Forterra plc (FORT) Earnings Call Transcript & Summary

Good morning, and welcome to our 2022 results presentation. Firstly, it's great to see so many people in the room. Thank you for traveling. So, let's click off looking at a few highlights. So it's our highest profit yet, 2022, best result we've had. Clearly, we're really pleased with that. And this is before we've opened the new factories that we're building, which we'll talk about a little more as we go on. I think we did a good job last year in managing the cost inflation. Clearly, cost inflation was the topic of 2022, and our commercial team did a great job in passing those cost increases through to our customers. Last year, we spent GBP 44 million on capital expenditure, reinvesting in our business and we also returned GBP 64 million to our shareholders. And on top of that, we're pleased to be recommending what will be the highest dividend yet. Before I hand over to Ben, who will tell you how many beans he counted last year, we -- just a reminder of our investment and the investments that we've made in the business. So we're currently running 3 large strategic projects, investing GBP 137 million in growing our business, both -- we're adding capacity, improving efficiency and decarbonizing. And as we'll talk about a little bit more later in the presentation, we're now at the point of starting to see the benefits of those investments come through. So with that, let me hand over to Ben.

Good morning, everyone. I'm pleased to be here today reporting on an excellent set of 2022 results. The story of 2022 is one of strong trading, which only weakened right at the end of the year. Cost inflation was a defining feature of 2022, although our agile approach to pricing allowed us to successfully recover input cost inflation. Revenues increased by 23% on a full year basis to GBP 456 million, with brick prices especially increasing on multiple occasions during the year in response to rising costs with the full year benefit not visible in the 2022 P&L. Our EBITDA increased by 27% to GBP 89.2 million with PBT improving by almost 40% to GBP 70.6 million, assisted by static depreciation charges and a reduction in our finance expense. I would also like to highlight our EBITDA margin increasing by 60 basis points to 19.6%, demonstrating our success in recovering input cost inflation. The benefit of the GBP 40 million share buyback completed in the year, with 15.8 million shares repurchased and subsequently canceled increases the year-on-year growth in EPS to over 50% at GBP 0.264 per share. Our cash generation remained exceptionally strong, with reported cash flow from operations of almost GBP 80 million, highlighting the recurring quality of our earnings. This feeds through to our balance sheet, where we reported net debt before leases of only GBP 5.9 million, and that's after returning a total of GBP 64.2 million to our shareholders through the buyback and dividends during 2022. In accordance with our policy of distributing 55% of our earnings, we are now recommending a final dividend of GBP 0.101, which when added to the GBP 0.046 interim dividend paid back in October gives us a full year dividend of GBP 0.147, representing an almost 50% uplift on the prior year. So moving on, so just a quick look at the profit and loss. I'm not going to spend too long on this slide, but there's a good opportunity at this stage to highlight the strength of performance of our Bespoke Products division, which made an EBITDA contribution of almost GBP 10 million, which becomes a reported EBITDA of GBP 3.7 million after the allocation of central costs. Our effective tax rate was slightly lower than the prior year at 19.3%, although it's probably a good time to remind everyone that the rate of U.K. corporation tax will increase to 25% in April 2023, and that will increase our effective tax rate going forward. Actually, I should have said earlier that we show all of these numbers before exceptional items. The only exceptional item in the year was a GBP 2.3 million profit on the disposal list and surplus land where we realized GBP 2.5 million in cash. So moving on to look at the segments in a little bit more detail. So first of all, Bricks and Blocks. So the Bricks and Blocks segment is the primary driver of our results. We have a very strong performance in the year, evidenced by the greater than 20% or GBP 15 million increase in EBITDA to GBP 85.5 million. Our capacity constraint and lack of inventory limited sales for much of the year, with market demand only softening at the end of the year. Significant price increases were delivered in the year with the prices of most of our bricks rising by a cumulative 50% during 2022. Despite a strong increase in absolute EBITDA, segmental margin did fall slightly as selling prices necessarily followed cost increases. Increasing production inefficiencies at the old Desford brick factory, which we expect to close for demolition at the end of this month, along with production issues within our Aircrete Blocks business also weighed upon these margins. So moving on to look at Bespoke Products. We're particularly pleased with the performance of the Bespoke Products segment. As a reminder here, the Bison Flooring business is by far the largest component of this segment. And as this business, start to deliver the strong performance, providing a contribution to group EBITDA of almost GBP 10 million prior to overhead allocations. That's double what we delivered in 2021. And as a reminder, again, that's off the back of a minimal capital employed. And the performance of this business is underpinned by our end-to-end customer service proposition, which stretches from design right through to installation. As with Bricks and Blocks, we have also been able to price dynamically increasing our selling prices to cover rapidly increasing input costs, including insulation and steel. With our flooring business now operating from a single facility, we have optimized our capacity, enabling sales of precast concrete floor beams to increase by 9% relative to the prior year. And we also are able to focus on the highest margin work, which benefits the bottom line. So given the current uncertainty, I thought it was useful that we just have a bit of a look at our cost base. So with the uncertainty surrounding the short-term demand for our products, our ability to flex production and reduce our cost base is important to emphasize. We have explained before that our cost base differs between our clay and concrete businesses with the clay brick business having a greater fixed cost base. We do see some stability returning to our cost base in 2023. And while some signals for ongoing inflation remain, as things presently stand, we are comfortable that our selling prices are aligned to