KGP.L Regulatory News (KGP)

 KINGSPAN GROUP PLC

PRELIMINARY RESULTS

Year Ended 31 December 2022

KINGSPAN GROUP PLC

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022

Kingspan, the global leader in high-performance insulation and building envelope solutions, reports its preliminary results for the year ended 31 December 2022.

Financial Highlights:

Operational Summary:

Summary Financials:

1 Net Debt pre-IFRS 16

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-IFRS 16 per banking covenants

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

Gene M. Murtagh, Chief Executive Officer of Kingspan commented:

"The 2022 outturn was very satisfactory in the context of accumulating uncertainty over the course of a bumpy year that saw a strong first half performance giving way to a more subdued environment in the second half of the year.

Kingspan recorded another meaningful year in its contribution to lowering the CO2 emissions of buildings combined with record revenue and EBITDA touching €1 billion for the first time. Notwithstanding ongoing challenges in the global economy, we expect to see a continuation of the structural drive in favour of more sustainable buildings over the longer term.

Given the powerful combination of our global scale, the diversity of our end markets, our ability to grow organically and through acquisition, alongside our strong innovation pipeline and an ongoing societal drive for energy efficiency, we believe Kingspan is very well placed for continuing progress for the benefit of all stakeholders."

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Business Review

The 2022 outcome for the Group as a whole was relatively pleasing given the accumulating uncertainty as the year progressed. Over-life carbon saved in buildings using insulation systems we manufactured in 2022 is an estimated 173 million tonnes of CO2e, driving record revenue of €8.3bn and record trading profit of €833m. This was achieved at a time of exceptional inflation and unprecedented disruption in supply chains globally, which was less a feature in the latter part of the year.

The performance of individual markets and economies varied significantly with the Americas, Germany and Australasia the most stable for Kingspan, with much of Europe weaker. The pattern of trade was also at odds with prior periods where many of our routes to market built inventory in the earlier part of the year, largely out of caution, followed by industry-wide efforts to lower stock levels in the second half.

Virtually all walks of life have been and will be further impacted by the prevailing energy cost and availability dynamics. This has understandably led to broader and growing concerns which may weigh on demand in the year or so ahead. Conversely it has also generated an unprecedented impetus amongst governments and society in general to ensure measures are taken to curtail reliance on fossil fuel. Conservation in buildings is a key component of this given almost 40% of all global energy related carbon emissions emanate from buildings and construction. Our solutions can, and are, playing a meaningful long-term role in this process.

Planet Passionate and our Impact

The vast majority of what we provide to the market enables others to dramatically reduce energy consumption and its related GHG emissions. That estimated impact during 2022 was 173 million tonnes of CO2e saved from insulation systems we sold during the year, taking into account their contributions over the life of the building infrastructure that they serve. Internally, our Planet Passionate initiative once again made tremendous progress, despite being hampered by supply issues, largely related to the procurement of solar panels from Asia.

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

In summary, 18 solar PV projects were completed across our facilities during the year which will generate 6.4 GWh of renewable electricity annually. 803 million PET bottle equivalent of recycled material was processed across the Group, and 14 rainwater harvesting systems were installed. In addition, 58% of all new cars within the Group in the year were zero emission vehicles, and our waste to landfill for the whole business reduced by 42% since 2020.

4 Excluding recent acquisitions due to unavailability of data at this time.

5 As we retire our Net Zero Energy target in favour of a carbon charge, newly acquired businesses are not included for this target.

Investing in our Future

Between organic and inorganic initiatives, we invested a total of €1.3bn during the year. Capital projects, mainly focused on capacity expansion, amounted to €276m and included significant projects either completed or commenced in the US, Brazil, France, Germany, Vietnam and Australia. Preparatory work is also underway for the Ukraine Technology Campus that we announced last year. Understandably, progress has been slow to date although we anticipate investing over €200m in the project over the next four years.

Acquisitions have long been a prominent feature of our strategy and in 2022 we invested a total of €1,054m, a record, in adding geographic footprint and new business lines to our portfolio including deferred consideration and a strategic minority investment. In total six transactions were completed, the largest of which was Ondura, a French headquartered global provider of roofing solutions. Together with Derbigum, this now forms the platform for expansion deeper into the Roofing and Waterproofing arena with combined run-rate revenues of approximately €500m entering the current year. In addition, we also acquired a 24% strategic holding in Nordic Waterproofing.

Innovation at Work

The nucleus of our innovation agenda is focused on driving product improvement across thermal, renewable content, embodied carbon and fire performance, while also incorporating more bio-based solutions across our portfolio.

PowerPanelTM and RooftricityTM made it to market during 2022 with very encouraging early signs. We have limited the launch to Ireland and the UK for the time being due to component supply constraints. Initial preparations are now underway for PowerPanelTM production enablement in the US, France and the Czech Republic, likely entering production sometime in 2024.

Our QuadCore™ LEC (Lower Embodied Carbon) insulated panel launched recently, giving rise to an estimated 17% reduction in embodied carbon (in life cycle modules A-C) relative to existing product. We aim to achieve further reductions in embodied carbon as we progress towards our 2030 supply chain targets. This is an exciting new departure which we are confident will resonate strongly with our global blue chip client base and beyond.

QuadCoreTM 2.0 development is significantly advanced and AlphaCore® is launching imminently following the acquisition of Calostat® technology in late 2022. Progress is also being made on the bio-based insulation front, albeit at a somewhat slower pace than we would like.

Product and System Integrity

By the end of 2022, 26 of our sites were certified to ISO 37301, with a plan to have 58 sites certified to the standard by the end of 2023. 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. To date, 133 of our sites have been audited by the Compliance Team. In addition, 651 third party external products and system audits took place throughout 2022.

Insulated Panels

(1) Comprising underlying +17%, currency +4% and acquisitions +2%. Like-for-like volume -7%.

The global and diverse nature of this business was reflected in the broad and varying performances of the different regional businesses and trends. Overall, the trading result has demonstrated growth, albeit that volumes became more challenged during the second half.

Advanced insulation cored products represented 85% of insulated panels sales volumes, whilst mineral fibre cored was 11% with older generation materials comprising the balance. QuadCoreTM, our highly differentiated and unique core material, represented 17% of insulated panels volume, having grown by 46% over prior year. Further progress is anticipated during 2023.

PowerPanelTM made its market entry, and we anticipate this family of ground-breaking solutions to feature prominently over the longer term. Supply chain consistency and reliability has been a challenge and we continue to explore ways of ensuring this is addressed.

Insulation

(1)  Comprising underlying +12%, currency +2% and acquisitions +26%.

Worldwide sales grew encouragingly by 40% over prior year. Much of the growth was delivered through pricing, and indeed the acquisitions added during 2022. Sales volumes in Logstor®, Kingspan's main technical insulation platform and now 25% of the division, grew by 18% in the second half of the year which was the first like-for-like period of ownership. Insulation board activity represents approximately 60% of the division with like-for-like volume decreasing by 10% in the year.

The two larger businesses acquired were Logstor (June 2021) and Troldtekt (April 2022), both Danish headquartered, but in entirely different markets with significant growth potential. Logstor, the larger of the two, focuses primarily on pre-insulated pipes for district heating (and cooling) infrastructure, an area of ever-growing opportunity as the world accelerates towards clean power generation and distribution. Our capacity will be increased by 30% during the current year, and by a further 50% over the following three years. Troldtekt addresses both the acoustic and bio-based insulation segments. Again, we expect to grow capacity by 60% over the next two years or so reflecting the opportunity afforded by the extension of applications and geography.

On the innovation and new product agenda, AlphaCore® launches imminently following the acquisition of Calostat® technology. An A-Class Optim-R® should reach market in early 2024. We are in the process of assembling the leadership and skills required to enter the stone wool segment which is part of our long-established ambition to be the sole global provider of the 'full spectrum' of thermal solutions.

Light + Air

(1)  Comprising underlying +15%, currency + 2% and acquisitions +10%

In 2022 this business delivered strong progress with revenue and trading profit both ahead, by 27% and 45% respectively. Notable growth was achieved in the Central European and Southern European businesses. North America also improved its performance, enhanced by the addition of the Solatube® product set and business model, which we anticipate rolling out more regionally across the US over the coming years.

As the Group grows, so too will the divisional structure that supports it. To that end, going forward the Light, Air and Water businesses will be reported as one enlarged division. Combining the service businesses of both, leveraging the online success at Water + Energy, and having a wider global route to market and channel synergy will make this combination compelling over the longer term. The enlarged division will have real global scale and scope, with revenue run-rate expected to be approximately €1bn in 2023.

Roofing + Waterproofing

The maiden year for this new business was marked by two meaningful acquisitions, Ondura and Derbigum, acquired in September 2022 and June 2022 respectively. The annualised revenue run rate is approximately €500m. This combination brings Kingspan into both flat and pitched roof membrane solutions, from the primary outer layer of the roof to the secondary underlay. In both applications, the core basis of our strategy is to create pull-through for Insulation products through a warranted system-sell. Early progress has been encouraging. From a roofing technology perspective, we intend to broaden our portfolio of waterproofing, and our geographic presence, through both organic and inorganic routes. The trading margin above reflects acquisition and other related costs during 2022.

Data + Flooring

(1) Comprising underlying +26% and currency +7%

Strong progress was again achieved in the data solutions activity in this business as large scale cloud services infrastructure continued to expand globally, and as our share of those internal solutions grew. This trajectory and the active pipeline of live projects give us confidence that further growth ought to be delivered during the current year.

Water + Energy

(1) Comprising underlying +6%, currency +1% and acquisitions +3%

This business delivered a reasonably solid outcome for the year owing to some recovery of position in the Australian market, albeit with margin pressures elsewhere reflecting a lag in the recovery of raw material inflation.

Financial Review

The Financial Review provides an overview of the Group's financial performance for the year ended 31 December 2022 and of the Group's financial position at that date.

Overview of results

Group revenue increased by 28% to €8.3bn (2021: €6.5bn) and trading profit increased by 10% to €833.2m (2021: €754.8m) with a decrease of 160 basis points in the Group's trading profit margin to 10.0% (2021: 11.6%). Basic EPS for the year was 329.5 cent (2021: 305.6 cent), representing an increase of 8%.

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

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

The key drivers of sales and trading profit performance in each division are set out in the Business Review.

Finance costs (net)

Finance costs for the year increased by €1.4m to €37.7m (2021: €36.3m). The Group's net interest expense on borrowings (bank and loan notes net of interest receivable) was €34.6m (2021: €32.2m). This increase reflects higher average gross debt levels in 2022. In particular, this includes the interest expense relating to the two new acquisition related financing facilities with an aggregated value of €800m which were arranged and fully drawn in 2022. Lease interest of €4.7m (2021: €3.7m) was recorded for the year. €0.1m (2021: €0.2m) was recorded in respect of a non-cash finance charge on the Group's defined benefit pension schemes.

Taxation

The tax charge for the year was €130.6m (2021: €118.4m) which represents an effective tax rate of 17.5% (2021: 17.2%). The increase in the effective rate reflects, primarily, the change in the geographical mix of earnings year on year.

Dividends

The Board has proposed a final dividend of 23.8 cent (2021: 26.0 cent) per ordinary share payable on 9 May 2023 to shareholders registered on the record date of 14 April 2023. An interim dividend of 25.6 cent per ordinary share was declared during the year (2021: 19.9 cent). In summary, therefore, the total dividend for 2022 is 49.4 cent compared to 45.9 cent for 2021. This payout is in line with our shareholder returns policy.

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. The total pension contributions to these schemes for the year amounted to €1.8m (2021: €nil) and the expected contributions for 2023 are €nil (2021: €nil). On 6 December 2022, the Group completed a bulk insurance annuity insurance policy 'buy in' for the Colt Life Assurance and Retirement Scheme ('CLARS'). This buy-in ensures an insurance asset that fully matches the remaining pension liability and was net settled in cash for an amount of €15.9m in January 2023. There was no impact on profit before tax from this transaction. In addition, the Group has a number of smaller defined benefit pension liabilities in Mainland Europe. The net pension liability in respect of all defined benefit schemes was €49.5m as at 31 December 2022 (2021: €28.0m) with the increase reflecting, primarily, a decrease in the value of scheme assets during the year partially offset by actuarial gains on scheme liabilities.

Intangible assets and goodwill

Intangible assets and goodwill increased during the year by €685.5m to €2,687.3m (2021: €2,001.8m). Intangible assets and goodwill of €708.9m (2021: €418.9m) were recorded in the year relating to acquisitions completed by the Group. An increase of €9.0m (2021: increase of €50.9m) arose due to year end exchange rates used to translate intangible assets and goodwill other than those denominated in euro. There was an annual amortisation charge of €32.4m (2021: €29.5m).

Financial key performance indicators

The Group has a set of financial key performance indicators (KPIs) which are presented in the table below. These KPIs are used to measure the financial and operational performance of the Group and to track ongoing progress in achieving medium and long term targets to maximise shareholder return.

(a) Basic EPS growth. The growth in EPS is accounted for primarily by a 10% increase in trading profit partially offset by an increase in the Group's effective tax rate by 30 basis points to 17.5% and an increase in minority interest. The effective tax rate increased due to the geographical mix of earnings year on year. The minority interest amount increased reflecting the performance at the Group's operations which have minority stakeholders.

(b) Sales performance of +28% (2021: +42%) was driven by a 16% increase in underlying sales, a 9% contribution from acquisitions and positive currency translation of 3%. The increase in underlying sales reflected a combination of strong year on year price growth due to raw material inflation offset by an overall reduction in volume particularly in the second half of the year as global construction markets eased.

(c) Trading margin by division is set out below:

The Insulated Panels division trading margin decreased year on year reflecting the market mix of sales, inventory cost dynamics as well as negative operating leverage driven by year on year volume declines. The trading margin decrease in the Insulation division reflects, in the main, negative operating leverage associated with year on year volume declines and the category mix of sales. The increased trading margin in Light + Air reflects activity growth, investment in specification and other processes as the division continues to scale up. The Water + Energy trading margin decrease reflects lag in the recovery of inflation in the first half of the year. The trading margin in Data + Flooring is consistent year on year.

(d) Free cashflow is an important indicator and reflects the amount of internally generated capital available for re-investment in the business or for distribution to shareholders.

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

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

Working capital at year end was €1,195.9m (2021: €977.8m) and represents 14.5% (2021: 13.8%) of annualised sales based on fourth quarter sales. This metric is closely managed and monitored throughout the year and is subject to a certain amount of seasonal variability associated with trading patterns and the timing of significant purchases of steel and chemicals. The 16% growth in underlying sales in 2022 required a consequential investment in working capital to support the sales growth. The December 2022 working capital position is untypically high reflecting higher than normal inventory levels although these have been reducing through the second half. The business took the opportunity to build an element of buffer stocks earlier in the year due to availability constraints and has been steadily working through this in the second half as supply chain bottlenecks and pricing eased. We expect working capital levels to normalise further during 2023.

(e) Return on capital employed, calculated as operating profit divided by total equity plus net debt, was 15.9% in 2022 (2021: 19.5%) and was 16.5% with annualised impact of acquisitions. The decrease year on year reflects the 160bps reduction in trading margin and elevated levels of working capital. The creation of shareholder value through the delivery of long term returns well in excess of the Group's cost of capital is a core principle of Kingspan's financial strategy.

(f) Net debt to EBITDA measures the ratio of net debt to earnings and at 1.62x (2021: 0.88x) is comfortably less than the Group's banking covenant of 3.5x in both 2022 and 2021. The calculation is pre-IFRS 16 in accordance with the Group's banking covenants.

Acquisitions and capital expenditure

During the year the Group made a number of acquisitions for a total upfront consideration of €887.0m.

In April 2022, the Group acquired 100% of the share capital of Troldtekt, a Danish natural acoustic insulation producer. The total consideration, including net debt acquired amounted to €220.4m.

In September 2022, the Group acquired 100% of the share capital of Ondura Group, a French headquartered global provider of roofing membranes and associated roofing solutions, for a total consideration, including net debt acquired of €515.6m.

The Group also made a number of smaller acquisitions during the year for a combined cash consideration of €151.0m:

The Group's organic net capital expenditure during the year was €250.6m encompassing a number of strategic capacity enhancements and ongoing maintenance.

EU Taxonomy and TCFD

Climate related disclosures are required under the EU Taxonomy Regulation (Sustainable finance taxonomy - Regulation (EU) 2020/852) and by the Task Force on Climate-related Financial Disclosures (TCFD). The disclosures will be included in our 2022 Planet Passionate Sustainability Report that will be published at a later date within the required timeframe.

Non trading item

The Group recorded a non trading charge of €16.5m (2021: €nil) in the year in respect of the Group's net loss on the complete divestment of its Russian operations.

Capital structure and Group financing

The Group funds itself through a combination of equity and debt. Debt is funded through syndicated bank facilities and private placement loan notes. The primary bank debt facility is a €800m sustainability linked Revolving Credit Facility arranged in May 2021, maturing in May 2026, and which was undrawn at year end. The Revolving Credit Facility was increased by €100m in December 2022 under the facility's accordion clause.

In April 2022, the Group arranged two additional banking finance facilities with an aggregate value of €800m (€500m maturing in April 2024, €300m in April 2025). The facilities were fully drawn at year end.

In addition, as part of the Group's debt funding structure, the Group has total private placement loan notes of €1,322.0m (2021: €1,377.1m) which have a weighted average maturity of 5.7 years (31 December 2021: 6.4 years).

The weighted average term, as at 31 December 2022, of all drawn debt was 4.1 years (31 December 2021: 6.3 years).

The Group has significant available committed undrawn facilities and cash balances which, in aggregate, were €1.45bn at 31 December 2022 (31 December 2021: €1.3bn).

Net debt

Net debt increased by €783.5m during 2021 to €1,539.6m (2021: €756.1m). This is analysed in the table below:

Key financial covenants

The majority of Group borrowings are subject to primary financial covenants calculated in accordance with lenders' facility agreements which exclude the impact of IFRS 16:

- A maximum net debt to EBITDA ratio of 3.5 times; and

- A minimum EBITDA to net interest coverage of 4 times.

The performance against these covenants in the current and comparative year is set out below:

Investor relations

Kingspan is committed to interacting with the international financial community to ensure a full understanding of the Group's strategic plans and its performance against these plans. During the year, the executive management and investor team presented at 11 capital market conferences and conducted 624 institutional one-on-one and group meetings.

Share price and market capitalisation

The Company's shares traded in the range of €43.60 to €106.65 during the year. The share price at 30 December 2022 was €50.58 (31 December 2021: €105.00) giving a market capitalisation at that date of €9.2bn (2021: €19.0bn). Total shareholder return for 2022 was -51.5% (2021: +84%).

Financial risk management

The Group operates a centralised treasury function governed by a treasury policy approved by the Group Board. This policy primarily covers foreign exchange risk, credit risk, liquidity risk and interest rate risk. The principal objective of the policy is to minimise financial risk at reasonable cost. Adherence to the policy is monitored by the CFO and the Internal Audit function. The Group does not engage in speculative trading of derivatives or related financial instruments.

Board Changes

The Board of Kingspan is pleased to announce the appointment of Louise Phelan, who will join the Board as an independent Non-Executive Director with effect from 28 April 2023. Louise was formerly Vice President Global Operations EMEA of PayPal, and is a highly respected business leader and adviser with experience leading global organisations in both the renewable energy and finance sectors. The Board looks forward to benefitting from her experience in the years ahead.

Following the conclusion of this year's Annual General Meeting, both Michael Cawley and John Cronin will be retiring from the Board on the expiration of their terms of office. Both Michael and John have been valued Board and committee members over the past nine years. The Board would like to thank them both for their significant contributions to Kingspan during those years.

Looking Ahead

2022 was a bumpy year with the strong performance in the first half giving way to a more subdued environment in the second half of the year. The combination of war in Ukraine, the consequential steep energy and consumer inflation, and an industry overstocked due to supply chain concerns were all factors that weighed on second half demand and performance.

The more recent performance of our business has differed significantly by sector, end market and geography. Within the mix of business there are strong sectors of out-performance led by a need for ultra-energy efficiency and lower carbon. This is a theme which is likely to play out more fully in the medium term as society grapples with the need for a step change in energy efficiency and de-carbonisation.

It is difficult to look too far ahead in this environment. We anticipate delivering a broadly similar trading profit in the first quarter of 2023 to that of 2022, aided in part by the contribution from acquisitions. We are mindful of a more demanding comparative to come in the second quarter. Longer term, Kingspan is very well placed given the powerful combination of our global scale, diversity of our end markets, strong innovation agenda and an ongoing societal drive for energy efficiency.

On behalf of the Board

Kingspan Group plc

Consolidated Income Statement

for the year ended 31 December 2022

Kingspan Group plc

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2022

Kingspan Group plc

Consolidated Statement of Financial Position

as at 31 December 2022

Kingspan Group plc

Consolidated Statement of Changes in Equity

for the year ended 31 December 2022

Kingspan Group plc

Consolidated Statement of Changes in Equity

for the year ended 31 December 2021