Hello, welcome to today's Kingspan acquisition announcement call. My name is Bailey, and I'll be the moderator for today's call. All lines will be muted during the presentation portion, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Catriona Nicholson, Head of Investor Relations. Catriona, please go ahead.
Thank you. Good morning, everybody. Thank you for joining us at short notice. I promise it's not our intention to do this every week. A couple of quick housekeeping calls. The call today is 30 minutes. It'll be a short presentation followed by Q&A. We may not get to all the questions. We should be able to cover all the salient points.
Many of you know we put out a trading statement last week. In effect, that means we are in closed period as we release our half year results on the 18 August. I respectfully request we keep the questions on this call related specifically to the acquisition announcement overnight. I'm joined on the call by Gene Murtagh, CEO of Kingspan, and Geoff Doherty, CFO of Kingspan. With that, I'll hand over to Gene.
Thank you, Catriona, good morning, everybody. Obviously, at this stage, you know, you'll all be aware of the detail as was issued yesterday evening. In summary, we've agreed to acquire 51% of STEICO, which is the world's leading brand of wood fibre insulation based in Germany, but manufacturing in Poland and in France currently. It's a business that we've admired for very many years. It's grown extraordinarily over the last eight or 10 years in particular, and obviously occupies a leading position in a growing category of natural insulation in the world.
In summary, we've agreed to acquire the 51% at EUR 35 per share upfront, followed by up to an additional EUR 35 per share, which we very much hope to be having to pay in a couple of years' time. There have been a number of questions, obviously, overnight and this morning about providing some color around the conditions of the earn-out, and it's very straightforward.
It's about EUR 251 million straight in, most of which will be in cash. Essentially the same amount for the achievement of an EBITDA in 2025, of EUR 120 million, which is an EBIT of, you know, 85 to 90, without being too precise.
High 80s, which is clearly a very significant growth on where the business is performing right now. At an EBITDA level, it looks at a essentially a similar multiple, and at an EBIT level, it's an improved multiple, clearly, at the end of the earn-out. The business, if you'd like, we move on to the second slide, which is just to deal with the facilities, manufacturing facilities.
Currently producing, in three locations, with two in Poland, Czarnków and Czarne, and a manufacturing facility in southern France. Naturally, I've been to them with the teams, and I can tell you they're really some of the most extraordinary manufacturing facilities that I've ever seen in our industry. Exceptionally well invested.
The engineering is extraordinary, and there's an additional brand-new facility that's nearing completion in Gromadka in southern Poland, which essentially provides something in the order of EUR 200 million of manufacturing headroom from the get-go.
The asset base is, as I say, extraordinary. Naturally, the sector overall, the residential insulation sector, and wood fibre indeed as well, is under some pressure right now. Naturally, we don't expect this to be a protracted situation. In terms of the positioning of it market-wise, it's predominantly Germany, France, and some other Western European countries, but the product ships all over the world, depending on the application.
It's predominantly refurb and very much residential, both of which are areas that will complement the existing profile of Kingspan, where we're naturally more new build and much more non-residential focused as an organization. In terms of the next slide, which deals with the full spectrum, in essence, this is a strategy we've been pursuing for very many years.
In terms of us wanting to provide essentially all solutions to a specifier, contractor, building owner, whatever. Each of these categories have their own particular strengths. As a group, we will, we want to be able to provide just a balanced portfolio of, and an unrivaled portfolio of insulation solutions, which obviously the acquisition of Steico significantly enhances. Not just the fact that it's natural.
We've recently done a small transaction for a hemp-based business in Germany. By comparison, extremely small, but obviously STEICO significantly enhances our whole position, and in doing so, we become the world leader by a very significant margin in natural grown insulation. In terms of the drivers of growth, like obviously, refurb will be a growing area.
Bio-based will be a growing area. Beyond that, I think within Kingspan, we have a global, well-established channel to market via our existing insulation business. also via our insulated panel business and potentially even via our access floors business. We would see naturally some pull-through just at a trading level via those channels.
Also via our whole innovation process, we would expect to open up opportunities for the use of wood fibre insulation, even in insulated panels, in the board business, and as I said, potentially even in flooring and in roofing elements for residential construction, structural roofing elements. There are lots of areas that we will explore over the longer term.
To be clear, none of this will happen overnight. It's gonna need development, it's gonna need certification and all of that, but we'd be kind of more enthused about this opportunity than a lot of the opportunities we've executed in the past. I think naturally, in terms of it complementing our Planet Passionate strategy, I think that's self-explanatory. It's an entirely sustainable product, grown and manufactured.
It does use significant energy, that has to be said, but the vast majority of that is provided via biomass facilities on site, and most of that is powered by literally the bark from the trees. There's a lot more we can do on that front as well in the future. In summary, that's it, and we're open to some questions.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question, and please do ensure that you have unmuted locally. Our first question today comes from the line of David O'Brien from Goodbody. Please go ahead, David, your line is now open.
