Earnings Call: H2 2018

Feb 22, 2019

Ladies and gentlemen, welcome to the Kingspan 2019 Preliminary Results. My name is Jake and I'll be your coordinator on today's call. During the call, you'll have the option to ask a question by pressing star 1. I'll now hand you over to your host, Jean Murta, CEO to begin. Jean, please go ahead. Hi, good morning all and welcome to the results call from Kingspan. We'll take you directly to page well in the presentation, which, hopefully you've all got its title 2018 in summary. In essence, it was a great year for Kingsvan. Revenue up 19% to $4,400,000,000. Underlying revenue was up around 5% and the rest taking into account acquisitions and currency, was the remainder. Profit was 445,000,000 up 7% at an underlying level. 2018 in total and basic EPS was up 16% at 184%. There was growth largely right across the piece, both as an organic and acquired level, panels up 21%, boards up 12 Leitener, almost reached $300,000,000 in revenue and some improvement at the margin. Although not yet quite at the target level, but we'll get there. Water and Energy sales of 13%, also with a newly established frontier up in the Nordics and the data and foreign business, which is our access floors business kind of morphing into its next stage of development, saw a growth 3%. We invested, we invested around $470,000,000 in acquisitions, and they covered investments in Southern Europe, South America, and also in Poland covering Eastern Europe. So that's really a established substantial, new presences for us in markets where the hadn't, had not already been established. So in essence, I'd say, it was a very positive year for the business. Get into that in much more detail now. I'll just hand you over to, to Jeff on slide number 13. Thanks, Jean. And just to go through initially the financial highlights for the year, group revenues of $4,370,000,000, up 19% trading profit of $445,200,000, up 18% and I'll come to the constituents of both in a second. EBITDA up 18% to 521,200,000 earnings per share, $0.184 per share, up 16%. The total dividend for the year, $0.42, up 14%, free cash flow very strong in the year at $308,400,000, up 55% on the comparable amount in 2017. Net debt, 728,000,000, up 264,000,000 year on year. Clearly a key driver of that was the acquisition spend year on year, which I'll again, I'll come to in a second. The group trading margin was 10.2 percent, down 10 basis points versus 2017. We'll come to the divisional mix in a second. Net debt to EBITDA of 1.4x compared to 1.05x in 2017. And our return on capital employed 16.8 percent. If you annualize the impact of acquisitions made, it's 17.1%. Versus 17.8 in the prior year. Turning to Page 14, just to give you the divisional split of trading margin, insulated panels delivered 10% buying in line with 2017. Installation boards was slightly ahead, 12.2% versus 11.9% in the prior year. Lives and Air continued to progress its margin 7.4 percent, up modestly and 7.2% in 2017. Water and energy down in the year to 7%. Most of the reason for that is the exit from smaller lines of activity that we exited during 2017. And data and flooring technology delivered a margin broadly in line prior year, 11.9% versus 11.8%. And you'll see on the left hand side of the page, compounded trading profit growth of just under 32% in the period since 2014. Turning to Page 15, just to bridge the sales and profit performance and dealing with sales initially, group sales up 19%. Currency was minus 3 percent or 92,000,000. Acquisitions contributed 17% or 623,000,000 and underlying sales grew by 5% or $172,600,000. From a profit perspective, overall trading profit was up 18% and the components of that work, currency, minus 2% or minus 1,000,000. Acquisitions contributed 13 percent or 1,000,000 and underlying trading profits were up 7% or 25,600,000. And as I mentioned at the outset and turning to Page 16, We had a very strong, free cash performance in the year, delivering free cash of $308,000,000. Naturally the key driver of that was the strong EBITDA during the year, but also we had a modest reduction in working capital. Our working capital metric, our working capital to sales ratio in 2018 was 11.5% compared to 12.4% at the end of 2017. So ninety basis points reduction in working capital, and that was mostly around lower levels of the inventory days on hand. The other key items on the bridge, our cash interest expense, 1,000,000 our cash tax $75,000,000 and our net CapEx incurred for the year was $131,000,000. Then on page 17, just to bridge the opening and closing and net debt position, We opened the year with 464,000,000 of debt. We reduced debt by 308,000,000 as a consequence of free cash flow. Our acquisition spend in the year was $472,000,000. The significant components of that being being the Sentasia Ambalyx acquisitions. Our dividend was $68,000,000. We've deferred payment due of $30,000,000 on the Sentasia acquisition, which we've accounted for as debt. And all of that, combined to the 728,000,000 euro of debt at the end of the year, which is leverage of 1.4 times net debt to EBITDA. Turning to return on capital employed on page 18. This is a metric that is is driven hard through the business. In 2018, 16.8% compared to 17.8% in 2017, which, and then when you annualize the impact of acquisitions bearing in mind that