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RNS Number : 2730E Forterra plc 10 March 2022
10(th) March 2022
Forterra plc
Strong 2021 results; upgraded guidance highlighting benefits of the new
Desford brick factory
Before exceptional items¹ Statutory
2021 2020 2021 2020
£m £m £m £m
Revenue 370.4 291.9 370.4 291.9
EBITDA 70.4 37.9 76.5 18.5
EBITDA margin 19.0% 13.0% 20.7% 6.3%
Operating profit (EBIT) 54.0 20.8 60.1 1.4
Profit / (loss) before tax 50.7 17.4 56.8 (5.4)
Earnings / (loss) per share (pence) 17.5 6.6 19.9 (2.6)
Cash flow from operations 81.2 53.9 80.6 48.3
Net cash before leases 40.9 16.0
Total dividend (pence) 9.9 2.8
¹Exceptional items are disclosed separately where management believes 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
· Strong trading throughout the year with FY21 results slightly
ahead of market expectations
· Full year brick sales volumes 33% ahead of 2020 and 1% ahead of
2019
· H2 cost inflation not fully recovered in the short-term leading
to margin decline relative to 2019; significant (double-digit) selling price
increases delivered by 1 January 2022 with further double-digit price
increases effective 1 April 2022
· Continued strength of operating cash flow drives strong liquidity
position; with closing net cash of £40.9m before leases
ORGANIC INVESTMENT
· Construction of new Desford brick factory remains on track with
commissioning due end 2022
· New Desford brick factory now expected to deliver a 22% effective
increase in brick production output from 2025; anticipated incremental EBITDA
increased to c£25m from c£15m. This increase primarily driven by the reduced
performance of the old factory as well as the benefit of increased selling
prices
· £27m Wilnecote brick factory refurbishment proceeding according
to plan, with main contractor appointed
· Announcement of a highly cost-effective £12m investment to
manufacture clay brick slips at Accrington factory
· Sector-leading investment in renewable energy generation through
a Power Purchase Agreement (PPA) with a c£50m commitment over 15 years
securing around 70% of our electricity requirement from a dedicated Forterra
solar farm
CAPITAL ALLOCATION
· Capital allocation policy structured to maximise shareholder
value
· Attractive pipeline of organic investment projects in place each
offering compelling returns
· Progressive dividend policy with payout ratio of 55% of earnings
recommending final dividend of 6.7p bringing total 2021 dividend to 9.9p
· Leverage target at or below 1x EBITDA
· £40m share buyback programme commenced in January 2022 with
£5.5m returned to date
· Balance sheet flexibility allows opportunistic bolt on
acquisitions
OUTLOOK
· Market conditions remain highly supportive with continued demand
for new housing and constrained UK manufacturing capacity driving brick
imports to record levels, despite increasing macro-economic uncertainty and
supply chain pressures which have created a higher interest rate environment
· Order books remain strong, supported by robust customer sentiment
and an ongoing housing shortage
· Selling price increases leave business well placed to recover
cost inflation and benefit margins
· Approximately 70% of 2022 energy requirements secured with
greatest coverage in winter months where volatility has been historically
greatest
· Management expects the Group to achieve further progress in the
coming year and beyond
Stephen Harrison Chief Executive Officer commented:
"We delivered a good financial performance in 2021, with strong trading
throughout the year and full year results slightly ahead of expectations.
Our markets continued to recover from the effects of the pandemic, with our
brick sales volumes similar to 2019 and further growth only limited by
production capacity and available inventory.
We continued our programme of organic investment, with the construction of our
new Desford brick factory remaining on track for commissioning at the end of
this year, our Wilnecote refurbishment proceeding to plan; and new investments
in Accrington and solar power generation announced today. We remain
disciplined in our capital allocation and have maintained our progressive
dividend policy whilst commencing a share buy-back programme and retaining
balance sheet flexibility for bolt-on acquisitions.
Our order book remains strong and, although inflationary pressures continue,
we remain confident of recovering these through selling price increases.
We remain watchful as to the impacts of increasing macro uncertainty and
supply chain pressures as well as increases in interest rates. Approximately
70% of the Group's 2022 energy requirements have been secured.
With market conditions remaining highly supportive, and Desford now expected
to deliver a 22% effective increase in brick production and increased
incremental EBITDA of £25m from 2025, we are confident that the Group will
achieve further progress in the coming year and beyond".
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, 10 March 2022, 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 for
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
2021 proved to be a very different year to 2020, although one that brought
with it many new challenges. Despite this, we were pleased to see that the
strong recovery in our markets, which began in the summer of 2020, continued
unabated through 2021.
The ongoing Covid-19 pandemic and associated lockdown restrictions which
persisted through much of the first half of the year had little impact on our
results but did continue to influence the way we managed the business, with
the safety and welfare of our employees remaining paramount.
Supply chain pressures mounted through the year with shortages experienced
across several key inputs, along with growing cost inflation, which in the
case of energy prices reached unprecedented levels in the final quarter.
Our Markets
Our markets recovered strongly from the effects of the pandemic with UK clay
brick demand now similar to 2019 levels. Total clay brick consumption in 2021
is estimated at 2.4bn bricks, of which 422m were satisfied by imports due to a
continuing shortfall in domestic production capacity.
UK housebuilding continues to fall short of Government targets with around
198,500 new build homes estimated to have been completed in Great Britain
during 2021 compared to the UK target of 300,000. As demand for high quality
homes continues to exceed supply and house prices continue to rise, this
creates a supportive environment for the recovery of our own cost
increases.
Despite recent and ongoing investments, the UK brick market presently lacks
the capacity required to meet demand, with domestic production capacity of
c2.1bn clay bricks per annum still lower than the pre-financial crisis figure
of 2.6bn. Brick imports to the UK increased in 2021 to a record high of 422m
bricks, which equates to around 19% of market demand in 2021, with this figure
higher still towards the end of the year.
The number of imported bricks increased by 6% relative to 2019 with evidence
that imports are now being transported greater distances, at even greater
cost, as supplies in nearby continental Europe tighten. We know our customers
would rather buy British where possible because we can ensure provenance and
quality, we can supply from stock which is available for prompt delivery, and
there are shorter transport distances than purchasing imported product. The
UK's island geography, combined with similar cost bases in Europe, also
provides an economic barrier to entry with the increasing cost of
transportation ensuring that imported products continue to sit at a
significant cost disadvantage to those manufactured domestically.
These market dynamics leave us ideally placed to substitute imports with
production from our new factory at Desford which, upon commissioning at the
end of 2022, we believe will be the largest brick factory in Europe offering
market leading efficiency. The housebuilding sector's present reliance on
imported products also provides an incentive for further investment in
domestic production capacity.
Results for the year
Statutory Exceptional items¹ Before exceptional items Before exceptional items
2021 2021 2021 2020
£m £m £m £m
Revenue 370.4 - 370.4 291.9
EBITDA 76.5 (6.1) 70.4 37.9
Depreciation and amortisation (16.4) - (16.4) (17.1)
Operating profit (EBIT) 60.1 (6.1) 54.0 20.8
Finance expense (3.3) - (3.3) (3.4)
Profit before tax 56.8 (6.1) 50.7 17.4
¹Exceptional items are disclosed separately where management believes 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.
Our revenues show a strong recovery relative to 2020, which was adversely
affected by the impacts of the initial Covid-19 lockdown. Total revenue of
£370.4m represents an increase of £78.5m (26.9%) on the prior year
(£291.9m) and more meaningfully a decrease of £9.6m on 2019 (£380.0m).
Brick and Block revenues of £298.1m, represent an increase of 33.6% on the
prior year comparative (£223.1m) and an increase of £19.0m on 2019
(£279.1m). This is reflective of the strong market demand throughout the
year, with production capacity and available inventory being the limiting
factors to further growth upon 2019.
Bespoke Products revenues of £76.1m represent an increase of 6.1% on the
prior year (£71.7m) and a decrease of 26.5% on 2019 (£103.5m), this decrease
primarily being driven by the restructure of the Bison business, with the
Swadlincote hollowcore factory closing in mid-2020 and the co-located bespoke
precast manufacturing factory closing in late 2021. This rationalisation of
capacity allows us to pursue a strategy of maximising the profitability of
this segment, focusing on margin improvement as opposed to volume.