the cost base that we envisage in 2023. We have secured at least 80% of our energy requirements for the year. This percentage is probably a little bit more fluid than in recent years given the uncertainty around the production levels that we're going to need to service customer demand. We do expect our energy cost to increase year-on-year with 2023 expected to be the peak in our energy costs. When it comes to the cost on here that we've classified as fixed, the largest of those being labor, we are experienced in managing this cost base, having done so in the global financial crisis, and more recently, in 2016, following the Brexit referendum and following -- and again in 2020 at the height of the COVID pandemic. We have a number of levers that we can pull to manage our cost base should we need them in response to any fall in demand. Whilst there is presently a great deal of uncertainty, we are currently planning for an underlying fall in demand for new homes of 20% relative to 2022 levels. It's worth adding as well that we began 2023 needing to rebuild our inventories to give customers certainty in our ability to supply such that they will have the confidence that they no longer need to rely on imported bricks. Our new Desford factory with the effective 22% increase in brick production capacity that will ultimately provide is fundamental in building this customer confidence. We also benefit from the optionality to switch some production to the new Desford factory from less efficient factories, maximizing this market-leading efficiency that will be gained as we ramp up production. This is the potential to reduce the drop-through impact should sales volumes fall in 2023. So just moving on to our cash flow. The cash generation of our business has always been one of our strengths, and this is again demonstrated this year with an operating cash flow of almost GBP 90 million. Capital expenditure totaled GBP 44.1 million with the Desford brick factory accounting for around GBP 27 million of this total. Our maintenance CapEx in the year totaled GBP 10.5 million. This is slightly lower than the guided long-term run rate of GBP 14 million. With the GBP 40 million share buyback completed in the year, along with the GBP 24 million of dividends paid, we returned a total of GBP 64 million of cash to our shareholders during the year. During the year, we also spent almost GBP 12 million purchasing shares for our Employee Benefit Trust. This is completely separate to the share buyback and the level of our purchases in 2022 was inflated due to an earlier pause in purchasing shares during the COVID pandemic. Accordingly, payments to acquire shares will be much lower in 2023 and are expected to be around GBP 4 million. These shares will be used to settle employee share schemes by far the largest of which being the free all-Employee Sharesave Scheme where a large number of shares will be required at the end of 2023, with the company subsequently benefiting from a sizable cash inflow in early '24 as employees use their savings to buy these shares at a discount. Final point on this slide is just the increase in our lease liabilities relates to the continued replacement of a large portion of our distribution fleet with the latest, most efficient vehicles. So just looking at CapEx in a little bit more detail and just a bit of guidance as to our forward spend. So this summarizes how things presently stand for the next couple of years. We're continuing to invest in our 3 ongoing strategic projects with each of them offering attractive levels of returns. The guidance on this slide focuses on existing commitments and is subject to increase, especially in 2024, if we were to commit to one of the further strategic projects in our pipeline, which we are continuing to progress. 2023 will be the year of greatest spend on the Wilnecote project. Whose cost we now expect to be closer to GBP 30 million as opposed to the original estimate of GBP 27 million, primarily driven by inflation. We will, however, retain our financial discipline. And as I mentioned earlier, we have a number of levers we can pull to manage production and optimize our cost base. We would look to manage inventories to 3 months' worth in Brick and Block. So just quickly on working capital. As I said, our working capital cost base, overall working capital remains pretty stable during the year. When looking at inventory, the increase in the carrying value is driven by an increase in valuation with the physical quantities on hand remaining at historic low levels. Although with slower market demand, we have now seen some inventory build since the beginning of the year. In terms of guidance for 2023, we do expect to build further inventory. We expect to have an inventory build of around GBP 25 million of inventory affecting the cash flow in '23. And that takes us from around 1 month finished brick inventory, which is where we ended '22, and we look to rebuild that to around 3 months. As I said earlier, we need to rebuild inventory to ensure that the levels of customer service we offer will be persuasive in convincing our customers that they no -- no need to rely on imports. As I said, we will retain our financial discipline. And I referred to earlier, we have a number of levers that we can pull to manage production. And as I say, we will make sure we limit brick inventories and don't let them grow out of control. So moving on, looking at our balance sheet. So we closed the year with a minimal net debt of GBP 5.9 million after spending GBP 44 million on capital expenditure and returning GBP 64 million to shareholders in the form of both buyback and dividends. At the beginning of 2023, we have completed the refinancing of our GBP 170 million revolving credit facility with it now extending to the beginning of January '27. We also have a further 18-month extension option, which is subject to lender consent. This facility is now sustainability linked with our decarbonization plastic reduction and employee development targets now embedded. The achievement of these being rewarded with a modest reduction in interest rate. At the end of the year, we have GBP 40 million drawn on this facility, with the offsetting large cash balance of GBP 34 million being received from customers at the end of the year. So just to sort of summarize from my perspective, we face this current period of uncertain market demand from a position of strength with minimal debt and long-term committed facilities with significant headroom. Our strong balance sheet leaves us well placed to continue with our pipeline of attractive organic investments alongside providing optionality for both bolt-on acquisitions and further shareholder returns. I'll now hand you back to Stephen to talk a little bit more about the market.

