Kingspan Group PLC

ISEQ:KRX

Earnings Call Transcript 2022-Q2

[Operator]

Hello, everyone, and welcome to the Kingspan Interim Results 2022 Conference Call. My name is Bruno, and I'll be operating your call today. [Operator Instructions]

I will now hand over to your host, Gene Murtagh. Please go ahead.

[Gene Murtagh, CEO]

Good morning, and thank you, Bruno. I'm joined here this morning by Geoff and Catriona, and we will take you through the interim results over the next half hour or so.

So let's get directly into it on Slide number 3, which is titled H1 2022 in summary. And to the right-hand side of that slide, in essence, no surprises from the recent communications that we have had.

Revenue is marginally behind prior year by 2% at EUR4.1 billion and delivered a profit that's broadly in line, a nudge ahead the prior year at EUR436 million, which resulted in EPS improvement of 3%. And then in addition to that, related to our whole Planet Passionate program, our direct greenhouse gas emissions reduced by a very significant 51%, largely in this case owing to emissions improvements from our processes rather than necessarily from our primary energy consumption, but nevertheless, a very significant improvement in the greenhouse gases.

So that's our H1 in summary, no surprises, and I'll hand you over to Geoff for some detail.

[Geoff Doherty, CFO]

Thank you, Gene. I'm going all the way to Page 15 in the deck for those who have it in front of them. So just to give you the key financial highlights. Group revenues a little under EUR4.1 billion, down 2% on the first half of last year. Trading profit at EUR435.5 million, a touch ahead of last year and in line with the update that we gave in July. Group earnings per share, up 3% to EUR01.752. And we declared an interim dividend of EUR0.263, up by 3% in line with earnings and a payout ratio of 15%, which is in line with our policy guidance. A particular highlight of these results has been the record by some distance in terms of free cash flow, EUR357 million of free cash generated in the first half of the year.

Net debt was EUR1.37 billion, up versus the half year period last year, but reflective of the fact that we've made considerable development investments over the last 12 months or so. Trading margin up 20 basis points to 10.7%. Our effective tax rate, 17.5% for the half year, and that's our guidance for the full year effective rate, which is also in line with last year's effective rate. Net debt-to-EBITDA 1.43 times. Return on capital employed 15.8%, but bearing in mind the timing of acquisitions when you annualize the impact of acquisitions, that measure is 16.3%.

Turning then to Page 16, just on trading profit and trading margin. You'll see on the right-hand side the trajectory of trading profit in successive half year periods since 2019. And on the left-hand side, we've got the profile of margins by division. Insulated Panels, a particular highlight, 12.2% trading margin in the first half. That's reflective of the market mix of sales, but also ongoing progress in areas of the business such as QuadCore, which was 25% of our insulated panels sales in the first half this year versus 21% in the first half of last year.

The Insulation margin under a little bit of pressure, 9.5%, compared to 10.5% in the first half of last year. And that's reflective of predominantly the negative operating leverage associated with negative volumes in the period.

Roofing + Waterproofing is more of a second half-weighted business, but nonetheless it's had a -- the trading environment in the roofing category has been a challenge. We would expect to make a full year margin a little north of 7%, so an improvement in the first half. But I think it's also fair to highlight the fact that the integration of the various businesses that we've acquired in what is a new category for Kingspan, that integration is going very well.

Light, Air + Water, good margin progress in the first half of 120 basis points versus the first half of last year. And we expect for the full year to be knocking on the door of 8%. And we are, as we've highlighted before, very much on the march towards 10% in that division within the next two to three years.

Data & Flooring, again, had an exceptional margin performance in the first half of 14.7%. The Data segment, in particular, performing very, very well. So all told, that added up to a 10.7% group margin.

Just on the sales and profit bridge on the next page. You'll see that acquisitions added EUR283 million of sales half year-on-half year and EUR16.7 million of profitability half year-on-half year. Underlying sales were down EUR318 million or 8% and profitability -- underlying profitability down by [ about ] EUR10.5 million or so.

Currency, a modest negative of 1%, both in terms of sales and trading profit. Free cash flow is set out on the next page. As I mentioned at the outset, a very strong free cash flow performance. Working capital was an inflow of a little under EUR85 million. We typically increase working capital in the first half of the year whereas this year we've actually reduced that. And to put that EUR85 million into context, we had an outflow of EUR262 million in working capital in the first half of last year. So a very positive performance from a working capital perspective.

It's more reflective of the fact that we came into over the last 12 months or so, working capital levels were elevated. Our working capital sales ratio at the end of June 2022 is 13.2% compared to 14.5% in June 2022. And we would expect that measure to be sub 13% by the end of the year. So we expect further progress to come in the remaining part of the year. Other items on that page, tax outflow is reflective of the income statement charge. CapEx of EUR115 million, in line with our organic development plan.

