Forterra plc (FORT) Earnings Call Transcript & Summary

Good morning. Thank you for joining us and welcome to Forterra's 2024 Full Year Results Presentation. Introductions, first of all, my name is Neil Ash, and I'm the CEO of Forterra. And I'm joined today by Ben Guyatt, who is our CFO. 2024 was a challenging year but we stayed focused on the things we can control and delivered a resilient result. While full year revenue was flat, H2 saw growth of the U.K. brick market, and with Q4 dispatches 20% up year-on-year. Thanks to our focus on commercial excellence, prices have remained broadly stable. And adjusted EBITDA was GBP 52 million, slightly ahead of our previous year guidance. And cash flow from operations was GBP 60 million, marking a return to strong cash generation. Net debt before leases was just below GBP 85 million, with leverage at 1.9x EBITDA. We've also made great progress on our major CapEx projects. Desford's performance improved throughout 2024, achieving several key milestones, including the successful start-up of the second kiln. We've also made good progress at Wilnecote and Accrington, and I will talk more about these projects later in the presentation. Thanks for the great people we have in Forterra, we've navigated a tough year well. And we are in an excellent position for market growth. I'd like to take this opportunity to thank everyone in the business for their contribution in 2024. And now it's over to Ben for a more detailed look at the financials.

Thanks Neil. Good morning, everyone. It's good to see you all again and some new faces as well. I'm pleased to be here today delivering a robust set of results that reflect the positive impact of the management actions we took in 2023 in response to the weakness of our markets. Firstly, just to clarify, unless otherwise stated, I'm talking about adjusted financials. These adjustments are made to give the fairest and most comparable assessment of our underlying trading performance. I do have a slide later where we summarize these adjustments. We reported flat revenues year-on-year. Although if you recall at the half year, we reported revenues 12% behind 2023. So in H2, revenues were up 12%, with progressive improvement seen through the second half. Whilst our EBITDA fell by around 10% to GBP 52 million, this is still a particularly resilient performance. As I explained last year, 2023 EBITDA was underpinned by a large and unsustainable inventory build of over GBP 50 million, effectively absorbing upwards of GBP 20 million of fixed costs into inventory. In 2024, we've eliminated this inventory build, returning the business to a firm footing with only a modest reduction in EBITDA. Our EBITDA margin did fall by 170 basis points, as we are no longer growing inventory and effectively absorbing those fixed costs into stock. However, since producing production output, we are now carrying unavoidable burden of inefficiency. The percentage fall in profit after tax, whilst a greater percentage relative to EBITDA is simply a function of the reduction in EBITDA, coupled with increased borrowing costs, with these driven by both increasing borrowings and increasing interest rates through 2023. Depreciation has increased slightly due to the full year effect of Desford -- is our cash flow, however, where the true strength of our 2024 performance is most visible. We have delivered adjusted cash flow from operations of GBP 60 million, compared to a corresponding outflow of GBP 5 million in 2023. Notwithstanding continued strategic capital investment that I shall discuss later, the strength of this cash generation has allowed us to reduce our net debt to GBP 85 million which equates to a leverage of 1.9x on a pre-IFRS 16 banking basis. The Board are recommending a final dividend of 2p per share, bringing the total distribution for the year to 3p in line with our temporary 40% payout ratio. So this next slide allows me the opportunity to provide clarification on a few of the more technical aspects of our numbers. The 2024 full year headline rate of corporation tax was 25%. Our effective tax rate has increased up to 27.1% from 24.5% last year. As a result of the 6% increase in the headline rate of corporation tax implemented by government from April 2023, we see an increase of around 1/4 of this or 1.5% in 2024 relative to '23. We normally expect our effective tax rate to be around 1% ahead of the statutory rate, although our currently low profit before tax means that permanently disallowable expenses have a greater impact hence, the greater differential in tax rate this year. Looking ahead, as our profits increase with an improving market, I would expect our effective tax rate to remain around 1% ahead of the headline tax rate, so 26% at current rates. Our finance expense is stated after capitalizing borrowing costs of around GBP 2 million, which are attributed to our projects at Wilnecote and Accrington. We expect the capitalization of borrowing costs to cease in H1 2025, as both of these projects are completed, giving 2025 capitalized borrowing costs of around GBP 1 million. With our current expectations, this would lead to a P&L interest charge of around GBP 8 million and with a cash outflow of around GBP 9 million. So just quickly looking at the adjustments to the statutory numbers. As you can see, the net adjustment to statutory EBITDA this year is a reduction of GBP 2.7 million, compared to an increase of GBP 14 million last year. All of these adjustments relating to the treatment of surplus energy commitments, restructuring costs and the aborted corporate transaction have even been discussed previously at the half year or last year-end. So in the interest of time, I won't go over these again now. So we will now move on to our segmental performance. And if we look into a bit more detail, Bricks and Blocks, which is always the primary driver of our group's performance. Consistent with a wider business, we're reporting flat revenues year-on-year. Our brick dispatches were flat in the year, broadly in line with the market, where department for business and trade figures show domestic brick dispatches increased by 2% relative to the prior year. We did see a stronger performance in our Blocks business with Aircrete benefiting from changes to building regulations as well as our competition facing some supply challenges. The segment delivered an EBITDA of GBP 49 million, only slightly down on the previous year with a margin only 110 basis points below that prior year. As I touched on earlier, this is a positive outcome, especially given that in 2023, we built significant inventory. And that in 2024, the market demand was still around 30% below '22 levels. Because of this, we were operating at around 60% of our productive capacity and as such, carrying significant cost inefficiency. Continuing the trend seen through 2023, Brick pricing remained relatively stable to the point that our average Brick prices ended '24 only mid- to high single digits below the peak prices we achieved in the end of 2022. Where if you recall, prices rose by almost 50% in that single year. Our cost base remained broadly stable in 2024, although we did experience continued labor cost inflation, along with a substantial increase in business rates. We've seen some stabilization of our energy costs, but they still remain significantly