Thank you, Ben. Let's start off and look at the market that we supply, which is primarily the U.K. residential market. Look, we're a long-term business that takes a long-term view. We've got 50 years of mineral reserves. We build factories that are generally there for 40-odd years. If we look at the medium- and long-term fundamentals of the market that we supply, we are very confident that they remain very strong. We are likely to see, as Ben said, a dip in demand this year following the political instability from last year, and we wait to see what the spring selling season brings from our house builders. So our working assumption at this stage is that the market will be down around 20%. And I'll explain a little more what that means. Just as a reminder, the U.K. brick industry, the capacity, the installed capacity is still below what it was before the global financial crisis when 20% of the capacity was permanently removed. By the end of this year, between us and our competitors will have added back about half of that capacity. And the industry has been operating at full capacity for many, many years now. And what we've seen as a result of that is imports increase fairly dramatically. So if we look at imports in a bit more detail, last year in the U.K., there were 2.5 billion bricks sold, of which 570 million were imported. Now that's a record number. And to give a bit of color to that, in 2019, there were 400 million bricks imported. When we listed our business in 2016, there were 220 million bricks imported. And in 2007, pre-financial crisis, there were just 35 million bricks imported. So these rapid growth in the number of imports has very much been to service the industry and the market that the U.K. manufacturing industry has been unable to service. So what we anticipate this year is a steep drop in the number of bricks imported to the U.K., which will cushion us from the import of -- the impact of a fall in demand and support the U.K. manufacturing business. Bricks clearly are not well suited. You don't have to be a rocket scientist to know they're not well suited to travel. They're heavy and cheap. And therefore, we expect we will displace and our U.K. competitors will displace imports quite significantly this year. I think the one thing that's probably fairly short term, and we're seeing at the moment is the customers destocking. So both the number of building materials on site and in builders' merchants and also the work in progress that are being held by housebuilders, we're seeing that reduce. Now we've seen this before where as the industry cycles, we see working capital held by our customers reduce and therefore, there's an impact on demand. And we see the counter to that when the market comes back and we see a pickup in demand. So I think, therefore, we'll see this year slightly half 2 weighted as -- in the very early part of this year, we'll see an impact on our sales of our customers destocking. Having said that, I think we're already seeing some early signs of improvement. There's a lot of macros around customer sentiment that what the house builders are saying in their own presentations and also the mortgage rates have dropped a little bit in recent weeks. But more importantly, in our business, our floor beam business that Ben talked about earlier, which sits in our Bespoke Products segment, that's the product that we put into a house first. It's an obvious thing to say, it's the ground floor. Obviously, the house is built after. We've seen pretty subdued sales through December through February as we've seen housebuilders clearly build out what they've got with the work in progress they've got. But in fact, the last 3 weeks, we've seen significant week-on-week increases in our order intake. That gives us some confidence that when we say that we think this year will be half 2 weighted and that the market will recover. We think we're seeing early signs of that. But I do stress it's fairly early signs, but very encouraging nonetheless. So if I move on to talk about our strategy a little bit. Look, our strategy is to invest in our business organically. We're growing our capacity. We're making our business more efficient and taking cost out and more importantly, we're decarbonizing. And when we look at how we spend money, we're looking at 3 clear areas. So strengthening our core business, do what we do better, do it cheaper and do it producing less carbon, expanding our range of products, giving more products, to our customers' greater choice. And then thirdly, innovation, new products, completely different things. And I'll explain these a little bit more in a moment. But maybe this is a good opportunity just to remind everyone why clay bricks are the products that are used to build houses. Clay bricks are and will continue to be the most cost-effective way to do a really good-looking durable, long-lasting maintenance-free facade to a family home. And by investing in our business by the capital that we're investing, we are rapidly decarbonizing and making our bricks much more environmentally friendly and reducing the carbon emissions that we have met. So we believe clay bricks are and will be the product of choice for many years to come. So the factory that we've been talking about, seems like a long while now since 2018, the new factory that we're building at Desford in Leicestershire is now operational. There's a bit more work left to do on the project. Hence, there's a bit more capital to spend this year. But we're making bricks, as you can see in the picture, and we will be dispatching bricks to customers imminently. And as a reminder, this will be, we believe, the largest and most efficient brick factory in Europe and will subject to the market by 2025 generate annual incremental EBITDA growth of GBP 25 million a year, so a significant project and a really exciting point. We're going to be inviting people to an opening of this plant in May, so we can take people around and show what we spend the money on having talked about it for the last 5 years. Secondly, we're redeveloping our Wilnecote factory. Now this is slightly different. This is a complete redevelopment of an existing factory, including a new kiln and will allow us to produce a greater range of products, so different