Good morning, guys. Thanks for taking my questions. Three, please, if I could. Obvious one first, just the remaining 39% of the group, any intentions around that and how you could proceed there? Maybe a little bit premature, but if you could give a comment. Secondly, typically, Kingspan has targeted a 15% return on capital hurdle. Is that still the case with this deal?
What kind of timing around reaching such a return level? Finally, you've talked about, Gene Murtagh, the fact that the product ships globally already. What is the potential to bring STEICO more into North America? Can you put a manufacturing platform there as well, much further down the line, but really, what is the potential to globalize the business?
Okay, David. In terms of the remaining 39%, there's no intention whatsoever. As you said yourself, it's early days, but even thinking longer term, there's no intention or no pressure around that point at all.
Yeah, in terms of return on capital employed, there's no compromise longer term on the 15% hurdle, but we're some years away from that, and clearly it will require end markets to be in better shape than they are now. This is very much a position in our business well for the medium to long term.
David, in terms of manufacturing in the U.S., like, if Udo was speaking now, the founder, he'd be telling you that's an area he's been interested in for some time. Product has shipped there, so it's obviously not something that would be sustained from a European manufacturing base, and as a category, it's virtually non-existent in the U.S.
To answer your question, like, obviously there's the raw material, and there's the potential demand as well, in that market, which might in time require a facility. These facilities would be in the order of EUR 150 million-EUR 200 million each to construct. They're, they're quite the beast, and we look forward to actually showing them to you all as well at an appropriate time.
One thing to remember here is that the product is used extensively in attic applications. It's obviously a flexible material and ideal for refurb of attics, which is where huge amounts of existing fiberglass and stone wool is used. Kind of it's up against those materials is where we're gonna be pitching it. Naturally, in North America, that is the dominant insulation as well.
Great. Thanks very much. Really helpful.
Thank you. Our next question today comes from the line of Arnaud Lehmann from Bank of America. Please go ahead. Your line is now open.
Thank you very much. Two question on my side, one on the financials, one on the operations. On the financials, I think, did I catch the number well? I think you said EUR 120 million of EBITDA by 2025 for you to have to make the extra payment. I think that brings the margin above what it has been historically and the actual, in terms of actual size, so that would be a record number for STEICO.
Does that include synergies that you would implement following the acquisitions? Talking of synergies, have you given a number? Actually, can you implement any synergies considered? Does that include synergies that you would implement following the acquisitions? Talking of synergies, have you given a number?
Actually, can you implement any synergies, considering there will still be about 40% minorities? That's my first question. The second question on the operations: Could you comment on the route to market for STEICO? Is it closer to your insulation boards business, going through distributors or are there also some direct sales? Thank you very much.
Thanks, Arnold. Just on the earn out piece, like you say, it probably suggests that you're saying it suggests that the margin is above what it's been historically. That clearly depends on the revenue, which hasn't been talked about. It's not necessarily that we would anticipate the net margin exceeding what it has done in the past.
In terms of synergies, without getting into the nitty-gritty, naturally, we would expect to be creating pull-through over that period, like, bearing in mind, the end of the earn out is two and a half years from now. We'd be, we wouldn't be very successful if we're not creating pull-through by that stage. Yes, there is an expectation of some pull-through by then.
Second point was, what was that?
Route to market.
Sorry, route to market. There are two routes to market. One is via the insulation business, selling either a STEICO or a Kingspan branded product. That's all TBC at the present. That's one area. The second area is that we actually consume the product, perhaps in a different form or different specification via some of the other channels. Like at a very simple level, we would see potential for this to be used actually in a metal insulated panel as well. You know, we have to figure out areas around structural characteristics, fire characteristics, and so on.
As a material, again, in a similar way that we use stone wool, there'll be certain applications that would be appropriate to use wood fiber as an insulated panel core as well, and indeed some other, some other areas of synergy across the group.
Thank you very much.
Thank you. Our next question today comes from the line of Yves Bromiere from Societe Generale. Please go ahead, Yves, your line is now open.
Good morning, everybody. I hope you can hear me well.
Morning, Yves.
Thanks, first of all. Thanks. Thanks for the presentation. Just three on my end. The first one, I just want to understand whether this deal is also an opportunity to get a foothold, not just into wood insulation, but also, I think STEICO makes quite a lot of wood sheeting and sarking, which you can probably cross-sell your own membrane and your own foam insulation.
Just wanted to understand if there is quite a lot of pull-through here in this product category. My second one is just on the current supply in the wood fibre industry. Can you maybe comment on this? How do you intend to maybe resolve this issue should it come with potential consolidation near term? Lastly, just trying to understand the penetration rate.
