Edited Transcript of MSLH.L earnings conference call or presentation 12-Mar-20 9:00am GMT

Huddersfield Mar 16, 2020 (Thomson StreetEvents) — Edited Transcript of Marshalls PLC earnings conference call or presentation Thursday, March 12, 2020 at 9:00:00am GMT Okay. I think we’re ready to start. Good morning, ladies and gentlemen. Welcome to Marshall’s 2019 review. Hopefully, for those of you here, it wasn’t too […]

Huddersfield Mar 16, 2020 (Thomson StreetEvents) — Edited Transcript of Marshalls PLC earnings conference call or presentation Thursday, March 12, 2020 at 9:00:00am GMT

Okay. I think we’re ready to start. Good morning, ladies and gentlemen. Welcome to Marshall’s 2019 review. Hopefully, for those of you here, it wasn’t too difficult getting in the building today. And certainly you’ve had some interest hellos with everybody not sure exactly why we’re supposed to do it.

In today’s presentation, I’m going to start off talking about the highlights of, obviously, our financial performance last year, the detail of which is going to be covered by Jack, who’ll go — who’ll take you through that. And then I’ll come on and talk, obviously, about the market and give you an update on that.

This year, we’re also including an update on our activities with ESG. We think the timing of that is right. And in the past, perhaps, we haven’t spoken enough about it. And obviously, at the end, I’ll make some comments about what our plans are concerning, obviously, the coronavirus, and before we take any questions at the end.

So performance itself, another strong year for Marshalls. You’ve seen 10% growth in terms of on the revenue line. And that has flowed through in terms of into the profit, EBITDA of growth of some 12%. That’s obviously worked its way through to the earnings per share, and that’s allowed us with our dividend policy to see the increase in dividends, again. We’ve seen the normal dividend in terms of going up some 20%. And also for — I think it’s the third year running, we’ve held the supplementary dividend at the 4p level. And that, obviously, is subject to shareholders’ approval, will also be coming through half part of this year.

The ROCE, we’ve had another performance over 20%, which is really positive because that shows, obviously, the cash business is generating and able to invest back in itself. And also, the net debt has fallen. The net debt now is down to, as you can see, GBP 18.7 million, come down some GBP 20 million. And obviously, that, again, allows us to look at a strong situation going forward, whether we’re looking from an acquisition investment in the business. And also, you have to make a comment, obviously, in today’s environment, putting ourselves in a strong place in terms of with our net debt position being very low.

This is also the sixth year running in terms of really strong performance. We’ve seen, obviously, the revenue growth. All of the numbers are growing effectively in double digit.

What you can see is the revenue growth business going from some GBP 300 million up to — over GBP 500 million. The EPS has gone up some 24% in the last 5 years. And EBITDA from just below sort of GBP 37 million all the way up to GBP 90 million. So again, steady progress, which has come right away through the business and obviously that’s working its way through that we’re able to pass them on to the shareholders in terms of the dividends and the strong growth we’ve seen there.

What I’d now like to do is to pass over to Jack, who’s going to take you through the detailed financial numbers.

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Jack Clarke, Marshalls plc – Group Finance Director & Director [2]

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Thank you, Martyn. So in an uncertain time, I think it’s refreshing that we can rely on, I’m going to tell you, pretty much what I’ve told you for the last 3, 4, 5 years that we have continued to implement our 2020 Strategy. Martyn is going to talk about the 2025 strategy. But in these uncertain times, Marshalls is proving a rock and delivering on exactly what it says in terms of the strategy and the numbers demonstrate that, this sort of a record.

So yes. So revenue is up 10%, as we’ve said. Within that, obviously, that’s fueled by the acquisition of Edenhall, which is very much in line with strategy, about new housebuilding. I’ll touch on Edenhall in a moment. But also, the underlying business has grown, particularly in public sector, commercial were up 4% for the year. That’s quite remarkable given that the market was flat at best. Our domestic was flat. But overall, Marshalls is up, and that’s very much a product of the continuation of the delivery of the strategy.

If we analyze that revenue in a bit of detail, the left-hand pie chart talks about which were the end markets. And you can see that now we’re 70% dependent on the public sector commercial. That’s a good place to be. Martyn will talk a little bit about the drivers for growth going forward, but it’s all around new build housing, infrastructure, the markets that we are very much — we’ve invested in and we’re focused on. That’s the big part of Marshalls these days.

Domestic was flat. As I say, that’s a pretty good result given the way the market was. And international has proved very positive, revenues were up 13%. It’s a small part of the group, but it has been a difficult part of the group. And I’m pleased to say that now it’s heading in the right direction, and it’s contributing.

On the right-hand side of the chart, we’re looking at the revenue analysis by business area, by type of product. And you can see that 76% of the group is actually in landscape products. So that’s the block, the flag, the curb, the mainstream of Marshalls. It’s hundreds of thousands of products every day translating into thousands of transactions with customers. It’s volume driven. It’s very dependable, very reliable. You can see it. It’s steady, steady, steady, which is fantastic. That’s how a manufacturing business should be.

