Earnings Call: H1 2019

Aug 23, 2019

Ladies and gentlemen, welcome to the Kingspan Interim Results 2019 Conference Call. My name is Charlotte and I will be coordinating your call today. I will now hand over to your host Jean Marta to begin. Jean, please go ahead. To our interim results call. We'll take you directly to slide number 14, assume you've all got the deck there. It's titled 2019 H1 in summary. And in summary, it was a decent first half first revenue up 12% to just over 2,200,000,000. And trading profit ahead by $230,000,000, which resulted in basic EPS up 16% almost 0 point 9 $4 All of the businesses and most geographies performed well. Just by product sector insulated panels were up 14%. Particularly strong in the Americas and in Southern Europe, weaker in Germany and predictably weaker in the UK, which we'll cover off a little more in detail later. The boards businesses achieved growth of 5%. Again, strong volume growth in most markets particularly Western Europe, Ireland, Nordics, markets like that were particularly strong. But a lot of that volume growth was offset by significant price deflation as a result of, the well covered MDI cost reduction we've seen over the last 12 months, again, more on that later. At light and air business saw a significant growth of 11%. This was particularly evident in North America. You might recall we had a reasonably difficult period there last year. So we've recorded a strong rebound in first half. And that's expected to continue, right through the second half as well for that business unit. Water And Energy was quite stable apart from the impact of a small acquisition we did in the Nordic region. And the data and flooring business was particularly strong with 17%. Again, largely around the data offering as distinct from the office offering. So that's the, that's an ancillary, very strong first half And we'll hand you over to Jeff now, before we get into the business here. Thanks, Jean. And I'm now on page 15, the financial highlights slide So group revenue a little over $2,200,000,000, up 12% in the half year trading profit of 230 point $400,000 of 18 percent, EPS up 16 percent to $0.93.8. Our interim dividend of $0.13 is up 8% versus last year's interim, a decent free cash flow performance in the period $80,600,000 more than double the free cash in the first half of twenty eighteen. And I'll deal with the component parts of that shortly. Net debt broadly in line with the same point midyear last year. At $734,000,000, not withstanding the fact that we had a number of acquisitions year on year. Since the midpoint of last year. The trading margin 10.3 percent, up 60 basis points, and we'll talk about the divisional split it up in a second. Net debt to EBITDA 1.31 times, and an important metric return on capital employed 17.1 percent, up 150 basis points from midyearlast year. And turning to Slide 16, just to look at the trading profit over the last 5 financial or 5 half year periods, you'll see that the first half of twenty nineteen at $230,000,000 was more than double the left hand side of that page, the 2015s first half. So compounded profit growth of approximately 20% since the first half of twenty fifteen. I mentioned that the outset, a decent margin performance in the period and just to look at the divisional split of that insulated panels broadly in line with last year's full year. So 10.1% installation boards exceptionally strong margin in the period at 13.4% as compared to 12.2 full year last year. That margin will soften through the second half of the year. Light and air is very much a second half weighted business put on track there for 4.3 percent trading margin, a nudge ahead of the first half of last year. Water And Energy, again is the 2nd half weighted trading margin of 5.7 percent in line with the first half of last year. Data and flooring, a good first half margin performance driven by data center solutions in particular. So all of that combined to a 60 basis points improvement in the trading margin relative to the first half of last year. Page 17 bridges, sales and profits, half year 'eighteen to half year 'nineteen and just look at the component parts of it, profits and the first instance. So you'll see currency added, but 1% to sales growth in the period. Acquisitions contributed $155,000,000 or 8% to the overall sales growth in the period. Underlying sales were ahead by 3%, all combining to 12% revenue growth in the the period. And from a profit perspective, overall trading profit was up 18% and the constituents of that were currency added that lower $2,500,000 or 1 percent acquisitions contributed $15,900,000 or 8 percent and underlying profitability was up 9% or 16,500,000. Free cash flow is set out on page 18. The biggest driver naturally of free cash flow is the EBITDA performance of 271,000,000 We, from a working capital perspective, the first half of the year, working capital increases but the increase, or the outflow was lower at first half twenty nineteen versus first half twenty eighteen. So the working capital to sales ratio improved by 60 basis points, just a little over 13% working capital sales in the first half of twenty nineteen. Other significant cash flow items, cash tax was $45,600,000, reflecting the balance of tax owed from last year. And some preliminary tax for 2019, which will even out over the course of the year. And net capital expenditure of $68,500,000 all generating a net free cash flow of $80,600,000. Page 