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

Ladies and gentlemen, welcome to the ROCKWOOL AS Conference Call regarding the results for the first quarter of 2022. My name is Thomas Harder, I'm Director of Group Treasury and Investor Relations of ROCKWOOL A/S. Today, I'm pleased to present CEO, Jens Birgersson; and CFO, Kim Junge Andersen. 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 quarter of 2022. Afterwards, we will be ready to answer all your good questions. Before I hand over the words to Jens Birgersson, I must ask you to notice Slide #2, 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 #3. Jens Birgersson, I will now hand over the words to you.

So good morning, everyone. Just move to the quarterly highlights. To start with summing up the quarter. And this will -- generally, I'm very happy with how our local teams have taken this quarter on. It was quite challenging. And I think the outcome is quite good. Starting with the top line, 36% growth. That should be seen in light of that, there are logistic challenges, supply chain challenges, challenges to get people to the factories. On top of that, we had the Russian innovation of a Ukraine that required a lot of attention. And all these factors made a little bit more difficult to produce for many, many businesses. And we delivered that 36% growth where half is price, roughly half is price and half is volume. So I'm happy with that. And I'll come back later to in what markets, but little bit simplified. I would say, it has grown everywhere with the exception maybe of China. And again, China is less than 1% of our business. So it's not very important. Then we go to the bottom line, it takes us 5, 6 weeks, say, 6 weeks plus/minus a couple of weeks in most of our businesses to change the pricing. We have some OEM businesses with longer contracts. We have changed those contracts. But if you look at inflation impact and inflation here, I'd say, raw material cost, cost of goods sold, energy, all of it are basically production cost. Then it's quite dramatic what happened. So from fourth quarter 2021, to Q1 across the board, on average, it increased 20% and energy increased close to 40%. If we compare Q1 2021 with Q1 2022 it all increased more than 60% and energy is 2.5x up with gas taking the lead at maybe 3.5x up. But -- so what we bought for EUR 100 last year in Q1, we paid EUR 250 for today. When we did our cost forecast, remember, we are not very much hedged. When we made our cost forecast for Q1. And we decided on what prices we would have in Q1. We knew there were inflation, and we went out with quite significant price increases. But of course, we didn't predict that there would be a war. We didn't predict that there would be more or less an energy crisis and all of that. So we missed a little bit on that. That explains why we slipped down to 11% margin instead of 13% that we would normally have. And so a mess, but it's a forecast which we executed on our pricing plan. We exceeded our pricing plan a little bit. And we already have new prices launched for second quarter, and we are halfway through it. And we are executing on those also. So that's the background to that quarter. And therefore, obviously, we don't have the full operational leverage. But if you look at more than EUR 100 million of cost increases in a quarter and that we still delivered that 11%. I'm quite happy with that. And it's, of course, bigger than the year before. If we then go into sales on the segments, it's not so much to comment at that other than that Insulation did really well. And as I said, only negative growth in China, partly maybe there are some countries somewhere. But a couple of notable things is that Ukraine actually declined less than 10%. And we didn't even have an ambition to sell. We told our staff. You don't need to sell, just keep yourself safe. It's not a big business, but it's a bit surprising. Systems haven't had the same strong quarter. The reason for that is a couple of items. So basically, we have some of the businesses like Rockpanel and Rockfon doing really, really well. Then we have the business into and as a small business into car manufacturing or the automotive business, where we haven't seen much growth. And the reason is but they don't grow due to material shortages. Demand is super high, actually, as you all know. And then we have had 1 business that is impacted negatively and thus the growth on business where destocking of the supply chain in North America has impacted us quite a lot. Move to next slide, the regional sales development. Western Europe, 20% and above everywhere. And you see the countries that were particularly strong. So it was strong everywhere. In Eastern Europe, Russia is still continuing, but we expected to deteriorate the economy is getting worse but you haven't seen much of that yet in the construction activity. But -- and I think that's natural because you finish products, you have started. But we expect that business to not to start declining going forward. And then Poland, Hungary, some other markets really taking the lead in terms of growth. So all very strong performance in Eastern Europe. Going into the rest of the business, North America, Asia, both Canada and the U.S. very strong. We see maybe a certain leveling out of the Market Day on the new build. It's not quite as frantic as it was, but the demand for stone wool is very good, and we are basically selling as much as we can ramp up the capacity. And we have capacity left. It's just a matter of getting the shifts on board and the new factory in an we are not on full shifts yet it takes time to train and so we can grow more. In Asia, India stands out as a very big or not very big, but just very big growth. Also good pricing actually there. We have good business. And generally, the markets are now back after COVID with exception for China that is single-digit negative. I think also, we will see generally in some of these markets in Western and Eastern Europe that some of the commercial businesses and new build will decline. That's what we predict with all these cost increases or price increases that will probably impact the market, but that could also be a hope then that there will be a bit more labor available to do renovation and the energy efficiency improvement. And yesterday, you saw I'm sure you all read it, but REPowerEU that came out yesterday. They have the first principle and the first call they put out of 4 is to save energy. So we like that, use less, comes before everything else and the commission in the document that was issued yesterday, then increased the energy efficiency targets to 2030 from 9% to 13%, and it's also binding targets. So it's a binding energy efficiency target, which we haven't really seen before. So they upped the Fit for 55 package. Okay, move on to the cost curve. Yes, you see that natural gas is the crisis of them all. It's extreme. So energy year-on-year up 2.5x, but it's everything. And then, of course, looking forward, we also see that the inflationary pressures start to reach salaries. We have a higher salary increases here than last year. So it's kind of spreading and it's not news to you. But in terms of pricing power, we haven't had problems, we're putting the prices out. And actually, the dialogue with the customers has been very good because we announced, we have stuck to it, we have explained it, and I think we have been helped by