Operations
With the exception of our current Desford brick factory and the Swadlincote
precast concrete factory, our facilities generally operated at close to
capacity during the year. We ended 2020 with very low levels of inventory
and with demand consistently strong throughout 2021, there was no opportunity
for replenishment. As a result, inventory levels remained extremely low
throughout the year. Whilst the inventory value of £32.8m is very similar to
the prior year (£33.0m), this is driven by an increase in the valuation of
inventories following the significant increase in production costs during the
year with quantities on hand further reducing in 2021. Industry statistics
show that the UK brick industry held less than two months stock at the end of
2021.
Operating Costs
At the beginning of 2021 cost inflation was relatively benign although by the
second quarter the disruption initially triggered by the pandemic meant supply
chains were struggling to cope, and prices began to rise. Initially, inflation
was centred upon our Bespoke Products segment with steel prices increasing by
over 30% followed by similar increases in the cost of the insulation used in
our flooring systems. Cost pressures intensified as the year progressed, with
significant and often multiple increases in a range of commodities including
cement. Transport availability also became constrained, threatening the
delivery of key raw materials and pushing up the cost of delivering our own
products to customers. With clay being the largest raw material input, most of
which is sourced internally from own quarries, our brick business was
initially insulated from the worst inflationary pressures until significant
increases were seen in energy prices in the final quarter.
Energy Procurement
Our factories are significant consumers of energy with an annual combined
spend on natural gas and electricity approaching £30m under normal
circumstances. We take a risk-based approach to energy procurement and manage
our exposure to market fluctuations through forward purchasing a portion of
our requirements, sometimes years in advance. Traditionally our forward
purchasing is weighted towards the winter months when energy costs are
normally highest and most volatile.
We entered 2021 with around 60% of our gas and the majority of our electricity
requirement for the year forward purchased at competitive prices. At this
point energy prices remained low, due to the pandemic driven economic
uncertainty. With continuity uncertainty as to whether the ongoing pandemic
would further disrupt our demand for energy a cautious approach to committing
to further purchases was adopted following the £2.5m loss incurred in exiting
energy contracts in 2020 at the height of the pandemic. Energy prices began to
rise in the summer, and the sudden sharp increase seen in the autumn was
unprecedented. With prices rising to around four times historic norms, the
increased cost to the business in 2021 is approximately £8.4m. As explained
in more detail below, we have recently entered into an agreement to secure
around 70% of our electricity requirement from a dedicated solar farm from
2025, enhancing our sustainability credentials and providing long-term price
certainty.
Earnings before interest, tax, depreciation and amortisation (EBITDA)
Earnings before interest, tax, depreciation and amortisation (EBITDA) as
stated before exceptional items was £70.4m (2020: £37.9m, 2019: £82.7m)
with the prior year being impacted by the pandemic. Brick and Block EBITDA
before exceptional items was £70.5m (2020: £40.3m, 2019: £80.4m) and
Bespoke Products a loss of £0.1m (2020: loss of £2.4m, 2019: profit of
£2.3m).
Our business is managed as two divisions and we allocate our central overheads
to each division based on an historic revenue driven 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 are now
disclosing the allocation of central overheads to give greater visibility on
the profitability of our segments, in particular Bespoke Products,
demonstrating that this segment delivers a meaningful EBITDA contribution
whilst utilising a low level of capital employed.
Recognising 2020 was heavily impacted by Covid-19, EBITDA before exceptional
items for the year of £70.4m compares to a 2019 comparative of £82.7m, with
margins impacted by cost inflation, which in the short-term was not recovered.
This is shown in the bridge below which demonstrates that with sales volumes
returning to 2019 levels, once the impact of short-term unrecovered cost
inflation is taken into account along with other identifiable variances, the
result delivered is comparable to 2019. In addition, the 2021 result was
impacted by operational issues at the old Desford factory which is expected to
close at the end of 2022, as well as a significant increase in the bonuses due
to salaried staff relative to 2019, driven by achievement of financial
targets, resulting in a bonus and share based payment charge £4.9m greater
than 2019. All salaried staff, totalling over 400 individuals, participate in
the annual bonus plan.
During 2021 we sold an exhausted former quarry for proceeds of £0.1m.
Although the proceeds were modest, this sale relieved the Group of its
associated restoration obligations facilitating a release of £1.4m from the
restoration and decommissioning provision recognising a profit on disposal of
£1.5m which is included within other operating income.
EBITDA (Before Exceptional Items) 2019 to 2021 Bridge
£'m
2019 Actual Sales volumes Selling prices Cost inflation Swadlincote disposal Bonus & share based payments Desford inefficiency Property disposal 2021 Actual
82.7 4.0 16.3 (26.1) (1.1) (4.9) (2.0) 1.5 70.4
Unrecovered cost inflation in the above totals £9.8m.
Profit before tax stated before exceptional items totalled £50.7m (2020:
£17.4m; 2019: £62.5m).
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 of 590 million bricks per
annum. We are also a leader nationally in the aircrete block market, operating
Thermalite block facilities at Newbury and Hams Hall (Warwickshire). Our
aggregate block product has a leading position in the important South East and
East of England markets, with well-located manufacturing facilities at Milton
(Oxfordshire) and Whittlesey (Cambridgeshire).
This segment also includes Formpave, the Group's concrete block paving
business. Based at Coleford in Gloucestershire, Formpave manufactures a wide
range of high-quality concrete block paving to suit all projects from
commercial to domestic applications, including the patented Aquaflow
sustainable drainage system.
TRADING AND RESULTS
2021 2020 2019
£m £m £m
Before exceptional items Statutory Before exceptional items Statutory Before exceptional items Statutory
Revenue 298.1 298.1 223.1 223.1 279.1 279.1
EBITDA before overhead allocations 90.5 90.5 54.9 47.7 93.0 89.7
Overhead allocations (20.0) (20.0) (14.6) (14.6) (12.6) (12.6)
EBITDA 70.5 70.5 40.3 33.1 80.4 77.1
EBITDA margin before overhead allocations 30.4% 30.4% 24.6% 21.4% 33.3% 32.1%
EBITDA margin after overhead allocations 23.6% 23.6% 18.1% 14.8% 28.8% 27.6%
The performance of the Brick and Block segment is characterised by strong
demand and increasing costs. Brick and Block sales revenues were £298.1m, an
increase of 33.6% on the prior year comparative (2020: £223.1m) and an
increase of 6.8% on 2019 (2019: £279.1m). Sales volumes were well ahead of
2020 and slightly ahead of 2019, with production capacity and available
inventory being the primary constraint, as market demand exceeded our ability
to supply.
With demand remaining strong throughout the year and having commenced the year
with minimal levels of inventory, our greatest challenge was meeting our
customers' expectations. The year saw consistently strong demand from our
housebuilding customers, with our initial concerns around the impact of the
end of the stamp duty holiday on consumer demand proving unfounded. Repair,
maintenance and improvement driven demand from our distributor customer base
was also robust.
Accordingly, as a result of the above, segmental EBITDA as stated before
exceptional items, totalled £70.5m (2020: £40.3m) with the EBITDA margin of
23.6% representing a significant improvement on the prior year (2020: 18.1%)
although falling short of 2019 margin of 28.8%, primarily as a result of
rapidly increasing costs in the second half of the year, which in the short
term have not been recovered.
Operating Costs
Inflationary pressures in this segment were first felt in our blocks
businesses where we have the highest level of externally purchased raw
materials, with the price of cement increasing significantly. Inflation was
also seen across a wide range of categories as shortages of transport and
rising fuel costs pushed distribution costs upwards, along with increases in
the cost of packaging and many other categories. The biggest driver, however,
came from energy costs whereby, despite benefitting from our forward
purchasing to limit price volatility, we, along with much of the wider
economy, faced a sudden unprecedented increase in energy costs in the final
quarter. In addition, the price of carbon credits which we are required to
purchase under the UK Emissions Trading Scheme also increased markedly.
Operating costs were also adversely impacted by low productivity at the old
Desford factory which is nearing the end of its life and expected to close at
the end of 2022. A significant kiln related breakdown in the first half of the
year led to a loss of operating efficiency and, whilst the factory operated
more reliably in the second half the year, the output of the was still some
way below its design capacity.