19 reconciles the debt position to that at the beginning of the financial year. So debt at the end of last year was $728,000,000. Free cash flow reduced debt by $80,600,000. We paid out a dividend of $54,000,000 and then settled to deferred consideration in respect of, of east or west in Brazil of $29,700,000. So all, needing to a net debt position of 7 $34,000,000 at the end of the June. Page 20 sets out a return on capital employed. Good performance in the period. It's nudged up over 17%. So 17.1% and the first half of twenty nineteen, and that's a trailing 12 month measure. And that compares to full year, full year 2018 of 16.8 percent, so progression there. And the strength of our balance sheet is set out on page 21. So the total, of our available cash balances and committed undrawn facilities is 888,000,000. The principal components of that would be we have a 5 year 450,000,000 revolving credit facility, which was there was a modest amount of drawings on that at the end of the period. And we have an additional €300,000,000 revolving credit facility, which we arranged in June, which was undrawn at period end. And the weighted average maturity of our debt facilities is 4 0.8 years. So, and strong balance sheets across those headings. Our sales by geography is set out on page 22 And just looking at the key territories, you'll see a mainland Europe represents or represented 49% of group sales first half of 'nineteen, compared to 47% first half 'eighteen and the UK, 20% in 19 versus 23% in the first half of twenty eighteen. No other significant changes in the proportions of turnover. And then in the table below, you'll see the key territories And I think we, the other item I'd highlight on that is just that sales in Ireland are very strong in the period, up 22% in the first half of last year. So with that, financial summary, I'll hand back to Jean. Great. Thank you very much, Jeff. We don't propose going through all the individual divisional slides, but there's a copious detail there, which no doubt you've already read through. So we'd like to take you straight to slide 29, which is titled Outlook. Our order intake for the 2nd quarter was quite encouraging across most of our markets. And that's left us with, I'd say, healthy order books in most regions, particularly Southern Europe, both, both France and Spain. The Americas across all markets, Canada, the U. S. And indeed Brazil have entered the second half of the year in a very strong position from an order book point of view. There are a couple of exceptions, which won't really surprise anybody. The UK has got has got consistently weaker in particular the last 2 to 3 months, which is not surprising given that the We're kind of reaching the 31st October days. There's increasing level of nervousness. Confluence is lower. And as a result, the regular business in that market is weakening as we speak. That said, there are a couple of strong sectors for us, which are largely around data and online retail, which have been strong for the last couple of years. They're Brexit agnostic, as we call it, and they remain healthy 1st for the foreseeable future in the UK. But that all said, we would expect a lower sales performance in the UK for the second half than we achieved this time last year. The same can be said for Germany and indeed for different reasons. It's obviously been weak on the automotive side for some time. And that's, that's eventually spread across most other segments. So again, I'd say for the last 2 to 3 months, we've seen it consistently get weaker. And we would expect the second half to be reasonably challenging in Germany. The combination of all of those markets is just under 30% for us. So in essence, that's, that's the weak side of the business at the present time. And, but all in all, we would expect to deliver a fairly solid form is in the second half, bearing in mind that it's up against a very tough comparative for last year, which was an exceptionally strong period for us. That covers the formal part of our presentation. And we're now open to all kinds of questions. You. We have our first question from Robert Ethan from Goodbody. Robert, your line is now open. Just a few questions for me as usual. Just in terms of the order book you've given us a very clear picture of the plus and minuses. And when you just kind of aggregate them all together, is the order book or order intake at group level flashes when you consider the different moving part. So that's kind of a straight question. And just in relation to the UK, you talk about lower sales performance in the second half. Your volumes are only slightly down in the panels in the first half. Can you just be able to kind of frame the second half in a bit more detail, like what degree of decline should we be thinking about, at this stage, given what you've seen in your order book, kind of my second kind of area of question is just around the firepower that you have for M and A. You've outlined, but you've got a further facility in place. Just what you're thinking around and the extent of our products that you have, the M and A pipeline, how our discussion is going, multiples, and all that good stuff around that. And my final area of question is, sorry about this, is just how should we think about price cost spread in the second half? Clearly, it was when you just look at the net of them, it was a bit of a tailwind in the first half. Is that it, Robert? I can give you more if you want. Okay. Order intake at a group level or the order book would be up kind of, up around 3% worldwide, obviously taken in the plus and minuses. And that, that's a panel's incident. We're talking about here. The order book for insulation boards, is very short, differently times entirely. And as you know, it's about 3 months or so for panels, and that's the situation at a group level. In the UK, for the second half, we'd expect we'd expect high single digits year on year reduction, in both panels and boards. So that's obviously quite material. But we've, for a couple of reasons, there's obviously pressure in the end market. But in particular in insulation boards, we've taken a very strong stance in terms of our pricing. And that's we've given up some share in recent months that's going to take us a bit of time to recover. So that's, that's self inflicted, if you like. But all in all, the market is weak and is weakening further. In terms of our overall firepower, we'd say comfortably about 600,000,000 we, we didn't really transact at all, but one very small, very small acquisition in the first half. The pipeline is as healthy as ever. We're pursuing a good number of opportunities and hopefully we'll make progress on some of those during the second half. In terms of, pricecost dynamics, it's, prices are, prices are likely to be flat at best, I'd say, in the second half. Steel is a little unpredictable. It might weaken further. But MDI, which we've talked about in the last couple of years might harden slightly. We don't anticipate anything dramatic. It reached its bottom probably 6 months ago. It's crept, not much, but it's crept over the last, 6 months and we'd expect that creek to continue. So Yeah, the price cost dynamic should be relatively stable, maybe a little negative. Thank you. Our next question comes from Yves Broomhead from Exane BNP Paribas. Yves, your line is now open. Good morning, gents. Thanks for taking my question. I have 3. Hi. My first one is on the leading indicators. When we look at industry sentiments across your main regions, UK and Europe, as well as TMI's, and it started to weaken quite considerably. And some of your competitors, competitors, sorry, including today have also witnessed a slowdown in Eastern Europe as well as Germany. Is there anything a bit more structural going on in parts of Eastern Europe but also in continental Europe. And I understand that France is strong, but are you seeing anything which suggests that there could be a sequential slowdown? My second one is, just as a follow-up, actually, could you remind us what is the raw material deal between steel and chemicals? And my last question is on your net 0 energy commitments and your Circularity targets into 20252030. How should we think about gross margins as you use more recyclable materials into your production process? Okay. Thanks for that. In terms of lead indicators, look, we're as cognizant as any of our peers about, what's going on out there. What's what as we said, what's clearly obvious to us at present is Germany and the UK. In Central Europe, I guess the particular outfits you're talking about probably is a much bigger presence there than we have. But on balance, I'd say our business there is reasonably stable, reasonably stable. Like our big markets are Poland Czech Republic and Hungary. And by and large, I'd say there's nothing staggeringly brilliant going on in those markets, but for now, we wouldn't be we wouldn't be highlighting any significant drop in those markets. France, as you highlight, has been strong. And we would see that continuing for a couple of reasons. There's a clear conversion panels from traditional built up systems that we expect to continue. We've invested in a facility in Southern France and Perpignon and we're looking at a further facility in Central France to facilitate that further conversion. And in Southern Europe, you've obviously got recovery in Spain and Portugal as well as an increasing shift towards our type of solutions. And that looks reasonably sustainable, at least through the second half of this year. Beyond that, beyond that, it's very hard for us to have any kind of material gauge. In terms of NZ and Circularity, we you'll have noticed we've embarked on a, I'd say, a challenging set of goals we've set for ourselves for the next 10 years to cover an awful more than the net 0 targets we had previously. We obviously believe in those initiatives, and we believe they'll bring advantage to the business as well as it being the right thing to do. From a cost perspective, we wouldn't anticipate any material difference in our, in our bonds as a result of moving towards recycled material. Like presently, it's competitive. We'll be using an increasing amount of recycled PET. A lot of that would be in house generated. And we're also looking at the supply chain there in terms of us taking probably a more significant position in in capturing that supply chain. But no, from a, from a VOM's perspective, it can be broadly similar with virgin material. Yes, just on the steel and chemical bill, he's not going to be drawn specifically on that. I mean, that's been evolving over the last 12 or 18 months. It plays naturally into our selling prices. So you'll have the shape of it from previous conversations, but not going to not going to go into any particular detail on it. Okay. Thanks. Our next question comes from Gregor Kudlitsch from UBS. Gregor, your line is now open. Hi. Hi, Greg. Good