above pre-pandemic levels with the cost of our inputs, particularly those with a high energy component such as cement, not reducing. With good forward visibility of our energy costs, with our solar farm, which commenced generation in 2024, along with our own on-site renewables, now providing the bulk of our electricity. We've secured around 80% of our gas requirement for 2025 and have strong forward coverage beyond this. Our 2025 customer price negotiations are ongoing as we seek to recover what we see as a normalized level of cost inflation, along with the somewhat unwelcome increase in employer's national insurance contributions. With our business now, as I said earlier, with our business operating at around 60% of our capacity in 2024, we've now commenced what we refer to as Project Rebound, which is initially focused on increasing the output of Aircrete blocks in response to a currently strong demand. We remain well positioned to quickly bring further capacity back online, allowing us to benefit from our operating leverage as our markets recover. So moving on to Bespoke Products. So this segment has experienced the same challenging market conditions as the wider business. Although the comparison to the prior year picture looks a little different. As in 2023, this segment produced a record performance driven by favorable cost dynamics. The cost position reversed during 2024, challenging market conditions have led to some pressure on selling prices, restricting our ability to recover volatility in the cost of insulation, resulting in lower margins. Floor beam dispatches did increase by 10% year-on-year with another significant improvement in H2. But this product is often seen as a lead indicator of demand for our other products with the floor installed shortly after the commencement of the construction process. Despite a strong order book for our Hollowcore flooring, we have experienced repeated delays in customer schedules restricting our dispatches. So we now move on to look at the cash flow. And so, this is where the strength of our 2024 performance is most evident. I'm delighted to show that we have transformed an operating cash outflow of GBP 5 million in 2023, into a cash inflow of over GBP 60 million in 2024. With EBITDA actually decreasing by around GBP 6 million, this achievement is driven by an elimination of the inventory build, whereas last year, we increased our inventories by around GBP 53 million. In 2024, we reduced our inventory by over GBP 13 million, with much of this reduction attributable to Aircrete. We expect a continuation of this strong cash generation in 2025 although working capital is expected to remain relatively flat. As with Wilnecote coming back online and also Desford increasing output and efficiency, we expect our brick production to remain broadly match with dispatches in 2025. So this next slide looks at working capital. And rather than looking at the movement, focuses on the actual year-end balances. So as I previously mentioned, the reduction in inventories is primarily driven by the Aircrete business. The increase of around 25% in receivables in 2024 reflects a significant increase in activity in the final quarter relative to the particularly weak comparatives at the end of 2023. So moving on to look at our CapEx. So investing through the cycle and addressing our brick capacity constraint, we spent almost GBP 140 million of capital on strategic projects since 2019. We expect our current projects to be completed in 2025, leaving us ideally positioned to benefit from the recovery. We spent a total of GBP 25.6 million on capital expenditure in 2024, of this spend, GBP 21.6 million related to our strategic projects. Our maintenance CapEx was carefully controlled during the year as we managed our leverage position with our spend also reflective of our reduced production output. We envisage spending around GBP 15 million of CapEx in 2025, with around GBP 8 million of this directed towards the completion of the three strategic projects at Desford, Wilnecote and Accrington. So just to round off on cash flow. So we've already discussed many of the components of the cash flow, but this slide bringing it all together. Payments in respect of adjusted items include GBP 3.6 million of restructuring payments with most of these amounted in 2023. Hence, they're in the P&L for '23, but the cash flow fell in '24. There's also GBP 1.8 million associated with the exiting of surplus gas contracts alongside the cost of the aborted corporate transaction. The increase in monthly -- sorry, rather the increase in interest payable primarily reflects both increasing levels of borrowing and the rising interest rates we saw through 2023. We have a net tax receipt, and that's driven by a GBP 2.2 million refund in respect of 2023, which is offset by normal tax payments. With a large share save offer maturing at the end of '23, we received a net GBP 5 million inflow from the Employee Benefit Trust with our employees using their accumulated savings to buy Forterra shares previously held by the trust at a discount to market price. The EBT also sold some surplus shares during the year. Our policy remains to use market purchase shares for the settling of all of our share-based payments. The reduction in the dividend distribution reflects the temporary 40% payout ratio with the prior year outflow, reflecting the much larger 2022 final dividend, which was paid in 2023. Overall, our disciplined balance sheet and cash management has allowed us to reduce our net debt before leases by over GBP 8 million in the year. So that brings us on to our balance sheet position. And as I've said, we ended the period with net debt before leases of just under GBP 85 million. Our borrowings stood at GBP 100 million, which is GBP 9 million lower than the previous year. This leaves facility headroom of GBP 70 million against our GBP 170 million RCF, which is committed until the end of January 2027. Leverage, as stated on a pre-IFRS 16 banking basis was 1.9x. In 2025, we accepted similar levels of operating cash generation to that achieved in '24 and we will also benefit from lower capital spend. We expect to continue our deleveraging in 2025 and expect to be back within our leverage target window of 1x to 1.5x by the end of the year. So just moving on, so we're talking about the improving balance sheet. I think that leads us on to just an update on our capital allocation policies. And I just wanted to kind of take you through these. So as we've talked about, we're coming to the end of a GBP 140 million investment program. So our Brick business is especially well invested. Looking ahead, we intend to return to our 55% dividend distribution policy, potentially as soon as the 2025 dividend. We'll continue looking for opportunities to either consolidate our main markets or add bolt-ons that will help accelerate our strategic growth drivers. Our cash performance in '24 serves as a timely reminder of the cash-generating track record of the business. And with improving markets and the benefit of our operating leverage, we expect our debt to continue falling, creating opportunity for supplementary returns in the future. I'll now hand you back over to Neil, who will provide more insight into our markets, strategy, sustainability and both the current and longer-term outlooks.

