As I must also note that so far, we have only seen limited impact on sales from the renovation wave and also don't expect much from it in the near term. We will continue investing in capacity buildup, marketing, public affairs and digitalization, supporting the anticipated growth driven by the energy efficiency agenda in Europe and our expansion in the United States. These were my introduction comments and we will now go into the Q&A session.

[Operator Instructions] Our first question comes from Kristian Tornøe with SEB.

Two questions from my side. So first of all, on your North American business, if we, sort of, go back to before the summer, you were talking about good demand, capacity constraints, potential imports from Europe. And now you made it fairly clear that demand in Canada is down, but you also state that demand in U.S. is actually up and running and good. So, I assume but you now have, sort of, available capacity, I guess, on your Toronto factory. How easy is it to use that capacity in the U.S. market? And how fast can you, sort of, compensate for that? So should we really think about your North American business or the slowdown in your North American business as temporary?

I'm not even sure if that was one or two questions, but I'll answer the North American question. Correct, U.S. is back to the growth levels that we saw before the summer, and Canada being down. So we have capacity available in our large Canadian factories that we can use in the U.S. market. And that's a model we have had for years and used for years. So the products have the certificates and everything they need to be used in the U.S. market. So that is our biggest capacity, you can say, potential. In the midterm, we do see that we need to import certain products from Europe until our new factory in Wallula is up and running. And also there, we are ready both with capacity and what it takes to import these products.

Okay. So -- but maybe just to be more specific on my question. So, obviously, we see revenue down 7%, I think it was in Q3 in North America. So, I guess what I'm after is, can the U.S. compensate for the lack of revenue in Canada and hence, North America as a region return to growth again on the short term?

In Q4 already, we see that effect, that the U.S. because of its size now can compensate at least to a certain degree for them down in Canada. So, if it continues this way, yes, then we will see a growth in totality in North America again.

Okay. That's very clear. And then my second question is just your comment on reduced efficiency in several factories. Can you elaborate what has driven this and whether this is temporary or something we should be worried about?

It is temporary. We have a lot of projects going on and also some maintenance projects, we've decided to pull forward and they have affected our factory efficiencies. Then of course, there are some factories where we have lower capacity utilization. So the absorption degree is lower, but it's mainly from the first factor.

Okay. But when is efficiency back to normal then?

That's too specific. Then I have to go down on factory level because they are really projects by projects. Also some of our conversion projects are affecting efficiencies because we have to take the factories off-line when we install equipment. So it becomes very detailed. I was just -- my colleague was just calculating the North American or trying to come with an estimate, and we do see some -- a single-digit growth in North America in quarter 4 already.

[Operator Instructions] Our next question comes from the line of Anna Schumacher with BNP Paribas.

I have two. So firstly, on margins. If I take the midpoint of the new guide, an add back of EUR 15 million expense expected in Q4 for the Switzerland incident. If my math is correct, it suggests the Q4 EBIT margin decline of over 4 percentage points, which is quite a step down versus what we've seen in Q3 and Q2. Does this mean that your new full year guide is on the conservative side? Or are you expecting a worsening of conditions in Q4? And secondly, on Eastern and Southern Europe, where you mentioned pockets of good growth, what's driving this? Like is it new builds, renovation, new channels? And how repeatable business is this in 2020?

Just to the fourth quarter. The fourth quarter is always particularly December, our absolute slowest quarter and month. So that is more a year-to-year effect we see again and again. East Europe, it's right. We have some very strong market developments in Poland, in Romania. And what drives that? Poland is really the flat roof business has come back for us. We did small tactical price adjustments in the Polish market, and now see a very positive volume effect from that. And in Romania, it's the story that we've talked about for a long time now that Romania has adapted a new -- and it is a new fire regulation on buildings, but also this new EPBD programs, Romania is one of the first countries really to put that into action.

So, on the third question, I understand the margin is typically lower in Q4. But if I math is correct, it suggests that the year-on-year change in Q4 is bigger, like the step down is bigger in Q4 versus step down that we've seen in Q2 and Q3. In that because end markets are worsening or just slightly conservative guidance?

Yes. Anna, it's a very realistic guidance. We have most of the Flumroc, one-off expenses will be in Q4 and also continued, as I said, slowdown in Canada and Russia will impact the Q4 earnings. So there's nothing really unusual in our understanding of the market dynamics itself. They are unchanged compared to Q3.

Your next question comes from Claus Almer with Nordea.

