Marshalls plc (MSLH) Earnings Call Transcript & Summary

Okay. Good morning, ladies and gentlemen, and welcome to Marshall's presentation of the 2021 results. It's actually the first time, I think, in 2 years since we've been able to do this in person. It's nice to actually have people to speak to as opposed to just the camera. What I plan to do today is to, first of all, cover the highlights. Then I'm going to hand over to Justin, who's going to take us through the financial performance. I'll talk about the market and obviously give you an update on our 5-year strategy, which obviously is well underway; talk a little bit about ESG and the leadership, we think, that Marshalls bring to this area. And at the end with -- is an opportunity for questions. We are actually online as well. So first of all, we'll take questions from the room, and then there'll be an opportunity for any -- online who wants to ask questions through the operator. First of all, I'm going to talk, obviously, and we're going to talk today about the results, what we call the adjusted results, and this is really down to a prior pension charge. It's a noncash charge. But I think it's the underlying performance, obviously, of the business, and that's what we'll talk about. If you take the numbers for '21, this was a record year for us in terms of sales and profit. At times, it didn't always feel like a record year. You think a record year is obviously easy and successful. I think we all know there's been lots and lots of challenges in there. But there have been some really big highlights. I mean the sales were up sort of 26% against 2020. But obviously, our results, like many other companies, are going back and comparing it to 2019. And there, we were up some 9% and profit up 3%. From our point of view in terms of debt, we've come back into net cash positive against pre-IFRS 16, about GBP 100,000. So the balance sheet is in a good place. This year, we're returning to pay a full dividend, which, again, we see as a -- view positive. We have the 2x cover. And from our point of view, this year, we've chosen not to do a supplementary dividend, which I think is an indicator that we think we've got better opportunities to use that cash and investing in the business in terms of going forward. The first 2 months of the year have started positively. The business is good. I'll talk a little bit about the market later. Obviously, there was a pretty bad week with weather. But we are still seeing a very positive market out there, and that's why the Board is coming out and raising expectations for both '22 and '23 in the results of today. I think one of the big challenges, obviously, from our point of view last year is making sure you're looking after the customer. Customer service is critical. There were lots of factors at play. There was material availability. There was labor availability because of COVID in our factories and logistics. And there's also inflation on raw materials. I think it's fair to say in the process of that for 2021 and we've continued on '22 is we've established a process of how we pass the price on. So all the prices are covering the cost increases that we've seen and, in some cases, the cost increases that we've had from things like labor and obviously material. And that's been very positive and we've happen to manage all of that, and the process is there for us to do that throughout '22 as well. ESG, we believe, gives us leadership and gives us opportunities. This isn't just about doing ESG from a shareholder's point of view, which is important, but also ESG from a customer's point of view. We think that gives us opportunities and advantages. From a capital point of view, as I said, the balance sheet is very positive. We're looking this year at investing GBP 35 million in capital projects, which is the highest we've ever invested, and we see that again as a really positive sign. And throughout all of this, we focused on health and safety. If you take in the operations, our business is split in two areas. Obviously, staff, as in many other areas, have been able to work from home and carry on, but our factories and our logistics people have had to come in to work, and it's been absolutely critical that we provide the facilities to make sure we keep them safe throughout COVID. And they've operated throughout that period, and it's been a fantastic performance, and that's obviously enabled us to get the results we have. So with that, I'll hand over to Justin, who'll take you through the financial results.

