Chief Executive’s Review

Operational Performance Insulated Panels Environmental & Renewables	Access Floors Capital Expenditure and Acquisitions Looking Ahead

The closing quarter of 2009 gave some reprieve, and tangible evidence of stability began to emerge.

In the immediate aftermath of the international financial crisis, the global economy was exceptionally weak, particularly in early 2009. These difficulties transpired to be a sign of things to come and as the year progressed, pressures in many sectors continued to mount, and were acutely evident in the construction environment. However, the closing quarter gave some reprieve, and tangible evidence of stability began to emerge.

In all, the current environment has been the toughest experienced by Kingspan in modern times. It has necessitated a shift in management priorities, which were effected without impacting the business’ longer term positioning within the growing global theme of greater energy efficiency, lower emissions, and lower energy costs.

Widespread reorganisation and cost-out programmes led to an underlying reduction of €66mn in the Group’s fixed cost base since peak. Over the past 18 months, more than ten plants were consolidated into larger more efficient operations, and the relentless focus on cash drove a reduction in net debt of over €135mn, leaving the balance sheet considerably stronger than a year earlier. The profit performance of the business naturally suffered with revenue falling 33% to €1.1bn, but EBITDA and operating profits of €102.8mn and €62.7mn respectively, were solid given the times.

Operational Performance

• Solid performance in 2009 from the overall Group, despite hostile economic conditions.
• Excellent progress was made in debt reduction, with net debt at year-end of €164.3mn, down from €299.6mn. Operating working capital was €99mn lower than a year earlier.
• Insulation Boards total sales volumes were down 23%, but with growing sales and penetration in Western Europe.
• Insulated Panel sales volumes in the UK, Ireland and Western Europe were down 33%, with particular weakness in the speculative development segment.
• Insulated Panel sales volumes in North America were down 23%. Architectural façade products remained strong and the former Metecno business performed robustly in the circumstances.
• Central & Eastern Europe panel volumes were also weaker, down 25%. A substantial reorganisation of this unit was implemented, which will be completed in H1 2010.
• Access Floors sales volumes were down 31% globally, however margins improved from 14% to 17.5%.
• Across the Group, fixed cost reductions in the year of €50mn brings the total since peak to €66mn. This process is largely complete.
• Total investment in the year was €48.1mn. The main projects were the completion of a new Kooltherm^® phenolic insulation facility in the Netherlands, and the completion of a new solar thermal collector plant in Northern Ireland. The Group also entered the Australian thermal insulation market with the acquisition of AIR-CELL Innovations in December, complementing Kingspan’s already growing Insulated Panel business in that region.

Kingspan Insulated Panels
Chatterley Valley, UK

2009’s PERFORMANCE BY OPERATIONS SEGMENT WAS AS FOLLOWS:

Segment Result (profit before finance costs)	Insulated Panels €’mn	Insulation Boards €’mn	Environmental & Renewables €’mn	Access Floors €’mn	Total €’mn
Trading profit	26.3	13.5	1.8	25.5	67.1
Intangible amortisation	(2.8)	(0.7)	(0.8)	(0.1)	(4.4)
Operating profit 2009	23.5	12.8	1.0	25.4	62.7
Finance costs (net)					(6.0)
Profit for the period before tax					56.7
Income tax expense					(8.7)
Net profit for the year					48.0

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Insulated Panels

Sales volumes in the UK suffered heavily in the early part of the year, but broadly flattened out for the latter six months. In all, sales volumes were down 35%, and order intake was down 34% on prior year. This downward spiral eased towards year end and was reflected in improved order intake. A significant portion of the activity was both food and retail led, while speculative development, a key driver in the past, practically ceased. The result was a smaller average order size, and a shifting mix which in future will see a growing portion of sales in the higher value “Benchmark” architectural façade systems. This product suite, already marketed in North America, has now been tailored for the European markets.

INSULATED PANELS

Sales			% of Group Turnover
2009	2008	% change	2009	2008
€593.9mn	€862.1mn	-31%	53%	51%

This higher value-added range will be launched by mid 2010 and we anticipate that the medium to longer term penetration growth potential is significant. Nearer term, the project pipeline has trended very marginally up in recent months, quotation levels are robust, and order intake in the first two months of 2010 is up 20% versus 2009. Volumes in the Benelux were down 14%, reflecting the relatively stable environment in the region, which appears to be continuing into 2010.

Ireland volumes, now representing 5% of this category’s revenue, continued to reach new lows as the year drew to a close. Newbuild activity in this sector has fallen to levels not seen in Ireland for 30 years, as a direct result of excess non-residential inventory resulting from the overbuild in 2007 and early 2008. The stranglehold caused by lack of general business lending will compound this trend for some time, and is evidenced by declining architects’ workloads. Order intake levels in this sector were down 60% year on year, or down 73% since the peak of 2007.

The fundamental overhaul of this business’ cost base and work practices will be essential in ensuring its longer term recovery.

Across Central & Eastern Europe, sales volumes were down 25% in 2009, a pattern which also eased in the final quarter. The business’ performance in Poland and Germany was relatively strong, with volumes in these markets down only slightly. Czech Republic, Hungary, the Baltics, and Romania were exceptionally weak as funds availability and confidence both took a knock. Coinciding with this weakness has been overinvestment in the industry’s capacity levels, which is likely to continue exerting pressure on margins for the foreseeable future. In light of this, more new product introductions and a longer term move into the higher end insulated architectural façades will be key. In the meantime, the order book at year end stood 3% lower than a year earlier, although quarter one 2010 is expected to be somewhat down year on year due mainly to adverse weather conditions.

In Turkey and the Middle East, the operating performance of the business improved during the year, largely due to enhanced margins. Volumes were similar to a year earlier, and the run rate is likely to remain at similar levels for at least the first half of 2010.

In North America, non-residential construction tapered off sharply during the year, and underlying sales were down 23% on 2009. Volumes in Canada were more severely impacted, a situation that was exacerbated by the fall-off in developments in the oil producing regions. In the US, architectural sales were strong and notwithstanding the pressures on volume, it was a year of solid progress in building the team and the model for the longer term.

In 2010, the focus will be on achieving higher levels of operational efficiency in the US facilities, fully commissioning the two new plants in Canada, and continuing to drive the brand through the distinctly different channels of Architectural, Commercial and Industrial, and Cold Storage segments. 2010 is also likely to see the ratification of what will essentially amount to the first ever US wide building energy code. The Department of Energy’s Net Zero Energy programme will effectively establish an allowable base building energy performance that will ultimately culminate in grid neutral buildings by 2025. This legislative roadmap presents great opportunities for Kingspan’s model.

Australia and New Zealand showed an improved performance in 2009 over prior year, and the current year should build upon that progress.

Kingspan Insulation
Dundrum Shopping Centre, Ireland

Kingspan Insulated Panels
Caterpillar, US

Kingspan Modernisation Programme for existing building stock

• 1.8 million buildings
• 18% of total UK emissions CO₂
• 300 TWh per annum energy usage

Kingspan’s thermally efficient airtight building envelope systems, in conjunction with Kingspan renewable technologies, are ideally suited to the refurbishment of existing buildings, breathing new life and creating modern affordable energy efficient buildings.

Kingspan High Performance Insulated Panels and Boards are already saving:

• 5,060 GWh per annum of heating energy.
• 1,037,000 tonnes per annum of CO₂ emissions, equivalent to 228,297 balloons.

Future savings:

Governments have set ambitious, legally binding targets to reduce greenhouse gas emissions, therefore significant energy efficiency improvements for new and existing buildings are required to meet these goals.

Kingspan’s high performance insulated products and renewable technologies are ideally positioned to deliver these net-zero energy and CO₂ objectives.

* Carbon emission reductions relate to UK Government legislation for non-domestic buildings.

INSULATION BOARDS

Sales			% of Group Turnover
2009	2008	% change	2009	2008
€215.3mn	€345.2mn	-38%	19%	21%

In Britain, newbuild housing activity was approximately 50% lower than it has been for decades. In the Insulation business volumes were down 25%, a better outturn than for the general market activity. Growing penetration of rigid high performance insulation was further complemented by Kingspan’s Kooltherm^® phenolic insulation which continued to grow its underlying share of the market. From October 2010, building codes in the UK will be upgraded once again, and the targeted decreases in carbon emissions from new buildings will be in the order of 25%. The related increase in thermal insulation required will be a similar percentage, and will be implemented from mid 2011. As the codes become more stringent, the attractiveness of thinner and more thermally efficient rigid insulation like Kooltherm^® becomes greater.

In Ireland (including Northern Ireland), the Insulation Boards business is primarily exposed to the residential market in both newbuild and, increasingly, RMI.

Refurbishment activity provided a solid base for the business in 2009 given the collapse of the newbuild segment. This pattern is likely to prevail over the medium term, and much of the product strategy will be focused on the growing refurbishment segment.

Mainland Europe was comparatively stable during 2009, and volumes were down 7%. At present, the business' primary markets on the continent are the Netherlands, Belgium and Germany. The products marketed are rigid foam, produced in the UK, and Kooltherm^®, produced in the Netherlands. This latter facility was commissioned in late 2009, and will predominately serve the German and Dutch markets. The product is being focused most specifically on the external wall insulation refurbishment opportunity in Germany, and in the future, across Central & Eastern Europe. The current incumbent in these markets is fibrous insulation, like stone and glasswool, which will be increasingly inefficient given its relative thickness and poor over-life performance. The penetration in Continental Europe of high performance rigid insulation is currently less than 5%, offering clear opportunities for this business to develop and grow.

Towards the end of the year, AIR-CELL Innovations in Australia was acquired by Kingspan. This business provides an excellent platform and network from which to build our presence across Australia and New Zealand, not only with its own range of insulations, but also with the broad range of products that Kingspan will bring to the venture.

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Environmental & Renewables

With approximately 75% of this division’s sales coming from the UK and Ireland, this business bore the brunt of the recessionary slide in both markets.

This business’ product range is extensive, and includes solar thermal hot water systems, heat pumps, rainwater harvesting, water storage, fuel storage and wastewater treatment systems. Many are destined for the residential sector, hence the current pressures on volumes. These pressures will ease as the UK housing market, in particular, begins to recover, and evidence of this was already visible towards the end of 2009.

During the first quarter of 2010, a new entirely automated manufacturing facility for the production of solar thermal collectors is being commissioned in Northern Ireland. The plant will produce the highly effective solar thermal vacuum tubes more efficiently than any other comparable operation globally, and the current market focus is in Mainland Europe and North America, where our routes to market have developed rapidly in the past year.

On an underlying basis, this division returned a profit although as in other years, the figures are substantially impacted by the ongoing polyethylene raw material related warranty issues dating back to 2002/2003. Proceedings have been issued against the supplier of the material, Borealis, based on specialist legal and technical advice, in which the full recovery of past and future losses is being sought. A conclusion to the case is anticipated sometime in 2011.

ENVIRONMENTAL & RENEWABLES

Sales			% of Group Turnover
2009	2008	% change	2009	2008
€168.7mn	€266.7mn	-37%	15%	16%

UK Feed-in Tariff (FiT) Solar Panel Generation Incentive Scheme

Feed-in Tariff (FiT) for renewable electricity comes into force in the UK on the 1 April 2010. The FiT is the rate that the energy companies will pay to those generating electricity from a renewable source, for example:

>4 - 10kW @ 36.1 pence per kWh*
>10 - 100kW @ 31.4 pence per kWh*
>100kW - 5MW @ 29.3 pence per kWh*

The FiT rates are paid regardless of whether building owners/occupiers use the electricity or export it into the national grid. The FiT will be a significant market driver for the Kingspan powerpanel.

*Figures based on year one of a 25 year tariff lifetime with tariffs inflating annually.

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Access Floors

Given the late cycle nature of office construction, the weakness of the general economy wasn’t particularly evident in this business during the first half of 2009. Underlying conditions were deteriorating however, and in the second half, the year on year volume decline accelerated in both North America and Europe. Overall, first half volumes were down 25% on prior year, and the second half down 36%.

ACCESS FLOORS

Sales			% of Group Turnover
2009	2008	% change	2009	2008
€147.6mn	€198.7mn	-26%	13%	12%

We expect office construction starts will hit a low in 2010, driven largely by the excess capacity currently in the market. Vacancy rates in major US and European cities are at a five-year high, and development activity will therefore remain weak before any resumption of growth, possibly in late 2011 or 2012.

Despite the weakening completions, Kingspan’s businesses performed exceptionally well during 2009, and margins were strong at 17.5%. Firm management of controllable costs was the largest contributor to this, a theme that will continue to run through the current year throughout the Group.

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Capital Expenditure and Acquisitions

Total investment during the year was €48.1mn. This figure is significantly lower than that of recent years during which the Group substantially expanded its overall capacity, and it is above the run rate anticipated to maintain the business during the current year.

Investments of note in the year were the completion of the Kooltherm^® insulation facility in the Netherlands, the completion of a new, relocated insulated panel plant in Toronto, Canada, and a new relocated solar thermal facility in Northern Ireland. In December, the acquisition of AIR-CELL Innovations in Australia was also completed.

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Looking Ahead

In the near term, it is likely that the overall building environment will be more predictable than in the recent past. The virtual collapse in activity experienced in late 2008 and 2009 should be replaced with a more stable, albeit notably lower base from which to build businesses once again.

The Group has and will continue to benefit from its overhauled cost structure, and its more streamlined operations which are the result of substantial internal consolidation over the past two years. This has been achieved without damage to the core tenets of Kingspan’s competitive advantage being undermined.

An increased focus on a number of new products which were brought to market during this period, in addition to the broader palette of Kingspan solutions, will continue to generate long term potential across a wider geography than at any time in the past.

Notwithstanding these opportunities, the current year will continue to pose challenges for Kingspan as some economies climb slowly out of recession, leaving behind a construction environment that has not yet fully caught up with the general contraction of last year. In some markets building activity is therefore still likely to have further to fall.

Globally, the energy conservation agenda continues to gain impetus, which will become more evident when further tangible national and international energy saving commitments are firmed up. Kingspan’s strategy remains fully aligned with that global theme.

Gene Murtagh
Chief Executive
1 March 2010