Rockwool A/S (ROCKB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the ROCKWOOL ESG Investor Call. Today, I am pleased to present CFO, Kim Junge Andersen; SVP, Group Marketing, Communications and Public Affairs, Mirella Vitale; Group Sustainability Director, Anthony Abbotts. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the presentation over to your host. Please begin.

Thank you very much. Hello, everybody. So this will be our fifth ESG call today, so a year after our first ESG call back in September 2019. Next slide. Today, the topic is TCFD, so our disclosures relating to climate-related issues. Next slide. What I'll do is to walk through a little bit on what TCFD is. I'm sure many of you are aware of what it is, the governance around it, and then dig a little bit deeper into what our key material climate risks and climate opportunities are. We will talk a little bit about our taxonomy eligibility. And then Mirella will take over and talk about the opportunities related to the EU Renovation Wave. Next slide. So if we start with the background, the Task Force on Climate-Related Financial Disclosures created by the Financial Stability Board back in 2015 to develop consistent climate-related financial risk disclosures for the use for companies, banks, investors, et cetera. As of February 2020, there was support for TCFD from over 1,000 organizations, representing a market capitalization of over $12 trillion. And ROCKWOOL has publicly supported the Task Force on Climate-Related Financial Disclosures' recommendations since 2019, and we comprehensively report in accordance with TCFD through the Climate Disclosure Project. Next slide. All climate-related issues at ROCKWOOL are overseen by the Executive Board headed by the Board Chair. A wide array of climate-related issues are addressed. For example, the Board monitors progress against goals and targets as well as reviewing and guiding strategy and risk management for addressing climate-related issues. Managing the risk process is part of the CFO's area of responsibility and includes providing regular updates to the Audit Committee and the Board of Directors. Next slide. We have identified 3 material climate risks. The first one, which I'll touch on now, the regulatory; second one, technological; and the third one, physical climate risks. If we look at regulatory risks, then that particularly relates to the Emission Trading Scheme in the EU. All ROCKWOOL's European factories were included in the EU ETS Phase III. So that was in the period 2013 to '20. And in that period, we did not need to buy any additional CO2 allowances through that phase -- throughout that phase. And in the previous phase, the mineral wool sector is included in the EU carbon leakage list for the period 2020 to '30, and that reduces the risk of needing to purchase additional allowances. Our decarbonization efforts will reduce this need even further. Next slide. If we look at our second material climate risk relating to the technological process, whilst our process is energy-intensive, we're developing innovative technologies in order to significantly decarbonize, and we have talked about some of these in previous ESG calls. So examples include the installation in Norway, with the largest electrical melter producing stone wool globally, which reduces CO2 emissions by 80% compared to the conventional coke-burning furnace it will replace. In Denmark, through the development of an innovative fuel-flexible melting technology, we will achieve 70% reduction in CO2 emissions by 2030 compared to 1990. And it's important to underline there that, that 70% reduction is both in terms of absolute emissions and in terms of carbon intensity. And we are working on accelerating this plan, and you will hear more on this topic in due time. As we have mentioned on previous calls, we are exploiting the inherent recyclability of stone wool by offering reclaimed waste schemes in increasing number of countries. And on top of minimizing the use of virgin materials and the generation of waste, recycling also contributes to the reduction of CO2 emissions. This means limited end-of-life emissions as our material does not end in waste incineration clumps. Next slide. The third material climate-related risk relates to physical risks. And here, we have identified, in particular, 2 physical risks, 1 relating to