Hello everyone, and welcome to the Kingspan Interim Results 2022 Conference Call. My name is Nadia, and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. 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. We'll get straight into the business and, assuming you've got the slide deck there, we'll just take you to slide number 3, which is titled H1 2022 in summary. In essence it was a very strong performance on our turnover 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 it 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 strong. Again, we expect that to increase, you know, 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. Additionally, the acquisition of Logstor, which is 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, you know, we acquired just over a year ago. Order intake is running at an annualized rate of around EUR 500 million. 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 EUR 6 billion commitment by the German government, 50% supported by Brussels, specifically around district heating infrastructure improvements in the very near term. That’s one example, a single country, of the direction of travel there. We’re extremely well positioned in that business to be able to participate and take advantage of that future.
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 Belgian-based and Pan-European supplier. Obviously the Ondura acquisition, which was cleared by EU antitrust just very recently and will close mid-September. Just more recently, we've acquired a 24% strategic minority stake in a business called Nordic Waterproofing in again in the Nordics quoted in Sweden. We're well and truly you know got our feet under the table in this division now, and it's a very exciting end market for us globally.
You know, the combination of these two 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 and 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, which we'll deliver through in the second half. That business well on track to do what we outlined.
The data and 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 solution side. If anything, the pipeline in that business actually looks stronger than it ever has at any time in the past. Lastly, the water and energy business. I'd say it probably had a weaker start than we would've 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 five, 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. You know, if you take light and air, technical insulation, roofing and waterproofing, these were areas highlighted as being very attractive to us in the long term. You know, we've had embryonic positions in those up until relatively recently. Now in those three categories, we have businesses that are at or in excess of EUR 500 million, and in some cases, really at the very early stages of taking a global position. There's been really encouraging progress on that whole strategy, and we'll be fleshing that out further in the future.
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 six, going to touch briefly and remind people of some of the mega trends that are really driving the industry and driving our business forward. On the following slide, I'll just give some examples on how we're addressing those. I think obviously global priority is really around addressing climate change and, you know, insulation and energy efficient building envelopes play a very key role in that, particularly around refurbishing the building stock that are 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, you know, market-leading products in the region of climate performance, but also in how we utilize materials and how we build those products through low-carbon solutions. Finally, labor shortages are another theme that have been around over the last couple of years. We talk about the aging workforce, particularly in construction markets and labor tightness. I'll talk on the next slide a little bit of how we address that. If you move on to slide seven, please.
The first one is an example of a refurbishing project, just talking about averting a climate emergency, a refurbishing project that we were involved with in the UK. A house was encompassed in Kooltherm. The estimation is that it would drive a 73% reduction in carbon emissions from that building moving forward. It's really around space heating and space cooling. Insulation is really the cornerstone of addressing that and building efficiency into those buildings. That addresses energy independence as well because it drives down the energy needs for houses, communities, businesses and everything else.
We talk a little bit there. Gene mentioned the recent developments in Germany this week. District heating around energy independence is gonna be very important to the ability to address that, to look for ways for more renewable heating. You know, Logstor recently won a project in Hamburg Wärme, and it's a district heating that's moving away from coal to more renewable ways. 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. It'll move the equivalent of 20,000 homes from fossil fuels to renewable energy. I'll let Gene talk a little bit about QuadCore lower embodied carbon in a moment when he talks innovation.
You know, we have case studies and examples in QuadCore, where the installation can be up to 50% quicker than built-up systems, and obviously saving time, saving on labor and saving on money and just risks around projects. That's a link to a case study and a white paper on that there. Then I'll pass back to Gene for slide eight.
Great, Catriona. Thank you very much. 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 you know a full portfolio provider right across the various different technologies. The reason for that is preferences vary. You know, there are products that are more right for certain applications than others. You know, whether that's thermal, fire, circularity, carbon, cost, whatever the particular issues are. 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 you know areas in the legacy side.