morning. How are you? A couple of questions actually maybe 3. So just coming back to the price and commodity side of things. So it looks sort of at the first half, could you just sort of summarize for us what the deflationary effect was maybe at the group level? I don't know, against the 3% organic growth. And I think you were in answer to the previous question, I'm not mistaken. I don't know if you were talking about commodity pricing or or selling prices that you were suggesting a flattening of that. Is that the right way to think about sort of from a top line perspective? The second question is, are you seeing any competitive changes from the pricing side? I think, again, one of your peers today. Obviously, I know that the product is different, but just pointing out there's some pricing pressure in some markets that may may not see that relevant for you, but just checking. And then on the M and A side of things, so what's been a bit quiet for a while? I think some of the areas, particularly things like waterproofing or roofing membranes, which I think you've called out in the past Just wanted to get an update where we are there in that strategy to expand into sort of these new product categories or whether just simply noticing the opportunities? And then finally one, quick one, if we can just have an update on the CapEx profile for maybe this year and next helpful. Okay. I'll deal with a couple of those just first off. In terms of the competitive environment, we've Our materials as a result of the deflationary impact have obviously become more competitive over the last 12 months. And the impact of that has been significant, a regaining of share from traditional materials that obviously benefited from our cost flows a couple of years ago. So that's been evident largely across Western Europe and Western Europe, UK and Ireland. And it continues for insulated panels and on boards in Continental Europe. As I said earlier, we've company specific, we've taken a position in the UK and boards in recent months, which might, well, which will affect the volume profile in the second half But that's we will adjust that accordingly depending on how things evolve over the second half. From the wider strategy point of view, yes, waterproofing and industrial insulation are probably the 2 key areas that we that we highlighted as being of interest to us longer term. That remains exactly as it was, Gregor. So we clearly haven't been able to transact at any material level in those two segments, but they're both still very much, central to what we want to achieve longer term. We've in both of those segments, incidentally, we've been growing significantly organically. And so the top deck and ex deck product ranges which our membrane roofing insulated panels have been growing encouragingly, mainly in the European market, We've just recently launched a one deck product in North America, which is also to address that segment. So to to have insulated panel solutions available there to compete with built up systems. But anyway, it remains very front and central and from an industrial insulation point of view, our adopting and pipe insulation businesses, which are largely, comprising of cool term technology, again, have been advancing significantly across a lot of the markets were present with worldwide. So we're working with an organic level, and whenever anything significant and strategic presents itself, we'll be hopefully ready to pass. Just to pick up on two other of your questions, Gregor, the value volume split just to look at that for the 2 larger divisions. In insulated panels, underlying sales growth was up 3% in the first half. Directionally, the split of that was volume up about 6% price minus 3 In Insulation boards, underlying sales were flat in the first half. And again, directionally, pricing down high single digit volume up high single digits and net neutral. And so underlying sales growth of plus 3 and that's underlying sales growth has moderated slightly in the month since the half year end for the reasons Gene outlined earlier in terms of a couple of markets. The second question then is regards CapEx. The outlook for this year is approximately 140,000,000 and a similar number for next year. Our next question comes from Tobias Ryman from Morgan Stanley. Tobias, your line is now open. Hi, thanks for taking the questions. 3 from my side as well, if I may. Firstly, a follow-up on the pricing, you just kindly give split and I think in board you said it was high single digit for the first half. I think in Q1, we were down about 4%. So I think the pace of price cuts has accelerated a bit. How can we think about this for the second half if you reached the bottom here? Could pricing become actually more favorable or should we expect more price cut from here? So that's the first one. The second one, you have been, I think, talking for a while now on your fiber free ACO product. And I think actually the market potential there quite significant. So could you give us a little bit more insight here, how significant the opportunity is and maybe also where we stand in the development process? And then just the final one in terms of volumes, clearly H1 volume co was quite strong. And you mentioned just earlier that you have taken a lot of market share from traditional insulation peers. But thinking about H2, I would say if the price of additional price cuts is slowing, can we expect the level of market share gains to