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Edited Transcript of ROCK B.CO earnings conference call or presentation 6-Feb-20 10:00am GMT

Q4 2019 Rockwool International A/S Earnings Call

Hedehusene Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Rockwool International A/S earnings conference call or presentation Thursday, February 6, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jens Birgersson

ROCKWOOL International A/S - President & CEO

* Kim Junge Andersen

ROCKWOOL International A/S - Senior VP & CFO

* Thomas Harder

ROCKWOOL International A/S - Director of Group Treasury & IR

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Conference Call Participants

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* Brijesh Kumar Siya

HSBC, Research Division - Analyst

* Kristian Tornøe Johansen

Danske Bank Markets Equity Research - Senior Analyst

* Laurits Louis Kjaergaard

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Mikael Petersen

SEB, Research Division - Analyst

* Tobias Weimann

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Thomas Harder, ROCKWOOL International A/S - Director of Group Treasury & IR [1]

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Welcome to the conference call regarding ROCKWOOL International's results for the full year of 2019. My name is Thomas Harder, I'm Director of Group Treasury and Investor Relations of ROCKWOOL International. I'm here together with CEO, Jens Birgersson; and CFO, Kim Junge Andersen.

First, Jens Birgersson will go through our presentation and give you an update on the results for the fourth quarter and full year of 2019. 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 will now hand over the words to you.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [2]

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Good morning, everyone. When we look at the last quarter, I regard it as quite uneventful. But if you look at the whole year and just start with summing that up a little bit, we stepped into 2018, we had a broad-based market growth. And we stepped into 2019 with some fear for a global downturn, an expectation of a more volatile market environment. And in spite of all that, we came out with the revenue that is the highest ever and also an EBIT and EBITDA that is the highest ever. So we are very happy with that. And why am I happy with that? Yes. On the one side, our teams have adapted capacity. We are working on pricing, segment pricing. And for example, the whole Eastern Europe, we had a quite dramatic decline, and we pulled down capacities, moved down shifts. And then we had other markets like France where kind of the climate changed, so the energy efficiency drive from the government has created very significant growth.

And then one of our large markets, Germany, for example, is turning south due to lack of maybe economic activity and also lack of [real action] on the political side on energy efficiency. So we had a real mix of things. And very few markets played out as a steady state market, continuing what we did the year before. And in spite of that, we delivered this very good margin.

If we then look at some of the, I'm not saying operational parameter, but some of the things that we in the business care about. You look at, for example, lost time incident frequency, where we come from 3.5. This is 3.5 over 2018 and now to 2.9. So we've improved the safety. We did raise prices, but we have kept our focus on customers. And for the fifth year in a row, our Net Promoter Score increased. So we increased it from 43 to almost 50. So very, very high level. I'm very happy that the teams have kept working on it and for the fifth year now increased. It's just very hard to increase from this level, but we will have that vision.

And also some of the marketing and messaging around the product, we won, for example, the best B2B campaign for the 7 Strengths of Stone. I think that's very important because that frames stone wool as a unique material that is more than just an insulation. We set that framework, and we see that stone wool as a fire-resistant, circular material gaining ground, especially against the plastic [frames]. Again, we were 1 of 60 companies globally that are included in the SDG Invest portfolio of 60 companies. We are very proud of that. And in Norway, we won one of the highest environmental award for our project to reduce CO2 and modernize the Moss factory. We dropped CO2 of [85%] emissions out of production. So a very good year.

If we then look at the number for the year, I think there is 1 -- 2 aspects that stand out for the full year. First of all, that we continue this progression of the system division. Double-digit growth grow down -- I mean, good growth, good profitability development. And then also, the margin of the whole business, 13.5%. And that was caused by business mix, more system division and the -- but also the fact that some of that big project business declined a little bit. We lost some business there. And then we have kind of a richer mix. So those factors, together with what we control, costs and for the slight easing of inflation back to that 13.5%. So that's a very pleasing number.

Let's move to Slide 4. This is the quarter numbers. Nothing really to say about this other than that it was a flat quarter. It wasn't dramatic in any way. We did stop production at year-end, as we normally do. The previous year, we did produce. So it's not the fact that it's slightly below 0.6% or slightly below this year rate. It doesn't really worry me. There's no trend change or anything in the quarter. Cash flow, obviously, free cash flow down compared to the previous year due to the investments that we successfully progressed. So that's a good thing.

