Forterra plc (FORT) Earnings Call Transcript & Summary

Well, good morning, and a very warm welcome to yet another virtual presentation. So this morning, Ben and I are going to do 2 things. We're going to update on the first half results, which we'll do first. And then we're going to update you on the Board's strategy review and our view for the next 10 years. So if we turn the page on to our operational and trading highlights. Look, we've had a good first half. Trading has been good, both the new build market and the home improvement market, both those aspects of the residential construction market have been strong. And as a result, our sales have been good. Our revenue from our Brick and Block segments is actually slightly ahead of 2019 levels, which is encouraging. And we've seen a strong EBITDA recovery following last year in that segment, and profits are almost back to the 2019 levels. We finished the year -- or the first half of the year with a net cash balance. And as we look ahead to the second half, we're starting to see some fairly chunky cost inflation biting in 1 or 2 areas, which we think will continue to grow. Nonetheless, we're announcing a modest upgrade in our expectations for the full year. And with that, I'll hand over to Ben.

Okay. So moving on to the next slide, Slide 6, key financials. Morning -- first of all, morning, everyone. I'm pleased to be here this morning reporting on a strong set of numbers. Hopefully, this is the last time I'll be doing this remotely and that for the next results, we'll be doing this face to face. First of all, I wanted to point out that we presented our half 1 financials predominantly against the 2019 comparative. We feel this is more meaningful than comparing to 2020, which was obviously distorted by the impacts of the pandemic and lockdown. The RNS does show both the 2020 and 2019 comparatives. And we've also added 2020 comparatives in the appendices of this presentation for your convenience. Overall, revenue was approximately 7% down on 2019, although as Stephen just mentioned, within Bricks and Blocks, revenue was marginally up on 2019, with the decrease, as expected, being in Bespoke Products driven by the closure of the Swadlincote hollowcore flooring plant last summer. We returned a strong EBITDA performance of GBP 37 million in the first half. There were no exceptional items, although we have incurred nonrecurring costs of approximately GBP 1 million relating to the further reorganization of the Bison business. Therefore, on an underlying basis, EBITDA for the first half was GBP 38 million, which represents a fall of approximately 10% on 2019. Our profit before tax was GBP 27.1 million, 7% -- 17% rather, down on 2019, although adjusting for nonunderlying costs reduces this deficit. When looking at EPS, it's worth a quick reminder that we issued an additional 28 million shares in July 2020. Hence, the metric shown has a greater adverse variance than the profit measures and effectively isn't essentially comparable. Our cash generation has always been a strength of this business, and it's particularly pleasing to see cash flow from operations of GBP 31.6 million delivered in the first half. Our balance sheet position remains strong with our net cash position stated before lease liabilities increasing to GBP 26 million. We are now declaring an interim dividend of 3.2p per share, and Stephen will provide more color on our capital allocation and dividend policies later on. So on that note, if we move on to the next slide, Slide 7, profit and loss. This slide repeats much of what I just explained on the previous slide. So I'm not going to dwell on it, but there are a couple of points I would like to draw out. The first is our EBITDA margin. We have delivered an EBITDA margin of 20.5%, which is almost back to 2019 levels. In fact, if you add the GBP 1 million of costs relating to the restructuring of the Bespoke Products business, then underlying EBITDA margin increases to just over 21%. It's also worth quickly explaining the increase in our effective tax rate. As I've said before, our tax affairs are pretty simple. So our tax rate is normally pretty close to the statutory rate of tax, which is currently 19%. This year, however, we see the effect of the forthcoming increase in the corporation tax rate to 25%, which will happen in April 2023. This impacts our deferred tax charge driving up the effective rate for this year to 21.3%, and we expect this rate to apply for the full year. We now move on to Slide 8, the Bricks and Blocks segmental. And here we see that revenues have increased marginally over 2019 levels, driven by strong new build and RMI markets. Sales volumes remained slightly below the 2019 levels. We don't disclose our exact volumes as given the highly consolidated markets that we operate in, this is commercially sensitive. However, government figures suggest that the U.K. brick industry dispatches for the 5 months ending in May were 3% behind the 2019 comparative and our volumes were not dissimilar from this. Aircrete block volumes in the period tracked slightly behind bricks driven by higher levels of inventory in the supply chain at the start of the period, although these volumes have since recovered. EBITDA of GBP 37.8 million and a margin of 26.1% represents a strong performance in the period, but it could have been even better had it not been for the operational challenges at the existing Desford factory, which is reaching the end of its life. Significant cost inflation has become a talking point in recent months. With the exception of the increasing cost of carbon credits, the impact on Bricks and Blocks in Half 1 was limited, although further cost inflation is expected in half 2 across categories, including energy, cement and transport. Gas prices have more than doubled since last summer. And whilst we were insulated by forward purchases in Half 1, this will have some impact in Half 2. We normally forward purchase our energy for the winter when costs are most volatile. And what we are seeing now with a significant increase in costs in the summer gas is very unusual. Selling prices have been increased to offset rising costs where possible, although given the annual nature of many of our supply agreements, it's possible that inflation may not be recovered in the second half, although in the longer term, we do remain confident in our ability to recover cost inflation. So we now move on to Slide 9, the Bespoke Products segmental. The 27% fall in revenue is in line with expectations following the closure of the hollowcore flooring facility at Swadlincote last year. Beam and block flooring also performed in line with expectations, with volumes of approximately 85% of the 2019 comparative. This segment faced the worst of the cost inflation in the first half, with increases approaching 40% in both steel, which we use for reinforcing the concrete; and also expanded polystyrene that we use in our insulated ground floor systems. Having restructured our flooring operations last year, we have recently announced our intention to restructure the Bison general precast operations. With our strategy now focused on producing smaller volumes of higher-margin products, we will close our facility at Swadlincote that sits alongside the already mothballed hollowcore plant with work transferring to our Somercotes facility. The Swadlincote site represents a valuable land asset, and we intend to maximize shareholder value either through a sale or through retaining the site for alternative use. Costs totaling GBP 1 million have been provided in respect of this restructuring, meaning that on an underlying basis, the segment contributed a positive EBITDA of GBP 200,000 after absorbing allocated central costs of GBP 2.6 million in the first half. We move on to the next slide, Slide 10, which is cash flow. As I said earlier, a key strength of our business has always been the ability to generate cash. It is pleasing that this has been demonstrated so strongly in the first half of the year. Operating cash flow of GBP 31.6 million was ahead of the 2019 comparative driven by the strong trading coupled with disciplined working capital management. We spent just over -- just under GBP 12 million on CapEx in the period with approximately GBP 10 million of this relating to the construction of our new brick factory at Desford. In terms of CapEx spend for the full year, we are guiding to around GBP 48 million with around GBP 40 million of this relating to Desford. The latest phasing projections for Desford are laid out on the slide, although whilst we remain confident in delivering the project inside the GBP 95 million budget, there was always likely to be some movement in these phasings driven by the exact timing of some large payments. Quickly moving on to Slide 11, working capital. So this slide summarizes our working capital position. Inventories ended 2020 at record low levels. And we expected to be able to replenish these inventories over the winter, but that wasn't possible given the strength of the demand as we've effectively sold everything we can make. So what we see is inventory still at very low levels. Trade receivables and payables are generally seasonal with the greater balances to be expected at the midyear rather than the year-end, and this is driven by activity levels. Moving on to Slide 12, and looking at our net debt and banking facilities. So the outcome of our strong cash performance is evident here. Our cash position remains in line with the last year end, but we have reduced our debt by GBP 10 million, thus we're increasing our net funds by the same amount. Also, after the balance sheet date, in July, we have repaid the remaining GBP 5 million outstanding on our revolving credit facility, such that if you exclude leases, for the first time since we listed, we are currently debt-free. In the period, we also exercised an extension of our banking facilities for a further year out to July 2025. An arrangement fee of GBP 400,000 was payable for this and was expensed in the period. We have also removed all references to LIBOR in our facility agreement with interest now calculated with reference to SONIA. As a reminder, we are paying a higher rate of interest this year in return for the covenant variations we obtained last year, although these obviously aren't now required. From next year, our borrowing reverts to a margin grid where assuming our borrowing remains under 1x leverage, our interest rate will be 1.75% above SONIA. Just a final word on leases. The increase in the lease liabilities you see on the slide is primarily due to the ongoing replacement of our distribution fleet, a nice picture of which is included earlier in this presentation. I would expect a further similar increase in Half 2. As we look ahead, our balance sheet places us in a strong position, and Stephen will talk more about this later in the presentation. In terms of the year-end cash position, we are guiding to our net debt, again, stated before leases, to be close to 0. I think that concludes my run-through of the numbers and our performance, and I'll now hand over to Stephen to talk about our markets more generally.

