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Edited Transcript of KSP.I earnings conference call or presentation 21-Aug-20 7:30am GMT

Half Year 2020 Kingspan Group PLC Earnings Call

Kingscourt Sep 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Kingspan Group PLC earnings conference call or presentation Friday, August 21, 2020 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Catriona Nicholson

* Gene M. Murtagh

Kingspan Group plc - CEO & Executive Director

* Geoff P. Doherty

Kingspan Group plc - Group CFO & Executive Director

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Conference Call Participants

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* Arnaud Lehmann

BofA Merrill Lynch, Research Division - Head of the European Construction & Building Materials and Director

* Brijesh Kumar Siya

HSBC, Research Division - Analyst

* Cedar Ekblom

Morgan Stanley, Research Division - Executive Director & Equity Analyst

* Florence O'Donoghue

Davy, Research Division - Industrials Analyst

* Gregor Kuglitsch

UBS Investment Bank, Research Division - Executive Director, Head of European Building & Construction Research and Equity Research Analyst

* Manish Beria

Societe Generale Cross Asset Research - Equity Analyst

* Pierre Sylvain Gilbert Rousseau

Barclays Bank PLC, Research Division - Research Analyst

* Rajesh Patki

JPMorgan Chase & Co, Research Division - Analyst

* Robert Eason

Goodbody Stockbrokers UC, Research Division - Head of Research

* Xintong Ouyang

On Field Investment Research LLP - Analyst

* Yves Brian Felix Bromehead

Exane BNP Paribas, Research Division - Analyst of Building Materials

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Kingspan Interim Results 2020 Call. My name is Ruby, and I will be your moderator for today's call. (Operator Instructions)

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

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [2]

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Thank you very much and good morning, everybody. I'm joined here by Geoff and Catriona to go to our interim results for 2020.

We're just going to take a step back from the pandemania, if we can, and start our discussion on Slide #3, which is titled Our Mission.

So many of you will know that for a long time, years now that our ambition has been to accelerate the net 0 emissions built environment, and we are well on track in doing that. And we'll discuss just how in a moment. But in terms of the output of what that has done, just take a look on the right-hand side of this slide. So these are real hard numbers. In the year just gone by, we delivered insulation materials that over the life of buildings will save 172 million tonnes of CO2. And that's in 1 year over an approximately 40-year life of a building.

Next, on net 0 carbon, there's been an over 90% reduction in the energy intensity per euro of revenue in our business since 2012, which is really an enormous reduction in a relatively short few years.

In terms of circularity, and we'll be expanding this subject much more in our next issue. This goes way beyond simple recycling. But in the context of bringing plastic into our process, in the year just gone by, we up cycled almost 400 million plastic bottles, most of which went back into insulation materials. And we, as you know, have an ambition to bring that up to 1 billion within the next 5 years, much of which will be in our QuadCore product in the future as well.

In terms of our Daylighting business, we're currently installing capacity here in Ireland, in fact, that will create 9 billion lumens of natural life -- light annually, which is the equivalent to about 1 million homes in bulb language. And that, again, is an annual amount of daylight or savings from what would otherwise be powered, obviously, by electricity.

And then over in our Water & Energy business, so far, we've delivered systems that have saved in excess of 75 billion liters of rainwater that obviously, otherwise would have been to be taken from the water systems around the world. This is predominantly in Australia incidentally, but it's an area of our business that we're considering expanding much more globally.

Now on Slide #4, we talk all the time about the envelope. Our entire business is about maximizing our exposure to energy conservation via the envelope of the building. Again, this is well expanded, but there are some gaps in our portfolio, which we'll talk about. Our board business, and that's Insulation Boards used in roofs, walls, floors and any kind of application you can think of, accounts for 18% of our group revenue, and we're a global leader in that high-performance insulation business.

Our Insulated Panel business, again, global leader by a stretch, 64% of our business. That's an exterior, semi-structural product that's on the -- obviously, on the outside of the building that incorporates insulation types much like what's in the Insulation Board. Again, a very large part of our business and something that has very significant scope, both organically and inorganically to continue to grow globally.

Our Data & Flooring business is 5%; Water & Energy, 5%; Light & Air that we've just talked about is 8% and growing very satisfactorily at the moment; Industrial Insulation, we remain embryonic there with global revenue of about EUR 150 million in a market that's about EUR 5 billion. So plenty of scope for the organization to grow in that area.

And equally, I'd say that's the point when it comes to insulated flat roofing, which, again, we would have a sub-EUR 100 million worldwide via our insulated panel presently, but huge scope in the future to take a global position in this area. And again, this is all about maximizing our exposure to the envelope, and we'll come to the context of why that's important more broadly.

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Catriona Nicholson, [3]

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And Slide 5 just highlights some of the megatrends that are driving the business and changing the way buildings are constructed now and into the future and the types of buildings that are being constructed now and into the future. So I'll just take out a couple of points to highlight. One of which has been an aging workforce and labor shortages generally -- more generally around the globe. So speed of build and ease of construction is something that's become a greater priority in terms of the consideration of the types of materials being used.

Another issue that really, I think, come to the floor in the first half of this year has been change in types of industry. A piece of research highlighted that the percentage of retail that's done online is doubled in the first half of 2020 versus the previous year. And that's a trend we're seeing, not only in the change in retail, but in the evolution of the automotive industry, the consumption of data and the types of buildings that are being constructed for that type of industry plays very well into the type of solutions that Kingspan has.

And other key areas of concern is clearly energy and climate change, buildings contributed 30% of global greenhouse gas emissions. And totally efficient building envelopes and ultra-high performance insulation are a key solution for that. And then obviously, reversing a climate change to the 1.5-degree scenario is very important for that.

And I'm just going to hand back to Gene to talk about that in a bit more detail.

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [4]

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Thanks, Catriona. So the IPCC is the international panel for climate change, which has, I suppose, set a target of a maximum 1.5 degrees C of increase in global temperatures. Whether that's achievable enough is yet to be seen, but that's what's deemed to be kind of a maximum level by 2050.