Moving to Slide 5. Sales growth -- insulation business slightly or flat over the year and systems double-digit. Great work in the systems division and especially [Groan] stood out with very high growth rates. I see that as an indication of -- from how the focus on efficient, I would say, efficient food production is gaining ground. And we also had very good growth in North America in our retail business, say, [Grodan]. Also, another item that stand out in system division is that our acoustic business, the ROCKFLOOR business in Europe had a very good demand, and we had good depreciation of our products. We're happy about that. And that's an improvement compared to 3, 4 years back. Now we really second year in a row that we are progressing that business. And all the other businesses performed, too.

If we then look at insulation, what does that mean that the business came out flat? We have countries where insulation is double-digit up and double-digit down and flat, I mean, the whole mix of things. So the fact that it came out on a flat is more dependent on the mix of the countries where we saw their declining market activity and they were growing market today. But again, we kept adapting the business, we kept working on the costs and the productivities. And in terms of factories, the insulation business produced everything we have, all products, also the system division products, with few exceptions on the grid side. We also reached an all-time high in operational throughput efficiencies. So metric, I don't have it, but we stepped up in spite of several countries have declining business. And that's a good grade to my operational team.

If we go into slides -- on to Slide 6. Don't really have anything to comment on that one. It's the same as it was before, no trend changes. A little bit change of seasonality of the business. The ethics on factory of business declined at the end of the year. So that growth didn't show and then the growth on business also drive a lot, but there are some other businesses that are not so strong at the end of the year. So absolutely normal Q4. We didn't have a big snow [terrain] or anything like that, but I would say due to the market condition in Europe, it took a more normal stop. We didn't produce here at Christmas and New Year because we felt we can shut down the factories and the maintenance guys can stay.

But going to the regional sales development. Western Europe, overall, plus 0.2%. No changes to the trends at all. It's the same as in every other quarter. In the Nordics, we have some markets up, some markets down. U.K., France continue, and Germany still start on quite a low level, but maybe some signals to stabilizing. Then we move into Eastern Europe. Broad-based decline across all the markets. But Russia, I guess, thanks to the sanctions, they have sorted out the economy, and it's low growth, steady market, and the dependency on kind of oil and gas has been reduced, and they do a really good job of keeping that economy going. It's not booming, but it's growing. So -- and we do well in that.

And then North America and Asia and others. North America, good double digit. And then Asia, South Asia, more unstable. It should be said that after the sanctions were eased a little -- not the sanction, the trade dispute persists, we saw quite a good Q4 in China. But obviously, with the corona business now, we're probably heading into quarter that will not be great. Again, China is not a huge market for us. We don't depend so much on that.

Profitability in Q4. I already mentioned, Slide 8, we improved EBITDA. We improved EBIT margin, and we improved it in all businesses. So we're happy about that. Mix, country mix, business mix, cost, all of it work together to deliver that.

Move to Slide 9. What I'd like to see here in both businesses, in Q3, we have a little bit of a productivity gap. We had more inflation and more difficult comparable to the previous year. But what you see in both businesses here is that the bottom line has increased with a greater percentage than the top line, especially system division. I mean, double the bottom line, profitability improvement on a double digit, almost double-digit top line, 8%, 9%. They're good going, but insulation has also done a good job, so fine.

And here, this is happening in the middle of that we manage inventories weekly. And we do capacity adjustment as the markets go up and down. If we had not stepped up on total inventory, anything, and this even though some markets have slowed down, we've been quick to draw down. Investment activities, we hit our guidance around EUR 400 million, and the execution of divestment has been good, stable, what we expected. Pleased with that.

Move on to Slide 11, latest development. Here, I don't know, 10 or 15 years back, we acquired our first factory in China. We have since acquired another site, but the Guangzhou factory, and we have had a very good business there, but the areas around the factory has been rezoned and we have high rises just across the street coming closer and closer. So we were reaching a point where -- there were wishes to: a, not having the factory quite across the street from high rises; and b, that the land would be needed. And I would only say that to complement the cooperation with the local Chinese government and also [higher up], the deal we have made to relocate the factory, which really means that we get a near full compensation to relocate the factory and build a new one and upgrade it. And we will do that to about 100 kilometers away, but it has been a very, very good cooperation with the Chinese government. And we are now building. The new factory will be upgraded and be the absolute best in China, in terms of environmental compliance and how to produce strong volume in a very environmentally friendly way. So that will be great.

