Dávid Tibor: Thermal insulation became a strategic necessity during the energy crises. National subsidy programs are needed

It is necessary that the government steps in and launches more central programs as other countries do – said Dávid Tibor, president of Masterplast, in his interview for Portfolio. The company’s president also talked about how the surge in energy prices hurts the company and why it decided to enter a new market. 

Masterplast has said several times that the key to the energy crises is thermal insulation, as unused energy is the best way to save money. What do you see in the industry now that families are getting higher energy bills and a rough winter is underway? 

 Events of the past few months have increased the importance of thermal insulation production, and the insulation of buildings is not just a matter of economy and environmental protection but a strategic and political necessity. Europe will not turn back from its path of energy independence from Russia, and solutions provided by alternative energy sources still need to be improved. Insulation material is available relatively quick and with low investment, and all of Europe’s residential buildings could be thermally insulated within a few years while building a nuclear power station takes at least ten years.  

The best energy efficiency solution is energy saving, which we can only achieve by not wasting energy. 

 This is valid for residential properties and public buildings as there are energy-saving solutions available for them too. The corporate sector is also facing 10x higher energy prices which they will or will not be able to settle. Entrepreneurs will only have a few opportunities as they either close their businesses or insulate. 

What happens once recession kicks in? How recession-proof is the insulation market? 

We believe recession is underway, and we are prepared for the next two years to be complicated and subject to a recessionary external environment. We are also sure that new property investments will drop. We are forecasting a significant drop in projects at hotels and office buildings and a minor decrease in residential properties. Industrial facilities like plants, storage buildings, and logistic centres can survive easier as there are so many new investors in Hungary and webshops in need of storage buildings that we don’t expect a fallback there. 

Fewer new properties will be built, but they will use thicker insulations as everyone is aiming for A-category energy efficiency. Along with this, a strong modernization wave will appear, which will continue not only this year but in the following years as well. So the demand for thermal insulation material will remain the same. Even if the newly built property market slows down, we don’t expect a decrease in the annual sales volume of insulation material in this existing energy and economic policy crisis. It is the worth-case scenario that it will stagnate, but we predict a decrease in growth. 

To improve next year’s outlook, we should mention a slight gap in the cyclicality. This year construction activities were high, and the insulation process always falls to the final stages of building works; therefore, residential and office construction works that started back in the first half of the year will get to the insulation phase by autumn next year; hence these projects will keep the 2023 business year in a good position. We are expecting a vivid autumn this year, with many people planning on insulating. It is the autumn of 2024 when we will experience the absence of similar projects, but we can compensate for this with home renovations. 

It is a great idea to become energy independent from Russia by doing thermal insulation but in reality, how can the public finance modernization if recession is on its way, companies are closing down, people are losing their livelihoods, and there is vast inflation? 

We firmly believe that central programs are needed, and the government needs to step in like in many other countries. In Italy, the government provides a 110% tax return; in Slovakia, they launched a new green program to support 30,000 uninsulated, energy-insufficient buildings for a total of 530 million euros.

Here in Hungary, the Home Renovation Program is great, but reducing it only to energy efficiency upgrades and prolonging the end date would be worthwhile. The solvent demand might reduce during the recession, and to replace the lack of resources, relaunching the green loan and making it available for modernization and not only for newly built energy-efficient buildings could be a solution. Having a mortgage with reduced interest rates could be good as the savings on energy could pay off the monthly mortgage installments. 

This would also be great for the government’s budget, as after thermal insulation is applied on these buildings, the consumption will reduce below average and lower the state’s financial losses caused by the utility price cap. The energy consumption of a well-insulated house is well below average; therefore, the government can save on each cubic meter. Launching a program where the total budget saldo is positive or neutral and does not cost anything for the treasury, which is now limited, would be worthwhile. 

Masterplast has recently announced entering the mineral wool thermal insulation market. Why the decision now? 

 The current EPS- and XPS production capacity expansion is in full swing. We are building three new plants this year meanwhile we also wish to increase our product portfolio. We can see great potential in mineral wool thermal insulation material production as, at many places, only this type of insulation material is recommended, and in Europe, supply for both types of mineral wool insulation material – rock wool and fibre- is lacking, 

Rockwool is a complex product that combines thermal insulation, fire protection, and soundproofing. Fibre wool is generally a lighter, cheaper insulation material with good soundproofing and thermal insulation features, used for lightweight structured buildings. 

The mineral wool market is shared between four global companies, an elite club where margins and expansion are excellent and can stay like that in the long run, as the entry threshold is high. 

Who will be your competitors in this segment? 

Main competitors in the mineral wool market are Rockwool (manufacturing rock wool only), Knauf Insulation, Saint Gobain, and Owens Corning. The latest has a small market share in Europe, but they do have a factory. As entry thresholds are high, only large enterprises can play in this market; therefore, Masterplast has entered the big league. This is the insulation manufacturing elite category with the highest investment demand, and that is why only a handful of companies rule this segment, 

How big of an investment are we talking about, and what does this step mean in terms of profit? 

We are considering rock wool and fibre wool production, and preparation of the actual investment decisions depends on state subsidies, energy supply for stable manufacturing, and sustainability factors. Both domestic and international assets are being considered, which we will discuss at our investors’ conference on 20 September. However, we have already been collecting staff and evaluating potential premises and projects we hope to decide on this year. 

In terms of profit, margins for mineral wool are way over Masterplast’s existing profit. 

What about supply chains? Can production meet the expected increasing demand? 

During COVID, we worked hard to avoid interruptions in supply, and there were none, so we now have a more extensive stock. Currently, our production structure has no critical product, but construction works can stop for reasons beyond our control, like lack of bricks, cement, or tiles. We can see significant outages in construction areas where energy usage is more intensive, which can cause delays and interruptions. In Italy, many tile factories that supplied half of Europe have yet to resume production after their summer break. In Hungary, brick and cement manufacturers are producing at a low capacity; therefore, we can experience shortages in supply.  

Is raw material expensive for Masterplast? How are the prices at the moment? 

In general, plastic prices dropped, which compensates us for the increased energy prices. As a result, our product prices have remained the same, and there was a price drop in polystyrol and plasterboards during summer. We can see examples of many manufacturers building up inventory, and after shortages are gone, these companies are bothered by the high inventory and are now trying to lower their critical product amounts. 

How does the company handle energy price increases, and how much do the increasing utility bills affect Masterplast?  

There are no issues with the energy supply at the moment, and it does not affect our business. But it is different in each region where we have plants. For example, we have to follow different strategies in Germany as risks are higher than in Hungary, and we also use gas. We are taking steps to handle these situations. For instance, we have started a project in our German plant to use tanked LNG gas instead of pipelined gas. LNG gas is available even if the Russian piped gas supply stops. We want to establish this system by the end of the year. 

Two-thirds of our energy cost is electricity which is more normalized than gas. We add higher gas prices to our product pricing, but energy costs only take up some of our cost structure as raw materials and plastic prices are still more prominent. Certain construction products like brick, tile, plasterboard, and cement are produced using more energy; however, this is irrelevant in regards to Masterplast’s production. 

On the plus side, our leading manufacturing site is in Serbia, where gas and electricity prices are more favourable than in the EU. Serbia has a stable Russian supply and a gas price that is on a different level and follows European logic, as the Serbian national gas provider sells the gas for businesses and residents at a government-issued rate. There is no gas retail market; therefore, prices did not rise. The same applies to electricity. 

Are there any renewable energy projects going on at Masterplast? 

Yes, there is. We have started a solar panel project at our polystyrol plant in Hajdúszoboszló. Based on our experiences, we will either decide to expand this project to our other plants or not. 

There is news about Masterplast gaining optional purchasing rights to the rest of T-CELL Plasztik Ltd.’s 76% ownership, where Masterplast purchased shares back in 2019. Why is this important for the company? 

With this step, we created a favourable situation for Masterplast relating to the T-CELL acquisition, and we will be able to make decisions considering the company’s interests. According to this agreement, we get purchasing rights for the remaining shares of T-CELL, which we will have to accomplish within three years starting from the close of the 2022 financial year. We can buy our partner’s shares for 5 x EBITDA, and this way, we will own 100% of the company. This opportunity is excellent for speeding up our thermal insulation production and its intensive development. This way, by next year, we could own six thermal insulation manufacturing plants from which five manufacture EPS and one XPS polystyrol. In addition, the effect of this transaction on profit results is not irrelevant. T-CELL’s profit after tax was 585,000 euros in 2021. However, as our thermal insulation sales are soaring, the company’s results for this year could be even better. 

What is the most significant risk for Masterplast at the moment? What is the worst-case scenario that could happen? 

Long-term energy supply is in focus nowadays. Primarily in Germany but in all our plants, it is significant to avoid and to handle stoppages in case they occur. We are actively working on a proper energy supply that is cost-effective. We are not worried about the thermal insulation market slowing down, but construction can have issues; therefore, we need to ensure our partners stay solvent. In the past few years, this wasn’t an issue, but recently it became a risk, and we have to be vigilant about our outstanding invoices. Thirdly, now that Masterplast has entered the fibrous thermal insulation market, which is a considerable step up, all company areas need to follow this act. It is a significant management task to become a regional insulation manufacturer and all company departments to become efficient. During such hard times when recession, inflation, and pressuring prices are present, we need to work hard on keeping our profitability and improving human resources standards while controlling costs. A company can only excel in an industry if it’s a cost leader and can operate at a low cost. 

Despite growing risks and investors’ worsening mood, Masterplast shares are roaming. What do you think? How reasonable is the pricing of your shares? 

We are facing difficult times, but Masterplast’s main activity belongs to one of the few sectors that will keep operating. Thermal insulation production is an industry that must prosper. In the next few years, the development of this industry will not halt, I am sure of it. 

By entering the mineral wool market, our pricing should be similar to our European competitors like Rockwool or Saint Gobain. Masterplast is likely to experience massive success as it did when entering the medical sector. 

I like setting ambitious goals, and it would be satisfying if our share prices would reach 10,000 forints within two years.