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

Good day to everyone, and welcome to ROCKWOOL A/S Conference Call regarding the results for the first quarter of 2024. My name is Kim Andersen, I'm the CFO of ROCKWOOL A/S. Today, I'm pleased to present CEO, Jens Birgersson. [Operator Instructions] As a reminder, this conference call is being recorded. First, Jens Birgersson will go through our presentation, give you an update on the results of the first quarter 2024. Afterwards, we will be ready to answer all your good questions. Before I hand over the word to Jens Birgersson, I must ask you to notice Slide #2, which 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'll hand over the word to you.

Good day. With the microphone on this time. Good day, good morning, everyone. Looking at the numbers for this quarter, we started off in January with maybe the first 2 weeks, a little bit -- a little bit slow. You never know what happens in January. But as the quarter progressed, business picked up and turned quite strong. There was quite a big mix shift. We have very little residential business. We see very little activity still on the residential side. But on the heavy densities, the nonresidential and [indiscernible] flat roofs, sandwich panel, basically everything going in the industrial segment that -- that's started to grow. And I'm very happy with that top line. And considering that last year, we kind of held back on resources. We have trimmed a bit of cost, but not too much. When that growth came, that together with a price level that was stable, that turned into a nice and profitable quarter. In terms of volume due to the shift from overweight on the heavy densities, we actually have a double-digit volume growth in there compared to last year, again, comparing with the relatively easy comparable. Move to slide -- take Slide 4, please. Higher growth in the Insulation business. So we have 9%. Again, bearing in mind that there was quite a hefty winter in some areas, especially Eastern Europe last year, Q1. On the system business side, we see a decline, but that's picking up. We believe that systems will get back into growth territory from now onwards. So it's looking better, especially Rockfon had a very slow start of the year, but it's looking better now. Go to Slide 5. Regional sales development. Everything pretty slow invest in Europe, should be said that Germany had quite good growth. And it has recovered a little bit. It's still on a low level, but -- and it's not a double-digit growth, but it started to grow and -- but it was so extremely low for us last year. So -- but that's a positive. All the other countries are around the CRO, no particular good news anywhere. But there is a solid business and possibly a trend of improvement in some of the Western European market. Eastern Europe then, there is a broad-based growth, volume and top line. And to sum it up, I think there is only one country where we didn't grow, all the others grow and a lot of countries that grow double digits. So that's good. I think that fits with this, we try to understand why is that happening? It's heavy densities, it's industrial buildings, it's nonresidential segments. And I think it has to do with the people that invest in factories and those type of buildings, they now see the end of the downturn and they have started to invest again. Nearshoring possibly impact this and planning to be ready by the time it's the business cycle is improving. So that's what drives the business. In North America and Asia, we have double-digit growth in both places. Japan, where we made the acquisition, I was there in Q1 is still a very small business, but we have very significant growth, and we're starting to get some volumes into our factories. So that's nice. It's still a small business, but it's encouraging the growth numbers we see. Slide 6. Profitability. We had slightly lower prices compared to end of last year and just slightly below Q1 last year. We're talking so basically stable prices. We see logistics, radius increase slightly. The mix impact our profitability a little bit negative but materials are lower and energy are lower. So profitability is up plus