that some other materials started already. That had a different cost structure to be impacted by different things. So they increased building material prices already Q2 last year. For example, the plastic foam insulation. So I think maybe the -- a lot of the work there on realizing something drastic is happening on the cost structures. I think our customers have seen that. On the customer side, I would say that the customers that sit with normal consumer and end customers, some of them sit in a very tight position. Now obviously, they quote on they don't guarantee prices and they raise the prices. But generally, in distribution, I think distribution has been relatively strong on passing on the prices. Move to the next -- to avoid the discussion about how much is price and mix on that. We will not go too much into the details of the mix, but it's quite a big impact in the System division, the mix effect and the price effect. But we did increase prices in Q1 over Q1 last year with a bit about 17%. And -- but margins, obviously, EBITDA leverage has not -- is not enough to compensate there. And there, I would say, the normal rule would be that you keep gross margins and preserve EBITDA margins more, but -- at the moment, we steer a little bit more towards maintaining the EBIT margin because we feel the price increases when we need to pass on basically double to the inflationary increases in absolute terms to protect that the price increases become so incredibly extreme that we kind of put somewhere in between there. But we are working back to margins, and I think we are back on the 13% EBIT margin relatively soon. Move on to Slide 8. Only thing I really want to comment here is that, first of all, more is coming. We're talking double-digit price increase or something like that already in place above what you've seen in Q1. So that's coming into play a little bit of transition time coming. And then on the Systems division, where you see that drop. Obviously, a very difficult comparable last year right after Corona, a very strong quarter, very good mix, very low cost. So the [ 17.6 ] is probably not a reference, but I would say we have about 2% on the mix. The rest is missing price on the margin difference. Now Q1 investment activities, we have kept the green part relatively -- so the green part, the green investment, 26, 25, so the same number. And there, we have like melting conversions building efficiency improvement, health and safety and then other products like waste handling, emissions, lightning, projects, other things. But we keep doing that, that's progressing. And I guess the big one we are starting up now is really the Flumroc project in Switzerland, where we're talking quite a substantial divestment that we will do. We haven't spent an awful lot yet, but it has been launched. Next slide, free cash flow. Not -- I really don't have much to say on that because the net working capital percentage is stable. And with this extreme growth, it obviously -- it always impact the seasonal cash flow. We always are negative in Q1. But with this extreme growth, obviously, I think we should be happy that we just kept roughly the same net working capital percentage. Next, yes, we have done 1 partnership here with one ocean foundation. And this obviously fits into our effort with our SailGP exercise where we get a good -- very good chance to expose our brand and be in the leading kind of race circuit that really wants to be a sustainable rate circuit. But there is also another thought about behind this partnership with One Ocean Foundation. You can Google it's a very, very serious foundation with quite academic work supported by the Bocconi University and some PhDs. It's quite a serious quantitative approach to the ocean. And we are looking into that. And the reason we feel this one is important. One of the reasons is that we feel there is a need to increase the accountability from companies for what happens in the ocean. Today, for example, if you look at all the plastic waste that goes into the ocean is explained by that is the people around 5 to 7 rivers that needs to be trained to not throw it there. But I think there is a case for that there should be greater accountability in all countries and all companies for the ocean. And this shared element of the ocean is clearly seen in the UN SDGs that very few companies have an ocean SDGs that they are driving. And we think that needs to change. And now when we have our sports undertaking here, it fits in to have a partnership like this and start to drive that because we're going to save the planet, we also need to save the ocean. And to save the ocean, we can't have it as a kind of garbage pool that no one takes responsibility for us. So it might be one day that we put -- we need to figure out our link to it, but we put the target for ourselves on how we can improve the ocean. And we will also launch some projects in that field. Next, outlook. Starting with investments. First with assumptions, we haven't assumed in this that there will be a downturn. I don't exclude the risk. We haven't seen it yet. But with this high material prices, with the war, with interest going up, you can expect that some sort of reaction would come. And we have seen that in the GDP forecast now the growth rate has been lowered from maybe 6% to 3.6% global GDP. We see China not coming out of their situation, even though they have maybe GDP 4% plus to 5%. But nevertheless, we suspect that something will happen to GDP due to all this. That said, for the construction industry, yes, new bid might decline a bit, but they also very manufacturers talking for energy efficiency, saving the climate, the 40% CO2 from buildings, the EU directors. And now from yesterday, the REPowerEU with even tougher targets where we make ourselves energy independent. So that's all good for us, but we have assumed that we won't have drop off this year. It won't be the same growth as now. We see a normalization of the volume growth because we balance -- we have a more -- a better pricing, and we also see that activity levels should not be quite as high as what we experienced in terms of demand in Q1, might also be in a certain level of hoarding in Q1. So that's the basis for the forecast. On the inflation, we have basically we keep having the inflation but we fundamentally believe that now with the prices and the fact that it won't jump up with EUR 80 million between 1 quarter to the next. I feel we have that in hand to bring the margins back maybe now going forward, we should be able to deliver around 13%. Top line then with these prices is volumes and what we've already done. We upped it to 2025, which means it's a bit higher, but it's a combination of the price and what we have seen in volumes and certain assumptions in second half of the year. And then on the investments, obviously, one impact is that we stopped. We hadn't really started to spend serious on it, but we had forecast to start spending on the Russian project. We canceled that investment, that impact. But the bigger impact on the lower CapEx outlook is that with a very high loading we have of the factories, we have reduced certain upgrades, change of equipments, so we just minimized to make sure we can produce absolutely uninterrupted if we can avoid those to absolute postponing some CapEx that we plan, smaller CapEx. Okay. That was my last comment. So with that, I hand over for questions.

