Marshalls plc (MSLH) Earnings Call Transcript & Summary

Okay. Good morning, ladies and gentlemen, and welcome to Marshalls' plc's 2002 1st year results -- this is half year results basically. It's also the first time we'll be actually announcing results, which include, obviously, the Marley acquisition, which has now been part of the business for the first 2 months, certainly in the half year. My plan today is I'll cover the highlights. And then I want to spend a little bit of time talking about the new divisional structure that we're actually reporting on for the first time, which we hope will give a bit more clarity to the results and be able to give people a better understanding of the markets where we're operating in. Then Justin will come up and cover obviously the financial performance. I'll come back and talk about the market. The key drivers in each one. And then we have an update on our 5-year strategy, obviously, ESG. And at the end, there's an opportunity to ask whatever questions any of you would like to do. So first of all, I'll come into the results. The results are actually a record performance in terms of our turnover and profit for the group. Certainly, from our point of view, what I'm going to talk about today is the adjusted results Justin will explain the difference in the adjusted results and the statutory results, obviously, most of it following the acquisition. But as you can see here, the sales are up some 17%. On a like-for-like basis, they're up 7% if you take, obviously, the trading of Marley out. The profits are up some 15%. EPS is up 5%. It's a smaller number because obviously, more shares have been issued in terms of doing the acquisition. But even with the new shares, they're still up 5%. And the dividend that we're actually going to be paying, the interim dividend is up some 21%, again at the record level. Obviously, the net debt has risen in line with the acquisition and obviously, what we were trying to do then, and Justin will talk about some of that as we go through. Obviously, from our point of view, the acquisition of Marley, we believe, is truly transformational for the group. It further diversifies the group coverage of different sectors of the construction market, which is a strategy we've been pursuing, and I'll talk a little bit more about later. Certainly, from a business performance, it's been performing very, very well. Certainly from the point of view of the business, the RMI has been performing very strong, where there's less discretionary spend there. Obviously, people have to change their roof. Also from a point of view of integration, has been tracking online with the plans of everything we've put through. There's a strong cultural link, we believe, between the companies. Obviously, one of the things we identified was the opportunity in operations, and we still believe that opportunity is there to get enhanced performance effectively, therefore, giving bigger capacity to what we've got. And we're working our way through that. And obviously, that gives us the opportunities to increase the revenue. And certainly from a logistics and purchasing, we're looking at opportunities there to put in the 2 businesses together. What does that mean in terms of from our point of view, buying things and obviously, distribution-wise across the country. We've also identified other opportunities for potential new products. Brick slips is something that's been talked about for some time. The brick slip, we believe the right way to make that is on a title machine -- and obviously, our brick division, we very much like that product to add to its current portfolio. So we're looking at that and entrant into obviously, being able to do a concrete brick slip. We think that's got a big opportunity. And we're also at the moment, close to signing off a new concrete tile line to be installed, which will obviously give extra capacity as well. So the acquisition is going very positively and very strongly. As I said, I wanted to talk a little bit about the divisions. So we've made some changes, obviously, as a business. So first of all, we are trying to report today in 3 different divisions. We've got Marshalls landscape products, which may accept our commercial landscape products and domestic landscape products and international. And that was really the core of, I guess, Marshalls' historically. We then go Marshalls' building products, which has our sewerage and drainage, this is a business that obviously looking at all the drainage. This is our acquisitions from CPA in the past. We then got Bricks and Masonary , which includes the acquisition of Edenhall put together with the Marshalls' part. You then get our Mortars and Screeds in our aggregates. You then got Marley, obviously roofing products, which is made up of concrete and clay tiles is made up of the timber battens, components, accessories and then [indiscernible] solar solution that's offered. So we are reporting the numbers obviously in that way. What you can also see is how we used to report, which is really a domestic market, then we put everything into public sector and commercial, which included the acquisitions of Edenhall CPA. And then you had international. So we think this hopefully gives better clarity in terms of our net business. Obviously, as well as having the divisions is what markets that they operate in. So again, we give in that information by it was splitting now from new build, commercial stock infrastructure and private housing RMI. And our intention going forward is show all of the results in that area. If you look at the first half, I would say what we've seen is strong business from obviously a new build strong from infrastructure commercial. And we've seen some caution in the discretionary spending of RMI, which is obviously more in the landscape part than others. And really, we're expecting that to continue in the second half of the year. If I look at what