Then turning to the next page, just reconciling opening and closing net debt. The only other, beyond the free cash flow, reducing the debt, the only two -- other two movements of note were the acquisition investment of a little under EUR150 million in the period and the dividend -- last year's final dividend, which results in payment period. So we get landing at EUR1.37 billion.

Some metrics on the strength of our balance sheet is set out on the next page. Notwithstanding the considerable investment that we've made over the last 12 or 18 months, the balance sheet remained strong. Net debt-to-EBITDA of 1.43 times. Total available liquidity at the end of June of EUR1.56 billion.

During the half year period, we arranged new private placement loan notes of EUR319 million with a six year maturity. And the weighted average maturity of all of our debt facilities is 4.4 years. Our ROCE performance is set out on the next page at a reported level, 15.8%. But as I referenced at the outset, 16.3%, reflecting the annualized return of acquisitions.

Geographically, the profile of sales is set out on Page 22. I think the move to highlight is the Americas half year 2022 represents 23% of our revenues compared to 20% in the first half of last year. So that's the movement of note half year-on-half year.

So there, the key financials. And with that, I'll hand back to Gene.

[Gene Murtagh, CEO]

Excellent. Geoff, thank you very much. So we'll just finish up on the slide titled outlook. And in essence, the breadth of the business has been evolving and changing very positively over the last number of years. In terms of geography, in terms of product offering, in terms of sectoral exposure, all of which really leaves us in a fairly steady, robust position despite the concerns that are prevailing at the moment in general.

But with that also comes completely varying performances by market, and as you'd expect. And we're seeing weakness in particular, we would say, in Germany, to some extent, Benelux and obviously the U.K. And then areas of notable strength would be North America, South America and France. And then everything else is broadly in between.

But on balance, we're kind of -- we're well underway now in the second half and we would expect to deliver a fairly steady performance aided by the improving order intake comps, both in terms of the Insulated Panels and Insulation Board businesses. But we also need to bear in mind that the order bank that the business had this time last year was significantly greater than it is now. So whilst the intake is improving, the bank is still a lot lower. But all in all, we would expect a steady second half of the year.

And now, Bruno, we're open to questions. Thank you.

[Operator]

Thank you. [Operator Instructions] Our first question comes from David O'Brien from Goodbody. David, your line is now open. Please proceed.

[David O’Brien, Goodbody]

Good morning. Thank for taking my question, everyone. Firstly, if I could push a little bit further, Gene, on the order book -- or order intake commentary. I get that the easier comps are there, but I suppose could you give us a little more color how things are evolving, maybe even sequentially. Like are we seeing any signs of underlying improvement? If so, maybe a little more color on by region or end markets. I know you've given a bit of a helicopter view already, but any more color you can give.

Related to that, within the statement, specifically on North America, you talked about the larger projects for tech and automotive having an extremely encouraging forward pipeline. Specific to those type of projects, could you give us a sense of what type of visibility or how far forward you can see on the delivery of those given the size of some of them?

Next, just on the development pipeline, you noted in the statement a strong pipeline. And maybe you could just flesh that out a little bit. Is there -- you did EUR1 billion of deals in 2022. Is the pipeline of that kind of scale? Is it bigger? Have vendor expectations evolved? Are you seeing more assets coming your way than we were at six months ago? But just a little more color on that.

And finally, for me, you just noted some potential deflation into the second half. But given that it's a challenged volume environment, I guess, how are your comfort levels at managing price cost in that environment into the second half and then into 2024?

[Gene Murtagh, CEO]

Okay. Quite a few things in there, David. Just in terms of the order intake. So in essence, we were behind prior year for much of the first half and really around the turn of the year. So let's say, June, July and into August, the business -- businesses would be 10% to 15% ahead of prior year.

But I do have to stress that's against a pretty weak comp this time last year. You'll recall that the order intake and bank really peaked unnaturally around March or April last year and then tailed off. But that's how it's feeding for now. And the project pipeline that the businesses are working on is also reasonably healthy.

In terms of geographically, I would say that the Americas, both North and South and France would be positive standards. And then I think not unexpected weakness in some of the other markets, Germany, Nordics, and of course, the U.K.

In terms of our sectoral exposure on the tech end, that affects a number of the businesses. It's obviously insulated panels. It's boards on flat roof and floor insulation. It's technical insulation and obviously the whole data and flooring side as well, it's on the internals.

And there's -- I think by the very nature of these projects, there's probably more like a 9- to 12-month visible horizon there. And that's actually -- it's positive and improving, if anything. And that's not just in North America, but in other parts of the world as well.

