Kingspan Group plc (KRX.IR) Earnings Call Transcript & Summary

Good morning, everyone. It's David O'Brien here, Head of Investor Relations. And thank you all for dialing in on reasonably short notice. This morning, we're joined by Gene Murtagh, Group CEO; and Geoff Doherty, Group CFO. In a moment, I'll hand you over to Gene for an overview of this morning's announcement, and then we'll host some Q&A. But before I do, just to note, this morning's statement has outlined what is a potential process that we're exploring. And while very exciting, there are obvious limitations on the amount of detail we can give this morning, so bear with us. Also, I'll make the point, it's been 6 weeks since we released our interim results, and we're about 6 weeks from our Q3 trading update. So we will not be providing any comments on current trading. All told, we would expect to keep you a maximum of 30 minutes. And with that, I'll hand over to Gene.

Excellent, Dave. Thank you very much, and welcome, everybody, to this morning's call. Thank you for joining. We'll get straight into it. You've got a presentation and no doubt you've all flicked through. But just as a background to that, we've been operating in the data center market for over 20 years now in some form or another. And clearly, that's been growing a lot in recent years. And a couple of months ago, we created two new segments within the group, one of which was Advanced Building Systems, which going forward will be known as Advnsys without the A in the middle. And the reason for this, as we explained at the time, is that we see these businesses coalescing progressively and rapidly, and we want to capitalize much more meaningfully on the tech sector opportunity in particular. If you just step back from that, the -- about 40% of Advnsys' current earnings are derived from critical bespoke infrastructure into the tech sector and particularly into data. And we see that portion of this business growing to around 75% within a 3- or 4-year period. And clearly, we expect that 75% to be of a much larger absolute number also at that point. Particularly, we've been strong in the white space to date in data, but we are rapidly getting into the gray space, which brings some more complexity, but an awful lot more opportunity and value for Kingspan as well into the future. The opportunity is really enormous, and it's been erupting before our eyes at a pace that's way beyond what we expected even actually a couple of months ago. And just overnight, you'll have seen, just as it happens, the announcement from NVIDIA and OpenAI, which is just another of these gigantic announcements of $100 billion investment, particularly into the data market. And that's the type of thing we're really dealing with and referencing with regard to this particular announcement. We have a global footprint already that indeed you'll know about, but we're in the process of entering India, Vietnam, Brazil in this business segment. And I'd say, critically, we're moving ahead with a gigantic assembly site in Kentucky, U.S.A., which will produce hot aisle containment solutions, liquid cooling solutions and also air handling units, which is a sector that we've entered recently through the acquisition of Sandometal in Portugal and also to some extent, Q-nis in Ireland. We see the AHU segment and the CDU areas being areas that will present very significant growth opportunity for Advnsys and indeed for Kingspan well into the future. So this site in the U.S. is also on top of the already commissioned world-scale facilities in Virginia and more recently in Arkansas, all of which are filling up rapidly. And as we've referenced before, we're obviously building at a very significant pace, and that's to keep up with this burgeoning demand from all of our clients. So in essence, we feel that the time is now to shine a greater light on this business and on this opportunity, both as a potential stand-alone public organization and through Kingspan as its long-term parent. If you look at the crude numbers, and it's on Slide 7, I think, the past year -- the past 10-year EBITDA CAGR for the business has been around 21%. And we expect the 2026 EBITDA of the business to be in the region of EUR 300 million. And we're also acutely cognizant of the fact that relevant sector peers, and these are not building sector peers, they're tech end peers, that are supplying the data center market, are trading at and above 20x EBITDA. And hence, clearly, the reason and the time for focusing on this potential IPO. The aim is to fully explore going public in Amsterdam. Two global investment banks have already been appointed to jointly lead the process. And if successful, we expect to retain a shareholding of around 75% and continue, obviously, to consolidate Advnsys into Kingspan Group as an overall. So that essentially captures in summary, the background and reasoning behind this, and we'd be delighted to take all of your questions.

[Operator Instructions] Our first question today comes from Shane Carberry from Goodbody.

