Forterra plc (FORT) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to our 2019 results presentation. Before I start -- actually, it's really good to see so many people in the room. We were worried that no one was going to turn up earlier today. But I know there are quite a few people listening to the webcast, and there is an opportunity to put questions through the webcast, which Nick is going to assist us by reading out later on, should there be any. Before I get going, let me welcome Ben. Ben is -- was appointed CFO of the business at the beginning of this year, although Ben is not new to the business and, hopefully, not new to many people in the room. So if we move on just to the key points before we go into the depth of the presentation. So I think it's not a surprise to anyone in the room to know that the second half of the year in our sector was a little bit tougher than the first half. But we're actually pleased that despite the challenging market backdrop in the second half of last year, that our results are good, which I think shows the resilient performance of the business against that market position. We saw a revenue increase from Bricks and Blocks, although there was a slightly reduced sales volume. And then we saw a strong revenue increase from Bespoke Products, although margins did fall backwards. And we'll cover that in a bit more detail. Our balance sheet remains robust. Our net debt went up a little bit, and that's linked to the building of the new brick factory at Desford in Leicester, which is progressing well and to plan. And we'll cover that a bit more. And then finally, we're pleased to be recommending a dividend increase of 9.5% to a total dividend of 11.5p. And with that, I'll hand over to Ben to talk about the finances with a quick plug for our delivery vehicles. If we're looking at a sideline in raising some extra revenue, if anyone needs something to stockpile, bread roll and dry pasta, we can lend you one of these at a small fee for every day. So over to you, Ben.

Good morning, everyone. I'm delighted to be here doing my first presentation. I guess I'm the new CFO, but I don't really feel like a new CFO. So I've been with the business 13 years. I worked out that I think this is the eighth presentation of results that we've done for half years and year-ends. And I think every other one, I've been sat in the front row watching, so it's probably about time I did some work. So the first slide, just kind of just as a summary of our key financials. So I'm not going to dwell on this. So each of these numbers is found later on in the presentation, but it's just a useful aide-mémoire to have them all in the same place. Right. So this is the most complicated slide of the morning. So -- and I'm sure you didn't all pay to come and listen to an accountant talking about accounting standards. But the plan is I sort of do the technical stuff now and then let Stephen and myself talk about like-for-like trading numbers for the rest of the morning. So IFRS 16. So this is the new leasing standard, obviously came in, in 2019, and we've adopted it. The standard didn't require you to restate your comparatives. So what it's done, just for this year only, it's created a sort of a bit of a comparability difference between the 2 years, really only at an EBITDA level. It doesn't affect revenue and it doesn't affect PBT. But for those of you who track EBITDA, it just makes it a little bit difficult for this year. So what we tried to do is just take the statutory numbers on the left-hand side of the slide and then bridge across. So taking out the IFRS 16 impact, stripping out the exceptional items to then give a number before IFRS 16 and exceptional items, which is then comparable on a like-for-like basis with the prior year. So IFRS 16, as I'm sure you all know, basically removes what used to be known as operating leases. So leases where the lease payments were just expensed straight to the P&L, we now capitalize those assets. So strip out the payment from the operating profit, capitalize the asset and then depreciate it. So what you see is a significant increase of -- the GBP 6.3 million increase in EBITDA, offset by an almost equal depreciation charge and a small finance expense. So that sort of just confuses the numbers for this year, so we stripped it out. A few of you already asked, next year, obviously, we're not denying IFRS 16. It's happened. Next year, all the numbers will just be IFRS 16 versus IFRS 16, and this issue won't happen. So that's IFRS 16. The next thing is we have couple of exceptional items. So basically, the exceptional items of GBP 4.3 million, the majority of that relates to restructuring. So the biggest part of the restructuring is at our Kings Dyke London brickworks. So we've been building inventory there for a couple of years as our production was running above sales. So we've kind of taken a decisive decision to just manage -- making sure we manage our inventories and don't build unnecessary inventory. That puts us at risk of obsolescence, obviously consumes working capital. So we've decided to kind of realign our production to better match it with sales. We've already got healthy inventories at the Fletton brick, and we don't need to build those anymore. So what we've done is, unlike a normal brickwork, the Fletton process is slightly unique and it doesn't lend itself to minor tweaks because it's a kind of a high-labor element of the production cost. What we've done is effectively you need to make a step change to maintain your production efficiency. So we've taken that step change. We're going to reduce the workforce by about 50 heads, and that will ensure our inventories remain balanced going forward. Although it's a big change at Kings Dyke, I should probably sort of just sort of put it in context, across the whole of our business, this is nothing more than a minor readjustment. As we're decreasing production at Kings Dyke, we're also increasing production at some of our other works. So actually, on an overall basis, you won't really see any significant change in our production output. So once you've stripped out the impact of the exceptionals and IFRS 16, you don't have a sort of a like-for-like trading number with 2018. So we've got a 3.5% increase in revenue. That's primarily driven by the Bespoke Products segment. Brick and Block revenues increased slightly. As Stephen already mentioned, the sales price increases we obtained in the year broadly offset by the reduction in volumes. Overall, on a like-for-like basis, our EBITDA fell by GBP 2.4 million. We see that as a resilient performance in the face of the kind of the market headwinds we faced in the back of last year. The margin declined from 21.4% last year to 20.1% this year. Most of that is just effectively a mix effect in terms of the revenue growth was all within the lower-margin Bespoke Products segment. When you actually look at Bricks and Blocks in isolation, the margins remain broadly consistent in that segment. Unfortunately, EBITDA delivered by the Bespoke Products segment did fall by GBP 1.3 million. Unfortunately, the increase in revenue that we generated was offset by a decrease in the margin. Just looking at a bit more detail on Bespoke Products and the numbers there. It's probably just worth highlighting that we don't include any separate central costs. So all of our central costs, so the likes of myself and Stephen, for example, they are absorbed back into the -- to product -- to segments on a sort of pro rata basis based on revenue. So Bespoke Products does absorb 20% of our central overheads. Our total central overheads in 2019 were around sort of GBP 15 million. Also, it's worth pointing out that the Bespoke Products business and the precast business does generate a pull-through profit in the Brick and Block business. So we sell some of our blocks as part of the precast flooring system. So by having the precast business, we create a pull-through and additional profit in the Brick and Block segment. So moving down the P&L a little bit to tax. So just a quick word on that. So we've got a slight increase in the effective tax rate from the prior year. So 19.3% relative to 18.5%. The reason for that is primarily that the prior year benefited from some previous prior year kind of provision releases. So there were some one-off items in the prior year which reduced the rate. It's probably worth just sort of saying now, our tax affairs are pretty simple. We're a fairly sort of simple stand-alone U.K. business. So our tax -- effective tax rate pretty much just tracks the kind of current rate of corporation tax in the U.K. Moving on to cash flow. So just a sort of quick bridge on our cash flow. Again, starting from the sort of the adjusted EBITDA, kind of taking out the element of IFRS 16 and the restructuring costs. So we have a working capital movement of GBP 17 million. The majority of that or the largest part of that, around GBP 10 million, relates to inventory build. And that's just a function of as we saw sales decline in the second half of last year, we obviously built some inventories. Stephen is going to talk a little bit more about the inventory dynamic across the whole industry later on in the presentation. In the year, we spent GBP 24.3 million on the CapEx. And this is probably an opportune time for me just to sort of speak a little bit about our CapEx guidance for 2020. So obviously, the biggest element of our spend at the moment is on the Desford project. So on a cash basis -- and the amount that was sort of done on an accruals basis is always slightly different. But on a cash basis, at the end of 2019, we had already spent GBP 12 million on the new factory at Desford. Just a guidance going forward, we expect 2020 to be the biggest year of spend on the project. So we expect to spend GBP 42 million on that project in 2020, GBP 35 million in '21 and the final GBP 6 million in 2022. Some of you may notice that, that kind of cash spend has moved outwards a little bit since the previous guidance that you were given. I'm pleased to say that does not impact on the project at all. The project still is running to timetable. It's just obviously estimating the exact timing of the outflows can be difficult. So I expect total CapEx for 2020 to be around GBP 56 million. So that would leave us with around GBP 14 million of non-Desford-related spend. It's also just worth talking briefly about the tax. So our corporation tax outlay in 2019 was GBP 8.8 million. That's lower than the historic norm due to the receipt of some historic refunds from HMRC. So if you look at the norm, it's probably closer to GBP 11 million based on the current tax rate. It's worth just flagging that 2020, we'll see an extra tax outflow of around GBP 6 million. So this is purely cash. It doesn't affect the P&L account. But some of you may be aware that HMRC are changing the rules in terms of the payment of corporation tax. So at the moment, the company has to pay its corporation tax liability. So for 2019, half of the corporation tax for 2019 was paid in '19. The other half is in '20. In 2020, the business has to pay its whole corporation tax liability in the calendar year. So you effectively got a one-off bringing forward of your tax liability, which will see a GBP 6 million one-off extra outflow in our cash this year. The other point just worth mentioning is we have therefore -- on here is the EBT share movement. So this is the purchase of shares by our Employment Benefit Trust for the servicing of our employee share schemes. What we do is we've done it since IPO. So we've not issued any new share capital since IPO. So as we have our employee share schemes, we basically purchase shares in the open market to avoid issuing new share capital and diluting the existing shareholders. It's worth just adding that we purchased a lot of those shares for our all employee Sharesave scheme, the first scheme kind of launched in 2016. So it's a 3-year scheme. So a number of our employees benefited at the end of 2019 by being able to purchase shares at a discounted rate of GBP 1.35 a share at a time when the share price was more than double that. So it was good to see our employees be able to benefit from the kind of uptick in the company's share price. Moving on to just a sort of a quick summary of the net debt and facility. So the net debt before IFRS 16 was GBP 43.2 million, just a small increase on the prior year, again, reflecting that we've now started spending money on the Desford project in earnest. On a statutory basis, you then bring in GBP 14 million of lease liabilities. Most of our lease liabilities relate to our heavy goods vehicles, the delivery trucks that Stephen showed you a nice picture of earlier. So we add those onto the balance sheet now under IFRS 16. And obviously, they'll be there going forward. Our debt facilities remain unchanged. We have the benefit of a revolving credit facility for GBP 150 million, extends to July 2022. And at the end of last year, GBP 80 million of this was undrawn, so giving us flexibility and strength within our balance sheet. And in fact, it is the fact that our strong balance sheet does enable continued investment in the business. Just a quick couple of words on capital allocation. So this is just to sort of reaffirm our priorities, not flagging any changes here. So our strong balance sheet and continued cash generation, which will hopefully be further enhanced when Desford comes online, gives us significant flexibility and optionality. I mean I can just run through the sort of the previously stated priorities. I mean organic investment. Desford is the current centerpiece of our organic growth strategy. Obviously, Stephen is going to talk -- give you a little bit more of an update on that later in the presentation. Probably worth sort of letting you know that we're working on a number of other strategic expansion and renewal projects across our business. They're at different stages of the sort of the kind of evaluation process, but we do have a good pipeline of options. It's probably worth sort of reassuring you as well that they don't all cost GBP 95 million, or in fact, none of them will cost GBP 95 million. In that respect, Desford is exceptional, but we do have a number of opportunities to invest in our business, and the Board will be considering those in future years. Moving on to dividends. So we are very confident in the Desford project and the growth that it will deliver in our earnings. And in respect of this, we've already announced an increase in our dividend for 2019, taking our kind of dividend up to 40% of our distributable -- sorry, 45% of our distributable profits. The dividend increase is 9.5% on the prior year. Going forward, we wish to maintain a progressive dividend policy, especially as the kind of the new Desford projects drive -- hopefully drives increased earnings. We continue to look for potential acquisitions. We would look at acquisitions which strengthen our existing market positions or expand our product range or allow us to move into complementary markets. We are, however, mindful that we do operate in a consolidated industry, and there aren't necessarily that many kind of good-value opportunities out there. So we have to remain watchful. And the balance sheet strength that we have leaves us well placed to act if a suitable acquisition does become available, although I would reiterate that the quality of the pipeline of organic opportunities that we have to go with means that we're not forced to look for acquisitions. We will make an acquisition if the right opportunity comes along, but we're also happy to continue investing in our own business, and we're confident that we've got a strong pipeline of opportunities in that regard. So on that note, I'll hand you back to Stephen.

Thanks, Ben. Okay. Let's talk in a little bit more detail about the business over the last year. So just as a reminder to start with, for those of you that might be new to us, so we are U.K.-only heavy side building materials. Our split of sales between clay and concrete stayed consistent from 2018 to 2019, but what we did see was a slight rise in the proportion of sales that we sold into nonresidential, from 6% up to 10%. And that reflects the growth in revenue that we've achieved from our precast concrete business. So broadly, with a slight change in market segment split, broadly consistent with the previous year. So let's take a look at the market. The most important market for our business is the new build residential market. So the fundamentals for this, we believe, are really strong and set for the future. We've got high demand, supportive government policy, low interest rates and readily available credit. So actually, we look at new build housing and see this as a solid secure market. We've had 6 years of increases of housing starts since 2012, although in the second half of 2019, we saw the political and economic uncertainty in the U.K. meant that housing starts slightly fell back, leaving housing starts 8% behind in 2019. That didn't impact completions, which are also a key measure. But obviously, we look at starts going forward because that's the sort of the leading indicator in the housing market that we're interested in. All the sentiment -- all the market sentiment indicates that we're going to see growth in housing starts in 2020. And that's supported by the PMI, the Purchasing Managers' Index for construction, which grew in February after 10 periods of decline. So I think we look forward with a degree of confidence that we'll see the housing starts pick up during 2020. The other key market for us is the residential repair, maintenance, improvement market. The leading indicator we use here are the number of planning applications for projects below GBP 100,000, so residential planning applications for smaller projects. And you can see from the data on the screen that the -- that's been broadly flat. So despite the fact that we saw a reduction in the market in the second half of last year, if we look at that as a leading indicator, we don't believe what we saw in the last few months of last year is a structural change. And we think that market will continue going forward for us. So let's turn to the brick market. The brick market shrank by approximately 3% in 2019. And again, that's second half-weighted. What we did see was stocks increased. So as an industry, our stocks increased from 2.5 months' sales in December 2018 -- sorry, 2 months in December 2018 to 2.5 months in December 2019. Now to put that into context, as a rule of thumb, when we look at our business, we want to carry between 3 and 6 months' stock. Below 3 months, we think customer service and efficient running of plants becomes more challenging. And above 6 months, physically, you've just got an awful lot of bricks and you need somewhere to put them. So 3 to 6 months we use as a guideline. So actually, our view is that as an industry, slightly increasing stock levels at the back end of last year is a positive and will help us collectively service our customers. Imports didn't drop last year. They remain broadly consistent. And again, that's not a surprise. Projects using imported bricks tend to specify those bricks a long time in advance, all of those bricks a long time in advance. And so there's a lag if anything changes, probably at least a 6 months' lag, possibly longer before we see any change in imports. So the fact that imports didn't drop off, although we saw a 3% drop in the overall market, isn't a surprise to us. So if I go on to our Brick and Block reporting segment. So our brick sales remain -- our brick sales volumes are broadly consistent with the market. So what the market has experienced, what we've experienced. What we're pleased to see is that we did deliver a price increase last year. So that offsets the volume decline. Now those of you that were here last year will remember at this point in the presentation I pulled out a pint of milk, and we played a game to see who could guess how much a pint of milk was versus a brick. So I went to the M&S at the station this morning, and a pint of milk is still 50p. So at least we've closed the gap very slightly. I was going to play another game this year with a toilet roll, but the shelves were empty. If we look at -- that's bricks. If we move to blocks, our sales volume of blocks fell slightly -- proportionately slightly more than bricks. But again, not surprising. It's a more competitive market. There's more underutilized capacity. And consequently, there's more stock in the supply chain. So we saw a slightly more exaggerated effect on our sales volumes but not enough to impact revenue, as you can see. So I guess in summary, we were pleased with the resilience shown by the Brick and Block segment of our business on the back of a slightly reduced market at the back end of last year. We said we'd talk about the new Desford facility. The picture on the screen, I hope, gives this a bit of scale. So you can see clearly the new building at the front of the picture. And then behind that, the rusty roof is the old factory, which will be knocked down once the new factory is commissioned and become stockyard. And then behind there, you can see quarry. And to the left of the quarry, that's all of our landholding with mineral reserve underneath it, which will eventually get dug out and used in the new plant. So the project is -- just to remind you, it's effectively 2 years' earnings that we're investing in this GBP 95 million investment. We expect this to deliver long-term shareholder value. It will add 16% to our production capacity. And in terms of the project, as Ben said earlier, it's running to plan and schedule. And there's an enormous amount of activity going on the site, and it changes on an almost day-by-day basis. But it's an exciting place to be, and we're really pleased with the progress that we're making. So going on to the timing. We plan -- the factory, we'll commission it next year, 2021. We expect the factory to reach full run rate in 2022. There's 2 kilns. We'll commission one before the other. And then a first full year of production in 2023. We will build some inventory. So we expect the first full financial contribution in 2024. So before I go on to our Bespoke Products segment, I just want to spend a few moments looking at the precast concrete market. We grew the capacity in our precast business in 2017 through the acquisition of the Bison factory and brand. Our expectation was that we would see growth in both revenue and margin from this segment. Precast concrete is the obvious offsite structural building solution. So our expectation with shortages of labor and an increasing requirement to build quickly, our expectation was that this segment would grow both in terms of revenue and in terms of margin. Disappointingly, what we've seen is margin strength across the segment. So what we've taken here is our competitor group and looked at their company's house data, and we've actually seen EBIT margins fall between 2016 and 2018 by almost 40%. So the whole industry has not recovered costs through price, and margins have gone backwards. I guess -- although that's gloomy and disappointing, I guess the one -- the bright side that we need to look at here is HS2. There's reported to be over GBP 1 billion of precast concrete in HS2. That's somewhere between 1.4 million and 2 million tonnes of precast concrete, depending on which of the reports you read. So in terms of the industry, this could be a game changer. And we are, I guess, optimistic that we will see prices and margins firm up as we move into the delivery of products into the HS2 project. So difficult couple of years but with a slightly hopefully brighter future. So if we look at the numbers from our Bespoke Products segment, we can see a healthy revenue increase, exactly as we planned. And that's both from the -- our existing legacy products where we have greater capacity, having grown that business in 2017, but also as we've been able to move into products that we were not making before we added that capacity. Clearly, there's a lot more work to do here to make sure that we can operate this business unit at a satisfactory margin level. So in summary, we're pleased to see the sales growth. We're pleased to see us move into other products. We're still very disappointed with the margin and recognize there's a lot of work to do to improve that. Moving on, I used the word offsite a second ago, and we've talked previously about Forterra developing solutions to allow customers to build brick façades but reducing the time on-site and reducing the reliance on skilled labor. And I'm just going to talk you through 3 products that we've taken to market successfully in 2019, which allows our customers to do exactly that. So the first product up on the screen now is Quickwall. This is an innovative and unique product to us where we are gluing single-skin panels of brickwork together in a factory, and they are craned into position on-site as already-made walls. The key is getting the strength so you can lift these panels and they stay together. And that's the innovation that we've brought to the market. The project you can see there is a flood defense project in Derby. And clearly, the client there was very keen to get this project built quickly. And therefore, we've got an ideal solution in terms of a traditional brick wall or it looks like a traditional brick wall that can be quickly put into place. So we're really pleased with that. It's the first major project that we've done. It's gone really well, had good feedback from the clients, and we certainly got a lot of interest in that going forward as a solution for speed on-site. The next product that we've taken to market in 2019 is SureBrick. So this is a mechanically fixed thin brick or brick slip façade system. So the key point of this product is it's not traditional brickwork. It's deskilled. But because there's no glue involved and it's mechanically fixed, you can go above 18 meters. Once you go above 18 meters, you can't use glue, and that's because of fire regulations. So this product is a fire-safe, high -- product that allows bricks to clad high-rise buildings, taking away the need for traditional bricklayers and increasing speed -- and decreasing speed on-site. So we've started the first few projects on that, and we've got, again, a lot of interest and really good feedback on that going forward. And then finally, at the bottom of the screen, we've talked about new precast concrete products. So the picture you can see there is one of our Desford bricks, which is set into a precast concrete sandwich panel. So it's 2 layers of concrete with a layer of installation in the middle, and the outer layer of concrete has got bricks set into it. So to the untrained eye, it's a traditional wall, but obviously, very, very fast. That panel there is going to the new prison in Wellingborough in Northamptonshire, a big Ministry of Justice project, where the whole prison is being built off-site and assembled on-site. So this is the entry building with the bricks. The -- what they call house buildings don't have quite such a glamorous aspect, but the entry building has bricks. And we're supplying both panels with bricks and without bricks. So again, the 3 solutions there that we've brought to market in 2019, which allows our customers to take labor off-site and speed up construction but allowing for a traditional, good-looking, maintenance-free brick façade to be put on the building. Let's just turn to sustainability. We've been publishing our targets since 2010. And we're actually really pleased with the process -- the progress that we've made towards our sustainability targets. They're coming to an end. They were 10-year targets. And in our 2020 annual report, we'll publish new targets. And we'll focus on 3 areas. So first of all, people. We'll look at health, safety and well-being. We want to make our business a great place to work, that we can train people up and give them new skills and develop people in our business. And we also want to be an asset to the local economies that we work in. And then in terms of planet, we need to make sure we minimize waste, reduce carbon and help our customers create high-quality, long-lasting homes. And then thirdly, when it comes to products, we need to look at resource efficiency, alternate materials, recycled products and probably most importantly at the moment, the way we package and distribute our products. We do use a fair amount of plastic, and there's a lot of work going on in the business to reduce the amount of plastic that we use. So finally, if I turn to the outlook. Look, we remain optimistic that 2020, we will see recovery in the markets in which we operate, although we acknowledge it's been an extremely wet winter and it may take a little bit of time for the new construction projects that we anticipate to come through. We repeat what we said in January and that we expect the second -- or the first half of 2020 to be below our results, to be below that we saw in the first half of 2019. 2019 first half was really strong, dropped away a bit in the second half. What we expect is pretty much a mirror opposite of that when it comes to our 2020 performance. And then finally, look, we do remain watchful of the political, economic and, I guess, health uncertainties in the U.K. But we do believe that our market structure is fundamentally strong and the work we're doing in investing at Desford will deliver long-term shareholder value. So with that, let's open up to questions. David?

David O'Brien from Goodbody. Firstly, on the precast market, you talked about your appraisal of that market and maybe some of the disappointment over the last couple of years. Can you give us a sense of is that purely cyclical? Have we seen capacity being added? Is it slower pickup of offsite products than you would have expected or just simply competitive dynamics over a couple of years? You've also noted a satisfactory margin. Could you give us some color on medium term where can that margin get to? And is it purely based on the market picking up? Or what is within your own control? And finally, you've been -- you've given us some color on the difference between Block and Brick volumes through the year. Maybe some context on have pricing change evolved on the 2 product lines and what we should expect for 2020, please.

Okay. So if we start with precast, yes, I don't think it's particularly cyclical. I think it's the market dynamics. It is a fragmented market. There's lots of small businesses in that market. I think there's also been some investment made anticipating higher growth, particularly from the infrastructure spend, which hasn't come through yet. Lots of talk but less of it. So I think what we've seen is people pricing relatively low. And the fragmented market has, I guess, encouraged that. In terms of margins for that segment, look, we believe we should be targeting, and we've said this before, mid- to high single-digit margins. We don't expect margins from the precast concrete segment because of the structure and the lower barriers to entry to be where our Brick and Block margins are. But we certainly would strive for higher margins than we get there now. If you look across the concrete products sector, just look at the other businesses that sell concrete products, the margins are not where brick margins are. But we believe, yes, mid- to high single digit, I think, would be -- it is the aspiration that we have and we think over the medium to long term should be a reasonable aspiration. And then finally, talk about Brick and Block pricing. Last year, yes, we had a reasonable amount of cost inflation, a bit of energy inflation. We've delivered our cost inflation, as we've shown. I think as we go into this year, there's a little bit less inflationary pressure, which is good. Certainly, on the brick side, we've not yet -- so not all of our pricing anniversaries are January. Some come throughout the year. So I'm not going to put numbers out to that. That would commercially not be too wise. But we expect to deliver our cost inflation on the brick side. A bit tougher on blocks. I think overall, concrete products is a bit harder this year. So we're not quite as optimistic that as we were out doing price increases around October, November, December time, crucially before the general election, it was a tougher time to be negotiating prices, and we might see that the cost recovery on blocks is a bit harder this year and maybe not as positive as we expect bricks to be. Aynsley?

Aynsley Lammin from Canaccord. Just 2, please. One, given the kind of fall in energy cost, just wondered if you're hedged or to the extent you're hedged this year on energy, can you take advantage of lower cost maybe for 2021? And then secondly, just on the RM&I market, you're kind of saying you're seeing the good signs on the new housing. Just interested in your views a bit more on the RM&I, people on the ground saying they're beginning to see any green shoots. Just interested to what you've got to say there.

Do you want to pick up energy? And I'll pick up RM&I.

Yes. So on energy, we're pretty well hedged for 2020. So we're expecting a modest increase, so low single-digit increase across electricity and gas. A lot of that is actually certainly on the electricity side. You can kind of hedge the actual commodity rate, but there's a number of sort of add-ons and standing charges that are more government-controlled, and they are going up. So kind of low single digits would be how I'd look at our energy cost inflation for the year.

RM&I is a bit tougher. I mean there's lots of data around new house building. RM&I is obviously much more fragmented. I guess I can only give you the anecdotal comments that I'm getting from our builders, merchant customers that supply the RM&I market. And they are more positive. I mean anecdotally, small builders were pretty down come the end of last year and are now looking at longer -- better order books and longer lead times. So I think very difficult to put a number to it. But anecdotally, yes, it's a bit better. And if you talk to the very small builders, the consumer spend definitely dried up towards the back end of last year, and that's come back again. Clyde?

Clyde Lewis at Peel Hunt. A couple if I may, please, Stephen. Can you update us on where you are with PFA? Obviously, there's been a fair bit of change there over the last couple of years. And the second one I had really was sort of against both coming back to that concrete competition point. And obviously, you've got the big HS2 out there. But what can you do as a business to try and move your products, your service to a place where it's less exposed to just pricing and aggression from smaller family-run competitors?

Okay. Do you want to pick up the PFA one?

Yes. So PFA, we've made a lot of progress in the last few years. So in 2018, we kind of modified the Hams Hall plant to be able to take the conditioned ash. We did the same in 2019 at Newbury. So both of our plants can now take the conditioned ash. So we've achieved the first stage of decoupling our production from the power generation. So we've done that. And actually, in 2020, we expect probably about 60% of the ash that we use will actually be conditioned ash. We're still looking at sort of future improvements. We've got medium-term kind of conditioned ash supply secured. We're looking to kind of make that a more longer-term supply. And we also continue to look at further opportunities in the future, which may even include switching to sand, which is far more commonly used in Continental Europe. So I think we've removed the kind of the initial kind of concern, but we still got more to do to sort of totally remove that kind of risk going forward.

I think on precast, the answer to your question, it's around product, Clyde. It's about being less moving, where we can, away from the more commoditized product to particularly the architectural products. So we showed you the walls with the brick panels in. I mean that's our first major job and it is a big job. So it's really good to have the first job as a really big job. But we certainly think revising our sales mix between products is the most logical way to securing margin increase there. And that's what the current work is about. Christen?

Christen Hjorth from Numis. Three for me, please. First of all, obviously, that housing market was tougher last year, as you've alluded to. I think you previously said that it was maybe more the smaller and medium-sized house builders, which are more impacted. What are you hearing from them currently in terms of sentiment and things like that going forward? The second one, you've mentioned that you are in discussions with potential customers about taking product from Desford. What do you think that's replacing? Or is that the view that the market is going to get better, sort of displacing imports, et cetera? And then third, you talked about organic investment going forward. But in that context, can you sort of just touch on the age of your brickworks and whether there's a requirement to invest significantly because they get -- perhaps getting a little bit older or anything like that?

Okay. Should I pick up the first 2, Ben, and then let you pick up the third one? So if you look at the housing market, yes, I think if you look towards the back end of last year, a bit of nervousness in the market. When you open a new site, there's a lot of money gets pumped into that infrastructure, just putting the basic roads, drainage, energy connections, et cetera, in. I think the big builders at the moment are pretty cash rich. So it's not such a risk them starting new sites, even if there's a slight or putting money into the ground on new sites. I think for the small builder, where the money is borrowed or your own cash, I think that's a tougher decision. And what we saw across the industry was a drop in the number of new sites. Do you remember the number? The actual physical number?

No.

Anyway, we saw -- and the NHBC have published a number. There have been less sites operating and less new sites opened in 2019 than there were previously. What we can -- we can give you the number separately. But what we're seeing is a bit more confidence from those smaller builders about investing in those sites. Now it's the beginning of March. It's rained a lot. So I don't expect that to happen in the first few weeks of the year, but we do expect that to come through later on in the year. In terms of the Desford market, the capacity of the current plant is just over 80 million bricks per annum. The capacity of the new one will be 180 million. So there are more -- yes, there's 100 -- in round numbers, there's 100 million more bricks. But as I said, that's going to come through over 2022, 2023. So it's not all going to be chucked into the market on 1 day. The market for bricks in the U.K. at the moment is about 2.5 billion if you include the imports, and there's 400,000 imports. So even a very modest percentage growth, you would eat up that extra capacity, that extra supply and this 400 million imports. The underlying imports, the real specialist products, we would estimate to be near 150 million. So either way, we don't see gradually feeding that extra capacity into the market as a particular challenge or risk.

And just to finish off the point about the number of housing starts, so the new number of new sites opened in the year fell by 16%. So 2,900 relative to 3,450. So that's just an inclination of the movement. So on to the point around the organic investment, I think probably worth just sort of starting off of a bit of context back to sort of the recession. So as a business, HeidelbergCement were pretty unemotional about taking out surplus capacity during the downturn. Obviously, it was a business that was noncore to them. They didn't have any historical attachment to clay. So they were quite happy to get the bulldozer out and put it through the oldest and least efficient plants during the downturn. So we were probably more aggressive on that front than our competitors. So as we stand here today, we probably got, on average, and obviously everything's on average, a newer fleet of factories that are actually bigger than our competitors'. So I mean obviously, within those factories, there are different ages. Some of them will need replacing more than others. As a rough estimate, there's probably around 45 significant brick factories in the U.K., and 3 or 4 of them have been built or have had major work on them in the last sort of 15 years. So there is a natural kind of replacement cycle that needs to happen within the U.K. brick industry. And some of our projects were sort of -- we're looking at will sort of contribute to that. But it's also worth mentioning that when we do one of these projects, it wouldn't just be to replace worn-out capacity. It would actually make it bigger, better and reduce production costs. And we often say, actually, it's not to worry about people putting on capacity in good times. People shouldn't panic about that. We know Ibstock have just announced a new factory. But we need to remember that the industry does need to renew. And therefore, where you'd be worried is if we don't take out capacity during the slower times in the market. So we're continually looking at sort of how we keep our rolling kind of profile of renewals and upgrades going. We're focused on Desford, but we do have other opportunities after that. But yes, it's to reassure you, they won't be GBP 95 million.

As Ben said, if you look at immediately following the 2008 crash, the industry took out 20% of capacity. Half of that was our business, was HeidelbergCement at the time, was our business. That doesn't mean they starve the business of capital. So they shrunk the estate but still put money into keeping the plants, invested in the plants. Long term, I would say that's proved to be a really good strategy. Not sure that -- I think it was cash saving and cash consideration at the time, but it's actually proved to be a really good strategy and set our business up very well, I think, for the future. Alastair?

Alastair Stewart from Progressive Equity Research. A couple of questions. First, really following on from the house builder theme. You've dealt with the smaller guys. And the very largest players seem to be looking at no change to very slight up in volumes for 2020. You haven't really looked at the second tier, if you like, the larger private groups and so on and the smaller quoted guys. What sort of feedback are you getting from them right just now? That's the first question. The second question is quite quick, I think. Even within Desford, do you have scope for further tweaks to production debottlenecking and so on in the sort of mid- to long term? Or is it as big as it all -- as it gets?

Okay. Well, I love the fact we're talking about making the factory bigger even before it's been built. But I think as it stands, you've seen the picture of the piece of land there. We're putting something as big as we can on that piece of land, and we've also got the energy connections coming in. So unless there's a future technology change that isn't with us yet, that one's probably -- we're building something as big and efficient as we can. Now 5 years' time, that might have changed. But as we sit here today, we're sort of maxing out what we can do. We're not trying to save a few bob by taking some shortcuts and not maximizing what we can do. In terms of the house builder, no, you're right. We haven't talked much about the medium-sized house builder. But I think that's -- those guys are well funded. They're aggressive. They can see an opportunity to grow. They've got good products, good brands. So yes, I think that's where we will see growth, certainly from both a very small one, but most importantly, from that mid-tier. Yes, we're confident that we'll see growth from those. Jon?

Yes. Jon Bell from Deutsche Bank. Just 2 from me actually. Could you just elaborate a touch on the expected H1, H2 profit split in the very broadest of terms for this year? And then second one, really, any expectations or hopes for tomorrow's budget?

I'll do the profit split. So I think last year, our profit split was broadly 52% PBT in half 1 and then 48% half 2. We've obviously guided on half 1 being lower. So to reverse that might be a prudent approach. It's very difficult to get it to the nearest percent or so. But when we talk about a half 2 weighting, we're talking about a few percent, nothing more than that.

In terms of the budget expectations or hopes, look, I guess I don't expect this, but I think what would be good is the reform of stamp duty. There are a lot of older people living in larger properties who were not particularly incentivized to move out of those properties, particularly if they're on healthy pensions. And there could be something done there. . I also think -- and I think this is a real miss from government. They've amended the Help to Buy scheme so that after April this year -- next year, sorry, April '21, it's very much focused on first-time buyers. I think there's a massive opportunity to help key workers, NHS workers, placement teachers, et cetera, across the country. And if we were seeing something that would really benefit the housing market, I think that would be fantastic, a change in the Help to Buy to help the sort of key workers and the lower-income workers in the U.K. But I'm not expecting that. Nick, have we got any questions across the Internet?

So from Stephen Rawlinson, Applied Value, 2 questions. I think -- Stephen, forgive me, I think the first question regarding 2020 contract discussions, volumes and prices of house, but it's more or less been answered, but do shout if not. The second part is on energy. If oil prices remain low for a prolonged period, do your current contracts for energy supply allow you to take advantage of this?

We're pretty much bought forward for this year. Look, our job isn't about trying to beat the market. Our job is about knowing what our prices are when we agree our price increases with customers. And our big price -- our big costs certainly on the brick side, labor, energy and maintenance are our big areas of spend. Labor, we pretty much know what the spend is. Maintenance, we've got a pretty good idea. So the most volatile one is energy. So we're buying forward to try and make sure we've got a stable cost base. So yes, if the forward price drops, we will look to buy further, further ahead. And we're looking at -- we use a consultant to help us do this. Ben and I don't sit there with a crystal ball hoping. But we will look further ahead and where the energy market is against the long-term averages. But you've got to be careful because just a very short-term drop in today's energy price, oil price doesn't necessarily translate into the forward price, the 2-, 3-year price changing. But we will keep an eye on that. And yes, we'll buy further forward if we get the opportunity to lock in good prices.

No further questions from the webcast.

Okay. Anything else in the room? Charlie? One on the front.

Yes. Charlie Campbell, Liberum. Just a couple of questions on Continental Europe really. So I guess in terms of imports, there's a reasonable chance that the U.K. does better this year and next than the rest of the continent. So does that mean you might see more imports, all else being equal? And secondly, on the acquisition pipeline, you didn't say, but I imagine this is the case. But would all of that acquisition pipeline be in the U.K.? Just wondering whether there's any change to the ambitions on that front.

Okay. So if we start with imports, look, imports are still expensive. The value-to-weight ratio of bricks is horrible, particularly when bricks are half the price of a pint of milk. So I'm not sure just a slight slowdown in Europe is going to make a massive difference to the number of bricks coming. It's also worth saying that the brick plants that are in Holland, Belgium, Northern Germany are much busier than they were a few years ago. So we started talking about imports in earnest in 2014. Well, 6 years on, if you look at the number of bricks coming to the U.K. alone, there's 200 million more coming in. And some aspects of those local markets, particularly in the Netherlands and bits of France, have improved in that time. So I'm not foreseeing any massive change in the number of imports purely on a price basis. And then acquisition, look, we are a U.K.-only business with no immediate expectation to go overseas. I guess the thing that might make that attractive to us is if we saw something with a technology somewhere that we felt we could bring to this market. That isn't a leading comment. But in that case, we might look a bit further afield. But we're not sort of scouring the world looking for businesses that we can buy today. Okay. Well, thanks very much. I appreciate everyone risking their lives to come out and join us. So thanks very much.

Thanks so much, guys.