Kingspan Group plc (KRX) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Kingspan Interim Results 2022 Conference Call. My name is Nadia, and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Gene Murtagh, CEO of Kingspan, to begin. Gene, please go ahead.

Nadia, thank you very much. And welcome, everybody, to the Interim 2022 Call here at Kingspan. And we'll get straight into the business. And assuming you've got the slide deck there, we'll just take you to Slide #3, which is titled H1 2022 in Summary. So in essence, it was a very strong performance and outturn for the first half, pretty much as we had highlighted: revenue up 42% at EUR 4.2 billion, trading profit ahead by 32% and basic EPS ahead by 29%. Just taking you through the businesses in brief. The Insulated Panels business, which of course is our largest, was ahead by 39%, driven in the main by significant inflation; reasonably solid volume; and a pretty remarkable improvement in the proportion of QuadCore sales to the division which increased in volume terms by 63% in the period, which was very, very strong. And again we expect that to increase strongly into the second half and into next year as well. Our Insulation division sales were ahead by 69%, obviously a standout at that level, but once again very strong inflation in there; and additionally the acquisition of LOGSTOR, which was performing exceptionally well; and the general technical insulation sector, which now comprises about 35% of the division sales. Of note, for sure, is the district heating side, which we acquired just over a year ago. Order intake is running at an annualized rate of around EUR 500 million. And even as recently as this week, just to give you a flavor for the types of initiatives that are on the way here: There was a 6 billion commitment by the German government, 50% supported by Brussels, specifically around district heating infrastructure improvements in the very near term. So that's one example, the single country, of the direction of travel there. So we're extremely well positioned in that business to be able to participate and take advantage of that in the future. Then roofing and waterproofing, which is the establishment of our global platform in this segment. Again, we've talked about it as part of our strategy for some time. The rubber really has hit the road now with the acquisition of Derbigum in June, which is Belgium-based and pan-European supplier; obviously the Ondura acquisition, which was cleared by EU antitrust just very recently and will close mid-September. And then just more recently, we've acquired a 24% strategic minority stake in a business called Nordic Waterproofing in -- again in the Nordics, quartered in Sweden. So we're -- well and truly got our feet under the table in this division now, and it's a very exciting end market for us globally. So the combination of these [ 3 ] businesses are very significant on a number of fronts, but they also will markedly increase the group's exposure to RMI, which traditionally is an area which has been less of a feature in Kingspan. In the other divisions then: good progress in the Light & Air business, a very solid first half. We expect a strong second half. Key theme here is improving margins, which is very evident not just in the first half but in order intake and which we'll deliver through in the second half. So that business, well on track to do what we outlined. The Data & Flooring business again performed strong. And some of the newer solutions that are coming through that division are gaining traction, particularly in the data side, the data solutions side. And if anything, the pipeline in that business actually looks stronger than it ever has at any time in the past. And then lastly, the Water & Energy business, I'd say, probably had a weaker start than we would have liked, largely around margins; largely around, I'd say, slow recovery of raw materials in certain pockets of that business. Recovery, well underway; and we'd expect the second half to deliver a well-improved performance over the first half. We've kind of touched on this, but on Slide 5, which in essence deals with the broader strategy of the business that we outlined some years ago around the envelope and more recently around the arteries of the buildings, we've -- and if you take Light & Air, technical insulation, roofing and waterproofing, these were areas highlighted as being very attractive to us in the long term. We've had embryonic positions in those up until relatively recently. And now in those 3 categories we have businesses that are at or in excess of 500 million; and in some cases really at the very, very early stages of taking a global position. So there's been really encouraging progress on that whole strategy, and we'll be fleshing that out further in the future. So I'll just hand you over to Catriona to deal with some of the other bigger-issue topics.

