Ibstock plc (IBST) Earnings Call Transcript & Summary

Good morning, and welcome to the 2024 full year results presentation for Ibstock Plc. With me as usual today is our CFO, Chris McLeish. So let's start with the agenda. After my initial overview, Chris will walk us through the financials and cover divisional performance, after which I'll provide a market update and talk about the strategic progress we've made over the course of 2024. Having covered the outlook, Chris and I would be very happy to, as usual, answer all of your questions.  So turning first to the overview. I'm really pleased to say that we delivered a resilient performance in 2024 against a challenging backdrop with adjusted EBITDA in line with our expectations. Demand improved progressively during the year with revenues in the second half of 2024 ahead of both the first half and the equivalent period in 2023. The effective management of pricing and volumes throughout the 2024 year enabled us to deliver resilient margins, combined with share gains towards the latter part of the year.  New product development was a source of real strength for us with our unified innovation team driving delivery of a step change in the revenues from new and sustainable products, which increased to 22% from 11% in 2023. You may recall that we created a single unified innovation team at the end of 2023 to strengthen and accelerate the pace of new product development, and I expect the pace of innovation to continue in the years ahead. Our major organic growth program is now nearing completion. And the cornerstone of this program within the core business, our wire-cut brick factory at Atlas in the West Midland is ramping up well.  Our key investment in the Ibstock Futures business focused on developing a market-leading brick slips position is also progressing to plan with the first phase now live and the second phase on track to commission by the end of this year. We now have lower cost-efficient capacity in place to serve the recovery in both conventional and evolving construction markets over the years ahead. Despite operating in subdued market conditions, our business continues to generate positive cash flows and our balance sheet is robust. Overall, having invested significant capital over the last years, we're well placed to respond to an increase in activity as conditions improve and see a material improvement in earnings growth. With that, let me hand over to Chris to take us through the financials.

Thanks, Joe, and good morning. Turning to cover the financial summary. Revenues of GBP 366 million represented a reduction of 10% on the prior year, principally due to lower sales volumes in the core business in the first half of the year. Adjusted EBITDA of GBP 79 million was 26% below the prior year level of GBP 107 million, reflecting the impact of lower volumes and the effect of running our factory network at lower levels as we balanced production to sales. The prior year benefited from around GBP 15 million of fixed cost absorbed into inventory as we built finished goods stocks during the 2023 year.  A disciplined focus on commercial and operational execution enabled us to retain a solid EBITDA margin of 21.7% despite the reduced volumes and after the impact of adding back some capacity into the network in areas where demand improvement is anticipated. Our balance sheet remains robust with reported leverage at 1.8x. The year-on-year increase in net debt of GBP 21 million reflects the continued deployment of growth capital into both the core business and Ibstock Futures ahead of market recovery. As expected, net debt and leverage both reduced during the second half of the 2024 year. The Board has recommended a final dividend of 2.5p, set with reference to our capital allocation framework, bringing the full year payout to 4.0p, down from 7p in the prior year. The full year dividend represents 52% of adjusted 2024 earnings per share. The EBITDA number presented on this slide excludes GBP 12 million of exceptional costs, which were recognized in connection with the Group's enterprise restructuring program and the decision to close our GRC operations. Moving to revenue. We set out on this slide Group revenues compared to the comparative figures in 2023. Clay revenues reduced by 15% to GBP 249 million, principally due to lower sales volumes in the core business as well as a reduction in sales volumes during the first half of the year, the impact of sales mix contributed to average selling prices in 2024 slightly below the prior year.  In the current period, reported within the Clay segment, Futures delivered revenues of GBP 10 million compared to around GBP 12 million in the prior year. Concrete revenues of GBP 117 million were 3% ahead of the prior year or 7% lower on a like-for-like basis, excluding the impact of Coltman Precast acquired at the end of 2023. Weaker new build residential and rail infrastructure volumes were partly mitigated by stronger fencing and landscaping sales within concrete's RMI markets. Turning now to cover divisional performance, starting with Clay. The Clay division delivered a solid performance, supported by strong cost management and robust commercial discipline. Performance compared to the prior year reflected lower volumes, the impact of weaker mix and the operational efficiencies benefiting the business in the prior year as around GBP 13 million of fixed cost was absorbed into working capital as we built significant inventories in 2023. The division achieved sequential revenue growth during the second half of 2024 with demand supported by the business' leading service and supply proposition.  Overall, the effective management of pricing and volumes through the 2024 year enabled resilient margins combined with market share gains through the latter part of the year. Fixed costs were well managed with a reduction in cost in line with the annualized GBP 20 million reduction targeted following our enterprise restructuring program undertaken in the 2023 year. Whilst we continued to make progress strategically in Futures, activity levels were lower, reflecting broader demand trends in construction markets and regulatory uncertainty, which impacted activity in mid- to high-rise facade markets.  The core Clay business, excluding Futures, delivered adjusted EBITDA margins above 30%, a resilient performance against a tough market backdrop. Turning to cover Concrete. Revenues in Concrete were relatively more resilient, benefiting from the broad exposure to UK construction markets. EBITDA reduced from GBP 19 million to around GBP 15 million, reflecting the impact of product mix as rail and infrastructure volumes reduced proportionately more than residential activity levels and lower levels of operating efficiency as factories ran at reduced levels of throughput. During the prior year, with factories running at higher rates, performance benefited by GBP 2 million as fixed costs were absorbed into inventory. The integration of Coltman, the precast flooring business acquired at the end of the 2023 year has progressed well, and the business contributed sales of GBP 12 million during the 2024 year. Moving to cover cash flow. Overall, cash conversion improved significantly to 71% compared to 47% in the prior year, driven by the disciplined management of working capital. Overall, there was a working capital outflow of GBP 4 million in the 2024 year. We achieved a modest reduction in the volume of finished goods inventories, although this was offset by an increase in the level of trade receivables as the business had a stronger finish to the year compared to 2023. Net interest was slightly above the prior year as expected on higher average net debt levels, although we continue to benefit from our GBP 100 million private placement at a total cost of just over 2%, which does not start to roll off until November 2028. Capital expenditure totaled GBP 45 million in the year, which was slightly lower than the GBP 50 million originally guided due in part to the timing around year-end of stage payments on our major growth projects. Moving to the balance sheet. As I said earlier, net debt increased by GBP 21 million in the year to GBP 122 million, reflecting the continued investment in organic growth projects ahead of market recovery. As a reminder, the Group has GBP 225 million of committed borrowing comprising GBP 100 million private placement and a GBP 125 million revolving credit facility. These borrowings contain leverage covenants of no greater than 3.0x tested semiannually. Based on the covenant definition, leverage at the 31st of December 2024 totaled 1.5x, and the Group had GBP 94 million of undrawn committed facilities. Cash flows in the second half of the year were positive with deleveraging towards the top end of the range, as I guided at the half year. Moving forward, I would expect continued deleveraging as the market recovery builds. Before I hand back to Joe, I set out on this slide the moving parts of guidance for the 2025 year. Overall, we expect an increase in market volumes this year with momentum expected to build through the year. We will continue to invest selectively to bring capacity back where we anticipate demand improvement. On energy, we now have around 2/3 of energy for 2025 locked in with this cover being front-end loaded. Underlying depreciation is expected to increase slightly to around GBP 34 million in 2025, whilst interest expense is expected to remain flat at around GBP 9 million. Our effective tax rate is also expected to remain flat at around 26%. On cash, I would expect a small overall outflow in respect of working capital, although I also expect a typical seasonal outflow in the first half of the year, which will reverse in the second half. Sustaining capital expenditure will be around GBP 20 million, and we expect to pay the remainder of the capital expenditure on our growth projects. This number is now expected to be around GBP 20 million this year, including the underspend in the previous financial year that I referenced earlier. We expect cash tax to increase to around GBP 5 million, although this remains below the income statement charge due to the continued benefit of accelerated capital write-downs. And with that, let me pass back to Joe.