Thank you, Ben. So as Ben mentioned, we're going to move on to the markets. As we all know, there is a major housing shortage in the U.K. having only completed around 172,000 homes in the last 20 years, annually. The government target of 1.5 million homes over the current parliament clearly looks ambitious. However, talking to customers, things are clearly starting to get better. They mentioned improvements in the planning process and are starting to have an impact. They believe the enforcement of local authority targets will drive a change in behavior. And yesterday's publication of the planning and infrastructure bill will only help improve things further. Affordability is also improving. Recent interest rate reductions and further reductions expected will continue to help affordability. This will not only impact the new build market but also RMI as extensions on homes are often funded by releasing equity or by additional borrowing. Investment in things like the NHBC skills hub to accelerate the training of apprentices will in time to start to address the issue of labor availability. As a result, all of all this, customer sentiment is improving. National housebuilders report robust web traffic on their sites. Reservation rates are improving. New sites are opening and land is being acquired. Now of course, we would welcome some government support for demand stimulus. Any support, in our view, will simply accelerate the pace of recovery. If we look at the U.K. brick market now, there were 1.7 billion bricks sold in 2024, slightly ahead of the previous year. Based on CPA data, we expect Housing starts to grow by 11% in 2025 and 12% in 2026. Industry-wide capacity management has seen brick stock levels drop from the high of '23 and I should also point out that customer stocks, especially in housebuilders are at exceptionally low levels. And pleasingly, brick imports have continued to reduce in absolute and percentage terms. Taking a look at the capacity in the market now. I'll first draw your attention to the chart on the left. You can see here how domestic capacity has evolved since 2007. U.K. installed capacity reached a low of around 2 billion bricks before a round of investment that has seen installed capacity increased to 2.2 billion bricks. You can see from the 2 dotted lines, the blue shows the demand for bricks in 2022, when we built just over 200,000 homes, and the black line shows the estimated number of homes to build the government's target of, say, 300,000 homes per year. So it's clear, domestic capacity will be more than saturated when we get back to 2022 levels. Now if you move to the other chart, we have Forterra's capacity evolution since 2021. Due to the slowdown, we currently have 66% active capacity. Earlier, Ben mentioned Project Rebound. Rebound is all about the plan on how, where and when we increase in store capacity across our business. The first step for Brick is to run the active capacity at 100%, which includes saturating Desford, and once we've done that, we will start to look to bring back the mothballed site at Claughton. The other important message on this slide is as a result of Desford and Wilnecote, we have increased our installed capacity by 15%. No other U.K. brick manufacturer comes close to this level of additional capacity, and this puts us in pole position for when the market recovers. If we take a look at the strategic update now, we have two growth drivers within our strategy. The first is all about strengthening the core, where we have a fantastic business in Forterra, but like all businesses, it can be even better. We've made key capacity investments to strengthen the core of our business, but it doesn't stop there. We're also making progress in our commercial excellence and operational excellence programs, which added value in 2024 and will deliver value again in 2025. The second strategic driver is beyond the core, which is where we are trying to think about the products and solutions for the buildings of tomorrow, and we will talk more about the progress we've made here in the coming slides. To achieve those growth drivers, we have what we call strategic enablers. The first is all about safety and engagement, and it goes without saying, we want to create a safe environment for the people who work in our business. But at the same time, we really believe that engagement is the key to unlock the next level of performance in our business. A team working together knowing how they contribute and understanding if we are winning the race is and will continue to be the thing that makes Forterra special. The other enabler is sustainability, where we are focused not only on trying to leave the lightest footprint in the production of our products and solutions, but also thinking how we can innovate with sustainability in mind. Taking a look at strengthening the core. So following the completion of Desford, Wilnecote is the next exciting step in our capacity expansion program. We've invested around about GBP 30 million in redeveloping this factory. With an increased capacity, the plant can now produce 35 million bricks per year. Installation is progressing well, and commissioning of clay prep has already started. The priorities for this factory are clear. First is to reintroduce the well-established Wilnecote range of products. We will also introduce Blue Bricks, filling-in a long-standing gap in our product range and strengthening our customer offering. Wilnecote will also give us the flexibility to expand further into the specification segment, an area where we have historically been underrepresented. This investment allows us to move more -- move to remove beyond volume housebuilding and RMI and into higher-value one-off buildings by offering bricks in a wider range of colors, textures and sizes. This investment positions us for further growth, meeting and evolving customer needs whilst improving efficiency and sustainability. If we take a look at beyond the core now, we are well into the commissioning of our extruded brick slip factory in Accrington, an exciting step in our Beyond the Core strategy. And we are proud to say we will have the U.K. first slips plant of its kind to produce extruded slips at scale. Accrington has long been a traditional brick factory. And we have now integrated a dedicated brick slips production line alongside the existing brick manufacturing. An investment of around GBP 12 million enables us to produce approximately 48 million slips on an annual basis, with the flexibility to expand as the market evolves. As shown in the center image, our process extrudes 4 slips at a time in a main unit before or then being separated later in the production process. The slide also highlights the inefficiencies of a traditional brick cutting method. As you can see, cutting a soft mud brick, which has two phases, leads to around about 50% waste, whilst cutting an extruded brick, which only has one face, leads to 75% waste. Our process once optimized, will reduce the waste to 5%. Beyond production, we've also built a dedicated specification team, actively securing new projects and forging relationships with architects main contractors and external wall insulation providers, allowing us to serve both new build, renovation and remedial cladding markets. This investment will accelerate our ambition to build a leadership position in the growing of the brick slips market by offering customers a wide range of slips to suit almost any building design in a cost-efficient, sustainable way. If we take a look at sustainability, sustainability for a business like ours is a journey, and we're making excellent progress. The new Desford and Wilnecote factories produce bricks with around 30% less carbon than the old factories they replaced. The Forterra solar farm generated over 80% of our own electricity needs in 2024. And we've reduced our plastic packaging on bricks. And from next month, we will half the amount of plastic news on our Aircrete products sold under the Thermalite brand. Imagine, for Aircrete alone, that's a reduction of 280 tonnes of plastic based on our 2025 estimated production volumes. We're also working with external partners on alternative fuels and carbon capture. One point I didn't mention on the previous slide is the innovative industry-leading work we are doing on calcined clay. We have already started using calcined clay in the production of some of our concrete products. The calcined clay comes from our own waste, which is created as part of the London Brick production process. We take those bricks, crush them to a fine powder, which can then be used as a cement substitute, reducing our cement costs and carbon. The fantastic thing about lower Oxford Clay, the clay we use for London Brick is due to its reactivity, it is one of the best clays, if not the best clay to use as calcined clay and in turn, a cement substitute. We are currently discussing this opportunity with cement producers and are considering the merits of a separate calcination process to calcine raw clay to be sold as a cement substitute. And the great news is, we have more than enough clay for both products. If we move to the outlook now. I'm really pleased to report that in the first 2 months of 2025, trading has continued to strengthen, with brick volumes up 17%. But remember, this is against a very low prior year comparison. Our order book is improving. And it's now the strongest -- and it's now in the strongest position since 2023. We are finalizing necessary price increases and expect to offset cost inflation, including the impact of the higher NI costs. As the year progresses, we anticipate a steady recovery while remaining mindful of broader economic conditions. We have increased our domestic capacity more than any other U.K. brick manufacturer and are best placed for the market recovery. And it's that market recovery coming back to the 2022 levels, along with the impact of our strategic investments that allows the Board to believe the business can deliver an annual EBITDA of GBP 120 million. You can see from the pyramid how we build that up, starting with the 2024 EBITDA of GBP 52 million and the return to activity levels of 2022, we will achieve GBP 89 million of EBITDA. We know that we did it in 2022. At this stage, domestic capacity would be saturated. And as a result, you get the full benefit of Desford, a further GBP 25 million of EBITDA and Wilnecote adds a further GBP 7 million, bringing the total to GBP 120 million. On top of that, we have the further benefits of our excellence programs and brick slips. We will now move to the Q&A session, for the recording, please state the name of your organization.