Our emerging businesses are now about 1/4 of the group and a very strong contributor. They are all in positive territory. I’ll come on to the profits in a second, but it’s a good leg to the business now in terms of contribution.

How do we measure the success of Marshalls? Well, profit-wise, that’s obviously key. But it’s also — we’re a manufacturing business. We’ve got a lot of assets. How do we manage those assets, put your invested capital to work? Well, you can see that we have a very high return on capital employed. We have a CAGR that’s been growing at 14% for the return on capital employed. We are in the mid-20s.

So not only are we driving the profits up, but we’re also utilizing the capital extremely efficiently, and that’s the measure that we set and that we guard with some pride. We told you that we’d get in the mid-20s. And you can see for the last 4 years, we’ve had it in the mid-20s. The 2025 strategy that we’ll follow through on, Martyn will follow through on, we will look to maintain that going forward.

Coming back to the margin. We’ve guided in the past that we will continue to improve the margin. And again, this year, we’ve gone from 13.2% to 13.6% on an as-reported basis. That’s been driven twofold. The strategy has continued to deliver. That’s helped with the landscape products in terms of the efficiency, the new product development driving the higher margin, the acquisitions contributing, but also, importantly, our emerging businesses are now a key contributor to the group. And you can see a big part of that EBIT development is the emerging businesses, which is great. It’s what we told you we would do, and it’s what we’re doing.

So okay, revenue has gone well in the difficult markets, profits are up, how are you managing the cash? Many companies, many businesses have great profits and then you look at the cash and you think, how does that work? We’re 96% cash to profit. What that says is 2 things: A, the quality of the earnings is very, very good; and B, there are no exceptions, no restructurings; the profits are what you see.

How have we used that money? Well, we’re happy to say, we paid GBP 111 million in tax last year. We are very — the whole Board is committed to being sustainable and it’s being a good member of society. And we do that. We pay our taxes. We’re Fair Tax accredited for the fourth year running, and that’s a significant part of what we pay out in cash, and that’s how a good company should run.

Our inventories have increased a bit, but that would be natural, given that we acquired Edenhall. And of course, the dividends have gone up as well, which we’ll touch on in a moment.

You can see then that the GBP 75 million of net cash flow from activities translates down to a net debt of just over GBP 18 million. If you go back 3 years, prior to CPM, prior to Edenhall, we were at the same levels of debt. So the company has grown significantly. We’ve paid for all the capital, all the acquisitions, all the new product development, and we’re back at that level of debt. I’ll touch upon the debt in some detail in a moment, but that is a really good example and demonstration and proof of the model that we have in terms of our capital allocation; we will invest back in the business to grow, but we will maintain a conservative position. This is quod erat demonstrandum, this is the proof of it.

So I’ve talked about the continued cash generation at 96%, talked about the debt coming down. Additionally, there are a number of our banking partners in the room this morning. Thank you for your continued support. We have over GBP 100 million of facilities available to us, should any sort of crisis arise, then we are in a great position to ride that through. We have stress tested our balance sheet at a 25% downfall level, and happy to report that we will come through that. That’s been audited. So we are very conscious of managing this great growth company, but in a conservative manner that allows us to plan for the unforeseen.

There is a graph that shows the headroom. That’s been maintained throughout the cycle. So this is not new. This is the way the company operates. This is the way the Board operates. We are progressive, but we are conservative at the same time.

The capital allocation policy is a central tenet of what drives all of our business. Number one, I make no apologies for repeat-ness, I think it’s important at this time. I know you know the story, but I’m going to repeat it. Number one, we are going to invest in our business for organic growth. We’ve seen significant growth. The 2025 strategy starts with this. We will continue to invest in the business.

R&D, research and development, we’re going to keep pushing on that. We’ve got a great set of products coming out right now, not just in domestic, but also in commercial, and Martyn will touch upon that. Our dividends, we’ve promised you as investors that we’ll maintain it at 2x. We have. I’ll come on to the dividend at the moment, but it’s a very positive story.

Selective acquisitions. We do not go out and buy things willy-nilly. We are very focused. It’s going to be around housebuilding. It’s going to be about water management. We’ve made 2 acquisitions in the last 5 years. Both of them have been tremendous successes. The next acquisitions will be given the same sort of parameters, and they will be successful.

And the supplementary dividends, we’re not going to let cash hang out there. If we’ve got it, we will pay it back, after having delivered on those objectives. So apologies for repeating something that we’ve talked about many times, but it’s still there, it’s what we believe in, and it’s what we do and the numbers show that.

