Ibstock plc (IBST) Earnings Call Transcript & Summary

Ready to go? Good morning, and welcome to the 2021 full year results presentation for Ibstock plc. It's a pleasure to welcome you back to the I-Studio in -- face-to-face. And of course, we're all very mindful of what's happening in Ukraine and around the world. So just as we go through this presentation, very mindful of that and very grateful that you've been able to get here physically today. As you can see from the agenda, Chris and I will take turns going through the financials and operational topics today. There'll also be some updates on strategy, our new ESG framework and some midterm financial targets, which we believe really demonstrate the earnings potential of the business. We'll then make some time for Q&A at the end. So turning first to the overview. I'm pleased to report that the group has delivered a year of strong progress financially and strategically. Demand in our end markets remained robust and the business executed well in spite of more challenging supply chain conditions as the year progressed. The earnings progression we delivered was ahead of expectations at the start of the year, and this was combined with excellent free cash flow performance, which further strengthened our balance sheet. We also achieved good progress on our strategy, delivering in all 3 of our strategic pillars: sustain, innovate and grow. Our operational strategy has helped us to drive a collective focus on the things that matter, building a more resilient and agile business, able to capitalize on the opportunities in front of us. Having worked really hard to build such a strong platform over the last few years, I'm excited that we're setting our medium-term financial targets today which show a step change in the potential for growth and value creation. I'd also like to pay tribute to all of our people and the way they've navigated through and achieved performance to keep us at the heart of building in the U.K. And with that, let me hand over to Chris to take us through the financials.

Thanks, Joe, and good morning. Turning firstly to cover the financial summary. Revenues of GBP 409 million represented an increase of 29% on last year and were back in line with the levels achieved in 2019. Adjusted EBITDA also recovered strongly, up by around 98% year-on-year to GBP 103 million. I will provide more detail on the divisional margin drivers later in the presentation, but overall group margins recovered to over 25%, with progress reflecting increased sales volumes, dynamic commercial pricing to offset cost inflation and resilient operational performance in the face of sector-wide supply chain challenges. Adjusted earnings per share of 13.9p increased sharply from 4p last year, reflecting both this strong trading performance as well as a slightly lower adjusted effective tax rate. You've heard me talk regularly about the cash-generative nature of Ibstock's business, and the free cash flow performance this year was excellent with adjusted free cash flows materially above both 2019 and 2020. Net debt reduced to GBP 39 million by year-end, representing leverage of 0.4x. And in light of this performance, strong financial position and prospects of the business, the Board is recommending a final dividend of 5p, bringing the full year payout of 7.5p, representing 54% of adjusted earnings. Moving to revenue. We set out on this slide the progression of group revenue compared to both 2019 and 2020 comparators. As Joe said at the outset, with demand in our end markets remaining strong throughout the year, revenues of GBP 409 million were in line with pre-COVID levels. Clay revenues were up by over 30% year-on-year and were back to around 93% of 2019 with volumes slightly above the level we expected at the beginning of the year. We implemented a price increase during the final quarter of 2021, which provided a modest revenue benefit in the last 2 months of the year. Concrete revenues moved forward strongly, up 25% and 18% on the 2020 and 2019 comparatives, respectively, benefiting from strong demand in both residential and infrastructure markets. In light of input cost inflation experienced through the 2021 year, the Concrete division priced dynamically with selling price increases during the year, effective in mitigating mid-single-digit inflation in our cost base. Turning now to cover divisional financial performance, starting with Clay. Adjusted EBITDA of GBP 91 million was more than double the level achieved in 2020 and back towards the level achieved in 2019. Disciplined cost management, combined with the benefits of operational gearing as volume levels were covered, enabled margins to recover to over 32%. The division experienced higher levels of cost inflation during the second half of the year, primarily in the categories of energy, freight, carbon and materials. As I said earlier, having given notice to our customers, we implemented a selling price increase to recover this inflation partway through Q4. Whilst this reinstated the exit margin back to levels in line with that achieved in half 1, overall, there was a modest drag on half 2 EBITDA margins in Clay as a result. Turning to cover Concrete. Performance in this division reflected exposure to a broad range of robust residential and infrastructure markets with EBITDA increasing by 44% to GBP 21.7 million in the year. Activity levels remained resilient in all product categories with roofing, walling and flooring products showing strongest growth year-on-year. EBITDA margins of around 17% were slightly lower than the levels of around 20% achieved in 2019. This reflected 2 things: firstly, the increased impact of purchased products on which the business generates a lower average margin; and secondly, lower levels of operational efficiency caused by supply chain challenges and COVID-related productivity, impacting throughput and cost efficiency as the year progressed. Moving to cover cash flow. The business delivered an excellent cash performance, benefiting from the strong improvement in trading as well as disciplined working and fixed capital management. Adjusted operating cash flow totaled GBP 76 million, representing 74% cash conversion on EBITDA of GBP 103 million. Having delivered a significant working capital improvement in 2020, we achieved a further reduction in 2021 despite higher activity levels with a modest increase in inventories more than offset by an increase in creditors. Capital expenditure of GBP 25 million included GBP 5 million related to the major capital project to redevelop our Atlas and Aldridge factories. The sustaining capital expenditure figure of GBP 20 million was at the lower end of the range I guided to at the start of the year. Moving now to the balance sheet. This excellent cash performance enabled us to strengthen our financial position. And you can see on the slide the extent of our deleveraging through the year. At year-end, net debt was GBP 39 million, down from GBP 69 million at the start of the year, representing net debt to EBITDA of 0.4x as well as the operational cash flow drivers I set out on the previous slide, the group paid dividends totaling GBP 17 million during the year. Alongside this progress and strengthening in the balance sheet, we also refinanced the group's borrowings during the year, thereby diversifying our sources of funding at attractive rates whilst also achieving a significant extension in our debt maturity profile. By locking in fixed rates on GBP 100 million of private placement notes with maturities between 2028 and 2033 at rates on average of just over 2%, we have reduced interest rate risk and established an efficient long-term funding platform to support the group's investment for growth. Before I hand back to Joe, I would like to briefly cover the moving parts of our guidance for the 2022 year. By commissioning our remaining capital enhancements in Clay, we expect to increase network capacity by around 5% compared to 2021 levels by the middle of 2022. We have instituted selling price increases becoming effective during Q1, which were expected to mitigate the effects of visible inflation. The input cost environment clearly remains extremely dynamic, and we remain committed to taking the actions necessary to protect margins moving forward. On energy, our risk management strategy continues to serve us well. We've cover in place for around 85% of total 2022 requirement and well over 90% for the first half. We expect to incur operating expenditure of around GBP 4 million within Ibstock Futures in 2022 as we invest in research and innovation and build go-to-market capability. This will increase overall group spend on new product development and innovation from around 2% of group revenues to closer to 3% going forward. And on cash, I expect sustaining capital expenditure to be approaching GBP 20 million and for the cash spend on the major redevelopment to Atlas, Aldridge and Nostell to total around GBP 50 million. We also expect to realize cash from land sales in the year. We expect to pay lower levels of cash tax in 2022 compared to the GBP 10 million that we paid in 2021 as we benefit from the capital super deduction announced by the chancellor in last year's budget. Overall, we expect to deliver significant further financial progress in the 2022 year. With that, let me pass back to Joe.