Just two from me. I guess just with the figures that you've just given there, Gene, we're thinking about a business that could then be worth over EUR 6 billion, I suppose. With that in mind, could you give us a little bit more of a flavor, one, in terms of a bit of a reminder in terms of the complementary nature of kind of Data Solutions in the Light, Air + Water business? And then two, when I think about future product evolution in this business generally, how should I be thinking about things going forward and other product categories you could potentially get into?

Okay, Shane, thank you for that. So in terms of the compatibility and the growing, let's say, the coalescence of the businesses, that's around a couple of areas. Obviously, as part of what was the Light, Air + Water, air is an area that's been obviously focusing on ventilation for some time. So a very significant portion of that business is already in parts of ventilation. And both this and what was the Data Solutions business have effectively, as it happened, just ended up essentially chasing the same market to a large degree, some of which is for the data center opportunity and some of which, very important, is for non-data. Because obviously, we need a business that services markets for the very long term that's not necessarily tech linked. So they've been growing progressively into the same area, number one. I'd say secondly and very importantly, around 20% of what was the Light, Air business is actually in service. So annual maintenance of all types of systems. So that's in excess of EUR 200 million of business, mainly around Europe. So this is a very particular skill set that we see as playing a very important role in the maintenance of data center solutions as well into the future. And as I've just said, that's a skill set that lies within that business, not what was previously our Data Solutions business. And it's an area which is high margin and critically important for the longer term. So they're kind of the two main areas where we see the businesses joining forces most prominently. And then in terms of product evolution, we've -- like we've gone from -- and there's a slide on it, number David will point it out to you now. So we entered the data market via the access floors. Then it was direction layered through the floors. Then it was into the hack area, which was stick built to start with, then modularly built. Now we're integrating water cooling through manifolds into the hack. So we're doing that retrospectively in existing data centers. We're also doing it in new data centers as a complete unit. And we see that -- for a start, we see that as being an area that we're pretty embryonic in and the opportunity is enormous. And then, as I mentioned, the air handling space is one that we've more recently entered, and there, very significant opportunity, both retrospective and in terms of new build. Like I say, very early days. And to be honest, Shane, just between even those ones I've just mentioned at the latter end, the opportunity to capitalize on that globally is gigantic.

Our next question comes from Ephrem Ravi from Citigroup.

I appreciate it's early days, but again, to -- while doing the IPO, are you looking to raise new money to accelerate the growth in this business? Secondly, on the Kentucky plant, my understanding was that, that was more to do with roofing? Or is it kind of being transferred into Advnsys? And then also on the future outlook in terms of the data centers, is there transferability of these product categories to other applications other than just data centers?

Yes, absolutely. So -- well, for a start, from a capital raise perspective, let's see how this all goes and what the potential valuation is. But the intention for now is to flow 25% of it, and that money clearly comes into Kingspan Group. Like very broadly speaking, if that was successful, both Kingspan as the parent and Advnsys would end up essentially with zero debt and obviously, huge runway for both the businesses to take it from there. So at a crude level, that's kind of our thinking. In terms of the Kentucky site, that was never for roofing [Audio Gap] Oklahoma [Audio Gap] on top of Virginia, more recently, Arkansas and then this site, and that's very specifically around the whole Advnsys opportunity and not to be mixed up with roofing. And then the final question was transferability, absolutely very important. That's -- if you look at the data business and the light and air business, one essentially has been servicing what we call regular markets and the other has been very specifically the tech sector. And we see a number of the solutions here as having application in the world outside of data as well. And we believe long term, that's actually critical for balancing the business as well.

Our next question comes from Flor O'Donoghue from Davy.

Just I think one for me really. Just wondering on the CapEx requirements for Advnsys in terms of maybe the kind of the more bigger projects that may be kind of further down the line and also just the kind of recurring level of CapEx that's needed to run the business.