from here or should we expect volume growth to be more in line with sort of general construction, construction spending growth? Thank you. That's great, Tobias. So just dealing with your first question, we'd expect pricing in the second half to be broadly flat. So, no particular moves upward or downward. That is on a group level, correct. That's correct. And I know you specifically asked about boards, and that's likely to be the case for boards also. In terms of the A core solution, the development is ongoing there. We expect to launch a product during 2020, probably late 2020. And that will be version 1. There are a number of number of technologies that we're advancing. And it's likely that we will launch probably a niche application product in 2020, which will be geared around high rise residential UK. That's a, and just in the very same way as cool term was embryonic 20 odd years ago. We would see, we would see this product moving from, moving from a niche to more mainstream over the next five 10 years. It's not something that's going to be have a dramatic impact on the group in the next year or 2. So, yes, version 1 will give way to other versions down the line and we've got sight on what those technologies are going to be. In terms of market share, I'd say we're pretty much done in terms of movement one way or the other. So given the fact that our pricing is expected to be relatively consistent, as an industry, not just as KingSpan, we wouldn't expect a material shift either way in the second half versus other forms of material. That's very helpful. Thanks. Just a very quick follow-up to clarification on the pricing. If you say flat for are we talking H1 versus H2 or year on year for H2? We're talking H1 versus H2. Okay. And year on year, I guess, okay, the comparison is a bit different for the 2nd half, right? Down clearly Q3 2019 versus Q3 2018. Yes. Okay. Thank you very much. Thank you. Our next question comes from Arnold Layman from Bank of America Merrill Lynch. Arnold, your line is now open. Thank you very much, and good morning. I have three questions, if I may. Just coming back on the insulation boards, very strong margin in the first half. I think your historical high Can you give us an outlook on H2? I mean, because you said you're focusing on pricing of our volumes and clearly, that seems to be working. So why would you change the strategy if it enabled you to deliver better margins? That's my first question. And then maybe a couple of follow ups. Firstly, on the UK, are you doing any specific kind of no deal Brexit operation. I appreciate Brexit has been coming for a number of years now, but considering it's potentially hitting up in the coming months? Have you adjusted anything in your UK business to make sure it was ready? Are you moving product around from Continental Europe or from Ireland into or outside of the UK. Could there be any friction if there's more, more checks at the borders And lastly, on Ireland, a very strong first half, quite impressive growth there. Could you explain what was the driver? And also, would you expect some sort of Brexit related slowdown in the Irish economy going forward? Okay, Arnaud, thank you for that. In terms of the, in the board margin, we'd expect it to be reasonably consistent with first half and the second half. If not, maybe slightly down. That's kind of the position there, but we would see that unwinding through the second half, let's say, particularly into early next year. And so no major change in the second half versus first half on that side. From a Brexit standpoint, honestly, it remains as uncertain to us as it is. Couple of years ago. We clearly have, run the rule over a number of different scenarios, but we haven't as yet taken any firm action. Because the data has slipped and it slipped again and it might even slip again. So the way we're viewing this is that we've an awful lot of flexibility within the business between where we would shift production in particular, either from or indeed to the UK depending on what way things fall. But we see it as an evolving process rather than an event that's going to change from one day to the next So we'd be working on the basis that businesses and consumers in general are going to be afforded time to adjust to this, whatever, whatever the outcome is. So in summary, no, we haven't taken any firm action. We just keep an eye on how things evolve. And potentially, if things go haywire in the UK completely exchange wise and everything, it becomes becomes a very attractive export base for KingSpan. But our primary concern is not necessarily flows in and out because the UK is pretty self sufficient. So from an asset based perspective, it largely matches demand. It's reliant on some raw materials coming in, but not all. So it's our primary concern. This is what happens the activity level on the island of Britain rather than the flows east or west. Ireland, as you point out, has been exceptionally strong with sales up 22% and that's all organic. It's really a reflection of the general construction environment here. And even though that's very strong, house construction is still remarkably constrained, even in the context of that. So it's really a reflection of recurring activity levels, but it's still miles away from the concerning levels that was at 10 or 12 years ago. Could already be affected by Brexit clearly, clearly it could. But potentially there's also some advantage depending on what the