Half-year Report

 KINGSPAN GROUP PLC

HALF-YEARLY FINANCIAL REPORT

for the period ended 30 June 2023

KINGSPAN GROUP PLC

RESULTS FOR THE HALF YEAR 30 JUNE 2023

Kingspan, the global leader in high performance insulation and building envelope solutions, issues its half-yearly financial report for the six-month period ended 30 June 2023.

Financial Highlights:

Operational Highlights:

Summary Financials:

1 Net debt pre-IFRS16

2 Operating profit before amortisation of intangibles and non trading item

3 Operating profit before amortisation of intangibles and non trading item divided by total revenue

4 Net debt to EBITDA ratio is pre-IFRS16 per banking covenants

5 Earnings before finance costs, income taxes, depreciation, amortisation and non trading item.

Gene Murtagh, Chief Executive of Kingspan commented:

"We are pleased with a strong first half performance in a testing environment. Performance outcomes varied by product and by market, against a backdrop of higher interest rates and a degree of price deflation. 

This year the harsh reality of climate change has become an everyday reality for many, intensifying the urgency to deliver meaningful and increasingly smart decarbonisation solutions. Kingspan's Innovation and Planet Passionate strategies have the firm aim of addressing this challenge through driving progressively sustainable building envelope solutions. These strategies are deeply embedded across Kingspan, delivering a reduction of direct GHG emissions by over 50% in the first half and reinforcing a common goal for our people globally.

Our expanding spectrum of insulation solutions continues to progress apace. Since period end, we agreed to acquire 51% of Steico, the world leader in wood-based insulation, adding to a growing bio-based portfolio including hemp and wood-wool acoustic insulation. Along with our portfolio of LEC (lower embodied carbon) products, the first of which launched this year, we are now firmly established as a leader in the growing market for lower embodied carbon construction products.

As we look to the remainder of the year, we expect continuing strategic momentum supported by a strong development pipeline, an increasingly stable supply chain and pricing environment, and a global decarbonisation drive."

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Business Review

The first half of 2023 has been relatively pleasing for Kingspan given the somewhat challenging environment we were confronted with. Sales revenue reached €4.1bn and trading profit amounted to €436m, edging slightly ahead of the record achieved in the same period of 2022. Our direct GHG emissions reduced significantly in the first half, by 51%, reflecting ongoing traction from the many Planet Passionate initiatives underway across the business. In contrast to recent years, deflation has been a prominent theme, as has been de-stocking of our inventories which boosted the strong cash generation in the period.

Similar to the trading backdrop reported in the 2022 full year, conditions varied considerably by market and by end segment. The Americas, and the US in particular, has performed exceptionally well for us as Insulated Panels continued to deliver growth driven by conversion from traditional building envelope solutions. Europe has been more mixed with predominately weaker newbuild activity and refurbishment suffering somewhat due to the current interest rate environment. Broadly, France was strong with Southern and Eastern Europe weaker. APAC, albeit relatively small for us at present, performed well as our position in Australia improved and activity in South East Asia grew.

Planet Passionate and our Impact

Our Planet Passionate agenda, central to our purpose at Kingspan, continues to build upon the progress of recent years with the implementation of many more initiatives across the Group. Total Scope 1 & 2 emissions are expected to reduce by up to 60% since 2020 and direct renewable energy usage increase to 39%. The number of our wholly owned sites with solar PV installations forecasted to reach 48% and rainwater harvesting expected to double from 2020, increasing to 42 million litres throughout the year.

The table overleaf provides further detail on the progress within Kingspan by category:

Investing in our future

A total of €271m in capital was deployed in the period, €156m on acquisitions, and €115m in capex across all the product streams, largely focused on capacity expansion and new market entry. In addition, the planned Ukraine Technology Campus is progressing with final site location having been selected in Lviv. The scope of the development is likely to exceed the €200m initially indicated when the campus completes, expected around 2026 (subject to geopolitical developments) reflecting the likely need for increased capacity in the region.

