Kingspan Group plc (KRX) Earnings Call Transcript & Summary

Good evening, everybody. It's Dave O'Brien here, Head of Investor Relations. Thanks for joining us at a reasonably short notice. I'm joined today by Gene Murtagh, CEO; and Geoff Doherty, CFO. In a moment, Gene is going to take you through the slides reasonably quickly, and then we'll hand over to Q&A. All told, don't really expect to go on much longer than 15 minutes or so. When we move to questions, if you could limit yourselves to 2 person we get through that quickly. And with that, I'll hand you over to Gene.

Great. Thank you, Dave, and welcome, everybody. If we could move to Slide #2 here. So in essence, today, we've agreed to acquire a business called BMC Manufacturing, which is an Ireland-based business for the time being, but supplying worldwide in a very fast-growing sector of the data centers. It's a business that's been built over many years by Brendan and his team. And in more recent years, it's focused very significantly on the data center opportunity and well in excess of 95% of revenues derived from that sector now. The business has been acquired for an initial consideration of EUR 850 million, which is made up of EUR 600 million in cash and EUR 250 million of new Kingspan shares, which will be issued. The primary product that the business produces and the one where we can get most significant global leverage is a product called PDCs, power distribution cabinets. And I'll show you later on just exactly where that's positioned in our space and how it's such a very natural next addition for the Advances business within Kingspan. The deal itself from a financial perspective is obviously attractive. In reality, by the time we get this done, it's going to be into the fourth quarter. So we will -- all going well, we expect some contribution this year, but clearly, the lion's share of it into '27 and beyond. So the first full year multiple looks like around 5x EV to EBITDA, and that's based on both a significant backlog and a very compelling pipeline of opportunity that Brendan and his team have been focused on even in the absence of Kingspan so far. So the deal is significantly EPS accretive from the get-go. Geoff will take you through that shortly. And year 1 return on capital will be well in excess of 20%. Just on Slide 3 then, some of the numbers here I've already talked about. But in terms of our playbook and how we operate, naturally, BMC has been extremely successful in its own independent ROCE. We intend to clearly add some horsepower to that whole effort worldwide. And part of that comes from our relationships with the key hypers and colos around the world and also our ability to expand our manufacturing presence at some pace, which we've already demonstrated in the Advances business and beyond in the wider Kingspan group. So a lot of the opportunity facing the business is not surprisingly in North America. Right now, the business is manufacturing in a number of premises in Dublin, in Ireland and about to move into an even more significant facility close by outside Dublin. And still the lion's share of the manufactured product out of these facilities will be heading abroad and obviously, most significantly to the U.S. We've recently commissioned a facility within the Advances business in Glasgow, Kentucky in the U.S. And there is a facility essentially right next door to this that we would be intending to convert to a BMC manufacturing facility as fast as we possibly can. But in reality, that will take us through most of 2027 to actually get that up and running and then obviously producing product out of it in '28 as we expand the product range and the customer base in North America. There's also an earn-out aspect to the deal as well, EUR 50 million, which would take the total consideration up to EUR 900 million, and that's based on the achievement of an average EBITDA over the next 3 years of EUR 250 million. So from a debt perspective, immediately, 1.9x is where it leaves us, obviously, comfortable from the limits that we set ourselves. And assuming we do nothing else and drive the thing for cash during 2027, that takes us to just over 1x at the end of 2027. So everything looking healthy from that side. On Slide 4 and 5, these are kind of key to just, if you like, address people's understanding of where this fits with us. Like we've been developing up through the white space into what we would call light gray at this stage. And the PDC product itself really does take us kind of into that borderline territory. And on Slide 5, people always ask us, what is it that we do or provide through Advances and into data centers. And that's it in a nutshell on Slide 5, where you see we literally began at the floor level through tail access floors in the U.S. and Hewitson in the U.K. to the structural ceilings and now obviously, everything in between. So it's a modular hack unit that's got air management integrated, liquid cooling integrated, cable management, et cetera. And where you can see there just on the bottom left of the graph is where you see the PDC itself, which is literally bolted onto the hack and obviously, a very natural next step for us as a business. From a share of wallet perspective, which is like there are 3 areas that we find highly attractive in the general advances space. One is it's clearly a hugely growing sector data in its own right, data, AI, technology, et cetera. Our market share is still tiny if you take a world view of the opportunity. That's an area where we're growing. And then in terms of share of wallet, that's been a critical area of focus for us that when we've got the audience with the customer, we essentially try and sell to them as much as possible. And from a share of wallet perspective per meg, it's been growing very rapidly over the last few years. We're up at around $500,000 per meg of opportunity from our current offering. And literally, this product doubles that to about EUR 1 million, assuming naturally, we can execute and make that work. Then on Slide 6, the strategic rationale here I think, is very straightforward. We have a very solid track record of execution right across our businesses, but clearly in this sector as well. In terms of technology readiness, this is fully aligned to next-generation data center power specs and requirements and also the move to 800 volt, if anything, actually becomes an even bigger opportunity for the BMC business and its product set. And a very interesting dimension to all of this, which isn't something either Kingspan or Advnsys has been exposed to in the past is the obsolescence opportunity. So in practice, these products will work for approx 20 years. But in reality, things move on, computation requirement moves up, energy density moves up, et cetera, et cetera. And in practice, probably the obsolescence period for these products is in or around 5 years, which opens up obviously a critical and very attractive replacement opportunity over time. Again, extremely interesting for Kingspan. And then just finally, on Slide 8, I'll just take you to what it means for the overall group. We've clearly been growing at a significant pace for, well, a very long time now. Assuming our plans for this business in 2027 happen, which we'd be highly confident they will, it should take group EBITDA to around EUR 1.78 billion and group trading profit to about EUR 1.47 billion. And I'd stress this is obviously very significant organic growth of the BMC business itself in '27, growing EBITDA from approx EUR 90 million to EUR 180 million or potentially even more. And that's all organic growth in advance of the horsepower we will put behind this in '28, '29 and beyond. And it's worth pointing out here, just even if you look at the recent 5 or 6 years, in 2020, our EBITDA as a group was just about EUR 600 million. So assuming we achieve this target next year, in that relatively short 6 or 7 years, Kingspan Group's EBITDA and EBITDA will have both grown by 300%. And that's it in a nutshell. Now we'd be delighted to take your questions.

