Marshalls plc (MSLH) Earnings Call Transcript & Summary

Okay. Good morning, and welcome to Marshall's Half Year results, which we are presenting today. What we're going to plan to do is I'm going to take you through the highlights, obviously, the numbers, and also talk, I think, at the beginning, about the key challenges we're seeing in the marketplace and also how the management in the company has responded to these challenges in the first half of the year. I'll then hand over to Justin, who's going to go through the financial performance, and I'll come back to talk about our strategy, which is a slight change in the strategy, as we presented before, and then summarize the whole thing and obviously take questions. Today is being recorded. So we'll take questions in the room first and then anybody who's obviously phoned in, who wants to have a question, we'll have an opportunity to. So if we look at the highlights for the first half year. Obviously, the financial results have been impacted in the short term by a weak market backdrop. What does that mean from our point of view. Obviously, we have to respond to the market. If there's less products being bought, then we have to take actions. And those actions, from our point of view, have been very much focused on reducing our costs, obviously, improving the agility and managing cash, all of the time, trying to make sure we're not compromising our ability in the sort of medium term to respond when the capacity obviously picks back up. We believe the significant growth drivers in the midterm, many of the issues of construction that we actually represent and I'll go into some of the detail of that. So we do think the market is still going to come back and come back strongly. And obviously, from our point of view, making sure we're well positioned for when those markets recover. If you take from our point of view, and I'll demonstrate this today, we've got some examples of why we believe we can double the profitability of this business, with volumes still coming back below sort of normalized volumes of 2019 by about 10%. And I'll try and show you that in a second. If you look at the financial highlights, obviously, these have been impacted by the results of the business. Now in here, what you've got is, obviously, for the first 6 months is full trade-in with Marley. Last year, we only had 2 months of that. So whilst the revenue is up 2%, obviously, like-for-like, it is down. And that affects the other numbers in terms of the adjusted profit, the PBT and obviously, the earnings per share. The dividend, which follows the 2x policy we've talked about before, has come down. The positive thing, despite all of these numbers, and obviously the difficulties that we faced, is what we've seen is a reduction of some GBP 23.5 million in the net debt number, with the net debt ending up at the moment about 1.6x EBITDA. But the net debt is coming down. The business, as we've always said, throws off cash, and that cash is obviously helping us to reduce that number, and that will go on going forward. If you take the challenges, obviously, in 2023, what we've seen is macroeconomic environment has been deteriorating throughout the first half of this year. If you go all the way back to the beginning of the year, the expectation was difficult first half, recovery in the second half. What's really happened is that's just moved and shifted along. Inflation. Inflation numbers came out today, I think they reduced to 6.8%. But inflation has been coming down slower than what's predicted earlier in the year. And obviously, what that's done is have an effect on the interest rates. The interest rates, being the tool that's been used by the Bank of England to reduce inflation, is effectively being going up further for longer, and it's now forecast to be there for a longer period. That's meant that the swap rates, and obviously, the fixed rate mortgages have increased, and that's adversely impacting the housing demand, particularly for first-time buyers. So the house builders in response to this, have effectively reduced their activity levels significantly in terms of year-on-year volume reduction. At the beginning of the year, it was forecasted to be double digit. That soon went up to near 20%. It's gone up to 25%. And obviously, from that point of view, that is a big impact. The consumer confidence. It started in a bit for us in the landscaping, probably April last year, and it's continued on. If you take from the individual's point of view, the real income has been falling. Interest rate rises have impacted, obviously, private housing as people fixed rate mortgages have unwind, and those people effectively are spending less on discretionary spend. What that all adds up to is the demand for the group's products is reduced. If you look at it from our point of view, in many cases, many of our profit demand for them is about 30% less than they were a year ago. And that increased competition, has been from our point of view, in pricing, whilst we've recovered all costs, there's not an opportunity to take that any further. Obviously, against that backdrop, that was why in a few weeks ago, where we had to come forward in the marketplace and respond to the -- obviously, the numbers and expectations for this year. What actions have we taken? Obviously, as a management team, the key from our point of view is looking at capacity. How do we reduce capacity whilst maintaining the ability to still respond when the market comes back. We've had a factory closure of our site in Scotland and Carluke. This is a permanent closure. And we will sell that site off. We're preparing it in development, in terms of what we can do. We have a clay tile factory of Marley. We've taken out 1 of the tile lines there, because the demand for clay tiles has dropped as people have moved over to the lower-cost concrete tiles. And we've had a reduction in shifts in many of our facilities and factories. Obviously, from our point of view, the idea is, again, as I said at the beginning, improving our agility and reducing our cost base. This year, we've now identified GBP 9 million of cost saving would take out, which is net of obviously making less product. And we've got about 40% of that in this year, but obviously, we'll get 100% of it for next year. We've tried to simplify the Marshalls commercial function, as we've said before, taking the lead from Marley, and we've been doing that in the -- particularly the landscaping area, bringing the commercial and domestic businesses together. It's resulted in a reduction of 250 jobs in the first half. This, on top of the 150 jobs that we did at the end of last year. So 400 jobs is about 13% of the, sort of, population within Marshalls. So it's a significant number. And obviously, from our point of view, managing cash is important. We're very aware, obviously, the net debt numbers, the reduction in CapEx. We've now got reduced to about GBP 19 million. So we're spending money there, which Justin will go through what we're spending on, but things like the Dual block plant is still going forward. We've also carried on selling surplus sites, sites we don't necessarily use, quarries we're not utilizing. This is about GBP 7 million, it will be in total this year. And obviously, we're very much -- working capital, how do we manage that? We've managed this first half of the year to have operating cash flow as a percentage of EBITDA of over 100% to 105%, and that has all contributed to why we've been able to reduce the debt by some GBP 23.5 million. And the key is, obviously, from our point of view, we've been in a position for when the markets normalize. When I say normalized, one of the reasons for this is we have 3 areas that we're exposed to as a business. The first is house building. As you can see on the chart on the left here, we failed nearly every house building target has ever been set in this country for the last 30 years, and that continues. And actually, when the number is posted for 2023, I now believe it will actually be lower than number than it was in COVID. So we're building less houses now than we have for a significant period of time. And yet we've got a housing shortage. So obviously, the issue at the moment is about affordability, affordability for the first-time buyer. And we believe that is obviously driven by interest rates, which is driven by inflation. So you can see the link between all 3. But as the other 2 points correct themselves, then the country has to start building more houses significantly. And we see, obviously, and wait to see what, if any support is going to come for the house building section in the autumn statement. But it will come back, and it will come back from our point of view, relatively quickly, once that issue is addressed. The other part is RMI. The housing stock in the U.K., because we built so few houses, over 65% of the houses effectively over 50 years of age. What that means is if you think about it in roof in terms -- roof on average last 50 years. So there's a lot of product that's waiting this RMI business. And at the end of the day, you can put it off, but you can't actually not do it ever. So I think, from that point of view, obviously, we are confident that, that's going to come back as well. The third part of our business, what we call commercial infrastructure, has actually stayed strong, and we think that will continue on. So we have to be obviously well positioned for when these markets come back. The sales volumes, as I said, are expected to be below 30% of where they were in 2019. The reduction in our capacity has been mainly temporary. As you remember, last year, we closed the facility in Sandy. Sandy has 4 block plants. We are maintaining those block plants with a view that we will bring them back when they need it. Block plants can make either landscape products or concrete bricks. The facility is very close to our other facility in St. Ives. And from St. Ives point of view, we've moved some of the operators from Sandy. So putting them back would be quite simple and effectively to take both factories up to volume, we'd have to recruit. But still, from our point of view, that would be significantly below the jobs that have been lost. Probably 1/4 of the jobs that have gone out to bring us back to full capacity. And the manufacturing sites, obviously, from our point of view, of when invested, and you get the drop-through margins, which I'll talk about in a second. We don't need to spend capital to get that capacity back. It's just a case of manning and making sure, from our point of view, that the machines are still maintained. And the recovery in volumes will obviously have a significant positive impact on the profitability. What we've tried to do here is look from an illustration point of view. If you look at the volumes for our business, and the red here is the consensus of the 2 house brokers, but it's basically the consensus in the marketplace. If you take, from our point of view, if you put volumes back in at 20% from where they are in 2019, which is still 10% below where they were in 2019, sorry. What you've got, as you can see, is a significant change to the profitability. So what this shows is you get a drop-through of 42%. That's because what we have lost on the way down. You could argue it should be stronger than that. But just using that as a conservative approach, you can see an illustrative growth, you get 42% margin, which actually contributes the equivalent of 5% in the total group. The profitability and earnings per share double. You effectively get back to margins over 15% and the ROCE also comes back to 15%. If you look within the numbers as well, the pro forma numbers, obviously, if you remember, Marley has never been with Marshalls for the full 12 months. But if you run the numbers for both '21 and '22, you can see we were at the GBP 120 million operating profit, which is what this is forecast in any way. So I think in that sense, what this is meant to illustrate, if you take it as an example, is even with a reasonable return to normal volumes, this business can double in terms of profitability and double very rapidly, and there's very few barriers to that. So obviously, from our point of view, the ingredients that are in place there, the strategic goals in terms of doing that, I'll talk about some of the strategy, and we intend to grow ahead of the construction market. Why? Because 2 of the 3 areas I highlighted earlier will come back stronger than the rest of the market, particularly, obviously, new house building and RMI. If you look at, obviously, the higher volumes and efficiency improvements, the drop-through in a well-invested company like Marshalls will come through, and that's why the margins will go very much quickly back to 15%. The cash conversion, Marshalls and Marley have always had very strong cash conversion, 85% to 90% of EBITDA converted. As I said, for the first 6 months, we were over 100%. So this business will throw off cash, and it will pay down that debt in it's natural form. And obviously, the capital discipline and financial flexibility allows us to get back to the ROCE of 15%, and obviously, we carry on with our 2x dividend cover and the other parts of the priorities that Justin will cover. Now I'll pass over to Justin to talk about finance.

Thank you, Martyn, and good morning, everybody. So I'm going to talk through the financial performance for the first half of the year. That will include a review of each of our reporting segments. I'll then talk you through the key features of the cash flow statement, give you an update on funding and liquidity and the balance sheet, and then I'll close some comments on our capital allocation policy. So starting with group revenue. The chart on this slide shows a revenue between the first half of last year and the first half of this year. And overall, our reported revenue increased by 2%. But as Martyn mentioned earlier, revenue on a like-for-like basis contracted by 13%. And it did so -- would reduce revenue across each of our reporting segments. And that's been due to weakness in both private housing RMI and new build housing. The weakest performance was in Marshalls Landscape Products, and that was due to that segment's exposure to those 2 key end markets, and the fact that certain parts of it's product range are relatively discretionary. Revenue contraction in building products and roofing products was more muted, and the latter benefited from sales growth of Viridian Solar, which partially offset weaker volumes of traditional roofing products. So turning now to adjusted operating profit at group level. So first thing, just to point out here, is that these -- the profitability numbers throughout this presentation are stated after adding back adjusting items in order to show the underlying performance of the business. And it sees underlying numbers that are used by the Board to evaluate performance and when contemplating dividend payments. Adjusting items in the first half of the year, [indiscernible] operating profit totaled about GBP 15 million, and principally comprised the amortization of intangible assets arising on acquisitions and the restructuring costs associated with the various exercises that Martyn touched on earlier. Now of that GBP 15 million, about GBP 11 million is noncash and the balance of GBP 4 million represents cash redundancy costs. So anyway, coming back to the underlying numbers. The chart on this slide shows the component parts of the GBP 6.1 million reduction in operating profit during the period to GBP 41.9 million. And that comprises reductions in profitability in both Landscape Products and Building Products, and that's partially offset by an additional 3 months -- sorry, 4 months of contribution from Marley, which added GBP 13.4 million to operating profit. Now the downturn in performance in both Landscape Products and Building Products offset the benefit of the structurally higher margins that are delivered by Marley. And as a result, the overall group operating margin compressed by 2 percentage points to 11.8%. And as Martyn touched on earlier, we've taken decisive action to reduce capacity and the cost base, and that has resulted in a reduction in annualized costs of GBP 9 million, which we'll see 40% this year. So turning now to the individual reporting segments, starting with Marshalls' Landscape Products. And as a reminder, this includes the group's domestic and commercial landscaping businesses, landscape protection and the international businesses. And this segment has experienced some tough market trading conditions in the first half of the year due to weakness in both private housing RMI and new build housing. And against this backdrop, revenue is contracted by 20%, and that moderates slightly to 18% when we adjust for the disposal of our former subsidiary in Belgium. Now within that revenue contraction, we saw a reduction in -- domestically, sales of domestically focused products of around about 1/4 and a better performance from commercially focused products. And that reflects the robust demand levels in the commercial and infrastructure end markets that partially offset the weakness in new build housing. Segment operating profit declined by GBP 14.6 million during the period. And that reflects the lower volumes and the impact that's had on both gross profits and on the efficiency of our manufacturing and business operations. In addition, the business was impacted by a falling market price for Indian sandstone. And that has resulted in compressed or negative margins that has delivered a one-off GBP 2.8 million cost in the P&L account. So that will be recurring next year. So the impact of that lower level of profitability has clearly flowed through into the segment operating margin, which has compressed by 5 percentage points to 8.8%. And it's in this segment where we permanently reduced manufacturing capacity and also taking cost out of the business, and that results in annualized savings of around GBP 7 million. Moving on now to Building Products, which comprises our Civils and Drainage, Bricks and Masonry, Mortars and Screeds and Aggregates businesses. Now this segment principally supplies products into new build housing and commercial infrastructure and end markets and very little exposure to private housing RMI. And that weakness that we've seen in the new build housing market has impacted on revenues within this segment, particularly in respect of our Aggregates and Drainage business. And that's because they're relatively highly correlated to new housing starts. The performance of our Mortars and Bricks and Masonry business has been much better with revenues being broadly flat year-on-year, and we grew our market share in Bricks. And taken together, these factors resulted in a 9% reduction in revenues in the first half of the year. Segment operating profit reduced by GBP 4.6 million, and that's due to lower volumes and the impact of those volumes have on both gross profit and on the efficiency of our manufacturing operations. And that's fed through to compression in the operating margin of 4 percentage points to 9.6%. We've taken action to reduce or to trim our manufacturing capacity through a reduction in shift patterns, so no permanent closures of any facilities here. And to reduce the cost base by about GBP 1.6 million on an annualized basis. So moving now on to Marley, which manufactures and supplies a range of concrete and clay roof tiles, timber battens and integrated solar panels through Viridian Solar. And again, the challenging market in new build housing has resulted in lower volumes of traditional roofing products, which has impacted revenue. But that's been partially offset by revenue growth within Viridian Solar, which is driven by the trend towards energy-efficient solutions and the start of the benefit that we expect to see coming through driven by changes in building regulations. And we expect that to underpin revenue growth going forward. So taken together, this resulted in a reduction in revenues of 7% for the segment. Operating profit for the period was GBP 22 million and that represents a like-for-like reduction of 12%. And within that, you've got the profitability impact of lower volumes of traditional roofing products, partially offset by growing profits within Viridian Solar. And you can see that segment operating margins have remained very robust at 23.7%. Now we have taken action in July to mothball some capacity that Martyn referred to earlier. And we do in that in order to reduce some costs, but also to manage working capital levels into the second half of the year. So this next slide sets out the profit and loss account from adjusted operating profit through to earnings. You can see here, the profit before tax is contracted by 26%, and that's greater than the rate of contraction in operating profit. And that's driven through -- been driven by an increase in finance costs. So in the first half of this year, we had an additional 4 months of the Marley acquisition debt and the impact of higher base rates. And just as a reminder, the debt facilities are floating rate, but we have hedging in place for about 55% of the term loan. So about GBP 120 million at a SONIA rate of 3% plus the facility margin. The effective tax rate increased by 3.9 percentage points to 23.2%, and that's simply driven by the increase in the headline rate of corporation tax in the U.K.. And adjusted EPS contracted by 38%, reflecting the weaker operational performance, higher finance costs, the increase in the effective tax rate and a higher weighted average number of shares in issue. Moving now to cash flow performance. As Martyn touched on earlier, we've delivered a good cash conversion performance over the last 12 months, converting 105% of EBITDA into operating cash flow. The increase in finance costs and tax paid is driven by the higher levels of interest payments I've touched on the last slide. And these 2 factors, together with a reduction in adjusting items paid during the period, has delivered an improvement in net cash flow from operating activities of GBP 22 million year-on-year. And net cash from operating activities was GBP 23.8 million. Now from that, we spent, GBP 6.7 million on a net basis on CapEx which comprises GBP 10.4 million of gross CapEx, partially offset by GBP 3.7 million of receipts from site disposals, and we expect to deliver a similar amount from site disposals in the second half of the year. The acquisition and disposals, cash flows of GBP 4.4 million comprise a contingent consideration payment for Viridian Solar and the impact of the disposal of our business in Belgium. So taken together, we've reported a reduction in net debt in 6 months of GBP 6.6 million. So turning now to funding and liquidity. In the first half of the year, we extended GBP 350 million of the group's syndicated debt facility by 12 months, and that means that we've now got secured medium-term funding in place until April 2027. Net debt at the half year, including leases, was GBP 230 million, and on a pre-IFRS16 basis was GBP 184.6 million, and that reflects cash generation over the last 12 months of GBP 23.6 million. We got comfortable cover against the covenants in the bank facilities. So interest cover at 7.8x, and that compares to a minimum level of 3x and net debt to adjusted EBITDA of 1.6x, and that compares to a covenant level of a maximum of 3x, and significant headroom against our debt facilities of GBP 117.5 million at the half year. So this slide sets out a variety of measures on working capital, returns and balance sheet strength. And you can see that debtor days, creditor days and inventory turn were all broadly similar to this time last year. However, return on capital employed has reduced during the period by 2.8 percentage points to 10.6%, and that reflects the impact that the weaker market has had on the business' performance. As I mentioned on the last slide, net debt to EBITDA is 1.6x, and cash generation during the last 12 months of GBP 23.6 million. And it's that cash-generative nature of the group's business model that will support progressive deleveraging of the balance sheet as we move forward. And the balance sheet remains robust. Net assets at the half year of GBP 680 million and significant holdings of freehold land and buildings that held on that balance sheet at historic cost. So now turning on to capital allocation policy. Now you may recall that the Board updated the group's capital allocation policy in the second half of last year in order to prioritize deleveraging over any significant M&A activity. And there have been no further changes to the policy since that time. Our first priority is to continue to invest in profitable growth opportunities. And this year, we expect to spend around about GBP 19 million. Now within that, the largest single item is complete in the dual block plant that's nice and that's been somewhere between GBP 7 million and GBP 8 million that will go. We've got a key efficiency project, which we're midway through delivering, which will reduce the cement content of our products and take some cost out of the mix. And we're continuing to spend on IT investment to support one of the strategic objectives of being easy to work with, and Martyn will talk through the details of that later. And the balance of expenditure is all about maintaining the existing capital base of the group. Our second priority is R&D and new product development expenditure, and that's focused on low carbon and energy efficiency products. We aim to maintain dividend cover of 2x adjusted earnings and the dividend for the interim of 2.6 pence per share is in line with our policy. As mentioned earlier, the Board is aiming to reduce the amount of leverage in the balance sheet, and we're targeting for leverage to be 1x EBITDA by December 2025. Now that's 12 months later than our previous plan, and that reflects the impact that the weaker market is having on the business's performance. And finally, we will continue to look at selective bolt-on acquisition opportunities, where we see attractive businesses in attractive markets that will add value to our customer offer and to our shareholders. But there will be no significant M&A until the balance sheet has delevered. With that, I'll hand back to Martyn.

Thanks, Jason. And what I'd like to do now is to cover obviously the strategy. We've done two 5-year strategies in time I've been here, and both of those have had significant growth in EBITDA. And I'm confident that this strategy, as we've developed it for the new group, will work on the same basis. Not big of change in terms of it starting off, obviously, from our purpose, we're saying before, but creating better places and to be the U.K.'s leading manufacturer sustainable solutions for the build environment. There are 5 pillars to this. First of all, as we've mentioned many times before, the way in which we do business is very much about what we call specification selling. So obtaining and delivering those specifications for products and solutions. Then from our point of view is innovation. Obviously, optimizing the products and solutions. Then improving the cost effectiveness of the business. Obviously, how we operate with people is a key priority for us as a business. Our people are the big differentiator from any business. And obviously, to be easy to work with. So what I'd like to do is to go through each one of these. First of all, when we talk about obtaining and delivery and specifications, we believe that if you can get on the specification before it comes out, obviously, to bid, then you're in a much stronger position to obtain and hold that order. And that's the way in which we've been doing business for a number of years. If you take how does that really work? Obviously, within building products, we do design work for house builders, where we would do the drainage systems for them, try and get our products obviously specified in there. We do work with house builders to look in at where concrete bricks can help them, obviously, from a carbon point of view, in that design work before they even come out for tender. In the roofing products, from our point of view, Marley is unique in the marketplace. It's the only business that can actually offer the full roof solution. So other people can do the tiles. We effectively did the tile, the battens, the accessories. And now we've obviously got the in-roof solar system. So we can go and give this to our customers, sell this in advance. Obviously, if you think of social housing, if you think of RMI, and give a 15-year warranty, which people obviously have big benefits by, and see that as a big opportunity. And obviously, with solar, and the growth of solar is already, as we said, 30% of this year, it's going to go much, much higher than that by the end of the year as it kicks in through Part L with the new build. And we can do a lot of work with house builders there, making sure the specifications are correct. And then we've also talked, obviously, in landscaping. We've worked for years in terms of our Landscape Products in the commercial world. If you think of Battersea and you think of Nine Elms, you could completely transform those areas. We were working on those projects 5 years before they even come out to tender, and we will do that with architects to make sure we're specified. And obviously, in the domestic side, we work with the Marshalls Register. And the Marshalls Register, what we're trying to do is work with them and give people choice, give people the ability. And one of the tools we've been working on is in visualization, just show you in a second. So we've got an app that anybody can download. You download effectively to your phone. What this app allows you to do is to go into your area. So your garden, and you can see here, somebody is using an iPad. And that's all they're doing, is scoping out the area that they would like to transform and change into patio. So in quite simple terms, you go around the area, you click, you effectively close that off. You've now got an area. It can give you the measurement of that area and now your choice in terms of what you're going to put in the area. You've got the full ability to go through all of Marshall's products. So every product that we supply in the marketplace, you can choose whichever one you want. You then, having chosen it, decide on the laying pattern that you actually want to do, and then you decide on what you want in terms of, from a point of view, the motive. And as you can see, effectively, you're standing in the U.S. space, in newer garden, and you're looking at a real patio and what it would look like in that space. And as unique today in the marketplace, it allows our registered installers the ability to go with a customer, or they can use it themselves, an accurate court. You know what it is and gives you an idea of what the price is. So again, unique in the marketplace. If you take the other areas, from our point of view, is innovation. Obviously, from our products and solutions. And as we said, the big key here is, from our point of view, how do we actually get the carbon footprint effectively of what we are trying to generate in products into a commercial environment where we get actual benefit from them. So what we're talking about is we got EPDs, which are environmental performance declarations, this will become normal for all construction products. They will effectively have to say how much carbon is in the product that they manufacture. Now from our point of view, we believe we had massive advantages over all of our competitors. It might be a location of our facilities to the actual customer. It might be because we put less cement in our products. It might be because of a lot of the things we're doing with sequestration. But it's how you commercialize that and take that to market gives the group a big benefit, obviously, from a margin point of view. Our Dual block plant. Dual block plant is coming on stream in Sinai.This will make products, innovative products that aren't available in the marketplace, particularly to replace stone, which is imported from all around the world. We've got a granite solution. Instead of bringing granite from China, we manufactured the product here. That is for 20% of the carbon footprint of that material. So giving us a big, big benefit. The CarbonCure Technology, we've talked about sequestration in the past. We're now using this in one of our brick factories where we're actually pushing carbon into the product at the early stage, offsetting the carbon that's in there, obviously from a cement point of view. And we roll out this lower cement content that Justin was talking about with our capital investment plans. So all of those giving big advantages. And obviously, in Viridian Solar, we've launched the most powerful solar panel we've had. And also, we've designed and patented something called an ArcBox, which effectively is the connection from that system to your house in your electricity. One of the big issues you've got is [indiscernible] where you've got a spark effectively. And the last thing you could imagine you want is a spark going in the loft of your house, which can obviously give all sorts of fire issues. So here, Viridian have invented the ArcBox system. It's gone down very well. We've had many awards for this. And this gives a safe way of connecting effectively the solar system to your electricity within your house. This innovation has given us, again, big, big advantages in the marketplace. We talked about the cost base. We talked about obviously taking out. We've said, we've got $9 million cost reduction. This is in the core base. This will not be put back in, in many cases. So again, we should have a bigger drop-through than what we saw coming out before. The capacity has been reduced, but the capability is still there. We will keep maintaining the machines in the mothball facilities, and we will keep the ability to actually bring them back and bring them back very, very quickly. We're talking about weeks. We're not talking about big investments. Obviously, the capital expenditure plans, we've brought them back as we should do. But we're still prepared to spend money where we can see efficiencies and where, from our point of view, making sure we are improving the product range and everything we're offering. And obviously, working capital is absolutely critical. We've taken the decision, even though it's financially painful in the second half of this year with the forecast that we're in, that we will actually take the inventories down by the year-end. So when we exit the year, we'll be at the right element for, obviously, going forward. We could have carried on manufacturing, but we think that's the wrong use of cash. We've obviously talked about operating in a safe pace where people are obviously the key priorities. We have a clear road map in terms of safety. Safety is taken very seriously in the company. And also continuous improvement is, how do you keep reducing that cost base. We have employee voice groups, which have been operating now for a number of years, which are very good tools for getting actually what the organization wants and listening to, obviously, any of the concerns. We do group-wide employee surveys. Again, given opportunities, and we've rolled that out in terms of -- as we've acquired companies to understand the feeling within those companies. We have a group code of conduct. Everybody goes through the training on an annual basis to make sure they understand what the company is saying we should be doing and how we should be responding. And obviously, continued investment in apprenticeships. If you take today, there are some parts of our business, like many people are finding. If you want engineers, as an example, it's very, very difficult to go out and recruit engineers. So the alternative is you bring apprentices in on an annual basis and we grow in those. We have over 50 a year, and we will continue to do that and putting those into the business, having trained them, and obviously then, hope to retain and keep them. We talk about being easy to work with. It's an easy statement to make, but I think it's really important. We shifted more and more of our transactions to electronic, whether people are doing it through EDI or they're actually doing it through apps and dropship, where we actually ship directly for customers. And this is helping us because previously, we were receiving orders and manually enter them into our systems. This is both time consuming, it takes cost and there's lots of potential events. So a big change there. As we said, we are still investing in migrating the Marshalls business systems. All of them are going to the cloud. And we think, again, that's a better and more efficient system. We're introducing a digital channel in roofing products. I mean, if you take the range of products now for the end user on the back of solar, what you can have is car charging units, battery units, and we're starting to obviously brand those as Marley and sell them in the marketplace. And the ability of those will grow and grow. And as I showed you earlier, the rolling out of the visualization software, we've used this commercially for some time. I think domestically, it can be a game changer because today, you're asking people to spend upwards to GBP 10,000, GBP 15,000. You would never spend that in a bathroom or effectively in a kitchen or even on a car without seeing it. So this is trying to bring that to people's homes where they can see what it would look like in their space. So in summary in outlook, obviously, the weaker market demand has affected volumes. As we said, down some 30%. And obviously, that has an effect in the financial numbers. But the management have taken action. We think it's decisive action, and when that has made a change, and we think that change will obviously a benefit in the long term as well. We've seen reduction in debt. So despite all the challenges, we've still taken GBP 23 million, which is again a testament to how the company throws off cash. The market conditions, we are saying we're not building in, an expectation of improvement in the second half of the year. We do believe this market is going to improve. But obviously, when it's going to improve is the big key. And it's not something we are driving. It's obviously today's announcement, it's inflation, which is going to affect interest rates, which, in my opinion, is going to affect confidence, whether it's confidence to build or confidence to spend. But in the medium term, certainly in the U.K. construction market, we think the strong structural growth has to come. We do not build enough houses in this country, and we've got a housing shortage. The two are almost a contradiction of each other. And as that gets corrected, and there is obviously the ability to build a lot more houses and the demand is there. The housing stock is on the agent, and we're adding to it very slowly, as you can see over the last 20 years. So they will become a demand more and more for RMI. Obviously, the infrastructure, as we said, is at the moment, good. I think everybody acknowledges that's going to be invested in for a number of years to come. But the big key is the group, I believe, is well positioned to take benefit, obviously, of that growth when it comes. Obviously, the manufacturing capability is there, looking at what we can respond to. We still look at 2018 and '19 as a normal market and certainly believe we can respond to that. And obviously, the significant operating leverage we've built in the illustration, 42%, it should be higher because of the cost reduction things and the points we've done. And I think the key part for me is, at the end of the day, we know we are in construction. We know we're in a cyclical business, and we know we're in different cycles. And this is probably the hardest cycle we've had for probably 10 years in this business. But this business, when the last cycle came, we lost money. And obviously, today, whilst the numbers are down from where they were, we're still making GBP 52 million and generating cash. So I think we're in a completely different position. And I think that will be demonstrated as when the market returns. With that, I'd like to go to questions. Justin, come up. Sorry, it's a microphone in the room, so if you put and up.

Robert Chantry, Berenberg. Just 3 questions from me. I suppose, firstly, in terms of capacity, could you just put some numbers in terms of volume or productive capacity or however defined around what that capacity was at the start of the year versus today?

Can we take the questions one at a time?

You can.

I follow for this before you obviously you get [indiscernible].

You have 10 rounds, 3 questions.

Yes. I mean if you take capacity, the way we look at it today is we try to run the factory, 75% to 80% capacity. And that's what we'd be doing on how we currently man it. But if you took it and you included unmanned capacity, it would probably be near 50% to 55%. So it depends what the manning you put in, and obviously, the mothball factory is a big part of that. But that's roughly in the year.

That's very helpful. And then secondly, I was looking at the day, I guess, the performance of Marshalls over the 15, 20-year view, and obviously, you came into the business after the last financial crisis. So just looking for some kind of insight in terms of the practical differences in market dynamics today and respond to the business versus the kind of 2011, '12, '13 period?

Yes. I mean for me today, Marshalls -- the Marshalls business you referred to is 1/3 of what we are today showing. So you've got 3 divisions. Marshall's landscaping products was Marshalls. So you add on to that, you've got the drainage business, the Marshalls Building Products, the Bricks, and obviously, with Marley. For me, it's a much more diversified, it's a stronger group, it's in a different place. And what you find in my experience in construction, is markets change and fluctuate in different areas. The most difficult area for us for the last 18 months has been domestic landscaping. And in 2021 was the best domestic landscape year we've ever had. So you have to be flexible and move with the different parts. And I think, that range between the 3 different divisions we have, it's put in a different place and can respond. Obviously, ultimately, if you've got less products to make, you're going to be less profitable. But as the market comes back, I think we've been in a very strong position and more flexible to take advantage of it.

And then the last question. So in terms of your, kind of, strategic objectives, and talked about the kind of focus on specified sale, et cetera. So what exact proportion of the business is specified or solution sale at the moment versus nonspecified or kind of product sale? And where do you kind of see that getting to?

Yes. I mean, it varies obviously by the different types of the business that we've got. I'd say, in general, probably, if you take in total, our specifications is probably up about 35%, 40% of what we do, where I'd say it's specified before it's come to market. And we're trying to grow that further each time. In some parts of our business, that could be as high as 60%. So it does depend on the different parts of the business.

Chris Millington at Numis. At the start of the presentation, Martyn, you mentioned a slightly tougher pricing backdrop in light of competition. I just wondered if you could kind of add to that? It doesn't come as a massive surprise, but I love to hear a bit more about that. I'll do one at a time?

Yes. I think on pricing, I mean, what you've seen today is, you've obviously got pressure because it's not the same volume. If I go back to '21, it was almost availability was the biggest issue of product and people were just fighting for everything. That is not the case. If you take in our products in general, because of the cost, one of the big cost drivers of our business is cement. Cement costs have not come down and there's no sign of them coming down. So what that's tended to mean is everybody is at the respective prices. So I don't think you've got prices dropping out there. But obviously, each price increase you have is more discussed and more fought over than they were previously. So I think, you're entering back to a more normalized situation where price increases of the likes of 3% or 4%, not double digit will be the future. What you do see in the marketplace, sometimes, is customers looking for lower cost. They're not necessarily getting the same price, same product for less price, but they may switch. We've seen it, for instance, in roof tiles, where the people are taking concrete roof tiles over clay roof tiles where they can because it's lower cost. We've seen it in some of the products from ourselves with stone, where people have been taking concrete. That doesn't always mean lower margins for us, but it can mean a different change in the mix first.

Next one is just on natural stone. You obviously pull out the headwind it was in the first half. Have you seen demand return now pricing has normalized and got to a better place relative to ceramics?

I don't think we have yet seen it. And the reason for that is there was so much stone in the supply chain. I mean, some merchants had 50-week stock of stone. So what happened was stone doubled in price. And effectively, from our point of view, we went down by 45% in volume. But that was throughout the whole supply chain. I think as Justin said earlier, our suppliers, our stock of stone is now down to the levels we'd be comfortable with going forward and is at the cost, that is the market cost. So that is sorted. But it has taken some time to sell through the merchants. I would anticipate in the end of the third quarter, it will return to normal. And then the question is, will a stone take back it's share that it probably lost to ceramic and become more affordable, because stone today is selling out at 2019 prices, not what they were 12 months ago.

Sorry, just two quick other ones.

You can use the mic.

Concrete brick share. Just wondered where you are. You said that it increased and you followed...

A little over 7%. So it's still by about a percentage point in the first half of the year.

And you're still following the pricing actions of the clay brick manufacturers? Or is there any change there?

No. I mean the clay brick, manufacturers obviously set the prices in the marketplace, we tend to follow those. I'd like to think that we're starting to see the growth of our share, and I think it will continue, will be on the carbon story. At the end of it, it's not just an alternative brick. It's a brick with half of the carbon content.

The last one was just about the mothballing of the clay tile line. I don't know if you could remind us how much of Marley was clay tiles. Vague, you remember it being slightly higher margin. And slightly surprised at the RMI side, which I imagine that's bigger in, has probably weakened to the extent your mothball. So I just wonder if you could just talk around that subject matter a bit more?

The clay drop off, I think, has more come from, like in social housing and not like where they've gone for a lower-priced product. If you take the clay tiles as a total for the Marley business, it's a relatively small -- I think it was about 10% or 12% of the turnover was clay tiles. So it's a smaller part of the business. it's not -- in RMI terms, people do tend -- still tend to replace what they had with what they had. I know because my neighbor has just had his clay roof tile with Marley. So -- if you take in that context, I think it's more in the social housing where they've looked at the cost. And because of the increase in gas costs, the differential between clay and concrete has got quite significant. That doesn't mean from our point of view, the margins are that different. It's just the prices.

Sam Cullen from Peel Hunt. You talked a bit about the kind of the recommissioning of plant volumes come back. Can you talk about the labor aspects of that and how that changes if they're mothball for a longer period of time to your former workers go off and do something else and decide not to come back to be an operator? How long would it take to upscale?

The plan that's been mothballed in landscape products, is it Sandy? Sandy's in Bedfordshire. It's very close to our site at St. Ives. And as Martyn said, we've taken. At the same time, we mothballed the Sandy site, we're also starting to commission the Dual block plant at St. Ives. So we've moved some labor from Sandy to St. Ives. And it gives us the opportunity then to use that core of labor -- core of experienced labor to see the recommissioning of the Sandy site. Across the other sites, the reduction in capacity has really been driven by reducing number of shifts. And therefore, you've got that core of experience that's there and you're effectively adding to it. So we tried to do this in a way when we thought about which site we would take out of the network. We had it in mind that at some point in time, we're going to bring that back online and therefore, how do we do that? So there's a plan that we have, and we're confident we can deliver that.

I mean, if you take most machines, they're manned by 2, 3, 4 or 5 people. The key is the driver, having the experience will be the job that takes the longest to trade. So if you've got the drivers, which we think we'd have, backfill in with the support staff, is much quicker to be able to do. So you talk in weeks.

Okay. The second one was just on a bit more color maybe on the Viridian growth rate in the first half and the margins, are they comparable to the rest of the Marley?

The growth rate of Viridian was 30% in the first half of the year, and we saw an improvement in margins. Not quite to the level of the traditional roofing products, but in the range of the 20%.

Clyde Lewis, Peel Hunt. And I'll do one at a time as well. The GBP 7 million of asset sales, property sales, you're talking about this year, does that include Carluke? Or is Carluke going to drop into '24?

No, it doesn't include Carluke. Carluke may drop into '24. It may be a longer term. What we're doing with that site is to assess the opportunity to change the planning consent from industrial to residential. If we go down that route, then it may take a number of years to get that and to sell it. We do that if that's the best way we can generate value for shareholders. If not, then there would be a shorter time period for selling the property. The asset disposals this year are principally things like DomAquarees and other surplus sites that we've got around the network, which really we took the opportunity to think about whether we generate a commercial return or whether we're better just selling the assets and putting the money in the bank, and it's that type of disposal that we're executing this year.

I want to ask you for an estimated value of Carluke, but how many acres is it?

Let me come back to you, Clyde, on that. I've got the reverse mouthing something on me here, but I'm not sure.

When you acquired Marley, you were certainly talking about possibly rationalizing some of the other group sites, either putting Marshalls operations on Marley sites. Where have you got to in that thought process and that evolution?

It is still something we're looking at. I think there are -- I think it's fair to say we still believe as a group, we've got more sites than we need longer term. What we need to do is to organize and plan how that will happen. And that is underway at the moment. I do believe that there are opportunities for us to rationalize the sites we've got and obviously, to sell the surplus sites. So that is something as active at the moment. It's difficult to tell you which one is, obviously.

Viridian, is it fair to assume at the moment that your sales of batteries, inverters, car chargers is effectively nil?

Not significant at this point in time. The range has been -- well, the range of inverters and batteries is being launched as we speak, and we've been selling the EV charges for most of this year. But we believe that will be -- it's part of -- it will be part of a system sell going forward.

I'm trying to get the, I suppose, the element of the panels versus the value of the other parts. What's the sort of, I suppose, scale of the add-on products compared to the solar sales? Would it be 20%, 30%, 40%? Or would it be actually more as a percentage of the total sales?

I think it will be more in the 15% to 20%.

I think the big issue with that isn't just about the sales of those items. The existence of those items, the batteries and inverters effectively change the payback considerably for this investment. And I think what you had towards is why would you have a roof without put in solar panels on? Because if you can store what you're effectively collecting in the daytime, not have to sell it back to the grid for peanuts, then it becomes a completely different financial payments. So whilst we would like to sell some batteries, inverters, our big game changer is the existence of those cost-effective way, makes the whole system that much more appealing.

I've got two more. I'm nearly there. GBP 90 million of CapEx this year. Where do you think '24 is likely to be in terms of up or down? I mean clearly, [indiscernible] in terms of the marketplace. But is that GBP 19 million, GBP 20 million a sort of a good guide for current expectations for CapEx next year?

Not sure, it will depend on the opportunity to spend money on efficiency CapEx. I don't think there'll be any need for any expansionary CapEx at all. So as a guide for planning purpose to work on sort of GBP 15 million to GBP 20 million, but we'll spend where we see good opportunities, and we'll continue to apply the 3-year payback rule that we use for all our factories.

There may be some enabling capital to accelerate some of the site opportunities, but they would still be within that category of expenditure.

Okay. Perfect. And last one, just really useful to get a bit of an update around sort of the commercial infrastructure markets. I mean, you talked about infrastructure and obviously, the requirement that we need to continue spending in the U.K., it would be useful to sort of update on some of the big projects that you're exposed to presumably HS2 is not yet featuring anywhere in the revenue line, but also to update maybe on where local authorities are in terms of their spending plans and what they do?

Yes. I mean the category we call commercial follows into a number of different areas. So I think one of it is what we've said in the past, is a pedestrianizing of city centers. That is carrying on in most cities. Now I'd say in the U.K., what you're seeing, as I mentioned earlier, Battersea and Nine Elms is about creating more public space that people want to utilize in, traffic isn't it. That is great from my Marshalls point of view and landscaping. So that is happening in Manchester, Leeds, Liverpool as well as, obviously Birmingham. [indiscernible].

And at bank station. So if you walk around bank station, well, certainly yesterday afternoon, there's a lot of our products around the pedestrianization of that area.

So you've got that element, I think. And then you've got roads which are carrying on. Obviously, there's still investment, the smart motorway program, we know it has been curtailed, but obviously, the investment even in central reservations, they need drainage products and the like. So that's carrying on. HS2 will come in. HS2 for us will be -- what we see from HS2 today is most indirect, I'd say, it's Birmingham. The redevelopment of the Birmingham area where it's coming in, and that surrounding area is giving lots of work opportunities. So that's positive. Local authorities, I guess, we see most from the roof point of view. And what solar is given now is a solution where you can address fuel poverty. So whereas people used to have programs of replacing roofs every 50 years or whatever, they're now looking at, if they brought some of that forward and actually changed it and with solar panels, they can sort out or make massive improvements on fuel poverty. So you've seen more and more quotes coming out. In fact, that 30% growth in solar is probably more coming from that area. The new build. New build by the end of the year when Part L is there, is going to have a big kick.

Carluke is 36 acres.

36 acres. We hear from this side.

[ Toby Thorrington from Equity Development. ] I have a quick supplementary on Carluke then. Do you know what it's in the books at the moment?

It's in the books at about GBP 1 million. .

So first one, what's your take currently on the installer network? I think, I saw that country chose order books have gone up again. What's happening there?

You'll notice today that we didn't use the slide on installer. I thought, last time when I was putting the number up, how can you have a 30% fall in demand and so it's not a KPI that's obviously showing the overall demand. If you take it today, the frustration that we have in share is still at the top end where people obviously haven't got debt and want to spend money. The frustration we get more than anything else is the lack of labor to do that work. I was hoping, and we may still see it that obviously with the downturn at the moment in house building, there's obviously ground workers out there who have got the ability to do the patios without any doubt. It's how they get in touch with the customers and how -- because they're not businesses. They may do it for somebody they know, but they don't do in it commercially. But the demand, that is unbelievable. It's still at the 17, 18 weeks, it's at levels we've never seen, and it's never come down. But it's not obviously covering the whole of our business. But yes, at the top end, it's still there. And you see it firsthand when you talk to people. I mean, people have come across landscape owners who have over 12 months' worth of work. And therefore, looked when to fit them in, usually depending on how big the area they want.

Are you seeing churn in the installer network then?

I wouldn't say any more than you've seen before, but a lot of them, if you go all the way back, a number of these people got burned. I mean, these are small businesses. These are 4, 5 people. A number of them will still talk back to 2008, 2010, when they had 2 or 3 teams working on this, everything was great and then it collapsed and they have to layoff friends. So a lot of them have taken the view, I'll stay as I am. I've got a big order book, I'm happy of making reasonable money. And in lots of cases, when they doubled and tripled the crews, they didn't make double and triple the money, they just had double or triple the hassle. So that's our challenge, is how do you get more people to see this as an opportunity because the order books are tremendous.

Okay. And come for Justin on cash, please. Net-net, it sounds like adjusting items will be cash slightly positive this year.

Adjusting items will be cash negative because of the redundancy payments.

But asset sales?

Well, asset sales are netted down again. So the net CapEx that I quoted of GBP 6.7 million is net of those asset sales. So gross CapEx for the year of about GBP 19 million and GBP 7 million of asset sales there or thereabouts. So it depends on which way you want to cut it, then if you want to include those in the air, then yes, you'd be about GBP 3 million cash positive.

Yes. Okay. And I'd like to have -- so where you think net debt might be at the end of the year?

We think it'll be a little bit lower than it is now. So just sort of $5 million to $10 million lower.

Are there any more questions? If there's not in the room, can we ask if there's any online, please?

[Operator Instructions] We don't have anybody in the queue at this time, sir.

Okay. Okay. Like I said, thank you very much for your time. If anybody want to download the app, we can show you where to get it in the Apple store. So thanks for your time. Thank you.