So that side of the business is actually very exciting, both in terms of the activity, but also the scale of these projects, the breadth of product solutions we can put into them versus some traditional projects is all really very meaningful.

And also just to bear in mind, in terms of pipeline and all of that, the district heating business, which has been actually an excellent performer for us and will be in the future, is again something with very long visibility naturally because of the infrastructure and underground aspect of it. And there, again, I would say that the pipeline of activity we're tracking would be well in excess of 50% higher than what it was even 12 months ago and that wasn't bad. So that side of the business also we expect to be -- to deliver very well.

And then from a development spend and pipeline, it's growing. I think as the business grows, as the various channels expand for Kingspan, we're actually seeing more and more opportunity. So we naturally just need to keep it all between the hedges from a debt ratio perspective. And that's what will be the constraining factor, if you like, not the opportunity.

[Catriona Nicholson, IR]

And finally, deflation?

[Gene Murtagh, CEO]

On deflation, we expect mild deflation kind of Q3, Q4 on the key materials.

[David O’Brien, Goodbody]

And you're comfortable given the challenging volume backdrop that, that's manageable from a price/cost perspective overall.

[Gene Murtagh, CEO]

Yes, yes. Broadly.

[David O’Brien, Goodbody]

Okay. Thanks very much.

[Operator]

Our next question comes from Flor O'Donoghue from Davy. Flor, your line is now open. Please go ahead.

[Florence O’Donoghue]

Thank you. Good morning, everyone. I'll stick to the Insulation areas, if that's okay. Just a couple of tiny questions on that, if that's all right. The first just maybe to understand the mix of the business between technical and I guess what you might call the legacy Boards aspect, just to understand the mix of that.

Second part then would be within the Boards part, how much of that is residential. My guess would be it arguably your business that's probably most exposed to what's happening in resi markets at present.

And then the other part of that, just something you mentioned in the statement this morning about the structural operating cost reduction measures in the PIR board. Be very interested to hear a bit more on that, if that's all right.

And then just finally, in that area. Just to comment around is destocking an issue or is that in play at all? Just wondering about that. Thank you.

[Gene Murtagh, CEO]

Okay, Flor. So in terms of the broad mix of the Insulation business now, it's around 35% from, call it, technical stroke, industrial insulation. That's covering everything from the district heating, we just talked about pipe insulation, to air conditioning, ducting insulation and all of this. And that's an area that we're going to be concentrating a lot on in the future as well. And even at that, that's probably, whatever, EUR500 million, EUR600 million, it's still actually a drop in the ocean in terms of the opportunity worldwide. So that's an area for future growth.

And then the other 65%, broadly it's about half-half between residential and nonresidential. And an area that you know from other industries that's under significant pressure over the last while has been large industrial flat roofing, and we feel that in our Insulation Board business as well. And in particular, around the margin point that Geoff referred to earlier on, that's where it's most acutely felt is on large-scale flat roofs mainly so far for Kingspan in Europe. And that's where the pricing pressure will, I think, continue for the near term.

From a -- just on the same subject, destocking is something that has got an awful lot of attention. I don't think it's a particularly prominent feature in Kingspan. Maybe it has been, to some extent, but it's not an excuse that we would draw on.

[Florence O’Donoghue]

Great. And just wondering about the PIR measures.

[Geoff Doherty, CFO]

Cost reduction.

[Gene Murtagh, CEO]

The cost-reduction measures? Again, they were a little bit sensitive, but they will cover all kinds of areas. Obviously, from material inputs, different blends, densities. Just general composition of product is where the concentration will be.

[Florence O’Donoghue]

Okay. Thanks, Gene. Thank you.

[Operator]

Our next question comes from Gregor Kuglitsch from UBS. Gregor, your line is now open. Please proceed.

[Gregor Kuglitsch, UBS]

Hi. Good morning. So a couple of questions, please. Maybe, firstly, just sort of coming back to the commentary, I think, Geoff, you made back in July where I think you were sort of saying perhaps we'll have a flattish volume half two and sort of an equal half one, half two profit. So just want to kind of double check whether that's still what you expect at this stage? And maybe within that, if you could give a little bit of extra color on what you think the Panel margin will trend towards?

And then the second question is maybe a bit more strategic. I think you kind of actually flagged sort of an expanding opportunity set, more channels, sort of more M&A opportunity and basically kind of the balance sheet being the constraining factor. Obviously, you bought Steico or agreed to buy Steico. I guess I want to understand like what's new, what's opening up as a sort of new opportunity, I don't know, compared to 12 months ago or something, whichever time frame you want to choose? Like what's changing in the opportunity set? And where specifically do you think you'll be expanding more into in the coming years?

[Geoff Doherty, CFO]

Okay. Yes. Just to take your first question, Gregor, on the second half. If you take the second half of 2022, we had sales of about EUR4.2 billion. I mean best sense at this stage is that underlying sales will be down somewhere between 4% and 5% as best as we can assess that, and that's volume/price. And as we've referenced earlier, there's a bit of deflation around. Currency, minus 1% or there or thereabouts in the second half. And then we have acquisition scope of 120 or 130.

So all of that points towards a similar sales outturn of about EUR4.1 billion in the second half, which is similar to what we did in the first half. And from a margin perspective, a margin of 10.5% or there or thereabouts looks like to be a reasonable estimate at this point in time. And that, when you do the math, essentially implies where consensus is currently at, which is about EUR870 million of trading profit. Clearly, the performances within the individual divisions will differ, but that's the shape of it from a group perspective.

[Gregor Kuglitsch, UBS]

Thank you.

[Gene Murtagh, CEO]

Yes. Gregor, just on the strategic side, yes, we talked about the -- an ever-expanding opportunity. And it's really right across the piece. For a start, there are other complementary technologies that we are progressively getting into. We've recently made, I think, a very substantial move into the natural end with the announced investment in Steico, which is proper industrial scale natural. It's not a laboratory scale. So it's a business with approximately EUR400 million of revenue and growing and very significant capacity.

That's an area where we believe over time we can develop that into a very exciting opportunity, not just as an insulation but as a core for insulated panels and other things. The technical and industrial area, we just kind of touched on earlier, again, relatively embryonic for Kingspan and an extremely important area from an energy conservation perspective. And I think an underestimated area in terms of the energy that's required for steam, for air conditioning, et cetera. So a huge, huge part of the challenge in reducing emissions is actually in that area and an exciting opportunity.

Daylighting and ventilation, we're getting places on the daylighting side. I still think we're Mickey Mouse on ventilation. And general passive air movement, that's an area that I think has lots of opportunity. Water, again, around water storage, harvesting, cleansing, all of that is an area that's got lots of scope. And of course, we've talked a lot about roofing. And again, we're really just starting off there. And that's a full global opportunity, not just for waterproofing, but for insulation pull-through of multiple technologies. So we're at the very early stages of a lot of these areas. And as I said, it's about prioritizing a pipeline rather than wondering what to do.

[Gregor Kuglitsch, UBS]

Okay. Thank you very much.

[Operator]

Our next question comes from Cedar Ekblom from Morgan Stanley. Cedar, your line is now open. Please proceed.

[Cedar Ekblom, Morgan Stanley]

Thanks very much. Good morning, everyone. I've got a question on the margins in the Panels business. QuadCore is growing as a percentage of that division. And I wonder if you could give us a bit of color on if we should think about a margin mix improvement over the medium term from that growth?

And then secondly, inventory benefits in H1 because of the unwind of working capital. Is it possible to quantify that? I'm wondering if the margins are lower in the second half because you don't necessarily have some of that tailwind in that division. Thank you.

[Geoff Doherty, CFO]

Thanks, Cedar. As regards to the Panel margin, I mean the 12.2% that we've made in the first half is a very strong margin in the current market when you take the average of the trading experience in the different markets around the world. The QuadCore progression over time absolutely is margin accretive as will be the, when it happens, the progression of PowerPanels as that starts to feed through from 2024. All of those innovations will progress margin.

But we're also having to ease negative operating leverage in a significant number of our businesses because market volumes are tight. So for now, the type of margin that we've made in the first half is as good as it gets in this market. And I think for there to be any progress beyond that really would take more accommodating end markets overall.

Then your second question -- yes, second question then around inventories, if I got it right. Really, the key impact there is balance sheet and cash flow, not necessarily margin. You might recall this time last year, we did have a margin hit in the second half because we were overstocked at a time when prices were coming down and that did impact margins in the second half of last year. That won't repeat or is unlikely to repeat itself in the second half of this year.

[Cedar Ekblom, Morgan Stanley]

More -- that's helpful. But just more -- just a follow-up. So you were hit on the margin in the second half of last year. Did you benefit materially on the margin in the first half of this year because you did the opposite as it relates to working capital?

[Geoff Doherty, CFO]

Well, I think what we did -- as we moved through the very early stages of 2022, we had less of a headwind to absorb from higher-priced inventory. So essentially got washed through and we were closer to market. So it was more about restoring margins following a period of more expensive inventory than necessarily being a benefit relative to, say, two years ago. We're just getting back to where we needed to be from an inventory days perspective.

[Cedar Ekblom, Morgan Stanley]

Understood. Thank you so much.

[Operator]

Our next question comes from George Speak from BNP Paribas. George, your line is now open. Please go ahead.

[George Speak, BNP Paribas]

Hi. Thanks for taking my question. Firstly, could we just get an update on PowerPanel. You just mentioned expecting it to come through in 2024. So maybe, yes, a bit of a flavor for what's going on there.

And then on Roofing, you've talked about selling installations through the Roofing business. I think we all understand the attractiveness of that proposition. Can you maybe just talk about how you go about convincing customers to buy roofing as a bundle? And then maybe what proportion of sales are currently bundled versus selling the components of the roof separately? Thanks.

[Gene Murtagh, CEO]

Thanks, George. So in terms of the PowerPanel, we've had to reset there, as we've said before. It's a more complicated innovation process than maybe we might have expected, which is no negative thing, to be honest. It's just a timing piece.

So effectively, we have completely redesigned the product. And the delay is -- well, we've redesigned the product and changed our supply sources. So it's a different technology. Structurally, it's different. Performance-wise, it's different. Length of guarantee will be more enhanced. Performance is higher, et cetera. And as I said, it's with a different partner.

But I think the delay from now on is actually just going to be literally the certification and approvals process, which are obviously vast and they're international. So we expect to start testing our product within the next four to five months. And we expect a launch in earnest around midyear next year, I will be hoping at the latest. And the opportunity to balance it is -- the opportunity is bigger than we would have anticipated. But let's get a product out in the market before we start tying up all that.

From an insulation through roofing perspective, it's very interesting because it is the model already in the U.S. So in that side, the construction industry is actually much more advanced than what it is in Europe where it's an awful lot more fragmented. So North America, I'd estimate at least 90% of roofing is actually sold as a bundle and guaranteed as such. And that's -- you will know the usual players of that. It's a well-developed, well-structured approach. In Europe, it's probably more like 10% and therein lies the opportunity.

So it's going to take time because there's obviously a little bit of -- there's procurement culture, et cetera, to change. But we are working on being in a very unique position of having multiple membranes and multiple insulation technologies that, to be honest, nobody else will actually be able to offer. But that's going to take time, but working on it.

[George Speak, BNP Paribas]

Okay. Thank you.

[Operator]

Our next question comes from Yassine Touahri from On Field Investment Research. Yassine, your line is now open. Please go ahead.

[Yassine Touahri, On Field Investment Research]

Yes. Good morning. Just a question -- a little bit of precision, if possible, on the organic decline in H1. I think it was minus 8%. Is it fair to assume it's like approximately minus 10% volume and plus 2% on prices?

And also, when I look at -- you're stressing you could get an organic decline in sales of 4%, 5% in H2. Is it fair to assume it would be like a little bit of a price decline, maybe 1%, 2%, and the rest in volume decline? That would be my first question.

And then second question is just a follow-up on the roofing landscape in Europe. So you have a stake in Nordic Waterproofing. I understand that there is more asphalt roofing in Europe than in the U.S. Where do you feel the roofing landscape in -- the flat roofing landscape in Europe could look in the future? Do you see more membrane? More TPO? More EPDM? More PVC? Do you want to focus on asphalt? I'd really like to get your thoughts or could we see the European roofing industry looks like the U.S. roofing industry in five to 10 years from now?

[Geoff Doherty, CFO]

Okay. Yassine, just to take the value volume piece first. Our underlying sales overall at the group level were down 8% in the first half. And it probably makes sense to just look at that in the two larger divisions for now. Insulated Panels underlying sales were down 10% in the first half. And of that, volume was minus 7% and price mix was minus three. Underlying sales in installation were down 7% in the first half, and there was some positive price activity in their sales in the first half. So on that basis, volumes were down low double digits in that division in the first half of the year.

Going into the second half, as you've highlighted yourself, the -- it does imply single-digit volume declines overall in the second half with a little bit of price deflation as well, bearing in mind what we've said about raw material prices, but that's the general shape of it.

[Yassine Touahri, On Field Investment Research]

Just very brief follow-up on this -- sorry. Just a very brief follow-up on the single-digit volume decline. I'm struggling to reconcile the message that you're giving on your order intake, which is up 10%, 15% in July and the single-digit volume decline for H2. Is it a methodology issue or...

[Geoff Doherty, CFO]

Yes, I suppose there's a few points. Firstly, Insulated Panels is 58% of the group. So those order book comments speak to the Insulated Panel division. Volumes in Insulation Boards will remain quite negative into the second half of the year, bearing in mind the comments we've made around the flat roofing category, but also the residential category, where we've got 50% of our Boards business is exposed to residential. So the volume outlook for the second half in Boards will be softer than in Insulated Panels.

And then I suppose the second aspect to it is that, as we referenced earlier, we were sitting on a stronger order book or more volume this time last year in total, bearing in mind the way orders were placed last year. There was essentially an accelerated order intake profile in 2022 in an inflationary environment and concerns around scarcity and all of that, which meant that orders were placed much earlier last year. And then we had a fallow period in the second half of last year. We have a more normal order placement profile this year. So it's really just the timing associated with all of those trends.

[Gene Murtagh, CEO]

And then on your second point, Yassine, about the pattern of roofing and different technologies and cultures. Our own business presently is a mix of synthetic through alwitra and bitumen through Derbigum. And obviously, we have that strategic stake in Nordic, which is multiple technology as well, but probably with a heavy enough bent on bitumen.

And you rightly point out that asphalt/bitumen is a much more prevalent technology in Europe than it is in the U.S. In fact, it's actually nonexistent in the U.S. So we would expect over time that the European market will drift towards technologies like TPO, in particular, and away from bitumen. It's not going to happen overnight. And I think some countries and building cultures are very, very slow to move. But I think it's very plausible that it will move that direction.

And then also a huge difference between U.S. and Europe is Europe uses multiple insulation technologies on roofs. Whereas predominantly in North America, it's what we call polyiso, which is a PIR board, which naturally we have as well. But in Europe, you have everything from XPS to PIR to EPS to stone wool, et cetera, et cetera, from a technology perspective. And therein lies the opportunity, clearly, for us with having as broad a spectrum of solutions as possible. So Europe is very different, but I think it will drift towards the American model.

[Yassine Touahri, On Field Investment Research]

Thank you very much. Very helpful.

[Operator]

Our next question comes from Yuri Serov from Redburn Atlantic. Yuri, your line is now open. Please go ahead.

[Yuri Serov, Redburn Atlantic]

Hi, good morning. Three questions, if I can ask them one by one. First of all, thinking about 2024, we're not talking about 2024 now, but I'm just trying to conclude, based on your comments. You're saying that the order profile for this year is more normal and the order intake is positive. Should we conclude that volumes are going to be positive in 2024? We don't know, but what's the best guess in this?

[Geoff Doherty, CFO]

I think at this remove, Yuri, it's hard for us to be any way specific about 2024. I suppose we'll have some early steer on us when we're next out in November. But at this stage, 2024 is a long time away.

[Yuri Serov, Redburn Atlantic]

Okay. Fair enough. Then a couple of -- well, another question on volumes looking backwards. You said that Insulation overall volume was now double digit, I don't know, call it minus 12%. But technical is growing. Can you give us an indication as to by how much technical was growing this half year? I mean last time you gave 18% growth in volume during the previous reporting season. Where are we at?

[Geoff Doherty, CFO]

Yes, it grew by -- in absolute terms, the technical insulation business grew by 17% in the first half of the year. Now that's the total sales. And broadly, volumes were 9%, 10% of that price was the balance of it. So that does imply that the Insulation Board volumes were down by more than the divisional average when you do the math on that.

[Catriona Nicholson, IR]

Yuri, there's still a few more people to ask questions, so maybe two more, please.

[Yuri Serov, Redburn Atlantic]

Okay. Just one last question and this is really technical. Looking at your financials and -- well, your financial income was very high. Can you explain that? I mean, part of that is dividends, but the numbers are quite elevated.

[Geoff Doherty, CFO]

Yes. Just on the income side, the only benefit of a higher interest rate environment is we actually get a return on our deposits. So we have interest income as a consequence of that. And then secondly, within that, there's a EUR2.5 million dividend in respect of our investment in Nordic Waterproofing. So it's really those two factors that have driven that increase versus the first half of last year.

[Yuri Serov, Redburn Atlantic]

I understand. So it's basically just interest rates. And in the comprehensive income, there is a negative item of minus 8%, which also relates to your equity investment. That's Nordic Waterproofing, I presume?

[Geoff Doherty, CFO]

That is Nordic Waterproofing, correct.

[Yuri Serov, Redburn Atlantic]

Okay. So it's just the market value of the investment.

[Geoff Doherty, CFO]

Just the mark-to-market on that.

[Yuri Serov, Redburn Atlantic]

Sounds good. Okay. Thank you.

[Operator]

[Operator Instructions] Our next question comes from Rajesh Patki from JPMorgan. Rajesh, your line is now open. Please go ahead.

[Rajesh Patki, JPMorgan]

Yes. Thank you. Good morning all. I've got two questions, please. First one is on the raw materials. You've talked about it from a broad perspective. Can you add some color on chemicals and steel individually? And now with the Roofing + Waterproofing division, are there any other raw materials that have become important?

And the second question is ahead of the Capital Markets Day. Could you maybe give us a teaser or key agenda for the Capital Markets Day? Thank you.

[Gene Murtagh, CEO]

Okay. Just on the raw mats. So to say there is steel and chemicals still remain our primary like, obviously, steel far more so than MDI and polyol chemicals.

And just to deal with the other part of your question first, there aren't any other major raw materials outside of that given the expansion of the business actually because it's a blend of all kinds of different technologies. So on the chemicals side, I'd say it's a gradual drift downward at the moment, partly input-related, partly energy-related, party demand-related. So that's a gradual drift down.

And on the steel, actually, it's up, down, up, down, up, down, if you like. So it's kind of -- it's up 100, down 100, up 100 and that's really what we've seen over the last three or four consecutive quarters. So down Q1, up Q2. We expect down Q3. Q4, don't know just yet. So that's kind of the pattern of the raw materials.

[Catriona Nicholson, IR]

And then the Capital Markets Day, Rajesh, we'll send out an agenda shortly. But there'll be 8 senior leaders from across the business that will be presenting on different regions, different market segments. So it should be a great day and then a site tour. But we will separately send you the agenda for that.

[Rajesh Patki, JPMorgan]

Thank you.

[Operator]

Our next question comes from Yves Bromehead from Societe Generale. Yves, your line is now open. Please go ahead.

[Yves Bromehead, Societe Generale]

Hi. Good morning, everyone. Just a few brief questions. First, on the presentation pack, you fleshed out your organic expansion. It seems that you're actually sort of bringing forward your ambition to build the flagship mineral installation plant. I think the time line is a bit earlier than what was shown in December.

So can I just ask whether you already have the permit for the plant? What's the total CapEx for that? And also thinking about the rationale of the geographic location, I think it's in Northern Ireland. Would this be more feeding the [indiscernible] type of markets? Or would you export to the U.S. and Northern Europe. Also sticking to stone wool for a minute here. Should we think about this as your first plant and then rolling that out to sort of the other side on Eastern Europe, Central Europe? Would you consider M&A in here?

And lastly, again, on organic expansion, I just noticed that your South American plants in Colombia and Paraguay didn't seem to be in the December presentation. So just trying to understand what kind of strategy are you having here. Are you thinking about growing faster than expected in South America, which is growing at the minute? Thank you very much.

[Gene Murtagh, CEO]

Okay. So just in terms of the stone wool, to be honest, we have limited ambition in this. So it's not something that we expect to be a very prominent feature of Kingspan. Even if we develop a EUR500 million business at 4% or 5% of the group at this stage, it's very much just part of fleshing out the full spectrum. There are obviously heavyweights in that area, and they're welcome to it, to be frank. I think we have a significant internal demand, about 120,000 or 130,000 tons already, which we acquire from the market. And obviously, we would want some comfort, if you like, around the supply sources of that, hence, our interest.

To be specific, no, we don't have a permit yet. Because actually, it's a difficult process to get planning for in any country in Europe because of the, frankly, the emissions related to the process, which is largely why we don't like it in the first place. So we're still working on that.

And our bigger consumption incidentally is by far in Continental Europe and the further east we go, it's even greater. So yes, we have ambition to do more for a start. It's very much part of the tech campus in Ukraine that we're moving ahead. It will be a cornerstone project in that whole development. And would we look at some M&A, we would indeed. But nothing that's going to divert us too much. So it's just, to be honest, it's one of the fans in the spectrum and it's nothing more than that.

And then from Colombia and Paraguay, you're right, that wasn't in the December pack, and I'm sure in the next December pack there'll be even more of some sort. That's just the nature of Kingspan. We have a presence already in Colombia, one manufacturing plant in Cartagena and we expect to build on over the next 12 or 18 months in Cali. So that's really very encouraging.

Paraguay, we have a smaller commercial presence, which currently is supplied out of Brazil, and we expect to invest in there, likely greenfield, but potentially an investment in the form of a JV either. And concurrently, we're looking at Chile as well. So we see -- and that's all insulated panels. So we haven't even got into any of the other technologies in Latin America, but we see it as a very interesting emerging opportunity for us.

[Yves Bromehead, Societe Generale]

Thank you very much. And just the margin in South America, is it the same as the overall Insulated Panel at the group level? Or is there like a mix difference given, I think, in Brazil, it's quite consolidated as well?

[Gene Murtagh, CEO]

No, no. It's actually broadly similar.

[Yves Bromehead, Societe Generale]

Great. Thank you very much, guys.

[Operator]

Our next question comes from Harry Goad from Berenberg. Harry, your line is now open. Please go ahead.

[Harry Goad, Berenberg]

Hi. Good morning. I've got two questions, please. You've obviously talked a fair bit around raw materials price/cost movement, but I imagine you're still seeing some quite considerable inflation in things like wages and overhead. Could you give us a feel for how the -- if you thought about almost in terms of sort of total cash cost on a constant volume basis, how that is progressing and how you think that ends up through the year?

And then the second one was just coming back to that point you're just talking about in terms of the global organic expansion. Can you talk a little bit to what you think the longer-term opportunities are and what that can contribute to the group's growth on an annual basis? Is it right to think it's maybe 1% to 2% contribution to group revenue growth on average over the medium term? Thanks.

[Geoff Doherty, CFO]

Yes. Just on the inflation of the overhead base. There are inflationary pressures in areas like payroll and other overheads. But against that, we do have some deflation as we've outlined in key raw materials. Overall, that's something that we have to manage through our margins. You'll have seen in the first half of the year we managed to add 20 basis points to margin. So we view these things from a margin perspective in terms of how we manage them.

Not going to get into the specifics of what the level of inflation is in terms of the overhead base. But what I would say is that the inflationary pressures that we were contending with 12 months ago were a multiple of what we're dealing with now. So we're not quite back to normal, but we're back to a situation that is more straightforward to manage from a volatility perspective.

In terms of the organic sales growth that's implied by all of the developments that we've had, I mean, we've said before that in a flat construction macro, we ought to be able to grow our sales by 3% to 4% beyond that. And clearly, the capacity plans that we've outlined this morning are part of that in markets and regions where we have a need for that capacity to enable that growth.

[Harry Goad, Berenberg]

Fantastic. Thank you.

[Operator]

Our next question comes from Jonny Coubrough from Numis. Jonny, your line is now open. Please go ahead.

[Jonathan Coubrough, Numis]

Thanks and good morning. Could I ask just on the U.S. panels market whether you now see that as being a structurally high-margin market due to consolidation. And I'd be grateful if you could give any context on how margins there do compare to panels within Europe?

[Geoff Doherty, CFO]

What I would say is that it is a -- it's a higher-margin market, not -- again, not going to comment on the specifics of it. But it is a higher margin market than the division overall. We've also seen ongoing progression in industry penetration for insulated panels across the U.S. and North America. So that's continuing unabated. And a lot of the sectors that are seeing very significant levels of growth currently, penetration of insulated panels is actually quite high in those categories because there's a demand for super efficiency in terms of the method of construction. So all of that is positive from a margin perspective.

[Jonathan Coubrough, Numis]

Thanks very much.

[Operator]

Our next question comes from Alexander. Alexander, please go ahead.

[Alexander Craeymeersch, Kepler Cheuvreux]

Hi. Good morning. Alexander Craeymeersch from Kepler Cheuvreux here. Just had some questions on the competitive space. So -- and then also maybe relating to M&A. So first of all, now that the energy prices are coming off, do you expect some more competition from mineral wools and considering that these are somewhat interchangeable with your [ PUR ] boards for flat roofs. I was just wondering to which extent this contributed to the volume losses in the Board business.

Then the second question would be with regarding to the nice improvement in the order intake for the Insulation Panels. Could you maybe shed some color on which type of projects are boosting these orders?

And then regarding M&A, I mean, we have seen a competitor of yours divest a legacy business and now has some cash on the balance sheet. Just could you maybe light a bit -- or shed some light on how that does affect your bidding towards some targets and if that becomes a bit more competitive. So that's my three questions.

[Gene Murtagh, CEO]

Okay. Alexander, just on your first point, yes, naturally, energy has come off considerably, which does affect the cost base to some extent of stone wool. We haven't actually seen -- we haven't seen any drift across to that material at all. In fact, naturally, we're benefiting significantly from it given that we procure 120,000 tonnes of it. So that's really been an advantage.

But in terms of industry penetration or market share movements, we haven't seen any because, bear in mind, the cost base of the insulation board as well as the other technologies we have has drifted a lot. Like all you need to do is look at the MDI indices to understand the way that's gone over the last six months. So I'd say no change in the competitive position of those two materials necessarily.

And then from an M&A perspective, I think I know what you mean. And there have been some actually hard-to-fathom multiples knocked around the industry over the last year or two. We've been part of those processes and would have pulled out on a number of them because it just doesn't make return sense to us. So it just means that we have to be just a little bit more agile, pick what we want to pursue and just be selective about what we do. And that's exactly the way we've been carrying on.

[Catriona Nicholson, IR]

And in order intake, what type of projects are we seeing [indiscernible] We kind of asked and answered earlier with big projects around tech and EV in the U.S. in particular. Thanks, Alexander. Bruno?

[Operator]

Okay. Thank you.

[Gene Murtagh, CEO]

Thanks, Bruno. That finishes it up for us. So thanks, everybody, for joining, and we'll be in touch over the coming days.

[Geoff Doherty, CFO]

Good morning, everybody. Bye-bye.

[Catriona Nicholson, IR]

Thank you. Bye.