colors, textures, sizes, very much targeting the architecturally specified market rather than the volume housebuilding market, which we can make higher margins from and get -- and higher selling prices and higher margins. So again, an exciting project currently underway. It's a big construction site. There's no pictures [ a bit ] at the moment because it looks like a construction site, but we will be commissioning this factory in quarter 4 of this year to sell bricks next year. And we expect annual incremental EBITDA of GBP 7 million a year from this project. And then the third project is up at our factory at Accrington in Lancashire, where we're adding a line to make brick slips, so thin bricks for cladding high-rise and modular buildings. This is a growth market and will allow us to get brick back into that market, a market that brick has perhaps lost a little bit in the last few years by providing a lightweight solution. We will use the existing kilns, and therefore, this is a relatively inexpensive investment at GBP 12 million because we're not having to build a whole new factory. We're building a new brick slip manufacturing line and packaging line utilizing the existing kilns. When we -- for every 3 bricks that we put through the kiln, we effectively lose 1 brick. So -- and the breakeven will be around 10 million brick slips a year, although we will be able to make up to nearly 50 million brick slips a year. So let's just move on to capital allocation. And perhaps I can repeat our allocation priorities. Firstly, strategic organic investment to deliver growth, efficiency, decarbonization, we've talked about that a lot. Secondly, a dividend payout of 55%. And we're, as we said earlier, pleased to be recommending by far the highest dividend that we've recommended. Thirdly, bolt-ons, if we see anything suitable. And if not, and we'll keep a watching brief on returning returns to shareholders as and when we have surplus capital. So this is very much a circular exercise. The more we invest in our business, the more cash that we generate, the more cash that we generate, the more we can both return money to shareholders and reinvest in the business. So, we're very much about taking a medium- to long-term view of reinvesting capital in the business for future growth and to strengthen the business. So let's move on to sustainability. Clearly, a key topic. So we set new targets in 2020. And as a reminder, between 2010 and 2019, we reduced our carbon emissions by 22%. The target from 2019 to 2030 is a further reduction of 32%. We are rapidly investing and adopting new technologies to decarbonize our business. And perhaps I can move on to talk about that in a little more detail. So if we look at energy to start with, we've signed a power purchase agreement for us to take renewable energy from a dedicated solar farm that is being built to service our business and provide 70% of our electricity needs from 2025. Actually, good progress is being made there, and we'll start to take electricity a year early. So when we announced this, we said 25%, we're going to start taking electricity from next year. This is not only a good thing from decarbonizing and sustainability, but it's also cost effective. So there's 2 significant benefits to our business there. We're also spending at the moment, GBP 2.5 million putting solar panels on to the roof of the new factory at Desford, which could provide the baseload of power for that factory. And then other new technologies that we're working on. First of all, carbon capture, I think this has accelerated a lot, and we're quite excited about this. There's a long way to go and a lot of work to do, but we're working with a partner looking at how we can capture the carbon that comes out of our kilns. And we -- hopefully, we'll have more to talk about that in the coming months and years. We're also running trials with hydrogen. You can see from the picture, currently it's bottled hydrogen firing one of the kilns to see how we get on with the product there. And we're also looking at biomass. And I think it will be a combination of various alternative fuels that we use in the future. We're also working on alternate raw materials. So a product called calcined clay, which is a fired clay, waste bricks that are ground very, very finely can be used as a cement substitute. So if you think of the circular economy impact, if we can use our waste product and create a cement substitute, there is a significant win there, both economically and from a carbon reduction point of view. I think when we set our targets in 2020, we thought that a 0 emissions plant was a long way off. It's still a way off, but we're actually making better progress than we thought we might looking at how we can use biomass, how we can use hydrogen, how we can capture carbon. And we're currently looking at a sort of blueprint for how we can build a 0 carbon brick factory, which is probably a few years off, but it's incredibly exciting, and we didn't think we'd be already at this point, working on a project like that. And then I'll move on to our outlook. Look, as we said, we're basing our numbers on an underlying fall in demand of 20%, which will be cushioned somewhat by a reduction in imports. And on that basis, our expectations for 2023 remain unchanged. As Ben said, we are well practiced at managing capacity utilization and our cost base. And we will pull the levers that we need to pull over the coming weeks and months, depending on what we see from our customers during their spring selling season. We did increase our prices at the beginning of this year. And I think we've done a good job at passing cost increases on to customers. And I think we're well set up price-wise for this year. And I think long term, we have very -- a great deal of confidence in the market that we service and the fundamentals of our business. So look, just before I open to questions, this is my last results presentation. And after 11 years in the job, I'd just like to thank Ben for his challenge, a lot of that, support and particularly friendship. So thank you. And I look forward to attending future AGMs, and I hope that Neil, my successor puts on a better quality of sandwich than I ever did. So on that note, let's open to questions.