Then we also closed a transaction with the acquired the [platform] business, primarily in Sweden, they supply the Nordics, but there's one factory in Sweden, very good business. So that has been closed due to that Owens Corning, still have a week or 2 before they announce. I cannot reveal the revenue of this acquisition. We wait for them. But it's not insignificant, but it's not huge. I mean, it's a 60-people business, but it's a healthy business, and we have already started integrating that in our ROCKWOOL business.

Free cash flow. I would basically say that everything hangs together. You see the net working capital ended at 9% instead of 7.4%. 9% is a normal level. 7.4% is a very low level. And the reason is basically that last year, December, we produced up through New Year's, which means the trade payables that we generate are unpaid. Here, we took the normal stop, which means a lot of the trade payables are paid before year-end, and that is the main difference between the 7.4% and the 9% you see there. So no change. I mean, I would say, the 9%, 10% net working capital, this is the normal year-end level.

Share buyback program. Basically, we proposed a dividend, DKK 32 per share. You know that you multiply with the 21 million share, you get to about DKK 94 million in dividend. But as we have discussed with many of you, our equity ratio is around 80%, and we have the cash surplus on the balance sheet also. So we have now added for the next 12 months and up to a maximum, EUR 80 million. That would then, if theory works to 1,600 share price gives some 3.7% gain, and on the 1,800, so DKK 3.3 dividend plus share buyback, provided share buyback work, too. So it's a relatively sound return from those. And we don't make any promises about the future, but we launched the program today, started, and you get a weekly update, the standard report.

Outlook for the full year, low single-digit growth in local currency. Basically, what we are saying there is just because a new decade started and also New Year, doesn't mean that I feel it's any different to what it was last year, continued volatile market, and I think the coronavirus underlined it. We can continue. I don't see a broad-based -- uptick all across, even though some markets looks more positive, others may be a bit more negative. But with our very short backlog and the fact that we are below 9%, 10% inventory, we don't know better than that. We see a continued about what we see. So that's on the top line.

And this midterm effect, green deal from the EU, whether I talk about doubling or tripling the renovation rate. Also, to push sustainable close to customer food production and create food production efficiency. And fire resilience, urban fire resiliency to increase fire norms. Even though those factors speak midterm, we have not factored in much of that. We just assume that we continue and

live in this kind of slightly positive growth mode, and we are agile and ready for that.

If we come to the EBIT margin, here, I guess, we are reaching a point, I mentioned my manager on EBIT because that makes them accountable for their investments. Investments can be sustainability investment, growth investments and maintenance investments. But maybe from your perspective now, the focus moves a little bit up to EBITDA because in the EBIT now with the margin decline, you see here, EUR 24 million comes from depreciation and noncash item. And then we have the start-up costs in Germany and Norway, and we also had the legal settlement we did in the U.S. last year that makes 2019 margin slightly higher. But anyhow, it's pretty much the same that these 2 startup effects on the legal case, apart from that, the underlying operation on margins and EBITDA and EBIT is the same, unchanged as we go into the year.

Yes. With that, I hand over to you for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Laurits Kjaergaard at ABG.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [2]

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First of all, Jens, maybe continue where you left off, the guidance of a low single-digit growth for 2020. You have some increased volume from new capacity coming in, in 2020, which you didn't have last year. And I guess what you can correct me on, you're still aiming for these 1% to 3% price increases. So given these 2 factors, I guess, that -- my question is, what's the implicit underlying decline of your existing factory footprint? Can you give any flavor to this magnitude?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [3]

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Okay. Apparently, I was muted, so I'll restart. So underlying between price increases and volumes on new factories, we don't disclose those figures. But fundamentally, on the capacity, we want to have a capacity buffer so that we can cope with, say, 3 years growth, in most places, 3, 4, 5 years growth so that we have time to invest because we believe the business, the midterm has a higher growth potential than what we indicate now. But we don't see those factors kick into this year. But then when you look at the capacity increases, they are not that dramatic in our big factory footprint. So we would use the capacity increases we have now to optimize our logistics. And then also when you look, say, Romania and Germany and the business in France, we need capacity there. So it's not bad. And then we can drop some more expensive shift.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [4]

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And also, may we go on to the EBIT margin here? You mentioned it's sort of the same level as 2019 adjusted for a couple of things in factories in Neuberg and Moss, along with, I guess, the legal case. And you also discussed the EBITDA margin. Can we get some flavor on the EBITDA impact? So these -- you mentioned startup costs and depreciation. What's the startup cost here? Okay. Can we get any flavor to the magnitude?