flooding and 1 relating to water scarcity. If we take flooding first, our insurance company, Allianz, has assessed that the risk of flooding at the majority of our production facilities is to be highly unlikely. There is, however, a higher risk at one of our factories in Germany, which is located near a large river and to a lesser extent, at our factories in Canada, the U.S. and China. The most recent case of flooding in the group was from 2018 at our factory in Grand Forks, British Columbia, where there was limited business or financial impact. In connection with the construction of a new line in Germany, we have made extra investments to elevate the site slightly to mitigate risk of flooding on the production floor. With regards to water scarcity, 4 factories in Russia, India and Malaysia have been deemed by a third-party to be located in potentially highly or extremely highly water-stressed areas. In each case, the factory's overall water consumption has been assessed not to be materially relevant when compared to the overall availability of water in the basin where each factory is located. However, in line with the group's sustainability goal on improving water efficiency by 20% by 2030 compared to 2015, we will, of course, continue to closely monitor and drive improvements in these 4 factories. Next slide. If we turn now to climate-related opportunities, I will touch on the solutions within climate mitigation and our taxonomy eligibility. And then Mirella will take over to focus on the commercial opportunities represented by the EU's Renovation Wave. C40, a network of the world's mega cities committed to addressing climate change, has identified 3 particular challenges that cities are facing as a result of climate change. The first, more frequent and severe heat waves; the second, flooding; and the third, storms or more intensive rainfall. There's an increasing pressure on the ecological status of Europe's surface waters. A large proportion of Europe's surface water has, for example, failed to achieve good ecological status, which was otherwise an EU goal for 2020. And the current legislation such as the Water Framework Directive, the flooding directive, the Urban Waste Water Treatment Directive are therefore being increasingly seen as insufficient and unlikely to be revised as part of the Green Deal. Rockflow addresses many of these challenges. The products removes, in a controlled way, large amounts of rainfall, reducing the risk of flooding. It protects the sewage system from potential overflow, which is a major contributor of surface water contamination, and it makes the rainwater available in the cities, helping to address water shortage. Next slide. We turn to taxonomy eligibility. The EU-wide classification system or taxonomy provides businesses and investors with a common language to identify those economic activities which are considered to be environmentally sustainable. The idea of the taxonomy system is that it will enable investors to refocus their investments on more sustainable technologies and businesses. Based on our own internal assessment, we have calculated that 95% of the revenue from our insulation business is taxonomy-eligible. The insulation business represents 75% of our total revenue. With regards to CapEx, we have estimated that 85% of our total CapEx is allocated to these taxonomy-eligible products. It is important to note that taxonomy rules are still maturing and criteria for taxonomy eligibility within the categories of climate change adaptation and transition to a circular economy and protecting water resources and biodiversity have yet to be set. As 100% of our products are classified as being SDG positive, we anticipate that a large share of the remaining revenue generated from our Systems business, which represents 25% of our total revenue, will be taxonomy-eligible. Just to cover the definition of what taxonomy eligibility is, as you may or may not be aware of, there are definitions within one category relating to climate change around which products are seen to have a positive impact on climate change, and part of those criteria relate also to insulation products. And that is why we have been able to achieve such a high taxonomy-eligibility level, but happy to take additional questions on that afterwards. If we move on to the Renovation Wave, over to you, Mirella.