Good morning, everyone. Thanks, Gene. Just moving on to Slide 6 [ kind of ] to touch briefly and remind people of some of the mega trends that are really driving the industry and driving our business forward. And on the following slide, I'll just give some examples how we're addressing those. So I think obviously a global priority is really around addressing climate change. And insulation and energy-efficient building [ and home ] will play a very key role in that, particularly around refurbishing [ the building stock ] that's out there. I think we've all been reminded this year around the importance of energy independence and building energy independence into all geographies and building reliance on renewable and away from fossil fuels. Sustainability and resilience is an important and growing theme. We'll talk a little bit about Planet Passionate in a couple of minutes and some of the innovations that we're doing to address -- and market-leading products in the region of client performance but also in how we utilize materials and how we build those products through low-carbon solutions. And finally, just labor shortages are another theme that have been around over the last couple of years. And we talk about the aging workforce, particularly in construction [ markets, and labor tightness ]. And just I'll talk on the next slide a little bit of how we address that. So if you move on to Slide 7, please. So the first one is an example of a refurbishment project just talking about averting a climate emergency; a refurbishment project that [ we resolved ] within the U.K. [ A house was encompassed ] in Kooltherm. It was -- the estimation is that it would drive a 73% reduction in carbon emissions from that building moving forward. And it's really around space heating and space cooling. Insulation is really the cornerstone of addressing that and building efficiency into [ those buildings ]. And obviously that addresses energy independence as well because it drives the energy needs for houses, communities, businesses and everything else. And we talk a little bit there, as Gene mentioned, the recent developments in Germany this week. District heating, around energy independence, is going to be very important to -- ability to address that, to look for ways for more renewable heating. So LOGSTOR recently won a project in Hamburg West, and it's district heating that's moving away from coal to more renewable ways. And one aspect of that is actually using waste heat from industry as a source of renewable heating or at least away from fossil fuel heating. And it will move the equivalent of 20,000 homes from fossil fuel to renewable energy. I'll let Gene talk a little bit about QuadCore lower embodied carbon in a moment when he talks to innovation. We have case studies and examples on QuadCore where the installation can be up to 50% quicker than [ built-up ] systems; and obviously saves time, saving on labor and saving on money and [ just risks ] around projects. So that's a link to a case study and a white paper on that there. And then I'll pass back to Gene for Slide 8.

Great, Catriona. Thank you very much. So Slide 8, as Catriona said. This is dealing really with the spectrum of insulation solutions that we cover throughout the organization. We've long had the ambition to be a full portfolio provider right across the various different technologies, and the reason for that is preferences vary. There are products that are more right for certain applications than others, whether that's thermal, fire, circularity, carbon, costs, whatever the particular issues are. And just as an organization, we are unique in the sense of the technologies that we have in house covering everything from legacy materials -- well, not everything but a lot of areas in the legacy side. Obviously our primary focus is on advanced high-performance materials. And increasingly, you're going to see us feature in what we'd call natural insulation materials, which we've obviously started off with the primarily timber-based Troldtekt business earlier this year. And we have 2 other technologies in particular that we have in the pipe at the moment; and we'd expect to commercialize, albeit at a very small scale, in the not-too-distant future. So the key for us here is that, as I say, the -- to be able to provide as broad a portfolio and not be a one-trick pony because the answer isn't singular in any of this. And the scope across all of these technologies obviously is vast as we look across the world. In terms of key innovations on Slide 9. You'll be familiar with a lot of these, but just to run through some of them and the progress that's been made: We've obviously launched our PowerPanel/Rooftricity model. We've had very encouraging engagements, so far, in just the U.K. and Ireland, which is the only area we've launched it, so far. We've delivered around 5-megawatt equivalent, which is around 50,000 square meters of roof area, as -- obviously we tested it internally on some large-scale roofs, and we've done one particularly large-scale external roof, so far. There's around 75-plus megawatt of quotations out there that we're engaged on. And that's really before we've kind of pushed forward with any real kind of power on this. So that's extremely encouraging at this stage. In A-class OPTIM-R, progress is well underway there; B-class Kooltherm, similarly. 2.0 in QuadCore, we will expect to launch this actually very soon. I think on the lower embodied carbon side we're going to launch in quarter 4 a QuadCore LEC, which will be a 50% lower embodied carbon product than exists presently. And I think that really from a product carbon composition is -- will be a phenomenal leap forward. Obviously it will be in relatively limited supply for a while until we get all of our sources up and running properly, but the fact that, that can actually be achieved and achieved at a commercially viable level is extremely encouraging, yes. And also, from a technical perspective, we've got clear eyes on being able to achieve up to 80% lower embodied carbon for a [ steel-foam-steel ] insulated panel, which is really very encouraging. So naturally that will entail low-carbon steel. You'll have noted from before our investment in H2 Green Steel in Nordics, which we expect over the next few years to be supplying very material levels of product to us; [ bio-based ] MDI in the core; and PET-based -- recycled PET-based polyol also in the core. So there's been tremendous work done in getting ourselves ready for this and obviously serious appetite out there in the market for lower-embodied-carbon materials. And we will be [ way in front ] when it comes to this. AlphaCore, we've talked about for some time. We're pretty much there from a technical perspective. It's a project that's been -- covered various technologies and various partners. We expect to be in small-scale manufacturing in this product actually in Q1 2023. Again, small scale, but we'll be there; and over time, we'll build a significant presence, similarly for our green pipe through LOGSTOR. And then over to our big Planet Passionate agenda. I'll just hand you back to Catriona.