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

I'll just stick to one in the interest of time. Could I just dig a little bit further into kind of the geographic expansion of this business? Obviously, Gene, you mentioned there in the presentation about the new facility in Kentucky. How should we think about the expansion here? Will it be existing data facilities that you'll be expanding and bringing the BMC product in? Will it be BMC site specifically? And how does that work in terms of the product that BMC are already shipping from their current facilities? Just how I should think about all that would be really helpful.

Yes. Thanks, Shane. So we will be -- the facilities will be bespoke to the assembly of PDCs under the BMC brand. Increasingly, we're going to launch a [indiscernible] power brand around the world as well. I think our preference would be to have these close or alongside the existing Advances facilities around the world. It doesn't necessarily have to be. Like it can be a product sale or it can be a package sale. So it's flexible on that front. But obviously, the opportunity worldwide is huge. The business is already serving some demand in Asia. So as that grows and obviously, as the North American opportunity grows, I think we'll just be expanding physical facilities, PDC dedicated close by the Advances premises as well.

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

Just a couple for me. Firstly, just wondering whether BMC is there a kind of a customer cohort they don't currently deal with that Advances does kind of -- are they missing some hyperscalers, some of the bigger colocators, et cetera? And is that something you'll be able to put them in front of now under Kingspan ownership?

Yes is the answer to that, Flor. Naturally, BMC have relationships with customers we do as you'd expect. But I think, obviously, our global presence and really our kind of 25-year experience in the data center segment already means we understandably would have a lot more relationships. And therein lies the beauty of it all that it's BMC's capability, its technology and our scalability is where this all really comes together.

Okay. Great. Second one, just more on the finance side, the kind of target of doubling EBITDA next year. Just to understand that, is that going to be based on a kind of a doubling in revenues as well? Or will it be kind of helped by margin instead or just to think about what we should be doing in terms of '27?

Yes, Geoff will take that for you there, Flor.

Yes. In very broad terms, Flor, you can model a little over EUR 600 million of 2027 sales and EUR 170 million of trading profit. So still very strong trading margins into 2027.

Our next question comes from Alexander Craeymeersch from Kepler.

Yes. So I mean, clearly, you're more moving into power management away from thermal and air management here. I'm just wondering whether this is also the direction you want to go in the future and you want to continue to go into space doing acquisitions? And then the second question I have is really on the multiple. I mean, obviously, a multiple of around 5 to 6x 2027 estimates. Can you like square this why the seller sort of accepted this? Is this because there were capacity issues or something like that? And then maybe if I can squeeze a third one in there. Is there a lockup on the shares that are issued?

Okay. So we take that in reverse. There is a lockup of 2 years post close on the shares. So that might kind of answer your middle question, and that's about as far as I go on that. And then the other piece, I guess we're certainly not moving away from thermal. In fact, we're at the very, very early stages of growth and expansion on the thermal side. So we're really after maximizing the full solution that we can offer rather than moving in any particular direction. So we see it as an enhancement of our offering to our customer base rather than a move in any direction. And yes, you can take it that we will continue to bolt on and expand technologies onto our offering for as long as our customers demand that from us. And we're in a strong position to be able to take this wider portfolio of solutions to the hypers and colos and others. So it's an evolving piece, very exciting, and I'd say many more steps to come as well.

Can I press a bit on the multiple here because...

We'll talk offline, Alex. We got to get everybody on for a question. We'll talk offline.

Our next question comes from Julian Radlinger from UBS.

So could I just get a little bit more help, please, with the accretion math. So first of all, did I just hear that correctly, EUR 170 million trading profit next year on EUR 180 million EBITDA. So that doesn't seem like there's a big difference. Maybe you can help out with D&A. And then will there be any PPA? And just maybe an idea of sort of the interest costs would be great to get a sense for the overall EPS accretion, if possible.

Yes, absolutely. I'm happy to take that, Julian. So going down the income statement, yes, approximately EUR 180 million of EBITDA. Depreciation is approximately EUR 10 million. So that bridges to the EUR 170 million of trading profit. The interest cost directionally will be about EUR 30 million on a full year basis. We intend to issue a public bond to fund this. The effective tax rate will be broadly at the existing group average, which is 16.5%. And the amortization in terms of the intangible of the order of EUR 50 million there or thereabouts, the noncash amortization charge. If you run all of that through the numbers, it's approximately EUR 0.38 of earnings on a full year basis, if you do the math on that.

That's including the small dilution from the new shares?

That's net of the small dilution and also the noncash amortization charge is within that.