Obviously, our primary focus is on advanced high performance materials. Increasingly, you're gonna see us feature in what we call natural insulation materials, which we've obviously started off with the primarily timber-based Troldtekt business earlier this year. We have two 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. You know, the key for us here is that, as I say, 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. 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 roof electricity model. We've had very encouraging engagement so far in just the UK 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 sq m of roof area. As you know, 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+ MW 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.
That's extremely encouraging at this stage. In A-class OPTIM-R progress is well underway there. B-class Kooltherm similarly. 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 four a QuadCore LEC which will be a 50% lower embodied carbon product than exists presently. I think that really from a product carbon composition will be a phenomenal leap forward. Obviously it'll be in relatively limited supply for a while until we get all of our sources up and running properly. The fact that can actually be achieved at a commercially viable level is extremely encouraging.
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. Naturally, that will entail low carbon steel. You'll have noted from before our investment in H2 Green Steel in the Nordics, which, you know, we expect over the next few years to be supplying very material levels of product to us. Bio-based MDI in the core and recycled PET-based polyol also in the core. 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. We will be way out in front when it comes to this.
AlphaCore we've talked about for some time. We're pretty much there from a technical perspective. The project's been, you know, covered various technologies and various partners, and 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 Greenpipe, Logstor. Over to our big Planet Passionate agenda to hand you back to Catriona.
Thanks, Gene. On slide 10, just to remind you some of the Planet Passionate targets and highlights. 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, just to reach the targets we have. It does give you, I suppose, an idea of just the scale of this of the agenda and the level of engagement that we have across the business. You know, we forecast in 2022 another 5% reduction in carbon in our manufacturing process.
We have ongoing exciting engagements with our supply chain and, you know, QuadCore LEC is an example of that. You'll see examples in the innovation slide above and in the innovation detail in the divisional slides later in the deck. You can see how much Planet Passionate is linked into innovation across the business. We have really differentiated products because of that effort across Kingspan. On slide ten, just to talk to product integrity and update on that. You know we've been rolling out ISO 37301 across the business. We now have 20 plants certified to the accreditation, and we'll expect to have 28 done by this year. 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. Significant engagement across the group on that. 615 internal product and quality system tests carried out so far in 2022. As usual, you know, significant external testing. You know, we talk a little bit about the framework and infrastructure to support all that. Clearly a lot of resource and training going into that with 19 compliance officers across the group, 35 additional compliance personnel, and two hundred and seventy-two employees registered for PCP training. You know, ongoing progress around our compliance agenda. Then I'll pass back to Gene.
Thanks, Catriona. Just briefly before we hand you to Geoff on slide 12, the global organic expansion. We're certainly on a mission there over the last number of years. The internal demand for CapEx is ever increasing. There's demand for about 25 new production lines or additions over the next 2-3 years, and they're outlined there country by country, region by region. 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. The intention there is that it'll be at least EUR 200 million of an investment in a single campus, which will cover five or six of the technologies that are in the group.
It'll be something like a 40-hectare site and around 200,000 sq m of under roof area. 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 or 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. 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 investment 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.
Leverage at 1.25 times net debt to EBITDA, and return on capital employed 18.1%, down on the first half of last year. 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 onto the next page, just on trading profit and margin itself. On the left-hand side of the graphic, you'll see the profile over the last five years. 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. Insulation at 10.5% is lower than what was, and we highlighted it 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. Those margins have progressed in the couple of months since half year end. Light and air has progressed its margins versus the first half of last year. At 5%, up from the 2.7 in the first half of last year.
Light and air is more of a second half weighted business, and we would believe on track to do at or about 8% from a trading margin perspective for this year. Water and energy down in the first half of the year from a margin perspective, largely associated with a lag in raw material recovery that ought to progress in the second half of the year. A very good margin performance in data and flooring, pretty much consistent with the last year's half year.
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. Onto page 18, which bridges both sales and trading profit. Dealing with sales in the first instance. At a headline, revenue's up 42%, and the components of that, currency plus 3%, underlying plus 27%, and acquisitions plus 12%. 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. EBITDA was EUR 512 million in the first half. Working capital increased significantly by EUR 262 million in the first half. 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. Notwithstanding that, our working capital to sales ratio is higher than it would typically be. It's 14, 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 of supply chains worldwide, we took the opportunity to carry a little bit more inventory than would be typical, and that will naturally be utilized as we move through the second half of the year. We expect that working capital to sales ratio to improve by 100 basis points by the end of this financial year. 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, for full year will 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. The two principal transactions that were completed in the period were Troldtekt in our insulation business, which Gene referenced earlier. We were very pleased to complete the acquisition of Derbigum in our new roofing and waterproofing activity just before half-year end. They were the two principal acquisitions completed during the period. 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, 1.25 times.
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. Healthy by any measure. The weighted average maturity of our long-term private placement notes is 5.8 years. That's at a fixed interest coupon of 1.74%. ROCE and the profile of ROCE is highlighted on the next page. As I 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.
Finally, the sales by geography is outlined on page 23. You'll see that we recorded very healthy sales growth 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. With the European territories broadly similar, as outlined on the page. With that, I'll hand back to Gene.
Thank you, Geoff. On slide 30, which will take you just directly to outlook, as we'll 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'll be what it'll be. I think all we can commit is that we will do our absolute best, no matter what end market environment is actually thrown our direction.
You know, setting aside that, obviously our focus will be, you know, 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. 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. That is it in a nutshell. Nadia, we'll hand it over to the floor now.
Thank you. If you would like to ask a question today, please press star followed by one on your telephone keypads. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question today comes from David O'Brien of Goodbody. David, please go ahead. Your line is open.
Good morning, and thanks for taking my questions. 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've seen. I appreciate it's hard to call, but you do make the comment in the statement and in the slide deck on number 30. 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 the period that is visible to you? And also, maybe could you give us a little bit of color on the feel for the various end markets geographically and by segment?
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, you know, from a standing start in January, you know, that on Ondura, you've completed a 24% stake in Nordic Waterproofing. You know, so with that footprint or platform established, you know, 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 six months or certainly into 2023, and we're not in any way trying to kind of avert, you know, dealing with that head on. It just is unpredictable. You know, 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. I think that has transpired to be the case, where the bank built up to an unnatural level and that's just been eroding over time and we're probably down at now at a more normal level of say, of intake and of bank.
Although it's obviously less than what it was at this time last year. You know, for the second half, revenue's probably gonna be in or 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 six or eight weeks ago whenever we issued our trading update. You know, from a raw material perspective, it's probably more available than it was. We have seen some degree of deflation.
Again, on that front, pending what happens during the winter, we're taking a kind of a cautious approach to reacting or overreacting to any movements on that side, because that can turn on a sixpence just as well with a crisis here or, you know, an issue there. We're very mindful of that. From an energy perspective, there's two risks. One is running our own facilities and the costs related to that. I think the cost is one side, and we just handle that. It's much more, does the stuff flow or not? It's our own operations, number one. Secondly, supply from both the perspective of energy and then gas clearly as a raw material into the chemical industry. From our own perspective, we're not enormously energy consumptive.
In fact, we're extremely low consumers of energy. We'd be reasonably confident of that not being interrupted. On the bigger end of things, you know, we're looking at all the info and indicators that you might have yourself. 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 four or six weeks ago. Although that naturally does remain unpredictable. From a roofing and waterproofing side, as you rightly point out, we've got ourselves established. You know, it's got substance now. It's obviously European focused and still at a very small share.
You know, we'd see the potential for that being pretty dramatic long-term, totally global, from both an organic and acquisition perspective. As always, the primary agenda here is to use this infrastructure as pull-through for insulation. It's to use the outer envelope of the building to create a specification to drive more demand for high performance insulation. That is gonna be a five, 10, 20-year program. Nothing's gonna happen overnight. It's an exciting prospect and we're delighted to be where we are.
Great. Thanks.
Thank you. The next question comes from Arnaud Lehmann of Bank of America. Arnold, please go ahead. Your line is open.
Thank you very much. Good morning, gentlemen and Catriona. Two or three 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 in the panels? I guess to what 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. 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. 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? 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 they would probably be different products, but they're both dealing with the roof. Was there any idea to include roofing and waterproofing in Light + Air, or it's just too different to make sense? Thank you.
Yeah. Okay, Arnaud Lehmann, thank you very much. Just on the raw material side, like we've got three primary raw materials. Excuse me. Steel is the largest. Various types of chemical inputs would be the second. And stone wool would be the third, where we're actually the largest consumer of it in our insulated panels business worldwide. As you rightly point out, there has been some movement on steel and on chemical. Now how sustained that'll be, we don't know. As a result, we've been cautious on our own approach to selling prices because as we've seen before, that can turn quickly. You know, all else been equal it's, you know, it could probably be sustained and it may go further.
It's all related to movements in our order bank as well, if you like. It's not that fundamentally, like demand's evaporated or anything like that. We've been very cautious to give our pricing on the basis that, as I said, you could get a shock on your raw materials very quickly. We're deciding, if you like, to drive our order bank in the particular direction it's going at the moment. On a mineral fiber perspective, that represents around 11 or 12% of our insulated panel sales worldwide. What we've seen kind of in the last 4-6 weeks is, you know, a significant release of volume in that area where it was probably in tighter supply, you know, in the run up to the half year.
That's kind of freed up a little, although pricing is reasonably strong. From the verticals on the demand end, you know, logistics and warehousing is a big part of the business. It's actually quite solid. You know, you'll have noted yourself just Amazon as an example and their approach to just fundamentally cutting everything was the kind of general drift of it, you know, a few months ago. What we are seeing is maybe a less radical approach to that. We've seen a resumption of construction in some areas where we felt maybe it wouldn't have continued. I would say in the UK 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.
Obviously on other areas, the data side remains very strong, both from data and flooring and from panel solutions in those. The automotive side, the order bank and the project bank that we're tracking is actually ever increasing. Our position as a group in that segment is becoming stronger. 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 and air as well, because that's where most daylighting solutions are in fact on the roof. 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.
Yes, that's a key part actually.
That's excellent. Thank you for the call.
Thank you. The next question comes from Yves Bromehead of BNP Paribas Exane. Your line is open.
Good morning. Thank you for taking my question. I'll have three if I can. My first one is on your comment regarding the quotation activity. Can you maybe give us a reference as to how much time and what's the success of conversion between a 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. Appreciate all the color on the stimulus packages. What's the timeframe of those packages? Do you need to increase capacity at a Logstor level, especially in Germany as it seems? Also, if you have any color in terms of other regions that are expanding into sort of a district heating.
Last but not least, just on the roofing and waterproofing segments, M&A is clearly towards Europe for now. 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? Thank you.
Okay. Yves, on the quotation side, as we said, quotation activity is actually reasonably solid in the vast majority of markets. Typically, this probably is not a typical period. Typically, there's about a six-month gap between quotations and bookings. That's generally been our experience, although obviously it varies somewhat by product and market. You know, in terms of our success rate and to what degree we can say that will convert in the next six months, it's actually just difficult to say. You know, as we've said before, you know, 2023 or next year is further away than it normally is, what it feels like now, and obviously it's less predictable.
We can't in any way be kind of solid or precise in that, except we'll continue to quote and do our utmost to convert. From a district heating perspective in terms of those new initiatives, by way of example is the German one we talked about earlier on. In terms of timescale, that's a five-year program. It's not like 10 or 20 years or something aspirational. It's very specific. EUR 3 billion contributed by the EU to be matched by Germany itself over specific projects in a five-year period. That's one country. Naturally that's gonna place, you know, pressure on our capacity. Our intention is to increase capacity by 30% next year, and by year three from now to have increased it by 100%.
We have projects in place to deliver that. From a roofing and waterproofing perspective, the USA is obviously a target. We missed out on Firestone a few years ago, which was an awful pity, 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 fine kind of smaller privately owned businesses, well, we've got the patience to do that. Let's see where we go from there. Lots of opportunity there to put it mildly.
Great. Thank you very much.