the volume growth, the big volume growth, that also adds to the profit. And we didn't need to add any much resources to produce that growth. So that goes through nicely to the bottom line. In terms of provisions, we declare provisions, most of the time we don't talk about it. But quarter last year and quarter this year is roughly neutral. So it's a margin improvement without the impact of any provision taking or restructuring, anything like that. Slide 7. Nice development in profitability on Insulation. You see the margins has improved from a bit above 10% to more than 15%, nice, and that's driven by the business I mentioned. On the Systems Division, we also had a healthy development. Last year, we were on 10.4% and now 14.2%, which is a more normal margin. So we're happy about that. Q4 '23, I just want to remind you that we had the EUR 60 million restructuring project that we booked in that quarter so that's not representative. But the System division has improved also, which is nice. Slide 8, Investment activities. We just keep investing. There are a couple of things that have happened. One is that we have started up the Flumroc plant, that was probably the main investment there. We also commissioned a new paint line for Rockpanel. And we keep doing that. So that has continued. And we haven't had any -- nothing especially notable in this. We just keep doing -- executing on the plan, and we haven't drawn back. We did also -- we see an increase, a couple of factors, our technical Insulation business, part of it due to competitors exit from the Marine business, but also a general increase in technical Insulation demand. We have also invested in Bohumin in increased capacity, and that business is growing nicely. Moving on to Slide 9. The electrical melter in Flumroc, okay, not everyone would know that, but it's in Switzerland and it's in -- that's a EUR 100 million investment. We made this acquisition and in the business plan. We made it several years back. It has been tremendous, successful. But we made a commitment to secure this location in Switzerland. And this factory is in Switzerland, for Switzerland, which is quite unusual in our sector, we have now completed that investment of EUR 100 million. It started up on the day, it's the largest electrical melter in the world and there are also another couple of extras in that plant that we have never tried before that has worked out, and it has been a beautiful project. CO2 reductions would be something like 75% with that, and we will have green energy driving that. So that's a really good project. It will also improve our ability to take back old products and do circularity of [ non-Bergen ] products. So that's good. Just to give you a little bit of feeling for this project, the total shutdown, I mean, we prepared everything and then we did a total shutdown of 5 weeks. And to get through that -- those weeks and supply the customers. In many markets, we can take in products from neighboring countries. In Switzerland, that is a little bit more difficult due to the nature of the products they prefer in that country. We had built up a strategic stock of 100,000 pallets. And it worked out really well and we kept the customer's supplied. Slide 10. Free cash flow, good as usual, net working capital is not a big issue for us. It's on a healthy level. Some of the reduction is also caused by the increase in deliveries and that we now have relatively low stocks. We are ramping up capacities. I'm not worried about being able to deliver good growth in Q2. We are ahead of the curve, and we should be able to grow more. The share buyback program is progressing as planned. And maybe we are -- I would say we are surprised, but the net -- we don't have debt against the 200 -- more than EUR 200 million surplus again, net debt free, so very healthy balance sheet position. Over to the outlook, Slide 12. We had already preannounced the outlook. We didn't change that now. So mid-single-digit, growth 50% margin, and we just maintain the CapEx forecast. So that's the outlook. And you had factored that in already in your estimates. So I think when we did the profit warning a few weeks back. Over to questions.