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [5]

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Laurits, it's Kim here. Very broad. We had approximately EUR 10 million gain in 2019, which is just shy of 0.5 percentage points. That's also a comparable number for '19. For 2020, we're going to have, as Jens mentioned, about just shy of 1 percentage points from added depreciation that comes from both from Neuberg and Romania, but also all the factories that we started off in U.K. and Poland. So that's about 1 percentage points. And then you have or just shy of that, and then you have between not up to 0.5%, but we have approximately 0.3%, 0.4% in various startup costs in -- and change [the one most.] So...

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [6]

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So in simple terms, you have the depreciation, it's fully visible. You have the legal claim that we won fully visible. And then you have tens of percentages up and down, which is just business as usual. But yes, we do start to factor it. And we are building up staff for the North American factory that will start the year after. But that's kind of normal operational on variance, plus/minus 0.5% on things we do. So -- and there, we don't go into that. But all the big items have already been disclosed in the numbers in the back.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [7]

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That was extremely clear. And then my last questions, you mentioned, I believe, it was in Q3, that you took out some limes in Trondheim in Norway and Roermond in Holland. And here, we see there's some strong operational leverage here in Q4 with delivery costs down 14% year-on-year. Can you give some flavor here on taking (inaudible)?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [8]

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Yes. I don't think I said in Q3. But on the slide, we discussed an example that when -- this we'll use an as example. As I said, we are not taking product from Trondheim to Germany anymore. It was just an example of how -- have -- what type of business because you asked about why the logistic cost not increase as much, extra warehousing and the long shipping. And that's, of course, the way we do it also now. We want to produce as much as we can as close to the factory, and we just continue to do that.

And then the individual items, generally, Southern Germany, has been a very good market due to all the economic activity, and we have capacity to meet that now. And -- but the specific details of each factory, we don't go into those. But those are examples of unusual cases that we have during the peak when we shift from Northern Norway down to Germany and maybe even Poland in our policy that we will keep customers whole. And of course now, we are back to this normal that in-country for country where a vast majority of business is within a custom [store].

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Operator [9]

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So the next question is from the line of Robert

Whitworth.

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Unidentified Analyst, [10]

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My first question, I just wanted to know, could you help us to understand how your margin guidance compares between insulation and systems? And I guess what level of normalized margins do you expect in the system division?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [11]

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We don't guide margin on that level. And it's also quite dependent on their transfer price in between the businesses, which is not a market-based pricing. So we don't guide it. We step into the year and then we'll report backwards on it. But obviously, we have -- the way you transfer price between the business, we have a steady machinery for (inaudible) tax-compliant machinery. And that is -- and what we don't guide on that. And it's also -- should also be said that all the businesses involved are could -- they are all very healthy businesses, but the margin is also different between the system division business. And we don't want to go into all that, where is the higher margin versus the lower margin.

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Unidentified Analyst, [12]

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Sorry, turning to another topic then. Is the [ETS space 4] a concern for you given, obviously, the manufacturing process is very capital intensive?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [13]

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No. No, no, it's not a big concern. So we fundamentally have -- we foresee that we will increase our sustainability investments, but it's not to optimize the trading scheme. It is to make our footprint more efficient and reduce the CO2 emissions like we did in Norway. And we have a whole program for that. And we will talk about that more as we progress with those investments, but we are working on the technologies we use, and we are also ramping up investments. It's not dramatic, but we will need to invest more on sustainability. And then hopefully, we never get into the -- having to pay for CO2. But if we don't, we don't see it as a big -- if we do, we don't see it as a big issue because we are driving it at the core, reducing the CO2 emissions.

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Operator [14]

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So the next question is from the line of Kristian Johansen.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [15]

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It's Kristian from Danske here. First question is just, I mean, if you could describe this improved operational efficiency in Q4? And to me, and correct me if I'm wrong, it seems like there is an improvement in the last quarter versus previous quarters. And therefore, my question is, how sticky is this? Is this something you can take with you into 2020?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [16]

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Yes. I mean I would say the business is set up now, for the current run rates in the markets. We went through that pain, I will say, Q2, Q3. And sometimes, you have -- if you draw down a shift, you might see the capacity go down, but you might be a bit later with getting the cost out due to delays in the process of reducing a shift. So I think at the moment, we are quite stable in the setup. You saw quite a steady state Q4, yes.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [17]

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But does that mean that if you're right, that, that growth is going to be low single digits, you should be able to run your production more efficiently in 2020 than what you did in 2019?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [18]

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In a way, there are factors that will be less efficient because we are ramping up people. Romania is fully up in terms of people, but in Southern Germany, Neuburg, we are hiring in the shifts. And then we are also starting to train the people for the North American factory. So that comes as an overlay, but underlyingly, we continue to be efficient, but we thinking every year, we aim for a couple of percentage point productivity improvement across our factories and cost savings we try every year.