Thank you. Next question comes from Yuri Serov of Redburn. Yuri, please go ahead. Your line is open.
Hi. I have a few questions. I will ask them one by one, if you don't mind.
Yeah, whatever you like.
First of all, on the margins. I'm just looking at margins. Your margin in the first half is down by 80 basis points. I think you made some statements previously about what your expectation is for the full year margin. Can we just get an update as to what you're thinking now?
Yeah, absolutely, Yuri. Yeah, 10.5% in the first half. You know, 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. Our full year margin should be in that 10.5% zone for the group.
Okay, that's helpful. Full year saying yes, it's 10.5, yeah?
Full year 10.5. Yeah.
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 2017, which is quite low. It was lower before, but, you know, it's quite a long history. What's your expectation for that segment, particularly?
Yeah. Well, I think you know, 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. 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. That's 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 insulated panels. At the end of March, your quarter backlog was up 19%, and in the end, the full first half volumes were down by 4%, which to me seems like a stunning collapse in the second quarter. Is that true or not?
No, that'd be completely inappropriate way to characterize it. I think as we've as I tried to say earlier on, it was a stunning a stunning expansion of it this time last year, which we've tried to explain, although it's difficult, but that was unnatural. I think what we've seen is a corresponding reduction to bring it back to some form of normality. Like, the only way we like, obviously, the trends have been down. We've been absolutely crystal clear about that. You know, in case you missed our statement a couple of months ago, we spelled that out in black and white.
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. 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 crisis, there's panic on pricing, there's all sorts of stuff which has driven, to be honest with you, even from our perspective, a pattern that's been difficult to interpret. There's no question about it. It was far higher this time last year than it is now, and currently it's trending down.
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. You know, we can drop our prices any day. That's never too late, but you can drop your prices too early. That's from experience.
Yeah.
And, and-
The order bank, Yuri, is never a uniform comparison from point to point. You know, 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. 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 2021 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.
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.
Yeah. No, listen, I understand that. If the order bank is up 41%, you know, the length of the order bank is actually significantly prolonged. As a result, the volume doesn't actually jump by that percentage. You know, that's clear. Gene, what you just said, I mean, it's interesting that you are using the word cautious in respect to your pricing activity. Usually, when people say cautious, that means that they don't push prices up too much. I think what you're saying is that you're not willing to drop the prices at the sign of material cost inflation going up because you think that it may actually have to go up again. Am I right to get a sense that your pricing activity is actually pressuring your volumes a bit?
Absolutely. That's entirely right. It's not. I'm not saying we're cautious because we think it could go up again. We're cautious because we don't know what it's gonna do, and it's obviously been a volatile period on supply in recent years. That's hence the caution on that front. Yes, like as I said, it's you know, moving prices down is a very simple thing to do. We'd rather try and defend it for the time being, see how the supply side works out, and then see where we go.
Thanks. I think, Yuri, just to give everyone a chance to ask a question, I think we're gonna move on to the next person. You can send me an email if you have any further questions.
Okay. Can I just ask one last?
Okay. Go for it.
On the cost side, you previously were giving us some guidance as to how much you expect the cost to grow, year on year in steel and chemicals. Can you give us a sense of what you're expecting for this year at all?
No. That's too commercially sensitive.
Okay, I understand. Just one thing, but it's not a question, but quicker one. Technical insulation, I mean, if you make waterproofing into a new segment, are you thinking about making technical installations in this new segment as well?
Well, it clearly is, but it's under the umbrella of insulation generally. We'll have building insulation and technical insulation all under the one home. Yes, as a category, absolutely, we expect to grow it substantially.
Thank you.
You're not planning to separate it out?
No.
No. Not now.
No, no. No.
Thank you.
Thank you. The next question comes from Gregor Kuglitsch of UBS. Gregor, please go ahead. Your line is open.
Hi, good morning. I've got a few questions, if I may. I think you've previously kind of quantified kind of a price over cost level. I can't remember. I think it was EUR 70 million that you sort of thought, you know, perhaps aligns one day. Can you give us an update on that, please, if you can, and you know, if that's still the case? Coming back to the roofing and waterproofing and roofing segment. I think in the US, you've just been very successful in kind of bundling insulation and roofing membranes and sort of giving a system warranty. I think margins are like 15%-20%.