I think if I'm not mistaken, about 5% of the insulation market is in wood fiber in Europe today. Where do you see that going medium term? Thank you very much.
Yeah. on the I'm taking it from probably the last one first. the 5%, like it's not. If you think that's essentially grown from almost nothing in 10 years, like, not quite nothing, but almost nothing. you know, it's very conceivable that over the next seven to eight years, that would double as a portion of the insulation market. That's kind of the way we would be thinking about it. None of that's guaranteed, of course, over the next seven to eight years, that would double as a portion of the insulation market. That's kind of the way we would be thinking about it.
None, none of that's guaranteed, of course, but our expectation would be that the natural category comes much more to the fore over that time horizon. In terms of the present time, look, it's obviously a tough time for the business. STEICO themselves have discussed that at length in their recent trading updates and so on.
Essentially, what's happening is, there is a lot of capacity coming on stream at a time when the market is under pressure. It's just, that's naturally a bad combination. We would consider that a timing issue rather than anything else. That the market ought to be able to absorb this through penetration growth over the medium term.
When exactly that comes into equilibrium is very difficult to judge, but we wouldn't expect that to be very many years out. Whether or not there's further consolidation in the industry, that's, you know, let's get one foot in the door first, Yves.
The third was pull-through.
Yeah, the pull-through of insulation. There's going to be pull-through via our channels, like we said, but as you also said, there's STEICO has a ready-made channel itself to be able to pull through some of the sarking membranes and so on, that we that we have well established now throughout the group both from the Ondura business and from the recent CaPlast acquisition as well. There's lots of synergy the other direction also.
Great. Thank you very much.
Thank you. The next question today comes from the line of Gregor Kuglitsch from UBS. Please go ahead, Gregor. Your line is now open.
Hi, good morning. Thanks for taking my questions. Just a point of clarification on the earn-out, just to be clear, the starting point, I guess, is EUR 60 million of EBITDA, which is what's expected for this year, then scaling up to EUR 120 million. Basically, if EBITDA stays at EUR 60 million, you pay EUR 35 million, it goes to EUR 120 million, you pay EUR 70 million. Obviously just linear in between. Is that the right way to look at it in terms of the earn-out? Okay, it's EUR 60 million, not EUR 90 million.
It's early EUR 60, up to EUR 120, and paid linearly on that base.
Okay. The second question is, I suppose I think this is the second deal now in natural insulation. I think last year you did one in Troldtekt.
Yes.
Just want to understand sort of how it all kind of fits together, I guess, you know, the deal you did last year, the deal you're doing this year. I guess, you know, where you see that sort of broader category featuring, you know, as a proportion of the group.
Then maybe finally, just to be clear, the EUR 200 million additional revenue, just for clarification's sake, are you saying there's four manufacturing sites today going to five, or is it going from three to four? And what's the sort of rule of thumb for each of the revenue run rates, so we can get a sense of what the revenue potential is. I think you're kind of implying EUR 650 million, if I'm not mistaken. I think STEICO is saying EUR 750 million.
I think the years are slightly different, but just sort of so we can gauge the revenue capacity of the business, please and thank you.
Yeah. Yeah. Gregor, it's three current going to four imminently. Like, it completely depends on the product mix, but it's in the EUR 650 to 750 category, is. That all depends on pricing and product mix. To put in simple terms, it's EUR 200 million additional capacity from what was there, STEICO's last peak year, which I think was, you know, early EUR 400 million or in that order of revenue. It is probably in that order. Their STEICO's last peak year, which I think was, you know, early EUR 400 million or in that order of revenue. It is probably in that order. The other point was.
Basically, how the different natural insulation.
Oh, yes. Yes.
what's the difference-
Yes.
How it sort of all fits together in the grand scheme of things?
Yeah. Obviously, this will be running its own course through a period, obviously, because we're working in partnership with Udo and the other shareholders, and the earn-out has some time to run. We're obviously about doing is assembling a very compelling portfolio of different natural insulation products, some of which we're developing ourselves, incidentally, and some of which we will acquire.
As a total category, like our group run rate will be in excess of EUR 500 million next year with this, with Troldtekt and with the small but emerging MFlex business as well. It's, you know, we wouldn't be at this unless we felt that within a five-year period, the category would be about EUR 1 billion in revenue.
That may take some further consolidation and obviously lots of organic growth, but that's the kind of way we'd be thinking about it.
Okay. Sorry, one final one. The 10% extra buyout is basically just 10x EBITDA, or how does it work?
Yes, yes.
The 10.
Yes. Yes. Straightforward like that.
Thank you.
Thank you. The next question today comes from the line of Cedar Ekblom from Morgan Stanley. Please go ahead, Cedar, your line is now open.