And we aim for the same this year. So our goal is, obviously, not to be less efficient. But then there could be things on the raw material cost side, that could change with the quarters over the year. And as you know, we don't hedge. We just go with it. And you saw some of that in Q4. And with that will go, at the moment, I guess, our outlook is that we have only marginal inflation this year. But that could change. You have the storm in Australia or you have something or something happened. But at the moment, it looks like limited inflation and therefore, continued high efficiencies in several respects.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [19]

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Okay. That's quite clear. Then just on prices. Is what you assume in your 2020 guidance, the usual 1% to 3% from prices?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [20]

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Yes. That exactly. The point is I put a high value to doing

an annual price increase. And then some years, we aim for more and some for less, but that's kind of the standard strategy I want to apply, and I want to do that this year, too, and we have announced price increases in many cases. But of course, we do this by segment. This is the aggregate I want to achieve, and we have some markets where on projects, the prices might be a little bit lower, but we are not -- we don't want to [give it] from our strategy.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [21]

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Okay. So just to understand, the around 12% will then imply at the 12% assumption that roughly 2% from price. Is that how to think about it?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [22]

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No, I wouldn't think about it. It's similar to what we did last year that we have extra cost, we do changes, be agile, all of this cost money. So in the top of things,

we want to deliver around that. And some of the changes compared to the previous year, the mathematical, the depreciation, and then we need to hire 110 people to run a factory, [140] people, the bigger piece. But the rest, we're just going to work, reduce costs, some costs go up, and we just work the productivity and the aim to have an underlying, maintain profitability, taking all the factors together.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [23]

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Okay. All right. And then my last question is on the investments in sustainability, How much of the 400 million you're guiding for this year relates to sustainability investment? Can you elaborate exactly what they are besides the conversion of the Norwegian factory?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [24]

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We haven't come to conclusion that we should do that yet. And probably, we start to talk a bit more about specific cases when we do it, so that you understand why. We will probably also in our sustainability report here in March, throw some light on some of those cases, read that report. And then we take it one at a time. But the only thing I want to say, it is increasing. And some of those investment is not going to have a dramatic effect on this year, a lot of what we invested, but it is an increase. Saving water, saving CO2, getting more efficient, getting cleaner. We do review that. And it also has to do with our existing own building stock, where we're putting some CapEx into renovation. So it's a collection of that to just driving it a bit hard.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [25]

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All right. I will wait for more details. Then just before the (inaudible). The new factory you are setting up in China, the one you're moving, I guess, will -- what melting technology will you use for that?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [26]

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Yes. We will -- we will go electrical -- local electrical for that. We want to test our technology, although it's relatively small factory. So it's a good test of a small melter, but it should be said that from a pure green perspective with the current real supply in that area of China, another technology in the next 10 years will probably be cleaner because the grid is not clean yet. But we are working on getting clean electricity. But how quickly that will happen in China in that area, we don't know yet, but we are going electrical on that.

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Operator [27]

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So the next question is from the line of Brijesh Siya at HSBC.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [28]

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I have 2 questions. Probably the first one is on the CapEx. You're guiding for EUR 400 million now for 2020. How do you split that into maintenance and growth CapEx? And relates to that, I understand last year, maintenance CapEx was EUR 130 million. And what kind of run rate do you expect that to be in the near-term, the maintenance CapEx? So that's my first question.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [29]

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Yes. We don't provide that data. But you can see we have -- do we have it here? (inaudible). We account for it as we move through the year. So you have on Slide 10 in the deck, you see the maintenance. And we will do the same time now, but it's a similar level, but I'm not...

