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Edited Transcript of ROCK B.CO earnings conference call or presentation 22-Nov-19 10:00am GMT

Q3 2019 Rockwool International A/S Earnings Call

Hedehusene Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Rockwool International A/S earnings conference call or presentation Friday, November 22, 2019 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

* Claus Almer Nielsen

Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT

* Kristian Tornøe Johansen

Danske Bank Markets Equity Research - Senior Analyst

* Laurits Louis Kjaergaard

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Marcela Klang

Handelsbanken Capital Markets AB, Research Division - Analyst

* Mikael Petersen

SEB, Research Division - Analyst

* Tobias Weimann

Morgan Stanley, Research Division - Equity Analyst

* Yves Brian Felix Bromehead

Exane BNP Paribas, Research Division - Analyst of Building Materials

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the ROCKWOOL report for the first 9 months of 2019. Today, I'm pleased to present CEO, Jens Birgersson; CFO, Kim Junge Andersen; and Investor Relations, Thomas Harder.

(Operator Instructions) As a reminder, this conference call is being recorded.

I will now turn the presentation over to your hosts. Please begin.

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Thomas Harder, ROCKWOOL International A/S - Director of Group Treasury & IR [2]

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Welcome to the conference call regarding ROCKWOOL International's results for the first 9 months 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 third quarter and the first 9 months of 2019. 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.

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

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Yes. So good morning, everyone. Thanks for listening in. I think this quarter is quite uneventful, actually. So we will not spend too much time on the PowerPoint, but I will move through quickly, and then into the questions.

So if we move on to Slide 4. We saw a Q3, the 3 months, we saw a Q3 that had -- it's a very, very good top line. It's the biggest top line we have had in any Q3. But it was also a Q3 where we saw the continued volatility with a couple of trends, basically, Eastern Europe going, except for Russia, into very negative territory. So we dealt with that in terms of capacity. We focused also a bit on profitability, pulling down capacities. We have made most of the adjustments already. And then the numbers, I think, are important here that we had a 1% growth. And we delivered about 3% on the bottom line, but we've kept -- the profitability was nice to see.

And move to Slide 5 -- to 6, we go straight into the quarter. And on the quarter, when you look at the top line, the real highlight is the continued good top line and growth across the board in Systems. And we had -- I don't know if you remember, but we had a Q1 double digit, Q2 just below on our double-digit one again. And we are very pleased with that. And that's quite broad based. And here, also, Lapinus had a very good quarter. They're normally -- they are selling a big portion of the business into automotive, and they were doing fine. So it was good to see that we had a broad-based growth.

Moving on to Slide 7. Western Europe, France and U.K. are the 2 engines. There are also some Nordic countries like Finland and Sweden doing well. They are more like flat. So -- but Germany had a difficult quarter again, negative growth, but we landed at plus 4% here. So happy about that. And when we look at Germany, you have moderate decline on building permits, lots of order backlog and the market is still stuck, and it's not really flying. I should say, though, that the level is high. It's a high loading. We had to take out some shifts to supply Germany. But fundamentally, quite high activity, but not quite as high as the previous year.

Central and Eastern Europe. There, it was more of a increased trend of decline where only Russia grew, more or less. And it was good to see that both pricing and volumes and top line held up in Russia. The rest of Central and Eastern Europe, I think, we had a quarter where you, on the one hand, had a slowdown in the activities, but you also had the debuilding. We saw that in Q2, where the distributors have too much stock, and they are using up the stock. So I think that we have now worked up through. I think the distributors have now gotten rid of the excess stock they had. So we had a bit of a double effect in Central and Eastern Europe.

North America, Asia. North America grew. China had a flat quarter, which is very positive. And then the rest of South Asia that got kind of the Chinese economic impact, they are almost all of them in negative territory.

Profitability, Slide 8, underlying. So pricing is up above last year. And in some segment, the competition is harder, the heavy segment, the product sets. But pricing is up and profitability, generally, I'm satisfied with that. And the big improvement, of course, is in System division that we see on Slide 9, the next slide, where you'll see double-digit EBIT improvement in the Systems division and more than 20% improvement on the EBIT.

On the Insulation business, you'll see the decrease in EBIT. And there, I will say that, that's pretty good, what we see there because we have the one-off start-up costs, they all sit in the Insulation division. And we also see all capacity adoptions, they are sitting in there. So pretty good going, I must say. It's a good profitability.