Thanks, Gene. So on Slide 10 and just to remind you some of the Planet Passionate targets and highlights. And you'll have, hopefully, seen our Planet Passionate report already this year which highlights some of the detail around the projects that were implemented last year. Just a reminder: This is a huge agenda across the business with significant engagement, and the expectation is there'll be over 260 projects implemented this year and just to reach the targets we have. So it just gives you, I suppose, an idea of the scale of this -- of the agenda and the level of engagement that we have across the business. We forecast in 2022 another 5% reduction in carbon in our manufacturing process, with ongoing exciting engagements with our supply chain. And QuadCore LEC is an example of that. So -- and you'll see examples in the innovation side, both -- and innovations detail in the divisional slides later in the deck. And you can see how much Planet Passionate is linked into innovation across the business and with really differentiated products because of that effort across Kingspan. On Slide 10, just to talk to product integrity, an update on that. We've been rolling out ISO 37301 across the business. We now have 20 plants certified with the accreditation and we'll expect to have 28 done by this year, so fantastic progress on that. Over 122 of our sites have been audited by the internal compliance team. And some sites actually are on their second audit already, so significant engagement across the group on that. 615 internal product and quality system tests carried out so far in 2022 and, as usual, significant external testings. And we talked a little bit about the framework and infrastructure to support [ some of ] that; and clearly a lot of resource and training going into that. We have 19 compliance officers across the group, 35 additional compliance personnel and 272 employees registered for PECB training, so ongoing progress around [ ISO ] compliance agenda. And then I'll pass back to you.

Thanks, Catriona. Just briefly, before we hand you to Geoff, on Slide 12, the global organic expansion. We've been certainly on a mission there over the last number of years and the internal demand for CapEx is ever increasing. So there's demand for about 25 new production lines or additions over the next 2 to 3 years; and they're outlined there country by country, region by region. And obviously the most recent one added to this is the Building Technology Campus in Ukraine, which we are at the early stages of working up. And that, the intention there is that it will be at least EUR 200 million of an investment in a single campus which will cover 5 or 6 of the technologies that are in the group. And it will be something like a 40-hectare site and around 200,000 square meters of -- [ on the ] roof area. So lots of progress on that front and much more to come. Geoff, we'll hand it over to you now for the real stuff.