Thanks, Chris. So let's turn firstly to an update in activity levels in our markets. In our core markets, we experienced strong positive momentum during the 2021 year with the expectation of further growth over the medium term. New build residential markets grew with both starts and completions recording significant double-digit increases compared to 2020. Our customers are reporting strong forward order books and positive pricing environment, and industry projections indicate that continuing growth in both starts and completions, albeit at more modest rates as we look out over the next couple of years. The RMI markets also increased by double digits in the year, which helped to drive stronger sales to the builders merchants channel. Again, we anticipate strong activity levels in the RMI markets even if growth is more modest. In addition to the growth in new build, social housing and RMI, we are seeing increasing opportunities in the mid- to high-rise segment of the market, where we already have a presence with brick slip systems, but where we see significant new growth potential. Indeed, there are more than 1,700 buildings over 18 meters in the U.K. that require recladding in noncombustible materials and many more to be investigated between 11 and 18 meters. New building project approvals are also increasing and the penetration of brick and masonry products, which are noncombustible, shows significant increase over other materials. The build-to-rent sector is expected to be a key driver of growth in this segment over the medium term. And while total completions remained broadly flat year-on-year in 2021, we anticipate positive growth trajectories as we see -- as the U.K. seeks ways to build the levels of new housing stock required to meet the demand for household formations. Moving to inventory and production. On this chart, you can see the monthly ONS stats for domestic brick production as a percentage of previous year. Total domestic production of some 1.9 billion bricks was back to around 92% of 2019 levels. Domestic dispatches were marginally ahead of domestic production, meaning that industry inventories reduced modestly from the levels we saw in December 2020. At less than 2 months forward sales, inventories remain at historically low levels. At Ibstock, we have continued to focus on planning and collaboration with our customers to manage and improve service levels. Imported bricks increased to around 460 million bricks across 2021 as a whole, accounting for around 19% of total volume supplied, which is broadly in line with 2019 levels. Overall, industry dynamics remain positive. Moving now to provide an update on our strategy. So firstly, let me remind you of our overall strategic vision. We presented this slide last year, and it summarizes our path for growth. So we have a strong, well-invested core business today across both our clay and concrete and modular divisions. Our business delivers structurally high margins and cash generation. The operational strategy, combined with our commitment to environmental sustainability and social progress, has built an even stronger platform for growth and value creation. As we think about the growth opportunities in front of us, we're focused on 2 areas: firstly, in capacity, efficiency and sustainability enhancements to optimize the performance of our existing business; and secondly, on innovation and extension into new markets to diversify our revenue base within the construction sector. To that end, we see 2 strong forces of change that will transform the markets we operate in: an intensifying focus on sustainability; and a new wave of the industrialization of the construction sector. Let's just update you a bit more about our 3 pillars now to cover the updates from last year. So in the sustain pillar, we made further progress in advancing our culture of health and safety, delivering a 44% reduction in lost time accident frequency rates. The work we've been doing on maintenance and reliability has really paid off in terms of our plant industrial performance, which was excellent last year. We also completed a major project to optimize our quarry management operations, which will deliver cost and process benefits for the clay business over time. And we took further steps to enhance the environmental performance of the business, meaning we have now exceeded the initial target we set back in 2018, which was to reduce carbon per tonne by 15% by 2025 from the 2015 baseline. Having reached 19% in 2021, we want to accelerate our progress in this area and have set ambitious new targets, which I'll cover later. Turning to our second pillar. Innovation is at the heart of our growth plans, and we're committed to continuing the enhancement of our product portfolio and our customer proposition to strengthen our market positions. During the year, we brought a range of exciting and innovative new products to the market in both divisions. In Clay, our focus was on building presence in the higher-value market segments with the launch of our I-Range, targeting the specification market. In Concrete, we continue to develop new products and solutions with mixed designs to reduce the carbon footprint in both our residential and infrastructure offerings. And we continue to explore ways to digitize our business, successfully piloting a direct-to-consumer digital sales platform for several of our concrete products throughout the year. During the year, we also advanced plans to deliver expansion, both within the core business and in diversified areas of growth. The broad footprint and land reserves we have provide Ibstock with a unique optionality to upgrade assets and invest in highly accretive projects like our new net zero carbon brick factory at Atlas, which is progressing really well and to plan. Other enhancement projects previously announced will increase our capacity in the clay network by around 5% by the middle of 2022. Our Nostell investment to create the world's -- the U.K.'s first automated brick slip systems factory will enable us to increase our presence in the fast-growing mid-, high-rise sectors referenced earlier as well as the growing off-site modular homebuilding market. We expect a strong injection of cash from land sales over the medium term, which will contribute to funding these investments. Over the next 5 years, we anticipate at least GBP 25 million of cash from land disposals. And to support our growth, we've been building on our existing human resources with more project management and innovation capability. To ensure we drive more efficiency and synergies across the core divisions, Darren Waters joined us last year as Chief Operating Officer from Tyman plc. This will enable the operational and commercial momentum and will allow me more time to focus on growth. In order to grow beyond our core business, in November, we announced an exciting direction with the launch of a new business unit Ibstock Futures. Ibstock Futures will capitalize on opportunities in new growth sectors of construction markets, such as the mid-, high-rise segment I've just mentioned. In this segment, facades, for example, is circa GBP 10 billion and the cladding element alone, which is a natural addressable market for us, is circa GBP 1.5 billion. So operating with a different level of agility and pace, the Futures business will build on a strong competitive platform that we have. And the new business has a remit to develop innovation capabilities to grow both organically and inorganically and to create new models of partnership across the construction value chain from early-stage start-ups to establish commercial enterprises. Our brick slip systems factory in Nostell, which I covered earlier, will be the organic launch project for Futures, but we have a strong pipeline of opportunities, both organic and inorganic behind that. In January, we acquired a small but strategically important position in glass reinforced concrete, GRC, by acquiring the assets of Telling Architectural. GRC is a lightweight noncombustible material increasingly used as panels for facades in the mid-, high-rise sector. This allows us access to a growing technology niche with a product that provides the traditional strength of concrete, but with significant like-for-like material savings and environmental benefits. The GRC product offering, including brick-faced GRC will complement our existing MechSlip and Nexus facade products. We're focused on creating a dedicated and experienced team to lead Futures, and I'm delighted to say that our new MD of the Futures business, Jeremy Romberg, is on board and joined us here at the I-Studio today. There he is. Jeremy has a rich and diverse background in building innovative businesses in his time and since working with LafargeHolcim in Europe, Asia and the Middle East. And I'm sure he'll be happy to chat to you today, but we will be saying more about this area as the year progresses. We have a real ambition to grow Futures over the next 5 years, and it's just one of the components in the midterm financial targets that Chris is going to take you through now.