Investment activities. We are starting up in Romania now and submitting products for testing and certification, has gone really well. The project in United States is moving ahead now. No obstacles to that. And Germany is following the schedule we have, too. So that's progressing. And you see there, CapEx at a high level, and depending on progress on site and invoicing, now we're going to stay on that level until we're done -- not on this specific level, but we're going to have high CapEx now. Also, we have high activity on the projects.

And move to Slide 11. There, I guess, the main number is that we have kept the net working capital percentage. And I think that's always important when you have certain markets slowing down because that also means that you'd be -- need to be very quick with our production to slow down. Otherwise, you're going to build up unnecessary finished goods and inventory in those markets, which we haven't done because we have really been on our toes in that. And we took the big piece of those adjustments we took in Q1 and Q2, but we have kept on top of that.

Guidance for next year, the change we did. We put in the lower end of the growth mathematically. We enter into Q4. We have December in front of us. And as you know, December for us can either -- it's always a lower month. But sometimes, we get a lot of snow, and it becomes an even lower month. In some years, like, for example, 2014, I don't know if you remember that year, we have a year where, mainly Germany just stopped the sites very early in the year, mid-December, and not so much revenue. So we see -- we don't know what December will be, and we don't know if it will snow, but you have the uncertainty in the fourth quarter as usual.

So with that, I would like to hand over to questions. I have Kim with me here also to answer those questions. So please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Yves Bromehead from Exane BNP.

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Yves Brian Felix Bromehead, Exane BNP Paribas, Research Division - Analyst of Building Materials [2]

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Just a few questions on my side. My first question would be on the capacity ramp-up and your overall strategy regarding capacity. And given the weaker outlook in Europe, and you're mentioning that you shut down some lines, could you maybe help us in understanding how much net capacity you're actually adding if you are making some lines cold? So that would be my first question.

And then my second question, I understand that you have already filed the permits for a plant in France. Could you update us on that and whether you will go ahead with the project? And how much would it -- what would be the investment cost of that project?

And lastly, my last question is on the nitrogen emission regulation in the Netherlands on both the agriculture and the housing market impact it had. Do you expect that to impact the Insulation in Grodan?

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

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Okay. So on the capacity, we actually haven't -- we haven't shut any lines. So we worked -- simplified. You could say, 7/24 is 5 shifts in our language, 3 shifts depending on the countries, Monday to Friday. So what we have done is that there is no line cold unless it's for a maintenance stop or something like that. But there are no lines. So what we have done until now is just to take out a shift or 2. And for example, in Germany, what happens there is you have a very good demand in the south. If that demand decreases a little bit, then we shift off, the next shift maybe up to Dortmund and Gladbeck, for example. So that's how we work it to just optimize logistics.

And then on the capacity, we are adding now, say, half a big factory and 2 big ones. And what that means as a percentage, it's not huge on our total. We are still talking about loading above 80% across the board. But how we use that extra capacity is, of course, that in Romania today, we have quite a substantial export to Romania. We will shift that into the market and have short logistic costs. In Neuburg in Southern Germany, again, we will deliver from the new factory and take away shifts further away and reduce the logistics and also variable production cost optimized. So that's how we see on that. And then 2 big ones and one 1/2 plant. And the next one in (inaudible) Germany is coming in, in H1 next year, and the one in North America, we still have in the second half year, and then depending how the market goes and also the optimization of our other assets we did on time, the use of that, again, based on logistics and where we need it. So -- but the progress is good on all those projects.

Then on the France case, there's a bit of a different approach. We buy land, and here we are just doing the permitting. And we do that homework so that we know that it's possible, get ready, but we have not taken a decision yet to build the plant, just to be clear, a formal decision.

And nitrogen emissions in Netherlands. I was in the Netherlands on Monday. So I got to listen a little bit to this. It's a very, very Dutch issue. And to sum it up, I sort of understood it, basically, they use a lot of nitrogen in the farming. And for years, they have been exceeding their own targets and some laws on what you're allowed in sensitive areas to load into the ground. And another issue like -- and where they cannot do that anymore. And what we have seen there? We have seen that lots of building permits are being put on hold. And we also heard that they've taken a decision to lower the speed limit from 130 to 100 in the whole of Netherlands. It's not implemented yet, but I think they decided it. So definitely, if this continues, this kind of local in-house, although I'm not sure you call it a crisis, but it's an issue, it will impact, and it has impacted the building industry. I hope that we'll solve it, but it's the fundamental issue, will they go after the nitrogen in the farming or not. And they are very vocal, the farmers, and we started up.