Now independently, it's been assessed that, that's entirely impossible to be achieved without the envelope being a critical part of that path. So we can have as much renewable power as we like, but unless we're actually conserving in the first phase, the grid will not be able to handle the level of electricity is going to be flowing through it.

So the envelope is creative here and buildings have to reduce energy consumption worldwide by 30% actually over the next 10 years. And in order to do that, deep retrofitting is critical. So we've talked about this for some time. We're probably retrofitting at a pace of about 1% per annum globally, and that needs to increase fourfold if we're remotely able to achieve this level of reduction.

So this is why the envelope is an absolute criticality and features at least as highly as renewable power generation does in the first place.

In terms of the context of our own business and products, we provide a broader spectrum of solutions as possible to be able to achieve these results. So right the way from incorporating synthetic mineral fiber into some of our products right across to the right-hand side for our most optimum insulation product is OPTIM-R.

Now as you go across this slide, the products effectively get thinner. So it gets thinner to build, thinner transport, much lighter to install, et cetera. So our emphasis as a business from an innovation perspective is all focused on the right-hand side of this, and indeed, we'll be expanding that portfolio of insulations as we go forward.

To understand the context of why thickness is important. I'll just hand you back to Catriona.

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Catriona Nicholson, [5]

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Thanks, Gene. Yes. So just -- this is a particular example of a building that Kingspan was quoting for, and it just highlights how Kingspan innovates to really provides solutions for our customers and solutions for some of the megatrends that are driving the construction industry.

So this is an example comparing 2 products that Kingspan do make. So QuadCore insulated panel and a synthetic mineral fiber insulated panel and just some of the comparatives of how we add value to our customers. So some of the ones that we just highlighted, a 25% lower panel system costs, so a real value proposition even from the first instance. And just something so obvious is 300 fewer trucks to -- almost 300 fewer trucks to sites, it goes back to what Gene's pointed out, lighter thinner materials. And just the amount of energy and carbon that goes into having those trucks on the road or just congestion on site makes a very clear advantage to using an ultra performance material.

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [6]

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And then just following up on that space point, just look at an office application. So that was a large industrial building application. So again, understanding the additional square footage or the additional rentable floor space that can be created out of having thinner materials. The returns are actually extraordinary the higher up you go. So in this instance, for an additional development cost of EUR 142,000-odd, there's a capitalized additional sales value of almost EUR 1.8 million. We're giving a return of in excess of 1,000%. And that's a fully backed up case study, again for a particular project.

So the -- I suppose the important thinner material as we go forward, which is why our whole developmental landscape is there is we're going to become more and more critical on multiple fronts.

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Catriona Nicholson, [7]

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And then just to talk a little bit about it the Planet Passionate agenda program that we launched last December. And just -- it's not a talk in ESG efforts. This is something that's deeply embedded into the business and has been for a long time. And hards targets around energy, carbon circularity and water. And the 12 of these are monitored and measured annually and these hard targets annually for the business and a number of projects have already been -- are underway this year, and we look forward to talking about them in more detail as we go through the year through this program.

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [8]

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Perfect. On Slide 11, we've got our global organic expansion mapped out, and much of this is actually underway. Just to pick out a few, for example, naturally, some of them have been delayed due to the interruptions that we've been experiencing more recently. What's underway at the moment is a very large Kooltherm plant in Sweden, which is all about conversion growth against traditional systems in the Nordics.

We've just installed and commissioned K-Roc insulated panel line in Hungary. In France, there'll be significant development there over the next number of years, which will be based out of the Bacacier site that we acquired late last year. We're effectively going to develop a group hub, which will cover insulation board, panels, profiles, and online retail activity. So really, it will be a showcase for the entire group product portfolio, and that will be done by 2022 near Clermont in France.

We're -- In terms of Russia -- and forget where the dot is on the map there, it's not in Siberia, it's more in Southern Russia. We've -- we're literally now in the process of starting a PIR insulated panel line, which in time will produce QuadCore, and that complements our existing K-Roc panel plant in St. Petersburg.

And then if we move across the Atlantic, we're in the process of completing a new Insulated Panel line in Southern Brazil. And that's on top of 1 that was completed last year. Our business there is growing extraordinarily well. And between next year and '22, we will be installing a further line in the North of the country.

And that will have us ending up with facilities obviously, totally pan-regional presence. And again, that's all about supporting the organic growth in that region.

Then finally, here in the Northeast of the U.S. under the all-weather Insulated Panel brand, we're developing a site in Pennsylvania, and that ought to host a QuadCore insulation board plant as well in time. So that's under construction as we speak.

All in all, history is history, but over the last 20-odd years or so, we've grown at a compound of 17%. Can't promise we'll be able to continue that. But it's been encouraging so far.

And then that takes us into the here and now. So just in summary on Page 15. This is the H1 that you'll have all seen this morning. So revenue, I think, predictably down but probably not down as much as anticipated. It's down 8% to EUR 2.1 billion. Trading profit, similarly down 13% to just over $200 million, and our basic EPS down 15% to just short of EUR 0.80.

So now I'm going to hand you over to Geoff to give you some color on those numbers.

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Geoff P. Doherty, Kingspan Group plc - Group CFO & Executive Director [9]

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Thanks, Gene, I'm now on Slide 16, just to deal with -- in the first instance, the financial highlights for the period. So as Gene has outlined, our sales in the first half were down 8% versus the first half of last year. Trading profit down 13% to $200 million, and I'll come to the bridge of those 2 changes in a second. Our earnings per share down 15% to EUR 0.798. The -- no interim dividend declared for the first half, and that follows on from our decision to cancel last year's final dividend, and I'll deal with our dividend separately in a second.

A very strong free cash flow performance in the period more than tripled the comparative number, EUR 260 million of free cash. And again, I'll come to the components of that, and what drove us. A significant reduction year-on-year in net debt despite both the organic and indeed acquired development agenda of the business. So debt was EUR 438 million at the end of June. Our trading margin at 9.7%, and we'll look at that by division shortly. Our net debt-to-EBITDA at 0.79x at the end of June. Our effective tax rate broadly in line with the first half of last year, 16.9%, and our return on capital employed at just under 17%.

Just on the next page to look at the margin profile by division. And also, on the left-hand side of that page, you see the trajectory of profit in the first half of each year. So next to 2019, the first half 2019, which was a record half year for Kingspan, this is the next best at EUR 200 million.

By division in terms of trading margin, Insulated Panels margin was 9.3% that compared to 10.1% in the first half of last year. Naturally, as we worked our way through lockdowns in certain markets and the negative operating leverage associated with that, that did lean on margins, particularly through the month of April and May.

Notably in Insulated Panels, QuadCore continued to progress well, comprising 12% of our Insulated Panel revenues in the first half of '20 compared to 8% in the first half of 2019. So that continues to go well.

In Insulation Boards, a strong trading margin of 13.2%, broadly in line with last year's full year margin performance. Kooltherm continues to progress well. Also in the second quarter, very accommodating raw material markets as well that impacted positively on that margin in boards through the second quarter.

Light & Air, which is very much a second half weighted business, delivered a trading margin of 4.4%, in line with the first half of last year. Water & Energy at 7.4%, up on last year's full year number, some good initiatives there on cost containment, but also a positive trading experience, particularly in Australia, and good to see that coming through.

Data & Flooring had a very strong first half, particularly in the data center segment. So the trading margin of 12.8%. And that has continued into the early part of the second half.

In terms of the bridge of both the revenue and profit performance, that's set out on Slide 18. So in overall terms, sales were down by 8%. Currency impacted negatively to the tune of about 1% or EUR 18.6 million. Acquisitions contributed EUR 142 million or 6% to sales in the period. And that was principally Bacacier, which was acquired in our Insulated Panels division very late last year and the Colt daylighting business coming into Daylighting into the second quarter.

Underlying sales were down 13% or EUR 294 million half year on half year.

From a profit perspective, overall, profit was down by 13%. The -- in terms of the bridge, currency impacted modestly by EUR 1.5 million or 1%. Acquisitions contributed EUR 9.4 million or 4%. And underlying trading profit was down by 16% or EUR 38 million in the period.

The free cash flow performance is set out on Slide 19. And by any measure or comparison, a very strong performance, EUR 260 million, which is a record first half free cash performance. The single biggest driver, clearly, EBITDA, but also working capital, which was a reduction in the first half of 2020. Ordinarily, in a normal trading year, working capital increases in our business because typically, our June balance sheet is bigger than our December balance sheet when you bear in mind the seasonality in the construction cycle.

This year because of the constrained trading environment through April and May in many markets, working capital reduced. So EUR 95 million was the inflow this year. That compares just by way of comparison, and we had an outflow of EUR 72 million of working capital in the first half of last year and an outflow of EUR 92 million in the first half of 2018.

The other driver of it was the working capital to sales ratio, which is the key metric that we use to manage working capital through the business. That was 11.6% in the first half of 2020, which compares to 13.1% in the first half of 2019.

Over the course of the year, our working capital investment, our divestment will be 12% of whatever the sales growth or decline is in that period. So all that's happened this year, really. It's happened in an atypical way in the first half of the year.

Interest was EUR 10 million of an outflow. Tax-- corporation tax, EUR 14.9 million. That's, again, a little bit lower than what have been budgeted but will flow in the second half of the year. We would have expected to have paid out about EUR 50 million in the first half but that will follow through the second half of the year.

Our capital expenditure, EUR 58.7 million in the first half. So all of that combined to give a free cash performance of EUR 260 million.

The reconciliation of net debt, that's set out on the next page. So beyond free cash, acquisitions, the outflow there was EUR 42 million. The principal acquisition made in the period was Colt as well as the cash dimension to that, we also assumed a pension liability in respect to that business. So that's factored into the acquisition returns for that particular business. And FX and other movements were about EUR 23 million. So our net debt, a little under EUR 438 million at the end of June.

Our working capital performance is set -- sorry, our return on capital is set out Slide 21. So broadly comparable with last year's full year, a nudge under 17%. And so it remains at those levels.

The sales by geography, set out on Page 22. So you'll see just in terms of the constituents of our sales, the U.K., 17% of our business in the first half of 2020 compared to 20% in the first half of '19. Mainland Europe, 56%. first half '20 versus 53% in the first half of last year. In overall terms, the U.K. actually declined by 22% half year on half year. It's also worth highlighting the rest of world piece, Ireland is a very modest part of our business. But actually, Ireland sales declined by 35% in the half year. So an outlier to the negative from that perspective. But in overall terms, our global sales decreased by 8% across.

The strength of our balance sheet is set out on the next page. And just by way of recap on our funding arrangements, we have a EUR 300 million revolving credit facility, which we arranged in June 2019. That was undrawn at half year-end. Similarly, the principal EUR 450 million RCF was undrawn at the end of June 2020. We entered into a bilateral green loan for EUR 50 million, which we drew in February of this year. That's to fund the Planet Passionate program internally across the business. So we've total available cash balances and committed undrawn facilities of about EUR 1.2 billion, and the weighted average maturity is our debt facilities is 3.8 years.

And just before handing back to Gene, a note on the dividend. We've highlighted that we haven't declared an interim dividend. So the cash dividend this year will be 0 for 2020. And the reason we're not declaring a dividend at the interim stage is just in light of the context and backdrop that we're all operating through in this particular year. And it strikes us that in that context, it's a timely period for us to assess how we remunerate shareholders into the future. So broadly, this year, if we had operated our dividend policy, approximately EUR 90 million would have been paid to shareholders by way of dividend. And the question we're now posing, which we'll engage with shareholders on is, is there a better way to give that money back to shareholders over time by way of policy, whether that's buyback or some revised dividend policy. So we will complete that exercise before the end of -- at the announce of our 2020 financial results.

So with that, I'll hand back to Gene.

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [10]

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Great, Geoff. Thank you very much. We've got copious detail on all of the divisions here, which we don't propose going through. But no doubt, we'll deal with them in the Q&A session as we get to that.

But before we go there, let's just move to Slide 30, which is titled outlook. Very difficult to have an outlook at the present time. It has to be said, naturally, we would harbor some nervousness about late this year and into 2021 as really the effects of the pandemic unfold.

Now as against that, and it's been a really important part of our delivery so far this year. The business has become increasingly exposed to the data market, to the general tech sector, to online logistics and very interestingly, to the automotive sector, which although you might be thinking, that's all negative, there's a huge transition going on in the automotive sector, which requires entirely different facilities, not just for batteries, but for car assembly. And we've been fortunate enough to be at the forefront of many of those developments. And actually, we believe we're just at the very early stages of that curve as that industry evolves.

So that's all positive. As indeed, is the whole policy area. So we've talked about the IPCC targets, how important the envelope is for that, and that is going to increasingly get dialed into national legislation. And we'd have a little doubt about that. And even in the context of the various stimulus packages that will be unveiled globally, would be fairly certain that retrofitting and insulation and age conservation will feature very highly amongst those.

Now having said all that, it's very hard to think that the effects of the pandemic are going to be positive. Generally speaking, around the world, what we've experienced over with the pandemic itself, by and large economies have been -- or society at least has been shielded from this. But it's completely inevitable that across the hill, as fundamental demand for most sectors is likely to be curtailed.

Now what that means, you're all probably in a far better position to judge than us. What you can take that as a business, we'll be able and ready to respond to whatever kind of situation we're faced with.

That ends the formal presentation. And Ruby, we're now prepared to open it to the floor.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We have a question from Robert Eason of Goodbody.

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Robert Eason, Goodbody Stockbrokers UC, Research Division - Head of Research [2]

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Just a few questions from myself. Firstly, just on gross margins. If you look at a group level, very impressive performance in the first half of 70 bps against the backdrop of the decline in sales. Can you just go kind of through the various dynamics around that in terms of where the improvement is coming from? And how should we think about that as we go into the second half in the context of raw material costs?

And also just the general pricing environment and on the ground because I got a sense from a corporate perspective, not many corporates have been focused on pricing too much in April, May, June, July, it was all about just making sure your business was opening up in the right fashion. But just a general discussion around there.

And just also -- just on M&A, obviously, another further 2 deals announced today. What is the environment for M&A like? And it's more to point in terms of like is there much stress out there in terms of businesses getting into cash flow issues? What are multiples doing? Obviously, the stock market is going one way or what are multiples like on the ground? And so they are my kind of general areas of questions.

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [3]

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Okay, Robert. So just on the gross margin side. So we've gone through a period of reasonably low raw materials. And to some extent, we've been able to harness that within the business. That's been in favor of margins. I'd say equally, the QuadCore product range has increased in absolute terms, 50% year-on-year. So it's gone from 8% penetration to 12% in the panels business across the world. And that's been a clear positive for margins as well.

Kooltherm, similarly in the insulation business had a very positive period, and that all goes to it. And equally, you have noticed from the access -- from the Data & Flooring business, but it's been growing strongly. And the margin delivered from that business is quite superior, actually, particularly in the data end. So that's all worked in its -- our favor.

Now in terms of raw materials going forward, steel is likely to harden up further. And I think that's more out of pure necessity than market demand. Obviously, the demand for steel across multiple sectors worldwide, but most predominantly, the automotive is under enormous pressure. And you know from your own analysis for various steel companies that they're, to be honest, maybe at a level of desperation. So that's going to drive inflation in that material, let's say, short term.

But also on the chemical side, in typical fashion, MDI is yo-yoing around the place. So it was way up a couple of years ago. It hit its absolute low, probably earlier this year, and we're seeing a bit of a bounce in that. Now again, that probably could rise 30% or 40% over the next couple of quarters. That's clearly going to put pressure on us to recover that. But as usual, there will be some lag involved in that. So that might pressurize our margins, I'd say, particularly in the fourth quarter of this year as we try to recover it.

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Operator [4]

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We have a question from Arnaud Lehmann of Bank of America.

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Arnaud Lehmann, BofA Merrill Lynch, Research Division - Head of the European Construction & Building Materials and Director [5]

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I guess, two questions on my side. Firstly, would you mind commenting a little bit more on the trends in the order book? I mean I appreciate the visibility is not very high for 2021 yet. But as far as Q3 and maybe early Q4 are concerned, are you seeing any meaningful cancellation or postponements of projects? So qualitatively, do you think you can grow your underlying volumes into H2 or into 2021? Or the economies are just not strong enough for that? That's my first question.

And my second question, sorry to be annoying, but would you mind giving us the split between volume and price/mix effect of the divisions in the first half?

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [6]

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Okay. Arnaud. In terms of the order book, the order book globally, and this really relates to insulated panels because it's the one that gives us most visibility, is broadly similar to what it was this time last year. Now it varies clearly region by region. I'd say well up in Germany, well up in France, well up in the U.S. But in other areas, Spain, actually under pressure, the U.K. under pressure. Canada, particularly poor. So the picture varies country by country. But broadly, it's similar.

And in terms of order intake for Q3 so far, it's very slightly behind prior year. So I'd say broadly in line, but slightly behind prior year, which would give us some comfort for the next kind of 3 to 4 months of delivery.

Beyond that, honestly, at the present time, it's very hard to judge.

Now Geoff will deal with the volume pricing thing in a second. But before we do that, Robert, to cut you short there on the M&A question.

In terms of stress out there, no is the answer. We haven't really seen that so far. And as a result, we've not seen multiples revert to anything reasonable. So I think a little like the valuations you're seeing in the public markets, there's not been a downshift in the private market either.

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Geoff P. Doherty, Kingspan Group plc - Group CFO & Executive Director [7]

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And Arnaud, just on your question about the price volume dynamic in the first half of the year. I mean, I think it's worth highlighting that given the market mix that we had through the first half of the year, being locked out of certain markets for a pronounced period in certain cases, the product mix that we have in different geographies around the world, that price/mix dynamic can vary quite significantly from market to market. In overall terms, our underlying sales in panels were down 12%, and our boards were down 18%. And you can take it that the principal driver of that was volume rather than price. That really was the key dynamic.

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Operator [8]

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Now we now have a question from Flor O'Donoghue of Davy.

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Florence O'Donoghue, Davy, Research Division - Industrials Analyst [9]

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Just a couple for me. First one is just relating to your looking ahead comments in the statements. You're mentioning about your growing exposure to the areas like data, technology, next-gen, auto, online logistics, et cetera. You might just give us a sense of your kind of exposure in terms of group revenues or non-res revenues to these kind of areas. What it is? And maybe where it's come from in the last few years? And just, of course, to expand that question then, just be interesting to hear your views on the kind of Green Deal suggestions that are out there and the possible impact on the business.

Second question that I have is just going back to M&A. I guess, more technical than anything else, just -- can you give us an estimate of the full year M&A spend on the -- on top of the EUR 42 million in H1? And maybe also, if you could elaborate a little bit on the 2 recent deals that have kind of been announced on the panel side? Just in terms of kind of the snapshot of old businesses.

And then finally, maybe just one for Geoff, in terms of Capex, what CapEx guidance for this year now looks like?

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [10]

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All right, Flor. So Just in terms of the fast-growing areas like data tech, et cetera, we'd estimate at around that -- exposure to that entire area we've outlined there at around 25% for the group, but that 25% and growing, I guess, is what we say. As you know, many of these are global accounts, and once we can get in and provide the proper product and service to them, we tend to get the opportunity to follow them around the world. So that's a very key part of our strategy going forward.

In terms of Green Deals, I'd say that's an evolving picture, particularly in the context of the IPCC we talked about. So I don't think there's anything ultra hard we can point towards there, but it's evolving in the right direction by country.

And from an M&A perspective, we're committed between Colt and the others we're committed to approximately EUR 220 million of spend this year so far.

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Geoff P. Doherty, Kingspan Group plc - Group CFO & Executive Director [11]

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Yes. And just on CapEx, Flor, somewhere in the range of EUR 110 million to EUR 120 million for this year.

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Florence O'Donoghue, Davy, Research Division - Industrials Analyst [12]

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Great. And just those 2 businesses, the 2 recent ones in Europe. Just the kind of a profile of what they do, where it does fit in, if that's okay?

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [13]

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Yes, sure, indeed, absolutely. On Terasteel, Flor, it's a mix of an insulated panel business and a profiling business, both separate. It's manufacturing in Romania and Serbia and with plans to develop beyond there in panels and then profile. It's got effectively a kind of a Irish southern spoke type model, which is Romania-based. So that -- part of that business will be integrated into our Central Eastern European panels business, and the profiling side will plug into the -- our suite of business team.

And then the Trimo business is Slovenia-based, but that's really a bit of a distraction because it's actually been quite a successful global brand. So the vast majority of its revenue, in fact, is way out of that region. So strong in Germany, very strong in the Netherlands and the U.K. and in fact, the brand stretches well beyond that in specifications. It's a fiber core panel, a very high standard for that material, and we'll continue to focus on that. And it would also be our intention to have that team to introduce the QuadCore product offering to that team over time because they've got very, very strong spec channels. So the situation work with those.

Sorry, on the Trimo one, there's also a small manufacturing site in Serbia as well.

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Operator [14]

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We have a question from Gregor Kuglitsch of UBS.

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Gregor Kuglitsch, UBS Investment Bank, Research Division - Executive Director, Head of European Building & Construction Research and Equity Research Analyst [15]

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I have a few questions, some are a little bit nitty gritty, some are a little bit bigger picture. So maybe starting with the bigger picture one. So I remember a few years back, you'd obviously already called out some of the areas, I think to remind myself of the slide number of the sort of product categories, the Slide 4. So basically, you called out roofing membranes and industrial insulation is an area of growth, obviously. I think you haven't really done very much there. So I'd like to understand, I suppose where we are there and what the opportunities really are? I guess from an acquisition standpoint or whether in the end, you've concluded, you have to do this organically because basically, either the valuations don't work or there's no real businesses up for sale that are interesting in that area. So that would be question one.

Question 2 is just maybe quickly on earnings, just going back to the first half. Can you just remind us -- I think you did put a salary cut in place for the -- for a number of employees. Were those actually implemented? Or did you kind of reverse them as actually trading improved because perhaps things didn't pan out as badly as they ended up as you perhaps expected in April, early April. So just -- and if you could quantify that sort of temporary -- I don't know if you furloughed but certainly you took sort of temporary salary cuts. To what extent that kind of benefited?

And then just a clarification point on the dividend. So the dividend, are you saying the EUR 90 million that you would have otherwise paid, you're basically reviewing to return, I don't know, as a special or as a one-off or a buyback or whatever because you didn't pay it? Or are you signaling a broader payout ratio kind of ongoing revision, if you want, going forward? Or is that -- I just didn't quite understand what you were trying to get at.

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [16]

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Okay. We'll try and clarify that. So on the bigger picture there on the envelope and where the gaps are, I suppose what we've been outlining is the opportunity, the bigger strategic longer-term opportunity. And we are growing actually quite satisfactorily at an organic level in both of those segments. But you're right, in order for us to have a meaningful position in these globally, it's going to require acquisitions in both areas.

To be honest, there hasn't really been a satisfactory number of opportunities out there that we'll be able to transact that multiple. And we'll all will stand by our discipline in terms of pricing on these fronts. So if you like that, it's probably been a lack of a pipe and those that were available were not going to provide us with a reasonable return. And that's the only reason why we haven't really advanced further there. What you can take is there's still very much center of our thinking, and we'll get there eventually.

From the salary cut point of view, senior team took 50%, the vast majority of the rest of the business, although not all, worldwide took 40%. That was designed around -- obviously, we're in the teeth of the crisis at the time. We've no idea how long it would last. But at the time, we said we were implementing for 2 months, which is what we did, and we've resumed normal activity from the first of June. So everything is back to normal.

And in terms of the dividend, just to be clear, there won't be one this year. And what's under consideration is how we will return money to shareholders in the future. And that can take various forms, as you know. And we will indeed return money to shareholders. So it's not that we're abandoning that policy. It's just what shape it takes is what's under consideration.

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Operator [17]

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We have a question from Yves Bromehead of Exane BNP Paribas.

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Yves Brian Felix Bromehead, Exane BNP Paribas, Research Division - Analyst of Building Materials [18]

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Just a few questions on my side. The first one is really on the product development. I really enjoyed your introduction on your product side and the further towards the kind of energy saving argument. But I'm just thinking more broadly, I think you exposed a few times on your fiber-free A-rated panels, and I didn't see anything on that product side. So I just wanted to know how is that going? Is it progressing well? And what's the revenue potential here? But also on your solar panels, just trying to understand if here what is the demand pattern in the next few years? So that's my first question.

And then my second one, again, on strategy, you remain quite active on the M&A front. And with such a considerable amount of cash for firepower, I guess I've got a few questions. One is, could you now look at a more transportive deals? Two, are you happy with your end market exposure? Do you want to increase your renovation exposure given the Green Deal agreement, I guess?

And number three, I think Arcelor mentioned that it was looking to divest sandwich panel division. Would this be too difficult from an antitrust perspective?

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [19]

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Okay. Fair few things in there, Yves. Actually, apologies for missing to talk about the innovation side. And you're right. There actually was a note on the geographic slide about the AlphaCore plant, which we'll be constructing in the U.K. So that development, that's -- so again, that's AlphaCore, which is -- will be an A1-rated non fiber insulation material. We're working on 2 tracks. One is a high insulation performance, one is a performance more relative to styrene or mineral fiber, and both have fundamentally different characteristics and cost base.

Now the development of these has been fundamentally interrupted purely as a result of actual travel restrictions. So they're kind of reliant on a significant amount of international collaboration, and it's just not been possible to get our folks to meet them and demos, et cetera. But we're getting it slowly back on track. It's our expectation that we will -- we have a product for testing during the first half of next year and that we will have an operating facility, probably it's looking like 2022 now. So we haven't, by any stretch, taking our focus off that.

In terms of the potential for us, it really depends on how markets evolve, how the messaging around QuadCore and Kooltherm in particular, is understood longer term. And that really is an education piece around the -- I think a lot of the noise and confusion around the subject of combustibility.

So look, the potential, I would still say, for QuadCore and Kooltherm is much more, but where there is an absolute demand for one, we intend to be able to offer this as well as, as you know, some synthetic mineral fiber products that we have within the range.

In terms of PV, we call that the power panel. The development of that is nearing completion, and we expect to be putting that product through external testing during quarter 1 of next year and that we will have a reasonable-sized pilot plant in operation around midyear next year, and that will be based in Holywell in the U.K.

So again, this is going to be combining PV with an insulated panel. And I know we've been saying this for a long time, but we believe that we are now entering a phase where solar integration will become a really fundamental part of every roof. It's hard to know exactly to what extent, at what price and what quantities was.

As you look ahead, it's kind of almost unthinkable that you'd be building large-scale rooms in 5 years' time that don't have some form or integrated intent. And we think there's a tremendous opportunity of having that as a one-fixed-insulate and generate all-in-one piece insulated panel, and that's what we're after. So that's been -- that development has been growing actually pretty much according to plan.

And from an M&A perspective, we're going to keep plugging away as the well tested and proven formula of bolting on businesses. That's going to continue. Whether or not we could do something transformative, I guess, the firepower is there to do so. It's really about the opportunities and the valuations. So we're open to all. And actually, we'll be looking with a more cautious eye at the present time at all these opportunities. But yes, we're open considering all kinds of ideas. Whether or not that brings us more into renovation or not, that would be desirable, I have to say. And that could be the case, particularly when you look at the roofing type applications where renovation is, generally speaking, the larger part of the revenue.

You mentioned Arcelor Construction, not for us for multiple reasons. I suppose is the best thing to say about that.

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Operator [20]

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Now have a question from Rajesh Patki of JPMorgan.

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Rajesh Patki, JPMorgan Chase & Co, Research Division - Analyst [21]

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I've got three, please. First one is on margins. The margins for the boards business for H1 was less impacted compared to the panels business. If you could provide some color on what the key reasons behind that are? And how do you see those pan out for the full year?

And the second one is on the North American business. If you could talk a bit about the trends there. I think you mentioned some slowdown recently. But if you can provide a bit more color there would be great.

And the last one, again, a bit more on the long-term focus with policymakers focusing more on renovation, does that mean over the medium to long term, we could see a shift in Kingspan's end markets towards renovation, which is currently only 20% of the group.

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Geoff P. Doherty, Kingspan Group plc - Group CFO & Executive Director [22]

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Just on the margin piece, Rajesh, in both boards and panels in boards, it was 13.2% in the first half of the year. I think it would be fair to say that we did have a bit of a tailwind there from an input perspective.

And as we outlined earlier, with prices moving and increasing through the second half of the year, it's going to be difficult to replicate that into the second half at that level.

Panels. The panels margin was below 10% in the first half of the year. The principal driver of that really was the negative volume in the months that were most constrained. So again, having regard to the progress that we're making on the likes of QuadCore, in any kind of a stable environment, we ought to see the panel margin move beyond the 10% in the -- at least into Q3. So they're the principal margin drivers.

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [23]

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And in terms of North America, yes, we're seeing the U.S. slowdown a little. That's not to say it's entering negative territory for us at all because it isn't. But maybe just less buoyant than it's been for the last 6 or 9 months.

Canada, to be honest, there's been more of a issue over the last 3 or 4 months. It's reacted very negatively, and we think it's going to be slow enough to pull itself out of this. So that obviously taints our overall North American picture.

We should point out as well here that there's a -- there are a number of new entrants beginning to show up in the North American market. So between this year and next, we'd expect there to be more than likely 3 to 4 new facilities, which will pop up in the U.S., probably focused on the lower end of the market, we'd expect, but nonetheless, we anticipate them coming.

And from a renovation perspective, I think that will grow gradually, both across boards and panels. And perhaps we do acquire something that's got more of a renovation thing to it. But outside of that, I'd say the movement will be gradual.

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Operator [24]

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We have a question from Xintong Ouyang of On Fidel (sic) [Field] Investment Research.

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Xintong Ouyang, On Field Investment Research LLP - Analyst [25]

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I have two questions. The first one is on the...

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [26]

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Sorry, we're just finding it very hard to hear you there.

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Xintong Ouyang, On Field Investment Research LLP - Analyst [27]

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Okay. Sorry. Can you hear me better now?

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [28]

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Yes. Yes. Definitely.

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Xintong Ouyang, On Field Investment Research LLP - Analyst [29]

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Great. So I've got two questions. The first one is, if I look at the penetration, I'm trying to understand how the penetration growth is going to translate into revenues given the government stimulus. For example, if I look at the U.K., you have a pretty high penetration rate in Insulation Boards. And with the British stimulus on renovation, I'm just wondering, the EUR 2 billion investment they're announcing for the next 6 months, how will that translate to Kingspan's accounts? Like what kind of -- what's the magnitude of the positive impact?

And then the second is on the Nordics. You are assuming a very steep increase in the market penetration for the next 5 years. I'm just wondering why -- I'm just wondering, can you provide a little bit more color in the Nordics market, like outlook-wise?

And then my second question is on the circularity. I understand that you use a lot of plastic bottles in your products when you're manufacturing them. But then as for your product itself, are they recyclable at the end of their -- at the end of the used stage or they have to be break down in some sense, which is non-recycled. I'm just trying to understand the circularity of your own products?

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [30]

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Yes. Yes, absolutely. You're very welcome. Maybe we'll start with the last question. So our products are totally circular. And we're just working on our old scheme there, which will inform you much more about it, say, next results out.

So if you take our panels and boards, not only are they recyclable but actually far more impressively, they're reusable. So after life, these products don't actually disintegrate or return to dust or whatever, like a lot of alternative materials do. So we have countless examples of where our products are actually being reused in buildings, obviously, of a lower standard, and they go on to live another life, which to be honest, is far more and more impressive than it is to take it through a recycling process.

In terms of recycling the steel, which has taken off the pan is 100% recyclable. And the product itself can either be taken in pelletized and taken in hard for them back into the foam or indeed, it can be -- go through a glycolysis process to bring it back into a polyol, which is an area we're focusing on significantly at the moment. And then reintroduce it as raw material.

And beyond, in fact, the form of our products are used for multiple other reimagined applications, and they go from floors, to counter tops, to kitchens, et cetera. So there's a whole wider picture there that's actually truly circular, and we have a much more comprehensive picture to show you next time out.

From a Nordic penetration perspective, advanced insulation is something that's relatively embryonic in that region. It's dominated by very inefficient tech materials. It's not uncommon to have insulation of 0.5 meter thick, which is pretty extraordinary when you consider the amount of wasted space and wasted value and everything, not to mention the relative performances of those products. So we would see a tremendous opportunity to convert multiple applications across to advanced materials, which, of course, is why we're building our plant in Sweden. And that, of course, complements 3 existing facilities that we have already in Finland.

Now in terms of the U.K., the EUR 2 billion, geez, we'd love to get as much as that as possible, but it's very difficult for us to put a number on how much of that whole initiative is going to accrue to Kingspan. But you can take it, it would clearly be advantageous.

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Operator [31]

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We now have a question from Brijesh Siya of HSBC.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [32]

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I have one question probably left. And probably, if you can give a little more flavor on how end markets have -- each end market have performed in the last 3 months? And what you see in July and August? And related to that, whether if you can split that between new and renovation, whether there's any anomalies or performed fairly similarly?

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [33]

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Okay. In terms of end markets, Brijesh, the -- we'll just go through some of the major ones. North America -- well Americas in total, I'd say that the U.S. for us has been a very strong contributor during the first 6 months. And we expect it will be for the second, but probably just at a lesser level.

Canada has been weak. It's improving but still weak. And Brazil at an activity level has actually been an excellent contributor to the group. What's affecting us there, obviously, is exchange rates in more recent times, but those have recovered somewhat. But at an activity level, volume has grown actually very significantly in that region, and we expect that not to be necessarily interrupted into next year.

Closer to home in the U.K., we've had a very tough second quarter. Order intake has improved more recently. It's still trailing last year, but not by anything like the deltas that we saw in the second quarter. Pipeline looks reasonable. But honestly, we'd be unsure as to how executable what that pipeline is. There's still all sorts of uncertainty around the U.K., but it has been improving.

France. France for us has been -- I'd say, with the exception of April, it's been a very strong market for Kingspan this year, and we'd anticipate that to continue so.

Benelux, probably less so. Germany very strong for Kingspan, at least and continues to be the case. And Spain, I'd say, not surprisingly, has been a tough market. But again, it has been recovering I'd say quite well in the last 4 to 6 weeks, but still trailing last year.

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Brijesh Kumar Siya, HSBC, Research Division - Analyst [34]

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And would it -- will you be able to split that among the end markets like commercial, industrial or data centers for the renew? Are you seeing any differentiating growth numbers there?

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [35]

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For sure. On kind of large-scale service industry, industrial, we're seeing that strong. And the data market, we're seeing very strong, in fact, is what I'd say. Probably the residential side of our business is, probably the lower growth area so far.

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Operator [36]

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We have a question from Manish Beria of Societe Generale.

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Manish Beria, Societe Generale Cross Asset Research - Equity Analyst [37]

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So my first question is, when you talk about the 1% renovation rate, so does it mean 1% of building goes for renovation or it means 1% of energy saved of total energy used in the buildings? So this is the first question.

The second question is also market level question. So can you provide the split of building insulation demand in Europe by new build and renovation? So when I say market level insulation, I mean to include all material, be it glass wool, mineral wool or plastic or all the materials. So if you can provide that, yes.