[Operator Instructions] And our first question comes from the line of Yves Bromehead from Exane.

The first one is I just wanted to get a bit of a color on the volume story for the rest of the year, given your comments of increased sequential prices going forward, I would imagine that you -- as you mentioned, demand is normalizing. Are there any sort of hotspots where you expect that to be more pronounced. Are you seeing any evidence of either cancellation or delays. But also on your comment regarding renovation, I mean at the end of the day, do you think the consumer still has enough discretionary spending to pursue some of the renovation projects in countries where they need to actually tap into their own wallet. Or do you see a risk here? And my second and last question, on the CapEx front, you pulled the call on the Russian expansion. So can you maybe give us a clear guidance as to what other projects you're pursuing? And also any color on development of the French and Swedish expansion pipeline here? How is that getting along would be really helpful.

Yes. Okay. So tapering off, I -- we have taken down the volume growth, it is positive growth. We have assumed that, but not what we saw in the first quarter. So going down on single digit and no particular big markets. We have seen -- if you take, for example, the Nordics, still very high activity. But obviously, you can see now new products talk about postponing, not doing canceling. So I think there are signs of that. And I flagged that new build with this cost level probably will taper off. And then we look into renovation. I think you're absolutely right. If you -- with what's happening now with gas prices or petrol prices doubling, and that I think discretionary spending is going to be under pressure in large parts of society. So I think to get the renovation going, it's the Italian model. Otherwise, it won't really happen in this with food going up and all the rest. I absolutely think that's a risk. And therefore, I wouldn't exclude that you have a dip -- a bit of a dip after this happens. And then as a stimular and in line with the energy efficiency directive and now the REpowerEU, et cetera, that the money is there in the EU that they push it in and then how countries implement it. So I think it needs that to really take off, and therefore, definitely risk that there is a gap between those. Personally, I don't see it a big problem for us if we have a year or 1.5 years with less growth or no growth. But that might likely be the situation. Then when it comes to capacity expansions, the Swedish one, we haven't taken a go decision on yet because we had a go decision on Russia, and we have a go decision on Soissons. And in France, Soissons, we have been stuck now for a while with some permits and some hearings and some legal disputes the people. It has just taken time. But I would envision that, say, by September, we could start with groundbreaking. And then 2 years after that, say Q4 2024, we probably should be able to start to derisk. But that's dependent that we get our clearances and that we get okay to start, and we hope that we'll come here during July. Yes, I think I answered your question.

Yes, you did. Sorry, just 1 little specific question on the CapEx in Russia. Did you already commit and spend some CapEx there that is, let's say, lost for the time being? And can you bring cash back to Denmark from Russia.