Thanks, Gene. I'm on Slide 16 in the deck, just to deal with some of the financial highlights in the first instance. Group revenue, a little under EUR 4.2 billion, are ahead by 42% versus the first half of last year. Trading profit of EUR 434 million, up 32%. Earnings per share of EUR 1.706, up 29% versus H1 last year. We declared an interim dividend of EUR 0.256, which is in line with our policy guidance of paying out 15% of earnings. And that dividend is up 29% versus last year's interim. Free cash flow was down in the period, and I'll come to the constituents of that in a second. Net debt at EUR 1.2 billion is also up. And that reflects significant investments undertaken in the business during the period, about EUR 522 million between acquisitions and CapEx, but again I'll come to the constituents of net debt in a second. Trading margin, down 80 basis points to 10.5%. The effective tax rate, up 50 basis points to 17.5%. And that reflects the geographic mix of earnings year-on-year, and that's our guide for the full year effective tax rate. And leverage, at 1.25x net debt-to-EBITDA. And return on capital employed, 18.1%, down on the first half of last year. And that largely reflects the timing of acquisitions in the first half of this year and the returns on those acquisitions not having yet annualized. Just on to the next page, just on trading profit and margin itself. On the left-hand side of the graphic, you'll see the profile, yes, over the last 5 years. And our trading profit has grown on a compounded basis by 22% per annum since the first half of 2018. From a margin perspective, you'll see the profile of margin by division: panels, 11.2% in the first half, down 40 basis points versus the first half of last year. And insulation at 10.5% is lower than what was, and we highlighted at the time, an exceptional margin performance in the first half of last year. There was some lag effect in terms of recovery of raw material inflation in the first half of this year that we're already underway with the recovery of, so those margins have progressed in the couple of months since half year end. Light & Air has progressed its margins versus the first half of last year, so at 5%, up from the 2.7% in the first half of last year. Light & Air is more of a second half weighted business. And we're, we would believe, on track to do at or about 8% from a trading margin perspective for this year. Water & Energy, down in the first half of the year from a margin perspective, largely associated with the lag in raw material recovery. That ought to progress in the second half of the year. A very good margin performance in Data & Flooring pretty much consistent with last year's half year. So at a group level, that all amounts to 10.5%. And the divisional mix may be different in the second half of the year, but broadly speaking, we would expect at a portfolio level a similar trading margin of 10.5% in the second half of the year. On to Page 18, which bridges both sales and trading profits. So dealing with sales in the first instance. So at a headline, revenue is up 42%. And the components of that: currency plus 3%, underlying plus 27% and acquisitions plus 12%, yes. And from a profit perspective, in overall terms up 32%. Currency was plus 4%; underlying, plus 15%; and acquisitions, plus 13%. Free cash flow is dealt with on Page 19. The biggest engine clearly of free cash flow is EBITDA. So EBITDA was EUR 512 million in the first half. Working capital increased significantly by EUR 262 million in the first half. And we typically increase working capital in the first half of the year because June is at a seasonally higher point than in December. We also had very significant underlying sales growth, but notwithstanding that, our working capital-to-sales ratio is higher than it would typically be. It's -- or was 14.5% at the end of June. Our long-run average is more typically at 12.5%. And the principal reason for the elevated level is higher levels of inventory. Like others, given all of the disruption and dislocation in supply chains worldwide, we took the opportunity to carry a little bit more inventory than will be typical. And that will naturally be utilized as we move through the second half of the year, so we expect that working capital-to-sales ratio to improve by 100 basis points by the end of this financial year. And beyond that, from a free cash perspective. Tax, in line with our income statement [ rate ]. The outflow was EUR 82 million in the first half. CapEx, at EUR 117 million. And for full year, we'll be a touch above EUR 200 million for CapEx during this financial year. The net debt reconciliation is on the following slide, on Page 20. The acquisition spend and investment was significant in the period, EUR 357 million. And the 2 principal transactions that were completed in the period were Troldtekt in our Insulation business, which we -- which Gene referenced earlier, yes. And also we were very pleased to complete the acquisition of Derbigum in our new roofing and waterproofing activity just before half year end. So they were the 2 principal acquisitions completed during the period. And we also had some outflows in respect of deferred consideration, minorities; and paid dividends of EUR 49 million in the period. The strength of our balance sheet is highlighted on the following page, 21. Net debt-to-EBITDA, as I previously highlighted, at 1.25x. We arranged additional debt facilities of EUR 800 million during the half year. Our total available liquidity at the end of June between cash balances on hand and undrawn committed facilities, that combination reflects liquidity of EUR 1.74 billion, so healthy by any measure. And the weighted average maturity of our long-term private placement notes is 5.8 years, and that's at a fixed interest coupon of 1.74%. ROCE and the profile of ROCE is highlighted on the next page, I'll say, 18.1% in the first half, just largely reflecting the timing of acquisitions and ought to improve as we move through the second half of the year as those returns annualize. And finally, the sales by geography is outlined on Page 23. And you'll see that we recorded very healthy sales growth, yes, across all of our key territories. In terms of profile, the Americas now comprises 20% of the overall group compared to 18% in the first half of last year and with the European territories broadly similar, yes, as outlined on the page. And with that, I'll hand back to Gene.

Thank you, Geoff. On Slide 30, which will take you just directly to outlook, as we will probably go through some of the businesses in the Q&A. Obviously, in the near term and into 2023, it's likely a lot of our end markets will experience some degree of contraction. Many of you will be in as good or a better position to judge exactly what that will entail. It will be what it will be. And I think all we can commit is that we will do our absolute best no matter what end market environment is actually thrown in our direction. So setting aside that, obviously our focus will be, remains unrelenting in pursuit of more efficient building solutions, wider geography, broader product portfolio and so on to deal with obviously the energy crisis, the emissions crisis and all of those other areas that we've been focusing on for such a very long time. So in the short term, naturally there's unpredictability. And over the longer term, our businesses is increasingly exposed to, I think, very favorable structural trends. And that is it in a nutshell, so Nadia, we'll hand it over to the floor now.

[Operator Instructions] And our first question today comes from David O'Brien of Goodbody.

Three, please. And maybe I'll start off with just your final comments, Gene. Clearly markets are getting more challenging, and investors are trying to get a handle on the potential depth of any correction that we're seeing. I appreciate it's hard to call, which you do make the comment in the statement and on the -- in the slide deck, on #30. And look. You've seen solid quotation activity, so can you give us a sense of maybe what your order books are telling you for the second half or with the period that you -- that is visible to you? And also maybe could you give us a little bit of color and a feel for the various end markets geographically and by segment? Yes. Also, just on the outlook, you do make the comment that you're watchful of potential energy supply constraints over the winter months in Europe. Maybe you could give us a bit of color on how those risks relate to Kingspan and how you can manage or mitigate those should they transpire. Finally, from a standing start in January, that Ondura. You have Derbigum completed, a 24% stake in Nordic Waterproofing, so with that footprint or platform established, what is the strategy for waterproofing and roofing going forward, and the scale of the opportunity?

Okay, David, thanks very much. It is honestly very difficult to be precise around the next 6 months or certainly into 2023. And we're not in any way trying to kind of avert dealing with that head on. It just is unpredictable. We've obviously seen some contraction in our order bank. I think it's important to stress that at exactly this point last year we were at pains to explain that what we were seeing at that point was totally unnaturally high. And I think that has transpired to be the case with the bank built up to an unnatural level, and that's just been eroding over time. And we're probably down now at a more normal level, [ as we have taken up bank ], although it's obviously less than what it was at this time last year. For the second half, revenue is probably going to be in and around 10% up. That would imply volume down somewhat, obviously, as we flagged before. And on that whole front, in essence our sentiment remains exactly like it did, yes, 6 or 8 weeks ago, whenever we issued our trading update. So from a raw material perspective, it's probably more available than it was. We have seen some degree of deflation. And again, on that front, depending what happens during the winter, we're just -- we're taking a kind of a cautious approach to reacting or overreacting to any movements on that side because that can [ turn on at open as just as well ] with a crisis here or an issue there. We're just -- and we're very mindful of that. From an energy perspective, there's 2 risks. One is running our own facilities and the costs related to that, but I think the costs is one side and we'll just handle that. It's much more does the stuff flow or not. So it's our own operations, number one; and secondly, supply from both a perspective of energy and then gas clearly as a raw material into the chemical industry. So from our own perspective, we're not enormously energy consumptive. In fact, we're extremely low consumers of energy, and we'd be reasonably confident of that not being interrupted. And then on the bigger end of things, we're looking at all of the info and indicators that you might have yourself. And it would feel that the steps that have been taken over the last number of months would leave us a lot more comfortable on that front, to be honest, than we would have been maybe 4 or 6 weeks ago, although that naturally does remain unpredictable. And then from a roofing and waterproofing side, as you rightly point out, we've got ourselves established and it's got substance now. It's obviously European focused and still at a very small share, so we'd see the potential for that being pretty dramatic long term and totally global from both an organic and acquisition perspective. And as always, the primary agenda here is to use this infrastructure as pull-through for insulation. So it's to use the outer envelope of the building to create a specification to drive more demand for high-performance insulation. And that is going to be a 5-, 10-, 20-year program. It's nothing that's going to happen overnight, but it's an exciting prospect and we're delighted to be where we are.

And the next question comes from Arnaud Lehmann of Bank of America.

I have 2 or 3 on my side. Firstly, obviously you've seen steel prices coming down, and I believe chemical prices have started to come down. Are you starting to adjust your selling prices on the panels? And I guess, to which extent does that contribute to some sort of wait-and-see situation from your customers, maybe some of them waiting for lower prices on your side, to adjust? And in this context, what does that imply to your margins? I know historically your margins were improving when commodities were coming down, but I guess this cycle probably should be slightly different. And staying on the demand side, would you mind giving a bit more color on the verticals? There's a lot of discussion around potential slowdown in the logistics space or warehouses related to online distribution. Have you experienced a similar slowdown? And lastly, if I may, just I think you're planning to set up a new division, roofing and waterproofing. That's fair enough, although are there any links with Light & Air? I appreciate there would probably be different products, but they're both dealing with the roof, so was there any idea to include roofing and waterproofing in Light & Air? Or it's just too different to make sense.

Yes, okay, Arnaud, thank you very much. Just on the raw materials side. Like we've got 3 primary raw materials. Steel is the largest, and various types of chemical inputs will be the second. And stonewall will be the third, where we're actually the largest consumer of it in our Insulated Panels business worldwide. So as you rightly point out, there has been some movement on steel and on chemical. Now how sustained that will be, we don't know. And as a result, we've been cautious on our own approach to selling prices because, as we've seen before, that can turn quickly. All else being equal, it's -- it will probably be sustained and it may go further, but it's all related to movements in our order bank as well, if you like. So it's not that fundamentally like demand has evaporated or anything like that. We've been very cautious to give up pricing on the basis that, as I said, you could get a shock on your raw materials very quickly, so we're deciding, if you like, to drive our order bank in the particular direction it's going at the moment. And then on a mineral fiber perspective, that's -- represents around 11% or 12% of our insulated panel sales worldwide. And what we've seen kind of in the last 4 to 6 weeks is a significant release of volume in that area, where it was probably in more tight supply in the run-up to the half year. So that's kind of freed up a little, although pricing is reasonably strong. From the verticals and the demand. And logistics and warehousing is a big part of the business. It's actually quite solid. You'll have noted yourself just Amazon, as an example, and their approach to just fundamentally cutting back on -- well, actually cutting everything was the kind of general drift [ of us ] a few months ago. What we are seeing is maybe a less-radical approach to that. And we've seen a resumption of construction in some areas where we felt maybe it wouldn't have continued. So I would say in the U.K. in particular, which is a very big part of our logistics and warehousing side, the kind of [ 6-month, 9-month ] program there looks quite encouraging, in fact. And obviously, on other areas: The data side remains very strong both from Data & Flooring and from panel solutions in those. And the automotive side, the project bank that we're -- the order bank and the project bank that we're tracking is actually ever increasing; and our position as a group in that segment is becoming stronger. And then, yes, from the roofing and waterproofing side, very much -- and actually, sorry. I omitted that. Very much part of the program there will be to pull through Light & Air as well because that's where most daylighting solutions are, in fact, on the roof. So it's precisely that combination of waterproofing, daylighting and insulation that will be able to be driven through the spec team on the waterproofing side, so yes, that's a key part [ actually ].

And the next question comes from Yves Bromehead of BNP Paribas Exane.

I'll have 3, if I can. My first one is on your comment regarding the quotation activity. Can you maybe give us some reference as to how much time and what's the success of conversion between your quotes and an order? And then how long does that translate into potential volumes coming out of your factories? That's question number one. Question number two is just going back on the district heating side. I appreciate all the color on the stimulus packages. What's the time frame of those packages? And do you need to increase capacity at a [ lock strong ] level, especially in Germany as it seems? Also if you have any color in terms of other regions that are expanding into sort of district heating. And last but not least, just on the roofing and waterproofing segment. M&A is clearly towards Europe for now. And we do remember the U.S. acquisition that you've tried with Firestone at the time. Are there any targets in the U.S.A. that are possible? Or is it just too consolidated with too few small family-owned businesses there?

Okay, Yves, on the quotation side, as we said, quotation activity is actually reasonably solid in the vast majority of markets. Typically -- and this probably is not a typical period. Typically there's about a 6-month gap between quotations and bank and -- but that's generally been our experience, so it will -- obviously it varies somewhat by product and market. In terms of our success rate and to what degree we can say that will convert in the next 6 months, it's actually just difficult to say. As we've said before, 2023 or next year is further away than it normally is, is what it feels like now. And obviously it's less predictable, so we can't in any way be kind of solid or precise on that, except we will continue to quote and do our utmost to convert. From a district heating perspective and in terms of those new initiatives. So by way of example is the German one we talked about earlier on. So in terms of time scale, that's a 5-year program, so it's not like 10 or 20 years or something aspirational. It's very specific, 3 billion contributed by the EU to be matched by Germany itself or specific projects in a 5-year period. And that's one country. So naturally that's going to place pressure on our capacity. Our intention is to increase capacity by 30% next year and, by year 3 from now, to have increased it by 100%. And we have projects in place to deliver that. And then from a roofing and waterproofing perspective, the U.S.A. is obviously a target. We missed out on Firestone a few years ago, which [ was on offer bidding ], but it was a little bit too expensive for Kingspan in terms of the multiple. There are other opportunities. And if that means bringing together a collection of very five -- fine kind of small or privately owned businesses, well, we've got the patience to do that. And yes, let's see where we go from there, but lots of opportunity there to [ put a mile ].

And the next question comes from Yuri Serov of Redburn.

I have [ a few questions, if I can ]. I will ask them one by one, if you don't mind.

Yes...

[indiscernible] on the -- yes. On the margins, I'm just looking at margins. Your margin in the first half is down by 80 bps. And I think you made some statements previously about what your expectation is for the full year margins. Can you just give an update as to what you're thinking now?

Yes, absolutely, Yuri. Yes, 10.5% in the first half. And as best as we can assess that at this point, I would expect at a group level a similar margin in the second half of about 10.5%, so our full year margin should be in that 10.5% zone for the group.

Okay, that's helpful. So full year, [ you're saying ], yes, it's 10.5%, yes...

Full year, 10.5%, yes.

And then more specifically on Insulation. You say this is against a very high margin last year, which is fair enough, but if I look at the history, your Insulation margin in the first half of this year was the lowest [ since '17 ] which was quite low. Well, it was lower before, but it's quite a long history, so what's your expectation for that segment particularly?

Yes. Well, I think, the margin performance in the first half, we did see a lag in the recovery of raw material inflation. And that recovery effort now is well underway, so I would expect in the second half of the year the Insulation margin will be north of 11%, in the second half, reflecting that recovery.

Okay, helpful. Speaking about volumes -- and I don't actually know. I mean I don't have the full data but just reading what you have said looking at the Insulation funnel. So at the end of March, your order backlog was up 19%. And in the end, the full first half volumes were down by [ 4% ], which to me sounds, seems like a stunning collapse in the second quarter. Is that true or not?

No, that will be completely inappropriate way to characterize it. I think, as we've -- as I tried to say earlier on, it was a stunning expansion of it this time last year, which we've tried to explain, although it's difficult, that, that was unnatural. And I think what we've seen is a corresponding reduction to bring it back to some form of normality. Like the only way -- like obviously the trends have been down. We've been absolutely crystal clear about that. And in case you missed our statement a couple of months ago, we spelt that out in black and white, but an easier way to try and articulate this is that our order intake for the first half of 2022 is precisely half of what it was in the whole of 2021, which kind of is about the same. And that's the only way we can try and explain this because there simply are, at a time like this, hard-to-explain gyrations in order intake because there's panic on materials. There's panic on crises. There's panic on pricing. There's all sorts of stuff which have driven, to be honest with you even from our perspective, a pattern that's been difficult to interpret, but there's no question about it. It was far higher this time last year than it is now. And currently it's trending down, but again as we've said, we have been very cautious on our pricing, which if you like is kind of feeding that trend in itself. And we can drop our prices any day. That's never too late, but you can drop your prices too early. That's from experience.

Yes. And the order bank, Yuri, is never a uniform comparison from point to point. That's been the case over many years, but I think that's been accentuated over the last couple of years just in light of raw material moves and other factors. And to kind of give you further context on it, you might recall that last year, towards the end of last year, we highlighted that our order bank at the end of September '21 was 49% ahead in volume versus September of the previous year. Now you haven't seen us print volume growth, in any period, of that order of magnitude in the period since because the order bank flows into sales in an uneven way. So as Gene has outlined, the best way we can help with understanding it is to point out the order profile over an extended period of time, which is the full first half this year versus the full year last year. And it's steady as she goes in that context.

Yes, no, listen. I understand that. If the order bank is up 41%, the length of the order bank is actually significantly prolonged, so as a result, the volume doesn't actually jump by that percentage. That's clear, but given what you just said, I mean, it's interesting that you are using the word cautious in respect of your pricing activity. Usually, when people say cautious, that means that they don't push prices up too much, but I think what you're saying is that you're not willing to drop the prices [ at the time ] of material cost inflation going up because you think that it may actually have to go up again. Is there -- why -- am I right to get a sense that your pricing activity is actually pressuring your volumes a bit?

Yes, yes, yes, absolutely. So that's entirely right. It's not, I'm not saying we're cautious because we think it will go up again. We're cautious because we don't know what it's going to do. And it's obviously been a volatile period on supply in recent years, so that's hence the caution on that front. And yes, like as I said, it's moving prices down is a very simple thing to do. It's we'd rather try and defend it for the time being, see how the supply side works out and then see where we go.

[ Okay ], I think -- Yuri, just to give everyone a chance to ask a question, I think we're going to move on to the next person. You can send me an e-mail if you have any further questions.

Okay, can I just ask one last...

Okay, go [ for it ].

On the costs side, you previously were giving us some guidance as to how much you expect the costs to grow year-on-year in steel and chemicals. Can you give us a sense as to what you're expecting for this year [ as well ]?

No, no, no. That's too commercially sensitive.

Okay, I understand. Just one thing. It's not a question but [ quickly one ], technical insulation. I mean you're -- if you make waterproofing into a new segment, are you thinking about making technical insulations a new segment as well?

Well, it clearly is, but it's under the umbrella of Insulation generally, so we'll have building insulation and technical insulation as all under the one -- under one home, but yes, like as a category, absolutely, we expect to grow it substantially.

But you're [ not planning ] to separate it out.

No, no, no.

No, no.

No, no. [ It doesn't make sense ]. Thanks, Yuri.

And the next question comes from Gregor Kuglitsch of UBS.

So I've got a few questions, if I may. So I think you've previously kind of quantified kind of a [ price-over-cost ] level. I can't remember. I think it was 70 million that you [ set it off ], perhaps unwinds one day. Can you give us an update on that, please, if you can; and what you -- if that's still the case? And coming back to the roofing and -- waterproofing and roofing segment: So I think in the U.S. [ you seem ] very successful in kind of bundling insulation and roofing membranes and sort of giving a system warranty. I think margins are like 15%, 20%. Do you think that -- is that basically what you are trying to do here so that you sort of give a system's -- you sell the system with insulation. You give a system guarantee and therefore you kind of get better price and better margin. Is that the sort of plan, to replicate that business model? And then maybe on the order intake. I mean I appreciate your comments on the 50% for the full year. I guess what I've never really -- or at least I don't know is the seasonality. So would you say, kind of looking back, I don't know, 5 years or so, that there isn't really that much seasonality in order intake and therefore that's a meaningful statement of 50% for the full year of last year? And then maybe a final question: Do you have any contingency planning in the event MDI production kind of comes under pressure due to the shortage of gas, let's say, in countries like Germany?

Just to deal, Gregor, with the margin question in the first instance. And we did indicate that last year was an exceptional year from a margin perspective and that there was 70 million or there or thereabouts of recovery beyond the level of inflation. You can take it that, that has naturally flowed back to our end markets through this year; and is one of the factors explaining why this year's margin guidance is about 10.5%, which takes account of that as well as the business mix year-on-year.

Then Gregor, just on your -- you're absolutely right. So the model that has been very successful in the U.S. is a package- or a bundle-type approach where the insulation and the waterproofing comes from one house with a corresponding warranty for the full roof. That's a very sensible way for things to go both from a customer perspective from the warranty, a roofer perspective in terms of a single source and so on. It's been much less well developed in Europe because, generally speaking, insulation and roofing have not been under the same ownership. It's very gradually moving in that direction, and it's absolutely our ambition to try and establish that as a firm model in Europe. As I said, it's not something that will happen overnight, but it's very much the direction of travel with us. I think what will be unique over time is our offering across roofing will be much more substantial than anything that exists already. So we will obviously have the membrane. We obviously will have a portfolio of insulation that nobody else has. We have daylighting which nobody else has. And going beyond that, we actually manufacture -- we're the largest producer of structural [ metal deck ], which is actually the supporting system onto which all of that goes on a roof as well. So there's a much wider bundle potentially for us to get at over time as well. In terms of the 50% stat and how meaningful is it versus seasonality, yes. Like honestly, over time, first half, second half, there would be very little difference, over time, in terms of what that is. So it is meaningful in that sense, but there's no question the second half is going to be down. And we've been clear about that in the past as well.

Okay. [indiscernible] MDI, if you have any [ contingency ]...

Sorry. On MDI. Well, on MDI, that's not particularly straightforward. MDI goes down. It's a material not easily substituted, as in not possible for us. So obviously we've got different cores. We have opportunity with styrene. We've got phenolic, which from a board perspective could probably -- could actually take a significant portion of any down in terms of PIR board, but in the panel, no. We would naturally be exposed there, but if MDI comes down because of gas, to be quite honest, everyone will have much bigger problems to think about. And there won't be alternative materials because it's all reliant in some way on either energy or gas as a source, so it will be a bigger catastrophe, to be honest, if that does transpire.

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

I'll keep it to 2, if that's all right. First one is for Geoff, just wondering if we could maybe get a steer on the incremental contribution from M&A on the kind of a pro forma basis maybe for H2 and for next year as well. And then the second one, just maybe if we could touch on governance. Any updates there maybe in kind of warranty patterns, et cetera, just that whole theme. If we could have a quick update on that would be appreciated.

Thanks, Flor. Yes, just on M&A, in the second half, we should broadly have 140 million of sales that we didn't have in the second half of last year. And that comes with the assumption that Ondura completes as we expect it to in September. And that broadly ought to translate into trading profit of about 13 million in the second half of the year. And then the rollover into 2023 will be approximately EUR 350 million of revenues in '23 that we won't have had this year, yes, and that's broadly EUR 35 million of incremental profitability versus this year. On warranties, no material change between June and December, so no particular update on that regard.