Okay. Thanks, Ben. So if we move on to Slide 14, I'm going to spend a couple of minutes talking more broadly about the market and our trading. Look, I think the housing market, both new build and the home improvement market, and the strength of it is well documented and probably doesn't need me to add to that. Our customers are positive. Our order books are very strong. And interestingly, construction output growth is at 24-year high in June. So we feel pretty comfortable and confident with the backdrop that we see in our broader market. Turning the page on to 15 to look a little bit more of the housing market. The housing market has clearly recovered very quickly, sort of, almost classic V-shape recovery. And what we're now seeing is the Construction Products Association forecasting both housing output and new build completions to have recovered back to 2019 levels during 2022. Flicking on to look at some of the fundamentals of the housing market on Slide 16. We believe they remain supportive. All of the fundamentals in the housing market that are detailed on the right hand side of the slide, and I've been through many times, remain supportive of our business. There's clearly still a significant gap between the government completions target and the number of houses being completed. And we think that's very positive for our business, and that helps us have confidence to continue to grow our business, and more importantly, invest in our business going forward. So what does that mean for the brick market on Slide 17. So the brick market has quickly recovered. Sales volumes have quickly recovered and correlated with the housing market recovery. Where we see now is brick inventories are at a record low. The manufacturers and distributors are holding less bricks, a lot less than they can hold. At the same time, we're seeing imports being relatively stable. I think what we're seeing from imports is my expectation is that they are unlikely to grow significantly because of domestic demand in the European countries where imported bricks are manufactured. And also, we're seeing significant growth in transportation costs, which will also impact imported bricks. So I think if you add all this stuff up, the indications are very positive for our business and for commissioning our Desford plant next year, which, as we've said before, will add 16% to our installed brick manufacturing capacity. So as we sit here today, I think the timing looks pretty positive. Moving on, as a business we're very committed to further improving our sustainability credentials. We've done a lot of work on this over the last few years, and we talked extensively about this in our full year trading update back in March. The goals continue to be incredibly important to us, and we've put a lot of our management time into our sustainability goals. And as we talked about when we issued our annual report and we talked about in March, the targets that we've set for the next 10 years are pretty ambitious, and therefore, need to occupy a lot of our time and be one of the more important things that we focus on within our business. So if I click on to Slide 19, and I'm just going to highlight a few of the things that we've done this year. And we're pleased with the progress that we've made in the first half of '21. So just to highlight a few bits and pieces: firstly, we are -- in the second half of the year, we will be trialing the addition of hydrogen into one of our kilns. This is a pretty big project for us. And not only do we want to see how the kiln performs with hydrogen in it, we want to see what happens to the product afterwards. So there's a lot of energy and effort going into really better understanding what hydrogen does rather than natural gas. And I'm optimistic that we'll be able to report back on that later in the year. Within our road transport fleet and forklift trucks and the mobile plant in our factories and quarries, we're trialing the use of hydrolyzed vegetable oil, otherwise known as biodiesel. That generates a 90% reduction in the carbon emitted rather than burning ordinary diesel. So again, an exciting project and all of the new vehicles that we're buying, including the vehicles that Ben talked about, are able to use this product rather than regular diesel. We've taken part alongside one of our customers this year in a large project funded by Innovate UK, aiming at reducing the carbon emitted through the production of precast concrete by 40%. So the results of the survey have been published literally in the last few days and -- survey -- projects, I should say, in the last few days. And we look forward to taking some of the learnings from that project and applying them to our business. And then finally, if I highlight where we are on plastic packaging. So we talked about a 25% reduction in plastic packaging by 2025, it was one of our targets that we've set. With our Kirton brick plant in Nottingham, we've significantly reduced already the amount of plastic packaging. And last week, we installed trial machine at our Accrington brick factory aiming again to significantly reduce the amount of plastic packaging. If that trial and the new packaging format is successful, we'll be looking to roll that out across the rest of our estate over the coming months and years.