I don't see it will impact Grodan at all, okay? Not at all. Maybe, of course, in terms of demand that some of the farmers on normal ground will move. So from a production perspective, it won't impact Grodan negatively. But of course, it could possibly mean that you get more into our type of farming, the pesticide-free one, in a control environment where you don't put any nitrogen on the ground. It could be. It could be. But we haven't seen -- I don't think we have seen that effect. I must admit, though, that Grodan is growing really well everywhere. So there could be that there is an effect. We have not discussed it as an effect we have seen yet, okay?

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Yves Brian Felix Bromehead, Exane BNP Paribas, Research Division - Analyst of Building Materials [4]

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And just to be clear, how big is the Netherlands market for you, especially on the insulation market?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [5]

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It's -- I mean it's important, but it's not one of our main markets. It's -- Germany and Switzerland are bigger than Netherlands for us.

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Operator [6]

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And the next question comes from the line of Kristian Johansen from Danske Bank.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [7]

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First question is on your margin guidance. So when I do the implicit numbers for Q4, the margin you are indicating by keeping this 12.8% indicates that the margin dropped versus Q4 last year. So I just wanted to have you elaborate on what should drive this?

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

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Yes. I mean, I see the following. I see probably an inflation that is under control and not getting worse. I see maybe some more price pressure in Eastern Europe on the heavy side of the portfolio. But fundamentally, I see a new focus on profitability as -- so I see we have control of the margins. And then we have the variability on profitability in December. That's it. But underlying, there is no difference in the business. We don't see that apart from that December is a short month. And we -- in the year, so from 2014 up to now, my fifth December, or -- that means that we have seen everything on December over this period depending on what's happening. So it's a reflection of that, but I peg it on December, and the December then produces to give a reasonable EBIT, of course, not at all on the level of October and November, then profitability will continue to be fine.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [9]

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All right. Understood. Then my second question is whether you can elaborate a bit on the differences you see within residential versus nonresidential, but also within new building versus renovation?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [10]

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Yes. We -- so we -- it varies, of course, across lots of market. But if you were to say a section of nonresidential, I would say, there, we see that the big warehouses and those big projects, we have fewer projects. And then if you look specifically in the case of Germany, for example, you see a moderate decline in permits on both residential and nonresidential, but it's bigger on nonresidential. And then France here -- France, you see the opposite. Actually, it's increasing in nonresidential, and then residential permits are down. But there, we see renovation market. So we see a very mixed -- in Poland, you see, actually, residential up and then nonresidential down.

So I would say, on average, we see that the hesitation about the economy impacted it, the nonresidential on the commercial side of things, and residential hasn't really been much impacted in the last 3 to 5 months. And then -- and that has that effect, the heavy segment projects, that section of the market has declined.

And then on renovation, since the levels, even though we look at Poland, you have had a really drop in the demand plus the inventory effects. But if you then look into the segments, we don't really see a uptick in renovation apart from countries like France, where we have the energy efficiency project really driving growth.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [11]

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And then this lag of an uptick, is that due to an already high level and lack of labor and these things? Or...

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [12]

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This -- with Germany, I mean I tried to understand this thing, the lack of labor and the order backlog. And I -- there are many people in Germany that say that Germany is dependent on lack of labor, but it beats me then why it is on a high level, but why -- and why has it declined if it was lack of labor? So I think it's a mix of things. It might be a lack of labor, but it's also uncertainty in the market and that people hold back and try to wait or starting up new projects and things like that. So that's my suspicion. But I have not managed to get one-to-one explanation of what's going on in Germany. But one thing is for clear, the business confidence, when you look at that curve, is down in Germany.

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Operator [13]

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And the next question comes from the line up Tobias Weimann from Morgan Stanley.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [14]

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I have 2, if I may. The first one on the Systems division, we had another strong quarter, and it seems to me like the trends in Systems are going in completely different direction as the trends in Insulation. One is slowing down and the other one is increasing. So could you just maybe give a little bit more detail, what is the driver of that? And also, where do you see Systems versus Insulation in 2020? That's the first question.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [15]

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I'm not going to give you a forecast for 2020, but Tobias, you have been on these calls for quite a while, haven't you?

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [16]

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Yes.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [17]

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Yes. So you remember, we had some issues in the System division where we were kind of fluttering, and we were not really getting it off the ground. And there were a couple of factors. One was in ROCKFON, where the business -- we had problems in Asia. We were not growing and had loss make there. And we didn't really manage the business as well as we could and use our portfolio. So there, we did the changes. We shut down that Chinese plant. We put a bigger focus. We brought a new management, and that has made the difference. Then what has also happened, I think, is with these acquisitions that is happening, the big acquisitions, AMF Knauf (sic) [Knauf AMF] so -- all these moves. I also think that we've already good customer service, good product out there selling, gives us a little bit advantage while the others worry about integration and other things. So I think that's part of the driver there. But the big aspect is we are selling, and we are out there working hard.

And then you get to Grodan where Europe is doing well in Grodan. But there, we also had a step-up that we saw in mostly Q1, Q2 in the retail market in North America where we had stock debuild hesitation 2018 that just lost momentum, and then it came back and stepped up. And that has continued. So I think that's a driver.

And then if you look at, for example, Rockpanel, again, a new manager in there. We have this fire, noncombustible facades of the Grenfell, again, quite a push on selling, opening up some new markets. We see that on the top line. So that's on that.

And then on Lapinus, there we have ROCKFLOOR. It's not huge growth, but it adds a little bit to the growth. And then you also have that friction market that I suspect one of you maybe follow the automotive industry. I think in the automotive, we have seen a couple of quarters with fewer cars being produced every month. And now I think they have been in 3, 4 months where there are more cars being produced. And I think that probably helps them a bit.

So those -- did I forget something? No. Those were all the businesses.

And then traditionally, also, seating is a little bit later, internal -- interior seating is a little bit later on the cycle. So you have -- when the markets slow down, System division will keep going. But I must say, what I see here is sales efforts and really hard work on the portfolio and on the ground that is paying off, so I am adding in a couple of new markets where they hired more people, invested in fixed costs, and it starts to pay off.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [18]

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Okay. So it's not just a catch-up from last year, it's really higher volumes that are here to stay?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [19]

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That's what I hope. And we always have this view that -- I can't say that we keep going double digit all the time. But we always said, over the long course, we should be growing faster in the derivative business, the System divisions, because their footprint because the markets are going in a much smaller, so we can always add a new country when we are getting in with a good share in (inaudible) and keep working it, while in the Insulation business, we sit now with penetration into -- more penetration into the foam, the plastics segment and the renovation [agenda. And those drivers put] our market where we are, and then we add new markets, but at a slower rate because we always need to build a plant.

In the System division, you can start with 3 sales guys and move into market, basically, every 18 months or something. But you need to get success in each market you enter. And I think we are working very hard on that, and I hope we will see that continue.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [20]

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Okay. That's very clear. And then my second question, I wanted to follow up on Eastern Europe. Obviously, besides Russia, the performance was quite weak. So I wonder if you could give us a little bit more detail. I remember, last quarter, you said the slowdown was partly related to some projects related to the automotive sector that have been canceled. Is this still the key driver? And maybe also on a country basis, which was the worst? Which was a bit better? And how do you see the strength going into 2020?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [21]

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Yes. I mean I would say it's -- if you take the countries, and I don't give specific country figures, but you would say, apart from Russia, you can take Romania out. Romania is still doing pretty okay. But all the others is double-digit down. And they also think there is a certain panic reaction on the distributors that were believing in increased business all the time, that were overbuilding stock. So I think that -- but it's pretty low everywhere, I must say.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [22]

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It's in the quarter, yes.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [23]

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In the quarter, yes, and so it's a double-digit decline.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [24]

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Is it fair to say that part of the reason for the slowdown in Eastern Europe is that some of your competitors have cut prices quite aggressively, and you have kept prices at a higher level, and therefore, you have lost volumes in the market?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [25]

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We have lost little bit of big projects, but it's not too bad, actually. But what -- one effect that has happened here is that when people on the distributor side really believed in growth and they wanted to build stock, we were the only one that could deliver. So we sat with a lot more stock on the distributors and -- than our competitors. And so we have taken -- we have paid the price for that now because that was delivered before they're holding back, before they start to reorder. So what I will predict -- what I predict because the economic factors in Eastern Europe are not that bad, they still have lower GDP that they want to grow. I don't know how quick it will happen, but I think we cannot exclude the Central and Eastern Europe will start to stabilize. And then we had a couple of quarters a few years back when it went down very much in Poland, and then it came back, and then it grew. So I think we see a stabilization. If we see a lot of growth, I don't know yet, I will just follow it. It's very volatile, but they tend to overreact.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [26]

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Okay. But it's more an issue of oversupply rather than weak demand?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [27]

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I think it is a demand issue that people lost a little bit of confidence. And then they overreacted, and I hope it's coming back.

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Operator [28]

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

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [29]

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If I may just go back to the previous question about Eastern Europe, a double-digit decline in like-for-like sales. Obviously, Russia is 1/3 of that business, and Romania is probably a bigger proportion. That would mean the other businesses have fallen closer to 20-odd percent. May I ask you what's the impact of the destocking in Eastern Europe? If you could split out between what's the demand weakness and what is due to destocking. And relates to that, we have, I mean, new plants coming in Poland and impacting the pricing. If you could split out the 9.9% fall into how much is price impact, how much is volume impact there? So that will be my first question.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [30]

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Yes. So I'm not going to split it up in percent -- in percentages. But as a general direction, what I feel happened here over the last couple of quarters on that side is there was a fair amount of stock. So that -- the double-digit decline in some of these markets, quite a fair portion of that is the stock reduction. And then I -- and I think it will stabilize a little bit more, and then we see the true market. So I can't split it up like that for you. But -- and then on the residential permits, if you look, for example, in Poland, they are down from December to June by about 10% in nonresidential, and that is that segment for the big projects. So I -- those combined, a bit of decline in the market and then the others. And then the specifics, since we don't sit on the precise stock values, we don't know down to the percent.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [31]

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And any comment on the pricing scenario, especially in Poland?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [32]

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The pricing is basically that the distributor segments, where you do small orders, GBI, bread-and-butter business, relatively stable, and then tough competition on big projects. And would we put priority on taking down capacity and keeping a certain price quality, we are not willing to take big projects at lousy prices.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [33]

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Okay. And relates to that, in Russia, I think it's slightly better than your expectation, the performances, given that you were hoping, I mean, there'll be some kind of pricing pressure coming because of competition. Are you positively surprised there? And anything which has changed between last to this quarter?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [34]

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Yes. I guess what has changed over the last couple of quarters, and this is not a forecast for next year, it's -- and you have seen it maybe on the stock market index that said 2 quarters back, when we looked into next year, we sat and maybe we worried a bit about the cliff, more of a recession scenario. I probably now feel more, when I look at all the indicators and how people talk and how the cement industry is doing and other people are doing, I feel it's more of a continued volatile environment, but not that cliff reduction. And also in Russia, Russia continued it's growing. So I think that maybe those other scenarios, the risk of those feels a bit less likely, as I see it. And we have improvement also of this China, Donald Trump discussion. So less of those super macro risks, but still very volatile.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [35]

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Okay. If I can just move to my second question, which is more on Western Europe. You had, obviously, strong performance in France and U.K. Would it be fair to say that these markets are growing double digit now?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [36]

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Yes. I don't go into contributors, but they are growing very well -- and I think, for many players in the market, but the difference of France is more broad based, every supply grows. And in the U.K., it's the demand for stone wool, specifically that is growing. I think the market is not growing. But I think on the high rises now, stone wool is seeing us the solution you should use, and therefore, we benefit from that. So the markets are different. But if it's a single-digit to double-digit type, I don't reveal for them, but this is very good growth in both places.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [37]

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Okay. And probably, lastly, on Asia. You are talking about stabilization in China. Are you kind of looking at a possibility where Southeast Asia also comes to a level of stabilization some time in Q4 given that it flows from China?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [38]

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No, I'm a simple economist, I never dare to forecast. But when China really went down, and now they have a flat quarter, and it's the second flat quarter they have. When China went down, it took a couple of quarters, and then all the others went down. Now China has been stable. So well, if it goes that way downwards, why not that way when it stabilizes. That's my simple logic. But you could tell me if that's the case, but I just -- the same way up as the way down. That's my logic. But is that fair on an economist would approve of that thinking, I don't know. But that's my thinking, at least. So I hope we see a stabilization in South Asia.

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Operator [39]

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

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [40]

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Just also a few questions from my side. Coming back to the pricing environment. At Q2, you mentioned that you saw price competition mainly from stone wool producers having too much of inventory. Since then, we have seen other technologies also being slightly lowering their prices due to cost deflation. How do you see that impacting stone wool prices? That will be the first question.

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

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Yes. I think what's happening -- I mean the EPS is -- seems to be a bloodbath, and we don't get involved in it. I think on glass, well, probably in several markets, a bit of stabilization, at least U.S. and maybe also France. And then on peer, that came down because of this chemical. So they have set a bit of price competition. But what we have seen now lately on the projects, especially in Eastern Europe, is the fact that there's available capacity and then smallest suppliers that just want to get rid of the tons, and they target the projects. So that's the picture. And that's pretty much what we have predicted. And that means also that we tend to focus more on the distribution side, so small business, take care of that. And then when the big ones come, if someone really, really go for loading, we have rather than reduced capacity, and we said we can win that business back when we need to. But we, of course, make sure that we are not, in any way, stepping out of the key strategic projects, that we don't do.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [42]

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So just to be sure, you're not that concerned about pricing as an overall theme, so to speak?

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

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I am -- if you -- you know me. So you know that I work with price all the time. And it will vary in the markets. We will, of course, have a much tougher pricing environment to go forward due to the situation, also new capacity coming online. But we don't want to let go of our pricing approach to increase the prices next year. We're going to come out of this year with a higher pricing than last year. So that's still the ambition, and we work it. But yes, the environment is a bit tougher, but my ambition -- we have some inflation for next year. My ambition is to pass that on and increase the prices, on average, in the business. But yes, there are segments, competitive situations where you might have to adjust prices. But fundamentally, I will try to raise them a little bit.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [44]

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So you have price -- cost inflation going into 2020? That was what you said, right? Shouldn't you have -- shouldn't you have some relief due to coking coal coming down?

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

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There is relief. You're right. And we have seen a relief because we have like an inflation -- a comparable relief. But the recent inflation this year, it's lower than last year, and then next year -- it's especially lower second half year compared to last year. And then next year, I think we'll see moderate inflation. But again, I don't know that. But in the current market environment...

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [46]

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Let's guide -- bet on that, Claus, when we come to February.

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

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Yes. We will know more. But again, if the inflation would kick off more, then, of course, we will be much more active on pricing -- but there is some...

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [48]

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Sure. Okay. Yes. Okay. Coming back to the split between the different markets and also Systems and Insulation. So Insulations on reported numbers or local currency numbers are down year-over-year. Is that purely due to Eastern Europe situation and mainly due to price? Or how should we think about Insulation price versus volume?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [49]

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We have the prices up on our aggregate for that duration, but then there are quite big mix changes now. So how do you calculate that when you are losing very high-density tons in the heavy segment because that is declining and you keep going the light segment. So it depends a little bit with how you calculate. So you have a higher profitability on aggregate due to that mix shift.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [50]

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Okay. That makes sense. And then just -- I'm sorry, just continue.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [51]

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No. No. But that's -- and you know that is with the lighter grades, higher margins. And then less of those nonresidential box projects that then slides over into a richer mix, yes.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [52]

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Okay. And then just a final question regarding your new Chairman. And I know it is early days, but is there anything to add? Would that make any possible changes to the strategy? Or how should we think about this?

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

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I met Thomas the first time in 2014. I worked with him for 5 years. He knows this business, this company and the industry better than any other Board member. And he has worked for me the last 5 years. And he's great at stone wool. He has been part of making the strategy. He loves the company. And we work together. So this is a nonissue. It is the timing, and it's live and a great opportunity for him. But we just look forward to that. And we, as a management team, will keep running the business every day, and we congratulate Thomas to that role. And I also want to thank Henrik. It was great with Henrik. This is not an issue for us. We are really well supported in our strategy. And we keep working at and the macros are every day improvement for us.

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Operator [54]

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And the next question comes from the line of Laurits Kjaergaard from ABG.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [55]

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First of all, well done on the net working capital. I just have one question here in terms of Q3. It seems transportation costs of -- or delivery costs of EUR 95 million is down 4% year-on-year. But as far as I have understood it, when you started guiding in the beginning of the year that you said that you'll be delivering to some of the areas where you're currently ramping up new factories. What's the reason for delivery costs being down year-on-year? It seems like the first time since Q3 2016 this has happened.

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [56]

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This -- thanks, Laurits. This is a good observation. It's not only on the logistic costs, it's also on the warehousing costs. Obviously, last year, when we had this pressure in the market to supply, we did have more global warehousing costs that -- which we have now gone out of these many external warehousing costs, and then in general, less transportation between countries than we had last year. So that's the main reason.

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

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So when -- we, for example, have the slow down now in Germany, we cut -- and the demand is very good in Southern Germany, we cut shifts first furthest away. We took Denmark and Norway at the beginning of the year, but now we took Northern Germany and especially into Netherlands. And that means we get closer to the customer on average.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [58]

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So in the beginning of the year, when you were guiding this 4% to 8% sales growth, did you expect perhaps to sell more in the areas that you are currently ramping up new factories and this has not perhaps happened? And therefore, you -- obviously, you sell a little bit less in these areas, but you have better margins in these areas?