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [30]

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We just -- we have previously disclosed that we have a maintenance but it's around EUR 80 million to EUR 100 million per year. So you can sort of see that if you add them up, it's slightly higher than EUR 80 million or EUR 100 million. That's what Jens is referring to as the sustainability investments.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [31]

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So there is a difference there, but there is also another aspect to that. And that is, in 2018, we were a little bit lower on maintenance for a while. So we did a bit of extra early 2019. But again, sustainability investments are sitting in the maintenance part, yes.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [32]

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Okay. Okay, understood. Just to elaborate on that, I get your point, the maintenance CapEx is moving up, which is all understood because of 5 sustainable investment as well. So I'm trying to think too beyond this current CapEx cycle right now. And previously, we are running 2 years of high CapEx, expansion CapEx. Now moving beyond 2020, assuming this CapEx are getting over in '20, then are we kind of getting to a new normal, where the maintenance CapEx will be higher but nowhere near to those big, big numbers we have seen in 2018 and '19?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [33]

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Yes. (inaudible) can refer to there -- we don't comment CapEx forward. But in last year's 2018 year's annual report, Page 20. You have a study of the trend, 10 years trend of the CapEx backward where we said there have been about [11%]. We make some comments on that. But fundamentally, we don't guide to CapEx in 2021. But we are trying to get to now, I believe in the business, the growth perspective of the business, and we want to have a capacity buffer so that we have time within the investment to take greenfield decisions. And until we are getting closer to that point now. So 2021 will depend -- or 2022, will depend on how that midterm and the green deal and increased renovation investments are playing out. We postponed the decisions as long as we can. What I can say now is that with the investments we have done now, 2 years in a row, we have a little bit of a capacity buffer. I mean, that's exactly...

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [34]

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(inaudible) as you know, we have not announced any capacity -- new capacity projects. So you will have to wait to see during the year here. And the thing is, which is the latest one will be ready end of the year.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [35]

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No, beginning of (inaudible)...

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [36]

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(inaudible) Early next year. It means the CapEx will sort of...

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [37]

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Will flow this year. That's in the forecast.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [38]

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That's clear. And probably, the next question is on your pricing strategy. I understand 1% to 3% is a broad range, which we are aiming each year. Just to prove you a bit on that. How that has played out last year in terms of -- are you able to achieve the lower end of that 1% last year?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [39]

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I don't comment on that. But the base assumption, a couple of percentage points, some years a bit better, some years a bit worse, that's the goal. And we did absolutely okay last year, and we kept the price. We would have locked prices at the end of the year, you would have seen it in the margin. So we had a good execution on the strategy. And we have the same strategy this year, even though in some regions, we see a tougher, tougher climate.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [40]

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Okay. And probably my last one is on Eastern Europe. You mentioned in Q3 that there is a destocking event, which really impacted the numbers and obviously, the sales as well. But have things changed there? Or is there any signs of stabilization in Q4 that has the kind of inventory levels, which you (inaudible) kind of normalized?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [41]

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We saw the worst of the Eastern Europe, combination of a market slowdown in destocking in Q2, Q3. And now we need to follow it. But for sure, it's over 6 months, typically, distributors will destock when the market steps to different levels. So we will follow that now moving forward. But what happened in Q2 and Q3 and the destocking that aggregates the situation, I think we have that behind us.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [42]

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Okay. And just one, if I may, is on the competition pressure in Eastern Europe. Last time you talked about Poland is a market. Any other market where you are kind of seeing, further competition intensity, coming because of lower volumes in the market?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [43]

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I think we mentioned -- I mean, that's quite public that in Poland, capacity have increases. There is another market, Ukraine. We don't have manufacturing there, but there are 2 stone wool players that one has expanded a lot. And you have overcapacity in that market. It's not a big impact for us, but the case is there.

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Operator [44]

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The next question is from the line of Tobias Weimann at Morgan Stanley.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [45]

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Just before -- to clarify. I misunderstood the last question. I thought it was only Eastern Europe. We also have the startup of the competitor's factory in France last year, this year or this year, probably that will come into the market. That's also an increased competitive pressure. So you have Poland, we saw Ukraine, that doesn't so much impact also than the well-known factory in France. So just to clarify. I misheard him. I thought he said only Eastern Europe.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [46]

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(inaudible) What you said in the end, the plant in France, I guess, you were referring to the [glass] plant. Is it running already or?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [47]

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Yes. It is running. We don't see much of it, but we believe it's running.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [48]

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Okay, okay. Fair enough. Okay. So my question, I guess, the first one, again, on the CapEx. I'm really trying to understand what's happening with the investments because initially, you guided for EUR 330 million, then through '19, then it was EUR 400 million. My impression was that some of the spending came a little bit earlier, and I was expecting a little bit of a decline for 2020, but now for 2020, you're guiding again from EUR 400 million, which seems quite a bit above what [the analysts] was expecting. So what is the reason for this? And when can we expect the normalization again because now in 2020, it seems like it's going to be the second year where basically we will have 0 free cash flow. So what's the reason for the high CapEx and when will it normalize?