The largest acquisition investment in the period was CaPlast at €85m, adding to the growing array of solutions being offered by our emerging Roofing + Waterproofing segment. Since period end, we agreed to acquire 51% of Steico, the world leader in natural wood-based insulation for an initial consideration of €251m.

Innovation at work

A number of LEC (lower embodied carbon) products have been launched, including QuadCore™ Insulated Panels, Access Floors and Insulation Boards. All are being well received by specifiers as the demand for distinctive lower carbon building solutions gains momentum. We expect to add to this proposition in the second half.

Our PowerPanel™ and Rooftricity™ solutions have been reset after considerable trial activity as we seek to significantly enhance product performance and longevity with a completely new design. Meaningful progress has also been made in recent months with a strengthened and more robust supply chain. Extensive testing and certification processes point towards market launch in Q2 2024.

In our Data + Flooring division, tremendous progress has been made developing an advanced HAC (Hot Aisle Containment) offering which has resulted in expanded long term revenue potential in the data centre market. This initiative will require a new manufacturing plant in the US which we plan to commission during the first half of 2024.

Last year we acquired Troldtekt in Denmark, a world leader in acoustic insulation and largely timber based. We recently added to the 'natural insulation' category by acquiring HempFlax, an emerging hemp materials business in Germany. Since period end we announced the acquisition of 51% of Steico, the world's leading wood-based insulation business based near Munich, Germany, which will catapult our presence in this growing category.

Product and system integrity

By the end of the first half, 47 of our sites were certified to ISO 37301, with a plan to have 60 sites certified to the standard by the end of the year. ISO 37301 is the leading global standard for establishing, developing and monitoring compliance systems. Our enhanced product integrity programme is now deeply embedded across the Group. In 2023 to date, 56 of our sites have been audited by the Compliance Team, with a further 50 scheduled to be audited by year end. In addition, 346 third party external products and system audits took place through the first half.

Insulated Panels

(1) Comprising underlying -10%, currency -1% and acquisitions +1%. Like-for-like volume -7%.

Trading in our largest division was relatively positive, albeit reflective of the regional variability in economic conditions. Global revenue trailed last year owing to weaker volume in some markets and a degree of price deflation, particularly in Continental Europe. North America delivered a stellar performance as conversion continued and the forward project pipeline of large scale tech and automotive factories is extremely encouraging. Order intake, which had been very lumpy in recent times due to general economic unpredictability, improved versus prior year as the months progressed. We expect quarter three order intake to be ahead of the same period in 2022. QuadCore™ sales represented 19% of total Insulated Panel volume as this unique advanced insulation core continues to advance in the specifier and end-user market.

Insulation

(1) Comprising underlying -7%, currency -1% and acquisitions +3%.

Global sales across the various insulation solutions fell back in the first half with a corresponding reduction in trading profit. The margin performance progressed during Q2 following a weaker first quarter as we defended prices at the cost of short term volume.

Demand in Western Europe has been notably weak for the board businesses as the residential segment in particular feels the pressure. Raw material costs have been reducing with a consequential pricing impact in many markets. A deep program of structural operating cost reduction measures is underway in the PIR board business.

In contrast, the technical insulation segment has powered forward with revenue in the District Heating product set growing by 17%. The growth rate may ease a little in the near-term as second half comparatives are more demanding. That said, the forward project pipeline is significantly ahead of the same point last year which augurs well for the medium term.

Light, Air + Water

(1) Comprising currency -1%

Total revenue in this enlarged division was broadly flat for the period, again reflective of mixed performances by geography and end-market. France, Benelux and Germany performed well as commercial measures executed during 2022 took effect with a positive margin performance.

North American performance was in line with prior year and the Middle East was somewhat weaker.

Water applications continue to perform well with resource scarcity on the minds of many.

Roofing + Waterproofing

We have been assembling this new platform over the past year or so. It is currently predominately European based and occupies positions in the three key categories of flat roofing, rigid pitched roofing and flexible pitched roofing. Rigid pitched roofing performed robustly in the period, as did the flexible category to which we added the €85m CaPlast acquisition earlier this year.

Our flat roofing business has been weakest, reflecting a difficult trading environment in Benelux and Germany in particular. Insulation pull-through, operational efficiency and product range expansion are the key priorities at present.

Data + Flooring

(1) Comprising underlying +11% and currency impact -1%.

The data segment is, and has been, an important end-market for a number of our businesses given the focus on energy efficiency, emission conservation and lower carbon in that sector. It represents in excess of 50% of this division which can be expected to grow meaningfully in the near and medium term as we expand the internal air management offering in projects across the US, Europe and South East Asia. Many of these are supporting the world's leading bluechip data providers.

To support this growth and ambition, we will develop a new manufacturing facility in the North Eastern US to become operational early 2024.

Financial Review

Overview of results

Group revenue decreased by 2% to €4,083.9m (H1 2022: €4,153.4m) and trading profit increased modestly to €435.5m (H1 2022: €434.2m). This represents a 0.7% decrease in sales and a 1.4% increase in trading profit on a constant currency basis. The Group's trading margin increased by 20bps to 10.7% (H1 2022: 10.5%) primarily reflecting a strong margin performance in Insulated Panels and the divisional mix of sales. The amortisation charge in respect of intangibles was €20.6m compared to €12.9m in the first half of 2022 reflecting acquisition activity year on year. Group operating profit increased by 2% to €414.9m (H1 2022: €405.2m) reflecting a combination of a higher amortisation charge in H1 2023 and the non trading item of €16.1m recorded in H1 2022. Profit after tax was €324.0m compared to €319.9m in the first half of 2022. Basic EPS for the period was 175.2 cent, representing an increase of 3% on the first half of 2022 (H1 2022: 170.6 cent).

The Group's underlying sales and trading profit performance by division are set out below:

The Group's trading profit measure is earnings before interest, tax, amortisation of intangibles and non trading item:

Finance costs (net)

Finance costs for the period were higher than the same period last year at €22.1m (H1 2022: €17.6m). Finance costs include a non-cash charge of €0.4m (H1 2022: €0.1m) relating to the Group's defined benefit pension schemes. Finance income includes a dividend received from an equity investment of €2.5m (H1 2022: €nil). Lease interest of €2.7m was recorded during the period (H1 2022: €2.3m). The Group's net interest expense on borrowings (bank and loan notes) in the first half of 2023 was €21.3m compared to €15.2m in the same period in 2022. This increase was due mainly to the higher levels of drawn debt year on year as a consequence of the Group's development activity.

Free cashflow

*Earnings before finance costs, income taxes, depreciation, amortisation and non trading item. Calculation is set out in Alternative Performance Measures at the end of the statement

**Excludes working capital on acquisition but includes working capital movements since that point

Working capital on 30 June 2023 was €1,118.8m (31 December 2022: €1,195.9m), a decrease of €77.1m (€84.8m excl. acquisitions) in the period. The decrease was driven by lower levels of inventories compared to both last year end and June 2022. As highlighted previously, inventory levels in 2022 were elevated intentionally in an uncertain supply environment at that time. Supply chains have now more or less returned to normal. The average working capital to sales percentage was 13.2% compared with 14.5% in H1 2022.

Net Debt

Net debt decreased by €166.9m during the first half of the year to €1,372.7m (31 December 2022: €1,539.6m). The movement in debt is analysed in the table below:

Retirement benefits

The primary method of pension provision for current employees is by way of defined contribution arrangements. The Group has three legacy defined benefit schemes in the UK which are closed to new members and to future accrual. In addition, the Group has a number of smaller defined benefit pension liabilities in Mainland Europe. The net aggregate pension liability in respect of all schemes and obligations was €32.7m at 30 June 2023 (31 December 2022: €49.5m). The Group cash-settled a pension buy-in arrangement in respect of a legacy defined benefit scheme in the period for €15.9m.

Non trading item

The Group recorded a non trading charge of €nil (H1 2022: €16.1m) in the period. The comparative charge was in respect of the Group's net loss on the complete divestment of its Russian operations.

Taxation

The tax charge for the first half of the year was €68.8m (H1 2022: €67.7m) which represents an effective tax rate of 17.5% on profit before tax (H1 2022: 17.5%).

Acquisitions

The Group incurred €156.3m on acquisitions during the period (H1 2022: €397.7m).

Dividend

The Board has declared an interim dividend of 26.3 cent (H1 2022: 25.6 cent) payable on 13 October 2023 to shareholders on the register on the record date of 8 September 2023. This is in line with the previously announced revised shareholder returns policy.

Capital structure and Group financing

The Group funds itself through a combination of equity and debt. Debt is funded through a combination of syndicated bank facilities and private placement loan notes. The principal syndicated facility is a green revolving credit facility of €800m entered into in May 2021 with a committed term to May 2026. There were no drawings on this facility at period end.

In addition, as part of the Group's longer-term capital structure, the Group has total private placement loan notes of €1,594m (H1 2022: €1,392m) which includes a new private placement issuance of €319m in June 2023 with a 6 year maturity. The weighted average maturity of all outstanding private placement loan notes as of 30 June 2023 was 5.5 years (H1 2022: 5.8 years).

During the period, the Group repaid part (€319m) of the 2022 acquisition related financing facility, with the remainder of the facility fully drawn (€181m).

The weighted average maturity of all drawn debt facilities is 4.4 years (H1 2022: 5.4 years).

As well as ongoing free cashflow generation, the Group has significant available undrawn committed facilities and cash which provide appropriate headroom for operational requirements and development funding. Total available headroom was €1,561m at 30 June 2023 (H1 2022: €1,743m).

Related party transactions

There were no changes in related party transactions from the 2022 Annual Report that could have a material effect on the financial position or performance of the Group in the first half of the year.

Principal risks & uncertainties

Details of the principal risks and uncertainties facing the Group can be found in the 2022 Annual Report. These risks, namely volatility in the macro environment, failure to innovate, product failure, business interruption (including IT continuity), climate change, credit risks and credit control, employee development and retention, fraud and cybercrime, acquisition and integration of new businesses, health & safety, and laws and regulations remain the most likely to affect the Group in the second half of the current year. The Group actively manages these and all other risks through its control and risk management processes. We will continue to actively assess changes in the external environment on events which could change our risk assessment and profile.

Looking Ahead

As we have highlighted previously, our end markets are not uniform with varying activity levels in different regions and applications. Our overall performance reflects the diversity and breadth of the Group's proposition and sectors we serve. Our spectrum of insulation solutions continues to progress apace with natural and bio-based materials the latest milestone in this advancement.

In more recent months, our order intake volumes have been trending positively overall versus the same months last year albeit with less demanding comparatives as we trade through the second half. Raw material pricing, which experienced some level of inflation in the second quarter, could see some deflation in Q3. The Group's balance sheet is strong which is important given the backdrop of a strong development pipeline.

The evidence of climate change is ever more apparent and the need to decarbonise is now of hyper-importance. Kingspan's solutions are at the vanguard of energy efficiency, and driving lower carbon in the built environment, which ought to position the Group well in the years ahead.

2023 Statement of Directors Responsibilities

for the 6 month period ended 30 June 2023

The Directors are responsible for preparing the half-yearly financial report in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, as amended, (the "Transparency Regulations") and the Transparency Rules of the Central Bank of Ireland.

Each of the Directors confirm that to the best of their knowledge:

The directors of Kingspan Group plc, and their functions, are listed in the 2022 Annual Report, with the exception of the following changes during the period:

On behalf of the Board

Kingspan Group plc

Condensed consolidated income statement (unaudited)

for the 6 month period ended 30 June 2023

Kingspan Group plc

Condensed consolidated statement of comprehensive income (unaudited)

for the 6 month period ended 30 June 2023

Kingspan Group plc

Condensed consolidated statement of financial position

as at 30 June 2023