REG - Forterra plc - Full Year Results
09/03/2023 07:00
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RNS Number : 3696S Forterra plc 09 March 2023
9 March 2023
Strong 2022 results, well positioned looking forward
Before exceptional items¹ Statutory
2022 2021 Change (%) 2022 2021 Change (%)
£m £m £m £m
Revenue 455.5 370.4 23.0 455.5 370.4 23.0
EBITDA 89.2 70.4 26.7 91.5 76.5 19.6
EBITDA margin 19.6% 19.0% 60 bps 20.1% 20.7% (60) bps
Operating profit (EBIT) 72.7 54.0 34.6 75.0 60.1 24.8
Profit before tax 70.6 50.7 39.3 72.9 56.8 28.3
Earnings per share (pence) 26.4 17.5 50.9 27.2 19.9 36.7
Cash flow from operations 89.0 81.2 9.6 89.0 80.6 10.4
Net (debt) / cash before leases (5.9) 40.9 N/A
Total dividend (pence) 14.7 9.9 48.5
¹Exceptional items are disclosed separately where management believe it is
necessary to show an alternative measure of performance in presenting the
financial results of the Group. Presenting these measures allows a consistent
comparison with prior periods.
OPERATIONAL AND TRADING HIGHLIGHTS
· Resilient trading delivered strong FY22 results ahead of
pre-pandemic comparator
· 2022 sales volumes broadly in line with 2021 primarily limited by
capacity constraints
· Dynamic pricing model implemented to recover severe cost
inflation
· Particularly strong performance from Bison flooring business
doubled Bespoke Products EBITDA prior to overhead allocations
· Energy cost inflation successfully managed through active
procurement strategy
· Continued strength of operating cash flow drives strong liquidity
position; closing net debt of £5.9m before leases
ORGANIC INVESTMENT
· New Desford brick factory now operational with first brick
despatches expected shortly
· £30m Wilnecote brick factory redevelopment commenced with
recommissioning expected in Q4 2023
· Contracts signed for £12m facility to manufacture clay brick
slips with first production in H1 2024
· Work continues on our pipeline of further attractive organic
investment projects, supporting future growth and offering compelling returns
CAPITAL ALLOCATION
· Recommending final dividend of 10.1p, bringing total 2022
dividend to 14.7p, a c.50% increase on 2021
· Robust balance sheet with leverage target at or below 1x EBITDA
providing flexibility for bolt-on acquisitions as suitable opportunities arise
· £64.2m returned to shareholders through share buyback programme
and dividends in 2022 with the Board continuing to keep further returns of
capital to shareholders under review
· £170m RCF extended until Jan 2027 (with further 18-month
extension option) with sustainability linkage
OUTLOOK
· Based on our assumption of an underlying fall in demand of 20%
relative to 2022, the Board's expectations for the Group's 2023 performance
remain unchanged
· The underlying decrease in market demand is expected to be
mitigated to some extent by substitution of imported bricks, although customer
inventory reduction presents an additional short-term headwind, which leads us
to believe that full year revenue and profitability performance will be H2
weighted
· Well-practiced in managing production capacity utilisation and
cost base
· Spring new house selling season to be a key determinant of 2023
sector activity levels
· Further selling price increases successfully implemented at the
beginning of 2023
· Continued confidence in attractive medium-term fundamentals of
housing undersupply and a shortage of domestically produced bricks
Stephen Harrison, Chief Executive Officer, commented:
"We are pleased with our strong performance in 2022 against a backdrop of
severe cost inflation.
"The short-term outlook for the UK housing market remains uncertain. We saw
signs of softening demand towards the end of 2022, and this continued into
2023, partly driven by customer inventory reduction. Whilst we expect demand
for our products to fall in 2023 relative to 2022, we are encouraged by
falling mortgage rates and recent reports of improving reservation rates. We
wait to see how our customers' spring new house selling season develops, as
this will be a key determinant of demand in the current year. Against the
continuing inflationary environment we have been able to implement further
selling price increases at the beginning of 2023 and secure at least 80% of
this year's energy requirement.
"We remain confident that Forterra is well positioned to face these uncertain
times. We began this year with minimal inventory, and are well practiced in
managing our production capacity utilisation and cost base. With our new
Desford factory now operational, we also expect to benefit from the
industry-leading efficiency this will offer, manufacturing a range of products
ideally suited to displace imported bricks. Alongside this, we possess a
strong balance sheet with minimal debt and have recently extended our credit
facility.
"Based on our assumption of a 20% fall in underlying demand relative to 2022,
mitigated to some extent by the substitution of imported bricks, the Board's
expectations for the Group's 2023 performance remain unchanged. Customer
inventory reduction is expected to disproportionately impact H1 performance,
resulting in full year revenue and earnings being H2 weighted. In the
medium-term we continue to expect to benefit from the attractive UK market
fundamentals of population growth, housing undersupply, a shortage of
domestically-produced bricks and an increasing focus on the quality of housing
stock."
ENQUIRIES
Forterra plc +44 1604 707 600
Stephen Harrison, Chief Executive Officer
Ben Guyatt, Chief Financial Officer
FTI Consulting +44 203 727 1340
Richard Mountain / Nick Hasell
A presentation for analysts will be held today, 9 March 2023, at 8.30am. A
video webcast of the presentation will be available on the Investors section
of our website (http://forterraplc.co.uk/ (http://forterraplc.co.uk/) )
ABOUT FORTERRA PLC
Forterra is a leading UK manufacturer of essential clay and concrete building
products, with a unique combination of strong market positions in clay bricks,
concrete blocks and precast concrete flooring. Our heritage dates back many
decades and the durability, longevity and inherent sustainability of our
products is evident in the construction of buildings that last for
generations; wherever you are in Britain, you won't be far from a building
with a Forterra product within its fabric.
Our clay brick business combines our extensive secure mineral reserves with
modern and efficient high-volume manufacturing processes to produce large
quantities of extruded and soft mud bricks, primarily for the new build
housing market. We are also the sole manufacturer of the iconic Fletton brick,
sold under the London Brick brand, used in the original construction of nearly
a quarter of England's housing stock and today used extensively by homeowners
carrying out extension or improvement work. Within our concrete blocks
business, we are one of the leading producers of aircrete and aggregate
blocks, the former being sold under one of the sector's principal brands of
Thermalite. Our precast concrete products are sold under the established Bison
Precast brand, and are utilised in a wide spectrum of applications, from new
build housing to commercial and infrastructure.
INTRODUCTION
In 2022 we delivered a strong financial result notwithstanding headwinds of
growing economic uncertainty and rapidly rising costs. We maintained strict
cost control and where necessary have successfully passed on cost inflation to
our customers allowing us to deliver a result that is ahead of our 2019
pre-pandemic performance.
We have made continued progress against our strategic goals with the new
Desford brick factory now operational. Delivering this transformational
project in line with expectations and within the original £95m budget,
against a backdrop of considerable supply chain disruption and inflationary
pressure, is a credit to everyone involved in the project.
OUR MARKETS
Our markets remained resilient throughout 2022 in the face of growing economic
pessimism, although we did see signs of a softening in market conditions at
the end of the year, particularly in demand for our precast concrete floor
beams.
Total UK brick consumption in 2022 is estimated at 2.5bn bricks of which a
record 570m (representing 23% of total market demand) were satisfied by
imports due to a continuing shortfall in domestic production capacity.
UK housebuilding continues to fall short of Government targets with 204,061
new build homes estimated to have been completed in Great Britain during 2022,
a slight increase on the 2021 total of 201,251 compared to the recently
reiterated Government target of 300,000 new homes annually across the UK.
Despite current and announced capacity investments, the UK brick industry
still lacks the capacity required to meet demand. Current domestic production
capacity of c2.1bn clay bricks per annum, remains lower than the pre-financial
crisis figure of 2.6bn, supporting the increase in brick imports seen in the
year with the number of imported bricks increasing by 35% relative to 2021.
We know that our customers would rather buy British wherever possible because
we can ensure provenance and quality supplied directly from stock, for prompt
delivery with lower transportation costs. These market dynamics leave us
ideally placed to substitute imports with production from our new brick
factory at Desford. Whilst it is likely that deteriorating economic conditions
will reduce demand for our products in the near term, the ability to displace
imported bricks will insulate ourselves and other UK brick manufacturers from
some of the fall in demand as our customers switch from imports to
domestically manufactured products which are expected to become more freely
available.
Many analysts and commentators following the housebuilding sector expect
demand for new housing to fall in 2023. As such, we are planning and
resourcing our business accordingly, for a 20% fall in underlying demand
relative to 2022. This decrease is mitigated to some extent by substitution of
imported bricks although, in the shorter term, the effects of customer
inventory reduction will further exacerbate the fall in demand for our
products. The outlook beyond 2023 is uncertain, although with customer
inventory reduction primarily impacting the first half of 2023, mortgage rates
now reducing and the major housebuilders reporting a steady recovery in
reservation rates, we are optimistic that demand for our products will
increase through 2023 and into 2024.
In the medium-term, we believe that our markets will continue to benefit from
attractive market fundamentals driven not only by a longstanding compounding
shortage of housing in the UK but also continued population growth and
increasing concern about the poor quality of much of the UK's housing stock.
The recent increases in energy costs also increase the desirability of new
energy efficient homes.
Results for the year
Statutory Exceptional items¹ Before exceptional items Before exceptional
items
2022 2022 2022 2021
£m £m £m £m
Revenue 455.5 - 455.5 370.4
EBITDA 91.5 2.3 89.2 70.4
Depreciation and amortisation (16.5) - (16.5) (16.4)
Operating profit (EBIT) 75.0 2.3 72.7 54.0
Finance expense (2.1) - (2.1) (3.3)
Profit before tax 72.9 2.3 70.6 50.7
¹Exceptional items are disclosed separately where management believe it is
necessary to show an alternative measure of performance in presenting the
financial results of the Group. Presenting these measures allows a consistent
comparison with prior periods.
With sales volumes stable year on year, our revenues benefit from the
essential price increases delivered on multiple occasions throughout the year.
Total revenue of £455.5m represents an increase of £85.1m (23.0%) on the
prior year (£370.4m). We increased the majority of our brick prices by a
cumulative 50% during the year with the selling prices of other products
increasing between 16% and 22%.
Operations
Our factories generally operated at close to capacity during 2022 although the
Wilnecote brick factory closed for redevelopment at the end of September, and
we continued to face reliability issues with the old Desford brick factory
which is expected to close within the next month. In addition, we have had
some plant reliability and production challenges within our Aircrete block
business which adversely impacted production and accordingly sales.