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [49]

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To the extent we have not met our guidelines from last year in our annual report Page 20, where we do say that we had 2 -- these 2 coming years with a higher CapEx ratio compared to the average. That is quite clear, the capacity expansions, we have already announced very clearly. And the reason why the CapEx is slightly higher this year, is that, yes, we have accelerated some of the -- new investments coming in. Some we have not announced because it is not a new thing to the market. But the CapEx ratio is going to be higher this year and it's -- as was last year, which is due to these announced capacity expansions.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [50]

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But 2019 was still 20% higher, more than 20% higher than what you have guided at the beginning of the year, which was the EUR 330 million? So again, that was the level that I would say, most analysts expected for 2020.

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [51]

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(inaudible) Yes. (inaudible) again because since the U.K. expansion was not part of the first announcement. So I can go through each quarter to explain to you what we have announced more. But during the year, we approved certain investments, and that's been across (inaudible) and then we just update this. I don't think that's necessarily something different from what we have guided. And I think we hit more or less the level that we expected in the Q3 announcement. And the guidance for 2020, I hope it's not a surprise for many, but that is clearly described in our midterm plan.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [52]

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Okay. Fair enough. And just on the specific project in West Virginia. I saw -- I think you were guiding industry for 2020 and now the annual reports says 2021. Are there any obstacles or any reason for the delay?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [53]

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No. What we're doing is we've -- we are a little bit [deregulated], but with the capacity need we have and the work we are doing, we are certain that's one-off. It's on track, it's progressing. And we are hiring people to train them, but we see that we need to start that for not next year. And that's what we have scheduled to do now. So it's just an adjustment to the schedule. That's not because something dramatic has happened. It's just operational and planning.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [54]

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Okay. And that's also not any sort of major risk because there's obviously a lot of protests going on in West Virginia? Do you think that's a risk from that?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [55]

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No. We don't see that.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [56]

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Okay, okay. Fair enough. And then also on the capacity, which is coming in now in Germany, obviously, in the first half of the year. And then in Poland, you have the second line running as well. Are you scared a little bit that the capacity is coming into some of the markets, which are currently weaker because, obviously, we talked about Germany being weak and certainly volatile for next year. And Eastern Europe, obviously, we have also seen sort of 10%-ish volume decline. So now next year in those regions, you have more capacity and you're having a higher cost base, but volumes are declining. Does this concern you at all?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [57]

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When you build plants that takes 2, 3 years to build, I said it a few times, you will land on -- you will not land perfectly. You might sometimes, you might not. We are not, the least, worried about the need for the factories, and then there could be market conditions, means that the timing is not absolutely perfect, but it never will be. Fundamentally, what's happening in the (inaudible) stone wool, we are not worried at all. We have been undersupplied in many of these regions for long, long time. And we have a fair view of that where stone wool is needed, but it's never perfect. There is no optimum because if it was, we would have to move the factories around several times a year. We adapt it and we shift shifts, balance between. And we also have overlapping footprints. When you get to certain scale with a certain number of factories, you can move shifts and loading with the market between the footprint. And we needed more in Southern Germany. So it will be fine.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [58]

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Okay. Fair enough. And then the last question I wanted to ask is on the [insulation] margins. Obviously in Q4, and it was mentioned earlier, the margin was very strong, you improved 110 basis points year-on-year, and that was despite the sort of mid- to high single-digit volume decline in the quarter. So I just wonder, a, was there anything particular that helped you? I mean, you mentioned the energy costs are favorable, but was there anything else? And b, maybe there was something in 4Q '18, that's in really, comparison days (inaudible), and maybe not everyone was aware of this, and that helped your -- is there anything like that?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [59]

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It's country mix, product mix with the less heavy product mix, less projects. And then inflationary pressures and productivities. So it's a mix of all those. But for example, Eastern Europe, a little bit less. And we have discussed that before, slightly lower gross margin. And this -- those are the mix factors that impacted. So it's all the things working together to make that mark.

But also, just to be -- this year, last year, in -- sorry, the year before, in '18, we talked extensively about the (inaudible) cost we had, we're using to service the market, maybe it had high growth. And of course, we don't have those in Q4. In Q4, we had the [gen set]. We are able to maintain a decent pricing throughout the Q4 and then combined with lower input costs, as we've also explained.