Pricing
Whilst the cost inflation experienced during the year was unwelcome, we
believe we are ultimately well placed to pass on the increases in our cost
base. Our pricing arrangements with customers vary by product, although many
of our arrangements until now have been annual in nature. Due to the sudden
and unexpected increase in costs seen in 2021 we have not fully recovered our
cost inflation in the very short-term, although we remain confident of
progressively recovering costs and positively influencing margins. Given the
significant cost inflation seen in the raw materials required to manufacture
our concrete products we increased the prices of our aggregate blocks in both
the spring and autumn and we increased our Thermalite prices by 16.0% in the
autumn.
With most of the raw materials sourced internally, our brick business was
somewhat insulated from the worst inflationary pressures until the energy
prices increased suddenly in the autumn. We elected not to further increase
our brick prices in 2021, honouring our previous agreements with customers
although we were successful in securing price increases of 16.5% from 1
January 2022 for the significant majority of our customers.
The current cost environment requires us to be agile in our customer pricing
and for 2022 we have amended our trading agreements to remove any commitment
to annual pricing and also reduced our obligation to give three months' notice
of price increases down to one month, allowing greater agility in our pricing
in the face of an uncertain cost environment. We have recently announced
further double-digit price increases to take effect from 1 April 2022.
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 alongside our highly efficient brick factory
at Measham. 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, with the
majority of floors fitted by our in-house installations team;
· 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.
2021 2020 2019
£m £m £m
Before exceptional items Statutory Before exceptional items Statutory Before exceptional items Statutory
Revenue 76.1 76.1 71.7 71.7 103.5 103.5
EBITDA before overhead allocations 4.8 10.9 1.2 (11.0) 5.4 5.1
Overhead allocations (4.9) (4.9) (3.6) (3.6) (3.1) (3.1)
EBITDA (0.1) 6.0 (2.4) (14.6) 2.3 2.0
EBITDA margin before overhead allocations 6.3% 14.3% 1.7% - 5.2% 4.9%
EBITDA margin after overhead allocations - 7.9% - - 2.2% 1.9%
Restructuring
The largest component of the Bespoke Products segment is the Bison Precast
concrete products business. Bison Flooring which manufactures precast concrete
flooring systems and Bison Precast which manufactures a range of bespoke
precast concrete products including walls and façades.
Following the mothballing of the hollowcore factory at Swadlincote in 2020 in
response to the impacts of the pandemic, in 2021 we regrettably took the
decision to also close the bespoke precast concrete manufacturing facility
co-located on the same site and subsequently sell the entire site. This sale
returns this segment to the same footprint it occupied in 2017 prior to the
Bison acquisition.
The business case for the Bison acquisition was that of a turn-around
predicated on increasing the utilisation of the Swadlincote facility.
Unfortunately, the market for a number of the precast concrete products
manufactured at Swadlincote was materially impacted by the pandemic and even
before this, margins across the sector had been declining for several years;
something that was not anticipated at the time of the acquisition. In 2020 the
decision was taken to refocus flooring production at the Hoveringham site,
reducing capacity and sales volumes but increasing margins through a focus on
more attractive customer segments. Aligned to the decision to sell the
Swadlincote facility, we decided to focus bespoke precast concrete production
at a single site, Somercotes in Derbyshire, with our strategy again driven by
the manufacture of smaller quantities of differentiated, higher value façade
solutions over commoditised grey concrete.
At the time of acquisition, we always recognised that the risks associated
with returning a loss-making asset to profitability could, at least in part,
be mitigated by the fact that the factory was located on a valuable and
marketable piece of land. During the year, we sold the entire site and
associated equipment for gross proceeds of £14.7m, recovering a large portion
of our original purchase consideration of £20m and realising a profit of
£6.1m after accounting for the costs of closure and redundancy. For
completeness, this profit recognised in 2021 follows a 2020 impairment loss of
£10.2m recognised in respect of the assets and goodwill at Swadlincote. Our
precast concrete businesses will continue to trade under the Bison brand.
Trading and Results
Segmental turnover in the year was £76.1m (2020: £71.7m, 2019: £103.5m).
Demand for our precast concrete floor beams and the flooring solutions in
which they are utilised, recovered strongly in the year, aligned with the
recovery of the housebuilding industry. Floor beam sales volumes recovered to
88% of 2019 levels although our output is now constrained by the available
production capacity. Hollowcore flooring sales volumes however were
intentionally reduced by 53% relative to 2020 and 70% relative to 2019
reflecting our decision to close the Swadlincote facility and focus on
maximising margin over volume. Bespoke precast output was also reduced
relative to 2020, reflecting the gradual run down of the Swadlincote facility
ahead of its closure in November 2021.
Segmental EBITDA, stated before exceptional items, totalled a loss of £0.1m:
(2020: loss of £2.4m) after allocation of central overheads totalling £4.9m
(2020: £3.6m). Presenting segment results both with and without the overhead
allocation demonstrates that the segment continues to deliver a meaningful
contribution to Group results.
Operating Costs
The Bespoke Products segment was the first to experience significant cost
inflation with steel used for reinforcement of our products along with the
insulation used in our flooring systems suddenly rising by around 30%. Like
our concrete block businesses, the Bespoke Products segment was also impacted
by increases in the cost of other key inputs such as cement and
transportation. Such was the level of input cost inflation experienced we
needed to increase our selling prices on multiple occasions during the year to
ensure operating margins were maintained.
Exceptional Items
Exceptional items total a net profit of £6.1m (2020: loss of £22.8m) and
relate solely to the closure and subsequent disposal of the Swadlincote
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 have
also been recognised within the exceptional item reducing the profit to
£6.1m. An exceptional impairment loss of £10.2m was recognised in the prior
year in respect of the Swadlincote site and associated goodwill.
Finance Costs
Finance costs totalled £3.3m (2020: £3.4m excluding exceptional financing
costs). Under the terms of our credit agreement, which were amended in 2020 as
part of our response to the pandemic, interest was charged at a margin of
LIBOR +4.00% and subsequently SONIA +4.00% until 31 December 2021. Our
interest rate now reverts 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, increasing to a margin of 4.00% should leverage
exceed 3 times. A commitment fee of 35% of the margin is payable on the
unborrowed credit facility.
TAXATION
The effective tax rate (ETR) excluding exceptional items was 21.3% (2020:
18.4%). Inclusive of exceptional items the ETR was 19.8% (2020: 3.8%). The ETR
is higher than the UK statutory rate of 19.0% (2020: 19.0%) due to permanent
differences, mainly as a result of depreciation on non-qualifying assets,
along with the impact of the increase in the UK statutory rate of corporation
tax which is to increase to 25% effective from 1 April 2023, the 2021 ETR
includes the impact of this rate change on deferred tax, resulting in a charge
of £0.8m, adding 1.6% to the ETR.
Excluding the impact of the rate change, the 2021 ETR shows a return to our
expected tax rate which tracks around 1% higher than the statutory rate. The
2020 ETR was impacted by the significant fall in profits driven by the
pandemic and therefore the permanent adjustments for non-deductible items
which had a bigger impact.
Earnings Per Share
Earnings per share (EPS) as stated before exceptional items were 17.5p (2020:
6.6p). Basic EPS after exceptional items was 19.9p (2020: loss of 2.6p)
reflecting the exceptional profit on disposal. Earnings per share is
calculated on the average number of shares in issue during the year (excluding
those held by the Employee Benefit Trust (EBT) which in 2021 was 228.1m shares
(2020: 214.8m), the increase being driven by the issue of 26.8m shares in July
2020 which were not fully reflected in the 2020 weighted average.
Dividend
Our dividend policy is that we intend to distribute 55% of our earnings. The
decision, announced in 2020, to increase our pay-out ratio from 45% to 55% in
2021 was driven by the strength of our balance sheet, coupled with the Board's
confidence in the strength of the Group's ability to generate cash on an
ongoing basis. The Board is proposing a final dividend of 6.7p per share
(2020: 2.8p) which in addition to the interim dividend of 3.2 pence per share
paid in October (2020: nil) will bring the total dividend to 9.9 pence per
share (2020: 2.8p).
Subject to approval by shareholders, the final dividend will be paid on 8 July
2022 to shareholders on the register at 17 June 2022.