So first of all, if you read our report, you come to an item with exchange rate losses deep time, there is a comment. So we have until the war started run a joint cash pool. So actually, we have the cash out of Russia up to that point and that's -- and Kim can explain that in more detail. So we sit on that cash from all of last year in the central cash pool. But on that project, we have started with some limited work and kind of design of the plant, we can take a lot of that engineering and use for the other plants. So it's not -- you don't need to worry about the right offer anything it's all already in our numbers, as you see now, the small, small impacts we had of that. But I'm not saying there weren't any, but it's just normal operations for us. We have not bought any equipment, anything like that. Should be said also that if we buy equipment, many of these equipment, we can just redirect to another plant. So no big risk or no risk there. I would say sale risk.

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

So I have 2 as well. So the first one is on your volume, if you could just give us a little more flavor about how the Q1 sets up in terms of underlying demand and how much of that is prebuying or a comp effect. And if you could give us how the current order book looks like, just to get a flavor of how the Q2 is setting off as we speak. Now the second question is on the pricing. So, you have done 17% in Q1. And now the comment you made about that the plastic foam pricing did help you. But looking at this point, how far you are -- or how much ahead of plastic foam you are or you are at level with them. So if you can give a little more color to just understand how much lever you have to raise for the price increase before any market -- this kind of things comes in the picture.

Okay. So on the volumes, I mean, you can calculate the volumes in Q1. And I'm not sure -- it's very hard to judge so shortly after quarter what was demand and what was because people started to prebuy and they were worried about future price increases. So it could -- and we try to avoid that because we don't like to overfill the supply chain. And we charged a new price for everything we delivered within the pricing period, so to say. So you can't buy today and have a delivery in 6 months and keep today's price. That's not how we work. So I think that underlying demand was lower than this double-digit volume growth we had, and that's because people predict that prices will go up. I think we are really in a market with a couple of percentage point growth. And then you have the case with the new build done in 3 quarters, 4 quarters, who knows will start to decline if this continues like this. Order book and activity, we don't have a long order book, but we have a visibility on what's happening. It is strong. Okay. And then on the pricing with foam, we don't -- I mean I can't sit and say that I have this much room left. We price here and steer towards our margins, and we look at our cost, so I can't say room left. Generally, I don't feel except for the flat roof segment in some countries it's not a main competition. With EPS, of course, they're always cheaper, but they now increase. But on the PIR and the PUR software specification work that makes the difference. And big projects might be impacted in the flat roof. But at this stage, we don't see that. We actually see that the availability of stone holders might be the constraint to that it grow even more, we have been able to deliver, but to step up and output this quickly in what is normally a low season is a little bit tough to do. So we probably could have sold a little bit more if you could deliver more, but we couldn't deliver more because we didn't expect quite this volume growth in Q1. Okay.

Our next question comes from the line of Arnaud Lehmann of Bank of America. .

Two questions on my side. Firstly, I guess, the slightly obvious question on margins. You were at 11% in the first quarter. you still confirm your full year guidance at 13%, which means you were hoping to do more than 13% in the coming quarters. So the question is, are you already back at 13% margin following the April or May price increases? And are you confident that you can exceed 13% margin in the second half of the year? That's the first question. And the second question is on your Russian operations. I believe you're one of the few companies in the sector that have decided to keep your Russian operations open and under your ownership. Are you still comfortable with this decision? And do you see any political pressure to change that? Or do you see any real risk to the ROCKWOOL brand of taking this decision.

Okay. Good question. Thank you, Arnaud. Are you in the U.S. or are you in Europe? .

I am in London.

Okay, in London. Okay. No. So on the margin, I'm not going to comment on the margins in the months now. But unless something happens in the market, something drastic, then I'm confident on the margins, okay? The margin we got in Q1 is simply the effect of that, that's the price we put out there and then the cost due to the war and in the crisis just went even higher than we expected. So if we would have known that it would have been on this level and put another price, it would have had a margin, okay? So -- and I don't think that was a good thing we did that way. It ended up that way because some of our customers, the distribution might find this relatively easy, but some other customer segment really have battled and we need to have a certain understanding of that. So I think that worked out fine. And I'm -- unless something else happen, I'm confident about the margin. And you are right that some quarters need to be on a higher margin to get to the 13%, so agreed to that. Then in terms of Russia, just to recap the arguments. We run -- your decision for Russia runs very much on what business model you have and what business you have. So you could have me as a CEO for another company where I would absolutely take the decision to step up. So it's not a principal decision. It's a decision based on where we are. And if you look at ROCKWOOL, we have been in this business now for more than 80 years. we have done a number of in-house developments. We are running plants that we design. We also have third-party plants in a way that no one else can, and we have equipment proprietary, equipment and processes, that means that we do this really, really well. And we are 4x or 5x bigger than #2 in terms of capacity in the world, but let's assume that 4x. You can't buy, it's not like a beer factory or something. You can't buy a ROCKWOOL plant. You can't get the knowledge out there. And our plants and the way we run the business is better, okay? That's our market leadership. Then we look at the business model from a perspective of how we set up where we put the factories. Local material, 95%, 92%, Systems division is slightly different, but the installation business, very local supplies on the income and material side, local people. We have no single expert in Russia. We don't run a matrix, full competence in the local team. And on average, we ship, I think the last time we put the number 300 kilometer, maybe now it's 350 kilometers. But 300 to 400 kilometer. It's local people, local business, but the key thing is that we put in our best IP, our best green technology, best everything in our factories. And that means that when we get to the conclusion on why we stay? Fundamentally 3 arguments. Today, we get the cash out of Russia still, that could change. But giving away that cash flow locally feels is wrong by losing control or giving nationalizing or selling it for ruble. Second thing is we feel is the wrong incentive to take this asset that is worth. It depends how you look at it. But if you were to -- what it cost to build or what you would get for it, if you sold it in out in the open market is billions of Danish kroner, but this is a very significant value in the asset. And then the third argument is that the IP, we don't want to give away the best green tech in stone wool that exists. We don't want to give that away. And then you could say, okay, why doesn't shut it. Our plants in Russia will not be allowed to stop. The people there can run them. It will just be on the new ownership. So for that reason, we have stayed. And that also means that when you look at Saint-Gobain, for example, [indiscernible], the French and the German competitor, they come to the same conclusion. But they because they probably have the same situation. So it's not the case that we don't have a competitor all exiting. And then finally, we haven't received any political pressure. We adhere to all the sanctions. Every sanction, now we are on sanction Package 5, 6 is being discussed, 7 is maybe moving. There could be a sanction, either in Russia or the EU sanctions may be more likely, that says that you have to drop, but you have to hand over the key, that could happen. And we live with that. And there are many cases where we could be -- we have to handover the key, but it would be wrong as we see it. So the political pressure on us is not there. But then, of course, in Denmark, you have certain newspapers and public opinion that want us to exit and the right to battle is relatively calm now, actually. On the other hand, when I sit and discuss it with customers. I explained the situation and then I said, what decision would you take or I ask an employee that take the same decision as we have taken. So we are not frozen on it, but we are convinced it's the best thing to do and our competitors are staying. There are some that are exiting, but you look at them typically very small. It's not worth the effort to stand up like we have done and explain this whole rationale if you are doing EUR 10 million, EUR 50 million in the country then just drop it and get out of there is much easier and focus on the rest of the business, okay? Is that okay answer or no?

Our next question comes from the line of Manish Beria of Societe Generale.

My first question is in your guidance, so what we have built for the remaining 9-month volume growth? So this is my first question. The second one is on what sort of price inflation we see in the cost of goods sold. So in the first quarter, I think it was something like 55% to 60%. So do you think in Q2, it moves up a little bit sequentially also Y-o-Y? The third question, I will take later.

Okay. So on the volume and the guidance, I've already answered that previously. Then if you look on the input cost inflation, we had 20% between Q1 and Q4. We are expecting the rate to decline a little bit going forward. So we don't believe it will jump 20% every quarter going forward. And yes, I think those -- you had the third question, Manish?

Yes. So in the press release, we have mentioned that the margin recovery is necessary to continue a high level of investment. So how should we think about it that due to inflation, maybe our maintenance CapEx, growth CapEx and working capital needs will be on a higher trajectory versus past in absolute euro. So in that sense, I mean, this high inflation, of course, lift up your EBIT, but doesn't necessarily mean higher free cash flow generation because of the higher investment needs. So this is how you think about, I mean, these inflation margins and investment needs?

Yes. I mean the higher investment level just to be clear on that. The drivers' energy efficiency, reducing the 40% CO2 that comes from buildings save the climate. And then we have now the REpowerEU on top energy independency. And then we have of course, all high energy prices. So long term, we said that we had another REpowerEU as an argument. On top of that, we have our rock cycle or circularity approach, where we'd also drive demand. So medium term, we believe in a good demand growth for our products. And that means that we like to sit on about 13% EBIT margin or a bit above that because we need to invest a lot to build capacity. And now -- so that's the reason. But then if you run the spreadsheet, if we have 11%, 12%, 13% or 14%, you probably don't get to different investment decisions. So it's not like it's a trigger level. But we feel that with the current climate or very high inflation on steel and all the rest is, obviously, important that we stay on a sound margin. It doesn't work that we operate the business on 5% margin, and then we build factories that now cross 30% more due to inflation. So we need to keep the margin on a pass on this. Otherwise, the sustainability is not there. But if it's 11%, 13%, 14%, 15%, that's not the key item.