Just to clarify, that's 50% by 2025. You said 25%.

Apologies. So if I move on to the outlook on Slide 21. The market outlook is good. Trading is positive. We look forward to a second half with trading continuing as it has in the first half. As I said earlier, our order books are good and customer sentiment is very positive. The fundamentals for our business, we believe, are good and the long-term housing market we are confident in. I guess we do need to talk about, as Ben did earlier, inflation and some labor shortages, and we think that will have some impact on the second half and probably mean that our full year is slightly half 1 weighted. But nonetheless, having said that, we feel confident today to be guiding to a modest increase in our expectations for the full year. So that's the first half done. Let's move on to the topic of strategy and capital application -- allocation, I should say. So moving on to Slide 23. We said earlier in the year, the Board was reviewing our strategy and reviewing our use of cash and capital and that we report back on it now. I guess, conveniently, this is 5 years since our IPO. And also, we raised equity last summer to support the balance sheet. So it's good timing, I think, to be reviewing our strategy and what we do with our money. And in summary, before I go through this in a bit more detail, our focus is going to be very much on organic capital investment and increased returns to shareholders. The new Desford brick factory that we've talked about many, many times, and I'll go through in a little bit more detail in a second, will be commissioned next year. And as Ben said, it's progressing to timetable and budget. We're really pleased this morning to be announcing another significant capital investment project, and that's spending GBP 27 million on our Wilnecote brick factory in Staffordshire, which will increase the plant capacity by 20% and generate a further GBP 7 million of annual EBITDA. We're also really pleased today to be announcing an increase in our dividend ratio. So last year or a couple of years ago, we said we would set a payout ratio of 45%. Today, we're increasing that to 55%, and that will be effective from 2021 earnings and our interim dividend that we've announced today of 3.2p per share reflects this policy. And then finally, as Ben talked about, we expect our leverage to go up to 1% -- to 1x EBITDA, except maybe in the short term, when we're happy to let it go up to around 1.5x. So let's talk about the use of cash on Page 24. So I think it's hopefully well known by analysts and our shareholders that our business is very cash generative. Once we've built our assets, they are there for a long time and generate significant cash. So over the next decade, we expect to deploy around GBP 200 million in organic strategic investment in our business. And really what we're focused on are 5 key areas as we've listed on the slide. So we want to grow our production capacity. We see room in the market to gradually grow and add further capacity. We also want to continue to improve our efficiency. So that's taking cost out, reducing energy use, reducing greenhouse gas emissions. These are all really important, particularly thinking on our sustainability credentials. I guess we also really importantly want to be able to extend our product range. This isn't a wholesale diversification. This is extending into different solutions and offerings to our existing customer base, and we see good potential to gradually extend and enhance our product base. And then lastly, the customer experience. One of the areas that we've continued to invest this year is making sure we've got more haulage trucks available and also in our systems to look after our customers and better service our customers. The next big area is dividends. We've talked about dividends and the progressive policy that will start this year with a 55% of earnings. And then finally, you've got M&A and supplementary returns, and we see them as being intrinsically linked. We will continue to pursue appropriate M&A in adjacent and complementary product areas. But as it's well known, our sector is pretty consolidated. So if in due course, the M&A opportunities are not forthcoming at the right price, we will look to increase or to make supplementary returns to shareholders. So skipping on to 25. So we talked about new products, big capital projects, improving our sustainability credentials. We need resource and skills to do this. The more projects that we run, the more R&D that we do both into new products and into how we make those products, we need people to run those product -- projects, and we need skills in our business, different skills and more skilled people in our business. So one thing that we are starting to do is build our skill base and our resource base, which will add some revenue costs. We expect this will add GBP 2 million to GBP 3 million a year of cost, of operating cost. But obviously, in due course, we expect to get a return for that as we grow our business and increase our product range and increase our profitability and cash flow. So both Ben and I have talked about Desford a couple of times. And look, the factory will be commissioned next year. It's proceeding to plan. We think for the reasons that we've said, this is pretty good timing. And last year, we had the big dilemma in sort of May, June last year, do we keep investing in the middle of a pandemic where most of our factories were shut or do we stop investing. And as I think is well known, we decided to continue investing. And I think with the benefit of hindsight, that's proved to be a good decision. And actually, we are pleased that we've kept that project running. And as the market looks today, commissioning next year looks to be good timing. As a quick reminder, for those of you that are new to the project, this is a GBP 95 million investment, building a new factory in Desford in Leicestershire adjacent to a retired existing factory, commissioned next year will generate almost 100 million additional bricks for us to sell, which is about 16% of our installed capacity, and in due course, would generate an additional -- or sorry, an annual EBITDA of GBP 20 million. So as I said earlier, we're really pleased, on Slide 27, to be announcing a further investment. So the Wilnecote factory is a relatively small factory in Tamworth in Staffordshire, sits on a high-quality clay reserve, and produces a range of high-quality products, generally sold into the architect specification market. So for our GBP 27 million, what do we get? Well, we obviously get a renewed plant, and therefore, significantly extending the life of the plant. But more importantly, we get a 20% increase in production capacity. We reduce emissions. We reduce the unit cost of the production, and we are able to enhance our product range. So skipping over on to Slide 28. This architect clearly specified brick market, I think Forterra has been historically underrepresented in. Desford is all about volume for the new volume housebuilding. So this investment in Wilnecote is a very slight diversification, but within the brick market that we already know and understand well. The project will start next year, and the plant will be closed for approximately 9 months. So unlike the Desford factory, this is a rebuild of an existing plant. That means, next year, we'll lose about GBP 2.5 million worth of EBITDA, and then we'll commission the plant in 2023. And then when we're selling the capacity from the plant, we'll be generating a further GBP 7 million of EBITDA. So we see this as an extremely attractive investment project, a little bit like Desford, relatively low risk, significant returns. Although like all organic investment projects, you have to wait for a little bit of time for it to fully deliver. Talked about the dividends already. And I think we're in a position where we've got a net cash position, and we've got a significant expectation in further growth of operating cash flow and particularly as the new Desford plant comes on. So what we're talking about here is saying, look, we want to prioritize organic capital investment, which takes a little bit of time to come through, but our balance sheet is such that we can reward shareholders now with an increased dividend starting in 2021 as well as continuing to invest. So Slide 30, I won't dwell on, but it summarizes our capital allocation priorities. So strategic capital investment, progressive ordinary dividend, acquisitions as suitable opportunities arise. And if they don't, we'll look at supplementary returns to shareholders. So just to close before we open to questions. I think the outlook for our business is positive. Our strategy is looking at creating long-term shareholder value. And we believe that prioritizing organic capital investment is the best way to create long-term shareholder value. But clearly, we can increase returns in the short term due to the strength of our balance sheet and cash generation. So it's been a good first half, supported by the construction -- the housing, the residential construction markets. Over the next decade, we expect to generate significant cash flow that we can allocate along the priorities that I've just discussed. And our outlook for both the rest of this year and the market looking forward and the fundamentals of the market is positive. So with that, I'll hand back to Jordan, and we'll open up for questions.