Yes. Thank you, Anthony. So we thought, obviously, after the communication from the President of the Commission and the State of the Nation of the EU, that we would give an update on where we are with the Renovation Wave in the EU budget. And I think you can expect over the next calls we'll go into more details, but I imagine that renovation will be a red thread and part of our communication over the next year. So if you take the -- how the budget has actually been divided, and probably most of you have this information already, but the original EU budget that was already agreed for 2021 to 2027 already held very ambitious climate action. So the EU Green Deal was not something that was new to the -- as post-coronavirus pandemic. But of course, it's positive for us and very positive for the whole of Europe to see that the focus of the additional funds that have been placed are highly focused on next-generation green recovery. So right now, we have the original approved budget of just over EUR 1 trillion, and now we have EUR 1.8 trillion that are going to be funneled into the member state. The new part of the budget, which is the Next Generation EU, which is the equivalent of the EUR 750 billion that you can see on the third column, there's a lot of discussion of where the money will come from. Ursula von der Leyen spoke about green bonds and how the money is going to be paid back. That is still under discussion. Of course, we follow that very closely. There's a discussion of implementing an EU tax on single-use plastics. And we will come back to that over the next call with more details on what that means for ROCKWOOL. Then as you already know, a part of these funds are in loans but a considerable amount of the money is also being channeled through grant, so therefore requires no direct payback from the market. One thing that hasn't clearly been understood is, as I was saying, the original budget already included a lot of green transition. So it's 30% of the total budget that is actually going to be reserved for green investments and at a minimum, 37% of the new recovery facility that is being implemented. And again, these are minimum amounts, so there's no requirement for the member states to just stick to 30% or 37%. There's also an opportunity to go for a much higher and more ambitious target. So then if we go to the next slide, of course, the first change that has already been made on the targets is that the EU has now agreed to go with a 50 55 -- with a 55% emissions target reduction. You would have heard the President speak about a letter from 170 CEOs across the world. You would have understood through our communication that ROCKWOOL was a signee of that letter. So this is something that we are supportive of and we are very much in favor of. If you look at the pie chart on the right, what we're saying here is, in order to achieve the emission reduction by 2030, the EU Commission needs to focus on certain flagship projects. And so far to date, where Europe has been lagging behind is actually the investment in building renovation and Renovation Wave. So you'll see that the new legislation talks about at least doubling the EU renovation rate, but actually, to achieve the target of the 55% reduction in emissions, we would be looking at something more in line with 3x the renovation rate that would be required. So what does it mean for ROCKWOOL? Of course, exciting to see that the Renovation Wave is a flagship project for the EU, and it has actually been called the Lighthouse Project, but we also expect to see an update on the energy efficiency directive and the energy performance of buildings directive. Because, of course, it's not renovation for the sake of renovation, but it's actually deep renovation to ensure that we are improving the overall building performance. In that sense, of course, ROCKWOOL has a task to communicate, but it's also not only about energy savings, there's multiple benefits towards deep renovation, and that is with regards to health, acoustics, moisture and, of course, fire safety, which is always a relevant topic. If we go to the next slide, then we're looking at how the money is being divided and what the time line is for this to fall into place. So whereas the money from the European Union is expected to be available from the first half of 2021 because final approval of how the money will be irrigated actually takes place in January, we already see that some countries are moving, which is also permitted by the EU Funds; where if you're already implementing actions right now that are helping the recovery and what are in line with the EU facilities, then you will be able to claim funds for actions that you've already taken since the pandemic has started. So we discussed last time that Italy has already gone in with a very ambitious renovation plan, offering 110% bonus. And then we're happy to see that France has also come out with a communication with a clear amount that is ring-fenced towards the renovation of building. And this becomes very important for us, so we would like to see rather than just high-level numbers that are dedicated to recovery, but actually seeing that there's a very specific amount of money that is ring-fenced towards the renovation of buildings. And in this sense, of course, for ROCKWOOL's point of view, so this is not a commission target, but it's a ROCKWOOL target. Seeing as the buildings account for 1/3 of all emissions in the European Union, we would believe that it would be fair to see that 1/3 of the funds are also channeled towards the renovation of the buildings themselves. The time line for this is member states can start to submit their plans already as of October, and some of them are already doing that in a very fast and efficient way, right down to the project level already. But actually, plans have to be submitted and approved and validated by the EU Commission by April '21. So in that sense, we will continue to update you as we have more information about how the different member states are participating and offering their schemes towards this project. The important thing is to say that we do believe it requires schemes. We know that renovation projects are a little bit more complex than large infrastructure projects, but we're confident, with the EU Commission's constant focus on the Renovation Wave, that it will be a positive outcome. Also important to note that there is funds dedicated to the Farm to Fork strategy, which will, of course, impact our Grodan business, but also the re-skill and up-skill project that is being implemented by the European Commission, where they specifically also mention the lack of craftsman and skilled workforce for the construction industry. So even though, again, not directly within the Renovation Wave, there are significant other projects that will impact the construction industry positively as a whole. So with that, I think we have closed our session of presentation, and we can open up for the Q&A.