Yes. All right. So we've been -- we've set very demanding hurdles and returns for all of our organic CapEx in the data side of the business. We've been getting and expect to get returns in literally a 2- to 3-year period. And that we expect to be the case into the future for all of the investments that are underway at present. So I don't see anything that's going to change that. But beyond that, clearly, like Kingspan itself, there's a very significant development pipeline, specifically into the Advnsys opportunity as well. And that clearly is much more of a capital consumer than the organic CapEx. But again, if we end up with a clean slate in both the parent and in Advnsys, I think our ability to develop at a rapid pace will be significantly enhanced.

Our next question comes from Alexander Craeymeersch from Kepler Cheuvreux.

Alexander from Kepler. Just a small question. I was just wondering about -- certainly, there are going to be some intercompany sales. I was just wondering how will you ensure that how these transactions will kind of happen at arm's length.

Can you repeat that, Alexander?

Well, I assume that there's going to be some intercompany transactions. So I'm just wondering if you -- how will you ensure that this transaction will happen at arm's length?

Alexander, there won't be actually intercompany. So just like right now, the Advnsys businesses don't intertrade to any significant degree. I mean small millions between that and other parts of Kingspan, we wouldn't see that being any different.

Our next question comes from [indiscernible] from JPMorgan.

I think you mentioned helping the debt profile of both companies through the equity raise. Is this kind of in anticipation of any large-scale acquisitions for Kingspan Group or just more of you seeing good opportunities going forward?

Yes. I think it's actually only a byproduct rather than a reason to be honest. But as we've signaled before, there's always a bigger pipeline of opportunity than we have the ability to execute on. And that's more from financials than from a physical perspective. So that's not any different necessarily, but naturally, it will put us in a much stronger position for execution on all fronts.

[Operator Instructions] Our next question comes from Pujarini Ghosh from Bernstein.

So one question on the listing. So basically, why did you decide to list in Amsterdam? And do you have any expectations of the timing of the potential listing? And the second question is on the medium-term outlook for Advnsys. So in the past 10 years, you've grown at 16% and EBITDA has grown at 20%. So what are your expectations going out to 2028 or 2030 in terms of top line growth and margin expansion?

Just on the first one, I would say that we would expect that growth rate to continue at least at that pace.

And just on the listing choice, at this early stage, we've done an assessment of the various alternatives that would be available to Advnsys, including the U.S. And our strong preference is Amsterdam based on that. It's a highly liquid market. There's over 300 companies trading on the exchange. It has IFRS from an accounting perspective, which makes it a very straightforward process. There's no stamp duty in that market as well, which makes it an easier environment for investors from a transaction perspective. So for all those reasons, it would be a very natural home for Advnsys. From a timing perspective, we're looking at Q1 2026, which is another benefit of Amsterdam as well as a listing location that will accommodate an earlier timetable than perhaps other markets.

Our next question comes from Glynis Johnson from Jefferies.

Two, if I may, and forgive me, they might be quite basic. I wonder if you can just talk us through the geographical breakdown of the business that you're listing, just how much is U.S., Europe and so on. And then if you can just talk about expected corporate costs. Obviously, there's cost of listing, how should we think about that for business you're listing, but also in terms of the business that will remain because I assume there will be some duplication that's required? So yes, if you can help us with that, please.

Yes, absolutely. So in broad terms, around 45% of the current Advnsys business is in the U.S. the rest being Europe and rest of world, which is particularly Southeast Asia, Australia at the moment. And it's probably reasonable to expect that 45% U.S. to actually increase significantly because it's there that we see the gigantic wave of investment. Obviously, it's happening elsewhere, but in the U.S., it's really other level. So we probably see that going well beyond the 50% over the next 3 to 5 years. As regards to corporate costs, I mean, we would expect Advnsys to have limited incremental corporate costs, bearing in mind all of the operating and administrative infrastructure is already within those businesses. So it ought to be limited in quantum. Thank you very much. So -- and over a short notice, I really appreciate you all joining, and I'm sure we'll have opportunity to catch up with you at a later point. But bear in mind, really, this is the beginning of the process, and we need probably the next 4 months or so to fully explore and see it through. Thank you.

Thanks, everybody.

Thank you, everyone.