Thanks very much. Hi, gentlemen. The way you are talking about STEICO, it's almost like you're acquiring 100% of the business when you talk about pull-throughs and synergies. Ultimately, this will remain, for now at least, a separate entity, a separate listed entity. I'm just trying to understand how you actually plan on capturing those synergies and where those synergies will actually sit.
Will they accrue to STEICO? Will they accrue to Kingspan? At the end of the day, I assume that these all need to be done very much on an arm's length basis. If we look at the ability for your insulation business to also sell the STEICO product, it's just a bit unclear, because at the moment, this looks like a bit of a financial investment.
I'm also thinking about some of the other financial type investments that you made in Nordic Waterproofing, as an example. I just don't understand why we're not actually looking at 100% of the business being acquired today, and then understanding how those synergies actually get realized, considering this is still a standalone entity. Thank you.
Yeah. No, you're right. It is absolutely a standalone entity that will be run exactly in that fashion. Bearing in mind, from the point of, hopefully, from the point of completion, there's a 2-year run into the full earn-out. Like, I suppose like any investment, of course, it's a financial investment, but that's not what this is about.
This is absolutely about a strategic entry into an exciting product and product category. Look, our interest will be in running that business independently for the benefit of all the shareholders of STEICO. It's no more or less complicated than that. Where that business sells into Kingspan, like it sells, by the way, into many other customers presently, it'll be just no different.
That'll be done at proper commercial, proper commercial terms. Kingspan will go on and do whatever it does with it. Where we go with the whole thing longer term is I guess, yet to be seen.
There's some other examples as well in our history, Cedar, where we've, you know, not least, which would be Brazil, where we've a 51% stake in that business. That has been a very successful venture. That's for some other examples as well in our history here, where we've, you know, not least, which would be Brazil, where we've a 61% stake in that business.
That has been a very successful venture. For some other examples as well in our history here, where we've, you know, not least, which would be Brazil, where we've a 61% stake in that business. That has been a very successful venture that's created value for all shareholders. You know, this is a tried and tested route from our perspective.
In terms of how it relates to Nordic, it's just an entirely different proposition.
Okay, thank you.
Very welcome.
Thank you.
The next question today comes from the line of Yuri Serov from Redburn. Please go ahead, Yuri. Your line is now open.
Yes, good morning. I have a few very quick questions, hopefully. One is: You said that the business is primarily residential, both new build and refurbishment. Can you tell us what the split is between new build and refurbishment?
Yeah, that's 60/40 in favor of refurb.
60 refurb, and the rest is new build?
Yeah. Yeah.
All residential, yeah?
It's 90% resi. That may change over time, but currently it's 90% resi.
Okay. Is there any potential for cost synergies? I suppose, no.
No, I think is the fair answer to that.
Okay. Can I just ask you said that lots of capacity came from competitors. Who are the who does STEICO want the category?
Yeah. STEICO is, like we said, is absolutely the out-and-out leader. No, nobody comes close. There's a business called GUTEX in Germany. There's a Ziegler, is a fairly significant, you know, recent capacity. PAVATEX, which is part of SOPREMA, the France-based business. They're kind of the key players in Europe.
They're all in the same products?
Broadly speaking.
Okay. A very technical question: Are you going to create a new segment for this, or where will it go?
Well, ultimately, it'll be a natural insulation category as part of the broader insulation offering across the group.
It will be in the insulation segment for you?
Yeah.
In the insulation segment.
Yeah.
Okay, thank you.
Thanks, Yuri.
Thank you. Our final question today comes from the line of Elodie Rall from J.P. Morgan. Please go ahead, Rajesh, your line is now open.
Yes, good morning. I've got two questions, please. The first one is, what conditions need to be met for the quarter of payment to be made in Kingspan shares? That's the first one. The second one is, if you could provide some color on the negotiations for this transaction. Was the due diligence for this transaction similar to the past ones, or was it somewhat rushed and an opportunistic one? Thank you.
Yeah, just on the equity component, there's a share price floor of EUR 60. If our share price was in the regrettable place of being below EUR 60, would be all cash, but the option is there if the share price is above EUR 60.
Rajesh, just in terms of whether this is opportunistic or not, I'd say not at all. As I said earlier on, it's a business that we've looked at and admired for very many years. Steico itself made a public statement not so long ago saying that Udo was examining the strategic options, which I think that was clear what that meant.
At that years, Steico itself made a public statement not so long ago saying that Udo was examining the strategic options, which I think that was clear what that meant. At that point, we entered a process like some others, so nothing rushed or opportunistic about it.
Great. Thank you.
Thank you. This concludes today's question and answer session. I'd like to pass it back to the management team for any closing remarks.
Thanks, everybody, for joining us this morning, and we look forward to keeping in touch.
Thank you.