[Operator Instructions] Our first question comes from the line of Laurits Kjaergaard from ABG.

Thank you, Anthony and Mirella, for the presentation. I guess my first question is where Mirella left off in terms of the great signals from the EU Commission this week relating to products, your products and deep renovations. I have to ask, though, these are many positives. Do you see any risks associated with the funding of these initiatives and also the ability of ROCKWOOL to able to deliver their products for this influx on demand, which is my first question?

Hello, it's Jens here, the CEO. I'll take this one. So I think the money is there. I don't see a big risk of that. And then, of course -- but we see one challenge along the way. So this is good news. We don't know when it's going to start to happen or how quickly because that's policy, it's practical policy, and that's a challenge. But I see basically 2 risks to just moderate this, so you don't believe all of these flow straight to ROCKWOOL. I don't want you to go away with that belief. There are 2 challenges. First of all, there is no one, no country that had been on 3x the renovation rate. And it's many buildings, it's many projects, small projects, it's mid- and small-sized contractors that do it. And to have that, all the big money that exists -- one day, someone needs to pay it back, but that's not now, to get all of that money to all these projects and to aggregate so you can allocate it in semi-big chunks and then deploy it, that is a big challenge. The other challenge is to do these projects well, to execute them well. And that's an issue about obviously using the right materials and doing quite high-quality work, but the fact that doing renovation can be challenging. For example, in France, we have seen a tremendous growth because there are 2 segments primarily, but they -- the money flows to through the right certificates, that is a very intelligent scheme. But -- and that is loft insulation, granular, small pieces of stone wool, glass wool to insulate the loft. And the other is between the basement and the ground floor, those are 2 relatively simple applications. But when you get into external wall insulation, renovating maybe artistic houses with a lot of detail, you get into those projects, and it's quite difficult. As always, when I talk about renovation to bring up the energy efficiency, you need to understand what you want to achieve. And I think there is also a need so that people that are practical, so that instead of bringing every building up to the highest, highest gold standard of energy efficiency, which you do with the new building, I think when you renovate, you need to look at how many steps in energy efficiency do you improve it, at what cost. You put the level well so that you can leverage the true constraints here, which is not the money, but execution on finding the projects. So I think some countries do this really well, and I think some countries will battle to get the practical handiwork of that plan. I hope that's moderated expectation. It's fundamentally a good direction, okay?

That's great. I think my second question will be a follow-up question then, Jens, on that very detailed explanation. You mentioned that no country has been on these 3x renovation rate. It's sort of maybe a challenge for the next 10-odd years for the EU. Could you -- I mean, is there more comfortability now with all these initiatives? Will it be enough just to pump money into the system? Or how do you see them solving this issue?

I think -- I might, of course, be wrong, on the 3%. I mean, I can't think of a country. And I don't see it in the table, but maybe there is some country that has pulled it off, but it is not easy. I mean, the rate has been 0.5% to 1%. But I think there is 1 difference now, if you look at, a, calculating energy efficiency in itself, there is no harmonized way of doing it across EU. That is difficult. And the other is to execute the projects. And then depending on the energy price, the payback is quite long. We're not talking 2, 3 years. We're talking environmental payback, climate payback and the money payback that is all acceptable, more than acceptable on the climate side, it's the biggest action we can take, but the monetary payback with energy prices is a bit longer. So I think that what's different now is that, instead of trying to sit and calculate with fine-tuned money calculation -- so it's a payback 8 years, 9.5 years, 12 years or whatever, you say sum those 3 up, damn it, we need to get it done. And I think that's the important thing that you can get out of the fine-tuned super calculations and realize. If we renovate 90,000 homes in this country per year, and we reach roughly this improvement, it's going to have this CO2 effect and this energy effect. And then you get out of all the super-complicated detail, motivation of each project. And I think that's the good thing here because now you have the 55%, you have the money. And I'm sure some very clever policymakers and entrepreneurs will start to get this right in a few places. I think the conviction is key here.

Yes. And the important thing to add is that we believe that it requires national schemes. And so that is why we're working with the different member states. Obviously, the EU sets the framework, but in order to drive the project towards renovation, then it has to be managed at a national level.

Our next question comes from the line of Brijesh Siya from HSBC.

I have 2 as well. So the first one is on Green Deal and EU renovation fund. Now you talk about member states submitting their plans due in October and so. But how confident are you in terms of any of those plans being materialized in '21 or in '22? What kind of expectations do you have from -- for '21 and '22?

Yes. So of course, as Jens was saying, in order to meet the ambitious target for emissions reduction, buildings have to be considered into the national mix. So we are confident that the renovation plans are going to be executed and presented by the member states. We also see the economic value for countries to do so because of the local job creation and because of the support that it gives to the SME throughout a country. And there's a lot of geographical spread in the construction industry. So for countries to implement the renovation plan, they're actually impacting in a positive way, the community at large. But of course, the challenge remains the fact that what the EU calls the shovel-ready projects are not necessarily easily accessible when we're talking in particular about residential renovation. It becomes easier when we're talking about public buildings because, of course, the cities themselves can go with very ambitious renovation plans of school, of hospitals and public structures. And we already see that they are moving in this direction. Of course, we see some preliminary plans from member states where they are very much focused on renovating hospitals and schools, et cetera. We are confident that this is going to improve. But as Jens said, are we going to reach the at least doubling rate? I think that's going to take some time before we see those figures. I hope I understood your question because there is a bit of [ latency ] from the microphone.