Cash flow - highlights
2021 2020
£m
£m
Operating cash flow before exceptional items 81.2 53.9
Payments made in respect of exceptional operating items (0.6) (5.6)
Operating cash flow after exceptional operating items 80.6 48.3
Interest paid (2.8) (2.8)
Tax paid (9.6) (5.2)
Capital expenditure:
- maintenance (5.7) (5.4)
- strategic (28.9) (19.5)
Dividends paid (13.7) -
Purchase of shares by Employee Benefit Trust (5.0) (1.0)
Proceeds from sale of shares by Employee Benefit Trust 1.2 0.9
Net proceeds from issue of shares - 53.0
New lease liabilities (12.4) (0.6)
Other movements (0.3) (0.6)
Gross proceeds from sale of Swadlincote (exceptional) 14.7 -
Costs incurred in sale of Swadlincote (exceptional) (0.3) -
Payments made in respect of exceptional finance costs - (3.2)
Increase in net funds 17.8 63.9
Debtor days 37 36
Operating cash flow before exceptional items totalled £81.2m compared to
£53.9m in 2020 and £64.9m in 2019, a demonstration of the Group's ability to
generate consistently strong cash flow and highlighting the quality of
earnings in the year.
Payments to the Employee Benefit Trust in the year totalled £5.0m (2020:
£1.0m) with payments suspended in 2020 in order to preserve cash in response
to the Covid-19 pandemic. Given the strength of our balance sheet, our
policy is to provide shares for settlement of our share-based employee
remuneration schemes through open market purchases of shares as opposed to the
issue of new share capital which would be dilutive.
The new lease liabilities primarily relate to new distribution vehicles as we
renew our fleet with the latest efficient and cleaner delivery vehicles.
Capital expenditure
Capital expenditure in the year totalled £34.6m (2020: £24.9m) with
strategic capital expenditure totalling £28.9m (2020: £19.5m) and
maintenance capital expenditure totalling £5.7m (2020: £5.4m).
Spend on the new Desford brick factory totalled £27.2m bringing the total
cumulative project spend to £59.3m with the project still on course to be
completed within the £95m budget. We expect £31m of the remaining spend to
be incurred in 2022, with the final £5m in 2023.
In addition to the spend on the Desford project, £1.7m was spent on the
Wilnecote factory refurbishment project. Spend on this project in 2022 is
expected to be approximately £12m with the balance of £13m in 2023.
BORROWINGS AND FACILITIES
At 31 December 2021 net cash (excluding lease liabilities under IFRS 16) was
£40.9m (2020: £16.0m). Net cash after deducting lease liabilities of £16.5m
was £24.4m. These leases primarily relate to plant and equipment,
in particular the fleet of heavy goods vehicles used to deliver products to
our customers.
The Group's debt facility comprises a committed revolving credit facility
(RCF) of £170m extending to July 2025 with a one-year extension option having
been exercised in 2021.
As at 31 December 2021 the facility was undrawn in its entirety, leaving
facility headroom of £170m. 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 IFRS 16) of less than three times and interest cover of
greater than four times although a package of bespoke amendments applied
until September 2021. The business has traded within these covenants
throughout 2021. The facility also includes a restriction prohibiting the
declaration or payment of dividends should leverage exceed three times.
Strategy and Capital Allocation
Our strategy can easily be articulated as three pillars that will drive
sustained earnings and cashflow growth through:
· Expansion of capacity, enhanced efficiency and sustainability
· Range expansion
· 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
· Progressive ordinary dividend with the pay-out ratio increasing
to 55% of earnings from 2021 onwards
· Acquisitions as suitable opportunities arise in adjacent or
complementary markets
· Supplementary shareholder returns as appropriate
Our consistently strong operating cash generation coupled with a strong
balance sheet with net cash of £40.9m before leases means the Group ended the
year in a strong position. This allows us to deliver our strategy, investing
in excess of £200m over the next decade (in addition to Desford) in ambitious
organic growth projects, taking advantage of unsatisfied demand for our
products whilst at the same time improving our efficiency, and reducing
greenhouse gas emissions. Alongside this we have increased our dividend
distribution rate whilst also commencing the return of surplus capital to our
shareholders, while retaining flexibility to deliver bolt-on acquisitions
should attractive opportunities arise.
Organic Capital Investment
The construction of the new Desford brick factory continues to progress
according to plan with commissioning expected towards the end of this year.
This factory will be the largest and most efficient brick factory in Europe.
When we announced the investment back in 2018 we expected the factory to
increase our installed brick manufacturing capacity by 16%. However, with the
old factory it will replace struggling to meet its design output and desired
levels of efficiency as it reaches the end of its life, the new factory will
uplift our actual production output by 22% and is now expected to deliver
incremental EBITDA of c£25m in 2025 up from our previous estimate of c£15m.
This increase is driven by the deteriorating performance of the old factory as
well as selling price increases having a greater beneficial impact due to the
operating cost efficiency of the new factory. We expect the increase in EBITDA
in 2023 to be approximately £10m, increasing to £17m in 2024. Annual
depreciation on the new factory is expected to be approximately £4m.
During 2021 we also announced a £27m investment in our Wilnecote factory, a
very different investment to Desford. Wilnecote services the architect-led
commercial and specification market which includes residential, commercial,
school and hospital developments, a sizeable market of around 400m bricks per
annum (approximately 18% of the UK brick demand) and a market segment where
Forterra has historically been under-represented. 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 will
close in July 2022 for a period of approximately 9 months, recommissioning in
the second quarter of 2023 and will ultimately contribute £7m of incremental
EBITDA to Group results.
We are also announcing 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 initially facilitate
the manufacture of up to 48m brick slips per annum, minimising our investment
through utilising an existing factory 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 fire-safe
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 expect to be manufacturing brick slips in late 2023
although the ramp up to full production could take a number of years as we
grow our market share.
Increased Focus on Innovation
Our strategy for growth requires an increased investment in innovation.
Starting in 2022 we will increase our future focused operating expenditure by
an additional £2-3m per annum resourcing our business allowing us to enhance
our product range, especially in façade solutions where we intend to develop
and expand a range of products that will establish firesafe brickwork as a
cladding of choice for modular and high-rise buildings.
Share buyback programme
On 26 January 2022 the Board announced the commencement of a share buyback
programme to repurchase ordinary shares of 1 pence each in the capital of
the Company. The intention is to repurchase and cancel £40m worth of shares
through 2022 with this decision taken in line with the Group's capital
allocation priorities reflecting the strength of the balance sheet with
reported net cash before IFRS 16 lease liabilities of £40.9m and the Board's
confidence in the Group and its ongoing strength of cash generation. As at the
date of the announcement a sum of £5.5m had already been returned to
shareholders.
Sustainability
Sustainability has always been very important to us, as evidenced by our
significant achievement of reducing our carbon emissions per tonne of
production between 2010 and 2019 by 22%. Since then, we have embedded
sustainability at the heart of our business and strategy. In 2021 we further
reduced our carbon intensity by a further 4.5% relative to 2019.
It is important to recognise that our products are inherently sustainable,
they last for well over a century and require no maintenance throughout their
lifetime. The bricks used in an average family home have the same carbon
footprint as driving around in an average family car for a year but will
provide housing for generations over a period of around 150 years.
Having said that, we are committed to reducing both our carbon footprint and
our wider impact on the environment. In doing so we have set challenging
targets and intend to reduce our carbon emissions per tonne of output by 32%
by 2030 and are committed to achieving net zero by 2050. Today we are
delivering large scale investments which will make our business more
sustainable whilst also, working in partnership with a number of providers to
discover how we can benefit from the game changing emerging technologies of
hydrogen and carbon capture and storage.
We are pleased to have recently entered into a 15-year Power Purchase
Agreement (PPA) which will see us receive around 70% of our electricity from
2025 from a dedicated solar farm, representing a c£50m commitment to
renewable energy over the period of the agreement which will also provide us
with price security and stability.
We are committed to transparent disclosure of our sustainability performance
and having taken steps last year to early-adopt a number of the requirements
of the Task Force on Climate Related Financial Disclosures (TCFD), we have now
undertaken the required scenario analysis in order to be fully complaint in
the year that this becomes mandatory. Full details of these disclosures and
others can be found in our upcoming Annual Report.