does that mean from a business point of view, if you take the 3 segments as we reported, then what you've got is roughly 50% of the turnover is obviously in landscape products, and then it's a 1/4 of the business in net each of the other areas of obviously, the building products and also Marley. If you look at the segments that we're in and where we're selling, as you can see here, what you've got roughly is a split of almost 40% in new build and obviously, commercial and then roughly 20% in terms of RMI. So from that point of view, we think and we hope this gives easier clarity to understand our business. If you look at the changes that's going on in the business, and as I said, from our point of view, what we've looked at over the years is trying to see how can we increase the exposure, if you take from the marketplace. So showing here 2013, I guess, picking that is when I joined the company, what you can see is we've actually hinged the exposure we have, particularly away from obviously just in landscaping, but also the effect of the domestic part, which we accept is obviously the discretionary part. So if you look forward to 2022, what you can see is the actual domestic landscape and is now 15% of the group, where it used to be 31% of the group. So from that point of view, it obviously has changed. Now we're not saying that because we see that as a negative section. Actually, if you go back to 2021, that was our fastest-growing business. What it really is trying to highlight is, from a construction point of view, we believe we cover all the different factors of it and obviously, one of the key exposures from our point of view is to make sure we're getting the best out of that business in the relevant areas of where we're operating. So hopefully, you give some clarity. With that, I'd like to hand over to Justin, who's going to go through the financial numbers.

Thank you, Martyn, and good morning, everybody. So I'm going to talk through the detail of financial performance for the first half of the year. And I'll do that in the new segmental reporting format that Martyn has just taken us through. I'll then talk through the key features of our cash flow performance during the same period. Before moving on to an update impact of the acquisition of Marley has had on the group's balance sheet and our funding position. I'll then touch on our capital allocation priorities and close with some comments on our interim dividend. Now before I go into the detail, it's probably just worth highlighting that the profitability measures that we report within this presentation are stated after adding back various adjusting items in order to show the underlying performance of the business. And it shows adjusted results the Board uses to assess performance and also to assess dividend payments. So adjusting items in the first half of the year were GBP 20.7 million, and they comprise the acquisition costs associated with the Marley deal, that was about GBP 14.6 million. The unwinding of a technical accounting adjustment made to state inventory at fair value, again, associated with the Marley deal, and that was GBP 3.9 million. And then finally, the amortization of intangible assets that arise on the acquisition of subsidiaries and that was GBP 2.2 million. And further detail of those items are set out on Page 51 on the deck if you've got some interest in that information. So turning now to the business performance and starting with revenue. So this slide sets out a revenue bridge between 2021 and the current financial year, and it's split between our new reporting segments. So overall, as Martyn touched on earlier, group revenues increased by 17%, and that includes the benefit of the Marley acquisition for the post-acquisition period. However, on a like-for-like basis, revenue growth within our businesses was at a more modest rate of 7% during the period. Now the key drivers of growth were a strong performance by Marshalls building products. The benefit of the Marley acquisition and that was partially offset by a softer performance from Marshalls' Landscape Products, and that's really reflects its exposure to private housing RMI. So turning now to operating profit, which increased by GBP 6.4 million or 15% during the period. And the chart on the slide sets out again a walk from the 2021 result through to the current year. And the key drivers of performance were strong growth in profitability in Marshalls Landscape Products; and GBP 8.6 million contribution from Marley in the post-acquisition period. And that was offset by a weaker performance in Marshalls Landscape Products, where volumes were lower year-on-year. Operating margins were marginally lower than 2021 at 13.8%. And that reflects a stronger performance in Marshalls' filling products. The benefit of Marley is structurally higher margins, and that was offset by a weaker performance within the Landscape Products business. So I'm now going to talk through the segmental results for each of the reporting segments. Now this slide sets out revenue, operating profit and operating margin for Marshalls landscape products. And as Martyn touched on earlier, that comprises our commercial and domestic landscaping businesses, landscape protection and our international businesses. Revenue in this segment contracted by 1% year-on-year, and that reflects its relatively high exposure to private housing RMI, which was weaker than in 2021. And that reflects a normalization of household expenditure priorities, declined consumer confidence and the impact of inflationary pressures on household budgets. We also saw continued cost inflation within this business. So it continues to be a key feature. And we are successful in being able to pass those costs on through the supply chain with no adverse impact on profitability. And therefore, the reduction in profitability during the period of GBP 5.5 million arose from lower sales and production volumes, which impacted both gross margins and the operational efficiency of our manufacturing facilities. And those factors resulted in a 2.4 percentage point compression in operating margins to 13.8%. So moving on now to Marshalls Building Products, which comprises our mortars -- sorry, our sewerage and drainage, bricks and masonry and Mortars and Screeds and aggregates businesses. Now activity levels in those segments continue to be very positive during the first half of the year. And we saw a particularly strong demand for our bricks and masonry products, and that led to a 21% increase in revenues compared to last year. We also delivered a very strong improvement in segment operating profit, so GBP 4 million to GBP 13 million. And that reflects the proactive management of inflationary pressures, along with strong commercial leadership. And those factors resulted in an improvement in margins of 2.3 percentage points to 13.6%. Turning now to Marley, which manufactures and supplies a range of concrete and clay roof tiles, timber batons and integrated solar panels. And this business has traded positively during the post-acquisition period, delivering sales growth of 18% compared to the corresponding period in 2021. And that reflects a good backdrop in both new build housing and commercial infrastructure and industrial end markets. And also the fact that its private housing RMI business is much less discretionary than say, our landscape products business. Marley delivered a profit of GBP 8.6 million in the period, and that reflects the proactive management of inflation pressures, some benefits of operational leverage and the fact that we focus on margins rather than volumes in our timber batten business. The margin performance was very strong at 24.2%, which is structurally higher than the Marshalls businesses. Now this slide sets out the profit and loss account from operating profit through to earnings and earnings per share. And you can see that the operating profit growth of 15% flowed through to just slightly slower rate of growth at the profit before tax level, that was up 13%. And that reflects additional finance costs associated with the debt taken on to part fund the Marley acquisition. The effective tax rate in the period was just over 19%, and that's a couple of percentage points lower than last year. And as a result of that, profit after tax or earnings increased by 16%. But as that flows down into earnings per share, we saw growth there of 6%, and that reflects the additional shares that we issued to part fund the Marley acquisition. Moving on now to cash flow. And cash flow from operating activities was a little weaker in 2022 than last year. And that reflects additional investments in net working capital, the largest component of which was an increase in inventories. And that reflects the transition to the Marshalls business being ex stock again. Net capital expenditure was GBP 7.8 million, and that was a little bit lower than our original expectations, which reflects some change in phasing of spend during the year and a reduction in our overall expectations for spend. We will see a ramp-up in the second half of the year, so we spent more on the new dual block plant. And we expect the first line to operation of that new factory in early Q4. And overall, we expect expenditure on CapEx now to be in the region of GBP 25 million to GBP 30 million. The cash flow statement also includes some significant items in respect of the Marley acquisition, including both the issuance of new equity and the drawdown of new debt facilities, and that's been used to finance the acquisition-related cash flows. And so overall, we've seen an increase in net debt of GBP 211 million, and reported net debt at the end of June was GBP 252 million. And on a pre-IFRS 16 basis was GBP 208 million. Moving on now to funding and liquidity. So we used a conservative capital structure in order to fund the acquisition of Marley, with more than 60% of the consideration be funded through the issuance of new equity. We also drew down a new term loan of GBP 210 million and replaced our existing revolving credit on old draft facilities with a new GBP 160 million RCF. So that gives us total debt facilities of GBP 370 million with a 4-year term and they've been priced at some plus 165 basis points. We've got very significant cover against the covenants that sit within the banking agreements with interest cover set at 52x compared to covenants to more than 3x. And pro forma net debt to EBITDA at 1.4x and that compares to a covenant of less than 3x. Gearing remains relatively conservative at 36% and on a pre-IFRS 16 basis, that's 29%. And at the end of June, we've got very significant headroom against our debt facilities of GBP 80 million. So turning now to the post-acquisition balance sheet. And I guess the first thing to draw out on this slide is a very significant increase in net assets. So around about GBP 360 million increase. And that principally reflects the new equity issued to part fund the Marley acquisition. Intangible assets have increased by GBP 450 million, and that's split broadly evenly between brands and customer relationships, both of which are being amortized and goodwill, which in accordance with accounting standards, isn't amortized. Net working capital increased by GBP 58 million. And that was driven by a combination, broadly split evenly of the impact of the Marley working capital coming into the balance sheet and additional investments in Marshalls working capital. And again, as I earlier that's largely in inventories. I've touched on the last slide, net debt has increased to GBP 252 million, and that reflects the funding of the -- apart from the acquisition of Marley. So now turning to our capital allocation priorities, and I'm sure you're a little bit familiar with this slide. I've used it many times before. And our capital allocation policy remains unchanged. The first priority is to continue to invest in organic growth opportunities. And as mentioned earlier, we expect to spend between GBP 25 million and GBP 30 million on CapEx this year with the flagship project in the new dual block plant and tiles. We'll continue to invest in R&D and new product development, and we expect to spend similar amounts in those areas as well as previous years with a very clear focus on low carbon products -- we operate a progressive dividend policy, and we aim to maintain 2x cover of adjusted earnings over the business cycle. We continue to be very interested in selective acquisitions. In the short term, they will be bolt-on. And we'll be very interested in businesses that we see in attractive markets that are good businesses and will add value to our customer offer and onto our shareholders. And finally, supplementary dividends will be considered but only when levels of net debt have been reduced to materially at lower levels than those reported at the half year. And finally, moving on to dividends. So I'm pleased to be able to report that the Board has considered the robust trading performance in the first half of the year, the benefits of the Marley acquisition and the strength of the group's balance sheet and has decided to declare an interim dividend of 5.7p per share, and that's an increase of 21% year-on-year. That reflects the application of our dividend policy of 2x cover of adjusted earnings and has the usual phasing between the interim and final payments. And with that, I'll hand back to Martyn.

Okay. Thank you, Justin. So what I'd like to do now is to come and talk, obviously, about the market, the market that we're operating in. The CPA have done a revised forecast and it has been reduced in some of the key areas, but it's still showing growth both for this year and the subsequent 2 years in terms of going forward. And as always, with the CPA, you have to look within that detail to understand the forecast. What you can see here is, as always, you've got different growth rates in different sectors. So what you can see from the point of view here is commercial and infrastructure is very strong. House building is remaining good. And the only one that's actually gone negative is in the RMI, which again, we can see obviously from our own part of the business. The key, though, is understanding that there are real growth sectors and making sure our job is to make sure we follow those sectors to get our growth, obviously, in the business. There are factors out there today. I mean one of them you hear a lot about is job vacancies. And we can see that from our own facilities where we've never had an issue in terms of filling jobs and now it's become more challenging. We do get back to the numbers, but certainly you have to work harder at it. But if you look at construction in general, I mean, there's now 400,000 people less working in construction than they were back in the peak. And the number of vacancies at an all-time high. So that is having effect in different parts of the business. It does have an effect on obviously, installation capacity of some of the products that we see in the business and we see that within our own register where the registered installer is struggling sometimes to get full money. And what that means for small businesses is they actually install less. Because even though RMI, as we said, is down, we're seeing that factor. When we look at the registered installer order books, they still had historical record highs ever since COVID. I mean we used to say that 12 weeks was quite long. We're up at the moment to 17 weeks. What we are seeing is that is being affected by obviously less gangs are working, not less companies. So we would have roughly 1,000 companies in the register and they'd operate 2,000 gangs, that's about 10% down in the gangs that are operating. So that is affected. And obviously, that lengthens order books. But there is still a healthy demand for effectively domestic product in the marketplace today. And from our point of view, obviously, what we want to do is increase that capacity. And the reason we think there's a strong demand is today, there's no doubt if you look at international picture that the inflation and pressures are giving lots of pressure. If you look in the national picture, as the numbers are showing here, there's up to 2.2 million people have less disposed link and the GBP 30 a month. In fact, needed 1.7 million of no disposable income. But if you look at the yellow part in what we call our core consumers, what you can see here is there's still over 2.5 million people have over GBP 2,000 a month of disposable income. So in the area of where people are making this investment, the funds are obviously still there and still available. If you look at, obviously, disposable income and savings ratios, savings ratios have reduced in the current situation, but they reduced really back to normal. But there still means there's a lot of money from obviously in the lockdown period. So our consumers and customers effectively are spending savings. What we're seeing even within our own product split in the DIY market and the sort of lower income and market of our products is lower and the higher one is still relatively strong. So we are seeing that, and it is obviously having an effect in the domestic business, but I still believe the underlying demand is there. One of the challenges is to increase the capacity of installation. In the ABI, this is where we look, obviously, from our point of view, particularly at obviously, projects as they're awarded and then looking at what does that mean as a consequence we say it's a lagged measurement. The reason for that is, if you think about it, obviously, landscaping and now roofing come at the end of projects. So from their point of view, we look forward at projects already that now see it in a year's time, we'll be doing that. What this is showing and it is very, very strong is obviously commercial, residential, roads are particularly strong. And what we can see when we're doing drainage products, for instance, that, that means in 18 months or 15 months' time, we'll be doing landscaping and roofing products in those same projects. So that is still strong. If you look at the number of housing completions, again, the market has been strong. We know the housing market -- you see through the house builders is basically sold out for all of '22, many sold out in the first quarter, second quarter of '23. What that means is the amount of houses obviously being built is still relatively strong from where it's been. And the other factor for us is obviously what type of houses are being built. So there's definitely more and more houses and both detachment and semi-detachment houses are being built in the country and less flats. And in simple terms, that's more roofs and more landscape in per plot than obviously what you have with flats and apartments. So again, there are elements of the market, which we see as strong and they're remaining strong. The other one, obviously, from our point of view, is looking in the new housing in terms of output and what that means. And if you look at the plans and the plots for the next 12 months, there's growth there. And obviously, house builders are trying to manage those plots and manage what they're doing. But we can see there's been a lot of new starts in the last 6 months, particularly, obviously, we see that from our drainage products, which we've been doing very well. That bodes well for the future in terms of obviously as they come towards completion. Now our 5-year strategy, if you take from our point of view, we came out with a 5-year strategy, which we call the 2020 plan some time ago. And that so forecasting, we could grow our EBITDA from some GBP 50 million to GBP 100 million, which was achieved. And then we came out with this, our new 5-year strategy about 3 years ago. And the idea was it would grow another GBP 50 million. And obviously, because of the acquisition, we've accelerated that forward, and we have those numbers. What I thought today would be of interest is to actually show some of -- we've got 8 pillars within our 5-year strategy, but to give you some update on a few of those. The first one, obviously, we've said is operational excellence. As Justin mentioned earlier, we've got our new dual block plants, some GBP 24 million investment coming into our St. Daves facility. That will be operational in the fourth quarter. Now this gives us many, many different options of products that we manufacture with different materials, different finishes. We'll be doing all of it in line. So today, we manufacture many of these products. We take them off-line. We then do what we call secondary processing, repackage them. This will be done in one operation. So it will be much more efficient. The finish is also going to be completely different. We'll have the ability to do face mix, which we talked about in the past, to a different material on top to the bottom. Some of the plant is going to be powered by renewable energy. We're using solar panels. And certainly, from our point of view, looking at the aesthetic of the product is, we think, can lead to a much better offer in this area. And I'll talk a little bit more about why I think that's even more important going forward. And obviously, from our point of view, looking at how can we minimize curing, how can we increase the strength of the product. In simple terms, for our products, if you can increase the strength, you can usually remove some of the cement. If you can remove some of the cement, you take out cost, you take out carbon. And obviously, from our point of view, we see that as a big opportunity. So this, we believe, is a bit of a game changer from our point of view in the marketplace. We'll have products that nobody else can produce at quite competitive prices, and we think there's going to be a massive benefit to the group. Another area we've talked about in the past is digital. And what I wanted to do today is try and focus on how do you monetize digital? Do you actually make money out of it. And one of the areas we're looking at, and we've mentioned before and moving much closer to doing now it was call drop ship. So drop ship is the ability for a merchant to effectively today, a merchant online will show what stock they've got quite often only in the branch that you're actually logged into. What drop ship gives them the opportunity to offer the whole Marshalls range in that branch. So if they haven't got it in stock, we will deliver it from one of our facilities right across the country on one of our vehicles and what we can do is give them a completely different offering to the consumer. Obviously, from our point of view, the benefit is we get to sell our products. We get to sell the full range of our products, but that is becoming something that's going to be quite unique. We'll be the only person who can do it because of our logistics sector, and we think it gives the merchants we're working with a massive advantage in the market. We're also looking at an opportunity in marketplace. So where we have our own online offering the potential to offer high-end garden furniture, different parts that we physically don't need to touch, but it comes part of obviously the offering which you're doing. Customers are asking for automotive content. They're looking from their point of view of understanding when you make a choice, what's it going to look like. So we have apps where you can do visualization in your own garden, you can take a photograph of your garden. You can then drop in a different products that we make to get some idea of what they look like. And these are real life experiences from their point of view to help them make these decisions. And then looking a bit further ahead in some of our products like drainage and potentially solar. How can we use sensors to actually identify when flooding is going to occur? What sort of order is actually passing through? What can we do with obviously, with the use of solar? So there's a lot of opportunity, I think, in terms of moving that forward. The other part we've talked about is one of our pillars, was obviously the mergers and acquisition strategy. We've now done 3 companies. We brought in -- if you go all the way back to the group, the group, when I joined, we were making roughly GBP 7 million profit. This year, if you look at the consensus, we're at GBP 100 million. Now we've had organic growth in that period. We've also helped with the acquisition growth. We brought in a drainage business. We brought in a concrete brick business. We've now brought in a roof ware business. And this helps us. If you look at what we're trying to do in construction, in previously, we'd have only ever supplied the landscape products to these type of accommodations. We're now giving a much broader area. And from our point of view, we believe doing those efficiently. We've now got our Drainage business at record profit levels. We got our brick business at record profit levels, and we're confident that Marley will go to record profit levels. They all come on top of organic and have allowed us to have the growth we've seen in the recent years. ESG, we've talked about ESG in the past, and it's obviously very important from a group point of view and continues to be so. We very much look at how do you create effectively a better net positive future, everyone is focusing obviously on carbon reduction. We followed the UN strategic goals as part of, obviously, the platform of what we've built this up. We've used the Marshalls way, and we're trying to make it standard for our business effectively to do this on a day-by-day basis. Now you'll hear lots of people talk about ESG. Nobody is going to present and say that they're not active in doing everything in it. The reality is, from our point of view, you've got to actually start off, if you want to do this, I mean been science-based targets, we truly believe that. You've got to get there for all of your products carbon monitored and signed off by third party which way you come to actually agree on the targets that you're going to try to introduce. If you haven't done that with respect to all you're saying is words because there's nothing proving that you're actually doing it. So we were the first company to get this same off from our point of view in construction sector. We've got those targets. They are there. And obviously, from our point of view, we are trying to achieve those on a year-by-year basis, and we're very confident we can do it. And I do think that's going to accelerate in the next few years as to what -- when companies are doing this by. You hear many people talk about different dates when they're doing it. But in reality, it's going to, in my opinion, grow and grow. But I do think the science-based targets is what's going to really drive this. Now the key from our point of view then is adopting that into what does that mean on a yearly basis. So we've done that within our management targets within our own incentives. We're making sure everybody in the business understands how do you remove the carbon. You've got to remove it in things you can control. You've also got to work sometimes with suppliers, how you take that out. But we are confident in terms of how we can do that. And most importantly, we'll be -- effectively annually by a third party, who is signing this off on a yearly basis. So it's absolutely critical. And the one thing for ESG has not yet impacted in my view, is the ability to see what products you sell and how you sell these. And we've done some studies, and this is just an update on this. And this is looking at the typical product carbon footprint from cradle degree, which again is the right measurement not cradle to gate as some people do. So if you take that today and using a base of 100, which defines U.K. concrete made in a local area and you look at it at than effectively imported stone from China and India is 5x more carbon in it and manufacturing that concrete locally. If you effectively bring in ceramics, it's 3.5x. If you even use stone in our own quarries, it's higher. So what this is moving the whole market to, in our view, is more and more concrete products in the future. The dual broad plant hand-in-hand with this, will create products which look like stone, which look like ceramics, which ironically have been trying to look like themselves for years as well. So it's almost going full circle. But I do believe with the investment we're making, this is a way we can commercialize carbon. This isn't just about signing our targets. This is actually then go into a house builder, then go into local authority then go into a private investor saying, we can offer you a lower carbon solution than when you have -- at the moment, house buildings all have been about energy targets, that's going to change to embedded carbon that's in that footprint. So having concrete bricks is going to help having, obviously, from our point of view, the products in reducing that carbon is going to help that house builder. Obviously, accreditations and validations, I mean, as I said earlier, I believe there's too many. It's a bit like the wild west at the moment. From an ESG point of view, we have to follow all of them, so you can't pick. I do think this will get consolidated going forward. Certainly, I think when they started to become audited and the audit companies get involved, there some of these will win and some of them are not necessarily important. From our point of view, we follow them all. We got the accreditation. We've got the right numbers coming through in them. And obviously, from our point of view, we will continue to do that, and I hope continue to lead in that area. So in summary, I suppose from today, from our point of view, we've seen strong growth. We think the acquisition was really important. It's been a great acquisition. And as all we've had -- we owned it for a period has actually been more delighted with what we bought and learning in that place. And we think there is more to come. As we said, in terms of from Marley point of view, the revenue has been very strong. They are performing significantly ahead of where they were, which means obviously whatever you pay it for is a lower multiple. As we've said a few times today, there is weakening in some other parts of the market in domestic home market, improvement particularly at the lower end, where I think people are worried, obviously, about discretionary spend and probably worried about what they see in the news, but there is still strong demand at the higher end. As always, in construction, you have some areas that are stronger and some areas that are weaker. That's the whole purpose for me of the strategy. And if you take out sewerage and drainage, you take our bricks and masonry data at record levels and growing, and we're investing more into it. Certainly, from our point of view, Marley has helped us with that and given us more diversification. But there are strong sectors in the market, new build housing. I know the sector, people keep making concerns. It is still a very, very strong marketplace today in which we're operating. So the water management and infrastructure is carrying on. The ESG, as I've said, is embedded throughout obviously all of the business, and we see that as really positive with the science-based targets. Capital investment, we've made acquisitions where we'll still do record capital investment, the 24 million plant is going to be a fantastic addition from our point of view. New product development is going to be very much pitched at carbon. We want lower carbon products. As Justin mentioned, the balance sheet is still strong. From our point of view, we're still conservative. We will pay that down with the strong cash that we generate as a business. The interim dividend up 21%. This is the highest dividend the group has ever paid at that stage, and that's positive, we carry on doing that as profits obviously growth. And as we've said today, the Board is still expecting to deliver in-line market expectations. We've also announced we're doing a Capital Market Day on the 22nd of September, and that's in Marley's Burton facility, which obviously be invites to analysts and shareholders alike. So that's the end of the formal presentation. I'm happy to take any questions. Obviously, questions from the room, but also questions -- I know there's quite a few people online with some challenges in terms of traveling today, as we all know.

Sure, Aynsley Lammin, Investec. I think I've just got 2 actually. First I wondered if you could just give a bit kind of your view on the current trends you're seeing in cost of inflation, the key components, the kind of transportation, energy, labor, cement and how you expect that to unfold kind of into next year? And then secondly, just coming back on the landscaping business obviously, revenue was only down 1%, but profits fell 15%. And it seems you kind of offset the cost inflation very well and it's all volume. Are you able just to give us a bit of a feel for how much volumes were down? And on the domestic side, presumably lots of people did work during the pandemic. How much the volumes need to fall to get back to what you may consider to be a normalized '19 level or pre-pandemic?

Yes. I mean, well, the first the point that was the inflationary part is, for us, the biggest inflation things we've seen is cement, obviously, energy and then labor, obviously, paying our own people. So those have increases. Going forward, I'd anticipate obviously there'll be a pay increase this year for our people. And obviously, it worked exactly like everybody else is obviously struggling with the 10%. So we don't anticipate into be a low demand. On the other hand, you've got energy costs, whilst we've got obviously coverage going forward. That will unwind over time. So energy will definitely increase. And I'm fairly sure that will have a consequence in things like cement going forward. So we anticipate more cost increases coming forward, probably less than they were, I'd say, in the last 15 months because we had some exceptional things like container prices out there the Far East doubled the price of the product and then doubled themselves. So I think there'll be more inflation. I would lead to, obviously, our selling to manage in the price, but we still remain confident we can do that. I think the second part, as you say, the landscaping in the domestic side, particularly has had good price increase recovering cost. So therefore, as you say, the volume obviously is down. And I think in a sense, in that area, it's probably double digit down, but it was as you say double digit up probably the year before. In terms of coming back to the base number, I mean we've talked many times before, the peak of our domestic business was back in 2003, 2004. We are still 25% below that in terms of where we are. Now that was a different time when people were funding it differently, I think some mortgage equity withdrawal. But those are an awful lot of packs and drive ways out there from some 20-odd years ago, which need to replace in. So I think fundamentally, there will always be a strong demand for the product. I think today, our first challenge is the installer capacity. And I think secondly is that area of the market where the household that is feeling the tension is sitting there, possibly deciding well, I might wait until what's coming. So I think there's still a fundamental demand for the products in those categories, but I think we're in a period at the moment where people are sitting on their hands and they're worried and you can understand why.

[indiscernible]

So say, if you take where we're heading at the moment, they'll probably be a little bit less, I would have said in domestic than '19. I'm nowhere near the peak of last year. Any more questions in the room? Could we perhaps ask if it's online if anybody wants to ask a question, I think if you can register that and be easy enough to come through?

[Operator Instructions] We have a question from Chris Millington from Numis.

Apologies I can't be there, courtesy of Southwest trains. A few, if I can, please. I just wonder if you could first comment just on sustainable margins and returns in the various different divisions. Obviously, there's been quite a big moving elements within this year. I just wonder if you could just give us a feel kind of where you feel they should all be settling? So that's number one. Second one if there's any change in merchant stocking behavior more recently? And the third one I wanted to ask really is just whether or not you've seen any big change in product mix, probably more so in market just in light of obviously the high inflation and the cost of living squeeze and whether or not people are starting to trade down or back to your point before because you're seeing stronger defense than the higher end market, is that leading to a shift the other way?

Yes. I mean if you take on margins, I think we would say the margins in our landscaping product are depressed because what we've had there is the reduction and therefore, the consequent reduction in the manufacturing areas. And obviously, that's something we have to address in terms that cost base. So that's depressed those. I think if you did the building products, that's been on a growth trajectory really since we bought those businesses. As you know, they were lower margin than the business we had. So from our point of view, I see that as a growth thing and it has got more to go. I think if we take from Marley point of view, I mean, their margins are very strong. They're doing better than we originally had planned. So I think the only one I'd see change in the medium, long term would be a recovery of the landscape one, when you readdress the cost base to effectively the demand, I think, in that sense. I think your second question was on merchants. And obviously, if the marketplace softens, then you'd expect to build those merchants destock. So you always have a double whammy effect when it's going down and you have a double whammy effect when it's going up. So in that sense, I'd imagine the merchants and I know they will obviously be looking at readdressing their stock levels to a different volume. So yes, they would have been not just the market, but they would have been within our numbers also that sort of reduction. The third question was kind of around mix. The mix of products. I think the one thing we've seen in domestic, Chris, is natural stone went up so high. I mean if you take the marketplace, the way it used to be pitched was ceramic was the premium price product, followed by stone, followed by effect concrete. Almost overnight, stone has doubled in price because the instead of paying GBP 1,000 -- sorry, $800 for a container, we're paying $10,000 for a container. So that has doubled the price of stone. And what you found now is stone is priced higher than ceramic. So I'd say what you've seen is less stone and more ceramic, which from our point of view isn't brilliant because we have a bigger share of stone because obviously, some of the ceramic players are there. In the medium term, they come back, I believe the winner of all of this would be concrete because what ceramic is now going to have is when the hedges change on the gas prices, they're going to have significant cost increases coming through, which will probably take it back above stone. But what it's doing, even with cement increased costs, concrete is going to be significantly lower as a solution in those 2 solutions. So short term, I'd say, ceramic growth over stone. I don't know if there's any more questions online?

Yes, we have. Samuel Cullen from Peel Hunt.

Also I'm cursing Southern in this case. I've got 3 also. Extension of the last question really on the gross margin or the gross profit change you kind of called out the landscaping business. Can you walk us through the different kind of gross margin profile to the major products you have in that business? I'm guessing it's kind of slightly related to what you just said around kind of reduced level of stone coming through? And then secondly, just on the capability to add further capacity in concrete bricks and then the demand profile there that would be interesting? And then the last question really is on ESG and your points on the kind of cradle to grave versus cradle to gate debate. Do you feel that you're winning big kind of cradle to grave debate, and that will continue to move forward and put you in a better position.