Is that basically what you're trying to do here, so that you sort of give a system, you sell the system with the insulation, you know, 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? Maybe on the order intake, and I appreciate your comment on the 50% of full year. I guess what I've never really, or at least I don't know, is the seasonality. Would you say kind of looking back, I don't know, five years or so, that there isn't really that much seasonality in order intake, and therefore that's a meaningful statement, the 50% of the full year of last year.
maybe a final question, do you have any contingency planning in the event MDI production kind of comes under pressure because of the shortage of gas, let's say, in countries like Germany? Thank you.
Just to deal, Gregor, with the margin question in the first instance. You know, we did indicate that last year was an exceptional year from a margin perspective, and that there was EUR 70 million 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, you know, 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.
Gregor, just on your—you're absolutely right. 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 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 where we'll be unique over time is our offering across roofing will be much more substantial than anything that exists already. 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. 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.
Yeah, like honestly, over time, first half, second half, there would be very little difference over time in terms of what that is. It is meaningful in that sense. There's no question the second half is gonna be down, and we've been clear about that. We've been clear about that in the past as well.
Did you on MDI? If you have any contingency.
Oh, sorry. On MDI?
Yeah.
Well on MDI, that's not particularly straightforward. You know, MDI goes down. It's a material not easily substituted, as in not possible for us. So, you know, obviously we've got different cores. You know, we've opportunity with styrene, we've got phenolic, which from a board perspective 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 the 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. It'll be a bigger catastrophe, to be honest, if that does transpire.
Thank you. Appreciate the answer.
Thanks, Larry.
Thank you. Our next question comes from Florence O'Donoghue of Davy. Flora, please go ahead. Your line is open.
Thank you very much. Good morning, everyone. I'll keep it to two, 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 kind of a pro forma basis, maybe for H2 and for next year as well. 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 team, if we could have a quick update on that, it'd be appreciated. Thank you.
Thanks, Florence O'Donoghue. Just on M&A in the second half, we should broadly have EUR 140 million of sales that we didn't have in the second half of last year. That comes with the assumption that Ondura completes as we expect it to in September. That broadly ought to translate into trading profit of about EUR 13 million in the second half of the year. The rollover into 2023 will be approximately EUR 350 million of revenues in 2023 that we won't have had this year. That's broadly EUR 35 million of incremental profitability versus this year. On warranties, no material change between June and December.
You know, no particular update in that regard.
That's great. Thanks, Geoff. Thank you.
Okay.
Thank you. The next question comes from Rajesh Patki of JPMorgan. Rajesh, please go ahead. Your line is open.
Yes. Thank you. Good morning, all. I've got two as well. First one is related to pricing on the panels business. It was up 40% or so in the first half. Can you comment on the pricing that you're seeing within the order index? I think you've commented on volumes. Has the pricing eased so consistent to your comments on the easing inflation? The second question is on your RMI exposure, which has increased to 28% of the revenues in the first half. Following the recent acquisitions, where do you see that on a normalized level? What's the ambition of Group in terms of exposure to RMI? Thank you.
Just in terms of the pricing patterns on order intake. As you rightly point out, very significant inflation, which is the result of price increases pushed through actually over the course of last year, which have stuck very well. Right now, our pricing actually is reasonably stable, although easing somewhat naturally, which is what you would expect. We're cautious on any kind of release of the handbrake there. That will be our approach to this ongoing. We can just judge as we go along exactly what that's doing to our book and our market shares and all that. You can rest assured we're pretty agile in adjusting our approach whenever that's necessary.
You know, stable but easing somewhat naturally.
Sorry, what?
From an RM-
Year-over-year?
What?
He didn't hear.
The pricing on order intake just from a year-on-year.
That's what I'm saying. It's stable.
Yeah, I think, Rajesh. Yeah. Stable is the-
Stable, but easing back.
