Breedon Group plc (BREE) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to our 2022 results presentation. James and I will take you through our presentation and then open things up for questions. We've delivered another record year at Breedon, successfully navigating numerous challenges to deliver results ahead of expectations. This performance is a testament to the quality and integrity of our people and their resilience and dedication regardless of the challenges they faced. I'm extremely proud of their achievements, and I thank them wholeheartedly. So what contributed to our performance? Our key construction markets, noticeably infrastructure, housing and industrial continued to benefit from long-term structural growth drivers, our dynamic pricing strategy complemented by our forward hedging program and careful cost management ensured full cost recovery, and we continued to invest for growth, completing 3 strategically significant acquisitions and increasing organic investment. Our numbers matter, but so do the value generators that you can't see directly in the numbers, and that's what I want to show you in this next slide. In parallel to delivering the financials, I'm delighted by the progress we've made in our 3 strategic priorities. In respect of our sustained priority, we have progressed a range of initiatives. We have established a new Board-level Sustainability Committee. Our commitment to develop climate-related carbon targets has been accepted by the science-based targets initiative. And we have complied with TCFD and assessed and quantified the potential physical and transitional risks and opportunities posed by climate change. We have achieved our highest ever rate of cement alternative fuel use. We have launched our sustainable Breedon balanced range of products. And last but not least, we kept our focus on health, safety and well-being, and this is showing in our KPIs. In respect of our optimized priority, we have continued to drive efficiency and utilization. Progress during the year has included the implementation of electronic proof of delivery across the group, improving customer service, accelerating cash receipts and using less paper. The delivery of the CEMEX synergies and the introduction of an operating model to optimize quarry efficiency; and lastly, in respect of our expand priority, we have expanded our surfacing business in GB with the award of a place on the National Highways Pavement Delivery Framework. And through the acquisition of Thomas Bow, we are executing our GB surfacing strategy, which is all about pulling additional volume through the business without being margin dilutive or changing our risk profile. We have added marine dredging to our portfolio of activities through the acquisition of Severn Sands, and we have continued to invest in the lifeblood of our business, namely our minerals. In summary, we've delivered another great year at Breedon. I'll now pass you on to James to deliver his financial review.

Good morning, everyone, and thank you, Rob. So 2022 was a further year of significant progress for us as a group. Revenue increased by 13%, despite the challenging macro backdrop. And in a year with significant cost headwinds, we successfully expanded our operating margin by some 30 basis points to 11.1%, and EBIT for the year has come in around 5% ahead of consensus. We increased our returns on invested capital, building on the progress we made in the first half of the year, and delivering a full year return some 130 basis points higher than in 2021. As a consequence of the investment we made in the business, free cash flow generation was lower than our medium-term target with cash conversion of 29%. We reduced our leverage both year-on-year and since the half year. Finally, we've increased the dividend by 31%, reflecting both our progressive dividend policy and in line with our plans to grow that payout ratio towards 40% over time. Our top line growth of 13% in the year was principally generated through the success of our dynamic pricing actions with overall pricing of around 20%, offsetting volume declines of around 10%. Excluding acquisitions, which contributed around GBP 33 million, our revenue grew by 11%. And that pricing meant that we recovered the impact of the significantly increased input costs during the year and helped to offset the drop through on those lower volumes. You'll recall from this time last year that we'd originally planned for around GBP 100 million of incremental costs to come into our business in 2022, and we ended up with nearly double that due to the impact of inflation. And there's a detailed breakdown of our cost mix in the pack at Slide 31. The business did an excellent job of managing through what was a really changeable cost environment. And our hedging strategy delivered exactly what it is designed to do, giving our operations a degree of cost certainty and ensuring that we were not caught out by the significant energy price shocks that came through. And the changes that we made to our pricing model back in 2021 enabled us to react appropriately as those increased costs came through. We have hedges in place for substantially all of our power needs across 2023. And while those hedges are at higher levels than we were able to secure for this year, they are well below the compete costs that were seen in 2022. I estimate that the year-on-year cost impact of increased power in '23 for our business will be around GBP 25 million. Bitumen supply stabilized over the course of the year, and is felt to be much less of a risk in 2023. And as a reminder, we typically look to fix the bitumen elements of large contracts at the start of those contracts to give us price certainty. And as you know, the key question with bitumen isn't the absolute price that we pay for it as a raw material. It's the delta that we generate. The cost of carbon has resumed its upward trend since the turn of the year, with EU allowances now around EUR 95 a tonne and GB allowances around GBP 80. Our surcharge mechanism allows us to recover the cost of that carbon and has been well received by customers and that it gives them certainty around carbon costs for the quarter ahead allowing them to plan with confidence. Our most effective hedge, of course, remains the 1 billion tonnes of reserves and resources that we control and they sit on our balance sheet at historic cost. In 2022, we've replenished our production. And importantly, we have around 100 million tonnes of resources at various stages of the planning pipeline. In what is likely to be a headline deflationary environment, I expect that securing real price increases will be more challenging this year than in the past 2 years. However, as you would expect, we will continue to scrutinize the cost base closely and we'll use -- look to use dynamic pricing as required to protect and enhance margins and returns. Each of our divisions has contributed to that improved EBIT performance and to the overall improvement in our margins. GB materials expanded its EBIT margin to 8.9%, and delivered GBP 2 million of synergies from the CEMEX transaction across the year, principally through the increased utilization of the acquired assets and the work that we've done to internalize supply. The underlying CEMEX margin continues to improve and grew faster than the overall divisional margin in the year. In Ireland, the team delivered a resilient performance, recovering input costs and maintaining margin and as a business is well positioned for 2023. Cement had another strong year, recording a good drop through on its top line to increase it's margins by 40 basis points across the year. So overall a 13% increase on the top line and 16% increase on the bottom line, leading to a 30 basis point improvement to our underlying EBIT margin. And that's a pretty clean EBIT number, given that below the line, we only booked GBP 2.2 million of exceptionals, along with GBP 4.8 million amortization of intangibles. We generated GBP 69 million of free cash flow during the year and secured a strong working capital unwind in the second half of just under GBP 44 million, leading to an outflow for the full year of GBP 33 million. A proportion of this is down to the impact of inflation working through the balance sheet as well as the GBP 20 million of carbon allowances that we acquired for cash in the first half of the year. Net CapEx for the year came in at GBP 102 million, in line with guidance. And bear in mind that about GBP 20 million of that spend incurred was committed in 2021. However, capital supply chain challenges meant that the investment couldn't be made until this year. As a reminder, our banking facilities were extended during the year out to 2025, and we retain the option of a further extension to June 26. And there's a detailed breakdown of our debt maturity dates in the appendix to your pack. In terms of our technical guidance for the balance of the year, the NPA forecasting volumes to be mid-single digits lower this year, and that seems to us sensible as a core market assumption. We will get some benefit from pricing drag through from 2022. However, pricing as a whole for this year is likely to be lower than last, probably mid-to-high single digits. General cost inflation expected to run at similar sorts of levels, and as I mentioned earlier, we will see an increase in our energy costs year-on-year. Net interest expense for this year, around GBP 12 million, with substantially all of our drawn facilities at fixed rates and net cash interest paid probably closer to GBP 9 million. We're expecting an underlying effective tax rate of around 20%, and our cash tax payments will be slightly higher than the effective rate due to the expiry of the super deduction at around GBP 35 million. I'm expecting the normal working capital profile of a build to the half year, reducing over the year as a whole for a net outflow of around GBP 20 million. CapEx for this year is expected to be lower than last at around GBP 90 million. Bringing all this together, we combine it with cash dividend payments for '23 of around GBP 35 million, that should lead you to an year-end net debt number of around GBP 165 million. I wanted to finish up this morning by taking you back to 2 slides that we covered off at our Capital Markets event back in November of 2021. We talked then about the balanced financial framework that underpins our business model and aims to ensure that we allocate our capital in the most thoughtful manner possible. In 2023, we've invested in our business at all levels, not only replenishing our reserves and resources, but also creating a clear pathway to securing future planning applications, not only with high-profile capital projects such as the Mansfield asphalt plant, but also spending GBP 3 million to upgrade welfare facilities for our colleagues across the estate. Each of our 3 completed transactions helped develop a fresh angle to our business and the M&A pipeline in both the U.K. and Ireland looks promising. We've met our strategic objectives, we paid cash dividends to shareholders of over GBP 30 million in our first full year of dividend payments, and that reduced leverage means that we retain balance sheet optionality. And we've achieved all of this in combination with a further improvement in our return on invested capital to 10.8%, exceeding our targets significantly faster than we'd expected. So our financial framework is delivering for shareholders. And our record '22 performance means that we continue to make progress towards the targets and commitments that we outlined at the Capital Markets event. We've grown the top line and increased our profitability. The investments we've made into the business have had a knock-on effect on our short-term cash conversion. However, these investments will strengthen and benefit the business going forward. Our balance sheet is strong, our returns are improving, and those cash returns to shareholders have increased materially. So the report card for '22 is pretty good. 2023 will throw out a different set of challenges, which we will need to respond to. But for now, our expectations for this year remain unchanged. Thank you. And I'll now pass back to Rob.

Thanks, James. I'll start the operational review by highlighting the central theme of the market review is the normalization of demand following the exceptional post-COVID demand in 2021 and moderating growth in the second half of 2022 as inflationary pressures have grown. Let's look first at our U.K. market, where the picture in 2022 has been yet been one of normalizing demand and moderating growth. U.K. GDP is estimated to have grown by 4.1% in 2022. However, there was a meaningful loss of momentum in the second half of the year as high inflation and rising interest rates impacted on growth. Construction output is estimated to have grown by 1.6% in 2022, with growth driven by infrastructure, housing and industrial demand. However, momentum has again been lost in the second half. The latest data available for NPA volumes has confirmed that demand for mineral products declined as the year progressed with their estimate for the year being a decline in aggregates of 8%; in asphalt of 7%; and in concrete of 4%. Confidence as measured by the construction PMI also declined as the year progressed and stood at 48.8% -- sorry, 48.8 at December 2022. Considered against this backdrop, our U.K. performance in 2022 has been outstanding, and I will talk more about how it was achieved in our business review shortly. But before I do that, I want to turn next to our market in the Republic of Ireland, where the operating environment was more positive. Modified domestic demand is estimated to have grown by 7.7% in 2022. That made it one of the strongest performing advanced economies in the world and construction output is estimated to have grown by 9%. Our businesses in the Republic of Ireland benefited from this growth backdrop. Having said this, the benefits of this were masked at the island level by the absence of the governing assembly more specifically spending in Northern Ireland. And as with the U.K., momentum was lost in the second half. Again, like the U.K., confidence declined with the construction PMI standing at 43.2 at December 2022. Moving on to our businesses and to GB. Our GB business has had a successful year delivering significant organic growth and fully recovering rising input costs. Volumes softened in line with the broader industry as the U.K. economic growth moderated. However, we built on the servicing platform we established last year, expanding our presence in the East Midlands by acquiring the Thomas Bow business, and we were awarded a place on the National Highways Pavement Delivery Framework in England. Our associate, BEAR Scotland also successfully retained the Transport Scotland Northwest management contract. We expanded our strategic capability and reserves through the acquisition of Severn Sands, a marine dredging business. And we increased our concrete offering through the acquisition of RT Mycock. We complemented our M&A activities with significant organic investment, directing a meaningful proportion of our increased spend toward projects aimed at driving growth. For example, our new e Mansfield asphalt plant has expanded production capacity, optimized efficiency and enhanced sustainability by enabling the use of up to 50% recycled asphalt. In terms of sustainability, we invested in mineral reserves and resources and accelerated the sales of more sustainable asphalt and concrete products. We also launched Breedon Balance, our new product range that meets stringent sustainability criteria. Lastly, in anticipation of a change to building regulations in 2023, we also invested in a network of silos so that we can increase the use of CEM II in our concrete, a product with a reduced carbon intensity. Turning to our Irish business. It delivered a resilient performance, fully recovering input costs and winning high-quality new work. Softness in volumes at the half year reflected the absence of the governing assembly in the Northern Ireland and the tendering delays that we reported at the half year in the Republic of Ireland. In the Republic of Ireland, tendering activity accelerated noticeably in the second half. In Northern Ireland, the DfI revised the procurement process for infrastructure tenders in the second half, leading to several contract awards coming through. We were successful in the first 2 rounds of awards, securing the Down and Armagh District Term Surfacing contracts. Tenders have also been submitted for the remaining rounds with outcomes expected to be phased through 2023. We also have a successful street lighting maintenance business in Northern Ireland, which benefits from the switch to more efficient LED technology. In the second half, we were pleased to win 2 street lighting maintenance contracts with DfI, each for a 5-year term. We are positioning the business in Ireland for growth and rebranded Whitemountain and Lagan as Breedon during 2022 and made further investments in the team there. A review of strategic opportunities in Ireland also crystallized our decision to exit our civil engineering business during the year where the contract risk profile had deteriorated. Our mineral reserves and resources pipeline made substantial progress during the year, opening a previously dormant quarry in Kerry and progressing numerous other extension opportunities. Cement. Our cement business delivered a strong 2022. Volumes suffered in GB in line with the broader industry as economic growth moderated. Pricing remained resilient increasing steadily during the year in response to rising input costs. We introduced a dynamic and transparent pricing strategy, implementing a carbon surcharge mechanism which gives our customers direct visibility of the carbon cost of the cement they purchase. Our forward hedging program afforded us a clear view of our input costs, empowering our commercial teams to focus on full cost recovery. Our Kinnegad plant improved kiln reliability, a creditable performance considering the high performance proportion of alternative fuels it utilizes which adds complexity to the production process. In 2021, our Hope plant achieved Plant Mastery status for delivering 3 consecutive years of kiln reliability in excess of 96%. This is an industry-recognized measure, which denotes market-leading plants with strong cost and quality control, high workforce engagement and excellent health, safety and environmental records. This remarkable performance was sustained in 2022 with kiln reliability of 96.1%. Both plants delivered their planned kiln maintenance shutdowns on schedule and within budget. We are pursuing numerous strategies to reduce our carbon footprint, switching away from fossil fuel inputs, reducing the clinker content of our cementitious products and turning to innovation for carbon abatement solutions. In 2022, both plants increased fossil fuel replacement, achieving a blended rate of nearly 50% alternative fuel utilization, Hope increased its replacement by 2 percentage points, and Kinnegad improved its world-leading alternative fuel usage to 77%. Kinnegad was also granted planning permission for a 17-megawatt solar farm. The energy output has the potential to supply nearly 20% of the plant's total energy needs. Reducing the clinker content of our products supports our clients' sustainability objectives and lower clinker content CEM II now comprises 50% of Kinnegad sales, up from 40% and we expect this contribution to increase. With respect to carbon abatements, our Hope plant is actively involved in the HyNet decarbonization project as a member of the Peak Cluster. Moving away from 2022 and looking forward, we entered 2023 in a strong position. Our strategy provides multiple options for growth while our strong balance sheet provides the financial flexibility to take measured action at the right time. Our M&A pipeline remains robust, and we continue to engage with assets owners in GB in Ireland as we seek to infill our existing capability and footprint in the near term. Longer term, we will continue to explore the possibility of establishing a platform in the U.S., a large and fragmented market where that offers attractive growth prospects. We recognize the macroeconomic backdrop remains uncertain, but we have confidence. The U.K. is now only expected to suffer a shallow recession in 2023. The March construction PMI published on Monday of 54.6 supports this view. Whilst total construction output is forecast to fall by 4.7% in 2023, our end use is well exposed to markets where there is still expected to be long-term structural growth, namely infrastructure and industrial. And the government remains committed to infrastructure spending, GBP 600 billion over the next 5 years. In the Republic of Ireland, modified domestic demand is forecast to grow by 1.2% in 2023. Total construction output is expected to grow by 2.5%. And lastly, the government is also committed to infrastructure spending EUR 165 billion by 2030. So to briefly summarize before opening for questions, we've delivered a strong 2022 at Breedon with advanced margins, earnings and delivered higher returns. In parallel, we've made good progress on our strategic priorities. And whilst the macroeconomic backdrop remains uncertain, our end use exposure is supportive, and we have started 2023 positively. Lastly, as well as our results announcement this morning, you have also seen our announcement about seeking admission to the main markets. We believe the time is now right and that the main market now offers us the appropriate listing given our scale, maturity and growth ambitions. Going back to the outlook. Whatever materializes, the Breedon model and the people who operate it have repeatedly demonstrated their resilience, delivering strong operational performances irrespective of the macroeconomic backdrop, and I remain confident in our ability to continue to deliver. Thank you. We now welcome your questions.

Rob Chantry at Berenberg. Just 3 questions. Firstly, on pricing. Could you just give a bit more color around some of the geographical differences in the U.K. and how that's evolving? Are there any spaces where there's particular higher prices getting through good demand versus the address of that? Secondly, on the end market dynamics, could you just talk a bit more about the kind of non-infrastructure and noncommercial areas, specifically areas like new build in terms of timing, how those interactions are going and how that's changed over the past few months? And thirdly, could you just give some more strategic thoughts on different routes to market in the U.K. and how it's evolved? I know there's been a focus in the past year on servicing work and as a route to market? Are there any more avenues to kind of explore to open opportunities up?

If I take the pricing one and then Rob, if you take the other 2. So I wouldn't say that there were notable pricing variations regionally within GB. Clearly, there's a range of pricing outcomes depending upon the mix of the product set and who the customer is. But I wouldn't say there were notable differences depending upon regions or geographies.

In terms of market dynamics, mean our markets are slightly different. So if I pick off GB and Ireland separately, if I could, if I start with Ireland, I think the key bit of news flow in the recent weeks has been the Windsor agreement. And I think if that is accepted by all sides, I think it's upside for Northern Ireland versus where we are at the moment, given what I said about the spending challenges that have been there to date. I think in the Republic of Ireland, I think the growth prospects are positive. And as I close there, I mean, the government are committed to infrastructure spending there that's due to be in with migration of up to 1 million people in the Republic of Ireland in the sort of years to come. So it's looking positive there longer term. I think in GB, I'd say the short-term challenge is probably around house building. And I think you will all know more about what the house builders have said than we know, but I think the one key thing I would point out is just our end use exposure to that sector, which is relatively modest at circa 20%. And really what's driving us going forward will be the infrastructure where there is forecast still to be positive momentum and growth and industrial. And there is a view that investment in warehousing and things might have peaked, but I think there's still a pipeline over the next 12 or 18 months for that to be delivered. On the third thing about surfacing, I think the one thing and I mentioned before was just -- this is all about the route-to-market, post acquiring the CEMEX assets, we then had a national footprint to be able to compete nationally and the National Highways award of the contract for the next 4 years is really just the logical next step for Breedon. We will continue to try and expand at surfacing business, infilling regional businesses. And as I said, when I started this morning and as I said back at the Capital Markets event, it's not about margin dilution. It's not about changing risks. It's just about some pulling through additional volumes from our businesses.

I think it's just worth adding on that. If you look at the contracts up in Scotland, that underpins about GBP 50 million of revenue for our materials business.

Manfredi Bizzarri from Morgan Stanley. Just coming back on the pricing comments. Sorry, I missed the guidance. Did you say mid-single digit up in 2023 for pricing?

Yes, I think so. I mean, at a macro level, I think it's quite difficult to see how the market could absorb another year of pricing similar to what we've seen in '22 and '21. So I think that there will be price that come through this year, but I think it will revert to something more like sort of mid- to high single digits.

And assuming your pricing holds, so you cannot secure pricing increases. What's your rollover pricing from 2022 for the year?

Yes. So I think there will be, again, a sort of a mid-single-digit rollover in terms of price from '22 coming through in '23.

Okay. And lastly, in terms of pricing by product, could you guide there cement aggregates?

I mean there's a range, clearly. And we don't operate in terms of one price for each across the entire product set, but I think I'd leave it to you to extrapolate what the pricing might be.

Clyde Lewis at Peel Hunt. I think 3, if I may. You've very clearly given us the pricing impact for the business for last year. Can you maybe just give us an idea as to where you think you were relative to the industry moves because -- the second question, which follows on from that is obviously so the volume numbers that you've given, look as if you've slightly undershot the NPA numbers, I think, that Rob read out. And historically, you've never really chased volume hard but just sort of useful to get a bit of color as to, I suppose, where the volume differences were. And again, have we deliberately chosen to price a bit better and accept that you might do a little bit worse than the industry in terms of volumes? And the follow-on from that is in terms of sort of your CapEx thoughts. Are you thinking more about, given the volume profile that we've probably got in '23, are you thinking more about CapEx should be more aimed at cutting costs rather than adding more capacity?

So in terms of the first one, I don't think that our pricing left us at a relative disadvantage across the market last year. I think that if you look particularly at ready-mix, we've changed our operating model quite substantially there over the last few years. So if you remember, coming out of COVID, we didn't bring back all of our ready-mix plants at that point. The CEMEX acquisition allowed us to look at the overall ready-mix footprint. And we've not been afraid to walk away from or where necessary. So I don't think that overall, the pricing left us at a relative disadvantage in the market. And I think that where there has been volume contraction, it is either down to the market contraction that we saw relative to the high numbers that came through in 2021, which was a consequence of the post-COVID snap back or alternatively, it's down to us being disciplined about the type of work that we're willing to undertake. And I think in terms of capital investment, we talk about Mansfield a lot, and it's a bit of a poster child for us within the business because what it does for us is when it improves us operationally, it brings a lot of other benefits as well. It's a significantly greener asphalt plant, if there is such a thing. It allows us to internalize supply of aggregates still further. And it's very much the model of what we want to do going forward. And we think that targeted investment along those sorts of lines can continue to make a difference for us.

On the NPA, I mean our volumes aren't materially different from the industry. And there's so many regional variations. I mean I wouldn't get hung up on the NPA volumes and we're not there just to chase volume.

Christen Hjorth from Numis. Three for me, if that's okay. So first of all, you touched on the surfacing a couple of times and the margin dynamic. Could you just sort of provide -- maybe, I don't know, they have a worth example if you sort of win a new surfacing contract? Why does that margin -- why is that not margin dilutive, just sort of running through the different pieces because I understand the surfacing piece in itself would be slightly lower margin. The second one, you sort of pointed to the NPA expectations for volumes. I know last year, the volume drop-through looked like it was just below 30%. Is that a number to reference point looking forward in terms of how we should think about volume drop-through in '23. and the third one is, obviously, the ROIC performance has now got above target already despite the fact that margins are below target. So just sort of trying to understand the moving parts there. Is that maybe because there's been a little bit less M&A, which in the first instance, can be a bit dilutive to returns, but some color there would be great. Thank you.

Shall I do the surfacing one, James, and then pass those other 2 to you. Look, a worthy example of the surfacing is securing a surfacing sort of maintenance contract. And then delivering the surfacing margin, which is relatively small, but given the capital employed, it's a high ROIC and high return. But what we're also doing is pulling through to the asphalt margin and we're also pulling through the aggregate margin. And so when you get to see it reported up in our numbers, you end up with the surfacing revenue, but you end up with a surfacing margin, the asphalt margin and the aggregate margin. And that's why it's not margin dilutive for the group.

I mean, clearly, with volume drop-through, it does depend upon the mix and what volume has varied. But I think a good start point is a 30% drop-through, plus or minus on the volumes. In terms of the ROIC, it was a really good performance. At the half year, I think our aim would have been to hold on to the change that we delivered in the first half to the full year. We did that and then a bit more. Clearly, we benefited from the drop-through that's come through on the price cost dynamic on the EBIT margin has flowed through into the ROIC as well. We're not revising the target as yet, but we're very pleased that we're ahead of the target, and we would certainly aim to remain ahead of the target going forward.

It's John Fraser-Andrews, HSBC. Three for me as well, please. James, the cost buckets. You've said power is all hedged. Is all of your energy, other fuels for the various businesses, all secured now. And perhaps you can elaborate on other cost buckets like staff wages, salaries or any other specific items that are significant. Second one would be on the bolt-ons I'm assuming that you made last year. I'm assuming there's still some more juice to come from them in terms of margins. So CEMEX might be done, but there might be some more coming there. And then finally, on bolt-ons, the ones you're looking at, the M&A market in the U.K. and Ireland. Are you seeing pricing for deals getting any better, given the volume circumstances?

I'll take 1 and 2 and then if you take the third. So in terms of the cost base, there's a breakdown on Slide 31 of your pack. Our energy is fully hedged for this year. As I touched on earlier, the hedges for '23 are more in line with where the market is at. So we will see a step-up in the costs attached to energy of around GBP 25 million coming through the business in 2023, but the hedging strategy delivered exactly what it was meant to do last year. It gave us cost certainty in a year of unprecedented energy price volatility. So the idea behind our hedging policy and our hedging strategy is not to chase rainbows. It's about giving the business certainty, and it absolutely did that last year. In terms of other fuels and in particular, bitumen, which is around GBP 100 million of spend for us in any year. And the strategy there is very much that, that gets passed through to the customers in terms of the pricing. With bitumen, we typically look to hedge about 1/3 coming into the year, and that's been secured. We have 1/3 that we will lock in at the start of a longer-term project. So for example, the A11 project that we've been doing out in East Anglia and then the remaining 1/3 is passed on a job-to-job basis. In terms of the bolt-ons, I mean, they're all pretty small in terms of what they may or may not deliver financially in the context of the group. Strategically, they all bring slightly different things. We've talked about the dredging. We've talked about the volumetric concrete, and we talked about the surfacing optionality that Thomas Bow brings us. Yes, we would expect each of them to deliver an enhanced and improved performance on a like-for-like basis in the course of 2023 as a consequence of being part of a bigger group. But the real reason that those 3 acquisitions were made was because of what they gave us strategically rather than necessarily what they would deliver financially to the group.

I think in terms of pricing on deals, I think there was a slight disconnect probably between public sort of multiples and valuations and private expectations during 2022. But I think given the macroeconomic uncertainty out there, hopefully, they will start to correlate again and we do have a positive pipeline for 2023.

James, just on staff costs and any other big item perhaps dynamite or any other thing significant, there's inflation that's coming through that we should be aware of?

Yes. So I mean, I think that we'll see employment costs running in mid-single digits this year. That's, I think, in line with broader industry and broader market. Other costs, I think the challenge this year in terms of costs and in terms of cost management is going to be that the headlines are all going to be about deflation. But in the real world, there is still inflation coming into cost basis.

Tobias Woerner from Stifel Europe. Three questions, if I may, as well. Firstly, probably for James, with regard to the cash flow last year, you've had an impact from carbon credits. Maybe you can give us the number what you're short at or maybe even in pounds, if possible. In context of CapEx, you gave us guidance, GBP 90 million for '23. On a normalized basis, a percentage of sales, what would you say that compares to? The second question is about your quite sizable reserves and resources, 1 billion tonnes is a real asset. They don't make them anymore, especially given our planning system in the U.K. Do you have any royalty deals to give us a sense of comparative values per tonne or any other deals recently struck in the aggregate space? Probably one for Rob. And then just lastly, the other day on LinkedIn, I saw your JV partner, Colas and yourself working together, Colas obviously being a global international, what sort of corporation do you have with them? Just remind us of the JVs, what sort of work you do?

Okay. That was 4 questions, Tobias, not 3. Carbon, we are covered for '23 and '24. So we have the allowances that we need for '23 and '24, and we've got layers going out into 2025. CapEx this year was by some margin, the highest that we've ever invested in the business. Some of that, as I touched on earlier, was down to pull-through from investment that we'd originally planned to make in 2021, but we couldn't make because of capital supply chain challenges. The GBP 90 million will again be a significantly higher than our long-run average of capital investment back into the business.

I think in terms of reserves and resources, as you know, it is a huge asset. And it is the lifeblood that will feed the business. And as we sit here today, we have over 30 years' worth of reserves and resources. And we currently have 100 million in the pipeline -- in the minerals pipeline as well at the moment. So it is positive. We do have some royalty agreements. I think we do split minerals out in the accounts. I'm looking at Anthony at the back between freehold and leasehold. No, we don't. Okay. Well, we don't do that. I thought we did. But we do have some, but it's commercially sensitive as to what the implied or what the royalties are on those or what the implied royalties are, but I think a lot of research has been done by the analyst community over the last decade or 2 on implied royalties. So I think I'll leave it to the community to come up with their own conclusions on that, but it is an important asset underpinning our business. Colas, I mean the joint venture is in the process of being formed. It will start trading, I think, in April. And what do we bring to the party and what to Colas bring to the party? Well, Colas bring bitumen and innovation and we bring the materials. And between us, then we will deliver on the contract for National Highways. So it's a sort of marriage made where both partners are bringing something to the table and 1 plus 1 equals 3, which delivered it for us on the national framework agreement.

Glynis Johnson, Jefferies. Three, if I may, actually all focused on sustainability. Can you maybe give us some color. I don't expect numbers for me, but maybe a little bit of color in terms of the price premium you get on your sustainable products, I'm thinking the CEM II and also the recycled asphalt. And then talk about maybe the constraints in terms of the uptake of that product. Is it about just how much you can actually deliver to the customer or are the customers being very price sensitive about their use of sustainable products? And then just a quick update in terms of carbon capture. When will carbon capture do you think become meaningful for your business?

So I think on the first one on the pricing, I'm really sorry, but I'm going to have to hide behind the cement market data order and say, we're just not in a position to comment on any form of cementitious pricing. And on #2 and on CEM II, I mean if you look at Ireland and where we are in Ireland, 50% of our sales volumes being in CEM II and in the U.K., it's in single digits. We need to have the standards in the U.K. We need British standards to be updated. We're expecting them to be updated and we do expect -- we already are investing in silos to be able to have -- offer it to our customers. But we need the standards and when we've got the standards, we expect the demand for that to accelerate significantly in the U.K. On carbon capture, look, the industry would like it and we'd like it now, but there's an awful lot that needs to be done. And I think the key to having commercially available carbon capture and storage is to all the FEED studies that will need to be done in the next few years. But I think it's going to be in the early 2030s before it's commercially available generally to the U.K. industry.

Marcus Cole, UBS. Just 1 question on M&A. I was wondering if you could consider any product adjacencies such as clay bricks or anything else?

And we would always consider things and I think the most logical place for you to consider for us would be, we have our core outputs, which are cement and aggregates. And then everything else is a value-enhancing product and a route to market. So I think it's much more likely to be either through the surfacing or growing our concrete products business, which we'll be pulling through cement and aggregates as opposed to clay directly. Are there any calls on the line?

Yes, indeed. [Operator Instructions] And we take one off from David O'Brien of Goodbody.

A couple for me, please. Look, you've been quite successful in a number of fronts in terms of winning the framework agreements or winning tendering. Simple question is, what is the edge thing you have in winning these? What is the feedback that's coming back? I'm sure it's not, you're just the cheapest in the market. So can you give us a little bit of color. And maybe building on Glynis' question to a different angle. Is your sustainability capabilities playing into winning those framework agreements. And then finally, something that clearly gets an awful lot focus from you guys is safety, not so much when we're talking from an equity markets point of view. But like clearly you're succeeding when we look at the data that you provided today, what investments are you making there? And I guess how important is all of that attracting, retaining talent? And does it become a talking point or a consideration with the business owners that you're trying to acquire assets, but also people from over the last number of years?

Tendering. I don't know how much color I really can provide or want to provide because it's a competitive advantage really. But I think what I can say is that gone are the days when tendering is just based on a pricing decision. Quality, including sustainability is quite often now the majority of the awards in terms of scoring, I can -- without saying what they were, but I can talk about projects last year where vehicle movements and proximity of our plants was the key determination for us securing those jobs. So I think, I mean, the world is changing, and it's not all about price any longer. In terms of safety, David, it's a good -- really good question. And I think over the last year or 18 months, we have implemented a home safe and well action plan and not only colleague safety but also colleague well-being has been a critical sort of part of that plan. We aim to bring everyone into work and send them home at the end of every day safe and well. We've got more to do, but James touched on the amount we've invested during the year on the well-being facilities of all our colleagues. We've done a lot of stuff on the softer things in terms of mental health and well-being this year. We've also done a lot with people to try and help and alleviate the pressures from the credit crunch and the cost of living crisis. So it is front and center. And actually, safety and the well-being of our colleagues is our #1 priority.

And our next question comes from Andy Murphy of Edison Research.

Three questions around. First of all, around the cement plants and the investment that you're putting in, do you foresee a point where your cement plants reach 0 carbon. That's my first question. Secondly, you touched on this earlier around sort of U.K. house builders. You said it's around 20% of your business. But I was just wondering whether thinking about the outlook for '23, maybe '24 now compared to perhaps Christmas time, whether you're more optimistic or just less pessimistic? And then finally, on the M&A, you talked about moving away from the U.K. towards the U.S. I was just wondering why the U.S. as opposed to Continental Europe, which is a bit closer and arguably a little easier to keep your eye on.

I think they're probably for me those. And cement plants and the investment needed to deliver net zero hopefully, Andy, you would have seen our road map there is going to have to be significant investment not only at Breedon but across the industry to deliver that net zero by 2050. The lead technological solution at the moment is carbon capture and storage. And it will need material investment over the next 2, 3 decades. I think what is key, and I think the governments recognize not only here but globally that it's not going to be done just by industry, it's going to need the framework and the support of governments around the world to deliver that. I think in terms of house building, mean your comment about now versus where we were before Christmas. And if you're an optimist, I would say, you're probably slightly more optimistic than where you were on Christmas Eve and if you're a pessimistic person, it's slightly less pessimistic than it was there. But I would say that the sentiment is more positive today than where it was a couple of months ago. I think then the U.S., and I think your question was really the U.S. versus Continental Europe. And I think you have to go back to what we said at the original capital markets event in November 2021. And it's all about the growth prospects of those relative 2 markets and about the degree of fragmentation and i.e., the opportunity for Breedon to replicate the Breedon story in a third platform and to us, and please look at those growth statistics and the fragmented nature of the market, but hopefully, you will agree with us.

And up next, we have Ross Harvey from Davy with our the next question.

I've got 2. The first is just in regards to the return on asset capital. Obviously, you're above target now and put in some good figures there. Can you just give us a directional feel on the returns by business lines or the way that they're tracking and/or by geography, maybe more for out there. In terms then of the CapEx side, just wondering, in terms of the investments you're making this year and that you've made last year, what sort of return hurdles you may have faced and whether they are not anything specifically allocated, but I think you can give us there in terms of whether they're more short-end weighted or long-term weighted just so we can anticipate when we might see implications of that financially.

So I think in terms of returns on invested capital, clearly, we have one part of our business is very high capital intensity and that would obviously be the cement business in terms of the capital requirements of manufacturing cement. If you go and look at the other end of the spectrum, you look at the servicing business, that's a relatively low capital intensity business. The reason that we look at it on a blended basis is that all of our business is important to us and the buildup of margin and the buildup of returns that we generate from that integrated model is important to us and important to stakeholders. In terms of the capital investment, you've got a mix there. You've got the replacement of things like plant and equipment, plant and machinery. The quarry environment, it's an open air environment. It's an abrasive environment. So there is wear and tear. We do a lot of planned maintenance. We spend a lot of time and effort and energy in keeping our machines going in on the road. But there is necessary replacement and replacement cycles that sit there. There is growth CapEx investment for growth, and that would be -- a good example of that would be Mansfield and what we've done there. And then there's investment for sustainability. And in particular, one of the reasons that our CapEx for 2023 and beyond is going to be higher than it has been historically is that we are making some quite significant capital investments off the balance sheet in order to improve sustainability characteristics of the business and particularly of the cement business. And the ARM project that we've secured planning permission for this year, but Hope is a good example and an important example of that. We now have the consent to bring in alternative raw materials to use within the cement manufacturing process in order to bring those materials in, we need to make an investment in the infrastructure of the plant, and that's what we've approved and that's what we'll be making that investment on. You won't see the return necessarily on that investment for some period of time, but it's a very necessary investment in order to improve our sustainability credentials.

And just one quick follow-up. Just in terms of the ROIC level, mean I presume as you look at it between GB and Ireland, you have more scale clearly in GB. But is it fair to say that probably the returns are better in Ireland and just given the surfacing that's been invested in across the business, really?

Yes. Proportionally, you would expect the Irish business to deliver a higher ROIC than the GB Materials business.

Good. So I think we're going to draw it to a close. We've just taken over an hour. I know you're all busy people, and there's a lot of results and reporting going on at the moment. But I would just like to just to remind you, we are really pleased with what we've delivered in 2022. And James and I are confident that we, as Breedon will continue to deliver. Thank you very much.