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

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Yes. It is not so much. So if you look at it -- this Romania, we typically cover from Croatia. And we are on the same level or slightly up this year as last year. We grew it up to a level that is a good starting level to shift it into the factory. But you need to take the market position, and we need to make money on that. And it's quite a substantial loading we have built up. But once we get to that level, which we were already there last year, if we then have 5%, 8% growth in Romania versus last year, that doesn't really make a difference on that type of volume we are talking about.

And then in Southern Germany, if we take out 1 or 2 shifts and then especially, to not freeze capacity, a lot of the trick is to produce some products to stock. And since we saw volume as the extra warehousing that Kim talked about, you handle it, you need to produce it, you need to bring it there, put it in, keep track of it. And as soon as we can see a chance to say, "Okay, let's just eradicate one of those flexible external warehouses," we do it. And then you step out of the contract that could be EUR 1 million, EUR 1.5 million. And of course, we keep our eyes on that and do the calculation, and maybe we can take one on to do it.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [60]

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So it seems that this pressure that we were perhaps fearing a little bit in the beginning of the year has not really actualized. Does that mean sort of that we are at the sort of peak delivery cost now? And now the portfolio of factories is looking stronger, and therefore, we can expect the delivery costs to stabilize or even go down a little bit marginally relatively due to revenue?

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

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Yes. I think on a very high level, and then it could change depending on what market goes up and down on that, but of course, with every dot, factory dot you get in the geography, that is not placed entirely wrong. That means you get a smaller average sweet spot if the demand grows comparably. So that's right, but it's incredibly hard to predict this. You can almost look at population growth, look at something. But in some parts of the world, now suddenly lots of car factories are coming up. And we need to deliver for 1.5 years there, and we don't have capacity in the market, then we just need to ship in, and that might be for one [other.] So it's very hard to nail that down to the million with forecast, we can't do that.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [62]

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Okay, fair. Let's try to return to the topic maybe on Monday. And the next question was in terms of the drumbeat price that we've been discussing. Can you see that you've lost any market share when you've been increasing these prices by this 1% to 3% that you've been mentioning?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [63]

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Yes. Yes. I mean it's very, very hard when you have stock changes to check market shares. But if you look at the competitors that have announced, Kingspan, Recticel, Armstrong, so it doesn't look like we have lost market share. Then you have Saint-Gobain that gives you a very aggregate number for everything, and they are very heavy in France. They have the big -- and France is great. And I can just say that we grow considerably more in France than their aggregate numbers.

So when I compare, it looks like our organic growth is a percentage point above, or in some places, 10% above, because some people are shrinking. But with the big players, I have a feeling we are doing pretty okay. We are not gaining very much share. We are keeping our share. And then you have this odd small ones on any quarter go in and take 2 big orders. We don't get them. So they feel they've gained share, but that this is back-and-forth game. Once the market starts to take off again, that really even out. So I'd say we have done really, really well. And I think it's very important for me with my size, but I don't want to sit in a quarter and having pumped in volumes when I'm 4x bigger than #2. I want to do my job and cut capacity and try to match it with what I see as the end demand in the market and keep track of my market share. My strategy is not to increase my market share with 4% in a market that is slowing down or declining, my view is focus on price and take capacity out and be responsible in that respect.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [64]

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That's a good observation. Last question, we -- that was discussed earlier was that with auto factories, project sales growth has been a little bit weak in the past couple of years maybe because of some price pressure, but also a little bit of downturn in automotive industry would fetch you postponements of factories, et cetera. But now we're seeing sort of a ramp-up of Volkswagen and Tesla in Germany, et cetera. Is there any interesting projects that you may be considering making a bid on? Or is this like electric vehicles, maybe...

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [65]

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We will let -- we will be asked probably for all of this. I mean that -- you'll all buy that car, the new electrical push, the new one, what is it called?

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [66]

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The e-push. I don't know what it is called.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [67]

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The electrical push. This is super good-looking car. Anyhow, that factory is huge and they're building it. We got the whole project. And we normally get almost all projects with Volkswagen. I can't remember one we had lost. Tesla, new ground for me, but I hope Tesla doesn't build a factory in form -- classic form. I don't think they will, but I don't know. But most of those projects are really big factories for car industry. We are very strong there.

