Kingspan Group plc (KRX) Earnings Call Transcript & Summary

Hello, and thank you for your patience. Today's Kingspan Acquisition Announcement Call will begin in just a few moments time. Today's call will be led by Catriona Nicholson, Head of Investor Relations. And like I said, we will begin in just a few moments time in order to allow as many participants to join as possible. [Operator Instructions] Thank you. Hello, and welcome to today's Kingspan Acquisition Announcement Call. My name is Bailey, and I'll be the moderator for today's call. [Operator Instructions] I would now like to pass the conference over to Catriona Nicholson, Head of Investor Relations. Catriona, please go ahead.

Thank you. Good morning, everybody, and thank you for joining us at short notice. I promise it's not our intention to do this every week. A couple of quick housekeeping calls. The call today is 30 minutes. It will be a short presentation followed by Q&A. We may not get to all the questions, but we should be able to cover all the salient points. Many of you know, we put out a trading statement last week. In effect, that means we are in close period as we release our half year results on the 18th of August. So I respectfully request, you keep the questions on this call related specifically to the acquisition announcement overnight. I'm joined on the call by Gene Murtagh, CEO of Kingspan; and Geoff Doherty, CFO of Kingspan. And with that, I'll hand over to Gene.

Thank you, Catriona, and good morning, everybody. Obviously, at this stage, you'll all be aware of the detail as was issued yesterday evening. But in summary, we've agreed to acquire 51% of STEICO, which is the world's leading brand of wood fiber insulation based in Germany, but manufacturing in Poland and in France currently. It's a business that we've admired for very many years. It's grown extraordinarily over the last 8 to10 years, in particular, and obviously, occupies a leading position in a growing category of natural insulation in the world. In summary, we've agreed to acquire the 51% at EUR 35 per share upfront, followed by up to an additional EUR 35 per share, which we very much hope to be having to pay in a couple of years' time. There have been a number of questions, obviously overnight and this morning, about providing some color around the conditions of the earnout, and it's very straightforward. So it's about EUR 251 million straight in, most of which will be in cash and essentially the same amount for the achievement of an EBITDA in 2025 of EUR 120 million, which is an EBITDA of EUR 85 million to EUR 90 million, [ would I have been too precise ]. So high 80s, which is clearly a very significant growth on where the business is performing right now. So at an EBITDA level, it looks like essentially a similar multiple. And at an EBIT level, it's an improved multiple clearly at the end of the year. The business, if you'd like, we move on to the second slide, which is just to deal with the facilities -- manufacturing facilities. So currently producing in 3 locations with 2 in Poland, Czarnkow and Czarna Woda and a manufacturing facility in Southern France. Naturally, I've been to them with the teams, and I can tell you, they are really some of the most extraordinary manufacturing facilities that I've ever seen in our industry, exceptionally well invested. The engineering is extraordinary. And there's an additional brand-new facility that's nearing completion in Gromadka in Southern Poland, which essentially provides something in the order of EUR 200 million of manufacturing headroom from the get-go. So the asset base is, as I said, is extraordinary. Naturally, the sector overall, the residential insulation sector and wood fiber indeed as well is under some pressure right now. But naturally, we don't expect this to be a protracted situation. In terms of the positioning of it market-wise, it's predominantly Germany, France and some of the Western European countries, but the products ships all over the world, depending on the application. And it's predominantly refurb and very much residential, both of which are areas that will complement the existing profile of Kingspan where we're naturally more new build and much more nonresidential focus as an organization. Then in terms of the next slide, which deals with the full spectrum in essence, this is a strategy we've been pursuing for very many years in terms of us wanting to provide essentially all solutions, to specify, our contractor, building owner, whatever. And each of these categories have their own particular strength. And as a group, we will want to be able to provide just a balanced portfolio and an unrivaled portfolio of insulation solutions, which obviously, the acquisition of STEICO significantly enhances not just the fact that it's natural. So we've recently done a small transaction for a hemp-based business in Germany, by comparison, extremely small, but obviously STEICO significantly enhances our whole position and in doing so, we become the world leader by a very significant margin in natural grown installation. In terms of the drivers of growth, like obviously, refurb will be a growing area. Biobased will be a growing area. But beyond that, I think within Kingspan, we have a global well-established channel to market via our existing insulation business also via our insulated panel business and potentially even by our [ access ] floors business. So we would see naturally some pull-through just as trading level via those channels. but also via our whole innovation process, we would expect to open up opportunities for the use of wood fiber insulation, even in insulated panels, in the board business, and as I said, potentially even in flooring and in roofing elements for residential construction, structural roofing elements. So there are lots of areas that we will explore over the longer term. And to be clear, none of this will happen overnight. It's going to need development, it's going to need certification and all of that. But we'd be kind of more enthused about this opportunity than a lot of the opportunities we've executed in the past. And I think naturally, in terms of it complementing our Planet Passionate strategy, I think that's self-explanatory. It's an entirely sustainable product grown, manufactured. It does use significant energy, that has to be said. But the vast majority of that is provided by biomass facilities on site. And most of that is powered by literally the bark from the trees. And there's a lot more we can do on that front as well in the future. So in summary, that's it, and we're open to some questions.

[Operator Instructions] Our first question today comes from the line of David O'Brien from Goodbody.

3, please, if I could. Obvious one first, just the remaining 39% of the group, any intentions around that and how you could proceed there? Maybe a little bit premature, but if you could give a comment. Secondly, typically, Kingspan has targeted a 15% return on capital hurdle. Is that still the case with this deal? What kind of timing around reaching such a return level? And then finally, you've talked about, Gene, the fact that the product ships globally already. What is the potential to bring STEICO more into North America? Can you put a manufacturing platform there as well, much further down the line, but really what is the potential to globalize the business?

Okay, David. In terms of the remaining 39%, there's no intention whatsoever. But you said yourself, it's early days, but even thinking longer term, there's no intention or no pressure around that point at all.

Yes. In terms of return on capital employed, there's no compromise longer term on the 15% hurdle, but we're some years away from that. And clearly, it will require end markets to be in better shape than they are now. So this is very much a positioning of our business well for the medium to long term.

And David, in terms of manufacturing in the U.S., like if Udo was speaking now, the founder, he'd be telling you, that's an area he's been interested in for some time. And product has shipped there. So it's obviously not something that will be sustained from an European manufacturing base. And as a category, it's virtually nonexistent in the U.S. But to answer your question, like obviously, there's the raw material and there's the potential demand as well in that market, which might, in time, require a facility. And these facilities will be in the order of EUR 150 million to EUR 200 million each to construct. So they're quite the [ beast ], and we look forward to actually showing them to you all as well at an appropriate time. But one thing to remember here is that the product is used extensively in attic applications. So it's obviously a flexible material and ideal for refurb of attics, which is where huge amounts of existing fiberglass and stone wall is used. So kind of -- it's up against those materials is where we're going to be pitching it. And naturally, in North America, that is the dominant installation as well.

Our next question today comes from the line of Arnaud Lehmann from Bank of America.

2 questions on my side, one on the financials, one on the operations. On the financials, I think -- did I catch you the number well? I think you said EUR 120 million of EBITDA by 2025 for you to have to make the extra payment. I think that brings the margin above what it has been historically and the actual -- in terms of actual size. So that would be a record number for STEICO. Does that include synergies that you would implement following the acquisitions? And talking of synergies, have you given a number? And actually, can you implement any synergies considering there will still be about 40% minorities? That's my first question. And the second question on the operations. Could you comment on the route to market for STEICO? Is it closer to your insulation board business going through distributors or are there also some direct sales?

Thanks, Arnaud. Just on the earn-out piece, like you say, it probably suggests that -- you're saying it suggests that the margin is above what it's been historically. That clearly depends on the revenue, which hasn't been talked about. So it's not necessary that we would anticipate the net margin exceeding what it has done in the past. And then in terms of synergies, without getting into the nitty-gritty, naturally, we would expect to be creating pull-through over that period, like bearing in mind the end of the earnout 2.5 years from now. So we wouldn't be very successful if we're not creating pull-through by that stage. So yes, there is an expectation of some pull-through by then. And second point was -- what was that?

Route to market.

Sorry, route to market. There are 2 routes to market. One is via the insulation business, selling either a STEICO or a Kingspan branded product, that's all TBC at the present. That's one area. But the second area is that we actually consume the product, perhaps in a different form or different specification via some of the other channels. So like at a very simple level, we would see potential for this to be used actually in a metal insulated panel as well. So we have to figure out areas around structural characteristics, fire characteristics and so on. But as a material, again, in a similar way that we use stonewall, there'll be certain applications that would be appropriate to use wood fiber as an insulated panel core as well, and indeed some other areas of synergy across the group.

Our next question today comes from the line of Yves Bromehead from Societe Generale.

Just 3 on my end. The first one, I just wanted to understand whether this deal is also an opportunity to get a foothold, not just into wood insulation, but also I think STEICO makes quite a lot of wood sheeting and sarking for which you can probably cross-sell your own membrane and your own foam insulation. So I just wanted to understand if there's quite a lot of pull-through here in this product category. My second one is just on the [ churn ] supply in the wood fiber industry. Can you maybe comment on this? And how do you intend to maybe resolve this issue? Should it come with potential consolidation near term? And lastly, just trying to understand the penetration rate. I think if I'm not mistaken, about 5% of the insulation market is in wood fiber in Europe today. Where do you see that growing medium term?

Yes. So on the -- I'm taking it from probably the last one first. So the 5%, like it's not -- if you think, that's essentially grown from almost nothing in 10 years, like not quite nothing, but almost nothing. So it's very conceivable that over the next [ 7 or 8 ] years, that would double as a portion of the insulation market. And that's kind of the way we would be thinking about it. None of that is guaranteed, of course, but our expectation would be that the natural category comes much more to the fore over that time horizon. In terms of the present time, look, it's obviously a tough time for the business. STEICO themselves have discussed that at length in their recent trading updates and so on. And essentially, what's happening is there's a lot of capacity coming on stream at a time when the market is under pressure. So it's just -- that's naturally a bad combination. But we would consider that a timing issue rather than anything else that the market ought to be able to absorb this through penetration growth over the medium term. And when exactly that comes into equilibrium is very difficult to judge. But we wouldn't expect that to be very many years out. And whether or not there's further consolidation in the industry, that's -- let's get one foot in the door first, Yves.

And then the third question is pull-through of the insulations.

Yes, the pull-through of insulation. Yes, there's going to be pull-through via our channels like we've said. But as you also said, STEICO has already made a channel itself to be able to pull through some of the sarking membranes and so on that we have well established now throughout the group, both from the Ondura business and from the recent CaPlast acquisition as well. So there's lots of synergy, the other direction also.

The next question today comes from the line of Gregor Kuglitsch from UBS.

Just a point of clarification on the earn-out. Just to be clear, the starting point, I guess, is EUR 60 million of EBITDA, which is sort of what's expected for this year and then scaling up to EUR 120 million. So basically, if EBITDA stays at EUR 60 million, you pay EUR 35 million, it goes to EUR 120 million, you pay EUR 70 million and obviously, just linear in between. Is that the right way to look at it in terms of the earn-out? Okay. So it's EUR 60 million not EUR 90 million.

It's early 60s up to EUR 120 million, so -- and paid linearly on that basis.

Okay. And then the second question is, I suppose you've -- I think this is the second deal now in natural insulation. I think last year, you did one in Troldtekt. I just want to understand sort of how it all kind of fits together, I guess, the deal you did last year, the deal you're doing this year. And I guess where you see that sort of broader category featuring as a proportion of the group. And then maybe finally, just to be clear, the EUR 200 million additional revenue, just for clarification's sake, are you saying these 4 manufacturing sites today going to 5? Or is it going from 3 to 4? And what's the sort of rule of thumb for each of the revenue run rate so we can get a sense of what the revenue potential is? I think you're kind of implying EUR 650 million, if I'm not mistaken, I think STEICO is saying EUR 750 million. I think the years are slightly different, but just sort of -- so we can gauge the revenue capacity of the business, please.

Yes. So Gregor, it's 3 current, going to 4 imminently. And like it completely depends on the product mix, but it's in the EUR 650 million to EUR 750 million category. And that all depends on pricing and product mix. But in simple terms, it's EUR 200 million additional capacity from what was their – STEICO's last peak year, which I think was early-400s or in that order of revenue. So it's probably in that order. And then the other point is?

So basically how the different natural insulation -- and what's the difference and how it sort of all fits together in the grand scheme of things?

Yes. So obviously, this will be running its own course through a period, obviously, because we're working in partnership with Udo and the other shareholders and the earn-out has some time to run. But what we're obviously about doing is assembling a very compelling portfolio of different natural insulation products, some of which we're developing ourselves incidentally and some of which we will acquire. But as a total category, like our group run rate would be in excess of EUR 500 million next year with this -- with Troldtekt and with the small but emerging [ Mflex ] business as well. And it's -- we wouldn't be at this unless we felt that within a 5-year period, the category would be about EUR 1 billion in revenue. And that may take some further consolidation and obviously, lots of organic growth. But that's the kind of way we'd be thinking about it.

Okay. So one final one, the 10% extra buyout is basically just 10x EBITDA? Or how does it work, the put and call on the 10%?

Yes.

Yes, straightforward like thus.

The next question today comes from the line of Cedar Ekblom from Morgan Stanley.