Yes. I mean, yes, that's more about whether you will see any growth from renovation in '21 or early '22. That's kind of the precise question I was looking for an answer. And probably the second one is on your plan for decarbonizing your own production facilities now. You talk about Denmark. You have the technology where you could reduce your carbon reduction by 70%. What's your plan in terms of rolling that out, [ post ] group wide? I know previously you talked about having clean supply as well when you're trying to move to electric melter. So any plans around? And what's your current status?

Yes. So as you know, our current plan is related to our target, 2030, of improving the carbon intensity group-wise by 20%. So that's tons -- CO2 ton product, 20% compared to 2015. And that's currently our target. And we have an interim target for 2022 of 10%, and we're on track to meet that target. At the same time, we're, of course, aware that science is -- our understanding of science is developing, and that's why we have written publicly that we are currently looking at those targets seriously and reviewing whether we need to accelerate our ambitions regarding decarbonization. And as you rightly point out, we have this fuel-flexible technology in a number of our sites, one of which is in Denmark, which has meant that we can convert to natural gas. And that has given us quite a reduction. And we're, of course, interested in looking to see how we can improve that reduction. And then, of course, we have the electrical melter in Norway, which is a pilot project. We will learn a lot from that project in being able to produce stone wool with a large electrical melter. And the learnings from that project we can use elsewhere.

Our next question comes from the line of Mikael Petersen from SEB.

Thank you for a great presentation. My question is regarding the taxonomy. You say that 95% of the insulation division is eligible. Can you try to explain what the remaining 5% is? And then in relation to the Systems division, how much of that is eligible in terms of taxonomy?

Sure. So if we take the insulation business first, 95% of our revenue from the insulation business is taxonomy-eligible. That means that we have calculated that 5% is not taxonomy-eligible. The vast majority of that 5% is from traded goods. So they're not insulation products. They're from traded goods, for example, our HECK company rendering products, that kind of thing. So they are the products that are not taxonomy-eligible. And then, of course, we have 25% of our revenue from Systems. And as I mentioned, I think, in the presentation, the criteria around these product groups is still being matured. So they're not in place yet. And therefore, it is impossible for us to know to what extent those products will be taxonomy-eligible. But of course, we are very optimistic because of the positive impacts that products like Grodan, Rockfon, Lapinus have on areas like climate, water scarcity, circularity and that kind of thing.

But Anthony, just to clarify that, an insulation path is okay.

Absolutely.

Every battery shell, we sell 100 billion packages a year or something. Every battery in there is 100% eligible.

Yes. The auxiliary...

Yes, yes, yes. Exactly, exactly.

Membranes and stuff...

And that's the key message. Does that answer your question?

Okay. Yes. Well, to me, the Systems division in terms of the Rockfon and Rockpanel, that has an insulation effect and therefore is categorized as eligible. So that was just what I was trying to get more like clarification. But if it's correctly understood that you have not included Systems division because you do not have the right guidelines for categorizing this? Or how should I understand it?

We are waiting for better guidance in order that we can make those calculations.

Okay. And then to my second question, if you know, the EUR 185 million -- EUR 185 billion per year that should be invested within building renovation, have you seen any indication of the split of that? Because it's very wide category, goes from like heating to windows to solar panels. Have you seen any split of how much this goes into insulation?

No, not yet. So the member state plans, specifically just for the Renovation Wave, will be submitted during the month of October. And there'll be this 6-month period for validation that they actually meet the right target. So we know from the schemes that have been working in France and in other countries up to date. We don't have the exact split, but we know where sort of insulation fits into the picture. With regard -- if you take the Italian system that is there right now, every building has to improve by 2 energy steps. So if you're a C, you have to go up 2 steps say. If you're a C, then you would actually have to go up to a Class A. And for most of the buildings that we see, it will require actually an action to take place on the building facade because the buildings are not insulated at all. So we don't have those numbers yet. But I think, as I said, this will be the red thread over the next year, and we'll come back with more information as it progresses.