Thanks, Chris. So firstly, let me provide an update on our core markets. So the steps taken by the Labor government to create a supportive set of supply side conditions have been positive, and we expect this to gather momentum over time. We applaud the further recent steps to increase the rate of new build housing and the continued commitment to significantly increase the delivery through the period of the current parliament. The remobilization of the housebuilding supply chains also continues to progress. Initial signs that builders are growing overall land banks are positive as our steps taken to accelerate planning consents in readiness for recovery in effective demand. We are seeing some encouraging indicators of market improvements such as sales rates per site per week, site starts and house price growth. In discussions with our housebuilding customers, it's clear that they are targeting growth over both the near and medium term, although obtaining the skills necessary to grow the volume of residential construction remains an industry-wide challenge. And as we all know, affordability challenges continue to act as a break on this growth. You can see on the graph at the bottom of this slide, total housing starts in 2024 are forecast to be around 135,000, materially below the prior year and a long way below the level of circa 210,000 reported in 2022. Steps to address demand side constraints, either through specific government stimulus targeting first-time buyers or through broader macroeconomic improvement will be key to a full recovery in UK construction market. Private repair, maintained and improved markets have also been affected by weaker consumer confidence and inflationary pressure. Heavy side merchants are managing balance sheets carefully, and there's very little stock in the channels. While we anticipate a modest pickup in activity in this sector for 2025, the natural investment cycle in RMI is likely to be increasingly supportive over the medium term. In public RMI markets, local authority budgets are stretched with retrofit, mold and energy efficiency projects. However, we know that there is a huge number of projects on improving cladding and fire safety. According to the CPA in November 2024, social housing providers had identified 2,600 buildings over 11 meters with unsafe cladding, of which around half have not commenced work yet. So in summary, we see more positive supply side conditions. And whilst markets continue to be characterized by a degree of caution, we expect progress to build in 2025 as conditions start to turn more positive. In addition to private housebuilding, we're encouraged by other promising segments of the market that are showing positive signs. There is significant committed spend across public infrastructure. The schools rebuilding program and the increased investment in health care and hospitals are gathering momentum and the water sector will need to invest significantly over the next 5 years, which presents an opportunity for our Concrete products business. Institutional and pension fund investment is supporting a rapidly expanding build-to-rent sector with a focus on both multifamily and single-family homes with over GBP 5 billion invested -- GBP 5 billion invested in 2024. In addition to needing more traditional building materials, these segments also provide more opportunity to use more modern methods of construction and solutions provided by Ibstock Futures. And finally, the need for more social housing in the UK is at crisis levels with around 1.3 million households on the waiting lists. So you can see, in addition to private housebuilding, there's a wealth of opportunity for Ibstock to participate in over the next few years. Turning to focus on the UK brick market. UK total brick deliveries in 2024 were GBP 1.7 billion, which was in line with the prior year level. This remains over 30% below the level of GBP 2.5 billion achieved in 2022. Imported volumes reduced by an amount greater than the domestic market, representing 18% of total delivered volumes, down from 22% back in 2022. Industry inventories reduced by over 80 million bricks during the 2024 year to GBP 480 million as productive capacity is being managed in a disciplined way. So on the strategic progress in the year, I'm going to update you on how our 2 major capital investment projects are going at Atlas and Nostell, along with an update on the step change we're seeing across our approach to innovation in NPD. So starting with Atlas. As you may know, we've got an ambition to be the most sustainable manufacturer of Clay and Concrete building products in the UK and I'm pleased to report that our exemplar factory in the West Midlands is now ramping up with deliveries having commenced over recent months. The impact we're having in supporting decarbonization on the construction of new homes has been recognized by the Future Homes Hub, which has identified Ibstock as a reference business. The commercial offer from Atlas has been well received and we're seeing increasing demand from our carbon-neutral certified bricks as part of the product range. As you know, we see Atlas as a Pathfinder factory in our business, proving more sustainable technologies and processes that could be rolled out across the wider network to deliver a significant further reduction in carbon intensity. Turning to Nostell. Despite challenging conditions in diversified markets in the short term, the structural drivers supporting innovation and modern methods of construction remain compelling, and the Group's cornerstone investment in brick slip capacity is now nearing completion. Phase 1, the creation of an automated cutting capacity is now fully operational with customer delivery starting at the back end of 2024. The second phase, a more significant investment in the manufacture of brick slip and ceramic systems is well advanced with commissioning expected from the end of the current year. This project will deploy cutting-edge technology to drive innovation in both manufacturing and design, expanding the range of products available to the market and supporting a wide range of applications for diversified markets. As I said, one area of our business where we've made particularly strong progress over the last 12 months is around innovation. We're committed to manufacturing materials for life by both evolving our products and bringing new products to market with low embodied carbon, preserving raw materials and by providing product data transparency to promote informed and responsible consumption. Just over 12 months ago, we took the step to create a unified enterprise-wide innovation team, seeking to leverage the expertise we had at divisional level and moving this activity closer to the front of the end of the business. The centralized innovation team has enabled us to strengthen and accelerate innovation, R&D and our NPD pipeline to enable 22% of overall sales revenue coming from new and sustainable products in 2024. This has largely come from mixed reformulations towards lower carbon and lower weight materials in concrete, dematerialization and new ranges across the Clay estate and innovative facade solutions in Futures. During the year, Ibstock also launched Environmental Product Declarations or EPDs across its product ranges, becoming one of the first UK building materials manufacturers to enhance environmental transparency. This will better enable architects, specifiers, designers, developers, and property owners to include environmental data in their decisions when selecting building materials over the years ahead. Based on a certified product life of 150 years for our clay brick EPDs, we believe that our products offer a compelling environmental proposition compared to alternative building products. Over the longer term, we expect further progress in R&D projects in our business to provide significant opportunities. Having completed most of the technical work to determine the potential for our calcined Clay reserves, we're moving to the next steps to engage with potential partners for investment in the coming months. We will, therefore, be able to give a more comprehensive update on this exciting work later in the year. Similarly, having proved the concepts and case for the production of synthetic gas from waste, we're in discussions on co-investment opportunities with potential partners. There have been numerous industry trials carried out by the ceramic sector and we're waiting for funding decisions for the government regarding the use of hydrogen, which will both have carbon and value benefits. And following a 2-year research project with Sheffield Hallam University's Materials and Engineering Research Institute, the Group is in advanced commercial trials of a waste industrial material, which can be substituted to replace fossil fuel-derived products used in the manufacturing process. We've got several other projects like this, which may provide cost, carbon and circularity benefits. So whilst it's important that we approach these projects in a measured and considered way, I believe they have the potential to provide transformative opportunities for our business, both economically and through their environmental impact. Right. I think it would be helpful for us to present a view of our capital allocation approach over my tenure and to offer some perspectives on how we expect capital allocation to support both growth and capital returns over the medium term. When I joined the business, it was clear to me that the estate had huge potential, but that we would need to invest significant capital in our assets to maintain our leading cost and margin positions and to demonstrate our commitment to more sustainable manufacturing. To this end, over the last 7 years, we've invested around GBP 285 million in our networks. Across the business, this has involved significant upgrades or renewals at 10 factories over the period since 2018, adding lower cost, more efficient and more sustainable capacity to the network. Within concrete, we've deployed capital selectively to add capacity and take out fixed cost, and we're building a market leadership position in diversified markets predominantly through the organic investment in brick slip capacity up at Nostell. Over the same time frame, the level of capital allocated to M&A has been much more modest at around GBP 20 million, with the majority invested in smaller bolt-on acquisitions in the Concrete division, creating a more comprehensive offer in the UK flooring and infrastructure markets. Looking forward, with our organic investment program now nearing completion, I anticipate that capital expenditure will fall back to long-run sustaining levels, which is expected to support an acceleration in free cash flow generation in the years ahead. I also anticipate the recycling of capital from our land estate, which has been supplemented by attractive land assets following factory closures over the last few years. Conservatively, I would expect us to generate over GBP 30 million from disposals in the next 3 to 5 years. In terms of allocating capital after the sustaining investment and paying of ordinary dividends, I see a much more even weighting of capital allocated across growth and incremental shareholder returns over the medium term. So what does all this mean? With the strong platform we've now built and with the clarity and focus around our future strategy, we retain a strong conviction in the potential of our business set out in the medium-term targets. Whilst the current market conditions are weighing on financial performance, a return to market volumes similar to 2022 will drive significant earnings growth with positive operational leverage. This will be enhanced with our earnings growth from our major capital investments in Atlas, Aldridge and brick slip systems. At the same time, having managed the balance sheet effectively through this period of market weakness and during a period of significant organic investment, the strong cash flow generation profile of the business will provide additional scope for shareholder returns and investment in opportunities to accelerate performance. Overall, our confidence in our medium-term prospects is underpinned by a return to normalized demand conditions and incremental returns from our significant investment program. So as I've shared throughout today, you can see the Group has taken significant steps to upgrade its asset footprint and strengthen the capability of the business over recent years. Moving forward, in order to sharpen our focus on execution and align everyone across Ibstock behind our ambitious strategic goals, during the second half of 2024, we defined a new set of 5 focus areas under the banner of a unifying North Star. You can see the 5 areas set out on this slide. Briefly, we believe there's even more value through a more systematic program of operational excellence and standardization going forward. We've continue to take feedback from our customers, and we'll be developing a much more comprehensive customer orientation program to support them going forward. I've talked about some of the existing potential in innovation, which we think the construction industry badly needs. Sustainability has been a core part of our market leadership, and we will continue to drive here. But we really want to expand our social impact and see a huge opportunity to play a role in how placemaking can support social and affordable housing. And finally, we want to be seen as the reference for people and culture to build on our award-winning early careers and talent management agenda. So the focus on these 5 areas will ensure that we can continue to differentiate our business with clarity and ambition as we support positive change in UK housing and construction. And I believe this has the potential to create significant shareholder value over the medium term, and we'll come back to update you on progress in these areas and future market updates. So finally, turning to the summary and outlook. Trading in the early weeks of 2025 has been solid with sales volumes ahead of the comparative period. We're encouraged by improvement in sector lead indicators, and we expect an increase in market volumes building through the year, and we're committed to bringing back capacity where we can see further improvements in that demand. The supply side backdrop is improving, and we expect this to unlock growth incrementally over the coming years. And as the market recovers, we have a solid platform to support and benefit from a new era of housebuilding in the UK, and we believe that this platform will lead to strong growth and shareholder returns. And with that, Chris and I will be happy to take your questions. As normal for the record, if you could state your name and institution when asking the questions. And please don't ask 5 questions at once.

Hi, Robert Chantry from Berenberg. Three questions from me. Just firstly on market share in the Clay division. I think at the first half, you mentioned you gave up some share with volumes down more than the market, and now you seem to have recovered that. Could you just talk more about some of the dynamics around the market share evolution in clay brick? Secondly, in RMR, you mentioned very little stock in the merchant channel. Could you just give us some kind of indication of where that is versus history like are we at historic lows? And how does that impact your approach to a recovery in those channels? And then thirdly, you mentioned about GBP 30 million from land disposals over the next 3 to 5 years. Can you just talk about why it's 3 to 5 years if you know it's GBP 30 million and the factories are closed? Why is there a time lag, et cetera? Anything else around that would be interesting.

You take the first one, Joe.

So yes, thanks, Robert, for that. I think you'll recall when we stood up at the half year, we talked about a deliberate decision that we've taken through that first half to walk away from some volume. We've seen a sort of competitive backdrop. And therefore, we've taken perhaps sort of 200 to 300 basis points of share that had come down relative to where we were in '23. Now pleasingly, what we saw in the second half, and we anticipated this, we talked about this in August was the expectation that, that volume would come back. And so what we saw was the market moved forward in the second half. And you can see that sequentially between half 1 and half 2, the market volumes move forward, somewhere in the region of double-digit percentage. Actually, we did a little bit better than that as we came into the sort of fourth quarter of the year. So that share now has sort of -- has righted itself. We exited the '24 year with average levels of where we've been in '23. And I think the pleasing thing that, that was driven really by the focus that we have on quality and service. So there was an -- when you look at the progression of price over the '24, you didn't see a material reduction in selling price between half 1 and half 2 in our business. So that was really, I guess, a validation of the position that we talked about at the half year. Yes. And I think those of you who have been in the industry for some time will know that there was a very big destocking happening in around 2014, '15, and that led to sort of channels being very empty. I'm not sure at those levels at the moment, but merchants are really managing their working capital very, very tightly. A lot of the big merchants have got stretched balance sheets. And so they're managing the stock levels very, very carefully. I think that may provide some opportunity this year. If there's a tick up in the market, if there was a government stimulus, then people will have to restock. So in particular, for our business, that might provide some uptick in the year and possible upside. On the land, look, we've sold a lot of land. I think in my tenure, we've done about GBP 40 million -- over GBP 40 million of land disposals. It takes time when you close a factory, you obviously have to decommission the factory. You have to manage the quarries, you have to manage the whole building demolitions and so on. And you have to work on planning and with partners to optimize the maximum value of the land. We're doing that now. West Horsley, a very small plot, a few years ago, we sold for around GBP 8 million to GBP 10 million. We've got some very valuable land in Suri from one of the factories that was closed. We've got a very sizable piece of land up in the Northwest. There's a lot of other smaller things that we've got. Our land asset, I think we've got about over 3,000 acres of land in Ibstock. We generate some good revenues from land on an ongoing basis. But we want to really make sure we're getting the maximum opportunity from the land sales by working with the right partners at the right time. So it does tend to take about 3 to 5 years.

Gregor Kuglitsch from UBS. So my first question is on your sort of CO2-neutral brick. I want to understand if you're actually getting any price premium on that. In other words, are customers actually prepared to pay any extra for the fact that's CO2 neutral? So sort of a strategic question, I guess. On volumes, so can you give us an idea of what you're expecting now for this year? And then kind of as we think forward, how much of your capacity is sort of, I don't know, idle or semi-idled? And therefore, how can we think about operational leverage sort of over the medium term? And then finally, can you just give us an indication what kind of pricing you're going out with for or have gone out with for this year?

Shall I take the carbon and the capacity, you take the volumes, and I'll do the pricing?

Yes.

So yes, the carbon-neutral bricks are a really interesting part of the market, and we will be getting a price premium for those bricks. They don't provide the whole majority of the capacity Atlas. They're already -- the bricks at Atlas are 50% carbon reduction. But what we wanted to show is how we could learn and work with our partners because they're interested in carbon neutrality by doing some offsetting for the residual portion of the factory that hasn't got down to net zero. So we've invested in some nice offsetting projects, some of which are in the UK. And we've talked a lot to some of our bigger customers about that, and they're really interested in that range. But it doesn't provide the whole factory. It's a smaller range. And I think it just sends the right signal as well. We've already taken a lot of carbon out, but we want to show how we can learn around how you would offset what that means for the product, and it sends a powerful message around the long-term embodied carbon of our products. Capacity-wise, and I'll let Chris talk about volumes, we'd probably go -- if you think about our inactive capacity, it's probably about 20% that will need to come back. We've got some mothballed assets there that will take some time to come back. And then we've got a further 20% or so which is -- it's actively managed, but it's not mothballed. So we're reduced shifts, taking a kiln off, 5-day working patterns, things like that, that we can work. I think we've developed – I mean in a very high fixed cost business that needs volume, we've developed a very flexible operating rhythm to respond to these sort of markets. And the team had done a brilliant job. 12 years ago, you saw Ibstock had to sort of lay a lot of people off or do a lot of voluntary time off out of the business and bring people back. We've been much more agile this time on that side. Do you want to take that?

In terms of the sales volumes, Gregor, I mean I think the view overall in terms of sales volumes for the '25 year is that we expect something in the sort of mid-single-digit range. So that's we talked about in January. We still think that's the right sort of view for '25 overall. We made a statement in the outlook comments this morning that you would have seen that the year has started pretty well. And actually, we've seen now the domestic shipments number for January, which indicates that market in Jan, the domestic market was up somewhere in the region of double digit, so around 10%, 11%. And clearly, our performance was pretty strong as well. So I think that sets a positive backdrop for the year. I mean there's a couple of points of qualification. The first one is that, as you know, seasonally, Q2 and Q3 are obviously bigger than Q1. So nobody is getting ahead of themselves in that respect. And let's see what the spring selling season brings. And the other point, I guess, worth bearing in mind is that we are lapping in the early part of this year, some pretty weak comps. But I think in terms of getting out fast in the 2025 year, things have started solidly. And we, therefore, feel pretty good about that sort of 5% up in the year as a whole. There are some potential for upside. Joe talked about restocking into the channels, which presents the potential for things being a little bit stronger. And I think certainly, we're seeing the remobilization of supply chains in new build housing that can also bring some upside to that. But it feels as though that's at this point in the year, a sensible place to think about sort of volume growth in '25.

And then on pricing, yes, we've gone out with a price increase from the beginning of March. I would expect mid-single digits price increase. And our housebuilding customers, in particular, are really focused on volume and supply and supporting them with their ambitions. So it's been a relatively benign price for the last sort of 18 months, I would say, but we need this sort of -- we're always focused on make sure we're maintaining price in the market and moving prices forward in relation to our cost base, which is mid-single digits. So we need to make sure we've got a business that can continue to reinvest and maintain its margins. So positive discussions so far. And the discussions are much more focused on volume and supply at this stage.

Clyde Lewis at Peel Hunt. I think I've got 3, if I may. Where are you in terms of sort of bolt-on acquisitions? I mean, again, I suspect it's going to be largely focused around concrete, but it would be useful to get an update on that front. Brick slips, obviously, new products coming through, capacity increasing. How is the market developing? And how do you see, I suppose, the medium- to longer-term potential for that product in the UK? And then I suppose the other debate is, is there anything going on sort of soft mud versus extruded and how that plays in with, I suppose, imports? And as the market recovers, will that sort of jump in imports sort of go back to where it was? Or do you think, again, there's a structural change that we'll see?

Do you want to take the M&A one or shall I?

Yes. I'm happy to tackle that one. I think you're right, Clyde, in saying that from an inorganic perspective, we'd be looking outside of the core play business in terms of M&A. There's a good pipeline of opportunities. I think we've established over the last sort of year to 2 years, a much more rigorous origination and execution capability around M&A. And we've done a couple of small deals. I think actually that we will remain disciplined. There's good opportunities out there, and you can never anticipate necessarily when these things come to fruition. But I think we're certainly alive to the opportunities there. And I think in terms of the sort of firepower to do it, you've seen us talk about balance sheet strengthening through the course of this year. We've got good line of sight to performance improvement. We've now got a situation where CapEx will start to roll off pretty quickly. So I think certainly, you've got the means to do it, and we have the pipeline of opportunity to look to do it. So it's not just in the Concrete space. There are some good opportunities in adjacent markets within Futures as well. And so that definitely forms part of the thinking about where we could find those opportunities. But as you know us, we won't overpay. We'll stay disciplined. We're not doing it for the sake of growing the top line. We need to find things that are financially accretive and strategically very much aligned to where we have a sort of right to win, and that's where we'll continue to explore.

Yes. And the only thing I'd add to that is obviously Concrete would be an area of opportunity, but the Futures business provides a new horizon for also M&A opportunities with bolt-ons. Brick slips, I want you to think brick slips are really key part of the investment, but it's not just brick slips that we'll be producing. We'll have a lot of other type of ceramic products that can go into different facade systems. And that's the beauty of the second investment. So the first one, the brick slips cutting, that's definitely the mechanical fix-orientated systems for recladding, definitely building momentum. You kind of have to -- when you've got limited factories with clipper saws with one person cutting a brick, it doesn't really have much of an ability to develop the market. Now we've got an automated -- 3 automated lines that's cutting things. The market is starting to realize we can start to increase and ramp up these type of mechanical fix systems in the market. But the second investment will not just – it will not just do simple slips. We'll have other types of products and applications to go into the market. So we're quite interested in that. It's going to take time to develop that market just like the -- because the market needs to see the capacity to trust that it's there. But we're pretty confident that with the skill shortages and with the need for speed and cost opportunities that this brings, it's going to be a really interesting proposition over time. And then soft mud wire-cut. Look, at the moment, we've got the majority of the soft mud sort of in the UK and builders, merchants, obviously, RMI do a lot of soft mud and a lot of small higher-end house building does a lot of soft mud. So there's probably more of a balance towards wire-cut at the moment. That's why some of our soft mud assets are actually mothballed. But we do see a pickup in that going forward. And most of the imports that come into the UK are soft mud. So we've got that to go after as well. So that will probably change over next year or so.

At the front? You're not getting good luck here today.

Priyal Woolf from Jefferies. I've just got 2. The first one is a quick follow-up on the pricing and the competition point. You mentioned price increases are going through at the beginning of March. Is that largely aligned with what others in the market are doing? Or is there going to be some sort of push or pull there in terms of market share for the first couple of months? And then the second question is just around, there seems to be more of an emphasis on the shareholder returns that you're talking about today. I guess I'm just trying to work out the timing of that or what needs to be seen to get there. Is just getting back into that midterm 0.5 to 1.5x range enough? Or do you need to be comfortably below the bottom end of that to think about that?

Yes, good. Look, I think it's been a bit balanced. I think we normally lead the way on price increases, and we wanted to give our customers plenty of notice this time. So we've gone out at the beginning of March. I think some of the other competitors will be going out around the same time, and I think some of the others went out at the beginning of the year. So market shares ebb and flow, but one of the things that I'm really focused on is make sure we're maintaining price in the market as the market leader. We stood up in the half year last year where we lost a bit of market share, and I said it was better to hold on -- hold on to price rather than caving in and trying to chase volume. You need 3x the volumes for 1 unit of the price in our business. So we've managed that quite well. And it's really important because we've got a pretty high fixed cost business that needs to continue to invest capital. And the capital structure and the pricing points that we've got now in the market, I think, correspond to where the pricing should be. So I think -- and I'm pretty positive about that for this year. In terms of shareholder returns, look, we are -- we obviously want to get back to a decent level of indebtedness, 0.5 to 1.5, but we don't have to wait to get all the way back there. Our free cash flow generation is going to accelerate significantly, and we'll step forward if we need to step forward because I think a lot of our shareholders have been waiting for the recovery and they've been waiting to see the free cash flow generation of this business and some returns, and we're pretty focused on that. So we don't have to wait until we get all the way back to 0.5 or below. Yes, this slide, and he's been having his hand up all the time.

Ben Varrow from RBC. I'll do 3, please. Just when you say building volume momentum throughout the year, obviously, you've got softer comps in H1 and then you're going to lap some tougher comps in H2. How can you contextualize that? Second point on cost inflation and specifically natural gas, can you give an idea of your earnings sensitivity to that? And then third point, longer term, where do you see EBITDA margins of the business at full utilization?

[indiscernible] that one.

Yes. So I think when you look at the sort of volume expectations for the year, Ben, we've said that we expect things to build through the year. Clearly, there was some strengthening in '24 where things move forward by sort of 10% from half 1 to half 2. And it feels as though given the seasonality and given the sort of shape of recovery, we're looking at something that's likely to be -- it might be a sort of 47%, 53%, something of that order of magnitude at top line. And clearly, that's sort of amplified when you get down to the bottom line. So I think that's the way to think about things. In terms of cost inflation, Joe referenced it a little bit earlier in the context of pricing. When you look at the components of our cost base, if I talk about fixed cost, clearly, you've got the increase that comes through from the National Insurance rate increase on employers. And with the pay award as well, that gets you to somewhere in the region of sort of 5% within the fixed cost base. And then in the variable cost base, I think we contemplate -- anticipate something that's broadly similar, perhaps sort of 3%, 4%, 5%, something of that order of magnitude. As we always talk about, there are 3 components of that variable cost. You've got materials and ingredients, you've got outbound transportation, and then you've got the energy piece that you alluded to. So it's around 1/3 of the variable cost, which in and of itself is about half of the overall cost stack within our business, just to sort of give a sense of context. We've got about 2/3 of that covered now, and it is front-end loaded. We've moved that cover forward. When we talked to the market in January, we had about 60%. So we've taken the best part of an additional 10% or so. What we've actually seen in the last sort of 6 to 8 weeks is a little bit of softening in energy prices. There was some strong institutional buying into those markets, which actually I think has sort of gone away a little bit, which has caused that to soften a little bit. So we've been able to take a little bit of extra cover. We feel that we're in the right sort of place now. So having that 2/3 covered with it being front-end loaded gives us the level of price clarity and certainty that we would need and expect. There's a little bit of exposure on that balance, but it's relatively modest now against the backdrop of the sort of overall scale of energy costs, as I talked about. So you're not talking about a sort of huge risk. I guess if you priced in a current market, you'd be talking about a very, very modest sort of headwind relative to those numbers, but I think it's certainly eminently manageable. And then you talked about sort of long-range EBITDA. I mean, the comment that we've made about our sort of medium-term ambition remains completely unchanged. We have a conviction that our business is capable of delivering that top line GBP 600 million plus at an average EBITDA margin that's somewhere in the region of 28%. That's stated in the medium-term targets that we've had in the market. What we have said is, of course, we need a return to normalized demand conditions in order to make that possible. So if you look at that sort of performance, really, if you take 2022, business generated EBITDA of around GBP 140 million. We know we've got the capital to come out of the ground, both on Atlas and the slips investments. And so that moves you up into somewhere in the region of sort of GBP 160 million plus territory. And that's exactly what the slide alluded to that Joe presented in his prepared comments. So look, we see the business is capable of doing that. And I think the point of validation that's really important to me is that through this period of trough demand, the Clay business is still capable of delivering a stand-alone EBITDA margin in excess of 30%, which is a strong performance against any market backdrop. But I think it's testament to the resilience and the quality of the business that we're able to sort of deliver a performance like that when you've got demand that's down by sort of 30% to 35% relative to where it was 2 years ago.

Alastair Stewart from Progressive. Three questions, please. First is more industry-wide. I noticed today in the January brick figures, production was up by more than 100% year-on-year. I know January versus January is easily started. But are you getting any indication that the housebuilders on direct sales are kind of getting ahead of themselves sort of overordering whereas in the year -- last year, they've been sort of just living from hand to mouth in terms of deliveries. And the second question is on you mentioned build-to-rent. Obviously, there is a huge pipeline of capital waiting to go in there. But are you actually delivering much in terms of bricks for build-to-rent? And finally, I saw you use the CPA forecasts. Do you actually believe them?

I take the first one.

Yes, you can.

Yes. So look, you're right, production up very, very strongly in those stats. Production is a function really of the sort of operating pattern of the major manufacturers. If you run hard in sort of January, or February, you'll see those numbers come up. It's more the timing of when are you taking the major factories down. I wouldn't read too much into that. I think directionally, it's helpful. And clearly, what you saw last year was that there was a very disciplined use of capacity across the industry that saw GBP 60 million of bricks come out of the balance sheets of the manufacturers. So that's positive. But I think that's a -- don't read too much into a single-month data there. I think that the point that you make in follow-up to that, which is the channels are pretty thinly stocked is well made. And Joe talked about it in the context of the merchants, but across the piece, I think we're looking at a situation downstream in the supply chains where there's an opportunity for things to move if we see the sentiment start to turn more positive. So I think I'd agree with you on that score, Alastair.

Yes. And the build-to-rent, obviously, it's quite a -- there's a wide spectrum of build-to-rent, isn't there? So you've seen a lot of the housebuilders are actually selling bulk -- doing bulk deals with PRS. So we're obviously selling a lot of bricks into those sort of channels. There's the sort of mid-high-rise, the Grainger type build-to-rent, which is growing well, and we already supply that. They tend to use more of the brick product because they don't want to be rendering or doing anything. So they think that brick stands the test of time. And we think there's going to be a continued acceleration in that because the rental market is very good in the UK. I think we also need to have a big focus on the social and affordable housing markets because that's where the pinch point is for people who can't get on the market. And something needs to be done there because housing authorities, Section 106, you've heard it all. People can't -- the social housing providers can't afford to buy them. So there needs to be something addressed in that part of the market. But yes, we're supplying it and we see it as an interesting segment for us. And then CPA, well, I'm on the Board of the CPA, so I better -- I'm going to make sure I -- I actually think that Noble France is a strong economic guy, and I think he's got good data points. But at the end of the day, I mean, it's a crystal ball at the moment, isn't it? No one knows what's going to happen. There could be a kickup. If there's a government stimulus for first-time buyers or something like that, you could see a very different pattern of the market. But at this stage, it's a pretty center view, and that's the one that we look at. And it's an important data point. I'm not saying we put everything on it, but yes, it's an important data point.

Christen Hjorth at Deutsche. A couple of follow-ups and then a stand-alone. Just on the M&A piece, to what extent, if any, do you consider more transformational M&A perhaps to diversify the business? Second of all, on the incremental shareholder returns, to what extent do you consider dividends versus share buybacks, I suppose, particularly when the share price is depressed? And then the third one was on the customer orientation program. I know that was quite a big focus, Joe when you came in that customer relationship piece. What sort of things are you looking at there? And what sort of benefits do you expect?

Great. So I'll take the first and last and you take the middle. Is that okay? Transformational M&A, yes, I mean, look, you guys know much better than me that our business is a really high-quality business that generates over the cycle, great returns, but it's really hard to attract investors when a lot of fund managers can't invest in anything below GBP 1 billion in the UK in a cyclical sort of type of business. So if there was something that had a scale that could drive that, then yes, of course, we would look at that in there's different ways. So we're very open to that. But until something like that happens, we believe in the quality and the value of our business. It is frustrating to try and attract more shareholders in the UK, but hopefully, that will start to change with some of the regulatory changes and so on. But yes, we stand alone, we're a great business. Could we get more scale with something transformational? We will be very open to looking at that.

Okay. So in terms of shareholder returns, Christen, yes, look, in principle, we're agnostic. So we would look at the sort of merits of different forms of capital return based on the facts and circumstances. And clearly, given our conviction in earnings growth and what we see as the sort of current share price, then as you rightly alluded to, that could tip the playing field in favor of buybacks. But I think as the circumstance arises, we'll come at that with a sort of a blank sheet of paper and make the right call on it. So I think that's the way I would respond there.

Yes. I mean some of the teams are here today, Chris and Andrew are here today and are very focused on the whole customer orientation journey. And I think since they've come in, we've realized that we've got even more to go. We used to use NPS as our sort of barometer, but it didn't really give the granularity. We've changed that now, and we've got a much more granular insights by the customer, which is more transparent. And we can see there are areas that we can really develop. So it's really around the segmentation of the different customer base, understanding their journeys, what they want. Some want a lot of work on sustainability and strategic partnerships. Others are much more focused on service quality, the whole OTIFIC type stuff. And so it's a program to make sure we're segmenting the customers and holding the rest of the business to align around that customer journey. So I think we're a bit fragmented in the business. The sales guys are more customer-oriented, but how orientated are the factory managers? That's some of the stuff that we've got to be really developing the culture for.

Harry Dow from Redburn Atlantic. I think I've got 3, if that's okay. Firstly, just on imports, you mentioned potentially taking a share in soft mud imports may be going forward. I think maybe they've settled at a higher level than maybe people thought they might have. I mean, is there a reason in your view why they may be settled at that slightly higher level? And do you think they can fall in absolute terms from here? Or is it more about taking share in a relative sense as the market recovers? And then secondly, on brick slips. I wonder if you could just give us a bit of more color around, I suppose, the economics of brick slips for you guys and the customer from both kind of a price cost volume kind of dynamic in the sense, I suppose maybe in a simple term is what's kind of the EBITDA on kind of per square meter of brick slip for you guys versus sort of the standard cladding material? And then thirdly, just probably a follow-up on M&A, the sort of GBP 20 million mentioned in the presentation historically. I mean, should we see that quantum sort of step up over a similar time period looking forward? I know you mentioned where it might go, but maybe where that quantum might step up and what it might step up to.

Do you want to do the brick slips economics on the business case sort of I can add to that.

Yes. So look, let's deal with brick slips first, then we'll go with imports and M&A, Harry. I think we see this as being an attractive segment of the market. I think when you look at Futures as a whole, our expectation, our ambition, our belief is that the division should be capable of generating an EBITDA margin similar to where the concrete business is. So we don't see it as a 35% margin business like Clay, but we do certainly see it in that sort of 20% territory that concrete is operating at. I think certainly, we see an opportunity to produce slips at a fundamentally lower price point than we've been capable of historically and the market has proved itself capable of. So I think generally, we would expect to be a little bit above that in slips as a sort of product stream within the Futures business as a whole, but we would expect Futures to deliver that sort of 20% EBITDA margin as we bed it in.

Yes. And softwood imports being a little bit stickier. I think there are a couple of reasons for that. Firstly, the largest importer is one of the majors in the UK. and they've managed their capacity down and therefore, allocated more capacity from their imports. So that's one reason. The second reason, when you mothball plants like we've done, they need to have the products. And so some of the products have been imported softwood products. So I think that's the main reason for that. There's always been 150 million to 200 million imports in the UK market anyway. As the market gets back to 2.5 billion, we will need imports. And I think we'll grow a bit of capacity, so will some of the competitors, but we still need those imports. So that's the reason there. And then M&A, I think we're always going to be very balanced with M&A. This is a business that has given -- has done a little bit of M&A, but we've done a lot of organic investment. So the balance between M&A and shareholder returns is what is probably the bigger question now. And that you've got to be very disciplined with buying a business because we've got quite high hurdle rates. We've got a very valuable business. We're not going to just buy stuff and dilute the margins for the sake of growing bigger. It's got to be strategic. It's got to add value to the offer for the market and to add attractive value for us, and it has to compete with shareholder returns, which in a market like this, you can see, would be very hard to do. So that's the way we think about it. But we like to look at things strategically, and we like to look at things economically as well. I think we're out of time. Are we out of time? Signal from the back or so we are here. There are some people. We can have a little chat afterward. But look, we've got a great conviction in our business. We believe that the market is recovering. We're very, very well positioned with all the investments we've done, both in capability and assets over the years. And we've got some great operational gearing to come back into that recovery. So very excited about the potential of our business and really feel good about that as the market is coming back to play into it. So thanks very much for your time and attention today, and we can have a little chat afterward if you want. Thank you.