[Operator Instructions] Our first question comes from Casper Blom with Danske Bank.

I have 2 questions, please. The first goes to pricing. You've successfully more or less maintained pricing throughout '23 here in Q1. While we see that competitors like Kingspan and Saint-Gobain have been lowering pricing. Can you talk a little bit to the pricing dynamics in the market? And any kind of feedback that you're getting from customers on this topic? And secondly, with margins now at a higher level than we have seen historically, do you believe that there could be a situation where this could trend even higher if and then volumes bounce back to the level seen a year or 2 ago?

Okay. Thank you, Casper. So let's start with the pricing. We did -- first of all, the overall price number is the combination, obviously, of all regions. And we see different things in different regions. And we see different developments in different segments. But underlying, I would like to say inflation is still there. Yes, energy prices have come down to more normal levels and this and that, but we still have inflation in North America. We have it in Europe, and we have it in Asia. So going forward, to keep profitability [ fine ] because the inflation has not disappeared. Net, obviously, we have different pricing climate. So in North America, we have been quite careful on pricing until now. And the reason was that we got completely overwhelmed in orders and ended up with a very long delivery time. So now we have ramped up capacity and we have moved -- start to move through the backlog, get back to proper delivery times. And we have also launched a relatively substantial price increase in North America again because we don't feel we should raise prices and have lost this service to our customers. So U.S. have a positive pricing climate with also high inflation and high demand. So that goes that way. Asia, a little bit spotty. But again, in the big scheme of things doesn't impact overall numbers yet. In 5 years, I'm sure Asia will impact our numbers. But now it's not a big deal. Then we look at Europe, the tricky segment would be the residential general building installation where we're kind of walking a tight rope, but we are not dropping a lot, but we kind of adjust pricing a bit, but there is very competitive. And then you have some markets where you have projects, like midsized projects where we offer stone wool and there is complete carnage on the EPS side with very low pricing and we lose a bit of projects and we go down a bit. So -- but overall, on the heavy densities and with the demand coming now and we're gaining ground, then we increase prices. So the net of that is that I see stable pricing. But there's a lot of work in the different segments. You look at, for example, technical insulation into oil and gas, into marine, healthy demand and we pass on the cost increases. So that's the way we approach it. And our goal was always to kind of get through here. And we have always told our customers that we don't see the inflation go away. So we haven't -- and it's not going away very quickly, and therefore, I see continued small price increases. Then on the margins, Kim and I, we have this old 10%, above 10%. And we have never had a problem with being 16% or 7% because when we look at the CapEx and the massive investments and the price of the plants with inflation, I would fundamentally say that we should have a higher margin in the business. Again, higher margin is a bit of a dangerous concept because if we end up building say, 2 jumbo lines and we switch them on is several margin points in depreciation. So I think, again, in future calls, I said that last time, we should talk EBITDA margin. But I think we need a higher margin, and we should try to maintain a higher margin because with all these investments that are needed in this business. You have on the one side, the greenification with the CO2 take up, I've mentioned EUR 100 million in Switzerland, we need to charge for that. We cannot end up in businesses that don't cover themselves. So I think we need an underlying higher profit margin. Then we also have now the energy performance of buildings directive that was decided on 12th of April in the EU with very ambitious targets. And I don't see an impact in 2024, but you have now goals for 2030. You have goals for 2035. You have aspects in there on solar energy installations, which is a sweet spot for us because of the non-combustibility. You even have some guidance in there on fire safety hazards because when you install more electrification, heat pumps, PVs, batteries, recharging infrastructure, you need to be more fire-safe. And then you have all these buildings that are going to be renovated. So with that, we also see that we -- if that start to realize, we need to invest more, and therefore, I would like margins to be higher, okay? So nothing against maintaining the margins to make sure that we have a sustainable business. I hope that answered your questions, Casper.

Yes, I suppose just to, if I could sneak in one follow-up. It would be -- if there would be a margin level where you would say, okay, now it's pretty comfortable, let's try and go for more volume hunt instead of further increasing the margin.

Yes. I think we go for volume, but volume is super important. But if the volume gets restricted by capacity, it's not smart to sell out your volume at too low margins, right? So we need to build factories to cover the volume. I mean we definitely want to grow the volumes. But now we have -- we just come out of a period where it was just to navigate maintaining market shares and keep profitability of the business, but we have been seeing falling volumes. And now we come into growing volumes. So we have a different scenario. But for sure, for sure, we want the volumes to grow.

Our next question comes from Alexander Craeymeersch with Kepler Cheuvreux.

Congratulations on the nice set of results. Yes, I was just wondering on the capacity because you were already touching on that. In H2 2022, you did some capacity reversal, with unfortunate layoffs. And I think one specific item you mentioned there was a deep maintenance in the plant of Germany. Now that you mentioned that volumes are increasing and the demand that Eastern Europe and Germany is increasing. Have you already made some plans to increase capacity again restaffing or are you comfortable with the current capacity?

Yes. I mean the installed capacity is there, and we are -- look, in the U.S., we added several shifts. And we are ramping up now in line with the capacity increase. And as I said, when we did that big, when was it, 2022, in the autumn, we did the relatively big capacity take up. But that's -- so we struck earlier and then we set the volume level for the downturn. And that pretty much worked out. And also, I assume you are -- are you in -- based in Germany or no?

Based in Brussels.

Okay. A lot of [indiscernible] and all the other schemes. Now we see, for example, in Southern Germany, in Nurburg with the growth that is back from a low level. It's not healthy in Germany. It's nowhere near where it should be. Nurburg, for example, in Southern Germany is back up and running again on all lines. So we are putting in more capacity. But again, it's not -- from the level we are talking about, it's not a big problem, and we are planning that and we should be able to grow.

Okay. And then going on the capacity. My second question would be, if you could maybe give just an update in terms of budget capacity and timing of the plants in France, Romania and now also the U.S.

I hand that over to Kim.

Yes. Thank you very much. We still have a plan to go ahead to construct the factories in France and Romania to be online in the second half of 2026, cross fingers. And then, of course, the factory in Washington state in the U.S. has just been approved by the Board here lately. And we are in the planning there. We have a piece of land. We're going to do this on that. But that will only come online in 2027. So that's the [indiscernible]. So for us, the next new capacity will be most likely France and Romania here in Europe and in '27 in Washington State.

And then India.

And then India has also approved, and there will also be a 3-year period. So -- maybe -- yes, it's because it's a -- yes, but let's say, late '26 into '27 in India.

Our next question comes from Arnaud Lehmann with Bank of America.

My first -- I have 2 questions, please. My first question is on the margin. Is there any reason why you're a bit less optimistic for the margin in the second half? Are you just being a bit cautious maybe on pricing? Or is it possible that your 16%, 17% margin in the first quarter might be sustainable into Q2 and H2? That's my first question. And staying on the resi and nonresi diverging trends, clearly, quite positive trends in nonresidential demand. Could you be a bit more specific about which countries and which verticals where you are seeing this strong demand?

Okay. Thanks, Arnaud. So on the margin, when we did the outlook, we don't have backlog. So we came in and what we do, we factor in what we see into the next quarter, and then we see how the sales forecast build, but we don't have a long backlog. And therefore, we traditionally get this question after when we do a forecast because we factor in what we see. I guess a couple of months out. And for the rest, we take an assumption so that we don't come back and disappoint and don't deliver on it. The summer, we have August, for example, where France is down, and we have some other things that the margin in that period would be a bit lower, normally is. On the other hand, you have September that normally is a super strong month. So sometimes that [ wages ] are there. But I will say the following rather than trying and I don't see that there would be a dramatic thing on pricing. I haven't factored in anything like that. My intention is to keep pricing and keep working it on to price increases where we can and defend market share where we should. So I'm not too worried about that. So I wouldn't put more into other than to say that we don't have quantitative visibility into those quarters yet. We are getting deeper and deeper into it. But we know, for example, in Q2, we know pretty much that the business continues, it's growing, it's looking good. Then we come on that -- those segments. I would say, overall, the business is driven by the heavy business. For example, solar PV is pretty broad based, it's broad-based. And then you have, for example, North America, it's all types of business, residential, nonresidential. And there, we have I would say, less of -- so for example, the flat roof business in North America is not really big for us. So there, you have a broad-based uptick. Eastern Europe is exactly what you would expect: Manufacturing, logistics, data centers, all type, battery factories, you name it, some electric vehicles factories, it's all those, near shoring or just expansion of the industrial base. That drives it, and that happens in the whole of Eastern Europe. And then in Western Europe, I will say there is a bit of that coming, but I will say the fastest-growing segment is solar PV flat roofs.

Our next question comes from Brijesh Kumar with HSBC.

I have 2 as well. So starting with the first one is on the -- sorry, I lost it. But yes, I'll start with the cost one then. On cost side, what are you kind of seeing in terms of the dynamics, if you could just give us what you have hedged in pet coke in terms of pricing versus Q2 versus Q1 and I guess, previously, you were talking about cash. You hedged for Q1 as well as [indiscernible] if you can just give us a little more update about it where we are? And the second question is on the margin. I guess, many questions have already been asked for it. But if I recollect from history, you make a very good margin in your normal residential business versus flat roof. Given the mix has shifted to flat roof in Q1 versus this -- the historical numbers, when the residential business picks up, produce that [ tax ] margin has legs to go up, has the mix improves positively?

Thanks, Brijesh. Before I start, you remember that question you asked about the CO2 intensity in the last call. I checked that a little bit, and I'm going to look back and comment because we didn't answer it when you answered it. So basically, what happened is that we did improve the intensity, but what we had not done, and that was an omission. We should link that up. There were grid factors changing in Germany and France, those were the main contributors. So -- and also China, where we did, we put in electrical melting. We did all the work. But then we had not linked up the [ rexo ] those countries, especially France and Germany had a worsening grid factor mathematically that made the CO2 look worse. But when we go back and calculated it again and we match it with the regs, actually, we did improve. So we will not -- that will not happen this year. It was a mistake from our side because we did not predict that Germany would move so much to call as it did.