Going into a bit of finite detail on the capital discipline. We’ve taken — our debtor days were good at 43. We’ve taken them down to 36. And that’s really by being — having a cognizant discussion with our debtors, let’s pay guys. We’ve provided for you, let’s pay and we chase and we actively manage that. Creditor days, on the flip side, we’ve brought that down, so we’re paying our suppliers even quicker than we used to do. That’s a really good thing when things get difficult, people look out to who’s been proper, who’s been decent, and we have an excellent relationship with our supply chain.

Inventory turns, we’re still up at well over 3, which for a large-scale heavy-duty manufacturer is good. And all importantly, our liquidity ratio is above 1, it’s at 1.3. That’s what you want in a difficult time, a company that’s got far more assets than liabilities. And we will continue to maintain that.

We have the pension. This is a legacy defined benefit pension. It’s been well-managed by both the trustees and the company. We are still in a surplus situation. In fact, the surplus has increased this year. So it’s not an issue, per se. Long term, we will look to other alternatives to this. But currently, it’s not an issue. It’s been well-managed, and we’re very confident with the trustees we have.

Lastly, and perhaps most importantly, from an investor point of view, the dividend continues to grow. It’s up 20%. We’ve got a supplemental dividend. In addition to that that’s because we’ve managed the balance sheet well. And it’s very important — we recognize that we’re very much dependent on our investor support. We seek to reward that in line with the strategy, and this is the proof and the product of that.

With that, Martyn, I’ll turn it back to yourself.

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Martyn Coffey, Marshalls plc – CEO & Executive Director [3]

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Thanks, Jack. Okay. What I’d like to do now is to talk, obviously, about the market. If you take the market that we obviously see ourselves operating in, the CPA forecast, and this was the one done at the end of last year, has been doing in 3 areas, obviously, a central, a lower and an upper, and that really reflects the uncertainty about trying to forecast, obviously, the market. This was going into the Brexit situation.

When you look at it, in reality, what was forecast before was 2020 was going to be flat, which really is a continuation of what’s happened in the last 2 years that we’ve seen in the marketplace. So last year was actually quite strong for the first 6 months. And then between, obviously, the weather and the run up to Brexit, the market did slow down, and obviously, that’s included in our numbers.

When we say the market is flat, that doesn’t mean obviously all parts of construction are flat. And as we’ve said before, part of our job is making sure, obviously, that we are focusing on the growing areas. And in the next few years, it’s still forecast to say, obviously, the public new housing, private new housing and infrastructure is set to obviously expand. And also, that was reinforced yesterday with the budget. And in the budget there was talk about exactly those same areas that we are focusing on are the areas that effectively are going to get increased expenditure. And obviously, we welcome that. We wait to see the detail, but the sentiment is in the right direction, we believe, and that obviously plays into Marshalls — play themselves.

If we look into detail of what we call public sector and commercial, we use this ABI indicator. This is the contracts that are awarded. Again, as we’ve said in the past, we tend to play our role towards the end of projects. So you get the visibility, because obviously, when those projects start, you know roughly 12 months’ time to be expecting to put landscape-type products in. So that has shown some recovery.

We saw record levels at the end of last year of contracts that were awarded and then were delayed. And obviously, we’d expect those to be released as the year goes on. And also, when we talk about housing. I mean the response in housing is always, we talk about how many houses we’re going to build as a country. It seems every year, we increase the target. And every year, we don’t actually achieve the target. So in reality, there is a pent-up demand for housing, and that can obviously be social housing as well as private housing. And again, we see that as positive.

If I look in the domestic part of the market, again, the demand has been there. Market last year was flat, particularly the second half of last year was very difficult. Obviously, the weather has had an impact this year in February, but nothing like you can have in places like August and September when there was a lot of wet days, and that stops what were 12 hours of working and installing.

So the order book has stayed strong. And we — obviously, we see that being helped partly by, obviously, the funding that comes from the over 55s pension withdrawals, which continues to grow at record levels. And the intention, again, for what people are going to spend their money on, the #1 is in the home and in the garden. And obviously, with the lack of traveling that’s got going on at the moment, that will only increase as that goes through.

And we’ve used in the past is GfK consumer index to actually look at what people in the GBP 50,000-plus incomes are looking to spend their money on and that’s been steady. And then, actually, 2 days ago, the new figures came out showing the garden at a record high of 31.4%, and the driveway effectively gone up to 12.7%. So that — the demand for domestic is there. It’s strong. From a point of view, it’s actually satisfying that market with the capacity is one of the keys.

What I thought I’d do today is talk, obviously, about our business strategy, which is important going forward. We launched last July our next 5-year strategy. So the 2020 Plan, we believe, has successfully been achieved. So we’re looking at 2025.

And our goal is still the same: to be the U.K.’s leading manufacturer of products for the build environment. And we’re doing that under 8 pillars, and I thought it would be worthwhile sharing with you today the progress in those 8 pillars. The first one we talked about is a specification selling. So the key from our point of view is to get the specification on public sector and commercial jobs before they’ve even come out for tender, so that our products are already specified, they designed and people are quoting on them. We do that, and we have them for the last few years, by using the London design space. We’ve upgraded that and made some investment there. It’s very well used by architects and designers, and we’ve now duplicated it by opening 1 in Birmingham. Birmingham is going through a massive transformation at the moment of investment, again, in infrastructure, and we believe that’s going to be a very strong market for us for the next 5 years. We’ve opened it and getting a very, very good use of it already.

So the continual point from our key is this specification. To get on the specification before it goes to contract, when it’s then awarded, the key is hold the specification. And if you do that and you’re doing it, obviously, with our broad product range and it’s both margin enhancing and obviously very good for the product and sales going forward.

If you look at new product development, we’ve seen new products in terms of in drainage, in driveways, in commercial, the modal range, which we’ve brought out in commercial has been a big success for us in the last sort of 12 months, and this is offering a cost-effective solution in terms of house builders or also in some of the public sector areas, and it gives people a choice, different colors, different combinations and the range, obviously, of doing that. We’ve also brought new products in from our point of view in terms of in the landscape protection and also in the bricks, which I’ll talk a little bit about later.

We also talk about logistics as one of these pillars. Logistics for us is a key. As you know, we run our own transport fleet and try to make sure that, that is what’s delivering what we call the direct-to-site deliveries. So we’re in control of that. We brought in more measurements. We brought in electronic proof of delivery. This is a big differentiator for us in the marketplace. And we’re now looking at what we can do across the whole of our business to see if some of the other smaller businesses can also use and utilize some of our fleet, and that obviously gives benefits. And again, it’s a big differentiator in trying to hold that specification once you achieved it.

Also in operationals, we run factories. So the key is obviously how we run them and how efficiently. And there’s been big changes in these areas in terms of standardization that the factories are running the same way, that they’re assessed in the same way, the operational efficiency, which is like the productivity measurement, has been improving, and we’ve been developing and working with the people and the management structure.

And also, we talked last summer about a plant plan across the whole of the U.K., where we think, in some cases, we can actually consolidate to bigger sites and perhaps free up some of the sites. That started at the end of last year, where we closed our Bleadon facility at Weston-super-Mare. We did the restructuring. It was, again, as it always is, above the line in terms of in our results, and obviously, we’ll see the benefits of that going forward.

And we’re also starting the investment in our first dual block plant, which would be the first of its type in the U.K., into our St. Ives facility. And we also consolidated our Wet Cast. This is a — production has been falling over the years. We’ve gone from 2 sites down to 1. So that is all started, and that progress will carry on.

Also, we talk about delivery of materials. Without materials, we can’t make our products. So it’s absolutely critical. You’ve got a long-term strategy of where our sites are, obviously, combined into where we’re going to source the material from and how we’re going to source that material. So we have long-term relationships. We have an ethical supply chain, and that is absolutely important for us.

We talked about digital. Digital is obviously a critical part for us. We launched our domestic website last year with our commercial one. We believe both of these are the best in the industry that are out there. Again, what we’re trying to do in digital is capture the customer, capture the customer’s interest, to understand their demand and then work that way through. So the digital carries on expanding, both internally on some of the tools we use, but obviously, externally as well. And we’ll carry on investing in that area.

We identified customer centricity as something that’s really important, looking after the customer, getting the customer to — from our point of view, recommend us to somebody, 9 out of 10 is our objective. We’re up to 8.3. This in itself has given lots of work streams, listening to customers, what is it they want to do more of? How do you interact with them even more in the future?

Another area we’ve talked about is what we call our emerging businesses. And I thought it was worth in this slide just again reinforcing the fact that Marshalls has changed in the last few years. So 30% of our turnover is now not from hard landscaping. So this ability to go into these other areas is critical for us, and it gives us another opportunity in growth, where we’ve got smaller market shares in some of the areas.

If you look at that, we’ve made a change and we’ve taken CPM, the acquired business, and we’ve combined it with Marshalls drainage to create the Marshalls Civil & Drainage business. So from that point of view, we brought the sales forces together, we’ve got a better offering, and we think this gives us bigger opportunities of expanding and also new product development that we’re doing. You’ve got some of the pictures there of drainage products that you’ll see sometimes on motorways in the center of the motorway, which we’ve not participated in, in the past, but we think we will participate into some extent going forward.

Also, as I mentioned about new products and making sure that’s in the other areas, we’ve brought this new gatekeeper product through. This, as you can see here in the picture, is a product that can go into the rental market. So again, it stops vehicle access. This we’ve done with Natural Stone, which as you can see in the drawings, and obviously with the Marshalls markings on, and we think it stands out. And at the moment, we’ve had a fantastic reception from customers with this, and we see this can be the permanent or it can be in the rental market and certainly will give us significant growth going forward.

And also in terms of in the brick side of it, the new perforated facing brick that comes from our facility in Grove. That is able, obviously, to match up to any of the offers that’s out there.

I thought this was a good opportunity as well to tell you about one of the investments that was well underway at the moment in one of our facilities. For those of you who know Marshalls, Maltby is a site that was mothballed some 10 years ago, block paving plant in Yorkshire. We’ve seen the opportunity to convert it into a brick plant. The investment is very modest, GBP 1.5 million. It’ll take about 6 months, so we’re expecting it online in June. It will give us 50 million bricks, so the investment is fantastic in terms of further return of what we’re able to do.

Our plan is, obviously, to take that and expand it in terms of in the marketplace, but it’s important. It does 2 things for me: one is, it gives us the opportunity to expand our brick business. And two, if you read across, it means from Marshalls in the future, we have an ability to convert some of our landscaping capacity to bricks or vice versa because once you make modification, you can actually adjust back. It will take a couple of months. So it gives us a flexibility, which we think is really important.

And on that point, we’ve been doing some work in terms of — from the brick side of it. If you take the bricks today, in the past, the concrete break has been sold almost always trying to say it’s equivalent to, it’s as good as clay brick, and clay obviously dominates the market. What we’ve identified through doing some work is that actually a concrete brick has only 50% of the embodied carbon of a clay brick, and we’re going to change this debate and change this argument, effectively to house builders.

Our argument is that concrete brick should be the first choice when you’re building a house. It’s not a supplementary product. It gives them benefits and the carbon discussion is only going to grow in one direction. So we see this as a really big opportunity going forward.

Coupled with, obviously, our plans in terms of on our strategy mean what we’re doing with the people. And this development is carried on through investment in our HR and our facilities. We’re trying to obviously develop further our people. And that’s really important in developing your talent, bringing, obviously, succession planning through. This is critical for us and making sure we got better engagement with our people. And that engagement is working both ways. It’s both internally, allowing people to communicate better, but also externally in giving us a better position in the marketplace, so that when we are going out trying to recruit people, we’re recruiting them as Marshalls, we’re not using third party, we’re not using different ways of doing that. We have the ability to do it ourselves. And that gives us big savings, obviously, in the marketplace as well.

I thought this year, we also, as I said at the beginning, would talk about ESG. And if it’s one area we probably are guilty of, from a Marshalls point of view, is I think we haven’t publicized enough of what we’ve been doing in this area. And I think we should be doing more on that publicizing.

Our business model has been based on the UN Global Compact. We’ve been a signatory for over 10 years to this, one of the first to actually sign up to it. And we now work on what’s called the 17 sustainable development goals, these SDGs. Each one of those is categorized from our point of view of where we think through enhancement we can actually make steps forward. In some cases, in mitigation, making sure that, obviously, we are looking at each one of these and each one has a plan behind it, which we’re able to share, obviously, in the detail, but this is well-advanced, and we think is obviously taking us forward, which is really positive.

In terms of measurement, I’d say, in this area of ESG is going through some changes, and I’m sure in a few years’ time, they’ll be more standardizing. But today, you’ve got various third-party assessing companies, they measure them either with letters, they measure them with percentages, they measure them in ranking. But all of these things that obviously from our point of view we get rated. Last week, in the MSCI, we’ve got AAA rating, which is the highest you can get. Overnight, we became the first U.K. construction company to have our science-based targets approved. That is a real step forward. And the first one in the U.K. to do that. And as you can see in with FTSE4Good or CDP, we regularly come at the top end of our sector. And that is only a reflection of the activities that we’ve been doing. So instead of what we’ve done in the past, which has tend to answer shareholders when they ask or they’ve got a particular interest in ESG, we want to go in a more forward step and make sure we tell all of the shareholders what we are actually doing and keep publicizing that.

And also from the point of view, if you take the social part of this, this is also important to us. We’ve developed an Ethical Risk Index. So any customer who wants to source material from anywhere in the world, by using our index, they can actually assess in each country what risks they are doing in sourcing in those areas. And also we have our Fairstone, which is our brand that we’ve had, again, for about 10 years. What does Fairstone mean? Effectively, it means there’s no child labor. There’s no slavery. It’s proper health and safety and the wages that are paid there. So we put that effort in to make sure customers have that confidence in it. And that’s obviously been backed up. Our Sales and Marketing Director, Chris Harrop last year — OBE in terms of his work in slavery under obviously with Marshalls. And also from our point of view, the governance part of ESG is also — yes, it’s a given, but it is taken very serious. We have Vanda here today, who’s our new chair for the last few years and also by the time of our — the Board — our AGM, sorry, in May, 50% of the Executive Board effectively will be female, which is a long way from — certainly, when I first started in the company. So I think there is — has been change, and I see that as really positive. And there’s an opportunity for us to talk more about that, which we will obviously do.

So in summary, I think 2019 was another good year for Marshalls, even if the market didn’t help, and the market hasn’t been helping for a few years, and it’s unlikely to help us this year. Why is that happening is because our strategy continues to deliver. From our point of view, we see the profit growth. We’ve seen the margin growth and the actions we’re doing in those 8 pillars all are margin enhancing and obviously from a profit point of view.

The ROCE is a really good measurement of how obviously we’re efficiently managing with our cash, and that gives us the money to do to reinvest. The ESG is embedded in the business. So this isn’t something we do in as new. It’s something we’ve done for a long time. But I do believe the markets that we are focused, the new build markets, obviously, the infrastructure, the road, the rail, the water management are the markets to be focused on. They are the ones the government was backing yesterday. And I believe in the mid- and obviously, long term, that, that will give us great rewards.

Obviously, from our point of view, there are short-term issues. I mean you can’t obviously ignore what’s going on with the coronavirus. The executive team, we meet every other day to analyze what’s happening. We don’t source materials. I mean now 95% of what we make is in the U.K. and so it’s where we sell. We do source some materials from overseas. We’ve sourced granite from China. Some of that can be substituted from Portugal, but that’s coming back online. So we’re certainly not seeing a material shortage issue. But what we are doing is meeting every other day to assess, obviously, our people, assess what the risks are, what’s potentially happening to the marketplace.

The key at this moment for me is flexibility. You’ve got to be flexible. We’ve got, obviously, a low net debt. We’ve got ability to influence our investment plans in our strategic plan. We won’t change the strategic plan, but we can influence how much we invest and the speed we invest in that. So we have the flexibility, we think, to respond to whatever comes to us in the market.

That’s the end of the formal presentation. It’s an opportunity to ask any questions. I know today, we’ve got, I think, a few more people online than we’ve had in the past, so obviously, if there’s an opportunity for people who want to ask questions in that respect as well, we’ll try to answer.

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Jack Clarke, Marshalls plc – Group Finance Director & Director [4]

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Yes. I think the intention is to have the questions in the room first, and then we’ll open it up to the lines.

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Questions and Answers

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Howard David Seymour, Numis Securities Limited, Research Division – Director of Equity Analysis [1]

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Howard Seymour from Numis. If I could just ask a couple, please. I’m on an analyst day. So the first one, you alluded to the wet weather at the start of the year. And obviously, there’s probably been elements of merchants in stocking, restocking, destocking, whatever, I honestly don’t know. But just wondering about the sort of the price environment that you’ve seen against that backdrop and how you can sort of cater for this as well because, as I said — I quite like to hear your thoughts on what the merchants are doing at the moment, but whether that is actually influencing prices as well? And then I’ll come back on the second one, if I may, on facing bricks.

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Martyn Coffey, Marshalls plc – CEO & Executive Director [2]

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I think, first of all, I mean, the year started positively. I mean I think the sentiment following the election was — in house builders, particularly, was a better market. And people — you can see the activities rise up. I think from the middle of February, when the weather came in and you had 2 horrendous weekends, and for those of you who travel across the country like I do frequently, I mean, the country is under water. So there’s no doubt it’s had an effect on construction, and that will have an effect in everywhere.

From the merchant’s point of view, I think they obviously react to the market they’re in. So if they’re not getting the footfall in construction, that will make more pressure in terms on the volumes, and that always culminates in the price discussion. I think that’s an annual event. That never changes.

So from our point of view, the key with our activity always is, from my point of view, obviously, the merchant is very important. We’ve transacted with the merchants, all of our sales, but we are also responsible for creating the demand for our products as well. And we take that seriously. And from our point of view, getting the specification, getting the business coming through is critical to being enable then to say we’re going to — we want to hold that price increase.

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Howard David Seymour, Numis Securities Limited, Research Division – Director of Equity Analysis [3]

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Okay. And then secondly, Martyn, obviously, on facing bricks, very useful, as you’ve alluded to there, sort of two questions there. One is, I think the response you get from the cliff hirers would be their product they still regard as obviously better to say the cost dynamic on making, in terms of installation, et cetera. So wondering your response on that. And also really interested, you alluded to conversion of landscape into bricks. I was just wondering sort of time horizon on that, because what I would have thought, ultimately, if you want to get into bricks in a longer-term fashion, you’re not going to sort of chop and change between the two, you’d be sort of switching over and therefore keeping these things and potentially moving part of the portfolio over time?

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Martyn Coffey, Marshalls plc – CEO & Executive Director [4]

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Yes. I mean the capital — I mean, if you take for clay brick, I mean, I’m not here to say there’s anything wrong with clay bricks because they’ve been around for many, many years, I think the carbon debate is a new debate on it, which I think will obviously grow.

If you look at it, I mean, it’s — in simple case, we bought Edenhall. They had made an investment from greenfield of about GBP 5 million, which gave them 50 million bricks. As you know, if you talk about in clay bricks to get 50 million bricks, it’s probably going to be about GBP 50 million investment. So it’s massively different in the capital investment. So the flexibility for us, if we want to go to greenfield, is actually quite easy and straightforward to do.

The reason for making the comment about the block plants is obviously in the past, I mean, we have a high market share in terms of in the landscaping area. And if the landscape market changed overnight, I’d be silly to sit — stand here and say it wouldn’t affect us.

But if you’ve got the flexibility that you can change a block plant effectively from making block pave into concrete bricks and back, and once you bought the head and everything and the investment is fairly modest, let’s say, about GBP 1 million, you can actually do that within a number of weeks. So it’s more to say the flexibility is there, then we’re planning to do that. In an ideal world, we’ll fill all of our block times with block paving, and we’ll invest in new plants to make the concrete bricks. But I think in the current environment, knowing that there’s that potential is I see is a positive. I mean Maltby sat there for 10 years. So this is great and now we open that facility back up and utilize it.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division – Analyst [5]

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Aynsley Lammin from Canaccord. Three, actually, please. One, first one, if you could just comment on kind of cost inflation. Are you able to benefit from the lower energy costs we’ve recently seen? Secondly, just on the budget, obviously, very positive things in there for Marshalls. Just interested to hear a bit more color, whichever you’re particularly excited by the HS2 going ahead, again, your thoughts on that? And then thirdly, on acquisitions and just wonder what the pipeline was looking like? Have you kind of put that on the back burner given the COVID-19 issues?

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Jack Clarke, Marshalls plc – Group Finance Director & Director [6]

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Yes. So on cost, last year, we saw costs roughly coming through overall at sort of 2% to 3%. We were able to match that with pricing. Similarly, this year, on the fuel, specifically, we forward hedge on a 12-month rolling basis. So that will obviously impact against our budget, it’ll be a positive. But in terms of actual costs, sort of, cash flow, it will be sort of neutral. That’s on the up and the down side. I’ll just move on to the acquisitions. We have a very strong pipeline. I think there are — it’s very much in water management, new house building, the key prospects. This is a moment to just reflect. So would we do anything immediately? Possibly not. And I think the potential targets would think the same. However, in the medium term, the strategy, we believe, is a good one, and acquisitions is an important part of that, but not the key part, where the capital investments is the key part.

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Martyn Coffey, Marshalls plc – CEO & Executive Director [7]

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To comment on the budget, I think, obviously, it’s supportive in the direction. I mean as always, you’re always asking this question of the detail, which tends to come later.

I think from our point of view, again, as I said in the beginning, we tend to be at the end of jobs. So I think HS2 is fantastic. We’re still doing cross-rail, which is 3 years late. So if you take in terms of where they are, we’re not budgeting for, obviously, HS2 anytime soon. But if you think about it in sentiment and everything, it’s obviously positive for Marshalls. It’s the area we play in. And we’re doing that well. But we tend to have — our forward looking tends to be more at the projects that are really live and around you now, and that’s why I’d like to see the next level of detail of what they’re talking about. I think what you’ll see is so much of it is announced so many years in advance now. I think what you’ll actually see is the releasing of funds to do already announced projects, but do them quicker. So the road work that is going on is massive. And it’s taken a lot longer than it was ever first envisaged. That can easily be shortened and accelerated. And I think that will result in work in the short term. So housing, infrastructure, all really positive.

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Clyde Lewis, Peel Hunt LLP, Research Division – Analyst [8]

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Clyde Lewis at Peel Hunt. Three for me as well, Martyn. Could you just update us a little bit on the domestic installers? You’ve obviously put the order book, but what are they saying back to you at the moment on market conditions? And also, obviously, you’ve had a number of initiatives over the last couple of years to try and get them to use more IT and sort of up-sell, really, just to sort of understand how that sort of process is going.

Second one I had was on international. Just again, are your sort of aspirations, I suppose, in terms of sort of the markets you can get to sort of broadening a little bit and just sort of take us through that? And then the last one was on sort of commercial orders. You indicated a number of orders being delayed at the back end of last year. Are they still delaying them? I mean I suspect there may well be a few more delays creeping into the system. But maybe just say a little bit more about that in terms of your experience since the start of the year?

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Martyn Coffey, Marshalls plc – CEO & Executive Director [9]

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Yes. I mean the domestic installers, I mean, that’s been an interesting market for us. I think it’s like all these things, you keep learning, which I think is important in business. The installers that we work with, which are obviously our register, I think we work very closely with them. They still see a strong demand. They are still, from their point of view, as we’ve talked before, reluctant to necessarily expand it on capacity. So we’re trying to find ways of helping them.

So we are doing work where, for instance, we would do some of the quotations for them, which would release them up in terms of capacity to do more installing. They don’t all want you to do that, but there’s a number who do. So I think there’s ways in which we’re trying to expand that capacity. And I think we’d opening up as well, perhaps, a discussion on this, what we call domestic of some of that is actually small builders. So this will be a builder who might build 4, 5 houses a year. But they, when they build it, do everything. So they actually do their own patios and driveways, and we are trying to find a way of actually connecting more with them than we have perhaps in the past, which is in our domestic market. So I think there are opportunities to get that growth. And as I said, I mean, the demand is still there, and the demand is still strong, which is positive.

I think your second question was about the international. International, from our point of view, we have a small business in Belgium, as Jack said, which has been showing real signs of improvement, which sells in sort of Belgium and part of France, and that’s positive. The — so far, we’ve had a sales office in the Middle East, in Dubai and a sales office in North America. We’ve trade in terms of what products we’ll sell in those areas, and there was a view of natural stone, and occasionally some of the concrete products. But what is really now dominating those sales is our landscape protection, and that is growing. And so I think our view of the international sales is really in that product range today.

We have products, which, obviously, you do the designs for, you get the approvals, U.K. standards are accepted worldwide, there’s been a really positive standard for that. And obviously, the demand is just going one way. It’s growing. So we’ve seen — probably sales have been up sort of 3x what they were and inquiries probably 5x what they were. So people are making those investments and thinking differently about how they protect those investments. So I think that will also see growth.

I think your third question was about commercial. The delay we saw, I have to say, was, I think, very much brought to it ahead of the election. And since that point, we’ve not seen those delays that are coming through in terms of on those orders. And as I said, the pipeline is actually quite strong. We still come back. I didn’t put anything in the presentation today, but the development of city centers is still going on at the rate. That development usually means taking vehicles out of city centers. That means taking roads and convert them into pavements, and that is obviously very strong for Marshalls. So the big development in London, which is going to be Oxford Street that is going ahead, and that’s going to be probably 3.5 years of work for us. So we see that as really positive, but it’s the same in Leeds. We’ve seen in Manchester. As I said, Birmingham, you’re struggling to recognize the place. I mean so much development is going on, so…

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Graeme Thomas Kyle, Shore Capital Group Ltd., Research Division – Research Analyst [10]

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Graeme Kyle, Shore Capital. Just a couple, really, in that road, rail and water management space, do you expect competition to increase in any of those areas? Was the supply side fairly stable? And the second question goes back to the concrete bricks. And that is — it’s all seen as a low-end product to low-end housing in this kind of how it’s (inaudible) really I think. Would you — is that changing? Is there any technology there that’s driving it higher up the scale?

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Martyn Coffey, Marshalls plc – CEO & Executive Director [11]

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Yes. Well, if you talk in terms of the first one in water management, the country is changing its view towards water management because it’s having to, because the amount of water and the problems is coming. Will that increase competition potentially? I think yes. But I don’t think that’s all together a negative because it gives also opportunities as we talked about acquisitions and different things that I think we can do. So I think that’s getting a lot more focus. It’s not that legislations change, I think, it’s been enacted as it should have been in the first place. So people are having to take it a lot more seriously. Obviously, the damage that’s coming from some of the rainfall we’re having is meaning people are looking at — and in most cases, the debate is how do you move the volume of water, which tends to be through, obviously, products in the different specs you do to them. So I see the demand will carry on growing, which I think is a marketplace that we obviously want to be in and see that as really positive.

The brick side is an interesting debate. I mean if you take it today, if a house is built in clay or concrete bricks, I couldn’t tell the difference, and most people wouldn’t be able to tell a difference by visually seeing them. The attempt for the concrete brick for a number of years has been to make it absolutely identical to a clay brick, so the same weight, the same look of it and same everything. I just think this is a potential game changer in terms of it’s the first time when someone can say, actually, a concrete brick have some benefits over a clay brick. And not — let’s not forget, we import 18% of the bricks we consume in the U.K. So this isn’t a play against the clay brick manufacturers in the U.K., this is, why are we importing all these bricks when we could make them locally. And I think this whole debate with ESG, with carbon, with everything is only going to go one way.

So I think it’s a great opportunity. And as I’ve said, if you look at the economics of it, the investment of it is fairly modest for very interesting returns.

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Jack Clarke, Marshalls plc – Group Finance Director & Director [12]

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Yes. I think just building on that, since we’ve acquired Edenhall, the customer base in terms of the number of house builders who are using the concrete brick now, in terms of absolute numbers, not volumes, but absolute numbers, it’s more than doubled. So — and it’s the ESG thing that’s driving it. It’s almost like you’ve got to do it.

So I think this is a good time for questions from the line, if there are any questions.

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Operator [13]

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(Operator Instructions) There are no questions at this time.

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Martyn Coffey, Marshalls plc – CEO & Executive Director [14]

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Okay. Well, thank you very much for your time. And obviously, we look forward with interest in the coming weeks. Thank you.

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Jack Clarke, Marshalls plc – Group Finance Director & Director [15]

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Thanks.

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