Aynsley Lammin from Investec. I think, I've got two questions actually. Just -- your comment on the order book being the strongest it's been since '23. Just be interested a bit more color around that. Is it the kind of restocking of the supply chain, new housing get to stronger? What do you think is driving that? And does that give you more confidence that actually the recent trends you've seen will be good into the kind of busier part of the year? And then secondly, just on the Blocks. Would you expect the regulatory boost and the problems at the competitor on the Aircrete side to continue this year? Is the pricing similar to Bricks or are you kind of in discussions or is it actually a bit easier for Blocks given the strength of that market going forward?

Okay. Maybe I'll take both of those, Ben and feel free to add anything you like. The order book. Look, the thing which is so positive about the position we're in now, is we actually have an order book which is being given to us in advance by housebuilders. And there seems to be some planning going on for the future. Since I joined the business, which will be 2 years in April, it's pretty much always been -- we know bricks are available. We can order them and they'll always be delivered next day. And now housebuilders are realizing and they see the demand coming through, so they start communicating about the orders. We see that especially in housebuilding, and we see that especially with the specialist brick distributors. So it's pleasing to see the direction we're moving into there. If we look at Blocks, you're right to say there's been a couple of things which have driven the additional sales of Aircrete. The first one is the change in building regulations. So Aircrete is now being used below ground to a greater extent than it was in the past. It's replacing aggregate block in those situations. It's a better solution below ground. The regulations help support its usage as a result. And the competition did have some bumps in the road in terms of supply. So it was very, very hard to get a full read on where the market is actually at. But we've got that position clear now, and we -- at the back end of last year, start recruiting the third shift back into our factory in Hampton. And we're also recruiting the four ships. So we're getting back to full capacity. Now sometimes with Aircrete, people think, "Oh, well, there's all the talk of housebuilders and move in to timber frame construction and what impact is that going to have on the Aircrete market? Well, first of all, that 30%, 35% of Aircrete is actually used below ground. And if you build with timber frame, it's the perfect below brand solution. And also the change in regulations is helping making that market grow and develop. So although it might not grow to the same extent as Brick, it will still remain a growing and attractive part of our product portfolio. Thanks for the questions, Aynsley. Who's next?