Yeah.
On RMI, as you rightly point out, around 28% of a run rate. You know, near term, that should be hitting 30 or 30+. In terms of our ambition, to be honest, we've no limit on our ambition. We would expect the RMI dimension of the business, both through organic and acquisition to increase over time.
That's great. Thank you very much.
Thank you.
Thank you. Our next question comes from Yassine Touahri of On Field Investment Research. Yassine, please go ahead. Your line is open.
Yes, good morning, ladies and gentlemen. Thank you very much for taking my question. Firstly, you're suggesting that you're expecting volume to be down in H2. Could you tell us what level of volume decline you have observed so far in July and August? That would be my first question. Second question on your strategy minority stake in Nordic Waterproofing. Can you give us some color on how you want to manage this stake? Will you get a board position? And how will you manage the potential conflict of interest if Nordic Waterproofing and Kingspan are looking to acquire the same assets? The last question, could you just confirm that from a reporting point of view, you will have Light + Air and Roofing and Waterproofing being merged in one division?
Yeah, just to deal with the sales growth question first. As we've outlined earlier, you know, our best sense at this point is that underlying sales revenue will grow by about 10% in the second half of the year versus H2 last year. You know, in terms of the price volume split, that takes account of some softness in volume in the second half of the year. Naturally implies pricing is a little bit more than 10%, which reflects the year-on-year price increases that we've had to implement as a consequence of recovering raw material inflation.
Is it fair to assume that? Sorry.
Go ahead.
Is it fair to assume that the volume were down, maybe like low single digits or mid-single digits in July and August? Or is it too pessimistic?
Yeah. 5%-10%. In that kind of general region would be the shape of it. You know, as Gene outlined earlier, like, we can take a position on price on any day, and that has a volume impact. You know, the best those steers are best directional.
Okay. Yassine, on your point about Nordic Waterproofing. We've a 24% minority stake. Obviously, it's not a position of influence. We have no intention of going on the board. It's fully over to that team to do their business. In terms of handling any conflicts, we won't actually have them. It's an investment, and it's a competing business with Kingspan for the foreseeable future. From a light and air and roofing and waterproofing, we won't merge those 'cause actually, well actually, the name would be too long. That's not likely at all.
Actually, more seriously, the light and air product offering and the longer term opportunity goes way beyond roofing applications. There's clear overlap in some of the roofing solutions, but daylighting obviously covers walls. From an air and ventilation perspective, it is nearly nothing whatsoever. It's a different avenue that's gonna be explored totally independently with the light and air business, and that opportunity is equally significant. They'll very much remain separate organizations.
Will you create a new division in your reporting, which is waterproofing and roofing?
It's done.
Yeah. For this year's full year, more likely it'll be in the insulation piece, but we break it out next year as a separate division. Because all we'll have this year is a stub period of three months for Ondura and half year for Derbigum. It'll sit under insulation and break out then separately for 2023.
Okay. Very helpful.
that's only cosmetic. It's only cosmetic. It's a completely independent business.
Yeah.
Nothing to do with either.
Thank you very much.
Thank you. The next question comes from Brijesh Shah of Citi. Brijesh, please go ahead. Your line is open.
Thank you. Good morning, everyone. The first one is on EBIT margin. For H2, you're expecting a similar outcome versus 2020 H1. Connecting your comments about insulation being in the north of 11% and Light + Air, if I recollect you said 8% in H1, say, for the full year or second half, please correct me there. That implies that you're expecting a little more decline in panel business margin. Related to that, do you think that's because you are giving up price a little bit earlier there? The second one is on the discussion with government regarding cladding.
In the full year, you did say that you are fully with them to kind of find an amicable solution. Given the change in the head and what's coming, we don't know. Any update from that side would be really helpful.
Yeah. Just on the margin front, you know, given the profile of the business and the mix of activities, the 10.5% is about as specific as we can be in that context. It does imply a little bit of margin slippage in the second half in Insulated Panels from the 11.2% in the first half. You know, in the round, at a group level, 10.5%.
Okay.