And it was a bit of an oversight with China, where we did do the investment in the conversion but didn't secure the [ regs ].

Yes. So we -- so for example, China, we put in an electrical melter and then we didn't do the conversion to green energy, and that actually made it worse. But in effect, we dropped the CO2 emissions with 70% or something. So that would be corrected. And then if you go back to your questions, we haven't seen residential come up. But I guess, theoretically, if you keep -- if you keep the margin on the other business and the volume and the mix effect, it's relatively significant in Q1, but it compensated for with other factors. So that's a point. I will hand over to Kim soon on energy. But if you look -- when I look at it, generally, we see a better material in cost input side, but there are some categories going in up. That's logistics, it's wages and there are certain individual materials that creep up. But on average, it's going down. Maybe Kim, you can throw some light on that.

I think that we have told you before, yes, that we had this favorable deal on the coke for the first quarter. And that, for sure, is one of the energy cost that is going up. I think gas prices, electricity prices will be more stable for the remaining part of the year, but coke prices for us, at least compared to Q1 is going up. And then you have also oil-related prices like binders, plastic wrappings are also expected to go up in price. And then within [indiscernible] set logistics and wages.

Our next question comes from Zaim Beekawa with JPMorgan.

Two for me, please. Just one on the strength of the balance sheet. Can you speak about kind of the intention in the midterm between sort of CapEx growing the business and the buybacks, do you think buybacks could be a norm going forward? And then secondly, just to dive in a little bit on France, what was kind of driving the decline there? And do you see that trend remaining for the full year?

France -- I take France and then I hand over the balance sheet to Kim. So in France, we took a very small single-digit small decline. So I would say France has been quite resilient and done much better than Germany. So I think there could be some of the schemes for energy renovation that could be individual project, but it's nothing dramatic. We are slightly, slightly down. So I would -- I would give it another quarter to see how the quarter is coming out up now. And my prediction would be when France revs up that we're going to have growth in France also coming. A little bit like we saw in the Systems division, we had a gradual -- a bit of a decline in Q1, but we see that coming back to growth. So that would be my prediction. So I would just defer that one more quarter out and see if it was a bit of a blip.

Thank you, Zaim. We also had in France, we did the price increase in Q4. So I think there was a little bit of prebuying into anyway. On the balance sheet, the Board has decided this year to propose this EUR 160 million share buyback. And they did that, obviously looking at our own investment needs. And it's not something they will do on a regular basis, but it's for sure that -- now it's the second time the Board is doing it in also in our time. So it's definitely something that we will propose going forward in case that we can see there is excess cash in the business to do this mix of a continued sort of stable, progressive dividend and then supplement that with one-off share buyback.

Our next question comes from Kristian Tornoe with SEB.

Two questions from me. Firstly, just on price actions. So in the announcement when you upgraded your guidance, you sort of reflect that [indiscernible] you will take price actions. You've already mentioned that you've raised prices in North America. So I just want to check where else you have recently done price increases.

Yes. Thanks, Kristian. So we have -- there are segments also in some countries, if you take technical insulation, sandwich panel, there we have raised prices. But if you -- in addition to the countries you mentioned in the Nordics and the U.K., for example, we have launched price increases. And then we have been a little bit careful in some other markets. So -- but it depends a little bit how it develops now with volumes and what happens with inflation. But our -- I'm not talking big price increases in Europe, we're talking inflationary a couple of percent, 1%, and that's the outlook. But also segments where we need to defend the market share and therefore the net at this stage, we don't factor in price effect this year basically.

Great. Understood. And then my second question goes to this investment in Flumroc, which you're highlighting. So obviously, EUR 100 million is quite a large investment. Can you just speak a bit about the financial returns or how much can you then lift the predicted earnings in the Flumroc business as a consequence of this?

Yes. Without going into numbers. So first of all, we -- to keep it a going concern and you look how long we have run it without a lot of investments, you can -- you need to look at it as an industrialist, and it's a profitable business. And yes, we will improve margins. But the case we have for that is that we make something like 8-year payback on that investment. And we are a little bit -- we accept a longer period for sustainability investment and therefore the 8 years.

Okay. And just for my understanding, so how are you then improving profitability? Is it lower cost? Or can you charge a premium for the product or...