Our next question comes from the line of Cedar Ekblom from Morgan Stanley.

I've got 2 questions on the taxonomy. These might be a little bit difficult to answer because I appreciate that the rules are still maturing, as you said. The first question is the products that you produce that you believe are going to be taxonomy-eligible are produced in facilities which are CO2-emitting. Have you had any discussions with the relevant regulators to try and understand how those 2 competing interests as it relates to climate change would actually work under the taxonomy? And then the other question is, have you had any discussions with ESG-focused investors that are invested in your stock in terms of how they are thinking the taxonomy could affect sort of access to capital for companies that have good taxonomy credentials and those that don't? I don't know if those questions are too hard to answer based on where we are in this process.

I think they're very interesting questions, Cedar. I mean, let's take the first question because I think the first question is alluding to this do no significant harm criteria. So based on the criteria today, there are certain product categories that are taxonomy-eligible. And then you have this do no significant harm criteria, which means that those products can potentially fall out of the taxonomy-eligibility categorization if they're defined as being -- doing significant harm. Our understanding is that there are no clear guidance around this definition, but we feel confident that once those rules are set, that we will be able to fulfill them. So we don't see any challenges with that. So you mentioned the fact that we're emitting CO2 emissions when we're producing our products. But of course, at the same time, we're saving over 100x the amount of CO2 emissions that are from the products that we're producing. So I don't see an issue with that, but we, of course, have to wait to see the final guidance from the EU, which I believe they're working on still now. And you probably know more about that than we do.

I can maybe say, Anthony, that the sort of construction product regulation does have the scheme to analyze the life cycle assessment of a product. So I think it's covered in a different area, where they're looking at life cycle assessment and then the environmental performance declarations, but look at the sort of end-of-life use of a product, et cetera, where all of the cradle-to-grave emissions of the products are considered. So I think that they are regulated, and they are taken into account, but not in particular within the taxonomy eligibility, which is focused on the product itself.

Absolutely. I think it's a very good point because you could say that sometimes there can be a tendency to narrowly focus the emissions coming from the manufacturing phase. But you, of course, need to look at the whole life cycle to get that good understanding of actually what that carbon impact of producing those products is. And then your second question was relating to, I think, if I interpreted correctly, how taxonomy eligibility can influence ESG funds and what stocks they include in their portfolios going forward. Is that correctly understood?

So it's that, but also just have you had any real-world discussion? So we can obviously hypothesize what this may or may not do, which is an interesting discussion in itself. But have you had any interactions with any ESG funds invested in your stock where they've actually said, we are looking at the taxonomy, we are thinking about how this could direct investments? It's just quite difficult to understand what the impact of the taxonomy could actually be. It is early days, so maybe it's too difficult question or to actually answer, yes.

I mean, of course, we are talking with many different actors in the field to try to understand this landscape because it's dynamic and it's moving. But so far, we haven't had those specific questions around taxonomy eligibility.

[Operator Instructions] Our next question comes from the line of Josefin Johansson from Handelsbanken Capital Markets.

Thank you for a good presentation. My first question relates to taxonomy again. Just when you say taxonomy-eligible, do you mean that your products are in the taxonomy? Or do you all mean that they are actually aligned with the criteria that are currently set in the draft that we have right now in the taxonomy? And then my second question relates to the emission trading system. You said that you haven't had to buy any emission rights so far. But given that the amount of free allocation is going to be reduced each year and they increase that rate as well, do you think that you will have to buy them in the coming future? And do you have any estimate of how that would impact your business?

Yes. So if we take the first question about taxonomy eligibility there, as you may be aware of, within the climate change category, there are clear thresholds for different product types to what extent they meet the taxonomy-eligibility requirements. And as we talked about earlier, the -- our insulation products, there are clear thresholds defined in the technical document from the EU. And based on those thresholds, our calculation is that the vast majority of our insulation products are taxonomy-eligible.

Okay. So then they would be aligned?

Does that answer your question on taxonomy?

Yes. Just because eligibility to me, it's just that you included and then alignment -- if you're actually proving to be meeting that threshold. But thank you, that clarifies that.

I think the question is do we meet the requirements...