Aynsley Lammin from Investec. Just 3 for me, please. Firstly, could you just remind us or tell us how much of the kind of net incremental capacity will be coming on this year as Desford ramps up in terms of number of bricks? And then secondly, just on the imports. With your 20% fall in the market, what would you expect the imports to fall by? And what's the kind of price differential at the moment between imports domestic, caster, the contracts? Just a bit more color around that? And then thirdly, just on price increases. With the price increase you've kind of successfully passed on in January and the annualization of last year, what does the price increase look like on average for '23 at this point?

Okay. Shall I take the first one?

Go on.

So Desford is effectively GBP 120 million bricks additional capacity. We won't see all of that this year. We've got the first kiln lit, which we're producing bricks from and the next kiln will like next month. So we'll probably see incremental capacity somewhere around 30 million, 40 million bricks extra this year, but that will increase next year and to a total of 120 million extra bricks. So you won't get all of that this year, but you'll start to get a good chunk of that. And of course, even the bricks that replace what's being produced in the old factory, which shuts at the end of this month, we'll be at a substantially lower cost of production and a substantially lower carbon emissions. The imports -- yes, look, it's difficult to know exactly. Imports were 570 million last year. I would expect that to be 250 million to 300 million. Clearly, there are people that have had bricks made in Europe, and they're probably a little homeless at the moment, and they still need to import those bricks and sell them. So we need that to wash through, which will take a few months. And we've seen this happen before. We saw this happen in 2016 where the number of imports dropped quite dramatically, and it took a few months for that to wash through. But I would expect imports to roughly half this year. And I would have thought the run rate by the end of this year will be at half, maybe slightly less.

Looking at pricing for 2023. So we increased the prices of our bricks by a further 5% in January. That's off the back of a cumulative 50% increase through 2022. Some of the concrete project products increased by slightly lower numbers than that just to the nature of their cost base. But in terms of you're looking at revenue overall for '23, you're probably looking at about a 15% price increase kind of year-on-year, obviously, taking account the full year effect of the 2022 increases, which actually probably isn't a million miles away from the volume decrease that we anticipate. Therefore, a revenue that's broadly flat year-on-year probably isn't far off the mark from what we see at the moment.

Christen Hjorth from Numis. 3 questions, please, for me. First of all, could you just maybe remind us of the Desford efficiency benefits maybe versus the average cost of brick production across the portfolio or even the sort of least efficient brick production? Just on imports, again, so the imports, the macro will be the macro that imports are quite a key element of what happens to volumes. It all makes sense, but what are the risks around imports actually not falling as quickly as you expect? And interesting to hear about the potential future 0 carbon brick plant. What is new? Is it sort of getting more work on hydrogen and more work on carbon capture? Are those the 2 dynamics? And if you're going to sort of roughly guess, do you think that's something that could happen this decade?

Do you want to take the first one, and I'll take the second?

Yes. I mean, I think, first of all, Desford is going to be evolving over the next couple of years. We're not going to get the full efficiency in year 1. I think the key debate in year 1 is almost comparing Desford in terms of the new efficient factory with the old inefficient factory. And the cost of production there is at least sort of 30%, 40% less than the old factory. When you actually do it on average against the rest of the business in terms of the whole asset footprint, it will be a lower number. But we do expect to kind of continue to leverage the efficiencies of Desford but we won't get the full efficiency until the second kiln is open. So yes, we do have the optionality. I mean, that actually increases our resilience this year. We will look at our whole asset footprint. And if demand is lower, we will look to ensure we maximize production from the new efficient factory and if necessarily make adjustments to production elsewhere.

And in imports, I think there's 2 aspects to this answer, Christen. First, look, our inventories have not recovered since the pandemic. And therefore, our customer service has been compromised by the fact that we don't have any inventory and we've been hand to mouth. Now that's not a surprise. So I think the first thing we need to do is, to some extent, rebuild some inventory and Ben's talked about the working capital implication there. And we need to give our customers a degree of confidence that we can supply them the bricks they want from stock, and that is something that we are currently progressing. I think the second thing is probably what I painted at when I answered Aynsley's question is around these homeless imports and products that have been made and there may well be for a short term and perhaps that 6 months see some bricks flying around that people have had manufactured that they need to sell because they've got cash tied up in. And these are smaller distributors that probably need the cash, not large manufacturers that can afford to sit on them. So I think there may be some short-term disruption. But I think if we can convince our customers that we've got inventory that our service levels are back to what they were pre-pandemic, and that we can supply them with cost-effective, lower carbon products that are made locally, I don't think there's a massive risk. And then around the new brick factory and 0 carbon. Yes, I think carbon capture is probably the biggest element of it. I don't think it's just hydrogen. I think it's biomass as well. There are some technologies that we're looking at, at the moment where kilns are fired using a combination of natural gas and biomass and that could -- natural gas could switch to hydrogen. Hydrogen is not yet readily available. The main problem with hydrogen is getting it. You saw the picture earlier, where we load the cylinders. That's because that's all there is. We're way off piped hydrogen. So I think, yes, this decade is reasonable to assume that we can build something, but I think it will be carbon capture rather than hydrogen.

We're also designing a plan for future optionality. So yes, I think it's highly likely that we'll build the plant in this decade. We can then build it for certain things to be retrofitted later on. So it may not have full carbon capture originally. But if we design it with the space for it to be bolted on in due course, it allows us to kind of develop the factory over time. So I think the next brick factory we build after Desford and Wilnecote will certainly be capable of being truly 0 emissions and that doesn't involve lots of offsets or anything like that.

I think I've got 3. On the 20% kind of volume assumption, I think, Ben, in your comments, I think you said new build so just kind of to get the bridge between what you're assuming by end market there and then also with the destocking piece would be interesting. And then secondly, on the imports, I think that 2007 number surprised me given historically, people have talked about 150 million, 200 million of kind of structural imports, if you like. What changed between '07 and '14 to make that structural? And could that become unstructural going forward, i.e., could we go below that 250 million that you've talked about? And then just on the capital investment piece and the GBP 200 million pipeline, I presume we're still just talking U.K. for the business going forward?

Okay. Do you want to pick up…

Yes. I mean I pick up the first one. I mean I think we just used a high level kind of 20% fall for underlying demand for the market. We are predominantly kind of new build focus, as you know. So yes, if you apply something roughly similar to RMI, it's going to be in the rounding. So we've kept it simple and just said 20%, but you may wish to apply a slightly different assumption to RMI.

The CPI is saying 9% for RMI is probably slightly lower, but look, we're not trying to give a massively detailed forecast because we don't know. We're working on an assumption of 20%. And we'll see.

Yes. The key point to emphasize is effectively, we're not really giving guidance. We're saying that we don't know what's going to happen to the market. There's a lot of uncertainty. It's for the housebuilders to see how they get on how their spring selling season goes. We have kind of used the assumption that if it is 20% down, then we're comfortable with the consensus is like that. But we're not in a position to be able to say any more strongly than anybody else, whether it will be 20% or something different.

I think to answer the second question, Sam, what happened with imports was as a result of the financial crisis, there was 20% of the U.K. manufacturing capacity taken out. They were generally very small factories that were pretty inefficient. So what happened was naturally the range of products available from U.K. brick manufacturers reduced. And what you've seen is for the more sort of expensive architect led slightly more unusual product. You've seen growth in imports come in to recover that. And look, we've been pretty open that a lot of the money that we've spent has been around supplying the volume housebuilding market. Yes, we're now investing in our Wilnecote factory to supply this specification market. But clearly, that specification market, the capacity that was taken out in the financial crisis has been replaced somewhat by imports. And then thirdly, in terms of the CapEx pipeline, yes, today, we're very much looking at U.K. That doesn't mean no never, but at the moment, our focus is organic investment in our business to increase our cash returns.

Just pass the microphones find its way over to Jon. If anyone is on the webcast and would like to ask a question by typing into the box, then please do so now.

Jon Bell from Deutsche Bank. I think I've got 3. Apologies for going on about imports, but presumably, the sellers of imported bricks will try and defend their position. What do you expect to see from them? And is it purely down to price? Second question is some of the housebuilders have been buying concrete bricks, presumably because they couldn't get hold of clay bricks. Now they've got a better chance of doing that. Are you seeing them revert back to the clay brick market? And is that meaningful enough to move the dial at all? And the third question is just on energy. Obviously, you're very well covered for 2023. Can you tell us how things stand for 2024?

Okay. I'll pick up the first 2. So yes, look, people that are making a living selling imported bricks into the U.K. are going to fight to keep that market, there's no question. And the market that I just talked about answering Sam's question, the sort of specification market, I think both products are here, and they're probably not going away in a hurry. I think there are some volume housebuilders that I know well who've been buying imported bricks at a premium price simply because they couldn't get enough bricks off the U.K. manufacturers. And that's not just bricks, that's all products. And I think that market, they will struggle to retain. But of course, they're going to fight for it. And if you're a distributor and it's your livelihood, you're going to fight. So I think short term, there will be a bit of disruption, possibly a bit of price disruption, but I still think the import volumes will fall fairly sharply. In terms of concrete bricks, look, the number of concrete bricks sold are relatively small. And I think -- I'm not sure -- I think it's probably too early to say, are people switching off concrete bricks or not. I think one of the ways that we need to get people off concrete bricks is we need to improve our service levels, as I talked about answering the earlier question, and we also need to keep decarbonizing. So I think we're doing the right things. And clay bricks remains a much better looking, much nicer product to build a house from. You don't want a house that in 10 years' time has got a concrete brick that's fading. A clay brick is a natural product and looks great for years. Do you want to pick up the energy one?

Yes. And on the energy, yes. So as we said, we expect 2023 to be the peak of our energy costs. We're reasonably comfortable in saying that. So we have good forward visibility. So we've already bought around 50% of our gas for both '24 and '25. So we've got good forward prices on that. And also on electricity, as Stephen mentioned, we've got our solar farm coming online in 2024. So in 2024, that will be at a higher price. So it was originally supposed to be 2025. We effectively from 2025, have an energy price, electricity price locked in for 15 years, which is extremely competitive. For 2024, we've exercised an option to take the energy, but it's going to be at a higher price. So yes, but we have good visibility beyond 2023 that our energy costs will fall.