Health, Safety and Wellbeing
Health and Safety remains our number one priority with our ultimate goal being
that of achieving zero harm. Whilst the pandemic has not adversely impacted
our trading in the year it continued to present a number of safety related
challenges with additional measures put in place to ensure our workplaces
remained safe. We recognise the additional pressures the pandemic has placed
on our people and have significantly increased the level of mental health
support we are able to offer with 57 colleagues across our business qualifying
as mental health first aiders.
In 2021 we increased our focus on behavioural and cultural safety, launching
our Road Map to Zero Harm. Following an independent review of the
effectiveness of our approach to health and safety completed in early 2020
prior to the pandemic, a follow up review was completed in the year to assess
progress against the recommendations. We are pleased to say that the report
concluded that progress had been made on the direction of safety strategy and
leadership as evidenced by our simplified Golden Rules and the Roadmap to Zero
Harm.
Our People
We would like to pass on our sincere thanks to our people who have all worked
tirelessly in guiding the business through the challenges faced in the year.
Whilst the ongoing pandemic has fortunately had very little impact on our
current year results it did significantly impact many of our colleagues and
the way they had to work.
The strength of customer demand, coupled with very low inventory levels,
alongside substantial supply chain challenges has placed the business and its
people under a great deal of pressure and it is pleasing to see how everyone
has worked together to meet these challenges head on.
It is also very important to recognise the commitment of the majority of our
employees, who did not have the opportunity to work from home and continued to
come to work every day in our facilities through the restrictions. Equally,
it is also important to acknowledge those who had to spend a large period of
time working from home, without valuable face-to-face contact with colleagues,
while in many cases again having to balance childcare and home-schooling
responsibilities. It was encouraging to see the learnings taken from the
previous year and that the investments in improved technology have reaped
rewards, with the business able to function efficiently and without
interruption throughout the lockdown period.
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.
During the year we have continued the open and transparent communication that
was so appreciated during the initial lockdown helping all our colleagues
better understand the Company's purpose which is to Keep Britain Building.
Health and Safety remains our number one priority and our Roadmap to Zero Harm
begins with focussing on behaviours including treating others as family.
SUMMARY AND OUTLOOK
Market conditions remain highly supportive with continued demand for new
housing and constrained UK manufacturing capacity driving brick imports to
record levels. Order books remain strong supported by robust customer
sentiment and an ongoing shortage of quality housing in the UK. Inflationary
pressures continue although Management remain confident of recovering cost
increases with the Group announcing further double-digit price double
increases effective from 1 April 2022 following on from those delivered on or
before 1 January 2022.
We remain watchful as to the impacts of wider macro uncertainty and supply
chain pressures as well as increases in interest rates. Approximately 70% of
the Group's 2022 energy requirements have been secured, with the greatest
coverage in the winter months where volatility has been historically greatest.
The construction of the new Desford brick factory remains on track with
commissioning due at the end 2022, and the factory now expected to deliver a
22% effective increase in brick production and increased incremental EBITDA of
£25m from 2025. Management therefore expects the Group to achieve further
progress in the coming year and beyond.
GOING CONCERN
At the balance sheet date, the cash balance stood at £41.5m with available
undrawn borrowings of £170m available in the form of a Revolving Credit
Facility (RCF). 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. During the year
the Group agreed a one year extension to the RCF, which now expires in July
2025.
The Board have elected to return surplus capital to shareholders. On 26
January 2022 the Group announced it was commencing a share buyback programme
to repurchase ordinary shares of 1p each in the capital of the Company, the
aggregate purchase price of the shares is expected to be £40m with this cash
outflow occurring in 2022. The decision to undertake the share buyback was
taken based on a detailed consideration of the capital requirements of the
Group along with the current liquidity position and expected future cash
generation. The Board considers it is returning a prudent level of cash to
shareholders which reflects the strong cash generative ability of the Group.
The Group have modelled financial scenarios for the period to 31 March 2023,
reflecting both macroeconomic and industry-specific projections. These have
been modelled as a base case, and two severe but plausible downside scenarios.
Each scenario is tested to determine if there is a cash shortfall or there are
covenant breaches at each forthcoming covenant test date review. The severe
but plausible downside scenarios reflect a downturn in market demand in one
scenario and an increase in variable costs in the other scenario.
Scenarios were modelled over the period to 31 March 2023 (going concern review
period) to support the going concern assessment. In all the scenarios
modelled, and considering mitigative actions available, the Group had headroom
in both its banking covenants and existing bank facilities.
With manufacturing operations continuing at capacity since fully reopening in
summer 2020, the recovery to date has been sustained, and as such Management
are confident that i) the severe but plausible scenarios are unlikely and ii)
the mitigations in the form of cost reduction, reducing or delaying capital
expenditure and a reduction or curtailment in the quantum of either dividend
distributions or the execution of the share buyback that could be applied in
such a scenario would see the Group remain resilient.
Taking account of all reasonably possible changes in trading performance, the
current financial position of the Group, the post balance sheet share buyback
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 2023. 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 international accounting standards in conformity
with the requirements of the Companies Act 2006 and UK-adopted international
accounting standards 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
10 March 2022
CONSOLIDATED STATEMENT OF TOTAL COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2021
2021 2020
Note £m £m
Revenue 3 370.4 291.9
Cost of sales (240.7) (225.8)
Gross profit 129.7 66.1
Distribution costs (51.2) (44.1)
Administrative expenses (27.4) (20.8)
Other operating income 9.0 0.2
Operating profit 60.1 1.4
EBITDA before exceptional items 70.4 37.9
Exceptional items 4 6.1 (19.4)
EBITDA 76.5 18.5
Depreciation and amortisation (16.4) (17.1)
Operating profit 60.1 1.4
Finance expense before exceptional items (3.3) (3.4)
Exceptional finance expense 5 - (3.4)
Finance expense 5 (3.3) (6.8)
Profit / (loss) before tax 56.8 (5.4)
Income tax expense 6 (11.3) (0.2)
Profit / (loss) for the year attributable to equity shareholders 45.5 (5.6)
Other comprehensive loss
Effective portion of changes of cash flow hedges (0.2) -
Total comprehensive income / (loss) for the year attributable to equity 45.3 (5.6)
shareholders
Earnings / (loss) per share Pence Pence
Basic earnings per share 8 19.9 (2.6)
Diluted earnings per share 8 19.7 (2.6)
CONSOLIDATED BALANCE SHEET
AT 31 DECEMBER 2021
2021 2020
Note £m £m
Assets
Non-current assets
Intangible assets 17.7 11.0
Property, plant and equipment 201.4 187.1
Right-of-use assets 16.5 9.0
235.6 207.1
Current assets
Inventories 32.8 33.0
Trade and other receivables 39.1 35.7
Income tax asset 1.0 0.6
Cash and cash equivalents 41.5 31.5
114.4 100.8
Total assets 350.0 307.9
Current liabilities
Trade and other payables (75.6) (63.8)
Loans and borrowings 9 (0.6) (0.5)
Lease liabilities (4.5) (3.4)
Provisions for other liabilities and charges (9.9) (5.0)
Derivative liability (0.2) -
(90.8) (72.7)
Non-current liabilities
Loans and borrowings 9 - (15.0)
Lease liabilities (12.0) (6.0)
Provisions for other liabilities and charges (9.7) (9.2)
Deferred tax liabilities (2.7) (0.9)
(24.4) (31.1)
Total liabilities (115.2) (103.8)
Net assets 234.8 204.1
Capital and reserves attributable to equity shareholders
Ordinary shares 2.3 2.3
Retained earnings 213.4 162.3
Cash flow hedge reserve (0.2) -
Other reserve 23.9 41.5
Reserve for own shares (4.6) (2.0)
Total equity 234.8 204.1
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2021
2021 2020
Note £m £m
Cash flows from operating activities
Profit before tax 56.8 (5.4)
- Finance expense before exceptional items 5 3.3 3.4
- Exceptional items 4 (6.1) 22.8
Operating profit before exceptional items 54.0 20.8
Adjustments for:
- Depreciation and amortisation 16.4 17.1
- Profit on disposal of fixed assets and finance leases (1.5) -
- Movement on provisions 6.4 1.7
- Purchase of carbon credits (6.4) -
- Share-based payments 2.5 0.9
- Other non-cash items - (0.9)
Changes in working capital:
- Inventories 0.2 14.8
- Trade and other receivables (3.4) 4.6
- Trade and other payables 13.0 (5.1)
Cash generated from operations before exceptional items 81.2 53.9
Cash flows relating to operational exceptional items (0.6) (5.6)
Cash generated from operations 80.6 48.3
Interest paid (2.8) (2.8)
Tax paid (9.6) (5.2)
Net cash inflow from operating activities 68.2 40.3
Cash flows from investing activities
Purchase of property, plant and equipment (33.0) (23.5)
Purchase of intangible assets (1.6) (1.4)
Proceeds from sale of property, plant and equipment 0.2 -
Exceptional proceeds from sale of property, plant and equipment 14.7 -
Exceptional costs incurred in sale of property, plant and equipment (0.3) -
Net cash used in investing activities (20.0) (24.9)
Cash flows from financing activities
Reduction in lease liabilities (5.3) (5.2)
Dividends paid 7 (13.7) -
Drawdown of borrowings 5.0 80.0
Repayment of borrowings (20.0) (135.0)
Purchase of shares by Employee Benefit Trust (5.0) (1.0)
Proceeds from sales of shares by Employee Benefit Trust 1.2 0.9
Proceeds from issue of shares - 55.0
Transaction costs on share issue - (2.0)
Financing fees (0.4) -
Exceptional finance payments - (3.2)
Net cash used in financing activities (38.2) (10.5)
Net increase in cash and cash equivalents 10.0 4.9
Cash and cash equivalents at the beginning of the period 31.5 26.6
Cash and cash equivalents at the end of the period 41.5 31.5
Note: The cash flow presentation has been amended in the current year to
include a reconciliation from profit before tax through to operating profit
before exceptional items.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2021
Share Reserve for Cash flow Other Retained Total
hedge
capital own shares reserve reserve earnings equity
Note £m £m £m £m £m £m
Balance at 1 January 2020 2.0 (3.6) - - 157.8 156.2
Total comprehensive loss for the year - - - - (5.6) (5.6)
Dividend paid 7 - - - - - -
Issue of shares 0.3 - - 41.5 11.2 53.0
Purchase of shares by Employee Benefit Trust - (1.0) - - - (1.0)
Proceeds from sale of shares by Employee Benefit Trust
- 0.9 - - - 0.9
Share-based payments charge - - - - 0.8 0.8
Share-based payments exercised - 1.7 - - (1.7) -
Tax on share-based payments - - - - (0.2) (0.2)
Balance at 31 December 2020 2.3 (2.0) - 41.5 162.3 204.1
Total comprehensive income for the year - - - - 45.5 45.5
Other comprehensive loss - - (0.2) - - (0.2)
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 payments charge - - - - 2.5 2.5
Share-based payments exercised - 1.2 - - (1.2) -
Tax on share-based payments - - - - 0.4 0.4
Balance at 31 December 2021 2.3 (4.6) (0.2) 23.9 213.4 234.8
NOTES TO THE FINANCIAL STATEMENTS
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 2021 have been
extracted from the audited consolidated financial statements, which were
approved by the Board of Directors on 10 March 2022. The audited consolidated
financial statements have not yet been delivered to the Registrar of
Companies but are expected to be published in April 2022. 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 2021. Copies of the
Annual Report for the year ended 31 December 2021 will be mailed to those
shareholders who have opted to receive them by the end of April 2022 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 £41.5m with available
undrawn borrowings of £170m available in the form of a Revolving Credit
Facility (RCF). 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. During the year
the Group agreed a one year extension to the RCF, which now expires in July
2025.
The Board have elected to return surplus capital to shareholders. On 26
January 2022 the Group announced it was commencing a share buyback programme
to repurchase ordinary shares of 1p each in the capital of the Company, the
aggregate purchase price of the shares is expected to be £40m with this cash
outflow occurring in 2022. The decision to undertake the share buyback was
taken based on a detailed consideration of the capital requirements of the
Group along with the current liquidity position and expected future cash
generation. The Board considers it is returning a prudent level of cash to
shareholders which reflects the strong cash generative ability of the Group.
The Group have modelled financial scenarios for the period to 31 March 2023,
reflecting both macroeconomic and industry-specific projections. These have
been modelled as a base case, and two severe but plausible downside scenarios.
Each scenario is tested to determine if there is a cash shortfall or there are
covenant breaches at each forthcoming covenant test date review. The severe
but plausible downside scenarios reflect a downturn in market demand in one
scenario and an increase in variable costs in the other scenario.
Scenarios were modelled over the period to 31 March 2023 (going concern review
period) to support the going concern assessment. In all the scenarios
modelled, and considering mitigative actions available, the Group had headroom
in both its banking covenants and existing bank facilities.
With manufacturing operations continuing at capacity since fully reopening in
summer 2020, the recovery to date has been sustained, and as such Management
are confident that i) the severe but plausible scenarios are unlikely and ii)
the mitigations in the form of cost reduction, reducing or delaying capital
expenditure and a reduction or curtailment in the quantum of either dividend
distributions or the execution of the share buyback that could be applied in
such a scenario would see the Group remain resilient.
Taking account of all reasonably possible changes in trading performance, the
current financial position of the Group, the post balance sheet share buyback
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 2023. The Group therefore adopts the going
concern basis in preparing these preliminary financial statements.
New standards, amendments and interpretations
The accounting policies adopted in the preparation of the preliminary
financial statements are consistent with those followed in the preparation of
the Consolidated Financial Statements for the year ended 31 December 2020,
except for the adoption of new standards effective as at 1 January 2021, the
impact of which is described below. At the date of approval of these
preliminary financial statements there were a number of standards, amendments
and interpretations that have been published and are effective for accounting
periods beginning on or after 1 January 2022. The Group are currently
assessing any potential impact of amendments to IAS 12 (Deferred Tax related
to Assets and Liabilities arising from a Single Transaction) however no others
are expected to have a material impact on the Group. The Group has not early
adopted any standard, interpretation or amendment that has been issued but is
not yet effective.
(i) Interest Rate Benchmark Reform - Phase 2: Amendments to IFRS 9, IAS 39,
IFRS 7, IFRS 4 and IFRS 16
The amendments provide temporary reliefs which address the financial reporting
effects when an interbank offered rate (IBOR) is replaced with an alternative
nearly risk-free interest rate (RFR). The amendment includes a practical
expedient to require contractual changes, or changes to cash flows that are
directly required by the reform, to be treated as changes to a floating
interest rate, equivalent to a movement in a market rate of interest. The
Group has taken advantage of this in transitioning from interest rates
calculated using LIBOR to SONIA on its Revolving Credit Facility. The change
has not significantly impacted the interest rate payable, with LIBOR and SONIA
being regarded as economically equivalent. Further reliefs regarding hedge
designation and hedge documentation had no impact on the 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
·
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.
Segment revenue and results
2021
Bricks and Bespoke Products Total
Blocks
Note £m £m £m
Segment 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 before exceptional items 55.8 (1.8) 54.0
Exceptional items 4 - 6.1 6.1
Operating profit 55.8 4.3 60.1
Net finance expense (3.3)
Profit before tax 56.8
Segment assets
2021
Bricks and Bespoke Products
Blocks Total
Note £m £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 and cash and cash
equivalents are centrally controlled and unallocated.
Other segment information
2021
Bricks and Bespoke Products
Blocks Total
Note £m £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 assets additions 12.1 0.3 12.4
Customers representing 10% or greater of revenues were as follows:
2021
Bricks and Bespoke Products
Blocks Total
£m £m £m
Customer A 41.7 1.3 43.0
Customer B 35.9 2.0 37.9
Segment revenue and results
2020
Bricks and Bespoke Products
Blocks Total
Note £m £m £m
Segment revenue 223.1 71.7 294.8
Intercompany eliminations (2.9)
Revenue 291.9
EBITDA before exceptional items 40.3 (2.4) 37.9
Depreciation and amortisation (14.8) (2.3) (17.1)
Operating profit / (loss) before exceptional items 25.5 (4.7) 20.8
Exceptional items 4 (7.2) (12.2) (19.4)
Operating profit / (loss) 18.3 (16.9) 1.4
Net finance expense (3.4)
Exceptional finance expense (3.4)
Loss before tax (5.4)
Segment assets
2020
Bricks and Bespoke Products
Blocks Total
Note £m £m £m
Property, plant and equipment 168.3 18.8 187.1
Intangible assets 10.2 0.8 11.0
Right-of-use assets 7.5 1.5 9.0
Inventories 29.1 3.9 33.0
Segment assets 215.1 25.0 240.1
Unallocated assets 67.8
Total assets 307.9
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 and cash and cash equivalents are
centrally controlled and unallocated.