BALEX occurred mid year and Cintasia at the end of March annualizing for the impact of acquisitions is 17.1%. And the strength of our balance sheet is outlined on Page 19. From a funding perspective, we drew down in January 2018 a further $175,000,000 of U. S. Private placement loan notes, a coupon, a fixed coupon of 1.57%. With a weighted average term of eight and a half years. The total, available cash balances and committed undrawn facilities on hand at the end of 2018 was $675,000,000. Included within that is our 5 year $500,000,000 revolving credit facility, of which only $120,000,000 was drawn at year end. And the overall weighted average maturity of our debt is 5 years. So we're in good shape on the funding. And the profile of our geography year on year is set out on page 20, and the notable changes would be the the UK has gone up in absolute terms, but in percentage terms, the UK is 21% of sales in 2018. Compared to 25% in 2017. And mainland Europe has increased to 48% of the group as compared to 44% in 2017. The other key geographies, pretty similar year on year in terms of the proportionality. So that's the key financial highlights. And with that, I'll hand back to James. That's great. Thank you, Jeff. Just in the interest of time. I don't propose we go through every single last detail on the operational slides, but let's move to Slide 27, which is the outlook. The year has started pretty good for us in most of our markets, with revenue and volume ahead. Order intake and the order bank, also in most of our markets, I'd say with the with the notable exception of insulated pounds in the UK actually has started the year in pretty good shape. A significant feature over the last year or 18 months was obviously our raw material environment. Which really was the first time in a long time that it had featured so much. Really, the pressure on that side has subsided materials flowing. It growing a lot more competitively than it was. And part of the, part of the impact of that is a resumption of growth against traditional installation materials. So we'd have noted last year that other materials were gaining ground as a result of the lack of availability of polyurethanes, but that's not the case now and the industry is fairly rapidly recovering position against those materials. That aside, I'll just say that we're there's obviously, plenty of negative rhetoric around, no shortage of past And we bear that in mind as we go forward. But for investments, I just say, we started the year well, and we're in reasonably good shape going forward. So with that, really, I'd like to hand it over to the floor for some questions. The first question today comes from Robert Eaton from Goodbody. Robert, please go ahead. Just a few questions. Just firstly, can you just give us, kind of a guidance on, you know, what is the chemical bill for FY 'eighteen so we can just have a sense of the scale of it and given the recent price declines in that And just related to that, can you just give us a kind of a picture of how that is feeding into the end product in terms of pricing of boards? And how is it different? Is it different in any, any specific geographic markets? Is competition more intense? Passing it on in one market or the other. And kind of related to all that, you talk about, you know, your regaining market share back against you know, the, the fiber, influence. Can you give us a bit more color on that in terms of the extent of it? Is there certain markets that are that is happening more than others? And so that's kind of questions around inflation boards. And my other question is just on the balance sheet, obviously, in very, very good shape. You just give us a sense of kind of the M and A pipeline for, you know, 2019, just kind of setting our own expectations, what we should expect on that front, from Kingspan. And sorry, just one other question, related to water and energy. Jeff, you, you took note of kind of just, 1 or 2, one off in relation to that impacts the margin. Just give us a bit more kind of clarity on the scale of that so we just understand the impact on the margin and that division? Thank you. Okay, Robert. We'll have to write a completely separate report for you on all those questions, I think. No problem. On the deflation side, it's a well known fact that MDI has gone in the complete opposite direction to what it was doing a year ago. That all that stuff is very public on the isis lower index. So like broadly speaking, the material is kind of down to pretty much in the same place it was before any of the of the tightness started 18 months ago. And that obviously led to significant price inflation our end over the last year. And it's leading to deflation, I'd say, particularly evident in insulation boards, although it's also affecting family. So any, any of our price deflation is effectively funded by the raw material reductions. And obviously, we don't want to go into, exact pricing movements, etcetera, of our products just in this particular form. We're gaining share as you rightly point out. You highlight fiber. It's not just that. It's other forms of insulation materials as well that were more available last year. Let's say, polystyrene in particular, with regard to places and applications, let's say, flatt roofing would be a particularly, a particularly notable end application where those materials gain share last year, and that's reversing at a fairly rapid pace presently. And that will go for mainly for UK And Western European Markets. On the M and A pipeline, it's as healthy as ever. We've, we've got probably 5 or so of $600,000,000 of real scope, I suppose, in the present year. Whether or not we get an opportunity to execute on that, it's always difficult to say. But it's, yes, it's in as good a shape as ever. And then there was the Northern Energy margin point, Robert, about $2,000,000 was the impact of those costs in the 2018 numbers. I'm sorry. Can you just give us a kind of a sense of the chemical bill for 'eighteen? Just give us a sense of the scale of that bill. Well, there'll be, there'll be what I'll give an absolute, it'll be about $100,000,000 of deflation in our in our chemical bill as well. Okay. Thank you. The next question today comes from Emily Godov from JP Morgan. Emily. Your line is now open. Good morning, guys. And I've got two questions, please. Firstly, the first one on the UK, I just wanted to understand the sort of comments there a little bit more. I think it sounds to me like you're sort of making broadly similar comments to sort of Q3, but is there anything you're seeing at the moment that you sort of is in any way unexpected or anything that's particularly changing there. And our sort of our orders in the UK down against sort of weaker comps at the moment Secondly, just on the US, obviously, sort of the commentary sounds really positive. I think in the middle of last year, you said that orders were up to around 10% is Is that the same sort of magnitude I? Thanks. Okay. I mean, just in the UK, yes, our order intake, order intake, sales, I should say are actually quite healthy right now. But that's on the basis of a reasonably healthy bank coming into this year. Current order intake trends, however, are are negative year on year. And still single digit, though, I'd highlight, there's no major panic on that front, but they are down single digit and that will obviously have a dispatch impact on our U. K. Panel's business from, from into the second quarter. And the project pipeline that we're tracking actually is, again, quite healthy, but there's a very natural reluctance on some investors part to actually push ahead with construction projects. That specific to insulated panels, our board business actually is, is at a volume level, up year on year in the UK. So at a square meter level, our sales and intake are ahead in the 1st 6 weeks of the year. And that's probably a pattern we'd expect to continue. As I say, and that's largely reflecting a recovery of share for the materials that we're in. And in North America, very healthy intake last year. We exited the year with a bank significantly up in prior year. The intake is probably not quite as bubbly in the first weeks as it was last year, but it's a very early days. And as we all know, there's huge weather disruption there during January and it's very difficult to quantify the impact of that. But obviously, it wasn't particularly helpful. During that period. But the business from a bank and dispatch perspective is still in very healthy shape there. The next question today is from Gregor Guttslitz from UBS. Can I just come back to the commodity side, just for the $100,000,000 deflation? Is that a comment on 2018 or is that your expectation for 2019? And if you care to comment also what's happening on on the steel, please, because I think there's also some deflation, I think, in absolute terms, it's obviously a much larger bill. And then as regards to price, if I remember correctly, when we had the peak commodity surge in, in 2017. I think you remember you kind of had group wise high single digit pricing, correct me if I'm wrong, now that it's kind of going into reverse, is it fair to assume that you're going to get some pretty substantial top line deflation, appreciate on earnings just different matters, obviously, capture it back. But I just want to get a sense of what we should be expecting. It's not particularly obvious from your short term numbers looking at Q4 and your comments on Q1 that there's sort of a very big impact, but I would like to have some more detail on that. And then perhaps any comment you could help us on, on, on, on CapEx as we go over the next couple of years would be helpful too. Thanks. Okay, great. So the 100,000,000 that's a year on year 2018, 2019 over 2018. That's what that refers to. In terms of our own selling price that's obviously something that's very much influx presently. And as you point out, there was kind of a high single digits inflation as a result of a lot of this pressure. And you can take it. It'll be in the kind of 5% to 10% overall even if deflation, again, on the downside of this. And obviously, that's into account the entire mix of everything. We're doing that cool terms unaffected by this. Panels are much less affected by this. But on the whole, it will be something like that and obviously much more extreme in some applications. And then in terms of our CapEx plans, Yes, our CapEx stands, as we go forward for the next couple of years, this year's CapEx guidance is 130,000,000 with a similar number penciled in for 2020 at this point. Okay. Can I just push you one what time on the pricing? I'm guessing that 5% to 10% isn't really what you're seeing yet because I think you exited last year at percent plus looks like you're up mid single digit in the 1st few weeks of the year. So is this kind of what you expect at an over an 18 month period as all this commodity wash us through. Is that the right way to look at it? Yes, it's going to take time. Like, obviously, we haven't overreacted to the reductions too quickly. We've a, for start, we've got a project banker, sorry, an order bank in insulated panels is completely unaffected by But on the, yes, on the output pricing of the business from now, that that's kind of the levels you're seeing. And it will take a little bit of time for that to flow through. The next question comes from floor O'Donnell from Davy. Please go ahead. Thank you very much. Good morning, everyone. Just a couple from me. On the UK side, I'm just wondering particularly, I guess, in relation to the panels business, could you give us a sense now of what the mix is like in terms of end markets, be it warehousing, logistics, office, etcetera? Also, just in terms of Europe, obviously, it's now up to nearly 50% of revenues. We're perhaps getting an update on the rough breakdown of the geographical spread across Europe. And then, currently, just the interest in your thoughts on some of the newer places like, India, Brazil, Nordics, etcetera. And then finally, sorry, if I can jump in one final one, Just in reference to Slide 29, of the pitch and the global expansion projects, just a couple of ones there if you look interesting and your cost to be appreciated. 1 is Paraguay in terms of 2021. And the other one is just the XPS facility listed for the UK for this year. So thanks very much. Yes. Okay. So just in terms of the Yes, the trend trends in the UK, like on the whole, obviously, it's going to be trending downwards for very obvious reasons. There's a lot of pressure around warehousing, on the positive. Like there's pretty much, pretty much, everywhere has in the country is is full. So that side of the business actually has been reasonably stable and if anything, the pipeline is looking positive. Again, I think a lot of that was dependent on what the outcome of the ongoing negotiations are. But that's that's relatively stable. Residential is clearly going to see a downturn. I think our businesses, our exposure to that in the UK is is, is not too high, I would say. So you would expect kind of marginal reductions on that side. In terms of office, actual office construction right now is reasonably healthy. But again, that's plus the completion of projects that were underway over the last year or 2. And as we look ahead, we do expect to see, I'd say, in excess of a 10% reduction in office start this year, and that probably decrease further into next year. And again, this is all just a present view of life of the UK, and a lot of that's contingent on where this whole thing ends up. And in terms of some of the newer markets, India, Brazil, Nordics, you've highlighted like India, just taking it in that sequence, it's really a very tiny embryonic market for installation and indeed for insulator pans. Like in insulation, general terms is all but non existent in it as a country. Panels have tended to win their mainly around cold storage and food distribution applications. And in very broad terms, the market size in India would be have what it is in the UK. So if you run the square meter per head of population statistic there, I think there's an awful lot of scope in the future in that market, but it'll be slow to move. And Brazil, quite different. It's reason it's more developed We've got a substantial footprint in the market. The standard of products generally speaking is is a lot lower. So the standard, the price of the product, etcetera, is at very different levels to what we see in Europe or in North America. And that's obviously going to take some time to evolve, but we'd be very encouraged by the progress of our partnership there so far. And as you point out, and I'll come back to some of the greenfield projects, but we're obviously going to be expanding that presence. And then in the Nordics, we've had a presence there in insulated pounds for some time. That was supplied predominantly from Poland, although some from the UK, in the 1 up towards starting a manufacturing plant in Finland. About 18 months ago. We also have a the presence of the fiber panel, in Finland through the Parrot acquisition. So all of that side of the business actually has been progressing quite well. And then from an installation perspective, we have a small business in Finland, and we're, We're halfway through the construction of a cool town facility in Sweden. And again, when you look at the the penetration metrics of advanced insulation in that market, they're sub-five percent, versus, obviously, of the past, across Western Europe and the UK and elsewhere. So we see significant scope for the displacement of traditional materials in that market. And because simply because of the, they're just unwieldy kind of, thicknesses of materials. We're very confident of 4 or 500 millimeters of insulation, which obviously is crazy, in terms of the space requirement for that and buildings. So conversion from those materials, has been happening progressively and we see that accelerating, I think, into the future. So we should get going in that facility, probably around the turn of the year. I'd expect that we'll start producing Curls from there. Then in terms of the, the other organic expansion, there's lots of them underway. You've highlighted Paraguay and XBS in the UK. I think the South American piece, we've, obviously well established in Brazil. And there are 2 more facilities from an organic perspective, we intend to build out there. One of them has started already, near enough to Sao Paulo. And there'll be a further one up more in the Manalas area of Brazil. That's probably a couple of years away. And then we want to get into other parts of, other parts of Latin America. It's probably starting with Paraguay, Paraguay indeed, even Uruguay thereafter. So we really want to get a complete footprint out of what we've gotten Europe, quite across the Latin American market at this early stage. The XPS investment that you highlight in the UK is is pretty much ready. That's a material that we had been importing from partners in mainly in Southern Europe actually into the UK. So we've had a sales presence in XBS in the UK for quite some time. And say now we're just establishing our own manufacturing presence, which obviously is complemented by the learnings from our XBS business in Winchester North America. Flora, just to deal with your question on the outline phase of mainland European revenues of 48%. Very direct to me. France, Germany and the Benelux would be approximately 10% each. And the balance of our European spread would be the Nordics, Eastern Europe and Southern Europe. Great. And Jeff, if I can ask a separate question. Is there what can you give us any color on the residual impact from last year's deals, what we should have in. Obviously, it'll all pretty much come through in H1, but just because of the fact that Alex would be in for H1, Ciantasia will be in for a little bit extra. So what kind of number should we think about in terms of the incremental M and A in our models? Broadly, the run rate of revenues into this year is about 150,000,000 dollars, $150,000,000 of full year revenues into 2019 at a margin of somewhere between 7% 8%. The next question comes from Andy Murphy from Bank of America Merrill Lynch. Andy, your line is now open. Thank you. Good morning, guys. I've got 3, hopefully, quick questions. On the roof board opportunity that you've highlighted in the statement. I was wondering if you could just delve into that a little bit and give us a sense of the size of the opportunity there. Secondly, around Spain, can you perhaps give us a guide on what level of market share you are or unlikely to enjoy? In a short and in the medium term? And then just on the recycling of recycled materials, which are raw materials, I'm just interested to see that. I was wondering if you could, expand a little bit on that, what what the costs of it are, what the long term benefits are for the firm, and and much of a sort of an altruistic angle there is in terms of sort of technical and environmental stance? Sure. Andy, so just even with the roofboard opportunity, that's, we obviously had a very long presence in roofboard installation through the thermal range. Of PIR board. We're, we're very close to launching a quad core, material here, which is really about setting ourselves apart from the PIO competition. We've been successfully doing that in the escalated panels. We've got 8% of our global sales revenue of panels is now quad core. It's a margin enhancement and a cure differentiator and our a flat roofing board business lacks that's, advantage. So And trials have been very successful. We're going through the accreditation phase at the moment and we'll launch that. We'll launch that soon. And in terms of Spain, it's from an insulation perspective, actually it's a from a urethane insulation perspective, it's it's actually a very small market. We've a fine facility there just outside it's right around the world with certain, certain product applications, but the local market itself has a long way to go in terms penetration by capacity, any other place we are. And we obviously have an insulated panel business close by as well. It's focused right across the spectrum, but it's predominance emphasis on cold storage applications. And that's a well established market in Spain and our share would be, be at a healthy level there. From a recycled material perspective, again, that this has a Spain bias to it. So we're we bought when we bought the SanTEzia business, we also bought a supply capability of polyols, which is about 40% of our, polyols will be about 40% of our PIO and the quad core blends. So it's our intention to use those facilities to accelerate and the use of recycled PET based polyols within Kingspan. So so far that would have been almost nonexistent. And it's our expectation that 100 percent of our corticosterol polyol, whether it's internally supplied or externally supplied will be a recycled PET based. We have a number of initiatives underway to, to at least double that over the next 4 or 5 years. And to the answer to that, that's a conservative estimation. Okay. Great. Thanks very much. We currently have no further questions. And we'll obviously be touching base with many of you over the coming days weeks. So again, thanks. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines