Kingspan Group plc (OTCPK:KGSPF) Q2 2022 Earnings Conference Call August 19, 2022 3:30 AM ET
Company Participants
Gene Murtagh – Chief Executive Officer
Geoff Doherty – Chief Financial Officer
Catriona Nicholson – Investor Relations
Conference Call Participants
David O’Brien – Goodbody
Arnaud Lehmann – Bank of America
Yves Bromehead – BNP Paribas
Yuri Serov – Redburn
Gregor Kuglitsch – UBS
Flora O’Donoghue – Davy
Rajesh Patki – JPMorgan
Yassine Touahri – On Field Investment Research
Cedar Ekblom – Morgan Stanley
Operator
Hello, everyone and welcome to the Kingspan Interim Results 2022 Conference Call. My name is Nadia and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Gene Murtagh, CEO of Kingspan to begin. Gene, please go ahead.
Gene Murtagh
Nadia, thank you very much and welcome everybody to the interim 2022 call here at Kingspan. We will get straight into the business. And assuming you’ve got the slide deck there, we’ll just take you to Slide #3, which is titled H1 2022 in summary. So in essence, it was a very strong performance and outturn for the first half, pretty much as we have highlighted, revenue of 42% at €4.2 billion, trading profit, ahead by 32%, and basic EPS, ahead by 29%.
Just taking it through the businesses in brief, the Insulated Panels business, which of course is our largest, was ahead by 39%, driven in the main by significant inflation, reasonably solid volume and a pretty remarkable improvement in the proportion of QuadCore sales to the division, which increased in volume terms by 63% in the period, which was very, very strong. And again, we expect that to increase strongly into the second half and into next year as well.
Our Insulation division sales were ahead by 69%, obviously a standout at that level, but once again, very strong inflation in there. And additionally, the acquisition of Logstor, which is performing exceptionally well and the general technical insulation sector, which now comprises about 35% of the division sales. Of note for sure is the district heating side, which we acquired just over a year ago. Order intake is running at an annualized rate of around €500 million. And even as recently as this week, just to give you a flavor for the types of initiatives that are on the way here, there was a €6 billion commitment by the German government, 50% supported by Brussels, specifically around district heating infrastructure improvements in the very near term. So that’s one example, the single country of the direction of travel there. So we are extremely well positioned in that business to be able to participate and take advantage of that in the future.
Then Roofing & Waterproofing, which is the establishment of our global platform in this segment, again, we have talked about it as part of our strategy for some time. The Rubber really has hit the road now with the acquisition of Derbigum in June, which is Belgium-based and pan-European supplier; obviously, the Ondura acquisition, which was cleared by EU Antitrust just very recently and will close mid-September. And then just more recently, we have acquired a 24% strategic minority stake in a business called Nordic Waterproofing in, again, in the Nordics quoted in Sweden. So we are well and truly got our feet under the table in this division now and it’s a very exciting end market for us globally. So, the combination of these two businesses, are very significant on a number of fronts, but they also will markedly increase the group’s exposure to RMI, which traditionally is an area which has been less of a feature in Kingspan. In the other divisions then, good progress in the Light & Air business, a very solid first half. We expect a strong second half. Key theme here is improving margins, which is very evident not just in the first half, but in order intake, which we will deliver through in the second half. So that business is well on track to do what we outlined.
The Data & Flooring business again performed strong and some of the newer solutions that are coming through that division are gaining traction, particularly in the data side, the data solutions side. And if anything, the pipeline of that business actually looks stronger than it ever has at any time in the past. And then lastly, the Water & Energy business, I’d say probably had a weaker start than we would have liked, largely around margins, largely around, I’d say, slow recovery of raw materials in certain pockets of that business. Recovery well underway and we would expect the second half to deliver a well-improved performance over the first half.
We have kind of touched on this, but on Slide 5, which in essence deals with the broader strategy of the business that we outlined some years ago around the envelope and more recently around the arteries of the buildings. We’ve – if you take Light & Air, Technical Insulation, Roofing & Waterproofing, these were areas highlighted as being very attractive to us in the long term. We have had embryonic positions in those up until relatively recently. And now in those three categories, we have businesses that are at or in excess of €500 million and, in some cases, really at the very, very early stages of taking a global position. So there has been really encouraging progress on that whole strategy, and we will be fleshing that out further in the future.
So I’ll just hand you over to Catriona to deal with some of the other bigger issue topics.
Catriona Nicholson
Good morning, everyone. Thanks, Gene. And just moving on to Slide 6, got to touch briefly and remind people of some of the mega trends that are really driving the industry and driving our business forward. And on the following slide, I’ll just give some examples of how we are addressing those. So I think, obviously, a global priority is really around addressing climate change and installation and energy-efficient building play a very key role in that, particularly around refurbishing building that’s out there. I think we’ve all been reminded this year around the importance of energy independence and building energy independence into all geographies and building reliance on renewable and away from fossil fuels. Sustainability and resilience is an important and growing theme.
We will talk a little bit about Planet Passionate in a couple of minutes and some of the innovations that we’re doing to address market-leading products in the region of client performance, but also in how we utilize materials and how we build those products through low-carbon solutions. And finally, just labor shortages are another theme that have been around over the last couple of years. And we talk about the aging workforce, particularly in construction markets and labor types. And just I’ll talk on the next slide a little bit of how we address that.
So if you move on to Slide 7, please. So the first one is an example of a refurbishment project, just talking about aversing a climate emergency refurbishment project that we resolved within the UK, houses encompassed in [indiscernible]. It was the estimation that it would drive a 73% reduction in carbon emissions from that building moving forward. And it’s really around space heating and space cooling. Inflation is really the cornerstone of addressing that and building efficiency into those buildings. And obviously, that addresses energy independence as well because it drives the energy needs for and houses community businesses and everything else.
And we talk a little bit there, Gene mentioned, the recent developments in Germany this week. And district heating around energy independence is going to be very important to – an ability to address that, to look for ways for more renewable heating. So Logstor recently won a project in Hamburg West, and it’s a district heating that’s moving away from coal to more renewable ways. And one aspect of that is actually using waste from industry as a source of renewable heating or at least away from fossil fuel heating. And it will move the equivalent to 20,000 homes from parcel fuel to renewable energy.
I will let Gene talk a little bit a bit about QuadCore, lower body carbon in a moment when he talks to innovation. And we have case studies and examples in QuadCore where the installation can be up to 50% quicker than built up systems and obviously say the time saving on labor and saving our money and just risk around projects. So that’s a link to our case study and a white paper on that there, and then I’ll pass back to Gene for Slide 8.
Gene Murtagh
Great. Catriona, thank you very much. So Slide 8, as Catriona said, this is dating really with the spectrum of insulation solutions that we cover throughout the organization. We’ve long had the ambition to be a full portfolio provider right across the various different technologies. And the reason for that is preferences vary. There are products that are more right for certain applications than others, whether that’s thermal, fire, circularity, carbon cost, whatever the particular issues are. And just as an organization, we are unique in the sense of the technologies that we have in-house, covering everything from legacy materials – well, not everything, but a lot of areas in the legacy side.
Obviously, our primary focus is on advanced high-performance materials. And increasingly, you’re going to see us feature in what we call natural insulation materials, which we’ve obviously started off with the primarily timber-based trial deck business earlier this year. And we have two other technologies, in particular that we have in the pipe at the moment, and we’d expect to commercialize albeit at a very small scale in the not-too-distant future. So the key for us here is that, as I say, the – to be able to provide as broad a portfolio and not be a one-trick pony because the answer is singular in any of this and the scope across all of these technologies, obviously, as vast as we look across the world.
In terms of key innovations on Slide 9, you will be familiar with a lot of these, but just to run through some of them and the progress that’s been made. We’ve obviously launched our power panel, stroke [indiscernible] model. We’ve had very encouraging engagement so far in just the UK and Ireland, which is the only area we’ve launched it so far. We have delivered around 5-megawatt equivalent, which is around 50,000 square meters of roof area. Obviously, we tested it internally on some large-scale rooms, and we’ve done 1 particularly the large-scale external roof so far. There’s around 75-plus megawatts of quotations out there that we’re engaged on. And that’s really before we’ve kind of pushed forward with any real kind of power on this. So that’s extremely encouraging at this stage.
A class OPTIM-R, progress is well underway there, B Class Kooltherm, similarly. 2.0 in QuadCore, we will expect to launch this actually very soon. I think on the lower and body carbon side, we’re going to launch in quarter four, a QuadCore LEC, which will be a 50% lower embodied carbon product that exists presently. And I think that really, from a product carbon composition, is – will be a phenomenal leap forward. Obviously, it will be in relatively limited supply for a while until we get all of our sources up and running properly. But the fact that, that can actually be achieved and achieved at a commercially viable level is extremely encouraging. And also from a technical perspective, we’ve got clear eyes on being able to achieve up to 80% lower embodied carbon for a steel form, steel insulated panel, which is really very encouraging.
So naturally, that will entail low-carbon steel. You will have noted from before our investment in H2 green steel in Nordics, which we expect over the next few years to be supplying very material levels of our product to us, Bio-based MDI in the core and PET-based – recycled PET-based polyol also in the core. So there’s been tremendous work in getting ourselves ready for this and, obviously, serious appetite out there in the market for lower and body carbon materials and we will be way front when it comes to this.
AlphaCore, we’ve talked about for some time. We’re pretty much there from a technical perspective. It’s a project that’s been covered various technologies and various partners. And we expect to be in small scale manufacturing in this product actually in Q1 2023. Again, small scale, but we will be there. And over time, we will build a significant presence similarly for our green pipe through Logstor.
And then over to our big Planet Passionate agenda, to hand you back to Catriona.
Catriona Nicholson
Thanks, Gene. So on Slide 10, just to remind you some of the plan of passionate targets and highlights you’ve hopefully seen our plan passionate report already this year, which highlights some of the detail around the projects that were implemented last year. Just a reminder, this is visibly huge agenda across the business, significant engagement, and the expectation is to be over 260 projects implemented this year and just to reach the targets we have. So it just gives you, I suppose, an idea of the scale of this the agenda and the level of engagement that we have across the business.
We forecast in 2022 another 5% reduction in carbon in our manufacturing process with ongoing exciting engagements with our supply chain, and QuadCore LEC is an example of that. So – and you’ll see examples in the innovation side, both an innovation detail in the divisional slides later in the deck. And you can see how much Planet Passionate is linked into innovation across the business, and we have a really differentiated product because of that effort across Kingspan.
On Slide 10, just to talk to product integrity. An update on that, we have been rolling out ISO 373 across the business. We now have 20 plants certified to the accreditation, and we expect to have 28 done by this year. So fantastic progress on that. Over 122 of our sites have been audited by the internal compliance team and some sites actually around their second audit already, so significant engagement across the group on that. 615 Internal product and quality systems has carried out so far in 2022. And as usual, significant external testing, and we talked a little bit about the framework and infrastructure to support on that and clearly, a lot of resource and training going into that with 19 compliance officers across the group, 35 additional compliance personnel and 272 employees registered for PCP training.
So ongoing progress around that agenda, and then I’ll pass on to you.
Gene Murtagh
Thanks, Catriona. Just briefly before we hand you to Geoff on Slide 12, the global organic expansion, we have been certainly on a mission there over the last number of years. And the internal demand for CapEx is ever increasing. So there’s demand for about 25 new production lines or additions over the next 2 to 3 years and they are outlined there country by country, region by region. And obviously, the most recent one added to this is the building technology campus in Ukraine, which we are at the early stages of working up. And that the intention there is that it will be at least €200 million of an investment in a single campus, which will cover five or six of the technologies that are in the group. And it would be something like a 40-hectare site and around 200,000 square meters of – on the roof area. So, lots of progress on that front and much more to come.
Geoff, we will hand it over to you now for the real stuff.
Geoff Doherty
Thanks, Gene. I’m on Slide 16 in the deck, just to deal with some of the financial highlights in the first instance. Group revenue, a little under €4.2 billion, are ahead by 42% versus the first half of last year, trading profit of €434 million, up 32%, earnings per share of €1.76, up 29% versus H1 last year. We declared an interim dividend of €0.256, which is in line with our policy guidance of paying out 15% of earnings. And that dividend is up 29% versus last year’s interim. Free cash flow was down in the period, and I’ll come to the constituents of that in a second. Net debt at €1.2 billion is also up, and that reflects significant investment undertaken in the business during the period, about €522 million between acquisitions and CapEx.
But again, I’ll come to the constituents of net debt in a second. Trading margin down 80 basis points to 10.5%. The effective tax rate, up 50 basis points to 17.5%, and that reflects the geographic mix of earnings year-on-year, and that’s our guide for the full year effective tax rate. Leverage at 1.25x net debt to EBITDA. And return on capital employed, 18.1%, down on the first half of last year, and that largely reflects the timing of acquisitions in the first half of this year and the returns on those acquisitions not having yet annualized.
Just on to the next page, just on trading profit and margin itself. On the left-hand side of the graphic, you’ll see the profile over the last 5 years. And our trading profit has grown on a compounded basis by 22% per annum since the first half of 2018. From a margin perspective, you’ll see the profile of margin by division: Panels, 11.2% in the first half, down 40 basis points versus the first half of last year. Insulation, 10.5%, is lower than what was. And we highlighted at the time, an exceptional margin performance in the first half of last year. There was some lag effect in terms of recovery of raw material inflation in the first half of this year that were already underway with the recovery of. So those margins have progressed in the couple of months since half year end.
Light & Air has progressed its margins versus the first half of last year, so at 5%, up from the 2.7% in the first half of last year. Light & Air is more of a second half weighted business. And we’re – we would believe, on track to do at or about 8% from a trading margin perspective for this year. Water & Energy, down in the first half of the year from a margin perspective, largely associated with the lag in raw material recovery. That ought to progress in the second half of the year, a very good margin performance in data and storing, pretty much consistent with last year’s half year. So, at a group level, that all amounts to 10.5% and the divisional mix may be different in the second half of the year, but broadly speaking, we would expect at a portfolio level a similar trading margin of 10.5% in the second half of the year.
On to Page 18 which bridges both sales and trading profit. So dealing with sales in the first instance. So at a headline, revenue is up 42% and the components of that currency, plus 3%; underlying, plus 27%; and acquisitions, plus 12%. And from a profit perspective, in overall terms, up 32%, currency was plus 4%; underlying, plus 15% and acquisitions plus 13%.
Free cash flow is dealt with on Page 19. The biggest engine, clearly, of free cash flow is EBITDA. So EBITDA was €512 million in the first half. Working capital increased significantly by €262 million in the first half. We typically increase working capital in the first half of the year because June is at a seasonally higher point than in December. We also had very significant underlying sales growth. But notwithstanding that, our working capital sales ratio is higher than it would typically be. It’s 14 – or was 14.5% at the end of June. Our long-run average is more typically at 12.5%. And the principal reason for the elevated level is higher levels of inventory.
Like others, given all of the disruption and dislocation in supply chains worldwide, we took the opportunity to carry a little bit more inventory than will be typical. And that will naturally be utilized as we move through the second half of the year. So we expect that working capital to sales ratio to improve by 100 basis points by the end of this financial year. Beyond that, from a free cash perspective, tax, in line with our income statement rate, the outflow was €82 million in the first half, CapEx at €117 million. For full year, we’ll be a touch above €200 million for CapEx during this financial year.
The net debt reconciliation is on the following slide, on Page 20. The acquisition spend and investment was significant in the period, €357 million. And the two principal transactions that were completed in the period were Topdek in our Insulation business, which Gene referenced earlier. And also, we were very pleased to complete the acquisition of Derbigum in our new Roofing & Waterproofing activity just before half year-end. So they were the two principal acquisitions completed during the period. We also had some outflows in respect of deferred consideration minorities and paid dividends of €49 million in the period.
The strength of our balance sheet is highlighted on the following Page 21. Net debt to EBITDA, as I previously highlighted, at 1.25x. We arranged additional debt facilities of €800 million during the half year. Our total available liquidity at the end of June between cash balances on hand and undrawn committed facilities, that combination reflects liquidity of €1.74 billion, so healthy by any measure. And the weighted average maturity of our long-term private placement notes is 5.8 years, and that’s at a fixed interest coupon of 1.74%.
ROCE and the profile of ROCE is highlighted on the next page. I say, 18.1% in the first half, just largely reflecting the timing of acquisitions and ought to improve as we move through the second half of the year as those returns annualize.
And finally, the sales by geography is outlined on Page 23. And you’ll see that we recorded very healthy sales growth across all of our key territories. In terms of profile, the Americas now comprise 20% of the overall group compared to 18% in the first half of last year with the European territories broadly similar as outlined on the page.
And with that, I’ll hand back to Gene.
Gene Murtagh
Thank you, Geoff. On Slide 30, which will take you just directly to outlook as we will probably go through some of the businesses in the Q&A. Obviously, in the near-term and into 2023, it’s likely a lot of our end markets will experience some degree of contraction. Many of you will be in as good or a better position to judge exactly what that will entail. It will be what it will be. And I think all we can commit is that we will do our absolute best no matter what end market environment is actually thrown in our direction.
So setting aside that, obviously, our focus will be – remains unrelenting in pursuit of more efficient building solutions, wider geography, broader product portfolio and so on to deal with, obviously, the energy crisis, the emissions crisis and all of those other areas that we’ve been focusing on for such a very long time. So in the short-term, naturally, there is unpredictability. And over the longer-term, our businesses is increasingly exposed to, I think, very favorable structural trends. And that is it in a nutshell.
So Nadia, we will hand it over to the floor now.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question today comes from David O’Brien of Goodbody. David, please go ahead. Your line is open.
David O’Brien
Good morning. Thanks for taking my questions. Three, please, and maybe I’ll start off with just your final comments, Gene, clearly, markets are getting more challenging and investors are trying to get a handle on the potential depth of any correction that we’re seeing. I appreciate it’s hard to call, which you do make the comment in the statement and in the slide deck on #30. And look, you’ve seen solid quotation activity. So can you give us a sense of maybe what your order books are telling you for the second half or with the period that you – as visible to you? And also, maybe could you give us a little bit of color on the field for the various end markets geographically and by segment?
Also, just on the outlook, you do make the comment that you’re watchful of potential energy supply constraints over the winter months in Europe. Maybe you could give us a bit of color on how those risks relate to Kingspan and how you can manage or mitigate those should they transpire? And finally, from a standing start in January that Ondura, you have Derbigum completed, a 24% stake in Nordic Waterproofing. So with that footprint or platform established, what is the strategy for Waterproofing and Roofing going forward and the scale of the opportunity?
Gene Murtagh
Okay. David, thanks very much. It is honestly very difficult to be precise around the next 6 months or certainly into 2023. And we’re not in any way trying to kind of dealing with that head on. It just is unpredictable. We’ve obviously seen some contraction in our order bank. I think it’s important to stress that at exactly this point last year, we were at pains to explain that what we were seeing at that point was totally unnaturally high. And I think that has transpired to be the case with the bank built up to an unnatural level, and that’s just been eroding over time. And we’re probably down now at a more normal level, as they have in taken of bank, although it’s obviously less than what it was at this time last year.
For the second half, revenue is probably going to be in and around 10% up. That would imply volume down somewhat, obviously, as we flagged before. And on that whole front, in essence, our sentiment remains exactly like it did 6 or 8 weeks ago whenever we issued our trading update. So from a raw material perspective, it’s probably more available than it was. We have seen some degree of deflation. And again, on that front, depending what happens during the winter, we’re just – we’re taking a kind of a cautious approach to reacting or overreacting to any movements on that side because that can turn on the open just as well where the crisis here or an issue there. We’re just – and we’re very mindful of that.
From an energy perspective, there is two risks. One is running our own facilities and the cost related to that. But I think the cost is one side, and we just handle that. It’s much more does the stuff flow or not? So it’s our own operations, number one; and secondly, supply from both the perspective of energy and then gas clearly has a raw material into the chemical industry. So from our own perspective, we’re not enormously energy consumptive. In fact, we’re extremely low consumers of energy. And we’d be reasonably confident of that not being interrupted. And then on the bigger end of things, we’re looking at all the info and indicators that you might have yourself, and it would feel that the steps that have been taken over the last number of months would leave us a lot more comfortable on that front, to be honest, than we would have been maybe 4 or 6 weeks ago. Although that naturally does remain unpredictable.
And then from a Roofing and Waterproofing side, as you rightly point out, we’ve got ourselves established. It’s got substance now. It’s obviously European focused and still at a very small share. So we see the potential for that being pretty dramatic long-term, totally global from both an organic and acquisition perspective. And as always, the primary agenda here is to use this infrastructure as pull-through for insulation. So it’s to use the outer envelope of the building to create a specification to drive more demand for high-performance insulation. And that is going to be a 5, 10, 20-year program. It’s nothing that’s going to happen overnight. But it’s an exciting prospect, and we’re delighted to be where we are.
David O’Brien
Great. Thanks, Gene.
Operator
Thank you. And the next question comes from Arnaud Lehmann of Bank of America. Arnaud, please go ahead. Your line is open.
Arnaud Lehmann
Thank you very much. Good morning. Two or three on my side. Firstly, obviously, you’ve seen steel prices coming down, and I believe chemical prices have started to come down. Are you starting to adjust your selling prices in the panels? And I guess to which extent does that contribute to some sort of wait-and-see situation from your customers, maybe some of them waiting for lower prices on your side to adjust? And in this context, what does that imply to your margins? I know historically, your margins were improving when commodities were coming down. But I guess this cycle probably should be slightly different. And staying on the demand side, would you mind giving a bit more color on the verticals. There is lot of discussion around potential slowdown in the logistics space or warehouses related to online distribution. Have you experienced a similar slowdown? And lastly, if I may, just I think you’re planning to set up a new division, Roofing and Waterproofing. That’s fair enough. Although are there any links with Light & Air? I appreciate there would probably be different products, but they are both dealing with the roof. So was there any idea to include Roofing and Waterproofing in Light & Air or it’s just too different to make sense? Thank you.
Gene Murtagh
Yes. Okay, Arnaud, thank you very much. Just on the raw material side, like we’ve got three primary raw materials. Excuse me. Steel is the largest and various types of chemical inputs will be the second. And stonewall would be the third, where we’re actually the largest consumer of it in our insulated panels business worldwide. So as you rightly point out, there has been some movement on steel and on chemical. Now how sustained that will be, we don’t know. And as a result, we’ve been cautious on our own approach to selling prices because as we’ve seen before, that can turn quickly. All else being equal, it could probably be sustained, and it may go further, but it’s all related to movements in our order bank as well, if you like. So it’s not that fundamentally like demand’s evaporated or anything like that. We’ve been very cautious to give our pricing on the basis that, as I said, you could get a shock on the raw materials very quickly. So we’re deciding if you like, to drive our order bank in a particular direction it’s going at the moment. And then on a mineral fiber perspective, that represents around 11% or 12% of our insulated panel sales worldwide. And what we’ve seen kind of in the last 4 to 6 weeks is a significant release of volume in that area where it was probably a more tight supply in the run-up to the half year. That’s kind of freed up a little, although pricing is reasonably strong. From the verticals and the demand and – logistics and warehousing is a big part of the business. It’s actually quite solid. You’ll have noted yourself, just Amazon, as an example, and their approach to just fundamentally cutting back on – well, actually cutting everything was the kind of general drift of us a few months ago. What we are seeing is maybe a less radical approach to that. And we’ve seen a resumption of construction in some areas where we felt maybe it wouldn’t have continued. So I would say, in the UK in particular, which is a very big part of our logistics and warehousing side, the kind of 6-month, 9-month program there looks quite encouraging, in fact. And obviously, on other areas, the data side remains very strong, both from data and flooring and from panel solutions in those.
On the automotive side, the project bank that we’re – the order bank and the project bank that we’re tracking is actually ever increasing, and our position as a group in that segment is becoming stronger. And then, yes, from the Roofing and Waterproofing side, very much – and actually, sorry, I omitted that, very much part of the program there will be to pull through Light & Air as well because that’s where most daylighting solutions are, in fact, on the roof. So it’s precisely that combination of waterproofing, daylighting and insulation that will be able to be driven through the spec team on the waterproofing side. So yes, that’s a key part of action.
Arnaud Lehmann
That’s excellent. Thank you for the color.
Operator
Thank you. And the next question comes from Yves Bromehead of BNP Paribas. Yves, please go ahead. Your line is open.
Yves Bromehead
Good morning. Thank you for taking my question. I’ll have three, if I can. My first one is on your comment regarding the quotation activity. Can you maybe give us reference as to how much time and what’s the success of conversion between your quotes and an order? And then how long does that translate into potential volumes coming out of your factories? That’s question number one. Question number two is just going back on the district heating side. I appreciate all the color on the stimulus packages. What’s the time frame of the of those packages? And do you need to increase capacity at a lock strong level, especially in Germany as it seems? Also, if you have any color in terms of other regions that are expanding into sort of a district heating. And last but not least, just on the Roofing and Waterproofing segment. M&A is clearly towards Europe for now. And we do remember the U.S. acquisition that you’ve tried with Firestone at the time. Are there any targets in the U.S.A. that are possible? Or is it just too consolidated with too few small family-owned businesses there? Thank you.
Gene Murtagh
Okay. Yves. On the quotation side, as we said, quotation activity is actually reasonably solid in the vast majority of markets, typically. And this probably is not the typical period. Typically, there is about a 6-month gap between quotations and bank, that’s generally been our experience. So obviously, it varies somewhat by product and market. In terms of our success rate and to what degree we can say that will convert in the next 6 months, it’s actually just difficult to say. As we’ve said before, 2023 or next year is further away than it normally is, is what it feels like now. And obviously, it’s less predictable. So we can’t, in any way, be kind of solid or precise in that, except we continue to quote and do our utmost to convert.
From a district heating perspective in terms of those new initiatives, so by way of example is the German one we talked about earlier on. So in terms of time scale, that’s a 5-year program. So it’s not like 10 or 20 years or something aspirational. It’s very specific, €3 billion contributed by the EU to be matched by Germany itself or specific projects in a 5-year period. And that’s one country. So naturally, that’s going to place pressure on our capacity. Our intention is to increase capacity by 30% next year and by year 3 from now to have increased by 100%. And we have projects in place to deliver that. And then from a Roofing and Waterproofing perspective, the U.S.A. is obviously a target. We missed out on Firestone a few years ago, which was now for sale, but it was a little bit too expensive for Kingspan in terms of the multiple. There are other opportunities. And if that means bringing together a collection of very fine kind of smaller privately owned businesses, well, we’ve got the patience to do that. And yes, let’s see where we go from there, but lots of opportunity there to put a mile.
Yves Bromehead
Perfect. Thank you very much.
Operator
Thank you. And the next question comes from Yuri Serov of Redburn. Yuri, please go ahead. Your line is open.
Yuri Serov
Hi. I have a few questions. I will ask them one by one, if you don’t mind. Yes, on the margins, I’m just looking at margins. Your margin in the first half is down by 8 bps, and I think you made some statements previously about what your expectation is for the full year margin. Can you just give an update as to what you’re thinking now?
Geoff Doherty
Yes, absolutely, Yuri. Yes, 10.5% in the first half. And as best as we can assess that at this point, I would expect at a group level a similar margin in the second half of about 10.5%. So our full year margin should be in that 10.5% zone for the group.
Yuri Serov
Okay. That’s helpful. So full year saying, yes, 10.5, yes?
Geoff Doherty
Full year, 10.5%. Yes.
Yuri Serov
And then more specifically on Insulation. You say this is against a very high margin last year, which is fair enough. But if I look at the history, your Insulation margin in the first half of this year was the lowest in ‘17, which is quite low. Well, it was lower before, but it’s quite a long on history. So what’s your expectation for that segment, particularly?
Geoff Doherty
Yes. Well, I think the margin performance in the first half, we did see a lag in the recovery of raw material inflation. That recovery effort now is well underway. So I would expect in the second half of the year, the insulation margin will be north of 11% in the second half, reflecting that recovery.
Yuri Serov
Okay. That’s helpful. Speaking about volumes, and I don’t actually know. I mean, I don’t have the full data, but just reading what you have said. Looking at the installation funnel. So at the end of March, your order backlog was up 19%. And in the end, the full first half volumes were down by 4%, which to me sounds – seems like a stunning collapse in the second quarter. Is that true or not?
Gene Murtagh
No, that will be completely inappropriate way to characterize it. I think as we’ve – as I tried to say earlier on, it was a stunning expansion of it this time last year, which we’ve tried to explain, although it’s difficult, that, that was unnatural. And I think what we’ve seen is a corresponding reduction to bring it back to some form of normality. Like the only way – like obviously, the trends have been down. We’ve been absolutely crystal clear about that. And in case you missed our statement a couple of months ago, we spelled that out in black and white. But an easier way to try and articulate this is that our order intake for the first half of 2022 is precisely half of what it was in the whole of 2021, which kind of is about the same. And that’s the only way we can try and explain this because there simply are, at a time like this, hard to explain gyrations in order intake because there is panic on materials, there is panic on crisis, there is panic on pricing. There is all sorts of stuff which is driven. To be honest with you even from our perspective, a pattern that’s been difficult to interpret. But there is no question about it. It was far higher this time last year than it is now. And currently, it’s trending down. But again, as we’ve said, we have been very cautious on our pricing, which, if you like, is kind of feeding that trend in itself. And we can drop our prices any day. That’s never too late. But you can drop your prices too early. That’s from experience.
Geoff Doherty
Yes. And the order bank, Yuri, is never a uniform comparison from point to point. That’s been the case over many years. But I think that’s been accentuated over the last couple of years just in light of raw material moves and other factors. And to kind of give you further context on it, you might recall that last year, towards the end of last year, we highlighted that our order bank at the end of September ‘21 was 49% ahead in volume versus September of the previous year. Now you haven’t seen us print volume growth in any period of that order of magnitude in the period since because the order bank flows into sales in an uneven way. So as Gene has outlined, the best way we can help with understanding it is to point out the order profile over an extended period of time, which is the full first half this year versus the full year last year. And it’s steady as she goes in that context.
Yuri Serov
Yes, no, look, listen, I understand that. If the order bank is up 41%, the length of the order bank is actually significantly prolonged. So as a result, the volume doesn’t actually jump by that percentage. That’s clear. But given what you just said. I mean, it’s interesting that you are using the word cautious in respect to your pricing activity. Usually when people say cautious, that means that they don’t push prices up too much. But I think what you’re saying is that you’re not willing to drop the prices at the time of material cost inflation going up because you think that it may actually have to go up again. Is there – why – am I right to get a sense that your pricing activity is actually the pressure in your volumes a bit?
Gene Murtagh
Yes, absolutely. So, that’s entirely right. It’s not – I am not saying we are cautious because we think it will go up again. We are cautious because we don’t know what it’s going to do. And it’s obviously been a volatile period on supply in recent years. So, that’s hence, the caution on that front. And yes, like as I said, it’s – moving prices down is a very simple thing to do. It’s – we would rather try and defend it for the time being, see how the supply side works out and then see where we go.
Catriona Nicholson
I think, Yuri, just to give everyone a chance to ask the question, I think we are going to move on to the next person. And you can send me an e-mail if you have any further questions.
Yuri Serov
Okay. Can I just ask one last one?
Catriona Nicholson
Okay. Go with it.
Yuri Serov
On the cost side, you previously were giving us some guidance as to how much you expect the cost to grow year-on-year in steel and chemicals. Can you give us a sense of what you are expecting for this year as a whole?
Gene Murtagh
No. That’s too commercially sense.
Yuri Serov
Okay. I understand. Just one thing, it’s not a question but quicker one. Technical insulation, I mean you – if you make waterproofing into new segment, are you thinking about technical insulation in new segment as well?
Gene Murtagh
Well, it clearly is, but it’s under the umbrella of insulation generally. So, we will have building insulation and technical insulation is all under one home. But yes, like as a category, absolutely, we expect to grow it substantially.
Yuri Serov
But you are not planning to separate it out?
Gene Murtagh
No.
Catriona Nicholson
Thank you.
Operator
Thank you. And the next question comes from Gregor Kuglitsch of UBS. Gregor, please go ahead. Your line is open.
Gregor Kuglitsch
Hi. Good morning. So, I have got a few questions, if I may. So, I think you have previously kind of quantified kind of a price of cost level, I can’t remember, I think it was €70 million that you see perhaps unwinds one day. Can you give us an update on that, please, if you can, and what – if that’s still the case? Coming back to the roofing and water – Waterproofing and Roofing segment, so I think in the U.S., we have just been very successful in kind of bundling insulation and roofing membrane, sort of giving a system warranty, I think margins are like 15%, 20%. Do you think that – is that basically what you are trying to do here, so that you sort of give a system, you sell the system with the insulation, you give a system guarantee and therefore, you kind of get better price and better margin? Is that the sort of plan to replicate that business model? And then maybe on the order intake, I mean I appreciate your comments on the 50% for the full year. I guess what I have never really – or at least I don’t know is the seasonality. So, would you say kind of looking back, I don’t know, 5 years or so that there isn’t really that much seasonality in order intake, and therefore, that’s a meaningful statement of 50% the full year of last year? And then maybe a final question. Do you have any contingency planning in the event MDI production kind of comes under pressure to the shortage of gas, let’s say, in countries like Germany? Thank you.
Geoff Doherty
Just to deal Gregor, with the margin question in the first instance. We did indicate that last year was an exceptional year from a margin perspective and that there was €70 million or there or thereabouts of recovery beyond the level of inflation. You can take it that, that has naturally flowed back to our end markets through this year and is one of the factors explaining why this year’s margin guidance is about 10.5%, which takes account of that as well as the business mix year-on-year.
Gene Murtagh
And Gregor, just on your – you are absolutely right. So, the model that has been very successful in the U.S. is a package or a bundle type approach where the installation of the waterproofing comes from one house with a corresponding warranty for the full roof. That’s a very sensible way for things to go, both from a customer perspective from the warranty, a roofer perspective in terms of a single source and so on. It’s been much less well developed in Europe because, generally speaking, insulation and roofing have not been under the same ownership. It’s very gradually moving in that direction, and it’s absolutely our ambition to try and establish that as a firm model in Europe. As I said, it’s not something that will happen overnight, but it’s very much the direction of travel with us. I think what will be unique over time is our offering across roofing will be much more substantial than anything that exists already. So, we will obviously have the membrane. We obviously will have a portfolio of installation that nobody else has. We have daylighting, which nobody else has. And going beyond that, we actually manufacture – we are the largest producer of structural metal deck, which is actually the supporting system on to which all of that goes in a roof as well. So, there is a much wider bundle potentially for us to get at over time as well. In terms of the 50% stat and how meaningful is it versus seasonality, yes. Like honestly, over time, first half, second half, there would be very little difference over time in terms of what that is. So, it is meaningful in that sense. But there is no question, the second half is going to be down, and we have been clear about that. We have been clear about that in the past as well.
Gregor Kuglitsch
MDI, if you have any contingency?
Gene Murtagh
Sorry, on MDI. Well, on MDI, that’s not particularly straightforward. MDI goes down. It’s a material, not easily substituted as in not possible for us. So, obviously, we have got different cores. We have opportunity with styrene, we have got phenolic, which from a board perspective could probably – could actually take a significant portion of any down in terms of PIR board. But in the panel, no, we would naturally be exposed there. But if MDI comes down because of gas, to be quite honest, everyone will have much bigger problems to think about, and there won’t be alternative materials because it’s all reliant in some way on either energy or gas as a source. So, it will be a bigger catastrophe to be honest, if that does transpire.
Gregor Kuglitsch
Thank you. Appreciate it.
Operator
Thank you. Our next question comes from Flora O’Donoghue of Davy. Flora, please go ahead. Your line is open.
Flora O’Donoghue
Thank you very much. Good morning everyone. I will keep it to two, if that’s alright. First one is for Geoff. Just wondering if we could maybe get a steer on the incremental contribution from M&A on the kind of a pro forma basis maybe for H2 and for next year as well. And then the second one, just maybe if we could touch on governance, any updates there, maybe in kind of warranty patterns, etcetera, just that whole theme. If we could have a quick update on that would be appreciated. Thank you.
Geoff Doherty
Thanks Flora. Yes, just on M&A, in the second half, we should broadly have €140 million of sales that we didn’t have in the second half of last year. And that comes with the assumption that Ondura completes as we expected to in September. And that broadly ought to translate into a trading profit of about €13 million in the second half of the year. And then the rollover into 2023 would be approximately €350 million of revenues in ‘23 that we won’t have had this year, and that’s broadly €35 million of incremental profitability versus this year. On warranties, no material change between June and December, so no particular update in that regard.
Flora O’Donoghue
That’s great. Thanks Geoff.
Geoff Doherty
Thank you.
Operator
Thank you. The next question comes from Rajesh Patki of JPMorgan. Rajesh, please go ahead. Your line is open.
Rajesh Patki
Yes. Thank you. Good morning everyone. I have got two as well. First one is related to pricing on the panels business. It was up around 40% or so in the first half. Can you comment on the pricing that you are seeing within the order intake? I think you have commented on volumes. Has the pricing eased sort of consistent to your comments on the easing inflation? And the second question is on your RMI exposure, which has increased to 28% of the revenues in the first half. Following the recent acquisitions, where do you see that on a normalized level? And what’s the ambition of the group in terms of exposure to RMI? Thank you.
Gene Murtagh
Just in terms of – yes, the pricing patterns on order intake. So, yes, as you rightly pointed out, very significant inflation, which is the result of price increases pushed through actually over the course of last year, which have stuck very well. Right now, our pricing actually is reasonably stable, although easing somewhat naturally, which is what you would expect. So, as we said a few times, we just – we are cautious on any kind of release of the handbrake there. And that’s – and that will be our approach to this ongoing. And we can just judge as we go along exactly what that’s doing to our bank and our market shares and all that. And you can rest assured we are pretty agile in adjusting our approach whenever that’s necessary. So, stable but easing somewhat naturally.
Rajesh Patki
Sorry, year-on-year? The pricing on year-on-year?
Gene Murtagh
That’s I am saying, it’s stable.
Geoff Doherty
Yes. I think – yes, stable is the…
Gene Murtagh
Stable, but easing back.
Geoff Doherty
Yes.
Gene Murtagh
And then on RMI as you rightly pointed out, around 28% of the run rate. Near-term, that should be hitting 30% or 30%-plus. And in terms of our ambition, to be honest, we have no limit on our ambition, but we would expect the RMI dimension of the business both through organic and acquisition to increase over time.
Rajesh Patki
That’s great. Thank you very much.
Catriona Nicholson
Thank you.
Operator
Thank you. And our next question comes from Yassine Touahri of On Field Investment Research. Yassine, please go ahead. Your line is open.
Yassine Touahri
Yes. Good morning ladies and gentlemen. Thank you very much for taking my question. Firstly, you are suggesting that you are expecting volume to be down in H2. Could you tell us what level of volume decline you have observed so far in July and August? That would be my first question. Then second question, on your strategy minority stake in Nordic Waterproofing, can you give us some color on how you want to manage this take? Will you get a Board position? And how will you manage the potential conflict of interest if Nordic Waterproofing and Kingspan are looking to acquire the same assets? And last question, could you just confirm that from a reporting point of view, you will have light and air and roofing and waterproofing being merged in one division?
Geoff Doherty
Yes, just to deal with the sales growth question first. As we have outlined earlier, our best sense at this point is that underlying sales revenue will grow by about 10% in the second half of the year versus H2 last year. In terms of the price volume split, that takes account of some softness in volume in the second half of the year, so naturally implies pricing is a little bit more than 10%, which reflects the year-on-year price increases that we have had to implement as a consequence of recovering raw material inflation, so.
Yassine Touahri
Is it fair to assume that the volumes were down like – is it fair to assume that the volumes were down maybe like low-single digits or mid-single digits in July and August, or is it too pessimistic?
Geoff Doherty
Yes, 5% to 10% in that kind of general region would be the shape of it. But as Gene outlined earlier, like we can take a position on price on any day, and that has a volume impact. So, the best – those steers are best directional.
Gene Murtagh
Okay. And then Yassine, on your point about Nordic Waterproofing, so we have 24% minority stake. Obviously, it’s not a position of influence. We have no intention of going on the Board. So, it’s fully over to that team to do their business. So, in terms of handling any conflicts, we won’t actually have them. It’s an investment and it’s competing business with Kingspan for the foreseeable future. From a light and air, and roofing and waterproofing, we won’t merge those because it would – actually the name would be too long. So, it’s that’s not likely at all. And actually, more seriously, the light and air product offering and the longer term opportunity goes way beyond roofing applications. So, there is clear overlap in some of the roofing solutions. But daylighting obviously covers walls. And from an air and ventilation perspective, it is nearly nothing whatsoever. It’s a different avenue that’s going to be explored totally independently with the light and air business, and that opportunity is equally significant. So, they will very much remain separate organizations.
Yassine Touahri
So, will you create a new division in waterproofing, which is waterproofing and roofing?
Gene Murtagh
It’s done.
Geoff Doherty
Yes. For this year’s full year, more likely, it will be in the insulation piece, but we break it out next year as a separate division because all we have this year is a stone period of three months for Ondura and half year for Derbigum. So, it will sit under insulation and break out then separately for ‘23.
Gene Murtagh
It’s a completely independent business. Nothing to do with either.
Yassine Touahri
Thank you very much.
Operator
Thank you. And the next question comes from Rajesh Sai [ph] of Citi. Rajesh, please go ahead. Your line is open.
Unidentified Analyst
Thank you. Good morning everyone. So, first one is on EBIT margin. You are expecting a similar outcome versus H1. But connecting your comments about insulation being in the north of 11% and light and air, if I recollect, you said 8% for the full year or second half, please correct me there. So, that implies that you are expecting a little more decline in panel business margin. And related to that, do you think that’s because you are giving up price a little bit earlier there. And the second one is on the discussion with government regarding flooding. In the full year, you did say that you are fully with them to kind of find an amicable solution. But given the change in the – ahead and what’s coming, we don’t know. Any update from that side would be really helpful.
Geoff Doherty
Yes. Just on the margin front, given the profile of the business and the mix of activities, the 10.5% is about as specific as we can be in that context. But it does imply a little bit of margin slippage in the second half in insulated panels from the 11.2% in the first half. But in the round, at a group level, 10.5%. And as regards the – just the question around cladding and the associated issues around that, there has been no movement of any consequence in terms of our provisions June versus December. So, we have nothing of any meaning in terms of update on that versus when we were last out earlier in the year.
Gene Murtagh
But we are dealing with all of this. We are just doing our best so far in the normal course.
Unidentified Analyst
Okay. And just on the specific to the house builders, we had some issues with that, and you were kind of part of that kind of discussion. Is there any update around it?
Gene Murtagh
Specific to what?
Catriona Nicholson
No update. I will take that. No update. Thanks Rajesh.
Unidentified Analyst
Understood. Okay. Thank you.
Operator
Thank you. And the last – and the next question comes from Cedar Ekblom of Morgan Stanley. Cedar, please go ahead Your line is open.
Cedar Ekblom
Thanks very much guys. A couple of questions. So, at the end of May, you told us that your backlog was down 2%. I wonder if you would share where you see that number at the end of July, appreciating lots of the volatility in that backlog that we saw last year. Secondly, how much of your MDI do you source from Germany? And how much flexibility do you have to source from other areas to the extent that, that production slows? And then just some comments that you were making on sort of pricing and moving pricing, is this the case that you are being cautious on lowering your price in order to try and sort of defend the margin? I am not really understanding what the comment is there, or is it a case that if you cut pricing, then you expect to see an inflow of volumes? Just to understand the sort of psyche of your customers at the moment. Thank you.
Gene Murtagh
Yes. I will start with the last bit. So, there is obviously only so much we can talk about in terms of pricing. It’s commercially sensitive, etcetera. So, it’s really very straightforward. We have had some give-up in raw materials. Our MO always has been to be quite relaxed around letting that flow back. Of all times, in my experience, this is the most unpredictable. So, materials could go way down, materials could turn and go way up. And actually, I haven’t got a clue what the outturn is going to be. It could be either. So, in the face of that, we are just being cautious in terms of protecting all that’s been achieved. And as we have said a few times, it’s the easiest thing in the world is to drop the price and pick up the volume. And naturally, those two things are very linked. So, that’s what – if you like, we are running a very conscious strategy of protecting price and margin in the face of unpredictability. The result of that in the short-term is obviously some give on the order intake and the order bank. But that can be turned around tomorrow morning. But that’s – we won’t be hastily getting there, if you like, is what I would say. In terms of MDI, approximately 30% of our global material is sourced from Germany itself. A lot more, by the way, from German companies, but from the country itself, around 30% of our product flow comes from there.
Geoff Doherty
Yes. I mean as regards to backlog, yes, I think we have dealt with that extensively in previous questions. Naturally, given the sales revenue guidance that we have given for the second half of the year, it does imply that volumes will decline somewhere between 5% and 10% in the second half of the year. But that’s…
Gene Murtagh
A long way to go on that.
Geoff Doherty
There is a long way to go on that.
Cedar Ekblom
Okay. So, you won’t give us the number on the backlog, if it was minus 2% in May? Just to confirm that.
Gene Murtagh
No, to be honest, with like we have tried to explain as in the plus-50 last year was announce since where it is now as announced since and let’s see where it is at the end of the year.
Cedar Ekblom
Fantastic. Thank you so much.
Catriona Nicholson
Thank you.
Operator
Thank you. And the final question comes from Jonny Kuber of Numis [ph]. Jonny, please go ahead. Your line is open.
Unidentified Analyst
Good morning. Thanks very much for taking my question. Just two, please. Firstly, I would be grateful if you could give us an update of where you expect your market share is of European insulated panels market. Given the strong price we have seen in the past few years, keen to get an update there. And then secondly, I would be grateful to hear your thoughts on what you would expect to be the drop-through to EBIT from a 1% decline in volumes. Now, I expect the answer pretty it depends, but a ballpark figure within insulated panel, that would be very much appreciated. Thanks.
Gene Murtagh
Yes, Jonny, just on the first one on market share. Like it’s – we are obviously number one, but it’s not particularly large when you think of the overall market. But naturally, it’s a little bit sensitive to be given out anything precise there. And on a 1% reduction in revenue, probably around 20% give from an operating leverage perspective.
Unidentified Analyst
Thanks very much.
Gene Murtagh
You’re welcome. And I think that closes up, and thank you all for participating. And for sure, we will be all speaking to each other a lot over the next week or two weeks.
Catriona Nicholson
Thank you.
Geoff Doherty
Thank you.
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