Other segment information
2020
Bricks and Bespoke Products
Blocks Total
Note £m £m £m
Property, plant and equipment additions 22.6 1.3 23.9
Intangible asset additions 1.2 0.3 1.5
Right-of-use asset additions 0.3 0.3 0.6
Customers representing 10% or greater of revenues were as follows:
2020
Bricks and Bespoke Products
Blocks £m Total
£m £m
Customer A 30.3 1.6 31.9
Customer B 28.1 1.5 29.6
4. Exceptional items
2021 2020
£m £m
Exceptional operating items
Restructuring costs - (2.4)
Closure and sale of Swadlincote factory 6.1 -
Asset impairment charges - (17.0)
6.1 (19.4)
Exceptional finance items
Debt refinancing costs - (3.4)
- (3.4)
Total exceptional items 6.1 (22.8)
2021 exceptional items
In the current year 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 is 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
has been disclosed as an exceptional item in 2021. The total recognised gain
of £6.1m can be 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.
2020 exceptional items
Restructuring costs totalling £2.4m were incurred in 2020 as a result of
changes announced to address the Group's cost base, including both changes to
shift patterns and adjustments to the size and structure of support functions.
Following the Covid-19 pandemic Management's immediate priorities were
reassessed and a £17.0m impairment was charged against assets in business
areas with more challenging market conditions and weaker margins. This fully
wrote-down the carrying value of goodwill within the business, wrote down
assets associated with hollowcore production at the mothballed facility in
Swadlincote and wrote-off an IT system. The Goodwill impairments (£6.8m)
substantially related to £6.0m of goodwill that had been recognised on the
historic acquisition of Hanson plc by HeidelbergCement AG in 2007 attached to
the Formpave site. Formpave following Covid-19 could no longer support a
carrying value that included this £6.0m of goodwill.
The remaining £0.8m of goodwill related to the acquisition of the Swadlincote
facility in 2017 and was recognised within the Bespoke Products segment.
Goodwill of £0.8m was impaired along with a £9.4m impairment relating to
idle assets at the Swadlincote facility. There was no value in use for the
foreseeable future following the decision to mothball the hollowcore facility
in response to the Covid-19 pandemic.
The final £0.8m impairment related to the write down of an IT system
following a decision to cease use of and replace this asset. £0.7m of this
was shown as an impairment within intangible assets and the remainder within
provisions as an onerous contract.
Further to the above, on 7 July 2020 the Group refinanced its existing banking
facilities. Costs of £3.4m associated with this refinancing were recognised
as an exceptional item.
Exceptional costs incurred by the Group are presented within the following
line items in the Consolidated Statement of Comprehensive Income.
Cost of sales Distribution costs Administrative costs Other operating income Finance expense Total
£m £m £m £m £m £m
2021
Total before exceptional items (240.1) (51.2) (27.4) 2.3 (3.3) (319.7)
Exceptional items
Closure and sale of Swadlincote (0.6) - - 6.7 - 6.1
Statutory total (240.7) (51.2) (27.4) 9.0 (3.3) (313.6)
2020
Total before exceptional items (207.8) (44.0) (19.5) 0.2 (3.4) (274.5)
Exceptional items
Restructuring costs (1.8) (0.1) (0.5) - - (2.4)
Impairment costs (16.2) - (0.8) - - (17.0)
Debt refinancing costs - - - - (3.4) (3.4)
Statutory total (225.8) (44.1) (20.8) 0.2 (6.8) (297.3)
2021 tax on exceptional items
The sale of the land and buildings at Swadlincote gave rise to a chargeable
gain subject to corporation tax. The redundancy
costs incurred are tax deductible.
2020 tax on exceptional items
Restructuring and refinancing costs recognised have been treated as tax
deductible. The aborted transaction costs and impairment charges on goodwill,
property, plant and equipment and land and buildings are not tax deductible.
The property, plant and equipment impairment gives rise to a deferred tax
credit such that they are not tax rate impacting, however
the impairment of goodwill and non-qualifying land and buildings impact the effective tax rate.
5. Finance expense
2021 2020
Note £m £m
Interest payable on external borrowings (2.6) (2.9)
Interest payable on lease liabilities (0.3) (0.3)
Other finance expense (0.4) (0.2)
Exceptional finance expense 4 - (3.4)
(3.3) (6.8)
In 2020, the Group drew down on its revolving credit facility in its entirety
from mid-March, securing cash in response to the Covid-19 pandemic, but
resulting in higher interest charges. At the 31 December 2020, £15.0m
remained drawn down under the facility which was repaid in full during 2021.
The interest payable as presented in the preliminary financial statements for
2021 relates to the commitment fee charged during the period.
6. Taxation
2021 2020
Note £m £m
Current tax
UK corporation tax on profit for the year (9.1) (1.8)
Prior year adjustment on UK corporation tax - 0.5
Total current tax (9.1) (1.3)
Origination and reversal of temporary differences (1.4) 1.2
Effect of change in tax rates (0.8) (0.2)
Effect of prior period adjustments - 0.1
Total deferred tax (2.2) 1.1
Income tax expense (11.3) (0.2)
2021 2020
£m £m
Profit / (loss) before taxation 56.8 (5.4)
Expected tax (charge) / credit (10.8) 1.0
Expenses not deductible for tax purposes 0.3 (0.5)
Impairment of goodwill not deductible for tax purposes - (1.2)
Reversal of uncertain tax provision - (0.2)
Impact of change on deferred tax rate (0.8) 0.7
Income tax expense (11.3) (0.2)
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.
7. Dividends
2021 2020
£m £m
Amounts recognized as distributions to equity holders in the year
Interim dividend of 3.2p per share (2020: nil) (6.3) -
Final dividend of 2.8p per share in respect of prior year (2020: nil) (7.4) -
(13.7) -
The Directors are proposing a final dividend for 2021 of 6.7p per share,
making a total payment for the year of 9.9p (2020: 2.8p). This is subject to
approval by the shareholders at the AGM and has not been included as a
liability in the preliminary financial statements.
8. Earnings / (loss) 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 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 2021 2020 2021 2020
£m £m £m £m
Operating profit for the year 54.0 20.8 60.1 1.4
Finance expense 5 (3.3) (3.4) (3.3) (6.8)
Profit / (loss) before taxation 50.7 17.4 56.8 (5.4)
Income tax expense 6 (10.8) (3.2) (11.3) (0.2)
Profit / (loss) for the year 39.9 14.2 45.5 (5.6)
Weighted average number of shares (millions) 228.1 214.8 228.1 214.8
Effect of share incentive awards and options (millions) 2.3 0.2 2.3 0.2
Diluted weighted average number of ordinary shares (millions) 230.4 215.0 230.4 215.0
Earnings / (loss) per share:
Basic (in pence) 17.5 6.6 19.9 (2.6)
Diluted (in pence) 17.3 6.6 19.7 (2.6)
9. Loans and borrowings
2021 2020
£m £m
Non-current loans and borrowings
- Revolving credit facility - 15.0
Current loans and borrowings
- Interest 0.6 0.5
0.6 15.5
The Group last refinanced its banking facilities in July 2020 securing a
facility size of £170m in place until July 2024 as well as a package of
covenant variations extending to September 2021. The facility agreement
included the option for the Company to request, subject to bank approval, an
additional extension for a further year to July 2025. The extension was
approved, with the facility now committed until 1 July 2025. An arrangement
fee of £0.3m was paid in respect of this extension which is included within
other finance expenses within note 5. The credit agreement has also been
amended to remove references to LIBOR with interest now calculated based on
SONIA plus a small credit adjustment spread. This change does not
significantly impact the interest rate payable.
The facility is secured by fixed charges over the shares of Forterra Building Products Limited and Forterra Holdings Limited.