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [38]

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Yes. No, we mean 1% of buildings, broadly speaking, get renovated annually, so 1 in 100. And that there will be significant political efforts, I would say, to increase that dramatically. As I said in the earlier slide, to increase that fourfold or else we're on a heightened to note in terms of the 1.5-degree target.

Overall, in Europe, the market for insulation is probably about 60-40. So it's 60%, new build; 40%, retrofit. But for our business, actually, it's less. So we're probably more kind of a 70-30 favoring new build.

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Manish Beria, Societe Generale Cross Asset Research - Equity Analyst [39]

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Okay. And maybe if I can add one more. So on your dividend policy or the shareholder remuneration policy. You have talked about the buyback, I mean, so what is the criteria for buyback? Do you look at really the evaluation of the Kingspan business? And when you do buyback cheap because the share price of the Kingspan has gone up. So probably, it has become less attractive from the buyback point of view. So why at this point when the share price are high, you are looking at buybacks right now?

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Geoff P. Doherty, Kingspan Group plc - Group CFO & Executive Director [40]

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Well, we're actually not necessarily looking at buyback now. What we've really -- what we're saying this morning is that we're in a year where we have not had any dividend for very understandable reasons. It strikes us that it's timely for us to assess what our policy might be going forward. So we don't have that policy today, but we will when we announce our results next year, and we'd have to take into account all of those aspects in terms of how we might think about payouts going forward. So no announced policy today.

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Operator [41]

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We have a question from Pierre Rousseau of Barclays.

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Pierre Sylvain Gilbert Rousseau, Barclays Bank PLC, Research Division - Research Analyst [42]

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The first one is on your balance sheet. It shows a benefit obligation in -- pension benefit obligation increased by about EUR 300 million. That seems quite high compared to your acquisition activity. So I was wondering if you could give more details on that specifically?

The second question would be on stimulus potential, but outside of Europe, specifically, clearly, we all hear about -- a lot about the Green Deal to try to (inaudible). So would be useful to hear also what happens in other geographies?

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Geoff P. Doherty, Kingspan Group plc - Group CFO & Executive Director [43]

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Yes. Just on the pension piece, actually, the net pension liability that we acquired in respect of the Colt acquisition was about EUR 10 million on acquisitions. So what you have quoted there is the liability piece and doesn't include the assets that were acquired as part of the scheme. So the net position is about EUR 10 million, which answers that one.

And then Green Deal, next question...

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [44]

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On the Green Deal, I suppose, you've spoken a fair bit about that already, Pierre. It's let's see, we've heard lots about Green Deals in the past as well. So let's just see how it evolves. We haven't much color to add to that for you, to be honest.

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Pierre Sylvain Gilbert Rousseau, Barclays Bank PLC, Research Division - Research Analyst [45]

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If I may just follow-up on the last one. It was more about the stimulus outside of Europe. We hear a lot about the Green Deal, but outside of Europe, it's less clear what could happen. So if you could give some details, that would be helpful.

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [46]

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Yes. And that's what I'm saying that we don't have any specific detail on that, except there's a lot of talk. It's going to form a significant part of any major stimulus package, let's say depending on the outcome of the election, obviously, North America, that will swing enormously one way or the other. And that goes for many other regions. But there's nothing hard and fast as of yet.

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Operator [47]

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We have one final question. It's Cedar Ekblom from Morgan Stanley.

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Cedar Ekblom, Morgan Stanley, Research Division - Executive Director & Equity Analyst [48]

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I've got two final questions, gentlemen. The first one is on your distribution channels. Your desire to grow your renovation exposure as a percentage of the group, does that require that distribution is a bigger percentage of your sales channels? And if so, could you talk about how you would grow that considering the technical nature of the products that you sell? Do they fit well within distribution sales channels?

And then the second question would be a perspective from you on where you see the greatest benefits as it relates to energy efficiency in buildings, the electrical side of things versus the material side of things? You guys are obviously exposed to this, you do a lot of work on it. When you talk to your customers, how do they think about delivering the energy renovation or the energy savings between those 2 components?

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [49]

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Yes, sure, absolutely. From a -- yes, if the renovation side of our business grows, that exposes us more to the requirement to have distribution. I would say, in the case of our Insulation Board business, yes, but that's a well-worn track in terms of how suitable our products are for that, already a significant portion of our Insulation Board actually goes through distribution of one form or another. So that's -- that, if you like, is well-worn and something that could easily be expanded.

The Insulated Panel, not so. So there's a -- it's a 99.9% direct channel and whether that's for renovation or new build we would expect that to remain the case.

In terms of, if you like, the trade-off between electricity and conservation, that really goes back to our earlier point. The more renewables, if you like, that are brought in into buildings, they will brought in electrical form. The issue really is the ability for a grid to handle that, and that's where the trade-off has to happen between the fabric and insulation. So we're -- if you like, we're in an entirely different space than the power generation. We're at the front end of all that, where we're decreasing the need for power in the first place. And really, we believe that there will be more of an emphasis on the envelope first going forward than necessary on renewable power generation. It's a very obvious first place to start.

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Cedar Ekblom, Morgan Stanley, Research Division - Executive Director & Equity Analyst [50]

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Yes. When I mean electrical, I'm actually meaning more sort of electrical components within the building. So more efficient HVAC equipment, the stuff that the capital goods companies are essentially pushing as their contribution to building energy efficiency. I don't know when you talk to customers, how much of a benefit they think they get from the more efficient building envelope versus more efficient electrical systems within the actual building itself.

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Gene M. Murtagh, Kingspan Group plc - CEO & Executive Director [51]

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Yes. The returns for the envelope are the most compelling involve. There's no question about that. We actually get rid of energy in the first place for relatively little cost, like on average -- in an average house, you're probably going to spend about EUR 2,000 if you do a proper job on insulating it. And the return from that is extraordinary.

And thanks everybody. So that ends our call. And we'll be speaking to a good number of you over the coming days.

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Geoff P. Doherty, Kingspan Group plc - Group CFO & Executive Director [52]

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Thank you.

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Operator [53]

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Ladies and gentlemen, this concludes today's webcast. Thank you for joining. You may now disconnect your lines.