It's Priyal Woolf from Jefferies. I've just got two questions. You mentioned that you think you should be back in the leverage target range by the end of this year. And you talked a little bit about extra shareholder returns as well. I mean, are there any sort of loose rules as to when we can expect any sort of further announcements on that to come through? And then the second question, I guess, linked to that, you talked about your aborted deal. I know we mentioned -- you've mentioned this before. Just checking, is that well and truly aborted? Is that something which could come back at some point as well?

Do you want to take the first one, please?

Yes. I mean on the leverage range. Look, I think at the moment, you've seen the progress we've made over the last year. So we're, sort of -- we're heading in the right direction. I think, what we were trying to do there is to show the direction of travel. If the business continues to flow off cash like we know it can. It's got a track record of doing that and the market recovers, there obviously is opportunity for supplementary returns in the future. Any decision -- obviously, we're not going to preempt any decision on when that would be now. It would depend on the market, our view of the market progression, where the Board's CapEx plans are and whether any M&A opportunities come along. So no, I can't give any specific guidance, but obviously, I just want to highlight the longer-term potential and the amount of cash that this business generates is more than we would ever need to invest in the business. So that is the potential, but we can't tie it to a specific leverage point or anything like that. It will be kind of a Board decision at the time.

Maybe on the aborted transaction. As Ben presented in the capital allocation, we're continually looking for opportunities to either consolidate our market or to take bolt-on acquisitions which will help accelerate our strategic direction. But I can say at this time, there's nothing active at the moment. So, that would be all I'd be able to say at this stage around that.

Ben Varrow from RBC. I'll do two, please. So just looking at volumes, so if you just take the Jan run rate and annualize that, you get to roughly 7% up year-on-year. Is there any reason to think that's unachievable, assuming the market continues? Have you got sort of any market share tailwinds and you spoke about restocking, so keen to hear your thoughts there. Second, on price. Noted there's been some delays in pushing them out. Has it been more difficult to push through price increases than you anticipated early this year?

Thanks, Ben. Do you want to take the first one?

Yes. I mean, in terms of January. I mean, I think, just to be very clear, what we're saying is our brick dispatches were 17% up January and February combined relative to the soft comparative of the previous year. Industry data is only available for January. Obviously, the February data is not out yet, but that showed that the market overall in the U.K. was 11% up. So, we've got a positive trend. I think, it's the same -- it's a continuation of what we saw before Christmas. The comparatives are soft. January and February are pretty kind of, if you look at the seasonality of the business, the volumes sold in January and February are a lot less than you'd be selling in the kind of the summer months. So I think your assumption, Ben, of 7% is not unreasonable. I think, the consensus is probably based on assumption of sort of 5% volume growth. That's kind of aligned to what a lot of the housebuilders are saying. Yes, there probably is a bit of an upside. So if you look at the way that brick dispatches fell and effectively fell more than housing completions, housing starts have also fallen more than housing completions. We know the housebuilders took out a lot of inventory in 2023. So in theory, there is the possibility of brick demand slightly outstripping kind of the recovery in housing completions. But to put specific time frames or bake that into our targets is quite difficult. So yes, but I don't think you -- your view is unreasonable. But also, I don't think anyone can get kind of too carried away that kind of just because we're 17% up in the first 2 months, certainly doesn't mean we'll be 17% up at the end of the year.

And on prices, I mean, your question around is it more difficult? I think the reality of the situation is we're in a very different period of time than when we were with kind of the hyperinflation and energy prices going through the roof where you could just basically go to the customer, it's that or nothing, and everyone was in the same position. I think, what we've come back to is a much more normal level of price negotiations and trading. And I think, the thing which has been challenging is different players have gone for increases at different times, even though we are all pretty much exposed to the same cost impacts, be it labor, be it NI, et cetera, et cetera. Now we've got that line in the sand that everyone seems to have announced and then the feedback we get from customers is that increases have been announced across the board. That puts a line in the sand, which we're now negotiating to and driving price increases forward. And some customers need to take the fully increase. Some customers need to take slightly less, because there's volume growth opportunities or product mix opportunities, because let's not forget, that's also a way of increasing price and, something that we're very, very focused on. So as we said, we're in the process and we're confident we'll land the necessary increases. Thank you.

Sam Cullen from Peel Hunt. I've got two. They're both kind of on the same theme really just on the cash generation and capital allocation. Just on the CapEx, first one for Ben really. If I was to add another year on to your strategic and maintenance CapEx, is it reasonable to assume that strategic could be 0 in '26 and maintenance would be slightly above GBP 7 million? Is that -- was, sort of, am I missing something there? That's the first one. And then, on the capital allocation and the M&A piece. Just interested to explore a bit more what the definition of adjacent and complementary markets are. Do you still view this business in 3 years' time being a brick-and-block focused business? Or would you look kind of into broader kind of wider building materials or building product sectors to grow the business?

I'll do the first one. Yes. So yes, I mean, first of all, looking at maintenance CapEx. I think in the long term, we guide that maintenance CapEx will be kind of GBP 12 million to GBP 14 million a year, although it isn't going to get there in the short term because we've got mothballed factories. We're running at less capacity. We've also got two brand-new factories that need less CapEx in the kind of first few years of their life. So I'd expect to see sort of maintenance CapEx grow, somewhere kind of, in next year, yes, you kind of GBP 7 million to GBP 10 million is probably kind of right for 2026 and say it'll grow a little bit beyond that. In terms of -- I'm categorically going to say there is going to be no strategic CapEx in 2026. That's probably going a bit far. I mean, I think we do still have a pipeline of opportunities that we're working on. We obviously need to look at those with the Board with reference to the market. And obviously, as we said earlier, we're only running at sort of 60% productive capacity at the moment. So maybe isn't the right time to add more capacity. We're also very mindful the views of our shareholders that we've invested GBP 140 million of CapEx in a pretty difficult market. And there is some desire from shareholders for return. So the Board have to balance all of those things. And obviously, we'll look at kind of the peak line of projects we've got on their merit. So at the moment, the priorities remain unchanged that we finish the existing projects. We want to get the debt down, but then, we'll continue to kind of look at things going forward.