As regards the question around cladding and the associated issues around that, there's been no movement of any consequence in terms of our provisions, June versus December. You know, we've nothing of any meaning in terms of update on that versus when we were last out earlier in the year.
We're dealing with all of that.
Just keep. Yeah.
We're just dealing with that, so far in the normal course.
Okay. Just on the specific to the house builders, we had some issues with that, and you were kind of part of that, kind of discussion. Is there any update around it?
Specific to what?
No update. As Geoff said, no updates. Thanks, Brijesh.
Understood. Okay. Thank you.
Thank you. The next question comes from Cedar Ekblom of Morgan Stanley. Cedar, please go ahead. Your line is open.
Thanks very much, guys. A couple of questions. At the end of May, you told us that your backlog was down 2%. I wonder if you would share where you see that number at the end of July, appreciating lots of the volatility in that backlog that we saw last year. Secondly, how much of your MDI do you source from Germany? And how much flexibility do you have to source from other areas to the extent that production slows? Then just some comments that you were making on sort of pricing and moving pricing. Is it the case that you're being cautious on lowering your price in order to try and sort of defend the margin? I'm not really understanding what the comment is there.
Is it a case that if you cut pricing, then you expect to see an inflow of volumes? Just to understand the sort of psyche of your customers at the moment. Thank you.
Yeah. Well, I'll start with the last bit. There's obviously only so much we can talk about in terms of pricing. It's commercially sensitive, et cetera. It's really very straightforward. We've had some give up in raw materials. Our MO always has been to be quite relaxed around letting that flow back. You know, of all times, in my experience, this is the most unpredictable. Materials could go way down, materials could turn and go way up. Actually, I haven't got a clue what the outturn's gonna be. It could be either. In the face of that, we are just being cautious in terms of protecting all that's been achieved. As we've said a few times, it's the easiest thing in the world is to drop the price and pick up the volume.
Naturally, those two things are very linked. That's if you like, we're running a very conscious strategy of protecting price and margin in the face of unpredictability. The result of that in the short term is obviously some give on the order intake and the order bank, but that can be turned around tomorrow morning. That's we won't be hasty getting there, if you like, is what I would say. In terms of MDI, approximately 30% of our global material is sourced from Germany itself. A lot more, by the way, from German companies, but from the country itself, around 30% of our product flow comes from there.
Yeah, I mean, as regards the backlog.
Can I just?
Peter, I think we've dealt with that extensively in previous questions. Naturally, given the sales revenue guidance that we've given for the second half of the year does imply that volumes will decline somewhere between 5% and 10% in the second half of the year. That's
A long way to go on that.
There's a long way to go on that.
Okay. You won't give us the number on the backlog if it was minus 2% in May, just to confirm that?
No. To be honest with you, like we've tried to explain it again, the +50 last year was a nonsense, where it is now is a nonsense, and let's see where it is at the end of the year.
Yeah.
Fantastic. Thank you so much.
Thank you.
Thank you. The final question comes from Jonny Kubecka of Numis. Johnny, please go ahead. Your line is open.
Good morning. Thank you very much for taking my question. Just two, please. Firstly, I'd be grateful if you could give us an update of where you expect your market share is of European Insulated Panels market, like, given the strong pricing we've seen the past few years. Just keen to get an update there. Secondly, I'd be grateful to hear your thoughts on what you expect to be the drop through to EBIT from a 1% decline in volumes. I expect the answer will probably be it depends, but you know, a ballpark figure within insulated panels would be very much appreciated. Thanks.
Yeah. Jonny Kubecka, just on the first one on market share, like, it's. We're obviously number one, but it's not particularly large when you think of the overall market. Naturally, it'd be a little bit sensitive to be giving out anything precise there. On a 1% reduction in revenue, you know, probably around 20% give from an operating leverage perspective.
Yeah. Thanks very much.
You're welcome.
Thank you.
I think.
Thank you.
I think that closes it up. Thank you all for participating, and for sure, we'll be all speaking to each other a lot over the next week or two.
Thank you.
Thank you.