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Operator [68]

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

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

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I have a question regarding the guidance that was narrowed a little bit. Can you talk about how much of that is pricing? And how much of that is due to volume?

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

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We haven't declined or reduced our pricing forecast.

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

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So the pricing forecast of between 1% to 3% is still intact?

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

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Yes. Yes.

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Mikael Petersen, SEB, Research Division - Analyst [73]

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Okay. And then my second question is regarding utilization level in your factories. You mentioned cutting shifts in Denmark, Norway, Northern Germany and then the Netherlands. Are those running at the more optimal utilization level now? Or are they below what you would call optimal for the thermal factories?

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

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Yes. They're running on a good level. I mean the issue that happens when you're running really, really hard is that if you get the equipment break, I guess, we don't have time to service. So now, we are still on a very healthy loading. So it's a good loading, and we can take away some of these warehouses. So it's good. But of course, we like to run a factory 7/24. But the Monday to Friday, we have almost the same VPC, and we are not down to subcritical levels anywhere. So good loading and a little bit space to breathe.

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Mikael Petersen, SEB, Research Division - Analyst [75]

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Okay. And then last question, if I may. In terms of maintenance CapEx, you flagged at the last quarter that it was going to increase, and we saw a quite high increase here in Q3. Have you already started to like the maintenance? Or is that not going to happen until 2020?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [76]

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Come again on that question.

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Mikael Petersen, SEB, Research Division - Analyst [77]

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You mentioned that the maintenance CapEx was going to increase going forward. And what we saw in Q3 was also quite an increase. Have you started the program, so to say, that you're going to renovate your building. I just wanted...

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [78]

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Yes. Absolutely. So in the CapEx number, we need to get used to that and that has to do with putting ROCKWOOL in the future sustainability capital. We have started, and you saw maybe our award in Norway for the electrical melter. It doesn't give more capacity, but a cleaner circular flow. And it opened up certain customers that will now put all their business with us. So we have started to do that. And that's probably at some future stage, we should have a topic where we talk a little bit about these different things. But it's already quite a substantial part where we want to go ahead and invest and upgrade on the environmental technology, the office energy efficiency, the melting technology, the spinning technology, the binder technology. So we have already started to ramp that up and continue. And I see that keep increasing, and we're going to keep working on that.

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Mikael Petersen, SEB, Research Division - Analyst [79]

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Okay. So the run rate of around EUR 50 million in the quarter, that is what we could expect for next year?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [80]

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I can't judge on that. But there is definitely, compared to 2 years back, much higher portion or much -- it's going to be a higher portion. But we'll come back to that maybe in the future and clarify a little bit what type of things we are doing now.

Okay. I think we are basically running out. So I'll take one more question. And then after that -- if you have questions after that, send them to Thomas or Kim and...

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [81]

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Or we see you on Monday.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [82]

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Or we see you on Monday. If we don't see on Monday, then send a question, and Thomas and Kim will call you up or respond in writing or whatever, yes? So I'll take one more question, and then we end this call. Any more questions?

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Operator [83]

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The last question comes from the line of Marcela Klang from Handelsbanken.

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Marcela Klang, Handelsbanken Capital Markets AB, Research Division - Analyst [84]

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I actually would be really happy if you could maybe compare the expected start-up costs for the new factories, which will be higher cost than previously, with the savings from lower transportation costs. How much bigger do you expect the start-up costs to be in the coming quarter or 2? Or are these 2 effects approximately comparable? Or is one much bigger than the other?

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [85]

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Marcela, this is a super difficult question and details, I don't even have it in front of me. I mean, we obviously have it in our budgets, we have it in our plans, and things happen, we reprioritize. But it -- at the moment, it's for sure, today, up to this point, we certainly haven't had any benefits from a new factory.

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Kim Junge Andersen, ROCKWOOL International A/S - Senior VP & CFO [86]

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Of course, there's only Romania.

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Jens Birgersson, ROCKWOOL International A/S - President & CEO [87]

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And we are just producing now to get the certifications and building the first stock. So up to now, it's for sure, we haven't got the benefit of the factories closer to the market. And then -- but that's precise mix of those, too. We have downsides but no upsides yet. But I don't dare to say that we worked. And then also when you start a big factory, there's quite a few people you need to take in and train. So it's quite substantial. But again, we come back to that when -- and incorporate that in our forecast when we speak back in guidance in February. Sorry about that, Marcela.

Okay. Thank you. So I wish you all a good weekend, and I look forward to see some of you on Monday.

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Operator [88]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.