And just on the M&A side of things, maybe trying to make that a bit sharper. Within our core business, our core business is essentially Brick and Block. The opportunities to consolidate further are very, very limited, but there are still one or two opportunities there, and we will be mindful of that. And then kind of the adjacencies, probably to be a bit sharper on that is -- you see it in our strategy, we've got the core of making that business better and then beyond the core. So the adjacencies and kind of bolt-ons will be the types of business we can look to acquire to accelerate our ambition to be the leader in brick slip. So it's more around that kind of area. There's nothing that we've identified at the moment, which is transformational from an M&A point of view. We keep on reflecting on those things and see if that does exist, but a message we kind of quite often get from shareholders is stick to your knitting. And I think, our knitting is getting the core even stronger and then also looking at beyond the core, which is still within our plague discipline of brick slip. So that's how I would really paraphrase that to answer that.

Harry Dow from Redburn Atlantic. I think, I've got three questions, if possible. Firstly, I suppose just on the profit bridge for 2025. If we think volumes are sort of 5%, 6%, 7%, somewhere in that range, what's the sort of rule of thumb drop-through that you're looking at for '25? And is there anything to think about around inventories? I know you've mentioned sort of broadly kind of flat for working capital, but anything there on the drop-through? And then on Desford, and I suppose, more efficient capacity as we come into this year that's going to be better utilized. Is there on top of the kind of volume impact maybe price cost flat, is there a benefit from a margin perspective of the bricks that are coming out at Desford as you ramp that up fully, I suppose, just putting all those together? And then just finally slightly different on the order book side, you mentioned kind of improving orders in the order book. I think, maybe a few years ago at the CMD, you mentioned when you came into the business, you were surprised that the order book is sort of flexible, if you want to put it that way, and the orders can go in, but they can also go out and that was something that potentially we might look to change. I know the market obviously has potentially changed as well, and we're in a world where we can't necessarily demand a lot of things. But as maybe as the market improves, is that sort of still the ambition maybe from an order book perspective?

Do you want to take the two, and I'll do the three?

First of all, on the profit bridge, I mean, I think I've talked about this before, sort of giving a single drop-through figure is very difficult. It's different for each of the businesses. So, we've talked previously about Bricks has a much higher fixed cost and therefore, greater operating leverage than the concrete business where you have more variable cost. But as a rough figure, probably about 50% drop through something like that kind of sounds about right. In terms of Desford, so yes, Desford is on a journey. So I remember saying kind of right from the start, like buying a brick factory is not like going to Currys, getting a telly and plugging it in. Basically, you've got to actually kind of slowly ramp it up iron out inefficiencies, fix snags. And we're on that journey, and we've made really good progress in the second half of last year. So Desford is ramping up it's efficiency on a single kiln. So the real benefit comes when you run both kilns. So we now started the second kiln in December, but we turned the first one off. So we're proving the whole factory works and we're working through to get to the levels that we've done. And although we've had a few kind of challenges, probably not entirely unexpected, but we're making great progress. And we recently did a desktop exercise taking into account -- kind of a post investment review, I guess, looking at everything we've learned and looking at how the factories performed over its first 18 months of operation, and we've come to the conclusion that we still firmly believe that it will hit its GBP 25 million a year EBITDA target. You need a supportive market and being able to run two kilns. The advantage of basically having the two kilns is when we like the second kiln and we've ramped the factory right up, then you kind of double your output, but you don't double your costs. So you only need about 30% more labor for 20% -- sorry, 50% more bricks. So same with energy costs. There are efficiencies throughout. So you don't get those until you can run the factory flat out. But I think we're certainly heading in the right direction.

Yes. And just on the order book, you're absolutely right. It was one of the things which shocked me that customers had the ability to cancel orders. And when I say the order book is in better shape than ever before, that's based on the fact that not only is it getting stronger, but cancellations are stopping. And we've always had an order book. And probably for the last 2 years, we've seen a lot of cancellations. But now we see that starting to restocking and reducing dramatically and the pipeline of new projects starting and demand is growing. So still frustrates me that customers can cancel and we'll address that in the right point in time in market. But yes, cancellation rates are dropping. So that makes the pipeline stronger. Thank you.

Christen Hjorth from Deutsche Numis. Three for me. Look, first one, looking at sort of slightly more medium term, but it's interesting that chart showing U.K. capacity, '22 demand and what the government wants. If the government -- if we start getting towards government targets, do you think there'll be a lot more pressure for U.K. brick manufacturers to invest in more capacity to help meet that and obviously, that plays into the capital allocation piece as well? Just secondly, interestingly, you talked about carbon capture, just where you are with that? Is that a 5-year plan, for example? And then just a quick one on potential seasonality of the year, in terms of H1, H2 split spend, just what we should be thinking about that?

Do you want to -- I'll take one and you do two and three.

Okay. Yes.