Priyal Woolf from Jefferies. I've just got 2. The first question is just with regards to M&A. So you seem to still say that clay bricks will be a core product in the future, but M&A is obviously still there in your capital allocation priorities. I just wanted to check what sort of products do you think you're missing? How does that pipeline look? Could we actually see deals coming through this year? And then the second question is just on calcined clay, which you mentioned. Will this just be for internal use only for your concrete products? Or actually, could you look to engage with some of the bigger heavy side producers as well?

Do you want to take the first one?

M&A. Yes, I mean, look, we continue to kind of keep a pipeline under review. As we've said pretty freely before there isn't a great deal available in our sector in terms of the current products. We've also kind of have feedback from shareholders that they want us to sort of stay relatively close to our field of expertise. So we keep looking. I mean we looked at an attractive business over the last year or so, but we couldn't agree value aspirations with the seller. So yes, we're not making any big claims of impending M&A, but we'll keep it under review. And on the capital allocation, as we said, we keep the flexibility for future shareholder returns under review and whether any M&A comes up or not will be one of the factors in determining whether we should do future returns to shareholders.

And calcined clay, clearly, we would want to use that as a cement substitute in our own business first. But if we can generate more calcined clay, make more calcined clay than we need, we would certainly look at that as a revenue stream. A bit early to give any guidance on that. But yes, it could be both.

Ami Galla from Citi. A few from me as well. The first one, if you could give us an update on the London Bricks business, it went -- how it fared in 2022? Is the price premium that the bricks have versus the ordinary bricks still holding firm? Or has that kind of faded a bit on the back of the inflation that we've seen? The second one, I know this is early days, but when we expect energy costs to reduce from '24 onwards, would you expect a similar trend on brick pricing as well to come through? What is the sort of message of feedback that you're getting from the large housebuilders there? And the third one, just a technical one. When we kind of look at your new build exposure, can you give us what is the mix between the SME builders versus, say, the large volume builders here?

Okay. Let me pick up on those. So London Brick, so just under 1/4 of England's housing stock is made from London Brick, so we sell that product to match the originals into the home improvement, effectively in the home extension market. It's held up well, had a very good year last year. I think we're seeing a little bit of short-term destocking as we are with all of our products from the merchants. So that's no surprise. We would expect to see that. But we believe the home extension, home improvement market remains strong. And sometimes in a market where people have put off moving because of high house prices, higher borrowing, et cetera, the home extension market can do rather well. So we think that market is probably constrained by the number of builders available to do the work more than anything else at the moment. So we're pretty confident on that. And yes, it's still come on to price premium as it always has. The energy costs, look, energy costs longer term probably will come down. But as Ben showed earlier, energy cost for our brick business is around 1/4. By far, the biggest cost is labor. And I think it's highly unlikely that we're going to be negotiating reductions in the cost of labor. So therefore, when you start to look at what that means to our pricing, and it means to our customers, I'm not expecting prices to reduce on the back of energy alone. And then in terms of new build, look, our split between the big builders and the SMEs is probably not far off the whole market. So the big builders produce roughly half and I think top 10 builders produce about half the houses and our split would be in line with the market.

Yes, we don't [ smell ] the smallest builders. So the smallest builders would be through a merchant. And obviously, the medium-sized ones, we do some direct and some would be through a merchant.

But we would be in line with the market.

Clyde Lewis, Peel Hunt. I think just one for me, just really around the blocks business. You've not said too much about it today. Focus obviously being on brick prices, costs and imports. But what are your thoughts in terms of sort of how you can move the block business forward. If you can update us as to the input issues around aerated blocks in particular, would be helpful to sort of understand that. But again, do you think there's a need to try and increase your capacity in either the aerated or the standard concrete blocks at all in the next couple of years?

Yes. Look, I think -- I mean, the market, we talk about bricks because there's so much information out there. The ONS does a nice job putting information out there on bricks. But the block market very much mirrors the brick market as it's the inlet of the same cavity wall that bricks go into. So, no great surprise. I think we have an opportunity to invest in our block business, particularly our Thermalite business, where we have the, I think, the option to add capacity and increase what we sell. I think we can also make that more efficient. And I think we can broaden the range of products. So at the moment, where we make a aerated concrete, we only sell Thermalite blocks. But I think there is the opportunity to add a broader range of products. And if you look at Continental Europe, there's a broader range of products. So sort of wall panels, floor beams in some cases, all sorts of things using lightweight or aerated concrete, but we have the opportunity to look at. And that's something that's very much on our investment agenda is how do we broaden our range of products using lightweight aerated concrete.

Rob Chantry just from Berenberg. I just have 3 questions. Firstly, just on the brick slips business, just interested on your thoughts around the kind of growth of modular housing, I don't know 5, 10-year view, do you think that's a kind of credible substitute? What are your thoughts around the uptick of it and the route to market for it? Secondly, in terms of gas pricing, I guess could you -- and hedging, could you just update us on, I guess, the policy? You mentioned 50% of the gas bought for '24, '25. Is there a structural policy in place to kind of always hedge 50% 2 years out? Or how do you -- what was that kind of hedging policy? How much does it evolve? And then thirdly, on electricity. Could you just remind us on the kind of net requirement to buy in the market once the solar plant is up and running? So, how much is left in the dynamics around the PPA? And what was the net requirement to buy electricity after that plan up and running?

Yes. Should I cover modular, and you can cover energy, Ben?

Yes.

Look, the modular housing market has got quite a checkered history. There's -- seems to be almost every few months, someone new sets up and someone else fails. I think there's a sort of vision that houses will come off of a production line a bit like cars do. And I think that's quite difficult to do. And it certainly hasn't taken on in this country, and I think it's quite a way off. I think the area that's more interest is what components of houses can be built in factories and delivered then assembled on site. And I think for us, rather than look at complete modular housing, how can we build those components? And our flooring products, for example, are they're off-site manufactured components that we build in a factory and get craned into position on site. And just answering Clyde's question, I talked about could we make larger format aerated concrete products that, again, could be made in a factory and delivered on site. So I think the modular bit yes, look, there's lots of talk about modular. I'm more interested in how can we take -- give solutions to our customers that reduce the amount of skilled labor on site and speed up the build. And I don't think that's just modular.

Okay. So, on the energy procurement, so we use a fairly dynamic kind of hedging strategy. So we've not got a rigid policy. If you had a policy that we must fix 50% of our energy 2 years in advance, you may have made some very expensive energy purchases last summer or something like that. So we look at it dynamically. We do look to build forward purchases in advance. I think we've realized over the last year or 2 that the risk associated with energy is significantly more than it ever has been. And therefore, we probably want to reduce our tolerance to that risk. So we will look to buy in advance, but we don't do it on a mechanical basis, we'll do it as and when we see value in the market. We'll also look to layer our positions. So we're not trying to beat the market. We're just trying to give ourselves certainty. And over the last sort of 6 to 9 months as we've been pricing with our -- pricing discussions with our customers, actually knowing what you're trying to recover is pretty important. So we're not trying to beat the market, but we're trying to get some pricing certainty. And I think we've done a reasonable job of that. But I'd say, and now we're already making significant purchases for '24, '25. We've even made some purchases in '26, and we'll be looking to extend our contracts so we can go beyond that. In terms of the electricity from the solar farm. So as we said, the solar farm will generate about 70% of the electricity that we need. We then have effective, what's known as a sleeving agreement with that because a solar farm doesn't give you much electricity at 9:00 o' clock at night in January, but we have a sleeving agreement with a provider who will kind of take the excess electricity in the summer and give us the electricity we need in the winter. So the electric -- solar farm is 70%. We've also got a commitment to generate 10% of our electricity by 2025 from on-site renewables. So Stephen mentioned the solar panels at Desford. We're looking at solar panels at other factories. We're in discussion with someone around a couple of wind turbines. Obviously, on-site renewables are particularly attractive because when you're looking at electricity, 30% of the cost of the electricity is the actual cost of getting it to your factory. So if you put a solar panel on your roof or a wind turbine at the back of your stockyard, then you don't pay that extra 30% of grid charges. So we're obviously keen to do that. You'll never be able do it for all of your electricity because the solar farm that we're building is 150 acres or something. It's massive. So you couldn't put one of those next to every factory, but we will use on-site renewables as well. So you're then looking at about 20% that needs to come from the market. So we might forward buy some of that, but you always want some flexibility as we talked about kind of uncertainty around volumes or whatever. So we would never look to kind of buy much more than kind of 90% forward anyway. So with that then gives us the flexibility if volumes vary.

It's not actually a question. It would be remiss for the analysts not to say a very fond thank you for your time at the helm. I've always split the world of CEOs and most other people into those I'd like to share a pint with and those I'd rather not. Stephen falls firmly into the first camp. As CEO, since before the IPO, Stephen's been the ideal leader, totally on top of his business, conservative with a small c, unflappable. And certainly in Stephen's case, a genuinely really nice bloke. Beer's not Stephen's only tipple. He spent his early career at the posher end of the wine trade. And however, he still manages to squeeze in the odd marathon and I'll be running in London next year with his -- next month, sorry, with his son. I trust he'll emerge from that unscathed, and I'm sure we all wish him the best in his career and hope you'll continue to have some connection with the building materials industry. And obviously, wish Neil all the best when he takes over. So once again, on behalf of all of those, I'm sure we'd say thanks and the very best wishes.

Thank you, Alastair. That's kind. Right. I'm afraid I'm going to ask, do we have any questions from those viewing online? No. Any from your iPad?

No.

Okay. Well, thank you again, Alastair. Thank you very much, everyone.

Thanks, Alastair, the check's in the post, so.