The footprint, closer to the customer, productivity improvement and product mix. Not all of them fully, but all contributed something.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [60]

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Okay. That make sense. But it was indeed also the fact that Q4 '18 was particularly a weak quarter because I think most analysts sort of looked at Q4 '18 as (inaudible) and there was significantly lower than Q3. And the question is, is this the seasonality that Q4 is always much lower than Q3? Or was Q4 '18 very weak?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [61]

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Yes. Q4 we don't make -- I mean, Q4 is Q4 with Christmas, depending on the -- where the (inaudible) site closed. Q4, it's not a representative quarter in this business.

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Operator [62]

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So the next question is from the line of Mikael Petersen from SEB.

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Mikael Petersen, SEB, Research Division - Analyst [63]

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I have a question regarding North America, Asia and others. In Q4, you grew 4.5%. How much is that from the Systems division? And if there was mainly from the Systems division was -- what brand was the main contributor?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [64]

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So it's the level we don't comment, Mikael. Sorry about that. We don't disclose to that level of granularity.

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Mikael Petersen, SEB, Research Division - Analyst [65]

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Okay. And then on to my...

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [66]

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Sorry, I can make one comment, and that's not a surprising comment. Obviously, what happened in South Asia after the trade dispute to that, and that we have been quite open with, it has been slower in Asia last year. And then, North America has been doing really well in some segment, plus or another second segment but the (inaudible) worked out to something very nice. So I would say, South Asia, Asia has been the main issue. North America is fast.

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Mikael Petersen, SEB, Research Division - Analyst [67]

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Okay. And then maybe if I can ask regarding your utilization level. I know you do not comment on it but if you assume that you increase your capacity by, let's say, 10% in 2020, and you have around 2% to 3% growth that will affect utilization level negatively. How are you dealing with this in -- for example, say, Eastern Europe, where you have seen the highest decline?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [68]

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Yes. So how we did with it? I mean, we run -- I mean, in our language, full-blast, running 24/7 is 5 shifts. So the good thing with the stone wool is if you run Monday to Friday, it's still a very, very efficient plant. So what we do is we just take off shifts and they're quite used to do this on the factories to set up that, and we are quite [good] at the moment.

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Mikael Petersen, SEB, Research Division - Analyst [69]

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Okay. And then maybe if I could follow-up on that. What utilization level would you say is the most preferable for a factory?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [70]

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That's kind of an evening discussion about philosophy between being an industrialist and being a market leader and earning the most money. I mean, if I could be a guy with one factory and I run in 7 by 24, no marketing, no nothing. Obviously, I wouldn't have a full factory. But if you have responsibility for that, the category can grow all the time. For example, in the U.S. and not run out. And you need to deliver the customers, you definitely don't want to be on a 100% utilization because that doesn't work in the long run for the industry.

So you need spare capacity to do good in this game long term. And it's not a big problem to have spare capacity on profitability either. Even though, of course, if you run at the absolute maximum capacity of an asset, then you have it all in the sweet spot, mathematically, that gives higher margin. But typically, when you own that capacity utilization, you have longer shipping. So it kind of counteract. And there isn't a single simple answer to that question, but we need to have a little capacity buffer.

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Mikael Petersen, SEB, Research Division - Analyst [71]

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What I'm trying to getting an answer to here is I suppose a question before, the Q4 '19 seems to be very strong. And I'm just trying to find out if this was, of course, due to better mix or if it's like the sweet spot utilization of the particular factory setup that you have now or if it's maybe something else driving it or? If you look historically, this Q4, it's probably the best you've ever had or at least (inaudible). I'm just trying to find out what exactly made this quarter this great.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [72]

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But for this all, it's country mix, it's product mix, with some fewer big projects, it's also inflationary, and then it's good productivity and a lot of shipments within the sweet spot of each factory. So it's all of those factors at all pitched in a little bit each. And you may be right. I haven't checked. Probably it is the best quarter, but I haven't checked it. I must admit it is the best Q4 ever. I don't know actually, possible. But it's a good quarter.

Thank you very much. See many of you tomorrow.

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [73]

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Yes.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [74]

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Yes? Thank you. Have a good day.

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [75]

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Thank you very much.

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Operator [76]

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This now concludes today's call. So thank you, all very much for attending, and you can now disconnect your lines.