[Operator Instructions] Our first question comes from Yves Bromehead of BNP Paribas.

I'll take them one by a time, if that's okay. First one, I just wanted to know if you could provide a bit more clarity on your outlook. You seem quite confident, but you're also talking about higher inflationary headwinds, the carbon costs going up, some shortages. So I understand you're not providing a specific guidance for H2, but maybe you could help us in understanding whether you can confirm that H2 EBITDA will be sequentially lower than H1? And maybe help us understand what level of margin we should have in mind for H2 given the comments that you've made so far?

Can you take?

Yes, I think, first of all, the market remains strong. So the market, we're not expecting any significant change in the market relative to half 1. The carbon costs you mentioned, they're generally fairly consistent through the year. Where we're seeing the real inflation in the second half is energy. As I said earlier, we normally forward purchase our energy, but focus on the winter. The energy cost for gas this summer has pretty much doubled over the last 6 months or so, and that's taken us by surprise a little bit. So what we're guiding to is that we said half 1 will be -- the result will be weighted towards half 1. The reasons for that, of course, are several fold, being the inflation, but also the timing of factory shutdowns. So in a normal year, the factory shutdowns are generally spread pretty evenly through the year. But what we saw last year, because of the impact of the pandemic, a lot of the factories were closed for up to 6 months, and we generally did maintenance before they reopened last autumn. So what that's caused in the first half of '21, the factories didn't need a great deal of maintenance. What we're seeing now is in the second half, some of those factories have now run almost a year with very little maintenance shutdowns, and now they're due. So we are seeing a sort of a weighting of maintenance towards the second half. So in terms of the numbers, I mean, we said that we expect the consensus to -- basically our results to be beyond management expect -- moderately above management expectations. So that's what it gives a guide for the full year. And as I said, we said it's going to be weighted towards half 1, so you can expect the half 2 number to be modestly lower than the half 1 numbers fitting into the sort of the overall guidance relative to our previous expectations.

Great. Maybe my second question is, could you put a number on the Desford plant's reliability issues and how much that impacted the margins? Maybe in absolute terms, what was the GBP million impact of that one in H1?

Between GBP 1 million and GBP 2 million.

Great. And maybe my last question is on the Bespoke. I wanted to understand, I mean, you've done a Board strategy review of the division. But did that actually also include the possibility of a sale and an exit plan. I'm just asking this because, obviously, it's been now a few years that you're trying to restructure the business, and it's quite a slow process right now in terms of getting it back to the profitability levels that you would like to achieve. So that would be just the first part of the question. Maybe the second part is, how should we think about the profitability of that business going ahead towards 2022 once you've done some of the restructuring that you've announced today?

Let me take the first bit, and then Ben can take the second bit. So yes, very much part of the strategic review. And if you look at our precast concrete business, you can effectively split it into 2. So the first part is flooring, that we sell the precast concrete floors, both ground floors and upper floors, to the same customers as our brick and block and there are both operational and commercial synergies between that business and our brick and block business. So very much part of our strategy and that continues. And we've separated that from a management point of view from our Bespoke precast bit. And as Ben talked about, we've consolidated our Bespoke precast offering into one factory. So we've gone into our Somercotes factory, which is up in Derby, and we will exit the site, the Swadlincote site over the next few months. And our focus will be, as Ben talked about, producing less but going for higher margin, more value-add innovative products where we can provide different solutions to our customers. And then from an exit plan point of view, as Ben briefly covered, we are working on a number of options, one of which is selling the site at Swadlincote, and we'll hopefully report back over the coming months on what we do there.

Yes. In terms of the financials, I think it is worth just sort of reiterating that although they don't look stellar in terms of the way they're reported, I mean, first of all, the business does absorb a significant amount of the group's overall overhead, the way we allocate the overheads between the Brick and Block and the Bespoke Product segments. So I think it's about GBP 2.6 million of overhead allocated to that segment in the first half. So if you look at that on a full year basis, before kind of we report any external EBITDA profit, it's already absorbed about GBP 5 million of overhead, and a lot of our overhead is pretty fixed. For example, it includes a percentage of my salary and a percentage of Stephen's salary. And those costs are still going to be in the group regardless of whether we've got the bespoke products business there. So we do need to sort of recognize that it is cash generative, and it is contributing before group overheads. Obviously, we want to grow the profitability of both the flooring business, the challenge for the flooring business at the moment is obviously the cost inflation, but we do want to increase the margins of that business and grow the returns that we make. And then the general precast, the Bespoke precast, as Stephen called out, that's more of a sort of a sea, there's a lot of innovation going in there where we talk about the additional innovation in R&D. That's an area where we want to deploy a lot of resource. And we see that as a future route to getting our products, so for example, bricks, into buildings where bricks would not normally be used. So off-site construction, modular construction, precast panels maybe with brick facing. It's actually developing new markets for our Brick and Block business. So there's a synergy there. But that's a longer-term growth strategy, and it's obviously harder to predict when those returns will come through. So the other point I'd make as well is just that this business does have a much lower capital employed than the Brick and Block business. So we've got a business that's not going to need a great deal of capital in the coming years, it's making a positive contribution to group cash flow. Yes, we'd like it to improve, but it probably -- the results maybe don't show it in the most positive light. But when you look at the allocation of overheads, it's still a business that's making a positive contribution for us.

Maybe just on the margin point and profitability going forward, how should we expect on that? Any guidance on that would be...

I mean I think the numbers are fairly small. And so it's probably easier to think about absolute numbers or absolute EBITDA rather than margins. But this year, if you -- in the first half, if you add back the nonrecurring GBP 1 million of restructuring costs, the business effectively broke even. I think that's our target for the second half as well, given the cost inflation that we're seeing in the short term in that business. Beyond that, if we can add GBP 1 million or GBP 2 million to EBITDA over the next couple of years. I think that would be a decent outcome and hopefully beyond that grow it further.

Our next question comes from Ami Galla of Citigroup.

Just a few questions from me. The first one was really on the market outlook that you're talking about. Could you give us a sense of where RMI demand stands versus '19 levels? I mean, again, based on the sort of numbers that you've given, it's definitely above that, but if you can give us some color to what range is the RMI market trending today for your business? The second one really is on the Wilnecote brick factory redevelopment. I mean, can you give us some color on that, on the sort of market for the high-spec bricks that you're talking about? At this stage, is the dominant player supplying to this market really one of the 3 key supply -- bricks producers in the country? Or is it mainly an import-driven market that you're really making inroads on? And the third one is on the aggregate blocks business. As we think about the sort of new build regs in the newbuilding market, is there any key shift that you're seeing among house builders? Do you think they are going to step away more materially from the aggregate blocks side of the business?

Okay. So let's take this one at a time. So if we look at the RMI market, Ami, look, the RMI market is massive, yes. And it goes from tins of paint to new boilers to people doing garden landscaping. So there are clearly aspects of that market that are going gangbusters, really strong. And we hear that from our peer companies in the sector. Our involvement in that market is very much the home extension market, making a property bigger market rather than just making it a bit nicer. We are seeing growth in sales into the RMI market. We actually think there's probably more growth that could be had, but there is a shortage of trained people to do the work. So our experiences relative to 2019 is positive, but actually, we think it could probably be more positive still. So I think some of the numbers that are quoted for the growth in the RMI market are probably bigger than the growth that we see, and that's because of the breadth of the market. If we look at Wilnecote, yes, we estimate that architectural specification market to be around 400 million bricks a year. And relative to our size and share of the market, we're underrepresented. But yes, all of the other 3 quoted brick players and indeed importers are in that market. And we see definitely an opportunity to displace a few imports by increasing the range of products that we make domestically at Wilnecote, which again, the number of imports running at about 16% of the brick market at the moment, we see our ability to displace a little bit of that with Desford coming on and also with Wilnecote coming on. And then your last question on aggregate blocks is a really good question. The -- as house builders have to improve the insulating properties of their homes and as the standards and codes drive that, there is, I think, probably a degree of shift towards our other product, which is the aerated concrete block, the aircrete block that we sell under the Thermalite brand which, by its very nature, has an insulating property. But that said, the construction market is very broad. And the jobbing builder large pieces of work that require a very strong block, there's still a significant market there for aggregate concrete blocks. So I think for the internal leaf of the cavity wall, you've probably seen a drive towards aerated concrete for some years now. Luckily, timber is in short supply. There's a global shortage of timber. So that's not a great solution. And that means that we've seen the aerated concrete block demand grow, but there is still, across the wider construction market, a significant market there for aggregate blocks.

Our next question comes from Christen Hjorth of Numis.

Three questions from me, if that's okay. First one, just sort of looking at this GBP 200 million of organic investment over the next decade, if those -- have the potential projects already been identified there? And what should we think about in terms of returns on those investments? Is Wilnecote a good example of the sort of returns we should expect on average? The second one is, obviously, great performance on the balance sheet. There will be some CapEx, I'm sure, as you've alluded to going into H2. But looking for this year and most notably 2022, the balance sheet is in a very strong position relative to that 1x net debt-to-EBITDA limit. As a result, is 2022 the year that we should potentially expect either bolt-on M&A and/or supplementary returns if the market remains supportive. And then the third question is just on imports because you obviously mentioned better markets in Benelux, et cetera, where those imports come from plus higher transportation costs. So 2 points there. So does that dynamic make you feel a lot more confident about Desford ramping up against that backdrop? And also in terms of pricing, as we move into next year, if imports are harder to come by and more expensive, does that give more scope for the U.K.-produced bricks to move up in terms of price?

Do you want to take the first 2? And I'll pick up the last one.

Yes. Yes. So in terms of the GBP 200 million, yes, we have a pipeline of projects that have been identified. Some of those we've even talked about before. So when we listed, we talked about the site we've got near Leeds, a site of a former brick factory, where we could potentially build a new factory at Swillington, and that remains very much on the agenda at some stage in the future. So we have a range of projects that are identified. We're progressing. These things don't -- you don't sort of suddenly decide to do these things in the morning and enact them in the afternoon. They need a lot of work, development. So we've got a number of projects, and we'll look to bring them forward in the next decade at the right period of time. In terms of the returns, I mean, I think that each project needs to be considered on its merits. Wilnecote probably has exceptionally high returns. I wouldn't necessarily expect the returns to be as high as Wilnecote, but we talked about the returns of Desford with an IRR in excess of 15% over 20 years. And I mean that's a reasonable guide. But be pretty sure that the projects that we take forward will have returns sort of well above a hurdle rate of our cost of capital. So in terms of our balance sheet and the net debt and the supplementary returns. Look, I think the return -- I mean this is a sort of a vision over a decade. So what we're not going to sort of commit to do is taking the net debt -- sorry, taking the leverage up to 1x at the end of each year and then paying a supplementary. That's not how it's going to work. It's going to work over a period of a decade. Look, M&A doesn't come around exactly when you want it to and there's an element of needing to retain firepower to do the M&A should it come along. And also the capital projects that we're doing, we're looking at Desford now, we are looking at Wilnecote. We need to then consider when the next announcement is. So I don't want to set any specific expectations around supplementaries either this year or next year. But what we're saying is over that 10-year period, if we're not able to deploy the capital in our own organic investment or proceed with M&A, we will look to make supplementary returns.

Christen, let me pick up on your question on prices. So look, I think it's pretty well documented that our business has been successful over the years in passing on cost inflation through to our customer base. What I think we've seen in the very short term is an unexpected increase in the cost of carbon allowances. We've also seen an increase in the price of gas. And probably more importantly, we've seen an increase in the cost of transport. What I think is well understood by our investor base is that our customer relationships are long term, and we're a key part of the supply chain to our key housebuilding customers. And we don't change our prices every 5 minutes. And we have annual pricing agreements with those customers. And as we move into next year, we're looking at gas, carbon, transport and I suspect some labor price increases as we go into 2022, and we expect to be passing those back through to our customers. And I think the increased transport costs will mean that the alternative, which is an imported brick, will become more expensive, which supports our case for increasing customers. But I think our track record means that we will be able to continue doing this.

Excellent. And just on the Desford point, I assume that, that was going to displace imports. If that dynamic, you're increasingly confident of being able to do that?

Yes, I think Desford does 2 things. The market is growing. And if you look at where the government want housing output to be, even if it doesn't quite get there, if it grows further towards there, there's the need for more bricks. And at the same time, there's 300 million to 400 million bricks coming in from Continental Europe. So adding 100 million bricks, where we're looking at a growing market and a high level of imports, yes, we're confident that we can sell those bricks.

Our next question comes from Clyde Lewis of Peel Hunt.

I think I've got maybe 3 or 4. I suppose one on stocks. Stephen, you sort of highlighted, obviously, again, the very low levels that are out there now in the brick industry. How do you think that gets back to a more normal level? Because if [Audio Gap] it's been more comfortably sat, I suppose. So is there a real sort of tight situation there for the foreseeable 2 or 3 years, I suppose that's the first question. The second one I had was on, I suppose, going back to Ami's comment around sort of concrete capacity. And I'm thinking more Thermalite rather than sort of just basic concrete blocks. But are you looking at increasing capacity there? And I suppose, attached to that question is, where are sort of situations in terms of the raw materials around fly ash, in particular? I mean you haven't mentioned at this time, I'm sort of assuming you found alternative raw material sources. So I'm just wondering if you can give us a little bit of an update on that one? And the last one I had was, I suppose, on the house builders and how they are starting to engage with you about trying to improve carbon footprint of your products so that they can obviously push their agenda forward in terms of getting to a 0 carbon output for new housing?

Okay. So let's pick those up one by one. So look, stocks are low. And the best way for us is to go back up. [Audio Gap] last winter was an unusual trading pattern. So the stamp duty holiday meant that our customers built pretty hard over the winter. And so when we brought our plants back on after they've been shut, they were shut at the end of March when Boris told us all to go home, and as the industry reopened from sort of June onwards, we started to reopen our plants. Now the market came back very, very fast and very, very hard, which was great. And that meant we went into the winter with low stocks. And then the demand continued at sort of peak level through the winter, which meant we weren't really able to build any stocks. Now it's not that season of our business, but our factories tend to work at a steady level of output and construction is a bit more summer dominated. So typically, over a winter, we build a little more. So I think there's an opportunity maybe if we get back to a more normal seasonal trading pattern this year for us to build a bit of stock over the winter, which would be good. But that said, if the market continues like it is, and this coming winter is like the last winter, then we probably won't. So I suspect we're in for a period of time where this is the, to use a horribly overused phrase, this is probably the new normal where we're going to run with much lower levels of inventory. And that means we have to work closely with our customers. We have to, in some cases, slightly reduce the number of bricks that we make in each factory. And most importantly, we need a much more better forward view, which we get from our customers, actually, and it's become much more of a supply chain partnership over the last few years rather than just someone ringing up and placing an order. Thermalite, yes, you're absolutely right. As we look at organic capital investment, Thermalite is certainly a key area that we're looking at. And you're bang on about raw materials. So it's not just fly ash, but you can also make aerated concrete out of the ground sand, a high silica content sand. So we -- one of the projects that we're running is looking at alternate raw materials to make Thermalite blocks. And it's also looking at where would be the best geographical locations to do that. So when I talked about adding resource into our business, adding resource into further looking at expanding our Thermalite business is something that's actively happening now. And then you asked about carbon footprint and house builders. Look, I think we all know that all structural building products and maybe with the exception of timber, but that's slightly confused because it's imported from the other side of the world and there's not enough of it anyway, but all of the structural building products emit carbon. And where our customers are, rightly, is, they're pushing us, as the market is, to become more sustained built, to produce less carbon. And no one is saying, "Actually, we're not -- we're going to stop building anything tomorrow morning because of the carbon emitted." What the message is, is we want to see that you're on a journey and reducing that. And part of our organic investment is to reduce the carbon that we emit and that has been very welcomed by our customer base.

[Operator Instructions] Our next question comes from Alastair Stewart of Progressive Equity Research.

Just one broad question really from me following on from Clyde's question and it's based on stock. Could you give us a bit more color on delivery times, how they've trended? Is there any particular type of product that you're facing the biggest challenges with. My assumption would be it's probably housebuilding rather than -- housebuilding bricks rather than the more architectural products of flattened somehow -- am I right on that? And is -- are the haulage driver shortages adding to this? And finally, you've talked about some phasing of maintenance work continuing into the second half. Is that likely to make the low stocks even lower?

So in terms of the products where we've got stock challenges, it's effectively bricks, blocks and floor beams. So it's pretty much everything, Alastair. It's across the board. So where we've got product or had a bit more product at some factories, customers have switched into those factories and are taking product from those factories. So this is fairly across the board. In terms of driver shortages and haulage shortages, yes, that's had a bit of an impact. There's been a little bit of impact in terms of shortages of cement in the last few months, which has impacted our concrete products and clearly not our clay products, but has slightly impacted our concrete products. I think we've worked well with our suppliers and being pretty innovative on the way we make stuff. And clearly, in the summer when the weather is warmer, you can get a faster turnaround time on curing concrete. In terms of inbound raw material, we have some good supplier relationships there who have kept us going. So we haven't had an issue with transport getting products in. We have had an issue with some raw material availability. It's more outbound transport that's been a challenge. And I think having our own fleet has been a real advantage this year. It's a question that we often ask ourselves, is having our own fleet the right thing or not. Some companies choose to outsource, some do it themselves. But I think this year, it's proved definitely to be a real advantage. And then in terms of the maintenance shutdowns, look, I think the reality is if we don't do maintenance, we end up with a much bigger problem because we end up with unreliable plant. And I think, much as we'd love to say we never need to stop a plant, we do. And our customers would rather work with us knowing there's a planned maintenance that we know when it's coming, we can be very transparent with them about when that is rather than a lot of unplanned stoppages. So as much as anything, we try to make our maintenance something which is visible and well known and well planned in advance.

Our next question comes from Glynis Johnson of Jefferies.

Maybe my question is a bit more big picture. What we've seen from your Wilnecote investment is actually, there are certain lines where you can increase capacity or change a factory, and will drive quite substantial improvements. I'm just wondering across investing in your asset base, are you now getting to a stage where that has largely been done? Or are there still opportunities across your assets? [ Could be ] the next CapEx program coming in a few more years that we'll keep driving these sorts of more substantial increases rather than sort of incremental creep?

Yes. Glynis, I think the little, tiny incremental spend, GBP 1 million or GBP 3 million or GBP 4 million to make something a bit better, I think we've done most of those. So we are looking at bigger projects. I mean Wilnecote, it's a fairly significant project. The footprint of the plant though is the same, but we're putting in new kiln, new dryers, new brick handling equipment. So we're sort of ripping a chunk of the guts out and putting it back in, but using the same -- the fabric of the site stays the same. I think where we are more likely to continue to invest is on existing mineral reserves and existing factory footprint, so be that a completely new plant like Desford is, but at an existing location with an existing mineral reserve or like Wilnecote, where it's actually ripping out the interior of a factory and putting a new interior in effectively. We talked in the past about our piece of land up at Swillington, just outside Leeds where we have planning consent to build a plant that could produce 100 million bricks a year. Again, at the moment, there's nothing there. There's just a large concrete slab and a big hole in the ground. But there are extensive long-term mineral reserves there. And bearing in mind, you've got road connections, utility connections, planning consent and a mineral reserve. We see that developing out that kind of site and project is more likely to be the way we go forward. Probably the exception to that is the Thermalite product, where we're looking at alternate raw materials. Therefore, we will probably look at adding a site in a different location. So yes, bigger projects, they may be more like Desford or more like Wilnecote, but will more likely be more significant capital projects.

We have no further audio questions, but have had some sent in to us. The first question from Flor O'Donoghue. He says, "Thank you for the update and the very helpful detail. Re the new guidance, where does it stand, this existing EBITDA consensus?

I think as we said in the announcement, I think we're saying -- I think the consensus at the moment, I think, depends on your sources, there is one outlier in that. If you include the outlier, the consensus EBITDA is up around GBP 68 million. If you take out the outlier, it's just below GBP 66 million. So I think we apply -- we use the language modestly above. So if you apply the modestly above to the GBP 66 million, I think you'd get to broadly the right place.

We've also had some questions in from [ Stephen Hall ]. Firstly asking, what is your view on the brick slips market? And do you see this as a future focus, i.e., as well as being an alternative to cladding? Could this grow as a method to speed up residential construction?

Yes. Brick slips is an interesting market. And I think in terms of residential construction, we're probably a little way away from that because it is a complete redesign of the way a house is built. I think in terms of cladding higher buildings or cladding modular buildings, so lightweight modular buildings, there is -- so that -- I believe that is a growth market. And as we consider how we -- how and when we deploy our organic investment over the next 10 years, we need to make sure that brick slips is part of that consideration.

Also, can you please explain further the impact and materiality to the results of carbon credits?

Yes, sure. I'll pick that one up. So we are now participating in the U.K. Emissions Trading Scheme. So previously, we were in the European Union scheme. So the price of carbon credits in the EU scheme, they increased pretty drastically in the first half of this year. So last year, we probably spent somewhere in the region of GBP 2 million, GBP 2.5 million on carbon credits. This year, we've now -- the U.K. scheme wasn't launched until May, and there was a bit of noise to start with trying to work out where those costs would settle relative to the EU, and they settled broadly just fractionally below the EU cost. So at the moment, I would envisage our carbon cost for the year being somewhere in the region from GBP 4.5 million to GBP 5 million relative to the GBP 2 million to GBP 2.5 million last year.

We've also had a question sent in from [ Shane Carberry ]. Firstly, you gave some useful color on brick and block revenues momentum through H1. Can you give us any color on, firstly, how momentum has progressed through July, realize the sensitivities here? And two, how we should be thinking about volumes versus 2019 for H2 as a whole?

Okay. I'll take that one up. So I think some people spotted it when we did the announcement in May for the AGM that we said that the brick and block revenues were up 2.5% at that period and now they dropped back a bit. So that tells us that in May and June, the volumes were slightly back behind 2019 comparative. It's a bit of a dangerous game looking at this by month. So if you look at January, February and March, the volumes were really strong and actually were ahead of 2019 to the point that we knew that wouldn't continue, and that was timing driven by the boost ahead of the stamp duty holiday. I think where we are now, we see volumes broadly around 2019 or just below. July was, from memory, probably the most difficult month of 2019. That was when we realized that things weren't going to be great and actually the referendum and all the Brexit hysteria, whether Brexit is going to happen or not, sort of started coming to a head. So we've got a slightly weak comparative to July. And therefore, the volumes look sort of slightly better than that at the moment. But for the whole year, I'm still expecting sort of volumes for the second half probably to be just fractionally below the 2019 levels.

And secondly, can you give us any further color on how you're thinking about the GBP 200 million of capital to be deployed over the next 10 years, i.e., any indicative splits in terms of what will be spent on increased capacity or spent on efficiencies, et cetera?

I think there's a really easy answer to that. It's very difficult to actually box the capital into those brackets anyway. So I think most of the capital projects we do will potentially address capacity, efficiency and sustainability at the same time. It's actually quite hard to separate them. So take the Desford factory that we're building. That's additional capacity, it's going to be way more efficient, and then it also through being more efficient and burning a lot less gas, it will be much more sustainable as well. The same applies to Wilnecote. So I think most of the projects you see us do will probably tick all of those. I don't think we would do anything that doesn't help the sustainability. And if we're going to add new capacity, it's always going to be more efficient than the old capacity that we've got. So I think you'll see that each of the projects does -- each of certainly the big projects will try to tick all of those boxes.

Excellent. We have no further questions on the line, so I'll hand back.

Okay. Look, thank you very much for dialing in. I appreciate you all giving up the time. And as Ben said, hopefully, next time, we'll see you face to face and have a cup of coffee with you. So thanks very much.

Thank you, everyone.