people's movements are thereafter. So very hard to call all that. But you haven't seen any short term slowdown in nylon like you saw in the UK? No, no. Our next question comes from floor O'Donoughue floor from Davie floor. Your line is now open. Thank you. Good morning, everyone. Just a couple for me. Firstly, just on North America, an update, a bit more color, maybe in how that that's doing obviously language and statement is quite positive. So a bit more around that would be helpful. And maybe just then to extend that out to Brazil and the Americas in general and what you're seeing there? And then the second thing, just ask, for Jeff, I guess, is more technical just wondering, have you any commentary on full year guidance around tax and interest, if you could? Thanks. Okay. So in terms of North America, yes, it's we've had we've had a very strong first half. The order book healthy and our project pipeline is very healthy into the second half. So we wouldn't see any upset in that pattern, for the foreseeable future. The segments that have been kind of standouts for us are automotive, online retail and data as an end market. And obviously, automotive is a standout there in the sense that it's totally at odds with what's happening in Europe and for different reasons. What we're seeing in North America there is a, and it's very material for us. Is that the preparation for shift towards, electric vehicles means that the infrastructure has to be significantly overhauled and actually just recreated many in So you've got battery plants, new assembly plants, etcetera, for a good number of brands that are underway and also in the pipe. So that segment for us, we'd see as being strong for, well ahead into the future. Online and data, I think, is quite obvious and it's reasonably consistent with everywhere else. But I think layered across all of this is that the North American market has lagged Europe significantly in terms of insulation and energy standards. And we see that continuing to move in the right direction. So that, that, if you like, creates an underbelly of demand and future growth for us in the North American market. Activity overall is not particularly exciting if you look at low rise nonresidential and we're obviously cognizant of what the various forecasts are saying about the sector. But, yeah, we'd be reasonably optimistic about that market for the foreseeable future. Brazil market is something entirely different. It's so far not really about energy. It's about its food production It's about basic industrial buildings, trying to use more modern materials. It's about trying to build more quickly, which is something that the insulated panel favors. So what we're experiencing there is a shift in conversion from traditional built up systems and even asbestos believe it or not, which is still a very prevalent, source of a roofing in Brazil. And so we're seeing a conversion from those type of systems across the panel. And that's all in the face of what is still a relatively weak economy. So We'd be encouraged by what we're experiencing there. We've just commissioned a new facility in the Sao Paulo region. We're about to kick off with another greenfield facility, which will be in the south of the country. And that's all around, supporting continued organic growth in general, South American region. And then Okay. Flora, just on the the two questions on the financials. The full year expected tax rate is approximately 17% and that compares to 17 1 in the first half. And our interest guidance for the full year is 21,000,000. Great. Thank you. If I could just come back in a couple of things or sorry, I had a couple of questions on. One is just on the CapEx in the U. S. Specifically, how much will that ultimately add to your kind of sales potential base or your capacity base? That's currently there. And then just secondly, just wondering what core is it running on target in terms of its level of panel sales or the number in H1, is it a little bit light to what might have been expected? We'd always like it to be higher for, but no, I wouldn't, I wouldn't highlight that as a concern at all. Like, a lot of our, a lot of our, issues related to quad core is actually just enabling facilities. It just logistically takes time to have this technology available from all facilities. And that has ramped a lot actually even in recent in the last half. So with that type of start of 8% of worldwide sales, and that's with practically 0 in the Americas. In fact, really 0 in the Americas. So that's really just kicking off an earnest in the second half. And some of the segments I just outlined a while ago will be heavily, quad core oriented. So that 8% we'd expect to ramp more in the second half and jump, I'd say, materially, during 2020. So while it was, we'd like it to be higher now. It hasn't, but no, I'd say we're largely still on track as I say, we expect a significant shift through 2020. Okay. And then your second point, the additional CapEx in the U. S. Yes, so we're just finishing off facility in Modesto. And we're about to start on 1 in the Northeast under the AEWIP brand. And the combination of those will add about $100,000,000 of capacity. You, Mr. Clark. We currently have no further questions. I will hand back to you. That's great. Thank you all very much for joining the call. And we'll be available to speak to you over the week, next week if that's required. Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining.