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Edited Transcript of IBST.L earnings conference call or presentation 3-Mar-20 10:00am GMT

Leicestershire Mar 31, 2020 (Thomson StreetEvents) — Edited Transcript of Ibstock PLC earnings conference call or presentation Tuesday, March 3, 2020 at 10:00:00am GMT

UBS Investment Bank, Research Division – Executive Director, Head of European Building & Construction Research and Equity Research Analyst

Good morning, and welcome to our London Design Centre for our 2019 results presentation for Ibstock. My name is Joe Hudson, and I’d like to welcome Chris McLeish here today, who’s our new CFO. This is his first results presentation, so go easy on him, please. Chris will take you through the financials, and I’ll give you a bit of an operational update. And because Chris has been here now for 6 months, he’s had some good input to the strategy, so we’ll both give you a bit of a view of how we see the future of Ibstock before taking questions later on.

So as you can see, the group delivered a resilient trading performance against a backdrop of market conditions that were softer in the second half of the year. We’re, therefore, pleased with the solid performance and revenue growth of 5% and EBITDA growth of 9%, 2% excluding IFRS 16. In addition to strengthening our teams during the year, we also progressed on our strategic priorities, with improvements in operational efficiency, sustainability and innovation as well as our pipeline of growth projects. I’m particularly excited to discuss a significant new project in our Clay division today, and I’ll expand upon that a little bit later on with some of our other initiatives.

So I’ll hand over to Chris now to take you through the financials.

Thanks, Joe. Good morning. I’m delighted to be presenting our full year results today having joined the business in August last year. I joined Ibstock from Tate & Lyle, where I spent 17 years in a number of financial leadership roles.

Looking from the outside, I was attracted to Ibstock by the quality of the business, with its market leadership positions, strong returns and cash generation and the potential to invest further for profitable, sustainable growth. I’m pleased to say that since joining, I’ve also been struck by the pride and passion of our people, the strong sense of collective ownership for our social agenda and the scale of ambition to take advantage of the opportunities in front of us.

Turning to cover the financial highlights, where, as Joe said, the business delivered a resilient trading performance. Revenue grew by 5% for the year, with growth across both divisions. Adjusted EBITDA grew 9% to GBP 122 million, or 2% excluding the impact of IFRS 16, driven by progress within our Clay division. Adjusted earnings per share were 3% lower than the prior year, reflecting a more normalized tax rate compared to 2018, which benefited from a deferred tax credit related to our pension plan.

Our return on capital employed remained strong, but reduced slightly to 19.3% as invested capital increased in 2019, reflecting capital invested through the first year of our enhancement projects, the acquisition of Longley Concrete and inventory build-back from historically low levels in 2018. We maintained our strong balance sheet, and at 0.7x net debt-to-EBITDA remained towards the lower end of our stated range.

Moving to revenue. We saw solid growth across both divisions. Clay achieved positive pricing, although volumes were slightly behind the prior year, with volumes in the second half weaker as we saw softer market conditions. Concrete revenues grew by over 10%, with good volume growth in roof tiles and the benefit from the impact of Longley Concrete. As I noted earlier, adjusted EBITDA grew 9% to GBP 122 million or 2% excluding the impact of IFRS 16. The Clay division delivered solid growth of GBP 5 million or 5% excluding IFRS 16, with positive pricing and lower material costs, partly offset by higher maintenance and energy costs. Before certain small one-off benefits in the second half, Clay’s adjusted EBITDA margin was approximately 35%, consistent in underlying terms with the prior year.

Performance within the Concrete division was more mixed. Despite the good volume growth in roof tiles, the business experienced softer demand in both RMI and infrastructure markets. Sales mix also impacted margins. Central costs increased due to higher operating expenses and the impact of lower R&D tax credits. EBITDA increased by GBP 7 million as a result of adopting IFRS 16, the new leasing standard.

Turning now to cover cash flow and balance sheet. Adjusted operating cash flow for the year of GBP 72 million was GBP 12 million below the prior year primarily due to an increase in working capital as we rebuild finished goods inventories from the lower levels carried at the previous year-end.

Capital expenditure of GBP 39 million included maintenance of around GBP 25 million as well as the first year of spend on our capital enhancement projects. As a reminder, the strength of our balance sheet and cash flow generation has allowed us to complete the acquisition of Longley Concrete and pay a supplementary dividend of 5p per share in 2019.

Our balance sheet remains strong, with leverage at 0.7x net debt-to-EBITDA towards the lower end of our range.

With that, let me hand back to Joe.

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Joseph Hudson, Ibstock plc – CEO & Director [3]

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Thanks, Chris. So before we get into some of the operational highlights, I thought it would be helpful to give you just a view on a few data points that we think summarize the recent market conditions.

So data from the NHBC indicates that housing completions were slightly up for the year as a whole. However, housing starts were down 8%, mainly due to a 9% decline in the second half. This clearly illustrates the lower levels of activity and the softer market conditions we saw in the second half. And I would note that the low levels of activity were not evenly spread across all developers, with smaller and midsized developers seeing a greater slowdown in activity.

Private housing RMI was down 2% according to the latest ONS data, illustrating the generally softer market conditions we’ve seen, particularly in our Concrete business. In the brick market, demand remains in excess of domestic capacity, and imports continue to enter the U.K. and now make up about 18% to 19% of the market. To be clear, we see these recent market dynamics as temporary due to the period of political and economic uncertainty we’ve had in the U.K., and the clarity following the general election has been helpful. If we look at recent data points around housing market activity such as transaction volumes, site visits reported by developers and house price inflation, these are all showing positive trends. And as a result, we do anticipate to see a pickup in activity throughout the year.

Indeed, when you look at the underlying fundamentals, such as the structural deficit of housing supply, the average age of housing stock and the enabling economic drivers, we reiterate our confidence in the newbuild housing market going forward.

So turning to operations and looking at the Clay division first. We’ve made very good operational progress this year with support from our new Divisional Managing Director, Kate Tinsley, who’s here today and her team. We’ve started to see some good impact from our sales and operational planning processes that have continued to reduce consolidation rates and improved supply chain efficiency.

Most importantly, we’ve been making improvements in the way we look at maintenance, moving to a continuous improvement culture. And we’re starting to see better reliability and production output from our key manufacturing sites following the program of planned outages last year. As a result, we’ve rebuilt our inventories in 2019 from historically low levels, and this leaves us better place to serve our customers better and benefit them when the market conditions improve.

Moving to Concrete. We’ve completed the restructure of the division to bring our 3 existing brands under a single management team and adding Longley Concrete during the year. The division continued to trade well despite softer market conditions in the broader RMI market and lower demand for certain infrastructure products during the year. On a positive side, we’re very pleased with our roofing business, which delivered double-digit volume growth, taking share in a well-established market, and this penetration leaves us well positioned for the future. The integration of Longley Concrete is progressing very well, and we now have a leading national flooring business with a strong presence in both of our key routes to market via builders’ merchants and housing developers.

Now given it’s the first year we’re reporting our 2 divisions separately, I thought it might be useful to provide some further detail on our Concrete division and why we continue to invest there. With over GBP 100 million of revenue, this is an important core business for us and one that generates industry-leading margins. Indeed, over the medium term, this business generates similar returns to our Clay operations when you consider the lower capital intensity. This slide shows the revenue contribution of the 3 product areas, and you can see that these are higher-value, smaller-element, aesthetic concrete products with a bias towards the residential housing market. We do have a small infrastructure division, but it’s pretty small compared to the other 2.

The division also shares the same primary routes to market as our Clay business, direct to housing developers and via builders’ merchants, and this gives us potential for more cross-selling opportunities in the future. Overall, the key takeaway is that our Concrete business has significant similarities with our Clay business in terms of routes to market and strategic focus. Given the more fragmented nature of the industry, there are opportunities, obviously, for inorganic growth should the right assets become available.

So to conclude this part of the presentation, we have a strong business and are making good strategic progress. The fundamentals of our core business, which is the newbuild housing, remain robust. And with better inventory levels and improved production capabilities, we’re well positioned to deliver into the future potential of this market. Although the short-term market dynamics have resulted in a slower start to 2020, we anticipate that activity levels will improve as the year progresses, and we, therefore, expect to deliver a stable outcome for the current year.

So let’s turn to our strategy now. In March last year, I shared with some of you my early thoughts on strategy, and underpinning that strategy is a deeper sense of purpose. Yes, we want to generate strong economic outcomes as a result of what we do. That’s why we’re in business. But as a company, we believe we should make a positive impact to enable the construction of homes and spaces that enable people to live and work better. There’s a lot going on in the building industry, and we want to be a reference point for transformation at the heart of building in the U.K.

Our strategy is based on 3 pillars: sustain, innovate and grow, which will improve the performance of our core business, keep pace with a fast-changing market and deliver growth through organic projects and selective M&A, all in a more sustainable way.

So firstly, if we look at sustainable performance, Ibstock is a long-term business, and to ensure we maintain our leadership and sustain the value-creation from our assets, we must have a focus on stewarding them well. What does this mean? It means ensuring that we have an absolute priority on the health, safety and well-being of our employees.

We’re investing in the structure and capability of our teams so we can manage performance and talent better. And we want to have more reliable and cost-efficient assets. And hence, the focus on operational excellence with programs like our maintenance culture, our planned shutdowns and more energy efficiency and automation with our enhancement projects, which I mentioned last year.

But sustainability is more than that. It’s also about our impact on the environment and on the society in which we operate. To that end, we’ve developed a road map, which we announced last year to 2025, with targets across the ESG spectrum. And these aspirations are being embedded into our day-to-day operations. We now have a sustainability board with external representation, and we’ll report on our targets that we set out last year in June this year.

We have a whole host of initiatives in this road map. But a few examples are, in the environmental side, we hope to reduce plastic use significantly and eventually eradicate it. And this year, we will have a minimum reduction target of 12%. We’re looking at our energy consumption and options for more renewable sources. And our first solar farm, which has just opened last month, will provide almost 30% of all power to all of our factories on our Leicester site, and there are 4 factories on our Leicester site. In our journey to net zero carbon, we set out minimum reduction of 15% by 2025, and we’ve been recognized with a second edie award this year for energy management.

We also want to make social progress as well. It’s not just about the environment, it’s about our social impact. And to that end, we’ve a national partnership now established with Shelter, and every site is now mobilized to raise money and awareness to tackle homelessness in the U.K.

Moving to innovation. As you can see from the slide, we’ve really made some good progress. Our businesses are more customer-focused, developing tools and process to give us better platform for growth. As well as opening our I-Studio design center, we rebranded the business last year, and we’ve invested in new product development and digital platforms to improve the experience and the choices for our customers. I’ve mentioned supply chain optimization already to improve customer service. And we’re working with clients to develop solutions that will save them time and resources on job sites with solutions like our MechSlip cladding system, which is behind Chris, as you can see. If you move a bit further off?

So before we get to the last leg of our — last pillar of our strategy, which is growth, I’d like to hand you over to Chris, as I think it will be helpful for him to give you more context on the capital resources to deliver that growth and the prioritization of capital over the future.

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Christopher Mark McLeish, Ibstock plc – CFO & Director [4]

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Thanks, Joe. So as Joe says, I’d like to now briefly cover both the capital pipeline and the allocation principles, which we will apply moving forward. This slide summarizes one of Ibstock’s key strengths, the strong free cash flow generation of the business and the robust balance sheet following the disposal of Glen-Gery. This creates a great opportunity to drive growth and create long-term value for our shareholders.

For illustrative purposes, on the left-hand side of this slide, you can see that, today, after sustaining investments and a payment of our ordinary dividend, the business generates normalized free cash flow of around GBP 30 million, equivalent to GBP 150 million over the next 5 years. Based on current debt levels and given our stated leverage range, we have headroom well in excess of GBP 50 million, and both of these amounts are based on current levels of profitability.

We also anticipate realizing GBP 10 million to GBP 20 million of surplus cash from property disposals over the medium term. Altogether, this provides over GBP 200 million of capital over the next 5 years for either investment for growth or return to shareholders. As Joe will outline, we have an attractive pipeline of investment opportunities to grow the business, but we will continue to apply strict strategic and financial criteria to any opportunity.

In order to provide clearer guidance on how we will allocate capital going forward, we published today refreshed capital allocation guidelines. To be clear, our commitment to disciplined capital allocation remains unchanged.

First and foremost, we reiterate our fundamental commitment to maintaining a strong balance sheet and our 0.5x to 1.5x leverage range, excluding IFRS 16. Against that backdrop, we will invest initially to maintain and enhance our existing network. Secondly, we recognize that the ordinary dividend is a cornerstone of the investment proposition. And we will adopt a sustainable and progressive dividend policy, looking to move the dividend forward, broadly in line with earnings over time. Thirdly, we will look to deliver major organic growth projects, which maintain our strong return profile and pursue inorganic opportunities where we see strong strategic fit and only where our strict financial criteria are met. Finally, we will look to return surplus capital to shareholders periodically where appropriate.

With that, let me hand back to Joe.

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Joseph Hudson, Ibstock plc – CEO & Director [5]

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Thanks, Chris. So Chris has shown you, we’ve got good free cash flow, and therefore, strong financial firepower to grow. The business has a strong history of delivering organic growth projects, and we’ve developed a strong pipeline of growth options here. Our projects have a high visible return profile and are not just purely about expanding capacity. Often, our projects are — we look at them to deliver on multiple fronts, such as improved cost profile to deliver better competitive positioning, the ability to improve capacity and our product and service offering to customers, and to improve our sustainability credentials and environmental impact.

Because we favor organic growth, we have a very targeted approach to any M&A opportunities we pursue. These need to have significant strategic overlap to complement our existing business, be primarily focused on the residential building envelope and our key routes to market and have high-quality teams and return potential to give us the opportunity for long-term value creation.

As you can see from the areas highlighted in green, we have a good track record, as I said, of delivering projects, and these are some of the projects that we’ve delivered over the last 10 years. Our industry-leading clay reserves and national footprint of sites gives us significant optionality and flexibility when looking at further growth options.

And I’m excited today to announce that we’re commencing with the project in our Clay division to redevelop our Atlas wire cut brick factory to expand capacity and significantly improve our cost and sustainability profile. The new factory will be built on the existing site, currently producing 40 million bricks and double the capacity to 80 million bricks a year. We expect to commission the project in 2022 and for it to deliver returns in line with group levels by year 3. The investment cost for the project is GBP 45 million, and we’d expect the net cost to be lower, taking into account the property disposals and the recycling of the capital that Chris talked about earlier on.

As I’ve mentioned, we also have other options and one of them is to develop our — one of our key concrete plants in Dewsbury, which will expand capacity for our flooring business and provide a platform for growth as we look to deliver value over the recent Longley acquisition. Longer term, we have other options, such as a new soft-mud factory similar to Eclipse in the Southeast, which would primarily target imported bricks. We will continue to review the potential of these projects and provide further updates as we keep going.

So to summarize, we now have a strong U.K.-focused, purpose-driven business, and I’m excited about the future potential of Ibstock. Our strategy sets out multiple drivers of growth and areas of both operational and commercial improvements. We’re confident all of these opportunities will lead to significant value creation for shareholders in the future.

And Chris and I will be very happy to take your questions. (Operator Instructions) So the quicker you get through the questions, the quicker you can have a coffee.

Good. We’ll start over there.

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Questions and Answers

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Aynsley Lammin, Canaccord Genuity Corp., Research Division – Analyst [1]

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Aynsley Lammin from Canaccord. Just 2 questions, please. First of all, wondered if you’d give any more color on trading in January, February? Maybe comment on what kind of volumes have done, any big difference from Q4?

And then secondly, any kind of views on what you expect cost inflation to be this year, how confident you’ll maintain the good margins in the Clay business?

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Joseph Hudson, Ibstock plc – CEO & Director [2]

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Yes. So trading continues to be quite subdued. Obviously, the weather hasn’t helped. Activity levels slowing down, need to manifest themselves into building walls and roofs and that — there’s still been quite a lot of work in progress in the system. So it’s too early to say how the year will play out.

But there is quite a lot of optimism, some green shoots happening, and there’s a lot of — there seems to be a lot of confidence to move forward now, which is the main thing that we were lacking at the last — end of last year. So it’s still too early to say how things are going. But it is a bit slower in the first few months of the year, but it has been, I think, on record, the wettest February in the history of the U.K., so that hasn’t helped.

In terms of margins, I’ll let Chris talk about that.

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Christopher Mark McLeish, Ibstock plc – CFO & Director [3]

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Yes. So when you look at the sort of cost base for 2020, think of energy costs. As you know, we buy forward, so we hedge both gas and power and sort of circa 80% to 85% covered on both accounts. Modest reduction in gas costs as we look into 2020; power, pretty sort of stable. You think around sort of maintenance cost coming off a little bit. Recognize carbon is an increasingly sort of meaningful cost, which will step forward a little bit.

So overall cost inflation, think sort of low to mid-single digit. And our ambition has been to sort of price that through. We’ve largely kept unit margins pretty stable. So think about them in pretty stable terms relative to 2019.

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Joseph Hudson, Ibstock plc – CEO & Director [4]

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Okay. Gregor had a question.

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Gregor Kuglitsch, UBS Investment Bank, Research Division – Executive Director, Head of European Building & Construction Research and Equity Research Analyst [5]

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Gregor Kuglitsch from UBS. Just coming back to the expansion point. I just wanted to sort of explore the thinking of going for sort of a smaller investment. I think you previously perhaps suggested you’d do the soft mud expansion that you kind of put on the slide there, that’s sort of a midterm potential. And specifically also in wire cut, because I think my understanding was the shortage was more on soft mud. Is this kind of a bit of a reflection of perhaps it’s a lower capital cost and, therefore, it’s a more cautious thing to do at this point? And then perhaps in due course, you can pull the trigger on a perhaps larger investment?

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Joseph Hudson, Ibstock plc – CEO & Director [6]

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Yes. Well, I think we have got a sort of more of an unfolding plan of longer term things to do. The reason for this investment, obviously with our enhancement projects, we’ve been to liberate more soft mud capacity in the short term, which we will bring on-stream next year. An investment in wire cut capacity also helps our competitivity and our cost position, and we’ll also release more soft mud into markets that we can play in by playing more wire cut capacity into the developer market.

But in particular, this project, which is identified by the Clay team, is a very fast payback. So it’s — we’re ramping up and commissioning in 2022. So we always look. We have a whole range of options that we’re constantly studying, and we decided to prioritize this one because of those 3 reasons.

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Gregor Kuglitsch, UBS Investment Bank, Research Division – Executive Director, Head of European Building & Construction Research and Equity Research Analyst [7]

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On the surplus capital slide, which I think you kind of tallied up as GBP 200 million over 5 years, I guess, you’ve kind of allocated GBP 45 million, give or take, for this particular project. Perhaps, there’s some M&A. Is there any kind of directionality you can give us in the further supplementary in the short term? Or is it too early?

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Joseph Hudson, Ibstock plc – CEO & Director [8]

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I think at this stage, we’ve set out our capital allocation priorities, we’re doing large investment projects. If there is surplus capital, and we decide — the Board has a decision to make as to how to deploy that. But at the moment, we have quite a heavy investment program going forward. So we haven’t made any decisions about any surplus capital back to shareholders at this stage.

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Gregor Kuglitsch, UBS Investment Bank, Research Division – Executive Director, Head of European Building & Construction Research and Equity Research Analyst [9]

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And then final question. I think in your remarks, you were speaking about some one-offs and the margin or the profitability. If you could just quantify how much those were at the group level against the GBP 122 million of EBITDA, so we can kind of establish a clean base. It would be helpful.

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Christopher Mark McLeish, Ibstock plc – CFO & Director [10]

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Yes. So clay benefited from circa GBP 2 million to GBP 3 million in the second half. Some of that was cost deferrals, so some self-help that we managed to deliver. And there were some small income items from the estates team as well. So GBP 2 million to GBP 3 million is the sort of number that you shouldn’t expect to occur in 2020.

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Gregor Kuglitsch, UBS Investment Bank, Research Division – Executive Director, Head of European Building & Construction Research and Equity Research Analyst [11]

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And then one final question, sorry. The capacity of the group in clay’s, what, 920-ish? Is that about right? Because I guess, you get a little bit of enhancement on top, which, I don’t know if they’re completed yet or whether they’re about to be completed, so we can contextualize the GBP 40 million extra.

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Joseph Hudson, Ibstock plc – CEO & Director [12]

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We never give a specific capacity, Gregor. I’ve told you that a few times before. We never give out specific capacity. Here and here.

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Alastair Robert Stewart, Shore Capital Group Ltd., Research Division – Analyst [13]

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Alastair Stewart from Shore Cap. A couple of questions. First of all, following on from Gregor, you mentioned the possibility of a soft mud factory in the Southeast targeting imports. My understanding has been that a large amount of the imports are from — more from the specialist — for the specified market, and they tend to be unusual shapes, colors, textures and so on. Is there going to be a wider range of product available from that factory if you do go ahead? And will it be a sort of big-bang approach or a bit like Atlas, a bolt-on?

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Joseph Hudson, Ibstock plc – CEO & Director [14]

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Yes. The import market is interesting. There’s always been about 100 million of imports, which are, specifically, as you just mentioned, quite specialist types of products for specific parts of the market. The imports, obviously, with the lower capacity in the U.K. and the growth in the housing market have started to move into other areas and to merchants and into the developer segment. So — and that’s been helpful. And last year, the dynamics are that you have to order imported bricks 6 months to a year ahead because they have to change tooling and have to set up things and they’re all bought and paid for. So as the market came off, you can see that there was a similar level of projected imports ready for the market.

But we believe that our products, for example, in Eclipse, we have wonderful simulated handmade bricks. Our existing fleet of factories have great capabilities to service some of those more specification-led markets. So if we did another factory in the south, yes, that would also have those capabilities for specialist types of high-end bricks. But we’ve already got some of those capabilities, and it’s a case of more what we’re doing here now, which is to drive the specification agenda and influence the market that way.

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Alastair Robert Stewart, Shore Capital Group Ltd., Research Division – Analyst [15]

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And would it be sort of a big effect? It sounds like Atlas as a bolt-on would be more like an Eclipse-type approach.

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Joseph Hudson, Ibstock plc – CEO & Director [16]

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Well, Atlas is a whole building of a whole new brick factory, which is 80 million. It is lower cost because it’s not a soft mud factory. But a new soft mud factory, we would probably do another 100 million factory like Eclipse because that’s where you get the best economies of scale.

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Alastair Robert Stewart, Shore Capital Group Ltd., Research Division – Analyst [17]

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And then very briefly, you said the weather had been really bad in February. Did you get — have you had any anecdotal feedback from your housebuilder customers that they were ready to go, but just couldn’t get the trucks in as it were.

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Joseph Hudson, Ibstock plc – CEO & Director [18]

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That’s exactly what they’re saying. There’s a lot of optimism, there’s more inquiries now happening. We are seeing more inquiries ourselves, but that hasn’t translated into activity yet. So everyone is sort of pent-up waiting. But there are some green shoots, so we are seeing some green shoots coming.

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Rajesh Patki, JP Morgan Chase & Co, Research Division – Analyst [19]

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Rajesh Patki, JPMorgan. Two questions. First, on the sustainability targets. You’re targeting a 15% reduction in carbon dioxide emissions per tonne of material. Can you give us a sense of where the absolute levels stand at the moment and how they’ve evolved over the last 5 years? And on — in addition to that, what are the key drivers that you’re targeting for the reduction there? And is there any impact on the fuel mix and…

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Joseph Hudson, Ibstock plc – CEO & Director [20]

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So our current — we’ve made quite a lot of progress even in the last year. We’ve reduced by 6%. We’re now looking at about 159 tonnes of carbon — 159 kilos of carbon per tonne of intensity in our group — across our group. And we probably are the leader in the brick space at this stage. We’re the most sustainable.

Obviously, going forward, there’s a lot we can do, and Kate and her team are in a big transformation program to see what we can do. That’s material. It’s thermal efficiencies. It’s how we can look to recycle more. And we have a whole list of initiatives, and we’ll report on those in June. We have a sustainability report that goes out.

So going forward, obviously, there are longer term things, such as biomethane and hydrogen into the gas network, which will significantly take carbon down. But there’s other things that we can do as well that we’re working on, such as green electricity and things like that. So there’s a raft of things. We believe that we want to head towards zero carbon, and we’ve set some realistic targets. A lot of people are saying, right, we’re going to get to zero target. But we’ve actually set some really realistic targets, and we want to make sure that we’re very responsible in delivering those. We’ll continue to revise them over time. What was the second part of the question?

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Rajesh Patki, JP Morgan Chase & Co, Research Division – Analyst [21]

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Just any impact on fuel mix going forward.

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Joseph Hudson, Ibstock plc – CEO & Director [22]

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Yes. I mean at this stage, no. But obviously, thermal efficiency, which is recycling of a lot of the gas and those sort of things, and the power that we talked about, so the energy sources with solar, renewables and LED lighting is a big part of reducing overall CO2.

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Rajesh Patki, JP Morgan Chase & Co, Research Division – Analyst [23]

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And just a quick one on working capital. I wanted to get a sense on what you think of the inventory buildup that we saw last year? And if you could expect an unwind in 2020 on that?

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Christopher Mark McLeish, Ibstock plc – CFO & Director [24]

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So the inventory build that we saw, which was around GBP 20 million in terms of the investment in working capital that we made, was actually seeking to build back up to the levels at which the inventory had typically been held over recent years. So don’t think of it as something that is abnormal or unusual that is expected to unwind. We actually feel a lot more comfortable about where the inventory levels are now. It gives us the operational flexibility and the opportunity to better serve our customers. So it wouldn’t — I wouldn’t expect it to unwind in 2020.

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Clyde Lewis, Peel Hunt LLP, Research Division – Analyst [25]

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Clyde Lewis at Peel Hunt. I think I’ve got 3, if I may. One on the supply chain improvements that you’ve made in the Clay side, if you can maybe give us an idea of the quantity. I mean obviously you’ve got the working capital shift up, but I’m just trying to get an idea for how much that’s really benefited the Clay business, in particular, over the last 12, 18 months as those changes have come through.

And linked into, I suppose, just trying to get an understanding of — you’ve got your brick stock levels, but what’s happened to the merchant and the brick factor stock levels? Has that moved around, do you think, in terms of particularly the last 6 months of the year? So that was the first one.

The second one, I’m looking behind Chris and looking at the brick slips, the mechanized system, can you give us an idea as to how fast that area is growing at the moment relative to more standard, obviously brick sizes?

And then also on pricing, could you say a little bit about how the pricing discussions have gone? Obviously, difficult Q4, I suspect, make it that easy for you guys to push hard for price rises. So I’m just — I’m not expecting you to give us the number, but just a direction, I suppose, of where that was, where it came in at? And do you think you’ve got a chance to maybe go back this year, particularly if the housing market does pick up as we’ve certainly seen the decent start from the new house builders?

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Joseph Hudson, Ibstock plc – CEO & Director [26]

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Okay. I’ll let Chris take the pricing question because I think he’s actually covered it already, but I’ll let him reinforce it. And I’ll take the other 2. So in supply chain efficiency, we’re working with a lot of our customers to try and partner with them. There is a paradigm in our industry, which is, it’s okay to cover — have lots of extra orders and then change it by 30%. So we’ve really seen some good inroads with certain customers going from 30%, 35% down to 5%. There will always be a little bit of change because sites have slowdowns or the planning doesn’t come through and so on. But it is improving. It’s improving our value proposition to the customer, and that is the main efficiency that we’re seeing at the moment.

Obviously, it’s going to impact turnaround times, make plans from factories. So the whole thing, the whole ecosystem, there’s a lot of opportunity there in the future. But at this stage, I would say it’s still quite early days. We brought someone in from automotive to help, and he’s our Supply Chain Director, and Kate is doing a lot of work on that with her team. But we’ve got to put some longer-term things in place, so I wouldn’t say it’s having a huge bottom line impact at the moment.

Stock levels and merchants, clearly merchants are quicker with their ordering processes. And I’d say because of the subdued market conditions, especially with the smaller housing builders, which tend to use builder merchants, they have quite a lot of stock in the channels at the moment. So hopefully, that will start to unwind, and they’ll start to call off more product.

Slips is a really interesting one. We’re interested to see how we can continue to support the growth of housing and in the U.K. So we see slips probably for more of the high-density residential applications, buildings, especially things as people are looking to reclad and they’re considering noncombustible cladding. This is a really interesting market for us. And at the moment, our MechSlip is really getting — gaining huge traction. Obviously, we’re working on that. It’s a new product. So it’s not going to make a huge dent in our numbers this year, but we see that as a very big potential going forward. And pricing?

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Christopher Mark McLeish, Ibstock plc – CFO & Director [27]

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Yes. Let me cover that, Clyde. So as we said, cost inflation is in the sort of low to mid-single digit. We always start with the intention and expectation of covering that, and we’ve been able to do that. So that gives you an idea of where we are. As we said in the presentation, if you strip out that sort GBP 2 million to GBP 3 million of one-offs, you get to about a 35% EBITDA margin in Clay, and that’s on a post-IFRS 16 basis. And that’s the sort of level that we would expect going forward, just to give you an idea.

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Christen David Hjorth, Numis Securities Limited, Research Division – Analyst [28]

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Christen Hjorth from Numis. Just 2 from me, really. First of all, in the second half of last year, sales by U.K. brick manufacturers underperformed against imports, so just sort of a bit of color on that. And I suppose if you have a stable market backdrop next year, do you expect the U.K. industry inventory to increase? Or would that displace some of those imports if there’s a bit of a lag or something like that?

And the second one, just on Atlas, just to be clear. Do you expect that to reach full capacity utilization at this stage at 2025? Because that’s a sort of a 3-year lead-up just on that. And sort of related to that. Clearly, a new facility does improve a number of things, extra capacity, more efficiency, but efficiency in terms of energy as well. And when you look at your portfolio of brick assets and factories, how important do you think is it over the longer term to sort of relook at those and perhaps do what you’re doing with Atlas at other plants as well to improve, amongst other things, sustainability credentials?

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Joseph Hudson, Ibstock plc – CEO & Director [29]

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Good. Okay. So yes, the import dynamic, I alluded it to a little bit last year. Obviously, the economics of imports versus local bricks and the lead times and supply chain efficiencies are not as strong. So the natural economics will always play out in my opinion because we have local factories, and people tend to want to have local bricks.

So — but obviously, as I mentioned earlier, they’re set up — they were set up a year and ahead. People have bought and paid for them. The factories have all done their runs and retooled their products because there are different size of products in the continent, which is where most of the imports come from. So I would say that imports, if it is — if it was a stable market, would start to decline. I think the market — I’m confident that the market is going to pick up. So I expect it to be still a high level of imported bricks as the U.K. industry continues to build capacity.

And with relation to Atlas, I showed you the sort of the history of some of our organic projects. And yes, we’ve got a large fleet, 21 factories across the country. We do have optionality to continue to invest in the efficiency of that fleet, but we have done quite a bit of it. If you think of Throckley, Chesterton, Eclipse, Atlas, we are investing in making improvements in thermal efficiency and energy usage. So there are more options going forward, but we’ve done quite a lot already. Okay?

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Christen David Hjorth, Numis Securities Limited, Research Division – Analyst [30]

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So just on Atlas, full capacity utilization at this stage, do we assume 2025? Is that reasonable?

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Joseph Hudson, Ibstock plc – CEO & Director [31]

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Yes. I think we’ve got commissioning in ’22. So you’ll see 2024, ’25 full capacity.

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Christopher Mark McLeish, Ibstock plc – CFO & Director [32]

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Yes. Christen, I think, it’s what we’re saying, we’ve looked at the investment in Atlas on to a number of economic scenarios. We expect that investment to get to group return on capital employed within the medium term. So that’s the sort of time frame that we were thinking about to deliver that level of return.

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Joseph Hudson, Ibstock plc – CEO & Director [33]

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Okay. Maybe one more question, or people would like a cup of coffee. No one’s asked me about coronavirus, which is nice.

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Unidentified Analyst [34]

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What’s happening [to the] coronavirus?

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Joseph Hudson, Ibstock plc – CEO & Director [35]

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I’m a victim to my own stupidity am I? I think it’s a fast-moving area, and I think the most important thing for us is the health and safety and well-being of our employees. We’ve already given 2 announcements just to sort of — in line with what the government have been saying and especially people who’ve been traveling and what to do and which countries are exposed.

For us, we don’t have any direct — there would be no direct influence because we’re not exposed to overseas raw materials or stocks or anything like that. Any impact on us would be more the wider economic impact that we’re all confused about at the moment. But it’s a very fast-moving topic, and I can’t really comment any more than that, other than just continuing to keep our employees abreast of where we are.

Okay. So thank you very much. That concludes things for the day. We’re here to have a chat afterwards. Thank you for your time.

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