And our next question comes from the line of Zaim Beekawa of JPMorgan.

Just coming back to the decrease in the CapEx guidance. Can you talk about how you think about that postponement may impact growth in H2 and indeed 2023? And second question, just on the Russian natural gas supplies. If that were to stop, how much of your business would be a direct impact? And what sort of mitigating measures could you take how easy would they be to implement?

Zaim, I hand that over to CFO because he has worked more actively with our CapEx breakdown. So Kim take that one.

Yes. Thank you very much, Zaim. We have, in the annual report mentioned a little bit about our CapEx expectations for the coming sort of midterm without sort of disclosing the specific number of years. This, as Jens said, an expectation that demand will continue to grow for our products, and we do need to invest in more capacity. Our business model is fueled by organic growth primarily and we need the capacity -- available capacity in order to grow. So we will see a CapEx amount going up in the coming years. Previously and in the annual report, we have said it will go up to a CapEx rate of up to 13%. Of course, that was before these very significant price increases, but it will be higher than the EUR 300 million, EUR 400 million that we have spent in the last few years, that's for sure. And next year, I'm sure there will be capacity projects next year that we will announce that will keep up a high CapEx level.

And the natural gas impact?

What was the question there, Zaim?

So just if the Russian natural gas supply were to stop how much of your business would see a direct impact? And what are the mitigating measures you can take within your plants and how easy are they to implement?

Absolutely direct impact. So we use gas in some other places in melting, we use it in abatement. Abatement is a fancy word for cleaning filters and things like that. And then we use it quite a lot for curing. And when you look at those processes, if the gas stops, first of all, it's obviously not all countries. And so the Russian gas was to be shut off now. There are about 5 countries that would be very severely impacted. There is this gas sharing law across Europe. We have analyzed that. There are also some assumptions on whether you belong to the industries that are being cut off or not. So for example, in 1 country, we are not on the list. We are on the list of the people of the companies that will be cut off because we are not a hospital or this and that at the same time, that says cutting off wouldn't be good because it leads to unemployment, so you will get 50%, but we can't put that in writing. So you have this type of deliberation. But if you take the worst case of that, we need -- we have about 5 countries where basically production would stop. I wouldn't bankrupt us, but it will stop. We are busy investing in a mitigation plan because we don't believe if the gas is being shut down, we believe you would go into technical recession across all of Europe. So we don't believe we need the demand. And therefore, we are working on mitigation plan that is relatively CapEx effective, where we can keep the level of production up that, that market demand, we have estimated in that situation. And the reason we don't invest in a mitigation factor for -- be able to deliver on this level is that we simply don't believe the demand will be there. And we also don't believe that, for example, replacement processes like LPG is relatively cheap to invest. But when we speak to 3, 4 suppliers on that, it's obvious that they cannot replace all the natural gas. So we have to make an assumption on what is realistic that they can supply. So we work on that. So I would just sum it up. It will have an impact. But I think the biggest, biggest impact of switching off the gas will be a very severe recession, okay.

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

Also a few questions from my side. I guess the first question goes to the very strong performance you had in Eastern Europe. Can you put more color to what was actually the main drivers behind the 70-plus percent growth in Q1? .

Yes. So if I just look at the countries, I mean, the growth rates are super high everywhere with Poland leading, Czech Republic also very high, but it's high everywhere. And it's light industry, sandwich panels, flat roofs, this whole logistic that segment, maybe some manufacturing, but it's basically light industry buildings that is driving it.

So it's more in the business segment and not the private houses, renovation of houses.

That's right.

And compared to -- sorry?

That is right.

Okay. And then so compared to Q4, for instance, have you seen any -- why this drastic change come from last year?

We have seen this happen in Eastern Europe all the time, basically. But it was very good activity in Q4. It was not bad. It has been growing all the time. But we see this in Eastern Europe, it fluctuates a bit up and down. And when it's good, then it's good all over, so to say. And then the next quarter can be a little bit lower. So let's see what happens in the next. My prediction is that we're going to see strong development going forward, too. And then the question is how long this wave of this extreme growth in Eastern Europe will continue.

Okay. Then the second question goes to Russia. You said that you expect an activity level, I guess, at one point into the future. As the world looks today, how much lower do you expect or where do you see Russia to stabilize?

I can't say. I mean Russia from a top line perspective is less than 10% of our turnover. And I just look at it, the GDP is down, they are totally isolated. It's just getting worse and worse. I would just predict it will start to decline. And we have seen some of it, but it's still too early. The war started at in end of February sometime. So it's not so many weeks into it, actually. So I think it takes a while to get through. And then I also think there is a certain effect of in uncertain times, so you sit on cash, put it in something real. And putting it also into our residential house for normal people, not business, but residential also makes sense. So you see we have seen that happen also. So -- but I'm pretty sure that we will see a decline in Russia.