Thanks, Joe. We've talked about the individual components of growth, and I'd like to set out here the scale of our ambition and to frame what we see is the potential of the business over the medium term. In terms of revenue, we're targeting an increase from the level of just over GBP 400 million to over GBP 600 million by 2026. We believe that volume growth in our existing network, combined with committed investments provide a clear pathway to exceed GBP 550 million over this time frame. And we'll target incremental investment opportunities to deliver further growth up to and past GBP 600 million. Diversified growth is central to our strategy, and we, therefore, are targeting revenues outside of the traditional clay brick business to represent 40% of group revenues by 2026 up from the level of around 30% today. We expect Clay EBITDA margins over the medium term to exceed 35% and for EBITDA margins for the group as a whole to be at least 28%. We see a number of drivers to deliver this growth, encompassing incremental margin and volume in our core Clay division, growth in the core Concrete division through modest incremental capital investment both to grow volume and to capture cost efficiencies. The step change growth delivered from the redevelopment of Atlas and Aldridge will add well over 10% to clay network volumes. The investment of GBP 50 million in our Nostell brick slip systems factory and our partner of attractive further diversified growth opportunities, both organic and inorganic within Ibstock Futures. And we are committed to retaining our capital discipline, targeting return on capital employed of 20% into the medium term. Given our very strong balance sheet position to date and based on the cash generation targeted over this period, we expect to generate additional cash of at least GBP 200 million over the next 5 years after sustaining and committed growth investments and ordinary dividends, which we will deploy for further investment in both the core and diversified growth areas as well as supplementing shareholder returns as part of our disciplined capital allocation framework. In light of the investment pipeline, the potential for capital returns will be kept under active review during the 2022 year. And with that, let me hand back to Joe.

Thanks, Chris. So I'd just like to spend some more time now going into our new ESG strategic framework, which we announced last year, and on which we provided more detail this morning. I believe a focus on environmental responsibility and social impact are deeply embedded within the Ibstock DNA, and it's something I've put at the heart of our strategy since I joined the business. You all know that Ibstock is a long-term business, and we have been market leaders in the areas of ESG for decades. Having invested in production networks over time, we have actually reduced, by over 60%, the carbon intensity of our products since the '70s. As you know, we set targets at the end of 2018 related to a 2015 baseline of activity, and the progress we achieved by the end of 2021 means we've now substantially achieved many of these targets as well as the 19% reduction in operational carbon intensity per tonne, we delivered an 8% reduction in mains water usage and removed over 200 tonnes of plastic packaging. The progress we've made is important for the world that we live in, but also being increasingly recognized and valued by our customers. Indeed, our major customers are looking for partners to support and enable delivery against their own ESG targets, and we are increasingly working in a collaborative way with partners across the sector to decarbonize the whole value chain. We recognize that the expectations of all of our stakeholders are evolving at pace, and we need to continue to set more ambitious goals for our business as we continue to show leadership in the sector. Having achieved much of what we set out to do in 2018, that's why we've announced our new ESG strategic framework with a more ambitious set of targets now measured against an improved 2019 baseline. And these are now set out on the next slide. So our framework is based on 3 areas: addressing climate change, improving lives and manufacturing materials for life. As an energy-intensive manufacturer, the main focus of our business is the mitigation of climate change through decarbonization. I'll talk about the journey we've set to net zero in a moment, but we also recognize the importance of promoting biodiversity and have set the target to achieve a net gain by 2030 across all of our sites. Improving lives is about building social value as a business and involves investing in our people, our culture and our communities. The measurement of progress here will be supported by the development of a social value framework. And we're focused on ensuring our colleagues can all belong, thrive and grow. To ensure the necessary focus on diversity, we've set a target to increase female senior leadership representation to 40% as a minimum by 2027. And to ensure we promote a culture of development and growth for all, we've set an ambition of at least 10% of all of our people to be in earn and learn positions by 2030. Within manufacturing materials for life, we will continue to focus on increasing the proportion of revenues we earn from new and sustainable products, but we'll also focus on embedding circular economy principles into everything we do and designing out waste at every step. I expect our strategy to evolve over the years ahead as we continue to find ways to go further, and we remain committed to sharing and learning best practices with our partners across the industry and beyond. And to this end, we're committed to achieving the highest levels of transparency, and we'll continue to evolve our external ESG disclosures. I wanted to give you a snapshot of our journey to net zero. And this next slide sets out the progress we've made and just show some of the plans that we'll take to 2030 and the pathway to become net zero by 2040. As I've said earlier, we've now achieved a 19% reduction in carbon intensity, reflecting capital investment in our network, renewable energy generation, procurement initiatives and a huge number of marginal gains from improved operational efficiency across the business. Over the period to 2030, we will look to take a step change through our investment plans, which will include the net zero projects at Atlas and Nostell and we'll target benefits from alternative renewable energy sources. We'll also move to more mobile fleet or electric, which will be electric or hybrid. We believe we can achieve a 40% reduction in carbon intensity without offsetting by 2030. And by scaling these solutions across the whole network and by establishing low-carbon products as the established core of our business, we have an ambition to be a net zero carbon operation by the year 2040. These new carbon commitments represent a bold step on the company's journey to address climate change and move the business into a low-carbon economy. So just to summarize, we're very mindful of the broader economic uncertainties, particularly related to the tragic conflict in Ukraine at the moment. Notwithstanding that, we have started the 2022 year well with strong trading momentum in the early weeks of the year. We'll bring additional capacity into the clay network by the middle of 2022. And expect to make significant financial progress in the year ahead. And we set out a clear path for value generation over the medium term, with growth to be delivered through a combination of investment in the core alongside diversified expansion. The financial targets we've set out frame the scale of our ambitions over the medium term. And our focus on ESG will continue to be central in everything we do as a business, and we're committed to making further progress in the coming years on that. So building on the solid foundations we've laid, the investments we have made and the strategic plans we have in place, I'm excited about the potential of this business and believe we are really well placed to deliver robust growth and value creation for all of our stakeholders. So with that, Chris and I are going to be happy to take your questions. And as normal, for the record, please, could you state your name and institution when asking your questions. And what we're going to do is we'll start with the room, those physically present, and then we'll go on to the telephone and then the webcast.

Okay. So if I can take the first question. Okay. Ladies first, Priyal.

Priyal Woolf from Jefferies. I think I've got 3. So first one, obviously, you've talked about keeping pricing dynamic, given what's going on with costs. I know you say that industry inventory levels are at record lows, but are you getting any sense that customers house builders merchants could be restocking? Presumably they are anticipating some sort of price increases coming through as well. The second is just on leverage. So you've obviously said you'll keep capital returns under active review this year. Even if we don't necessarily get any major investments, I mean, given the sort of macro risks, could we go into recession, et cetera? Is there any chance that you would actually be comfortable staying below 0.5x net debt to EBITDA as well? And then the last question is just on M&A. You've talked about it before. You said your pipeline is good. You're now talking about potential sort of shift away from clay. Are there lots of smaller-scale deals? Or could you potentially look at something, which is bigger and more game changing as well within that. Just some sort of sense of the scale of deals within that.

I'll take the first and the last, and Chris, you take the middle. So yes, I mean, obviously, the pricing environment, the market has been used to -- our customers have been used to taking very dynamic prices from other product groups. Timber was very dynamic last year as steel. I think what we've done in -- for example, in Clay and Concrete has been more stable. But I think that the supply and demand, the fact that inventories are low, and I think really importantly, the cost of brick in the wall and the total construction of the house being relatively small as a material, around 2%, 3%. Customers -- we can -- we still feel confident that we can pass pricing through to mitigate cost inflation. So I feel it's fairly positive from that end. But we will continue to be dynamic. We changed last year from annual pricing to being much more dynamic in Clay and even more dynamic in the Concrete business. So I think that's fine. I don't see much levels of stocking up at the moment. Everyone is really busy. It's -- people are -- activity levels are very, very high. I think we've probably got more stock in our own inventories than the rest of the industry. And we're just focusing on making sure we can keep the customers satisfied, plan carefully so that they can achieve their build programs and stock their yards effectively. So I think it's a good balance at the moment. Chris, do you want to talk about leverage?

Yes, sure. So on average, yes, 0.4x at year-end. The capital allocation policy that we've set out consistently has got sort of 4 sequential steps when we think about allocating capital. And we've got an active pipeline of opportunities that we're screening and are pursuing at the moment, as Joe described. So I think really, that's the focus in the first instance. Sequentially then, we'll come back to the question of capital returns as we track through this year. I would say, certainly, we feel that the range of 0.5 to 1.5 feels like the right place to be through the cycle. And so I would expect us to move up modestly. But really, it's about putting capital to work where we can see great opportunities to do it and then returning capital to shareholders sequentially after that. And that would be the process that the Board will work through, through the course of this year.

Good. And in terms of M&A, look, we always want to focus on organic investment is great, but M&A has always been part of our proposition. But we have quite strict criteria. It has to be strategic. It has to achieve certain hurdle rates because we have a really valuable business that we don't want to destroy value. We've got optionality within our core business, which is obviously more on the concrete side, and we'll continue to look at some adjacencies there. But I think the introduction of Futures brings a new dimension, and that's why we want to diversify into some of these markets. I talked about the mid- and high-rise markets. I mean this is a huge part of the construction ecosystem that we're not we're not really present in. If you think about the low-rise housebuilding being GBP 30 billion to GBP 40 billion in infrastructure, that's fine. But we've got GBP 60 billion worth of mid-, high-rise. And the residential component of that alone is nearly GBP 30 billion. We're very small in that area, and we see opportunities. And it's a very dynamic time. So I think the Futures business will really give this focus and attention. But we're still going to be very strict on hurdle rates and making sure that we're not -- we don't just want to grow revenue for the sake of it. We've got a very, very good business with strong margins and cash generation. So we're going to be disciplined to how we focus that. But Jeremy will give us a bit more of focus in that sector. Gregor?

Gregor Kuglitsch from UBS. I've got a few questions. Maybe sort of -- I mean, I guess the obvious one around gas. So I think you said you're 85% covered from memory, you kind of last year, maybe you incurred sub-100p of -- per therm of cost. Now the price is somewhere between GBP 4 and GBP 5. I mean does it even make sense to produce if prices are at this level? Are you better off just saying you're not going to produce the final 15% if gas prices stay where they are. So I want to see how you manage that. Second maybe question is a detailed question. I think you flagged it in your slide. Am I right in understanding you just sort of prepurchased CO2 last year? Is that what you did? Just to be clear on that. Third question is sort of on the additional OpEx. So the GBP 4 million extra into Futures, is that all incremental? Or is there already a little bit in the base? And is that kind of it for the sort of development side of things? And then maybe going back to the bridge and just some helpful slides in the back. So I read GBP 12 million from brick slip, GBP 10 million, I think, from -- I mean, I've gotten it the wrong way around but anyways, GBP 10 million from Atlas. There's the debottlenecking. So just maybe help us bridge the sort of roughly GBP 50 million, I think, that you between now, so last year, GBP 103 million to the GBP 150s million that you're looking at by 2026. And I'm sorry, this is a final -- I promise this is a final one. The GBP 200 million is predicated on what? Is it on the sort of the midpoint of that leverage range of 0.5 to 1.5? I mean, I'm sure I can work it out, but I just want to see you check it.

Okay. I'll -- I think there's quite a few for you, but I'll take the gas. Look, I mean, we really have to focus on what we can control at the moment. I think, as a business, we've done a great job, and we're probably ahead of others in terms of our hedging strategies on power and gas. We took a little bit more cover to, as you said, to get to 85%. We've got 90% for H1. So we've got a little bit of time to wait and see. Clearly, these levels -- these pricing levels are not sustainable for anyone, whether it's industrial or domestic performers. For sure, if it was 4x, you could still think about pricing through, but these levels that we're seeing at the moment are just -- they're just not sustainable for anyone. So we'll have to wait and see. We have some time. I think things will calm down. There's certainly not a reflection of the supply and demand element of gas, where we've had mild winter conditions. There's more LNG availability at the moment. There's actually more gas coming through Ukraine at the moment than it has been for some time. And there's more wind availability to generate power as well. So they're not reflective of the real reality. It's just a lot of people putting risk in. So I think something will have to change. We'll wait and see. But we have flexibility within our own operations, if we need to this year and more flexibility with pricing to a certain extent. But I think we can just focus on what we can control and these things are not -- this price level is not sustainable for anyone.

So I'll pick up the subsequent 4, Gregor. The CO2 credits, you're exactly right. I mean there's now a U.K.-traded mechanism to allow you to purchase carbon credits. We get a certain number of credits given to us. There's a certain amount over and above that, that we produce, and we're required to essentially submit credits to make good that difference. Historically, what we've done is essentially just cash settle that after the year. Now that there's a traded mechanism, what we've done is actually cash flowed around GBP 6 million in the year that we've just reported on. Some of which will be used to service the credits required for the 2021 year. A couple of million actually will be carried forward and used to settle obligations in respect of subsequent years. So it's actually -- it's part of a risk management mechanism on energy price in the same way that we do for both gas and electricity. So it's a risk mitigant and that was cash flowed within the numbers that we presented. So it does -- it puts in context the cash flow performance even in spite of that GBP 6 million that we paid for those carbon credits. In terms of the Futures OpEx, you should think about that as incremental. So, yet, it encompasses research in areas like, for example, the use of clay for cementitious replacement, one of the areas of focus. It also encompasses spend on innovation and new product development, and it also is about building a team with leadership and go-to-market capability that can fulfill and prosecute the plans that we have for the futures business going forward. So you should think about that as an incremental spend. In terms of the sort of path towards the medium-term growth of the building blocks, if you like, we talked about them on the slide. You're right, the EBITDA that we've talked about from Atlas is around GBP 12 million. We've talked about an EBITDA from the first phase of the slips investment of around GBP 10 million. We think that there is the potential to move volume forward but also mix and price over time within the core Clay business, which will be a significant element of that growth over time. And we also talked about the belief that through deploying modest amounts of capital in concrete, we can move that business forward again from a volume and a returns perspective with some pretty fast payback sort of cost reduction opportunities there. And the fifth element of it, as Joe has talked about this morning, is the opportunities to grow within the Futures business. The Telling acquisition, whilst very small in the near term, is a great strategic beachhead for moving the business forward in that regard. And that will be a good example of how we will build the revenue pipeline within Futures as the other element in getting to that ambition. In terms of the GBP 200 million, just to give you a sense of how we think about that. Within the opening balance sheet as we sit here today, we've got around circa GBP 80 million of capacity moving the business up to the midpoint of the leverage range as it exists today, with GBP 40 million or so of net debt as we entered the year. Free cash flow of the business after sustaining capital and the payment of an ordinary dividend will build over time. But again, we've talked about a belief that, that over time will be in the sort of GBP 40 million to GBP 50 million a year, so that contributes to that. We've talked about committed investments of GBP 110 million across Atlas, Aldridge and Nostell. So clearly, that's already using some of the capital. And Joe also talked about a belief that we can generate land sales as well over the medium term. So all of that gets you to a number that gives us cash capacity in excess of GBP 200 million, which is the number that we talked about in the presentation. So I think -- I hope that's all of them.

Clyde Lewis at Peel Hunt. I think I've got 3, if I can. One was around, I suppose, the current CapEx plan, the GBP 110 million that you've just flagged and the projects that you're going to come through, I suppose, if you can say a little bit about what's happening to the costs because inevitably, there are probably some cost pressures there. And also, I suppose, the availability and the timing of the projects and whether anything has changed on that front. And then attached to that is really a question around whether the expectations of the returns from those investments have increased as well because clearly, those plants are going to be a lot more efficient. And again, it depends on your assumption around energy, but there should be some extra returns. But -- and I suppose the other one was really around that GBP 600 million number that you've set out there as the '26 revenue number. What are you assuming in terms of sort of price assumptions? You sort of set out I think most of those are really volume assumptions in there. But are you assuming that current prices are flat? Or are you assuming a level of inflation that comes through to get to that GBP 600 million? That was probably it.

Thanks, Clyde. So yes, I'll take current CapEx, and Chris will talk about the assumptions and the growth. So yes, I mean, we've got really good dialogue with our OEMs. We are working on these projects. Clearly, when you set out a project of this size, you put a certain degree of contingency into it anyway. So we've certainly eaten into some of that contingency. We're seeing some price increases on things like steel components, and obviously, some of the civils, but we're not talking overall here more than 10%. And as you said, you kind of helped me answer the question, the return profiles is well with pricing levels that we've put in to the product and especially these -- the fact that these are low-carbon products, we believe that the return profiles will be at least as good, if not better. So we're constantly working on that. We're doing financial refocus all the time and really good dialogues with our suppliers. No major delays at this stage at all. We're on track with everything. Obviously, there have been a few delays with things like chips and -- but our OEMs have got quite big businesses where they've bought forward machinery, robotics and so on. So yes, we feel we're in quite good shape with both projects. And at the moment, both factory sites are completely cleared. And in Atlas, we're starting -- the OEMs will be actually going in to start the build in May and in Nostell that site has been completely cleared, and we've got a bit more time on that one as well. So in good shape at the moment.

Just in terms of the kind of assumptions around price that are embedded in that forward guidance on revenue, Clyde. Yes. I mean we've factored in an expectation, I would say, of normalized progression in a pricing environment over the medium term, by which I mean sort of circa 2% to 3% a year. We are also confident in our ability to move mix forward a little bit. So Joe talked about the launch of the I-Range and a greater focus on the specification segment, which naturally sort of moves revenue forward as well by virtue of the improvement in mix. But I think clearly, the 2022 year is likely to have a level of price progression in the top line that will be ahead of that. But I think we've been fairly conservative in the way that we thought about price progression over the 5 years as a whole.

If we don't have any more from the room, perhaps we have one question from the telephone.

[Operator Instructions]

We will now take a question from George Speak from BNP Paribas.

So 2, if I may. Just given the emerging risks in the macro environment, could you just give an indication of what level of flexibility you have on cash flow? And how much of that CapEx is committed? And then second question was just around pricing again. So you're talking about being more dynamic and moving away -- having moved away from sort of annual price increases. But could you just indicate how regularly you're reviewing price now? And what sort of slippage you have between cost increases and the pricing -- the subsequent pricing increases?

So if you take the first, I'll take the second?

Yes. Okay. Thanks, George. So let me answer the question around flexibility and cash committed. We are mindful of macro risks. And clearly, they are particularly elevated at the moment. That's why we believe that a strong balance sheet in that sort of leverage range of 0.5 to 1.5 is the right place to be. And we showed on the chart earlier that we've got significant available liquidity, so at year-end something approaching GBP 190 million. So good flexibility in terms of total liquidity and a strong balance sheet, certainly relative to the covenants that are attached to those lines of financing. In terms of the cash committed, I would say the business is committed to those investments. We see the attraction through the cycle of the economics that Joe was talking about with those investments, and so that is our firm conviction that we will continue and realize those investments over time.

Yes. And on pricing, obviously, last year, we set a price increase, which took effect in November. And then we had another price increase that went into effect at the beginning of February in the Clay business. In the Concrete business, it has been a bit more dynamic throughout the whole of the year because we had steel and cement prices and all sorts of other ingredients for the mix in Concrete changing quite a lot. So that was more dynamic. I think at the moment, we've got a price increase. We need to look at this constantly with the way the energy markets are going. And we are constantly monitoring it. It's -- we also have to balance how we manage with the customers. So I think notwithstanding the craziness that's happened in the last week or so, we would probably be looking at more quarterly approaches in pricing. But it's dynamic, and we just need to assess where we are constantly to try and maintain our margins.

And I would say just to build on that. I mean we have -- we are facing into some unparalleled conditions. But we have very strong levels of cover, particularly through the first half of the year that affords us the ability to observe and see how things play out over the coming weeks and months. So that is -- it's the right strategy. It's always been the right strategy to mitigate price risk there, but we are in a good position in that sense.

Yes. Thank goodness Chris was working over the Christmas period to look at the gas prices and doing everything, so yes. Okay. Do we have another question on...

Just one -- sorry, one follow-up on that, if I may. What's the sort of time -- what kind of head do you hedge for? So obviously, you have to kind of roll over these hedging contracts. What's the sort of duration that you look ahead?

I'll just touch briefly on the mechanism through which we lock in. So we enter into committed forward fixed price agreements with our supplier of gas and power. And the structure is that we put in place rolling hedges forward. So we have a policy that requires us to be carrying at least 80% of the following year's cover as we enter that year. But we will also then have subsequent cover for the year after that and the year after that. So we've got around 1/3 of 2023's energy owned at a fixed price today, and we've got levels of cover out into '24 as well. So it's something that we layer in through that mechanism over time.

We will now take our next question from Christen Hjorth from Numis.

Two questions from me. First of all, one on pricing, again, I'm afraid. If the gas price remains elevated, perhaps not at the current level, I mean, how do you think it sort of plays out? Do you think the brick industry will pass on the higher cost in full? And then the issue is a wider demand dynamic. Or do you think there will be a challenge to pass that on at an impact on margins whilst gas remains elevated? And then just the second one, just wonder if there's any sort of opportunities to accelerate organic investments to improve energy efficiency in the brick stake?

I'll take the first one, perhaps. I couldn't hear the second one. But -- so yes, I think, as I said earlier on, it really depends on where we are. These levels are not sustainable. And we'd have to -- but I really believe that with gas prices at sort of GBP 5, GBP 6, there'd be such a level of demand destruction for people who haven't bought forward at all that actually you would then have an inverse sort of release of price back into the market. So I don't think these levels are sustainable or I don't think they're going to stay. But we -- if there were further increases based on what we've got to balance that 15% that we have in the year, we would look to pass those prices on. And if you look at the cost of our product into the overall construction, we believe -- and the supply and demand dynamics, we believe we'll be able to do that. But then it just depends on the quantum. So at the moment, this is just not sustainable. If it was a bit more reasonable, then yes, I think we'll be able to pass them on. Chris?

Christen, in terms of the second, I think it was around can we accelerate the pace of investment to access lower energy consumption levels faster. I think -- I mean, a point of perspective on this, we've made excellent progress. You can think of the sort of consumption and generation of carbon that Joe shared as a good proxy for the level of energy efficiency that we've been able to achieve over the course of the last sort of 3 or 4 years or so. And we continue to focus on all of the marginal gains that help us to take that further forward. So that can involve things like dematerialization, but it's also looking at thermal efficiency in kilns across the network. There are opportunities to do that, and we'll continue to focus on those and access them because they reduce energy usage, and they reduce the generation of carbon. So they are beneficial from both perspectives. In terms of the sort of step change, moving ahead with Nostell and with Atlas and Aldridge, is in and of itself a way to move us quickly towards lower levels of energy consumption. But equally, that target that we set for reducing by 40% by 2030, again, will see us reduce levels of energy consumption in the business over time. So we're on the pathway. I think we're moving with a sense of urgency and purpose towards that, and we'll continue to do so because it's the right thing to do.

We will now take our next question from Rajesh Patki from JPMorgan.

Two questions for me. I think both will be for Chris. Firstly, I think you mentioned the -- mentioned building up stock levels. So I wanted to understand how you're thinking of working capital moves this year. And the second one is on the central costs that are included within EBITDA. There was an increase to GBP 9 million this year or in 2021. Does this include the setup of Futures business? And where do you see this settling going forward?

Rajesh, thanks. I had to confess I didn't catch the first question. I wonder if you could just...

The first question was around stock and working capital.

Okay, clear.

Yes. Yes.

So finished goods inventories across both Clay and Concrete are at pretty low levels within the business, certainly, when you look at it relative to a kind of 5-year historic view. Now we've been able to operate effectively at those levels because of some of the enhancements that we've made in supply chain and working with customers. We talk about order cancellation rates, for example, and working in a more collaborative way to try and take some of that inefficiency out of the system. So by doing that, I think we feel comfortable operating at the levels of inventory that we're at. Clearly, the network is running at very high levels of capacity at the moment as the industry at large is, and I would expect that to continue. So I think in terms of the sort of forward view on inventory, we may build a little bit of inventory back from where we are today, but I wouldn't expect it to be hugely material against the backdrop of current market. In terms of the second question, which I think was around the EBITDA impact of PLC costs, is that right?

Yes. It was basically what -- a little bit is Futures part of that? Or how is that...

Yes. So the Futures piece, as we talked about, will be incremental, so that operating cost of GBP 4 million will be over and above the PLC costs that we have incurred and reported historically. The GBP 9 million of PLC costs in the 2021 year was up modestly from previous years, which was primarily a function of variable REM cost within that number. But you should think about that GBP 4 million over and above the PLC costs as we move forward.

Do we have a question from the webcast?

Yes. We've got one question from Jon Bell at Deutsche Bank on the subject of pricing. Can you elaborate on how dynamic pricing might work? Do you expect this to herald the end of the annual brick price discussion process? And do you expect others to follow suit?

Yes. Thanks, Jon. I mean, as I mentioned, the annual sort of brick price negotiations have gone out of the window at the moment. And we expect them to be much more dynamic in the sense that we have to constantly look at input costs and what's changing, especially related to energy, and then come back and have dialogue with our customers. I'd say that's more moving to -- it's more moving to quarterly, but I wouldn't want to give a fixed sort of approach to it because it's even more dynamic than that. We have to look at it, and then we have to go back and work things out. Now obviously, we want to give good levels of forward notice and work with our customers to see how we can do things. So -- and there are different things you can do with surcharges and things, as you know. So we're looking at all of that, and that's what we mean by dynamic. And I guess that's the same with concrete, and it's the same for most people in our sector. I think we're a market leader, so we tend to sort of lead the way and others follow, but I don't think that's necessarily always going to be the case. I think we'll still be the leader, but we weren't always necessarily [indiscernible]. Okay. Well, I think that's all the questions we have. Thank you very much for your time today. It's been really nice to see people face to face after 2 years in the doldrums. We're really excited about this business. There are challenges on the macro side, but we really believe we've got an excellent strong business now that's primed for growth and look forward to talking to you more later this year. Okay. Thank you very much.