Our inventory levels ended the year at record low levels. Following the strong
recovery from the pandemic in the second half of 2020, until now there has not
been an opportunity to replenish our inventory levels. Inventory valuation at
the end of 2022 stood at £43.0m compared to £32.8m at the end of 2021.
However, when the increases in input costs and the costs of production are
taken into account, physical inventory quantities were lower than at the end
2021. Any slowdown in demand for our products in 2023 will facilitate a
replenishment of inventories which will be necessary in order to deliver the
levels of efficiency and customer service we demand of ourselves.
OPERATING COSTS
Large increases in our selling prices were necessitated by unrelenting
increases in our cost base including the increasing cost of energy. The cost
of energy first increased in the second half of 2021 with further rises during
2022 driven by the war in Ukraine. We have experienced unprecedented levels of
direct energy cost inflation, being the price we need to pay for our gas and
electricity, as well as experiencing indirect energy cost inflation as the
rising cost of energy impacts many of our input categories, from cement and
aggregates to steel, insulation and packaging.
The average market day ahead commodity rate for a therm of gas in the UK
during 2022 was £2.10, which compares to a figure of £1.16 in 2021 and
£0.35 in 2019. This highlights the level of energy cost inflation seen
generally with the cost of gas having increased sixfold. We have continued to
use forward purchasing to manage our exposure and to provide a degree of
certainty as to our cost base.
In 2022 our combined gas and electricity spend was approximately £57m
compared to £32m in 2021 and £26m in 2019. Our forward purchasing provided
us with some insulation from soaring costs although we have still seen our
energy spend increase by over 100% since 2019.
Whilst our forward positions allowed us to partially mitigate the cost
increase in 2022, we do expect a further increase in our energy costs in 2023
as lower cost forward purchases which benefited 2022 are replaced with higher
cost commitments for 2023.
We are well positioned with regard to energy procurement for 2023 with at
least 80% of our energy needs now secured by forward contract, although this
percentage will depend on our actual production levels.
We expect our energy costs to peak in 2023 and from 2024 expect to benefit
from forward purchases that have been secured at lower rates. In addition, we
will also see the first benefits of the Forterra solar farm where we have
exercised an option to receive power from this facility (albeit at a higher
cost) in 2024, prior to the inception of the competitively priced 15-year
Power Purchase Agreement in 2025.
Due to the success of our energy procurement strategy, we did not benefit from
the Government's Energy Bill Relief Scheme in 2022 and expect to receive
little if any benefit in the first quarter of 2023. Beyond this, even as an
energy intensive user, we expect to receive minimal, if any, benefit from the
Energy Bills Discount Scheme which becomes effective in April 2023.
As well as rising gas and electricity costs, we also saw the cost of diesel
fuel rise to record levels in 2022, significantly increasing the cost of
operating our distribution fleet of around 180 specially equipped heavy goods
vehicles and increasing the rates we pay our subcontract haulage contractors.
In addition, we experienced a further increase in our fuel costs following the
Government's decision to restrict the usage of red diesel and rebated
biofuels, meaning that from 1 April 2022 we and our contractors were required
to pay the full rate of fuel duty for fuel used in mobile plant and equipment
at our factories, including the winning of clay and the handling of both raw
materials and finished goods.
It is important to re-emphasise that the increases in our cost base extend
well beyond the direct cost of energy. Many of our other inputs have increased
significantly with the cost of cement for example, increasing by approximately
75% since the beginning of 2021.
During the year we also provided our workforce with what we believe was a
generous sector leading pay award, along with additional targeted support to
help the lowest paid, and it is our intention to continue to provide support
to our employees by offering competitive remuneration going forward.
Earnings before interest, tax, depreciation and amortisation (EBITDA)
EBITDA as stated before exceptional items was £89.2m (2021: £70.4m). This
level of profitability is ahead of the 2019 result of £82.7m albeit at a
lower EBITDA margin.
Our business is managed as two divisions and we allocate our central overheads
to each division based on an historic revenue driven allocation mechanism,
with central overheads allocated to Bricks and Blocks and Bespoke Products in
the ratio 80%:20% respectively. In practice, the allocation of overheads to
Bespoke Products exceeds the level of overheads that are directly applicable
to this segment, such that if this segment was to be discontinued or divested
then the saving of overheads, would in reality, be modest. Accordingly, we
also disclose the allocation of central overheads to give greater visibility
of the underlying profitability of our segments, in particular Bespoke
Products.
Despite the significant increase in selling prices within Bricks and Blocks
our operating margins have fallen short of 2019 levels demonstrating the need
to continue passing on cost increases to our customers. Bricks and Blocks
EBITDA before exceptional items was £85.5m (2021: £70.5m) and Bespoke
Products contributed an EBITDA before exceptional items of £3.7m (2021: loss
of £0.1m). Profit before tax as stated before exceptional items was £70.6m
(2021: £50.7m).
BRICKS AND BLOCKS
We have a unique combination of strong market positions in both clay brick and
concrete blocks. We are also the only manufacturer of the iconic and original
Fletton brick sold under the London Brick brand. Fletton bricks were used in
the original construction of nearly a quarter of England's existing housing
stock and are today used to match existing brickwork by homeowners carrying
out extension or improvement work. We operate nine brick manufacturing
facilities across the country with a total installed production capacity which
will increase to approximately 675 million bricks per annum once the new
Desford brick factory reaches full output. We are also a leader nationally in
the aircrete block market, operating two Thermalite block facilities in the
Midlands and South of England. In addition, our aggregate block business has a
leading position in the important Southeast and East of England markets with
two well located manufacturing facilities in this geography. This segment also
includes Formpave, the Group's concrete block paving business.
Our clay reserves are the foundation that our brick business is built upon
and are the primary raw material used in manufacturing our bricks. Each of our
mainstream brick factories is located adjacent to a quarry supplying locally
sourced clay directly into the manufacturing process. Sourcing material
locally is sustainable and therefore preferable wherever possible as it avoids
the costs and carbon emissions associated with transportation. Our mineral
reserves also provide a natural barrier reducing the threat of new entrants
entering the market; the planning process to secure consent for a
'green-field' quarry and associated brick factory could take as long as 10
years. All of the new brick factories built in the UK over the last two
decades have been redevelopments of existing facilities utilising established
quarries. We have access to over 90 million tonnes of minerals, on average,
these reserves are sufficient to sustain manufacturing operations for 50
years. The majority of our minerals are owned although a small amount are
secured by way of lease with a royalty payable at the point of extraction.
TRADING AND RESULTS
The performance of the Bricks and Blocks segment is characterised by resilient
demand, meaning that our sales were generally limited by production capacity,
whilst rapidly increasing costs required us to adopt a dynamic approach to
pricing our products.
Bricks and Blocks sales revenues were £370.2m, an increase of 24.2% on the
prior year comparative (2021: £298.1m). Sales volumes were generally in line
with 2021, limited by production capacity and low inventories as opposed to
market demand.
Segmental EBITDA stated before exceptional items, totalled £85.5m (2021:
£70.5m), an increase of 21.3%. EBITDA margin was 23.1% (2021: 23.6%) with
selling price increases generally following cost increases and production
challenges at the old Desford brick factory and the aircrete block business
also weighing on margins.
2022 2021
£m £m
Before exceptional items Statutory Before exceptional items Statutory
Revenue 370.2 370.2 298.1 298.1
EBITDA before overhead allocations 109.5 111.8 90.5 90.5
Overhead allocations (24.0) (24.0) (20.0) (20.0)
EBITDA 85.5 87.8 70.5 70.5
EBITDA margin before overhead allocations 29.6% 30.2% 30.4% 30.4%
EBITDA margin after overhead allocations 23.1% 23.7% 23.6% 23.6%
PRICING
Whilst the elevated levels of cost inflation experienced through 2022 have
been unwelcome, we have demonstrated our ability to raise our own selling
prices in response.
At the end of 2021 we informed our customers that we would no longer be able
to offer annual pricing agreements and instead we would take a dynamic
approach to pricing, we also amended our trading terms to require a single
month's notice of price increases as opposed to the previous three.
We increased our brick prices on three occasions in 2022. We started the year
with a brick price increase of c.16% effective 1 January 2022 but it was soon
clear that this would be insufficient and we announced a further c.12% price
increase effective 1 April. Cost inflation abated somewhat during the spring
although, by the summer, a further increase in energy costs triggered another
run of input cost inflation necessitating an additional 15% increase in the
majority of our brick selling prices which was delivered at the beginning of
October. Cumulatively, we increased our brick prices by over 50% in the year,
although 2022 revenue does not reflect the full benefit of this. This was
delivered alongside significant price increases on our other products during
the year.
Towards the end of 2022, we again entered into pricing discussions with our
customers as we sought to recover a further increase in energy costs that will
feed through in 2023, with our forward purchasing strategy successfully
deferring a degree of energy cost inflation from 2022 into 2023. Additionally,
in common with many other companies, we anticipate further staff cost
inflation in 2023.
Bespoke products
Our Bespoke Products segment focuses on specification-led, made-to-order
products comprising both precast concrete and chimney and roofing solutions,
much of which is customised to meet the customer's specific needs.
Precast concrete products are designed, manufactured and shipped nationwide
under the Bison Precast brand from two facilities situated in the Midlands.
Our Red Bank range of terracotta and concrete chimney and roofing products are
made at a single facility in the Midlands. Our products include: beam and
block flooring including Jetfloor, which was the UK's first suspended ground
floor system to use expanded polystyrene blocks combined with a structural
concrete topping to provide high levels of thermal insulation; hollowcore
floors alongside associated staircases and landings which are used for upper
floors of multi-family and commercial developments, structural precast
components including precast concrete walls used in applications such as
hotels and prisons, and concrete beams used in the construction of building
frames as well as stadia components; architectural precast concrete façades,
in a variety of finishes including brick facings; and Red Bank chimney pots,
flue systems, ridge tiles and air bricks.
TRADING AND RESULTS
Precast concrete flooring products represent by far the largest component of
this segment by revenue and profitability. Demand for these products remained
strong for most of the year although there was a noticeable softening towards
the end of the year. Segmental turnover in the year was £90.1m (2021:
£76.1m).
The strong segmental result was driven by the performance of the Bison
flooring business, operating from the Hoveringham factory in Nottinghamshire,
with this factory delivering what we believe is a record result.
Floor beam sales volumes increased 9% relative to 2021 as we maximised output
from the single flooring factory. We implemented a dynamic pricing model,
regularly adjusting selling prices on account of rising input costs. Segmental
EBITDA stated before allocation of group overheads was £9.7m (2021: £4.8m).
After an allocation of group overheads totalling £6.0m (2021: £4.9m) the
segment reports an EBITDA of £3.7m (2021: loss of £0.1m) before exceptional
items.
2022 2021
£m £m
Before exceptional items Statutory Before exceptional items Statutory
Revenue 90.1 90.1 76.1 76.1
EBITDA before overhead allocations 9.7 9.7 4.8 10.9
Overhead allocations (6.0) (6.0) (4.9) (4.9)
EBITDA 3.7 3.7 (0.1) 6.0
EBITDA margin before overhead allocations 10.8% 10.8% 6.3% 14.3%
EBITDA margin after overhead allocations 4.1% 4.1% - 7.9%
Exceptional Items
Exceptional items in 2022 related to the sale of surplus land for gross
proceeds of £2.5m realising an exceptional profit of £2.3m. Exceptional
items in the prior period totalled a profit of £6.1m and related solely to
the closure and subsequent disposal of the Swadlincote precast concrete
facility. The sale of the facility and associated equipment realised gross
sales proceeds of £14.7m, received in cash, generating a profit on disposal
of £6.7m. Associated redundancy and termination costs totalling £0.6m were
also recognised within the exceptional item, reducing the profit to £6.1m.
Finance Costs
Finance costs totalled £2.1m (2021 £3.3m). Under the terms of the credit
agreement, which was in place throughout 2022, interest was payable according
to a margin grid dependent on leverage with a margin of SONIA plus 1.75%
applicable whilst leverage (Net debt / EBITDA, pre IFRS 16) is less than one
times. A commitment fee of 35% of the margin was payable on the unborrowed
credit facility.
TAXATION
The effective tax rate (ETR) both including and excluding exceptional items
was 19.3% (2021: 19.8% including and 21.3% excluding exceptional items). The
ETR is slightly higher than the UK statutory rate of 19.0% (2021: 19.0%) due
to the permanent impact of non-deductible items such as deprecation on
non-qualifying assets, however this is reduced by the permanent benefit of the
UK tax super deduction on qualifying plant and machinery expenditure as
announced in the 2021 Budget. The 2021 ETR was above the statutory rate of
corporation tax at 21.3% as this reflected the impact on the deferred tax
liability of the rate change announcement in the 2021 Budget from 19.0% to
25.0% from April 2023.
Earnings Per Share (EPS)
EPS as stated before exceptional items were 26.4p (2021: 17.5p). Basic EPS
after exceptional items were 27.2p (2021: 19.9p). EPS is calculated on the
average number of shares in issue during the year (excluding those held by the
Employee Benefit Trust (EBT)) which in 2022 was 216.2m shares (2021: 228.1m),
the decrease being driven by the impact of the £40m share buyback which saw
15.8m shares purchased and subsequently cancelled.
Dividend
Our dividend policy is to distribute 55% of our earnings. This policy is
supported by the Group's consistent cash generating ability coupled with a
strong balance sheet. The Board is proposing a final dividend of 10.1p per
share (2021: 6.7p) which, in addition to the interim dividend of 4.6p per
share paid in October (2021: 3.2p), will bring the total dividend to 14.7p per
share (2021: 9.9p). Subject to approval by shareholders, the final dividend
will be paid on 7 July 2023 to shareholders on the register as at 16 June
2023.
Cash flow - highlights
2022 2021
£m £m
EBITDA before exceptional items 89.2 70.4
Purchase and settlement of carbon credits (5.6) (6.4)
Other non-cash movement 6.3 7.4
Changes in working capital
- Inventories (10.2) 0.2
- Trade and other receivables (5.2) (3.4)
- Trade and other payables 14.5 13.0
Operating cash flow before exceptional items 89.0 81.2
Payments made in respect of exceptional operating items - (0.6)
Operating cash flow after exceptional operating items 89.0 80.6
Interest paid (2.4) (2.8)
Tax paid (11.0) (9.6)
Capital expenditure:
- Maintenance (10.5) (5.7)
- Strategic (33.6) (28.9)
Dividends paid (24.2) (13.7)
Net cash flow from sale and purchase of shares by Employee Benefit Trust (11.8) (3.8)
Payments made to acquire own shares (40.3) -
New lease liabilities (6.8) (12.4)
Other movements 0.8 (0.3)
Exceptional proceeds from sale of property, plant and equipment 2.5 14.7
Exceptional costs incurred in sale of property, plant and equipment - (0.3)
(Decrease) / increase in net funds (48.3) 17.8
Debtor days 36 37
Operating cash flow before exceptional items totalled £89.0m compared to
£81.2m in the prior year, a repeated demonstration of the Group's ability to
generate consistently strong cash flow and highlighting the quality of
earnings in the year.
The movements seen in working capital are a function of the rapid cost
inflation experienced in the year as our trade receivables reflect the
increase in our selling prices and the working capital tied up within
inventories increases due to the rising costs of production, but inventory
volumes remain at record low levels.
The new lease liabilities primarily relate to new distribution vehicles as we
regularly renew our fleet with efficient and cleaner delivery vehicles.
Net payments to the Employee Benefit Trust (EBT) in the year totalled £11.8m
(2021: £3.8m) leaving the EBT in a strong position to meet any forthcoming
demand for shares in order to satisfy vesting awards under the Group's
employee benefit schemes. It remains our policy to provide shares for
settlement of our share-based employee reward schemes through open market
purchases of shares as opposed to the issue of new share capital which would
be dilutive and counter to the benefits of the share buyback.
Capital expenditure
Capital expenditure in the year totalled £44.1m (2021: £34.6m) with
strategic capital expenditure totalling £33.6m (2021: £28.9m) and
maintenance capital expenditure totalling £10.5m (2021: £5.7m).
Spend on the new Desford brick factory totalled £26.5m bringing the total
cumulative project spend to £86.1m, with the project still on course to be
completed within the original £95m budget. We expect the remaining cash
outflow in 2023.
We have also committed to spending approximately £2.5m installing solar
panels on the new Desford brick factory roof which will generate around 16% of
the factory's electricity requirement going forward providing cost effective,
transmission cost free, on-site renewable energy.
In addition to the spend on the Desford project, £5.3m (2021: £1.7m) was
spent on the Wilnecote factory redevelopment project. Spend on this project in
2023 is expected to be approximately £20m with the total cost expected to be
around £30m.
BORROWINGS AND FACILITIES
At 31 December 2022 net debt (before leases) was £5.9m (2021: net cash of
£40.9m). Net debt after deducting lease liabilities of £18.0m (2021:
£16.5m) was £23.9m (2021: net cash of £24.4m.) These leases primarily
relate to plant and equipment, in particular the fleet of heavy goods vehicles
used to deliver our products to our customers.
At the end of 2022, the Group's debt facility comprised a committed revolving
credit facility (RCF) of £170m extending to July 2025. At the year-end a
total of £40m was drawn on the facility leaving facility headroom of £130m.
The Group also benefits from an uncommitted overdraft facility of £10m.
The facility is subject to covenant restrictions of net debt / EBITDA (as
measured before leases) of less than three times and interest cover of greater
than four times. The business has traded comfortably within these covenants
throughout 2022. The facility also includes a restriction prohibiting the
declaration or payment of dividends should leverage exceed three times EBITDA.
At the beginning of 2023 we refinanced our banking facilities retaining the
£170m revolving credit facility but extending the maturity date to January
2027 with an option for a further 18-month extension subject to lender
consent. The margin grid has also been adjusted such that the grid commences
at SONIA plus 1.65% whilst leverage remains under 0.5 times EBITDA, increasing
to a margin of 2.75% should leverage exceed 2.5 times.
The amended facility is now linked to our sustainability targets with the
opportunity to adjust the margin by 5 bps subject to achieving annual
sustainability targets covering decarbonisation, plastic reduction and
increasing the number of employees in earn and learn positions.
The Board are pleased to have gained the certainty of an extended tenure of
facility with a margin reduction at the bottom end of the grid leaving the
Company well positioned at this time of economic uncertainty.
STRATEGY AND CAPITAL ALLOCATION
Our strategy is easily articulated as three pillars designed to provide
sustained earnings and cash flow growth through:
· expansion of capacity, enhanced efficiency and sustainability;
· range expansion; and
· new product innovation.
This, along with our capital allocation policy, which is centred on delivering
compelling returns to shareholders, leaves the Group well-placed to deliver
long-term shareholder value.
The Group's capital allocation priorities are summarised as follows:
· strategic organic capital investment to deliver attractive
returns;
· attractive ordinary dividend policy with a pay-out ratio of 55%
of earnings;
· bolt-on acquisitions as suitable opportunities arise in adjacent
or complementary markets; and
· supplementary shareholder returns as appropriate.
In addition to dividends of £24.2m, during 2022 we returned a further £40m
of surplus capital to our shareholders through a share buyback programme. This
was delivered alongside total capital expenditure of £44.1m, which includes
spend of £33.6m on our strategic projects at Desford and Wilnecote, and an
investment in further clay reserves at our strategic site at Swillington,
where in due course we expect to construct a new brick factory. Despite these
cash outflows we ended 2022 with a net debt (before leases) of only £5.9m
(2021: net cash £40.9m), demonstrating the ongoing strength of our operating
cash generation.
This balance sheet strength provides us with assurance that we are well
positioned to weather any deterioration in economic conditions that we may
face in the near future, whilst also giving us confidence that we can continue
with our programme of capital investment. We have indicated our intention to
invest over £200m (in addition to Desford) in organic growth projects
offering attractive returns on invested capital over the next decade, taking
advantage of unsatisfied demand for our products whilst at the same time
increasing our efficiency, and reducing greenhouse gas emissions. We also
retain the balance sheet flexibility to add bolt on acquisitions should
appropriate opportunities arise and we continue to monitor potential
opportunities. We will pursue acquisitions only where there is a clear
strategic rationale and where the value aspirations of sellers are realistic.
The Board continues to keep returns of capital to shareholders under review.
Near-term trading performance, driven by market demand, committed capital
expenditure on strategic projects, working capital impact of inventory build
and the timing of future strategic capital projects to support growth are all
key to this decision-making.
ORGANIC CAPITAL INVESTMENT
Construction of the new Desford brick factory is now virtually complete with
bricks being manufactured and the first despatches to customers expected in
the near future. We are extremely proud to be delivering what we believe is
the largest, most efficient brick factory in Europe and expect to complete the
factory within its original £95m budget during a period of significant supply
chain disruption and cost inflation. We would like to take this opportunity to
pass on our thanks to everyone who has worked tirelessly over the last four
years to deliver this project in the face of a variety of challenges, not
least a global pandemic and the failure of the initially selected equipment
supplier. This factory will be a fantastic asset to the business going forward
providing attractive returns for many years to come.
The new factory will increase our effective brick production capacity by 22%
and, with supportive market conditions, is expected to increase our EBITDA by
£25m in 2025. With greater market uncertainty for the next few years, it is
harder to predict the exact increase in EBITDA that the factory will deliver
in the shorter-term. Should demand for our products decline for a period of
time we will look to rationalise our production such that we maximise the
efficiency benefits associated with the new factory and its lower cost of
production. With its industry leading efficiency, we still expect the factory
to materially benefit our results in the coming year and in the medium term we
remain confident that the strong fundamentals of the UK housing market,
coupled with the undersupply of domestically manufactured bricks, will enable
the factory to at least deliver the previously communicated expected returns.
Alongside our investment at Desford, we have commenced the complete
redevelopment of our smaller Wilnecote brick factory at a cost of
approximately £30m, which has increased from our previous estimate of £27m.
This investment will strengthen our position in the architect-led commercial
and specification market which includes residential, commercial, school and
hospital developments in a sizeable market of around 400m bricks per annum
(approximately 18% of the UK brick demand).
This investment will expand the product range manufactured at the factory
providing a degree of diversification reducing our reliance on mainstream
housebuilding whilst increasing our total brick production capacity by around
1%. The factory closed at the end of September 2022 and will begin
recommissioning in the final quarter of 2023.
During 2022 we also announced an innovative investment in the manufacture of
brick slips, or 'thin bricks' as they are sometimes known. An investment of
approximately £12m at our Accrington brick factory will facilitate the
manufacture of up to 48m brick slips per annum, minimising our investment
through utilising an existing kiln with only a small reduction in the number
of bricks that will continue to be manufactured alongside the new slips. The
UK market for brick slips is currently estimated at around 120m units annually
with significant growth expected to be driven through growth of the modular
construction market along with growing demand for firesafe façade solutions
suitable for use in high-rise construction.
Brick slips also offer several sustainability benefits, reducing raw material
and energy usage relative to the manufacture of traditional bricks, and with
many slips currently being cut from traditional bricks, they can significantly
reduce wastage. We recently signed contracts with the equipment supplier and
we expect to be manufacturing brick slips in the first half of 2024, although
the ramp up to full production could take a number of years as we increase our
share of a growing market.
Sustainability
We have made continued progress towards our sustainability goals during the
year. We have clear targets including a reduction in our carbon emissions of
32% (from a 2019 baseline) by the end of the decade. In the longer term we are
committed to reaching net zero and having identified the measures required to
meet our medium-term targets, we have also developed an implementation roadmap
to ensure that we deliver on our commitments - The Forterra Carbon Management
Plan. Central to this Plan and the achievement of these reductions is our
investment in new production capacity and technologies, even if our carbon
emission intensity per tonne of output did increase marginally in 2022,
relative to the prior year, as a result of changes in the mix of products we
produced.
Our new Desford brick factory will emit 25% less carbon per brick than the old
factory it replaces, and we have recently commenced the installation of roof
mounted solar panels at an additional cost of around £2.5m which will provide
approximately 16% of the factory's electricity requirement going forward.
During the year we also entered into a wider electricity Power Purchase
Agreement that will see us secure around 70% of our electricity from a
dedicated solar farm at competitive prices from 2025. It is pleasing that
construction of this facility is now underway and we subsequently exercised an
option to take power from this facility from April 2024.
As we strive for a lower carbon future, we are committing more time and
resources to researching the innovative technologies that will ultimately help
us reach our goal of becoming a net zero business by 2050. It is important to
appreciate that at this stage, our decarbonisation plans beyond 2030 are not
yet clearly defined and that not every initiative we pursue will ultimately be
successful. Although we recognise that only through innovation, exploration
and investment, will we be able to take a sector leading approach to
decarbonisation.
During the year we partnered with a company offering innovative carbon capture
technology and are already exploring the deployment of this technology at one
of our brick factories. We are also progressing the trials of hydrogen and
biomass as alternative fuels for use in our kilns. Our hydrogen trials were
delayed by shortages of hydrogen in the UK but have now commenced and we
believe these are some of the first trials in the UK brick industry under
industrial rather than laboratory conditions.
As part of our commitment to reducing our consumption of plastic packaging by
50% by 2025 we are also now rolling out new packaging equipment across our
brick factories to reduce the average amount of plastic packaging used on each
pack of bricks by almost 50%.
Health, Safety and Wellbeing
The continuous improvement of our health and safety performance remains our
number one priority, working towards our goal of zero harm. We recognise that
our workforce is our greatest asset, and we aim to provide a working
environment that is free of accidents and ill health. We are committed to a
four-year zero harm strategy with our 2022 focus on health and safety
behaviours and safety culture. In 2023 our attention and messaging will
continue to focus on our Golden Rules and zero harm, with key topics being the
responsibilities of supervisors and emphasising the importance colleagues
taking time to stop and think, not rushing and cutting corners.
Our People
As always, it is important to recognise that our success is driven by the
ongoing commitment and enthusiasm of our colleagues underpinned by the
strength of both our supplier and customer relationships.
The result we have delivered this year has only been possible due to the hard
work and devotion of our employees across the business whether in our
factories or in our sales and back-office functions. With all of the recent
macro events it is beginning to feel as if there are no longer any routine
years and the Board have been impressed by how our workforce are able to
continually adapt to the ever-changing challenges that they are required to
face.
We appreciate the impact that the current cost of living crisis is having on
our employees and that this impact disproportionately falls on the lowest
paid. We continue to be a Living Wage Employer and alongside this we have
taken a number of steps to assist our employees through these challenging
times. We paid the majority of our workforce a one-off cost of living payment
of £500 which was received just before Christmas and we also provided our
entire workforce with a grocery voucher during the year.
BOARD CHANGES
Following the announcement made ahead of our 2022 AGM of Stephen Harrison's
decision to stand down as Chief Executive Officer after 10 years in the role,
the Board's Nomination Committee commenced a comprehensive selection process
to identify a replacement.
We were therefore very pleased last November to announce Neil Ash as our next
CEO who will join the Company as Chief Executive Officer Designate at the
beginning of April. Neil has almost three decades' experience in the building
materials sector and an impressive track record of improving performance and
delivering growth at Etex, the Belgian lightweight building materials
manufacturer, where he led the €2bn revenue Building Performance division.
Neil's business leadership and extensive building materials sector knowledge
will be invaluable in the next stages of our development and the Board looks
forward to working alongside him.
The Board are grateful to Stephen Harrison for the significant contribution he
has made to the business during his tenure as CEO and wish him all the best
for the future after he leaves Forterra.
We have today announced that Gina Jardine will be appointed to the Board on 3
April 2023 as an Independent Non-Executive Director. Gina is an experienced HR
professional with an extensive career within global building materials and
mining companies. Most recently Gina held the position of Chief Human
Resources Officer at FTSE 100 building materials business CRH plc, prior to
this she was Chief Human Resources Officer at Canadian listed Kinross Gold
Corporation and held a number of senior HR roles at FTSE 100 listed mining
group, Rio Tinto plc.
Through her experience and significant knowledge, obtained in some of the
largest global corporates, Gina will complement the existing skillsets of our
Board. Her addition will also help with succession planning for the
Non-Executive Directors, given that several are expected to step down in
2025-26.
The Board is committed to furthering diversity at all levels and it
acknowledges the recommendations of the Hampton Alexander review which
recommends that 33% of the Board should be female. In addition, the Financial
Conduct Authority guidance is that at least 40% of the Board be female. As a
company currently outside the FTSE 250, these recommendations do not directly
apply to Forterra although we retain our consistently held aspiration to
adhere to best practice governance requirements as if the Company were a
member of the FTSE 250.
Following Gina's appointment our Board composition will be 38% female. In
addition, one of the senior Board members is a female and one of the Board is
from a non-white ethnic minority background. In totality the Board believes
that the skills, knowledge, experience, educational background and upbringing
of individual Board members bring a diverse contribution to the debate and
discussion around the Board table.
CORPORATE CULTURE
The Board is aware of its responsibility to foster a corporate culture based
upon strong leadership and transparency, ensuring we do business responsibly,
adhering to the highest ethical standards, whilst minimising the impact our
business has on the environment.
Our purpose is to manufacture and supply the building products required to
Keep Britain Building. Our culture is underpinned by our values which are
laid out in our Annual Report. Adherence to these values is fundamental to the
success of the business.
Health and Safety remains our number one priority and the Board is determined
to lead by example in ensuring that everyone in our business is under no doubt
as to our commitment to zero harm. To this end, the Board continued to ensure
it remains highly visible in the business with each Director completing two
factory health and safety walks alongside full Board visits to four of our
factories during the year.
OUTLOOK
The short-term outlook for the UK housing market remains uncertain. We saw
signs of softening demand towards the end of 2022, and this has continued into
early 2023, partly driven by customer inventory reduction.
Whilst we are currently planning for underlying demand for our products to
fall by 20% in 2023 relative to 2022, we are encouraged by falling mortgage
rates and recent reports of improving reservation rates. We wait to see how
our customers' spring new house selling season develops with the outcome of
this likely to be a key determinant of demand for our products in the current
year.
Against the continuing inflationary environment, we have been able to
implement further selling price increases at the beginning of 2023 and we have
also secured at least 80% of this year's energy requirement.
We remain confident that Forterra is well positioned to face these uncertain
times. With our new Desford brick factory now operational, we also expect to
benefit from the industry-leading efficiency this will offer, manufacturing a
range of products ideally suited to displace imported bricks. We begin the
year with minimal inventory, and are well practiced in managing our capacity
utilisation and cost base. Alongside this, we retain a strong balance sheet
with minimal debt and have recently extended our credit facility.
Based on our assumption of an underlying 20% fall in demand relative to 2022
the Board's expectations for the Group's 2023 performance remain unchanged.
Customer inventory reduction is expected to disproportionately impact H1
performance, resulting in full year revenue and earnings being H2 weighted. In
the medium-term we continue to expect to benefit from the attractive UK market
fundamentals of population growth, housing undersupply, lack of domestic brick
production capacity and an increasing focus on the quality of housing stock.
GOING CONCERN
At the balance sheet date, the cash balance stood at £34.3m with an undrawn
balance of £130m available against the Group's £170m Revolving Credit
Facility (RCF) which now extends to January 2027. The Group meets its working
capital requirements through these cash reserves and facilities and closely
manages working capital to ensure sufficient daily liquidity and prepares
financial forecasts under various scenarios to ensure sufficient liquidity
over the medium-term.
The Group have modelled financial scenarios for the period to 31 March 2024,
including both plausible downside and reverse stress test, reflecting both
macroeconomic and industry-specific projections. It has been determined that
the circumstances necessary to create either a cash shortfall or a breach of
the covenants under the Group's credit facility would need to be so severe,
that in the opinion of the Board there is no reasonably plausible likelihood
of these occurring.
Should a scenario occur which is even more severe than the Board presently
considers plausible, there are further mitigations available to the Board
including cost reduction, reducing or delaying capital expenditure and
curtailment in the quantum of dividend distributions.
Taking account of all reasonably plausible changes in trading performance, the
current financial position of the Group, and the mitigations available the
Directors have a reasonable expectation that the Group has adequate resources
to continue in operational existence for the going concern period to 31 March
2024. The Group therefore adopts the going concern basis in preparing these
preliminary financial statements.
FORWARD LOOKING STATEMENTS
Certain statements in this announcement are forward looking. Although the
Group believes that the expectations reflected in these forward-looking
statements are reasonable, we can give no assurance that these expectations
will prove to have been correct. Because these statements contain risks and
uncertainties, actual results may differ materially from those expressed or
implied by these forward-looking statements. We undertake no obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise.
DIRECTORS' RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
· the Consolidated Financial Statements of the Group, which have been
prepared in accordance with UK-adopted international accounting standards in
conformity with the requirements of the Companies Act 2006 give a true and
fair view of the assets, liabilities, financial position and profit of the
Group; and
· the announcement includes a fair review of the development and
performance of the business and the position of the Group, together with a
description of the principal risks and uncertainties that it faces.
Stephen Harrison Ben Guyatt
Chief Executive Officer Chief Financial Officer
9 March 2023
CONSOLIDATED STATEMENT OF TOTAL COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2022
2022 2021
Note £m £m
Revenue 3 455.5 370.4
Cost of sales (292.9) (240.7)
Gross profit 162.6 129.7
Distribution costs (57.7) (51.2)
Administrative expenses (33.6) (27.4)
Other operating income 3.7 9.0
Operating profit 75.0 60.1
EBITDA before exceptional items 89.2 70.4
Exceptional items 4 2.3 6.1
EBITDA 91.5 76.5
Depreciation and amortisation (16.5) (16.4)
Operating profit 75.0 60.1
Finance expense 5 (2.1) (3.3)
Profit before tax 72.9 56.8
Income tax expense 6 (14.1) (11.3)
Profit for the year attributable to equity shareholders 58.8 45.5
Other comprehensive income / (loss)
Effective portion of changes in cash flow hedges 0.8 (0.2)
Total comprehensive income for the year attributable to equity shareholders 59.6 45.3
Earnings per share Pence Pence
Basic earnings per share 8 27.2 19.9
Diluted earnings per share 8 26.8 19.7
CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2022
2022 2021
Note £m £m
Assets
Non-current assets
Intangible assets 23.6 17.7
Property, plant and equipment 233.7 201.4
Right-of-use assets 18.1 16.5
275.4 235.6
Current assets
Inventories 43.0 32.8
Trade and other receivables 44.3 39.1
Income tax asset - 1.0
Cash and cash equivalents 34.3 41.5
Derivative asset 0.6 -
122.2 114.4
Total assets 397.6 350.0
Current liabilities
Trade and other payables (89.6) (75.6)
Loans and borrowings 9 (0.2) (0.6)
Lease liabilities (4.7) (4.5)
Provisions for other liabilities and charges (14.3) (9.9)
Derivative liability - (0.2)
(108.8) (90.8)
Non-current liabilities
Loans and borrowings 9 (40.0) -
Lease liabilities (13.3) (12.0)
Provisions for other liabilities and charges (10.0) (9.7)
Deferred tax liabilities (5.0) (2.7)
(68.3) (24.4)
Total liabilities (177.1) (115.2)
Net assets 220.5 234.8
Capital and reserves attributable to equity shareholders
Ordinary shares 2.1 2.3
Retained earnings 233.4 213.4
Cash flow hedge reserve 0.6 (0.2)
Other reserve - 23.9
Reserve for own shares (15.8) (4.6)
Capital redemption reserve 0.2 -
Total equity 220.5 234.8
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2022
2022 2021
Note £m £m
Cash flows from operating activities
Profit before tax 72.9 56.8
- Finance expense 5 2.1 3.3
- Exceptional items 4 (2.3) (6.1)
Operating profit before exceptional items 72.7 54.0
Adjustments for:
- Depreciation and amortisation 16.5 16.4
- Profit on disposal of property, plant and equipment and leases (0.4) (1.5)
- Movement on provisions 4.1 6.4
- Purchase of carbon credits (10.3) (6.4)
- Settlement of carbon credits 4.7 -
- Share-based payments 3.4 2.5
- Other non-cash items (0.8) -
Changes in working capital:
- Inventories (10.2) 0.2
- Trade and other receivables (5.2) (3.4)
- Trade and other payables 14.5 13.0
Cash generated from operations before exceptional items 89.0 81.2
Cash flows relating to operating exceptional items - (0.6)
Cash generated from operations 89.0 80.6
Interest paid (2.4) (2.8)
Tax paid (11.0) (9.6)
Net cash inflow from operating activities 75.6 68.2
Cash flows from investing activities
Purchase of property, plant and equipment (42.1) (33.0)
Purchase of intangible assets (2.0) (1.6)
Proceeds from sale of property, plant and equipment 0.4 0.2
Exceptional proceeds from sale of property, plant and equipment 2.5 14.7
Exceptional costs incurred in the sale of property, plant and equipment - (0.3)
Net cash used in investing activities (41.2) (20.0)
Cash flows from financing activities
Repayment of lease liabilities (5.3) (5.3)
Dividends paid 7 (24.2) (13.7)
Drawdown of borrowings 40.0 5.0
Repayment of borrowings - (20.0)
Purchase of shares by Employee Benefit Trust (12.2) (5.0)
Proceeds from sales of shares by Employee Benefit Trust 0.4 1.2
Payments made to acquire own shares (40.3) -
Financing fees - (0.4)
Net cash used in financing activities (41.6) (38.2)
Net cash (decrease) / increase in cash and cash equivalents (7.2) 10.0
Cash and cash equivalents at the beginning of the period 41.5 31.5
Cash and cash equivalents at the end of the period 34.3 41.5
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2022
Capital redemption Reserve for own shares Cash flow hedge reserve
Ordinary shares reserve Other reserve Retained earnings Total equity
Note
Balance as at 1 January 2021 2.3 - (2.0) - 41.5 162.3 204.1
Profit for the year - - - - - 45.5 45.5
Other comprehensive loss - - - (0.2) - - (0.2)
Total comprehensive (loss) / income for the year
- - - (0.2) - 45.5 45.3
Dividend paid 7 - - - - - (13.7) (13.7)
Movement in other reserves - - - - (17.6) 17.6 -
Purchase of shares by Employee Benefit Trust - - (5.0) - - - (5.0)
Proceeds from sale of shares by Employee Benefit Trust - - 1.2 - - - 1.2
Share-based payment charge - - - - - 2.5 2.5
Share-based payment exercised - - 1.2 - - (1.2) -
Tax on share-based payments - - - - - 0.4 0.4
Balance as at 31 December 2021 2.3 - (4.6) (0.2) 23.9 213.4 234.8
Profit for the year - - - - - 58.8 58.8
Other comprehensive income - - - 0.8 - - 0.8
Total comprehensive income for the year - - - 0.8 - 58.8 59.6
Dividend paid 7 - - - - - (24.2) (24.2)
Movement in other reserves - - - - (23.9) 23.9 -
Purchase of shares by Employee Benefit Trust - - (12.2) - - - (12.2)
Proceeds from sale of shares by Employee Benefit Trust - - 0.4 - - - 0.4
Payments made to acquire own shares (0.2) 0.2 - - - (40.3) (40.3)
Share-based payment charge - - - - - 3.4 3.4
Share-based payment exercised - - 0.6 - - (0.6) -
Tax on share-based payments - - - - - (1.0) (1.0)
Balance as at 31 December 2022 2.1 0.2 (15.8) 0.6 - 233.4 220.5
1. General information
Forterra plc ('Forterra' or the 'Company') and its subsidiaries (together
referred to as the 'Group') are domiciled in the United Kingdom. The address
of the registered office of the Company and its subsidiaries is 5 Grange Park
Court, Roman Way, Northampton, NN4 5EA. The Company is the parent of Forterra
Holdings Limited and Forterra Building Products Limited, which together
comprise the Group. The principal activity of the Group is the manufacture and
sale of bricks, dense and lightweight blocks, precast concrete, concrete block
paving and other complementary building products.
Forterra plc was incorporated on 21 January 2016 for the purpose of listing
the Group on the London Stock Exchange. Forterra plc acquired the shares of
Forterra Building Products Limited on 20 April 2016, which to that date held
the Group's trade and assets, before admission to the main market of the
London Stock Exchange.
2. Basis of preparation
The preliminary results for the year ended 31 December 2022 have been
extracted from the audited consolidated financial statements, which were
approved by the Board of Directors on 9 March 2023. The audited consolidated
financial statements have not yet been delivered to the Registrar of Companies
but are expected to be published in April 2023. The auditors have reported on
those accounts; their report was unqualified and did not contain statements
under s498(2) or (3) of the Companies Act 2006.
This preliminary announcement has been prepared in accordance with UK-adopted
international accounting standards. Whilst the financial information included
in this preliminary announcement has been prepared in accordance with IFRS,
this announcement does not itself contain sufficient information to comply
with IFRS. This preliminary announcement constitutes a dissemination
announcement in accordance with Section 6.3 of the Disclosures and
Transparency Rules (DTR).
The financial information set out in this announcement does not constitute the
statutory accounts for the Group within the meaning of Sections 434 to 436 of
the Companies Act 2006 and is an abridged version of the consolidated
financial statements for the year ending 31 December 2022. Copies of the
Annual Report for the year ended 31 December 2022 will be mailed to those
shareholders who have opted to receive them by the end of April 2023 and will
be available from the Company's registered office at Forterra plc, 5 Grange
Park Court, Northampton and the Company's website (http://forterraplc.co.uk/)
after that date.
The preliminary results are presented in pounds sterling and all values are
rounded to the nearest hundred thousand unless otherwise indicated.
Going concern
At the balance sheet date, the cash balance stood at £34.3m with an undrawn
balance of £130m available against the Group's £170m Revolving Credit
Facility (RCF) which now extends to January 2027. The Group meets its working
capital requirements through these cash reserves and facilities and closely
manages working capital to ensure sufficient daily liquidity and prepares
financial forecasts under various scenarios to ensure sufficient liquidity
over the medium-term.
The Group have modelled financial scenarios for the period to 31 March 2024,
including both plausible downside and reverse stress test, reflecting both
macroeconomic and industry-specific projections. It has been determined that
the circumstances necessary to create either a cash shortfall or a breach of
the covenants under the Group's credit facility would need to be so severe,
that in the opinion of the Board there is no reasonably plausible likelihood
of these occurring.
Should a scenario occur which is even more severe than the Board presently
considers plausible, there are further mitigations available to the Board
including cost reduction, reducing or delaying capital expenditure and
curtailment in the quantum of dividend distributions.
Taking account of all reasonably plausible changes in trading performance, the
current financial position of the Group, and the mitigations available the
Directors have a reasonable expectation that the Group has adequate resources
to continue in operational existence for the going concern period to 31 March
2024. The Group therefore adopts the going concern basis in preparing these
preliminary financial statements.
3. Segmental reporting
Management has determined the operating segments based on the management
reports reviewed by the Executive Committee that are used to assess both
performance and strategic decisions. Management has identified that the
Executive Committee is the chief operating decision maker in accordance with
the requirements of IFRS 8 'Operating segments'.
The Executive Committee considers the business to be split into three
operating segments: Bricks, Blocks and Bespoke Products.
The principal activity of the operating segments are:
• Bricks: Manufacture and sale of bricks to the construction sector;
• Blocks: Manufacture and sale of concrete blocks and permeable
block paving to the construction sector; and
• Bespoke Products: Manufacture and sale of bespoke products to the
construction sector.
The Executive Committee considers that for reporting purposes, the operating
segments above can be aggregated into two reporting segments: Bricks and
Blocks and Bespoke Products. The aggregation of Bricks and Blocks is due to
these operating segments having similar long-term average margins, production
processes, suppliers, customers and distribution methods.
The Bespoke Products range includes precast concrete (marketed under the
'Bison Precast' brand), chimney and roofing solutions, each of which are
typically made-to-measure or customised to meet the customer's specific needs.
The precast concrete flooring products are complemented by the Group's full
design and nationwide installation services, while certain other bespoke
products, such as chimney flues, are complemented by the Group's bespoke
specification and design service.
Costs which are incurred on behalf of both segments are held at the centre and
these, together with general administrative expenses, are allocated to the
segments for reporting purposes using a split of 80% Bricks and Blocks and 20%
Bespoke Products. Management considers that this is an appropriate basis for
the allocation.
The revenue recognised in the Consolidated Statement of Total Comprehensive
Income is all attributable to the principal activity of the manufacture and
sale of bricks, both dense and lightweight blocks, precast concrete, concrete
paving and other complementary building products.
Substantially all revenue recognised in the Consolidated Statement of Total
Comprehensive Income arose within the UK.
Segmental revenue and results
2022
Note Bricks and Blocks Bespoke Products Total
£m £m £m
Segmental revenue 370.2 90.1 460.3
Intercompany eliminations (4.8)
Revenue 455.5
EBITDA before exceptional items 85.5 3.7 89.2
Depreciation and amortisation (15.0) (1.5) (16.5)
Operating profit before exceptional items 70.5 2.2 72.7
Exceptional items 4 2.3 - 2.3
Operating profit 72.8 2.2 75.0
Finance expense 5 (2.1)
Profit before tax 72.9
Segmental assets
2022
Bricks and Blocks Bespoke Products Total
£m £m £m
Property, plant and equipment 222.6 11.1 233.7
Intangible assets 21.7 1.9 23.6
Right-of-use assets 17.6 0.5 18.1
Inventories 36.8 6.2 43.0
Segment assets 298.7 19.7 318.4
Unallocated assets 79.2
Total assets 397.6
Property, plant and equipment, intangible assets, right-of-use assets and
inventories are allocated to segments and considered when appraising segment
performance. Trade and other receivables, income tax assets, cash and cash
equivalents and derivative assets are centrally controlled and unallocated.
Other segmental information
2022
Bricks and Blocks Bespoke Products Total
£m £m £m
Property, plant and equipment additions 40.2 1.2 41.4
Intangible asset additions 11.4 1.1 12.5
Right-of-use asset additions 6.6 0.2 6.8
Customers representing 10% or greater of revenues
2022
Bricks and Blocks Bespoke Products Total
£m £m £m
Customer A 49.6 1.9 51.5
Customer B 43.7 1.1 44.8
Segmental revenue and results
2021
Note Bricks and Bespoke Products
Blocks £m Total
£m £m
Segmental revenue 298.1 76.1 374.2
Intercompany eliminations (3.8)
Revenue 370.4
EBITDA before exceptional items 70.5 (0.1) 70.4
Depreciation and amortisation (14.7) (1.7) (16.4)
Operating profit / (loss) before exceptional items 55.8 (1.8) 54.0
Exceptional items 4 - 6.1 6.1
Operating profit 55.8 4.3 60.1
Finance expense 5 (3.3)
Profit before tax 56.8
Segmental assets
2021
Bricks and Bespoke Products
Blocks £m Total
£m £m
Property, plant and equipment 190.5 10.9 201.4
Intangible assets 16.6 1.1 17.7
Right-of-use assets 15.5 1.0 16.5
Inventories 28.6 4.2 32.8
Segment assets 251.2 17.2 268.4
Unallocated assets 81.6
Total assets 350.0
Property, plant and equipment, intangible assets, right-of-use assets and
inventories are allocated to segments and considered when appraising segment
performance. Trade and other receivables, income tax assets, cash and cash
equivalents and derivative assets are centrally controlled and unallocated.
Other segmental information
2021
Bricks and Bespoke Products
Blocks £m Total
£m £m
Property, plant and equipment additions 31.2 0.7 31.9
Intangible asset additions 7.6 0.4 8.0
Right-of-use asset additions 12.1 0.3 12.4
Customers representing 10% or greater of revenues
2021
Bricks and Bespoke Products
Blocks £m Total
£m £m
Customer A 41.7 1.3 43.0
Customer B 35.9 2.0 37.9
4. Exceptional items
2022 2021
£m £m
Closure and sale of Swadlincote factory - 6.1
Sale of disused land 2.3 -
2.3 6.1
2022 exceptional items
On 7 March 2022 the Group completed the sale of an area of disused land for
total proceeds of £2.5m. Taking into account asset net book values and the
associated costs of sale, the profit on disposal totalled £2.3m.
2021 exceptional items
In 2021 the Group announced the closure of the bespoke precast concrete
factory at Swadlincote. This followed the decision made by management to
mothball the hollowcore facility co-located at the site in 2020, the
impairment charge for which was recognised as an exceptional item in 2020.
Following the announcement of closure, the site was subsequently sold in 2021.
In line with the treatment of the closure of the hollowcore production
facility in 2020, the second stage of this site closure and subsequent sale
was disclosed as an exceptional item in 2021. The total recognised gain of
£6.1m was broken down into a profit on sale of the land and buildings and
plant and machinery at the site of £6.7m, combined with associated redundancy
costs of £0.6m. Within the profit on sale, the Group received gross sales
proceeds of £14.7m relating to the sale of the facility and associated
equipment.
Presentation of exceptional items
The £2.3m profit on disposal of disused land in 2022, and the £6.7m profit
on sale of land and buildings at the Swadlincote site in 2021 are presented
within other operating income in the Statement of Total Comprehensive Income
for each year. Redundancy costs of £0.6m incurred in 2021 in relation to the
Swadlincote factory closure are presented in cost of sales within the
Statement of Total Comprehensive Income.
2022 tax on exceptional items
The sale of the disused land and the Swadlincote factory both gave rise to a
chargeable gain subject to corporation tax and the redundancy costs incurred
in relation to the closure and sale of Swadlincote were tax deductible.
5. Finance expense
2022 2021
Note £m £m
Interest payable on external borrowings 1.6 2.6
Interest payable on lease liabilities 0.4 0.3
Other finance expense 0.1 0.4
2.1 3.3
6. Taxation
2022 2021
£m £m
Current tax
UK corporation tax on profit for the year (12.3) (9.1)
Prior year adjustment on UK corporation tax (0.5) -
Total current tax (12.8) (9.1)
Origination and reversal of temporary differences (1.3) (1.4)
Effect of change in tax rates (0.3) (0.8)
Effect of prior period adjustments 0.3 -
Total deferred tax (1.3) (2.2)
Income tax expense (14.1) (11.3)
2022 2021
£m £m
Current tax
Profit before taxation 72.9 56.8
Expected tax charge (13.9) (10.8)
Expenses not deductible for tax purposes 0.3 0.3
Effect of prior period adjustments (0.2) -
Impact of change in deferred tax rate (0.3) (0.8)
Income tax expense (14.1) (11.3)
The expected tax charge is calculated using the statutory tax rate of 19%
(2021: 19%) for current tax. Deferred tax is calculated at the rate at which
the provision is expected to reverse.
In the March 2021 Budget, the Chancellor of the Exchequer confirmed an
increase in the corporation tax rate from 19% to 25% with effect from 1 April
2023. The Finance Bill 2021 had its third reading on 24 May 2021 and is now
enacted. There has been no change in the Finance Bill 2022.
7. Dividends
2022 2021
£m £m
Amounts recognised as distributions to equity holders in the year
Interim dividend of 4.6p per share (2021: 3.2p) 9.6 6.3
Final dividend of 6.7p per share in respect of prior year (2021: 2.8p) 14.6 7.4
24.2 13.7
The Directors are proposing a final dividend for 2022 of 10.1p per share,
making a total payment for the year of 14.7p (2021: 9.9p). This is subject to
approval by the shareholders at the AGM and has not been included as a
liability in the Consolidated Financial Statements.
8. Earnings per share
The calculation of earnings per ordinary share is based on earnings after tax
and the weighted average number of ordinary shares in issue during the year.
Earnings per share before exceptional items is presented as an alternative
performance measure to provide an additional year-on-year comparison excluding
the impact of exceptional items as detailed within note 4, and their
associated tax impact.
For diluted earnings per share, the weighted average number of ordinary shares
in issue is adjusted to assume conversion of all dilutive potential ordinary
shares. The Group has four types of dilutive potential ordinary shares, being:
those share options granted to employees under the Sharesave Scheme where the
exercise price is less than the average market price of the Company's ordinary
shares during the year; unvested shares granted under the Deferred Annual
Bonus Plan; unvested shares granted under the Share Incentive Plan; and
unvested shares within the Performance Share Plan that have met the relevant
performance conditions at the end of the reporting period.
Before exceptional items Statutory
Note
£m 2021 2022 2021
2022 £m £m £m
Operating profit for the year 72.7 54.0 75.0 60.1
Finance expense 5 (2.1) (3.3) (2.1) (3.3)
Profit before taxation 70.6 50.7 72.9 56.8
Income tax expense 6 (13.6) (10.8) (14.1) (11.3)
Profit for the year 57.0 39.9 58.8 45.5
Weighted average number of shares (millions) 216.2 228.1 216.2 228.1
Effect of share incentive awards and options (millions) 3.2 2.3 3.2 2.3
Diluted weighted average number of ordinary shares (millions) 219.4 230.4 219.4 230.4
Earnings per share
Basic (in pence) 26.4 17.5 27.2 19.9
Diluted (in pence) 26.0 17.3 26.8 19.7
9. Loans and borrowings
2022 2021
£m £m
Current loans and borrowings
Interest 0.2 0.6
Non-current loans and borrowings
Revolving credit facility 40.0 -
40.2 0.6
The Group refinanced its banking facilities in July 2020, securing a facility
of £170m until July 2024. The facility agreement included the option for the
Group to request, subject to bank approval, an additional extension for a
further year to July 2025. The extension was approved, with the facility then
committed until 1 July 2025. The interest rate under this facility is
calculated based on SONIA plus a margin adjustment spread.
In January 2023 the Group subsequently completed a refinancing of its existing
banking facilities. The facility remains at £170m until January 2027 with an
extension option, subject to bank approval, extending the facility to June
2028. The interest rate is calculated using SONIA plus a margin and the credit
spread adjustment has been removed. A new rachet has been added to the margin
grid at the bottom end giving a 10bps reduction when leverage is 0.5:1 making
the lowest level of margin 1.65%, extending to a margin of 2.75% when leverage
exceeds 2.5:1. An arrangement fee of £1.5m was paid in 2023 respect of this
refinancing.
The amended loan facility is now sustainability linked and subject to a margin
adjustment of 5 bps if the annual sustainability targets are met. There has
also been a change to the lenders with Santander being replaced by Sabadell
and Virgin Money (Clydesdale Bank plc).
The facility remains secured by fixed charges over the shares of Forterra
Building Products Limited and Forterra Holdings Limited.
10. Net (debt) / cash
2022 2021
£m £m
Cash and cash equivalents 34.3 41.5
Loans and borrowings (40.2) (0.6)
Lease liabilities (18.0) (16.5)
Net (debt) / cash (23.9) 24.4
Reconciliation of net cash flow to net (debt) / cash
2022 2021
£m £m
Cash flow generated from operations before exceptional items 89.0 81.2
Payments made in respect of exceptional operating items - (0.6)
Operating cash flow after exceptional items 89.0 80.6
Interest paid (2.4) (2.8)
Tax paid (11.0) (9.6)
Net cash used in investing activities (41.2) (20.0)
Dividends paid (24.2) (13.7)
Purchase of shares by Employee Benefit Trust (12.2) (5.0)
Proceeds from sale of shares by Employee Benefit Trust 0.4 1.2
New lease liabilities (6.8) (12.4)
Purchase of own shares (40.3) -
Other financing movement 0.4 (0.5)
(Increase) / decrease in net debt (48.3) 17.8
Net cash at the start of the period 24.4 6.6
Net (debt) / cash at the end of the period (23.9) 24.4
11. Related party transactions
Transactions with key management personnel
Key management personnel are those persons having authority and responsibility
for planning, directing and controlling the activities of the Group. The
Directors of the Company and the Directors of the Group's subsidiary companies
fall within this category.
2022 2021
£m £m
Emoluments including taxable benefits (3.4) (3.2)
Share-based payments (1.4) (0.8)
Pension and other post-employment benefits (0.2) (0.3)
(5.0) (4.3)
Information relating to Directors' emoluments, pension entitlements, share
options and long-term incentive plans appear in the Annual Report on
Remuneration within the Annual Report and Accounts to be published in April
2023.
12. Post balance sheet events
In January 2023 the Group completed on a refinancing of its existing banking
facilities. Details of this are disclosed within note 9.
RISK MANAGEMENT AND KEY RISKS
Overview
Effective risk management is critical to successfully meeting our strategic
objectives and delivering long-term value to our shareholders. Instilling a
risk management culture at the core of everything we do is a key priority. Our
risk management policy, strategy, processes, reporting measures, internal
reporting lines and responsibilities are well established. 2022 has brought a
number of challenges and as a business we are faced with a broad spectrum of
existing and new risks, of which both the deterioration of the macro-economic
climate, and continued energy price volatility since the Russia Ukraine
conflict started in February 2022, are particularly noteworthy.
We continue to monitor these risks along with a host of other rapidly evolving
business risks; introducing mitigating controls as appropriate, as they
develop.
· New build residential sector activity levels: As a result of the
increased macro-economic uncertainty, driven by political instability in the
third quarter and the swift and significant interest rate changes that
followed, we have seen demand in the new build housing market start to slow as
2022 has come to an end. We are well versed in operating in a downturn as
shown during the global financial crisis and more recently in response to the
Covid-19 pandemic and will ensure our operations are managed accordingly.
Present economic uncertainty aside, we continue to operate in a market
characterised by structural undersupply of housing with historical low
inventory levels and record brick imports entering the country.
· Cost inflation and volatility: Cost inflation has been a key
challenge throughout the last 12-18 months, impacting our business across a
wide range of spend categories. We have increased selling prices to recover
this cost inflation however remain watchful of volatility in key areas such as
energy. Although we benefit from having secured over 80% of our energy
requirement for the year ahead, we continue to monitor the longer-term risk
and the associated geopolitical drivers.
Our risk management objectives remain to:
· embed risk management into our management culture and cascade
this down through the business;
· develop plans and make decisions that are supported by an
understanding of risk and opportunity; and
· anticipate change and respond appropriately.
Sustainability
Sustainability continues to be a core focus with the increasing need to make
Forterra more resilient against the potential effects of climate change, and
evolving sustainability driven risks are highlighted within extensive
disclosure in our upcoming Annual Report. These reflect both the impact of our
operations on the environment but also the challenging targets we have set to
reduce this, targeting net zero by 2050 in line with the Race to Zero.
The Board is committed to compliance with the requirements of the Task Force
on Climate Related Financial Disclosure (TCFD) and comprehensive disclosure on
both short and long-term climate risks are included in our Sustainability
Report within our upcoming Annual Report. The Board's Risk and Sustainability
Committee continue to provide oversight and governance over the most
significant risks the business faces in the short, medium and long-term.
Key risks
Key risks are determined by applying a standard methodology to all risks,
considering the potential impact and likelihood of a risk event occurring,
before then, considering the mitigating actions in place, their effectiveness,
their potential to be breached and the severity and likelihood of the risk
that remains. This is a robust but straightforward system for identifying,
assessing and managing key risks in a consistent and appropriate manner.
Management of key risks is an ongoing process. Many of the key risks that are
identified and monitored evolve and new risks regularly emerge.
KEY RISKS AND UNCERTAINTIES
(*Where Stephen Harrison is listed in the below as Executive Sponsor, this
will transition to CEO Designate, Neil Ash, in due course.)
1. HEALTH AND SAFETY Gross change: Static Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
We continue to work to ensure the safety of employees exposed to risks such as Safety remains our number one priority. We target an accident-free environment
the operation of heavy machinery, moving parts and noise, dusts and chemicals. and have robust policies in place covering expected levels of performance,
responsibilities, communications, controls, reporting, monitoring and review.
Our safety focus in 2022 was effective employee engagement and communication
centred on our "Road Map to Zero Harm" and in the period we have delivered a
programme of behavioural safety awareness training emphasising the importance
of our safety Golden Rules. Our 2023 health and safety messaging will continue
to focus heavily on our Golden Rules and Zero Harm, with the key topics being
supervisory management of health and safety standards and colleagues taking
time to stop, not rush and cut corners.
Executive sponsor: Stephen Harrison*
2. SUSTAINABILITY / CLIMATE CHANGE Gross change: Static Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
We recognise the importance of sustainability and climate change and both the We recognise the positive impact that our products have on the built
positive and negative impacts our products and processes have on the environment across their lifespan and are keen for the durability, longevity
environment. and lower lifecycle carbon footprint of our products to be championed and
better understood.
Short-term transitional sustainability risks include increasing regulatory
burden or cost, an inability to adapt our business model to keep pace with new
regulation or customer preferences changing more quickly than anticipated or
too quickly for our research and development (R&D) to keep pace.
Several longer-term physical risks could have a material impact on the
business. These risks include more severe weather impacts, such as flooding,
and potentially changes to the design of buildings in order to adapt to
different climatic conditions.
A comprehensive sustainability report is included within our upcoming Annual
Report, providing detailed disclosure of the sustainability related risks
faced by our business.
Our desire to reduce our impact upon the environment sits hand in hand with
maximising the financial performance of our business; by investing in
modernising our production facilities not only do we reduce energy consumption
and our CO2 emissions, but we also benefit financially from reducing the
amount of energy and carbon credits we need to purchase, both of which having
increased in cost significantly this year.
Executive sponsor: Stephen Harrison* and George Stewart
3. ECONOMIC CONDITIONS Gross change: Increase Net change: Increase
Principal risk and why it is relevant Key mitigation, change and sponsor
Demand for our products is closely correlated with residential and commercial Understanding business performance in real-time, through our customer order
construction activity. Since housing demand has slowed across the second half book, strong relationships across the building sector, and a range of internal
of 2022, we remain watchful of further deterioration in the wider and external leading indicators, help to inform management and ensure that the
macro-economic environment. business has time to respond to changing market conditions.
The housing market has slowed in the second half of the year; driven by
Government economic policy which resulted in significant increases in
borrowing costs and accordingly affordability. This impact on affordability
and consumer confidence has impacted short term demand for housing and as such
management have increased the risk that demand for our products may fall as a
result. There does however remain a shortage of housing in the UK, financing
remains available (though now more expensive) and the population continues to
grow.
Our ability to flex output and slow production when customer demand weakens
has been effective in the past; and where market demand may fall we would
expect brick imports to reduce ahead of sales of domestically manufactured
bricks providing some degree of insulation to the effects of a market
slowdown.
Executive sponsor: Stephen Harrison*
4. GOVERNMENT ACTION AND POLICY Gross change: Increase Net change: Increase
Principal risk and why it is relevant Key mitigation, change and sponsor
The general level and type of residential and other construction activity is We participate in trade associations, attend industry events and track policy
partly dependent on the UK Government's housebuilding policy, investment in changes which could potentially impact housebuilding and the construction
public housing and availability of finance. sector. Such policy changes can be very broad, covering macro-economic policy
and including taxation, interest rates, mortgage availability and incentives
aimed at stimulating the housing market.
Changes in Government support towards housebuilding could lead to a reduction
in demand for our products.
Where identified, we factor any emerging issues into models of anticipated
future demand to guide strategic decision-making.
Changes to Government policy or planning regulations could therefore adversely
affect Group performance.
Through our participation in these trade and industry associations we ensure
our views are communicated to Government and our Executive team often meet
with both ministers and MP's.
The September 2022 mini budget demonstrated how quickly the financial markets
can react to changes in government policy and how this can correspondingly
impact the housing market.
Lack of quality housing remains a key political issue and as such we
anticipate current and future governments will continue to incentivise
construction of new homes, even if different political ideologies demand
different models of home ownership.
Higher levels of home ownership support a reduced reliance on the state in old
age, the Government remains committed to supporting increased home ownership
through the Mortgage Guarantee Scheme and we expect broader support to
continue should it's withdrawal risk a reduction in the supply of new
high-quality homes where a significant shortfall still exists.
Executive sponsor: Stephen Harrison*
5. RESIDENTIAL SECTOR ACTIVITY LEVELS Gross change: Increase Net change: Increase
Principal risk and why it is relevant Key mitigation, change and sponsor
Residential development We closely follow the demand we are seeing from our key markets, along with
market forecasts, end user sentiment, mortgage affordability and credit
(both new build and repair, maintenance and improvement) contributes the availability in order to identify and respond to opportunities and risk. Group
majority of Group revenue. The dependence of Group revenues on this sector strategy focuses upon our strength in this sector whilst also continuing to
means that any change in activity levels in this sector will affect strengthen our commercial offer.
profitability and
in the longer term, strategic growth plans.
All the major housebuilders have highlighted a slowdown in activity in the
sector across the second half of 2022, driven primarily by a weakening economy
and fiscal policy triggering steep rises in interest rates.
The investment in the redevelopment of the Wilnecote brick factory which will
focus upon the commercial and specification market will provide a degree of
diversification away from residential construction.
Executive sponsor: Stephen Harrison* and Adam Smith
6. ABILITY TO MEET CUSTOMER DEMAND Gross change: Reduced Net change: Reduced
Principal risk and why it is relevant Key mitigation, change and sponsor
Having sufficient inventories of our products is critical to meeting our Stock levels continued to be at record lows across our business throughout
customer's needs. Many of our product ranges are manufactured at single 2022. We saw a significant destocking as we emerged from the pandemic which,
facilities where there are low buffer stock levels and high-capacity due to continued strong demand thereafter, we have been unable to address,
utilisation. A breakdown can cause product shortages and have a detrimental presenting a short-term risk in meeting our customers' expectations.
impact on performance and reputation.
Maximising efficiency through utilising longer production runs necessitate
higher levels of inventory to maintain customer service. If these inventories With an expected reduction in demand in 2023 we anticipate that we will be
are not present, shorter and less efficient production runs will be required able to replenish our inventories, reducing the risk in this area.
to maintain levels of service.
A combination of the commissioning of the new Desford brick factory and the
additional production capacity this will provide, as well as the recent
deterioration in the economic environment, will most likely reduce this
pressure on our ability to service our customers effectively and therefore
lead to a reduction in this risk.
Executive sponsor: Adam Smith, Steve Jeynes and Darren Rix
7. CUSTOMER RELATIONSHIPS AND REPUTATION Gross change: Static Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
Significant revenues are generated from sales to a number of key customers. One of our strategic priorities is to be the supply chain partner of choice
Where a customer relationship deteriorates there is a risk to revenue and cash for our customers. By delivering excellent customer service, enhancing our
flow. brands and offering the right products, we seek to develop our long-standing
relationships with our customers. Regular and frequent review meetings focus
on our effectiveness in this area.
The high inflation market we are presently operating in could manifest itself
in damaged relationships with customers if low inventories, shortages of raw
materials impacting our production or the need to pass on significant cost
increases to our customers in order to protect our own margins are not managed
correctly.
This risk was increased in 2021 and remains at that heightened level.
To mitigate these risks we remain in constant communication with our customers
ensuring they are well informed of the challenges faced by our business and
the impacts it may have on our customer service and selling prices.
Executive sponsor: Adam Smith and Darren Rix
8. SUPPLY CHAIN: AVAILABILITY OF RAW MATERIALS AND ENERGY Gross change: Static Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
Whilst availability of raw materials can vary at times, shortages across both During the current period we have seen shortages of raw materials marginally
our industry and the wider economy have become more commonplace, threatening ease whilst remaining an area of significant risk.
our ability to manufacture and ultimately to meet customer expectations. Our
production processes depend on
energy and fuel and The exception to this easing is the energy market, which has been continually
volatile since the Russian invasion of Ukraine in February 2022. Shortages of
should supplies of these be interrupted production would be impacted. gas and electricity have driven prices higher leading to concerns that should
these pressures persist, particularly in winter months, whilst unlikely,
supplies could be interrupted.
In the longer-term these risks may be exacerbated with climate related matters
impacting availability of materials, management of which has been a priority
for a number of years. Where materials are in short supply we seek to limit our risk by utilising
more than one supplier and by developing new sources of supply. Where possible
we stockpile additional materials as we did in some cases ahead of Brexit
though many of our key materials are needed in such large quantities this
isn't possible.
We regularly review our production processes to reduce reliance on materials
that are in short supply and in the longer term we may seek to adjust our
production processes to utilise materials which have a lesser impact on the
environment.
In the longer term our focus on sustainability will see investment in
factories to reduce energy consumption, and we have recently entered into a
Power Purchase Agreement which will secure c.70% of our electricity needs for
the next 15 years through the construction of a dedicated solar farm, reducing
our reliance on grid capacity (though still supplied through the grid) as well
as providing price certainty.
Changes in industrial processes required to address climate risks have
impacted the availability and price of certain raw materials and we have taken
action to mitigate theses; sourcing from alternate suppliers or making
adjustments that allow us to work with alternative raw materials.
We continue to focus on ensuring supply risks are understood, forecast and
where possible mitigated.
Executive sponsor: Ben Guyatt, Steve Jeynes and Darren Rix
9. COST INFLATION Gross change: Static Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
We utilise a wide range of inputs in our business from We seek to manage our costs by putting in place annual pricing agreements with
our suppliers, although in recent times we have seen many suppliers being
raw materials to energy and labour. unable to offer this certainty.
Increases to the cost of our inputs will have an adverse effect upon our We aim to maintain a group of suppliers such that we avoid becoming dependent
margins if we are unable to pass these cost increases on to our customers. on any single supplier although like our own markets, parts of our supply
chain are highly consolidated, and as such, alternative suppliers may be
scarce.
Sudden fluctuations in our cost base makes budgeting difficult and exposes us
to risk as cost increases are unable to be passed on to customers without some
time delay. We also seek to manage our energy cost exposure by forward purchasing an
element of our energy requirement providing price certainty. However, as
happened in 2020, if our requirement for energy is lower than expected we are
exposed to commodity risk and having to sell pre-purchased surplus energy back
to the market, potentially at a loss.
In 2022 we have seen unprecedented increases in energy costs, and whilst our
forward purchasing has provided partial mitigation, the prices that we
currently see for energy have shifted our appetite for risk in this area and
it is likely we will seek greater forward coverage of our positions in future
as the markets allow.
Executive sponsor: Ben Guyatt
10. ATTRACTING, RETAINING AND DEVELOPING EMPLOYEES Gross change: Static Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
We recognise that our greatest asset is our workforce and a failure to We understand where key person dependencies and skills gaps exist and continue
attract, retain and develop talent will be detrimental to Group performance. to develop succession, talent acquisition, and retention plans.
A national shortage of labour has manifested following the pandemic on top of Challenges associated with labour shortages are presently faced across the
a market that was already adjusting to the impact of the Brexit transition business in particular around the availability of engineers.
period.
A wider shortage of labour in the construction industry may have the impact of
curtailing demand for our products as customers' build programmes are slowed
by labour shortages.
Employee support, strong communication and employee engagement remain focus
areas and we continue to invest in HR and payroll systems, with significant
resource now in place to see this investment through to delivery.
Executive sponsor: Shahbaz Idriss
11. INNOVATION Gross change: Static Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
Failure to respond to market developments could lead to a fall in demand for Strong relationships with customers as well as independently administered
the products that we manufacture. This in turn could cause revenues and customer surveys and market research ensures that we understand current and
margins to suffer. future demand. Close ties between the Strategy, Operations and Commercial
functions ensure that the Group focuses on the right areas of R&D.
New product development and related initiatives therefore continue and we are
committed to investing in research and development with clear links between
this area and the work undertaken in relation to sustainability.
Executive sponsor: Stephen Harrison*
12. IT INFRASTRUCTURE AND SYSTEMS Gross change: Static Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
Disruption or interruption to IT systems could have a material adverse impact We have undertaken a period of investment in consolidating, modernising and
on performance and position. extending the reach of our IT systems in recent years.
The cyber security event experienced by the business in 2021, which resulted
in some data loss but no interruption to trading, was an example of the
increase in cyber risk that has driven our continued investment and training
around cyber security and the risk remains at this heightened level.
Executive sponsor: Matthew Day
13. BUSINESS CONTINUITY Gross change: Static Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
Performance is dependent on key functions operating continuously and We have established remote working capabilities that enable the business to
uninterrupted. Should we experience significant disruption there is a risk continue operating with minimal disruption.
that products cannot be delivered to customers to meet demand and the business
may suffer financially.
Where a scenario without a pre-envisaged plan is faced, managers are able to
apply clear principles to develop plans quickly in response to emerging
events.
We consider climate related risks when developing business continuity plans
and have learnt lessons from weather related events in recent years which
inform these plans.
Loss of one of our operating facilities through fire or other catastrophe
would impact upon production and our ability to meet customer demand. Working
with our insurers and risk advisors we undertake regular factory risk
assessments addressing recommendations as appropriate. We accept it is not
possible to mitigate all the risks we face in this area and as such we have a
comprehensive package of insurance cover including both property damage and
business interruption policies.
Executive sponsor: Stephen Harrison* and Ben Guyatt
14. PROJECT DELIVERY Gross change: Static Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
This risk was originally recognised in light of the scale and complexity of The new Desford brick factory represents the largest capital investment that
the Desford construction project, however we have since announced an extensive we have ever made and the project has continued to progress to schedule with
programme of capital investment within our business over the next decade, the factory now operational, with the first despatches to customers expected
which will see a number of large projects adding to production capacity. shortly.
Beyond this, we have a pipeline of further investment, including the Wilnecote
brick factory redevelopment, and management closely monitor all major
expansion projects for potential challenges, cost over-runs and delays and act
promptly to ensure that risks are mitigated.
As further projects are announced, management recognise the additional risks
posed by running concurrent major projects. To mitigate, separate project
management structures are in place for respective projects and where common
suppliers are involved procedures are in place to ensure they retain
sufficient capacity to deliver on both projects without significant risk.
We recognise the need to support multiple major expansion projects with
dedicated resource, and have a designated Strategic Projects Director role in
place sitting on our Executive Committee.
Executive sponsor: George Stewart
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