Okay. And then just a final question about the ASP or the price increases you have done or the industry have to implement. Do you see a capture how much you can actually raise prices is there a cap where you are, you will start to get concerned to what extent the end users will actually be accepting these price increases?

The end users are going to be a result of all materials, the whole cost for the project, not the insulation stand-alone. So I think you will see that. And I think just looking at yourself, buying a new house and suddenly pay 30% more, that will change the mind in some segments. So I think we are there and we will see it. I think it is very high. But again, I have never lived in anything like this. I've never seen this type of increases before It could maybe also have the opposite effect that people believe this will continue they will invest more. But if it tapers off now and normalize that some people say, maybe we get through it, maybe we get through it because I don't think as such that 30% or 25% or whatever it is on building material will make all this project unviable because also salaries will follow along now. We will see salary inflation. So maybe it keeps going. So I don't think it's only the stone. But I don't think for stone wool that the 30% price increase will be impossible to build because it costs 30% more. I don't believe that.

Our next question comes from the line of Yassine Touahri of On Field Investment Research.

A couple of questions. Firstly, could you give us an update of your sales breakdown between residential construction, nonresidential construction, renovation and new build that would be very helpful. Second, if it's possible, could you give us a little bit of color on what you've seen in terms of volume in April and May. Have you seen the same kind of growth as in the first quarter? Or is it a little bit slower? And then last question on -- have you seen any new measures since the beginning of the war that needs tangible measure that will boost energy renovation, for example, like a tax cut in countries like Germany, Poland, [indiscernible], France. And do you expect any of those measures to have a meaningful impact on that like 6 to 12 months?

The last question you need to recap. But if we come at renovation and new at the moment, certainly more new. We don't give these testers, but I say something at least. So there is more new than renovation. And there is a little bit more and this varies by market. Some markets are absolutely are the opposite. There is a bit more nonresidential than residential. So if you go from 50-50, 50-50, it's slanted towards more new build and more -- and specially multi-unit and industrial. And then more non-residential if you make the 4x4 matrix. The second question, what was that Yassine?

Could you guys give us a little bit of color on your volume growth in April and May versus what you experienced in the first quarter.

Okay. So we don't comment the current quarter on volume. But as said in the previous question that, obviously, we made, we published our outlook yesterday. We see continued sound volumes, but we have told you that with the price increases we do, we believe and we forecast that volume growth will be single digit and that for the rest of the year. I'm not saying in April. April might be different. But we see an activity where you're talking single-digit growth. And -- but we had this Q1 effect. I mean whether that is in April also, I don't want to talk about that. But we see over time that it should go down to lower single-digit volume growth going forward. But it's still very high activities.

Okay. Last question was about the subsidiaries that you see for insulation. Are you seeing any new schemes in your key countries coming in the next 6 to 12 months? Are you seeing, for example, a new tax cuts going for happening in France, in Germany, in the U.K., in Benelux, in Poland.

You're -- very hard to hear Yassine. But I think you talked about governmental subsidy schemes for renovation.

Yes.

Okay. We -- I mean we see some things going. We see some things progressing. So nothing dramatic has been launched like in Italy. But you have in the recovery and resilience fund, EUR 225 billion that is for renovation and other metrics to recover. That's already going. Many countries have something. And then we have now the REpowerEU on top that I just talked about today. So we don't see any dramatic changes, but the activity is not bad, but it's certainly with the announcement yesterday from the EU needs to be higher, okay?

Our next question comes from the line of Yuri Serov of Redburn.

I have just 1 question, please. You talked that -- you talked about the fact that your utilization is very high, and you're actually trying not to disrupt the production with CapEx projects because of that. Does that suggest that we cannot really grow if your utilization is very high. I mean your -- all the comments about the underlying market growth instinct. But when we model, should we just assume that your volume growth is going to progress in line with your plants launch?

So we are rounding up very high capacity utilization today but we have the seasonality of the market, so it -- the full capacity is very much determined by how much we produced during the low season. And so yes, we can grow more.

By grow more, is that 3% or 15%.

It depends with or without price, but we can grow more, let's say that, and it's more than 3%, that's for sure. One more comment on that. We started up Ranson in North America, the Ranson factory in West Virginia. Obviously, we are not on for capacity on that one yet. We still have some more capacity there. We started to drop the one in Southern Germany last year. It's not on full capacity. We have several factories where we can put on more shifts, but we can also do a lot by producing more during the low season. So it's not single digit. I mean, we can grow definitely more than 3%, right, okay? And our forecast for this year on volume growth, even though Q1 is big, we don't expect this year to be super big volume growth year. We saw that Q1 came in a little bit different for various reasons. But we think a single-digit growth of the absolute number of storm will be delivered. That's what we forecast for the year. Okay.