Well, thank you, Martyn, and good morning, everyone. So I'm going to talk through the detail of the financial results for the year, and that's both the cash flow and the P&L account. And then I'll talk through an update on the strength of the group's balance sheet and our funding position, our capital allocation priorities as we look forward, and then close with some comments on our dividend for the year. So I'm pleased to be able to report that the group has delivered a strong top line performance in 2021, delivering revenues that are well ahead of 2019. The chart on this slide sets out a revenue bridge from 2019 to 2020 and then from 2020 through to the current year. And it's very clear to see from the chart the impact that COVID had on our 2 U.K. end markets in 2020. However, that's been followed by year-on-year growth of 26%. And for 2021 as a whole, we were 9% higher than 2019. It's also noteworthy that we report an acceleration of revenue growth compared to 2019 in the second half of the year, when revenue growth was 11% compared to the 6% that we reported in the first half. Now this strong performance was led by our domestic end markets. And with consumers spending more time at home, they've chosen to invest some of the savings that they've accumulated during the pandemic in home and garden improvements. And that's led to strong demand for both DIY projects and professional installations. And indeed, Marshalls' registered approved installers' reported order book is at 17 weeks, which is very high in historical context. So these factors have led to revenue growth year-on-year of 30% and growth compared to 2019 of 18% in that end market. We've also reported a strong bounce back in activity in the Public Sector and Commercial end markets. And that's been driven by residential construction and also infrastructure spend. And that's resulted in revenue growth of 26% compared to last year but at a more modest rate of 4% compared to 2019. And then finally, on our International business, for 2021, we reported 6% growth. But if we compare that to 2019, it's actually a cumulative 23% growth. And that's been driven by strong performance by our business in Belgium. So turning now to operating profit and margins. So the table on this slide sets out the year-on-year growth in revenue, operating profit and margins. And we've also included the numbers for 2019 to give you the prepandemic context. So this strong bounce back in operating profit and margins has been delivered against a challenging operational backdrop with continued waves of COVID variants impacting our workforce, raw material supply shortages and some challenges around the availability of third-party haulage. And the result we delivered demonstrates the benefits of the national manufacturing network and the fact that we operate our own vehicle fleet for a large proportion of our deliveries. So operating profit in the year was GBP 76.2 million, and that represents year-on-year growth compared to 2019 of 3% and GBP 49 million increase in profitability compared to the pandemic-impacted performance in 2020. We also reported a rebound in operating margins to 12.9%, and that compares to the 5.8% we reported last year. However, that is still lower than the performance in 2019. And that compression in margins was driven by a combination of the temporary supply chain challenges that we've been dealing with and incremental labor costs. And the increase in labor cost itself was the result of decisions to spend more on overtime and, to some degree, to have additional money in our factories. And that's to compensate for the impact that COVID has had on the absenteeism rates in our factories. If I look forward to 2020, though, we expect to see some improvement in operating margins as the impact of COVID subsides on our business. So this slide sets out the P&L account from operating profit through to earnings. And the first thing to highlight here is that the growth in operating profit compared to 2019 has fed through to 3% growth in profit before tax and a very significant increase compared to the result for 2020. The effective tax rate for the year, though, was relatively high at almost 21%. And that's been driven by a one-off charge resulting from the government's decision to increase the rate of corporation tax to 25% from 2023 onwards. That's been partially offset by the release of tax provisions that are no longer required and some benefit from the government's super-deduction that has been put in place to encourage corporates to invest in capital projects. So this higher effective tax rate has had a moderating impact on earnings growth when compared to PBT growth. And earnings per share for the year were 28.6p, which is actually slightly lower than the EPS reported for 2019, when the effective tax rate was 17%, which is lower than the normalized rate. So turning now to cash flow, which remains very strong. Cash flow from operating activities improved very, very significantly compared to the result for 2020. And that was driven by a recovery in profitability. However, when you look at the measure compared to 2019, the performance was a little bit worse. And that was driven through the combined impact of a conscious decision to invest more in imported inventory, the impact of revenue growth on trade accounts receivable and the timing of certain corporation tax cash flows. The conversion of EBITDA into operating cash flows remains very robust and was 80% for the year, and that's despite this incremental investment in inventories that I've just mentioned. Capital expenditure for the year was just under GBP 22 million, and that was a little bit lower than our original expectations. And that was driven through a combined impact of some favorable terms that we got on the purchase of some of the CapEx items together with some supply chain challenges for capital goods. The key components of the spend in the year were on the new block plant that's under construction at St Ives and on expanding our concrete brake manufacturing capacity. If I look forward to 2022, we expect capital expenditure to increase significantly to GBP 35 million as we ramp up spend on the new block plant at St Ives, which is on track to be delivered in Q3, and on a variety of other projects, which are designed to either increase capacity or enhance and maintain our existing capital base. So these factors led to an overall reduction in net debt of GBP 34 million. And net debt closed at GBP 41 million for the year. Now if you look at that on a pre-IFRS 16 basis, we actually had a small positive cash balance of about GBP 100,000. So now to touch on our bank facilities. We have total bank facilities of GBP 165 million of which GBP 140 million are committed. And following the renewal of certain facilities earlier in the year, we now have a balanced maturity profile, which extends out as far as the third quarter of 2025. And details of that are set out on the -- in the table on the right-hand side of the slide. We've got very significant cover against the covenants that sit within our bank facilities with interest cover at 54x compared to a covenant level of 2.5x. And net debt-to-EBITDA are effectively 0 compared to a maximum of 3x. Gearing is very low at around about 12% and actually is effectively 0 on a pre-IFRS 16 basis. And at the end of December, we had very significant headroom against our debt facilities of GBP 114 million. Now this slide sets out a variety of measures which focus on a combination of working capital, balance sheet strength and returns. And from a glance of the slide, you'll see the debtor days, creditor days and inventory return are all in good shape in a historical context. Returns have rebounded significantly to pre-COVID levels compared to the negative impacts that we saw in 2020. Gearing is very low in a historical context, as I mentioned on the last slide. And net assets have strengthened to over GBP 340 million. So taken together, we have the cash-generative nature of our business model, the strength of the group's balance sheet and the headroom against our debt facilities which gives us significant capacity to invest in our organic growth strategy and to evaluate selective acquisitions as and when attractive opportunities arise. So I'll move on now to our capital allocation policy, which I can confirm remains unchanged. Our first priority is to invest in organic growth opportunities. And as mentioned earlier, we expect a significant increase in CapEx spend during 2022 to around about GBP 35 million. Our second priority is to continue to invest in new product development and research and development. And we expect to spend a similar level in those areas as previous years with a focus on low-carbon products. We have a progressive dividend policy, and we aim to maintain 2x cover over the cycle. And our fourth priority is to continue to evaluate selective acquisitions of good businesses that operate in attractive sectors that are going to add value to our customer offer and to our shareholders. And finally, in the event that we don't have sufficient attractive investment opportunities, we will return funds to shareholders through supplementary dividends. So turning now to the dividend proposal for the full year. So the Board has considered the rebound in profitability, the strong cash flow generation of the business model, the strength of the group's balance sheet alongside our forward-looking capital allocation priorities. And I'm pleased to note that we're declaring or proposing a final dividend of 9.6p per share, which, when taken together with the interim dividend of 4.3p per -- sorry, 4.7p per share that was paid in December, brings the total payout to 14.3p for 2021. And that's consistent with our policy of 2x cover. And with that, I'll hand back to Martyn.

Thanks, Justin. So obviously, what I'd like to do now is talk about the market. I mean we can all see that the market is dominated at the moment by the terrible news in Ukraine. But at the end, if you look at it from a construction market point of view, I think we've got to keep remembering this is a very strong market that we're actually seeing and a market that we're obviously transacting in. If you look within the CPA, you can see by the numbers here that there was a strong recovery in 2021. And that recovery is continuing in '22 and also in '23. In fact, by the second quarter of '22, we will have returned to where we were pre-pandemic. So you can see the construction market is one of the better markets in my view out there today in terms of how that has recovered and how it's bounced back. And that's the construction market in whole. the reality is obviously, there's different sectors to the construction market and which ones you're actually exposed to. As you can see here, looking forward at the areas that are going to have the most growth, the main ones particularly are obviously in New Build Housing, also in infrastructure and RMI. And it's no coincidence that those are the three core areas also for Marshalls. So from our point of view, in the construction market as we see it, we see a positive market, and we see the correct focus in those main areas. Obviously, we talk about domestic. And as Justin said earlier, in the order book at 17 weeks is very high. If you look at these numbers, we started this process in the early 2000s. For many years, it ran at 6 to 8 weeks. I can remember standing here and saying 12 weeks was far too long. Since the pandemic, we've been up, as you can see, 17 weeks, even up to over 20 weeks. The reality is we don't actually know what this number is. This is the amount of weeks that the installers have quoted for and taken orders. The biggest complaint we have from the public today if they go on our website and they find a registered installer is they won't come out to even quote them for their job. So we don't actually know what the true demand is. We just know that it's at least 17 weeks out there today, which is historically very strong. Last -- if you look at last year, we did 18% more domestic sales than 2019. So the register is responding and the installers are responding, but the demand is very, very strong. Also, the U.K. housing market. We continuously say in the U.K. we don't build enough houses, we don't build enough homes. It's recovering, but the demand is still very, very strong. And it's the detail as well which is important on this. We're building more and more detached houses, semi-detached houses, and we're building terraced houses and apartments. Backfilled Marshalls is actually a very good part to be in because, obviously, there's more landscaping involved in that. One of the other key areas is understanding your customer base. If you take from Marshall's point of view, our customers are all -- the people who own their own homes. That's obviously the starting point. And when you look at some of these groups and surveys, trying to understand what they're actually trying to do, if you've got a reading of over 100, that's showing an intention to spend money in terms of going forward. And there are three really strong groups here in terms of the prestige customers, the people who've had domestic success and people country living. These individuals have funds. They have already declared that they want to do work in terms of their properties, and they are critical from Marshalls' point of view in terms of our customers. So they aren't going to borrow money to do this, and they're able to do it. And if you look at household savings, household savings have -- there's GBP 218 billion extra that has been saved effectively in the pandemic. So people talk about their savings and what people are going to do to it. There's enough money being saved effectively to do the work they want to do to their homes and also go on holiday, if they want to return to that. So I think the funds are available. The desire is there. People are seeing -- investing in their houses, something they actually want to do going forward, which is really important. In the Commercial business, a number of you know, we use the ABI to understand what is actually happening out there. And again, this is key areas in terms of Residential, Roads, landscaping. This is where these projects have been released. And again, these are critical areas for Marshalls that we focus in and where our business comes from. The 5-year strategy is obviously -- we announced this before the pandemic. It's still very much underway. And I thought it was an opportunity, from my point of view, to give you an update on some of the key parts of that for us. We've talked in this 5-year strategy of creating better spaces, about, from our point of view, becoming the U.K.'s leading manufacturer of products for the build and construction market. And there's pillars which support all of that. The first one, as we talked about before, is brand preference. From our point of view, this is a key differentiator to the competition. This is how we go about trying to win our business. Effectively, we use digital, we use ESG, we use our design capability and the product range. And the key for us is to make a spec, hold the spec and deliver the spec, which delivers, obviously, the sales. This is not our competition go-to-market. So from their point of view, they've got to break our specs. And a lot of our effort is put into these areas. Also, we've talked before about digital. Digital is continuously growing in everybody's business. And a key from our point of view is to give a good experience to the customers. And you do that effectively by tailoring to them what they want in terms of whether it's design, whether it's samples, whether it's product ranges. And now we're using visualization. So people can actually look in their own properties and understand what they would look like with our products, and they're able to identify that. Again, well ahead of anything that the competition is doing in this area. We talked about capital investments. The big investment we're doing at the moment is the dual block plant in our St Ives factory, which we hope will come on stream in September this year. And I can imagine we're going to have a Capital Markets Day there where people can come and actually see this operating. It's the first of its type in the U.K. It's well underway, and it's going to give us a real big differentiator in the marketplace. We're also, I'm pleased to say, identify many, many projects still coming from operations where people are identifying 3-year paybacks. And our claim to them is anything they come forward with, with a 3-year payback, we will invest in. Going back to capital allocation, it's still the best use of our money. And one of the benefits, we talk about new product development, which is at item 2. The dual block plant has given us many, many options in terms of different finishes for the products, obviously, being cost effective. We've had over 100 customers working in different sessions to understand who is wanting what products that's going to come out of this. It gives us the opportunity to make these in one pass, as we call it. So it's not second reprocessing and was the first of its type. So we think this is going to give us big, big benefits in terms of going forward. And another critical part of our business, and the story really for Marshalls, is a part of what we call the emerging businesses. These are the businesses we acquired in Water Management, in concrete bricks. The demand for those products is very, very strong at the moment. We've had a record year in '21. '22 will be even better. And the outlook in terms of concrete, whether it's in bricks or in pipes, is very positive when the competitors and competitive products are having all sorts of issues in terms of cost and availability. So again, these are areas we can see further investments in from our point of view going forward. I talked that we want to cover, obviously, ESG. And from Marshalls' point of view, we like to think we're leading in the build area of this. Now ESG for Marshalls is not something new. We've been doing this for over 20 years. We've been focusing on the carbon that goes into the products, what you can do about reducing it. And that has obviously led us to be a -- one of the first companies to use science-based targets to say we'll be net zero by 2030. And that is well underway. If you take how we build our model, it's effectively around the U.N. Global Compact, which we work with, combining that with how we do things in Marshalls, which we call The Marshalls Way. But it's really three key focuses. It's in terms of respecting people, it's in terms of the climate action and obviously making the products and making the products in the right way. And that gives us real big opportunities. Now the key ESG is focusing on two different parts really: it's mitigating, obviously, the issues that create problems in adoption; also, from our point of view, trying to give customers an option when they're choosing solutions for what they want to do. If we can bring products and different ways of making the products, then the customer, it gives them an opportunity to make those decisions. I mentioned earlier we've signed up to being, by 2030, net zero carbon, and we're now 2 years into that. And again, last year, we were below our target in terms of the carbon we are using, and that means we are very confident of the journey that we're actually going forward. What's also changing around us is the way in which carbon is measured. There's been a lot of debate in the past between how you measure this. Do you measure it effectively from cradle to grave or cradle to gate? And we've always said it's cradle to grave. It's the whole time you've got to take it in logistics. You got to take what happens when the product is installed and the potential of it being recycled at the end. And that is now being established as the measurement that everybody is using. So again, I think we were there before. So we've been using the right measurements. One of the most exciting things from our point of view is what is called carbon sequestration, which is an interesting concept from our point of view that we are working on today. Sorry, there's -- what you've got here in terms of the model is we take effectively working with utilities. They are capturing carbon. We're trying to turn that carbon into liquefied form. It would then be delivered to us, in many cases people paying a fee to take it away because, obviously, the alternative is they bury it. We have an option, and we're looking at two different ways of making this work. One is we put the liquefied carbon into the product mix when we're making it. Or the second is we put it in through the curing process by effectively vacuum-sealing the chambers and putting it in. Now what carbon introduced into concrete does is accelerates the curing process. So instead of the curing taking a number of days, it can actually be done in 24 hours. But the product consumes the carbon. So when you look at the carbon footprint, that is effectively offsetting the carbon that's gone in, for instance, from cement that's been introduced. So this gives us an opportunity of having a product that could be carbon positive even in terms of when you're then selling it, which, in concrete terms, is a massive benefit. Now to achieve this, we're working at the moment from our point of view, of looking at which of the two solutions work, potentially a combination of both. That will be an investment into our facilities in terms of the curing chambers. The dual block plant has been purchased with that already in place. So we'll be able to utilize that straight away. And we're even looking and working at the moment to see if there's a funding that we can actually apply for from the government in terms of on this for saving of carbon. Whether we can or can't is a byproduct. Obviously, it'd be a bonus, but we're going to do it anyway. So I think this is a big differentiator from our point of view in terms of measuring in this area. The other key focus for us is in terms of diversity, equity, respect and inclusion with people. I mean the construction market has not been leading the way here, but we are determined to make some changes in this area. We've been investing for some time in terms of obviously living wage. We've been -- this year brought in maybe -- or 100 graduate apprenticeships, and we want to keep developing this area. And we have a challenge within construction: how do you change in terms of the makeup the workforce? And what you want to do is attract more and more people to this area. The country is effectively competing for labor, so we want to make sure that we are seen as a company that people want to join. But the key part of ESG for me is the third-party accreditation, which is absolutely critical. You can claim anything in ESG. It's a little bit of a cowboy outfit at the moment. People, companies are coming out and making all sorts of claims, and it's all well and good. But at the end of it, it's got to be validated. And from our point of view, we focused on a number of areas. We've got, as you can see, lots of accreditation. But the key parts of ours, we're the first construction company effectively to have science-based targets that has been signed off and audited. We're the first company to have every one of our products to have carbon footprint. And that is absolutely critical because if you don't know what the carbon in your product is, how can you actually come out with targets that you're doing? And obviously, we've contributed to things like fair tax and going through. So being recognized externally, we think, is really important and critical. And I'm convinced in the next few years, this is going to move really down to a number of key measurements that people are going to be measured against. And I think we -- Marshalls are already there. We're doing it in the right way. We're measuring carbon in the right way, and we've got our targets all set. So in summary, as I said, 2021 was challenging. Lots and lots of balls in the air. But the reality is we've come out, we've ended up with a record year in terms of turnover, a record year in terms of profit. We see 2022 as a continuation. There's lots of challenges. As we said, the market is being talked about, lots of different things. But if we look at new build, it's very strong. We look at the structure, it's strong. You look at what cities are doing, they're investing to try and get people to come back into the city center, which is good for Marshalls. And if you look at Domestic, it's at levels we've never seen before. So we think the construction market is strong. We've established the process of how to manage the inflationary pressures and passing that through. And it's not just us. The whole supply chain is passing it through, whether it's merchants, contractors. Everybody is understanding that. As I say, from our point of view in terms of going forward, we've been positive for '22. ESG is becoming a commercial advantage. It's not just a case of something for shareholders. People are asking us for low-carbon solutions. They're prepared to pay premiums for those. Obviously, from our point of view, we -- as we told you earlier, in terms of our now different capital allocation policy, we're interested in acquisitions. We have the funding to do that, and that's something that is certainly being pursued from our point of view. New product development has always been critical for us. And new product development, I now draw with carbon reduction because I think the two things go together. The balance sheet is positive. The dividend is obviously back to full. And as we've done today, as I mentioned earlier, we have been able to upgrade the expectations for 2022. So that's the end of the formal presentation. I mean, obviously, we open up for questions. If Justin wants to come and join me. We have a microphone in the room. So if you could put your hand up and we'll try to bring it to you. So we've got 3 hands, 1 mic, so. [Operator Instructions]

Okay. Adrian Kearsey, Panmure Gordon. I'll keep it to two questions. Very interesting point that you made in terms of the -- so I think you referred to a sequestration of the product. Within the process, historically, the racking was always very much a sort of a bottleneck in terms of how much capacity some of the production plants had. How much kind of investment would you require if you had to have carbon dioxide sort of sealed chambers in order to have that negative carbon footprint? And would you require quite an increased footprint for that racking next to production? And then the second question. With Edenhall, are you finding that with the concrete brick, that you're actually converting new house builders to using the concrete brick for the first time? And it'd be good to perhaps get some details on that.

Yes. I mean taking the two -- in terms of the racking. So when we make concrete products today, the product is of a nature where it can support itself in weight, but it can't yet go into the yard. So it is already going into curing chambers. So the curing chamber capacity does not have to be changed. What has -- the investment is to basically vacuum-seal the room so you can then pump the carbon into the room. So I don't think it's going to be an investment in footprint, but it will be an investment in the building side of it. If you took -- if we did it for all of our facilities over a number of years, you're talking a few million pounds. But it's certainly manageable within our capital plans that we do. And as I said, we are looking at the potential of getting some investment support for that. So I don't think it's prohibitive in any way, and I certainly think it would pay back in terms of what it would give us in the opportunity. And what I think will happen is it'll be gradual. So it won't be all products going to that straight away. It'll be done in a progressive way. The starting point will be our dual block plant, where it's actually already built in. So I think from that point of view, we can trial that in the market, bring premium products and see where that is received and obviously is sold. The second, concrete bricks, absolutely. I mean concrete bricks is at the highest we've sold at any time. I mean there is a clear brick shortage today in the market, as you're probably aware. So it's much easier, if anything, to convince people to try the bricks. And when they're trying them, they find then there's very little difference between one and the other. So most of the national house builders today are laying and building houses with concrete bricks. So it's a case of expanding that. Last year, we opened up Maltby, which was an old block plant. And we are looking at further investment. When I do, anticipate we'll buy -- we'll build new concrete brick plants in the next 2 to 3 years, a number of them. So...

Chris Millington at Numis. A few if I can. Just quickly, just following on from Adrian's question, can you just give us an update on where concrete brick capacity is today? And maybe just put that in a historical context. Next one is just about order book length and delivery times. Has that normalized from last year? And then you mentioned about pricing mechanism in place as well. Martyn, perhaps you could comment on that. And similarly, maybe just tie in kind of what the key cost inflation components are out there at the moment and expected to be.

Yes. I mean, well, first of all, from a capacity point of view, concrete bricks is about 4% of the market. So it's a relatively small number. I think inputs is in about 20%. At the moment, with our capacity increases we've had, that's probably taking it to 5%. I think when we bought Edenhall, we always talked about having 2 to 3x what capacity it has, and I still believe that is feasible within a sort of 5-year period. So that's where the investment plans are. But if you work -- going forward, if we can get to 10% of that market, it would be great from our point of view. And I think that's definitely achievable in that sense. As far as the pricing is concerned, there's -- what we've been very clear, I mean, the whole supply chain, I mean, I've never seen inflation like this for many years. So I think last year was a little bit difficult. But I think it's much more established, we've been very clear with our suppliers, we need a notice period before they move their costs so that we can pass that on. The merchants are in the same position. They have a notice period behind that. So I think the whole supply chain now understands that. Whereas in the past, we'd have had annualized price increases, it'll come as often as the cost increases have come in. So last year, we had what we saw as two increases. This year, we've had the January increase. I think there'll be a second quarter increase again. Where the pressure is coming from, probably materials that are supplied to us, the energy users, things like cement, obviously, things like ceramics. Last year, it was about imported stone because of the container shipment costs. But where my confidence is coming from is we now believe in the supply chain, we have sufficient time for understanding any potential cost increases, to advising and passing on the price increases. Now some of our business is dynamic pricing, as you know. So we do that almost on a daily basis. So we can pick that up. But I'm confident we can pass those things through. Did I miss one question?

The order book.

Has that -- is it normalized now?

The order book, I mean, we used to sell effectively from stock. When that got very busy, we had ended up with a make-to-order, order book. That is now coming all the way back down. We're virtually back to stock, which gives everybody a bigger advantage from a merchant's point of view. So it's coming back. I'd say by the second quarter, we'll be back to normal.

Clyde Lewis at Peel Hunt. I think I've got a load Martyn, I'm afraid, so I'll do them one at a time to make it a little bit easier. Probably one for Justin, I think, on the pensions. A little bit quirky. Obviously, your pension surplus has gone up, and there's an extra sort of exceptional in there. Is that just a one-off and unlikely to reoccur?

Unlikely to continue. So the accounting surplus on the pension increased by over GBP 20 million in the year. But within that, there was an element of it which had to go through the P&L account in accordance with IAS 39. It's a one-off. There's no cash. And if you look at the Scheme on its actuarial valuation basis rather than the accounting basis, which is the important one for cash flows, it's in a surplus of more than GBP 20 million. So not going to be any cash flow, not going to be another P&L account charge associated with a complete one-off.

Okay. The drop-through. Last year, I mean, I was good enough to work out the drop-through from the revenue and the profits. I think it's 41% in landscape and I think it's 42% in Other. Should we be penciling that into our models going forward? Are there one-off factors that we need to bear in mind? Because obviously, as Chris has asked and we're all aware, cost pressures, price rises, et cetera. And obviously, the sort of big, sharp pickup in volumes last year has clearly led to probably a steeper drop-through than we'd normally get.

Probably you'll be building in that kind of drop-through into your models. What you should be expecting is some modest improvement in operating margins in 2022. But actually, we're still dealing with COVID. Whilst the impact on the business is receding, it's still there. In January, we still had pretty high levels of absenteeism, and they've tailed off since then. But those challenges are there, and we think they'll wash out throughout the year. So I don't think margins will recover to 2019 levels. But I'd expect them to begin with a 13.

Okay. And my next question was on those COVID sort of, I suppose, sort of overtime bonus costs. I think you sort of flagged them. You think those will drop this year but not completely disappear. But -- and presumably, you've got wage growth anyway offsetting a chunk of that.

We're 100 people off in January. It's now 30 -- or just below 30. So it's obviously improved a lot. But it's not 0. So we -- people still got -- if you get COVID today, the advice is obviously do not come to work because we don't want people to spread it. So people are still off for up to 10 days. So it hasn't completely disappeared. We are covering that. So yes, there's an ongoing cost. We'd like that to disappear to 0 and get back to normal, but it's not there yet.

Next one is on Transport. Any issues to flag at the moment? Or has that normalized in terms of availability of driver and pressures there in terms of sort of fleet?

We made an adjustment last year in terms of what we were paying our drivers. And obviously, market forces meant that we had to move that cost. Since we've done that, we have full employment effectively in our drivers. Today, we've always said -- I think having our own fleet is a massive advantage for Marshalls. And I think it's more now than ever. So it's something we're going to maintain. We have full manning. We invest, obviously, heavily in that area. And if you can imagine, going out into the market on spot hire today is expensive and challenging, to be honest with you, even getting the capacity. So I think I'm much happier where we are than if we would.

You obviously flagged the order book, the Domestic order book. And you talked about getting customers ringing up and saying, I can't get anybody to come and "to do the work." Has that got you thinking again about having directly employed teams going out doing the job for you as a business so that you can get that Domestic market going?

Now I've always said the same thing, and I do believe it. Marshalls' job is -- we know what our role is. We're not an installer and we're not a merchant. And I don't think it makes sense to do either of these roles and jobs. I prefer to work with installation teams and try and get them to recruit more and to do that work. Because the minute you go into that, you become a competitor to your customer. And I think it will only cause issues, to be honest with you. I think we work with them. We have lots of people who go around the country and check. And they work, training them, helping them, even trying to direct people from college to come and work with them. And I still think that's the best way to do it. I mean they responded last year by doing 18% more than they did in 2019. So the market is there. They know that. And I think they'll do more again this year.

Okay. Last one, I promise. Land sales. Should we be looking to see any more this year? Or was -- again, is it probably more into '23 or '24 before you might sell anything else?

I think there may be some modest sales this year, but they won't be particularly significant in either P&L terms or cash flow terms.

Any more questions in the room? I know we've got people online. Is it possible with the operator to ask if there's anybody who has any questions, please?

[Operator Instructions] And it appears there are no questions over the phone.

The sound of silence. Okay. Well, thank you very much for your time.

Thank you.