So yes, capacity and when the government starts getting towards their projections of 1.5 million homes or whatever averages out over the individual years. I think that will start to see us having confidence to think about what's next in our investment plans. Let's not forget, we've got 15% more capacity compared to where we were last time the market was at a decent levels. The next thing is we -- don't forget, we've got a oven-ready project, if you like, in Swillington, which was an old brick factory, which we could quite easily build a new factory on there. But I think that's quite a way ahead of ourselves. We would want to see the government on a pathway or the country on a pathway to build in more homes. And when we see that journey in that line of sight ahead of us, we will start to look at making the decisions around whether we need to invest in further capacity.

Okay. Coming on to carbon capture. So carbon capture, I think, something we have talked about before, it's something that we're spending a lot of time kind of working on and working with a number of partners, often express it. It's like you have to kiss a lot of frogs. There's a lot of people out there with technology. Not all of those technologies are actually going to be successful and not all of them are actually going to be scalable, but it's about kind of actually building those relationships. At the moment, we got the perverse situation where actually we're not emitting enough carbon. So a lot of the technologies at the moment, basically, they're more suited to the cement industry, where they actually have in terms of the emissions going at the stack of the factory, we don't actually have enough carbon in them to some of the current technologies to be efficient, but those are moving on all the time. I mean, the amount of kind of progress we've seen in some of these kind of solutions over the next -- over the last sort of 3 or 4 years is pretty impressive. And look, we're talking to various people about the possibility of doing trials or putting kind of micro-sized facilities that they've built in shipping containers that you can effectively bolt on to factories as trials and stuff. So yes, there's a lot of work going on that, but also, we want to make sure we back the right technology. This could be a going back and show my age, this could be very much a Betamax VHS. You don't want to go and spend a lot of money on a carbon capture technology that then is obsolete in a couple of years' time, because you've gone too early. So there's a lot of work going on in that area. And then back to kind of more now in terms of the seasonality that we do expect our results to be kind of a little H2 weighted, not enormously so. It's much driven by kind of timing of factory shutdowns and the normal kind of seasonal calendar as much as also we obviously do expect the market to improve as we go through the year. But very roughly, kind of EBITDA could be kind of 45%, 46%, 54%, 55%, something like that as a percentage of our kind of current guidance.

Charlie Campbell at Stifel. I've got two. I think, that they might be related. First question is on imports. I think you said imports into the U.K. down 4% last year. I'm just wondering kind of how you might think that evolves '25, '26. And secondly, obviously, there's a lot going on in geopolitics at the moment, but a possible outcome is that natural gas prices fall quite a lot, I guess. I'm just wondering what happens if that does happen, because I guess the majors are all fairly well brought forward. So I guess the benefits fall into next year. But just wondering if people can take advantage of lower spot to produce bricks more cheaply if there's any capacity in the U.K. or in exports that works like that?

Ben, do you want to talk about those two imports and politics?

Yes. Probably, yes, the more narrow question, imports. So yes, I mean, I think Neil mentioned earlier in the presentation that we're pleased to see that imports continue to fall absolutely and also as a percentage of the market. I guess what happens going forward depends not only on the market in the U.K. and how that recovers but also on what's going on in Continental Europe. So obviously, you've also got one of the large brick manufacturers in the U.K. is also a major importer and you obviously have to assume they're not going to do anything that's kind of to the detriment of their own business. But no, in terms of imports, I think as the market recovers, I think, we certainly very much see the opportunity to take share off of imports. So we're going to bring on Desford the major housebuilders have already demonstrated that for them, it's about security of supply chain, ease of supply. But yes, imports are right there, but there's a protracted supply chain, adds risk where do you go if there's a quality issue. Certainly, there are people out there. Some of the smaller merchants maybe may see opportunity in buying imports and sort of trading them a bit. But if you're a major housebuilder, it's all about security of supply we can demonstrate that we've got bricks available, ex works, can have them when you want them in the U.K., and that's an attractive proposition. So I think, yes, imports will depend on wider market dynamics. There is certainly an argument that maybe imports maybe haven't fallen quite far as some people thought they would. I think, there is a hesitance that everyone remembered, how reasonably this market was capacity constrained in 2022. And a lot of people couldn't get the bricks they want. And I think, there are -- there will be people out there who've got long memories who are nervous that the market could recover again pretty quickly. And then those shortages will come back and therefore, they're hanging on to their import supply chains. But I think all we can do is kind of what's in our control, basically make sure that we've got a strong product offering, invest in Wilnecote, that creates a new range of products for us, well suited to the specification market. Again, a number of those are currently served by imports. And I think as the market recovers, our job is to utilize our capacity and then hopefully, imports become the balancing figure. And then, kind of geopolitics and gas prices. So I guess there's several things going on here. So yes, you talk about kind of gas prices could fall. We've got strong gas forward purchases out to kind of '27 and even '28 and they're even a lot lower than the kind of the current gas price. So a lot of that is already baked into the forward market, and we've been able to kind of lock that in and capitalize on that. So we have good security of price for this year. We've got a positions for the coming years that kind of give us good security, but also give us some flexibility that if there is a further fall in the spot price, we would benefit. So I think we're pretty well covered on gas. Neil joined this business back in 2023, just at a time where kind of the gas markets went kind of really crazy and also, we probably got a call a little bit short, because we didn't have enough forward purchasing in place when Russia invaded Ukraine because we were still nervous about buying gas because of what happened in COVID. But I'd say, taking that out, I think you can demonstrate that over time, generally, you benefit from forward buying. So I think we're in a really good place. And I think we've got good visibility on price for the next couple of years. So yes, energy probably isn't quite as the kind of the concern of the volatility that it showed kind of the last 2, 3 years.

Clyde Lewis at Peel Hunt. I think, I've got three, if I may. Firstly, on brick slips, and maybe sort of just going back a little bit to Charlie's point there on imports. Have you got any idea how many brick slips are imported a year? And I'm also attached to slips. So are you developing systems alongside those slips, just be useful to understand that. The second one I had was on Aircrete and rated blocks. And I'm old enough to remember sort of probably about 3 or 4 or 5 years ago now where there were issues in terms of sort of raw material supply around PFA in particular. Have those all now gone because volumes are lower? And if volumes do recover, do those issues in terms of sort of raw material inputs come back? And the third one I had was around the calcined clay comments and beyond the call you were talking about there. What sort of volumes and potential CapEx? I mean, again, maybe touching on Sam's point about sort of expansion CapEx plans, sort of, can you give us sort of some sort of idea as to the scale of potential sort of investment sort of schedule revenue, I suppose, of those -- that sort of product?

Do you want to do slips then I'll do the system slips then.

Yes, I mean, on the slips, I think the majority of the slips currently being used in the U.K. are cut slips, so people taking bricks and then cutting them. There are manufactured slips. You can get manufacturer slips from Continental Europe and say some of those are coming into the U.K. But the premise of our factory in Accrington is to really effectively replace the need for cutting slips. So if you're going to get a really kind of architectural centerpiece building, then you may still choose to use an imported slip from Germany or anything. But as we see the slips market growing, we see kind of massive opportunity for replacing the slips that are currently cut. But not only that, we see slips as a facade gaining kind of significant penetration as we go forward. So that market will grow from where it is today. Do you want to comment on?

Just on slips systems, yes, absolutely. We currently have a BBA for a system called Surebrick. And interestingly, you can make probably the same amount, well, you can generate probably the same amount of revenue from the system behind the slip and also decent margins as well. So absolutely, we'll have a system. As you enter into more high-rise buildings, that's especially important to have a system that is tested and certified and we have all that in place. And we're also -- through our innovation program, we're starting to look about how do we start to innovate in the system. How do we make it easier to install, how do we make it faster. So when you certainly start moving away from products and move into systems and solutions, you can start to be innovative in how you can take cost out of total installation rather than just looking at products. So absolutely something that we have. And I guess the ultimate step is how do you modularize that and take it to site and remove the installation on the site. So that's part of our journey that we're going on in terms of slips. For Aircrete, look, what I would say, and I wasn't involved in all of that ash debacle, but I was involved in the gypsum debacle, which also came from the closing of powerstations. I think, where our business is very well placed is there's plenty of ash. It just happens to be buried in power stations. And what we've done over the recent years is develop the ability to use that ash rather than fresh ash from the power station. So we don't foresee any major issues in terms of the availability of ash. And we've also managed to address the ability to make high-strength product, because that tended to be used with fresh ash but we've now also got a solution for that. So we're in great shape from an Aircrete raw material point of view. Calcined clay, what I would say there is it's very, very early, very, very early, but I think it would be remiss of me not to say anything. Ballpark figures and desktop exercise. We reckon CapEx and the building for this type of equipment could be around about GBP 30 million. And we reckon depending on our view on the market, it could generate around about GBP 25 million of EBITDA each year. So it starts to look very interesting, but I would caveat that with, we are very, very early in the process, and it's a desktop exercise. But when you work on groundbreaking innovation projects like this, you've got to put a sense to the potential value. And if you don't put that sense to the potential value you won't start and you won't know how much resources you want to commit to it. So please take that as numbers I'm sharing as we go for our innovation process rather than firm commitments.

Alastair Stewart from Progressive. Interested in your views on yesterday's Planning and Infrastructure bill, not so much on the Housebuilding side, which most of the focus has been on, but it's the infrastructure and other sites, in particular, power transmission. Are there any opportunities you see for the bespoke products side in particular, in this area? Or is it an area that you could consider bolt-ons?

Thanks, Alastair. Maybe I'll pick that up and Ben feel free to jump in. It's very fresh. It landed on us yesterday, and we're digesting the content of it. I think absolutely, the clues in the title infrastructure and although we talk a lot in these presentations about our Brick business because there's so much data available to talk about it. We shouldn't forget that we have an important business, which is Bison. And within that is we have the bespoke side of the business able to produce concrete products for infrastructure projects. So when you look at different things like some of the issues that the water authorities have with waste transfer, et cetera, et cetera, we do have a product portfolio that can address that. Now is that an area where we can look at potential growth and bolt-on. It's something that we are considering. We do have a list of potential targets. But I guess the big picture is that growth vehicle wouldn't be overall EBITDA enhancing for our group. The capital intensity would be much less, but it won't be EBITDA enhancing -- EBITDA margin. So I think we need to reflect on that a little bit, but it's certainly something on our radar from a development point of view, Alastair.

Just to add, I mean, I had a quick read of the government document yesterday, I was obviously focused on my own document. But I think one observation just on infrastructure is, I don't think you can segregate infrastructure from housing. So one of the enablers of being able to build more housing is you need to put the infrastructure in place. You can't open up land for housing, build new housing estates if you haven't got a road to get there and it's not connected to a power grid. So I think actually some of the challenges around housing kind of as you free up infrastructure in the long term, it creates opportunity for more housing. So I think they fit pretty well together.

Okay. I think, we're coming to the end of the session. Is there anything online?

No, we don't have any questions online.

Well, thank you very much for your attention, questions and support. Thank you.

Thanks, everyone.