Yes, I understand. Q1 is the low season and you're talking single-digit growth for the rest of the year.

That's right.

But the way that it does then you're saying that you can grow by more than 3%. Well, that means that you're going to do all of that during this year. And next year, you stop growing.

We can grow next year also, yes.

A little bit?

No, we can grow next year.

And our next question comes from the line of Cedar Ekblom at Morgan Stanley.

Two follow-up questions, can you give us a percentage of revenues that are generated at assets, which explicitly run on Russian gas, so we can get an understanding of where the imminent revenue risk could be if there was a shut-off as likely as that may be? And then secondly, do we need to worry about production stability on your assets? And I ask that because you have delayed what we would call more of the sort of maintenance standard upgrade CapEx now for 2 years. These are big capital-intensive assets, do we need to worry about unexpected outages?

Yes. Okay. So we start with the last question. No, we don't mismanage our plants. Some of these investments is to change your filter, it can run 3 years or the lining of an oven, it can run another 2 years. No, you shouldn't see it on that. We take care of our plants. But some of the investments are just -- your schedule and you bundle a few from the future and now you might take a shorter stop and you do the important things and others you save for the next year. So no, it's not abusing the plants in any way. That doesn't exclude with our plans. We have probably once a year, once every second year, something breaks. Even though it's according to the maintenance schedule. So that can happen. But we don't -- we have more capacity and it's so far has never been a problem. So don't worry about that. The percentage of Russian gas is not the mitigation efforts, a very complicated country schemes it's just not possible to give that number. But I can say the following, there are about 5 countries out of the countries that we believe will be impacted if it happens, okay?

The question is not on what do you think will be impacted. But the question is, what percentage of your revenues today or assets or generated at assets that run on Russian gas. I appreciate all the comments around mitigation, which can make the real-world impact if we get a shuttle to be very different from the assets just being turned off. But it's useful to understand what your exposure is, what percentage of revenue potentially needs to get mitigated?

I don't have it presented for you, Cedar, sorry.

Our next question comes from the line of Joe George at Berenberg.

Yes. And just one for me. On the Insulation division, specifically, and some of your peers are seeing this flat volume growth year-on-year throughout Q1, and you guys are seeing you've experienced good volumes at the group level, roughly half of the 36% growth was volume. So different there. So my question is, what is the price volume split within the Insulation division specifically? And is there a feel across any certain regions that you're taking market share at all? .

Yes. I think it goes back to a little bit how -- we were pretty good last year after corona. So I need to go back to 2021. We went into last year and thought we would have a low year. And then we produced -- we had lower capacity. And then summer February, March, it was mid-March this craze started, and we were very quick to ramp up. Even it was a battle. We went up on very high volumes. So when you see this volume growth. It has to do with what your comparable is. So I don't think our competitors have a very different perspective. It's just that we had a low quarter last year. But if you look at Q4 and Q1 this year, we have kept running. We have kept running. So I think it's mostly a comparable game and some of them might be out of capacity because they have 1 factory. But we have fundamentally just keep going, and Q4 is normally a good quarter, and now we got to Q1 that is like Q4. So that's the only thing that has happened. It just keeps ramping, okay?

And our final question comes from the line of Yves Bromehead at Exane .

Just a quick follow-up. Assuming the costs actually come back down at some point towards more normal at sustainable levels what would be the strategy? Is it to hold prices constant? Or would you actually be giving back some of those, let's say, lower cost back to the customer?

Yes. It's a question that -- we haven't done surcharges. We haven't done much of that at all. We have put prices in place. And the normal situation will probably be that when it ramps up this quickly at the beginning, you get that back at the end if it goes back, right? And I should also say that we have quite a way to go before we have preserved our gross margins. And so if prices go down, it's probably because the volume in the market go down, and we would probably aim to try to then get our gross margins up again when we have less over-absorption and protect the bottom line margin. So we wouldn't like to just pass this down immediately because we still need to recover gross margin and especially if the volume goes down, we need to get back up on the gross margin.

And as we've run out of time for questions. I'll hand back to our speakers for the closing comments.

Thank you. Ladies and gentlemen, we would like to thank the equity analyst for all your good questions and the audience for listening in on today's call. We appreciate your interest in Rockwool A/S. If you have further questions, please feel free to reach out to me, Thomas Harder. You know my contact details or you may find them in the Investors section on our corporate website. Jens, Kim and I thank you for joining today's earnings call. Have a great day.