Also a few questions from my side. So more to this Q4 implicit guidance. So I'll try to make an implicit Q4 EBIT guidance. And if you try to adjust for Russia and Canada, as you mentioned in the report, and obviously, also the issues in Flums. I'm still getting to an EBIT decline year-over-year around 10%, if you are at the midpoint of the guidance. This maybe looks a bit strange given that U.S. is growing and you have Eastern Europe and so on. So maybe a little bit more color to why you see a lower, this quarter, underlying EBIT? That would be the first one.

Thank you, Claus. As mentioned here, besides the -- you can say, the one-off that we've already mentioned in the report, I see this as a normal Q4. There is nothing dramatic changes in neither our pricing points or inflation. We do have a few -- as always, at the year-end, a few reviews of what else is happening around the group. And I guess we have just taken precautions that we don't end up with outside the range that we have specified.

Okay. So meaning that we should -- everything equal, you will be in the upper end of the range. Is that the normal way, I think, we should understand?

So far, we have not specified or qualified the range.

Okay. All good. Then my second question is about the CapEx. We have been talking about CapEx for a long time with these ongoing new factories being built. Given, yes, your comments about an uncertain end market, especially in some parts of the world, are you considering planning to delaying some of this CapEx or maybe even reducing the CapEx spend? That will be my second question.

We monitor it all the time. And when we talk capacity, it has to be a discussion country-by-country or region-by-region because, as you know, we are sold out in South Europe. So, we need capacity in South Europe. We're sold out more or less in North America. We sold out more or less in India. So all these places, it's fairly easy and very robust to make CapEx decisions. And of course, we then look at other places, both on capacity, but also on our energy transition, how fast we want to do it, and if the timing should be changed significantly -- sorry, slightly. But overall, we keep the very high CapEx level and investment programs, because when we model these things, we are convinced, as I said before, about the long-term demand for our products, both in Europe and North America. So already now, I can foreshadow that next year's CapEx will be higher than this year.

The next question comes from Chase Coughlan with Kempen.

Maybe on the topic of CapEx. So of course, you maintained the EUR 450 million guidance for this year. I heard you just say that next year should be even higher than that. Can you provide maybe how much higher exactly? Or could you provide maybe a normalized percentage of sales CapEx figure just for the midterm? Just almost from a modeling standpoint, that would be very useful.

We'll come back with that in February, more guidance on those numbers.

All right. And then a second question. I know it's quite difficult to talk about the Russian business. And you mentioned in the press release, it's down double digit from a revenue perspective, and you don't feel there's much, let's say, improvement in the near term there. Can you share any of the insights that you're hearing from the local management? Is that expected to even worsen maybe in Q4? Or any kind of color would be extremely helpful.

No, unfortunately not because I don't talk to the Russian management. I have in my tenure as CEO, never had a conversation with them. So, I have no further insights than you have into what's happening in Russia.

Your next question comes from Yassine Touahri with On Field Investment Research.

So, two questions. The first is on the margin guidance that you're suggesting for Q4. So, I think you -- in order to achieve the margin of 14% to 15% for the year, it suggests that you're expecting a margin in Q4 of between 9% and 13%. And I understand that there is an impact -- there could be a negative impact of margin of maybe 1.5% from a one-off. So it suggests that the margin excluding one-offs that you're guiding for in Q4 is 11% to 15% approximately. And my question is like, this 11% to 15% that you're expecting in Q4, is it the new normal for Rockwool? Is it -- should we start -- should we think about this range when we're trying to forecast 2026? And my second question is like, when we look at Russia, I think, you're giving a number for Russia on the margin, excluding Russia and Russia as a percentage of sales. And when I do the math, it suggests that Russia was approximately 14% of your EBIT with a bit more than EUR 60 million of contribution in the 9 months and with a margin of 30%. Is it correct?

Yes. We don't want to right now put more color to the Q4 than we have already done. As I said, the market development or trends are more or less the same as in Q3. And we serve sort of a little bit of the margin outlook, we reserve that for other things we're looking at right now and have to make a decision on before year-end. So there's nothing really dramatic, and I don't want to say it, because a new normal because as I said, these -- some of them are one-off, some of them are market -- adverse market developments and they can happen all the time. But there's nothing dramatic in Q4. But we are looking at a few things that might impact as a one-off in Q4. On the Russian, I think your calculations are correct.

A question on -- and I think just on the margin, it's like you're guiding on margin of 11% to 15% excluding one-off in the Q4. But I think the market is expecting margin closer to 16% in 2026. So that's a big, big difference. So, it seems dramatic, when you look at it.

As I said, Yassine, yes, we have other things that we are looking at that we have not yet completed the analysis and decision points on. So -- and that means there's a little bit of space reserved for eventualities that is coming in Q4, also kind of a non-recurrent one-off things.