10. Net cash
The analysis of net cash is as follows:
2021 2020
£m £m
Cash and cash equivalents 41.5 31.5
Loans and borrowings (0.6) (15.5)
Lease liabilities (16.5) (9.4)
Net cash 24.4 6.6
Reconciliation of net cash flow to net cash
2021 2020
£m £m
Cash flow generated from operations before exceptional items 81.2 53.9
Payments made in respect of exceptional operating items (0.6) (5.6)
Operating cash flow after exceptional items 80.6 48.3
Interest paid (2.8) (2.8)
Tax paid (9.6) (5.2)
Net cash flow from investing activities (20.0) (24.9)
Dividends paid (13.7) -
Exceptional finance payments - (3.2)
Purchase of shares by Employee Benefit Trust (5.0) (1.0)
Proceeds from sale of shares by Employee Benefit Trust 1.2 0.9
Proceeds from issue of shares - 55.0
Transaction costs on share issue - (2.0)
New lease liabilities (12.4) (0.6)
Other financing movement (0.5) (0.6)
Increase in net cash 17.8 63.9
Net cash / (debt) at the start of the period 6.6 (57.3)
Net cash at the end of the period 24.4 6.6
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.
2021 2020
£m £m
Emoluments including taxable benefits (3.2) (2.0)
Share-based payments (0.8) (0.4)
Pension and other post-employment benefits (0.3) (0.2)
(4.3) (2.6)
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 2022.
12. Post balance sheet events
On 26 January 2022 the Company announced a share buyback programme, which
commenced 27 January 2022. The aggregate purchase price of all Ordinary Shares
acquired under the first tranche of this programme will be no more than £40
million (excluding stamp duty and expenses) and any Ordinary Shares purchased
under this programme will be cancelled immediately. In the period from 26
January 2022 to 8 March 2022 (the last practicable date prior to the date of
this document), the Company purchased and cancelled 2,258,335 ordinary shares.
On 7 March 2022 the Group completed the sale of an area of disused land for
total proceeds of £2.5m. Profit on disposal is expected to total c£2.3m
which will be recognised in the year ended 31 December 2022.
On 9 March 2022 the Group entered into a 15-year Power Purchase Agreement
(PPA) for a dedicated solar farm, which is expected to provide 70% of the
Group's electricity from 2025, representing a c£50m commitment to renewable
energy over the period of the agreement.
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.
In 2021 we were able to restart wider risk management, including risk
management site reviews, continuing to develop the physical links between
central and local management and expanding the risk conversation.
Communication continues to be strong, with our risk management policy,
strategy, processes, reporting measures, internal reporting lines and
responsibilities well established. A continued response to the impact and
associated risks arising both directly and indirectly from Covid-19 and Brexit
has been a primary focus during 2021, and many of the rapidly evolving
business risks are attributable to this.
We continue to monitor these risks and introduce mitigating controls, as appropriate, as they develop.
· Covid-19: Our markets saw strong recovery in 2021 and both we and our
customers were able to continue to operate without significant interruption or
Government imposed restrictions throughout the year. Our priority was
therefore to concentrate
on the controllable risks such as health and safety, where we continue to follow all public health guidance.
· Availability of raw materials and energy: 2021 has seen shortages of raw
materials above any seen in recent years. Impacts of both Covid-19 and Brexit
have required our business to secure new supplies, draw on long-standing
relationships with our suppliers
and explore possible changes that can be made within the production
process in order to mitigate the risk. To date, the primary risk
regarding energy was that of cost. More recently the war in Ukraine has
increased concerns as to the security of energy supplies and we continue to
closely monitor the situation.
· Cost inflation: Cost inflation has been an increasingly significant theme
throughout 2021, impacting our business across a wide range of spend
categories. We have increased selling prices to recover the cost inflation and
whilst we remain
confident of recovering costs in the medium term, our 2021 results have been impacted by short term under-recover of inflation.
· Cyber: A continued introduction of mitigative actions has attempted to
keep pace with a fast-moving cyber risk with
the business facing a significant cyber-attack during the year. This risk will continue to be a focus area going into 2022.
Key risks are addressed within the table on the pages following. In addition,
we continue to place emphasis on identification and
review of emerging risks to ensure these are identified, considered and appropriately mitigated.
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 within our business 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 disclosures 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 remains committed to implementing the requirements of the Task Force
on Climate Related Financial Disclosure (TCFD) and whilst both short and
long-term climate risks are summarised in this section, more expansive
disclosures are provided in the Sustainability Report within our upcoming
Annual Report and Accounts. 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
1. HEALTH AND SAFETY Gross change: Decrease Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
Our key risks remain the same as prior to the emergence of Covid-19. We Safety remains our number one priority. We target a zero-harm environment and
continue to work to ensure the safety of employees exposed to risks such as have robust policies in place covering expected levels of performance,
the operation of heavy machinery, moving parts noise, dusts and chemicals. responsibilities, communications, controls, reporting, monitoring and review.
Additionally, before mitigating actions, the underlying risk to employee At the beginning of 2021, with high levels of Covid-19 in the community, the
health increased with the emergence of Covid- 19, with working proximity for risk to our workforce was taken extremely seriously across our business with
employees becoming an additional risk. robust adherence to all Government safety guidance. Whilst able to continue to
run our factories, our offices were again closed, with investments made in
technology during 2020 enabling affected employees to transition seamlessly to
a home working environment once again.
As the prevalence of Covid-19 reduced through the spring our offices were
reopened, allowing our employees to return to work in a safe and socially
distanced manner. The vaccination roll- out has mitigated business
interruption and accordingly we have reduced the threat from Covid-19 to
business operations relative to December 2020. Non-Covid-19 safety risks,
however, remain unchanged.
Our safety focus in 2022 is effective employee engagement and communication
focused on our "Road Map to Zero Harm".
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 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.
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 are
becoming increasingly expensive.
Executive sponsor: Stephen Harrison and George Stewart
3. ECONOMIC CONDITIONS Gross change: Static Net change: Static
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. book, strong relationships across the building sector, and a range of internal
and external lead indicators, help to inform management and ensure that the
business has time to respond to changing market conditions.
With the economy again now fully open, the risk associated with Covid-19 have
receded, however we remain watchful of the potential for further economic
instability and are mindful of the current cost inflation and supply Our ability to flex output and slow production if customer demand weakens was
shortages. effective in 2020, although with the recovery across our key markets stronger
than anticipated our factories have run at full output throughout 2021.
The new-build housing market is expected to recover to 2019 levels in the near
future. There remains a shortage of housing in the UK, financing remains both
affordable and available and continuing favorable population growth. However,
should market demand fall, we would expect brick imports to reduce ahead of
sales of domestically manufactured bricks as they have in prior cyclical
downturns providing some degree of insulation to the effects of a market
slowdown.
Forterra remains well positioned to take advantage of attractive market
fundamentals. Whilst current trading is strong, the pandemic driven influence
on the economy has receded, however the increased geopolitical uncertainties
centered around the war in Ukraine and the potential wider economic fall-out
this may create is creating renewed uncertainty.
Executive sponsor: Stephen Harrison
4. GOVERNMENT ACTION AND POLICY Gross change: Static Net change: Static
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 MPs.
The Government have demonstrated that they remain committed to home ownership
and housebuilding, evidenced by the recent launch of the Mortgage Guarantee
Scheme. We consider the withdrawal of support unlikely should it risk a
reduction in the supply of new high- quality homes where a significant
shortfall still exists.
Government policy around planning reform also has the potential to influence
demand for our products and we remain watchful as to the significant
opposition to some proposed planning reforms designed to increase the
construction of new homes.
Executive sponsor: Stephen Harrison
5. RESIDENTIAL SECTOR ACTIVITY LEVELS Gross change: Decrease Net change: Decrease
Principal risk and why it is relevant Key mitigation, change and sponsor
Residential development (both new build and repair, maintenance and We closely follow the demand we are seeing from our key markets, along with
improvement) contributes the majority of Group revenue. market forecasts, end user sentiment, mortgage affordability and credit
availability in order to identify and respond to opportunities and risk. Group
strategy focuses upon our strength in this sector whilst also continuing to
strengthen our commercial offer.
The dependence of Group revenues on this sector means that any change in
activity levels in this sector will affect profitability and in the longer
term, strategic growth plans.
The strength of the sector's recovery from the pandemic has been reassuring,
allowing us to reduce this risk.
Government action and policy as laid out above continues to be a key
determinant of demand for housing.
The investment in the refurbishment 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: Increase Net change: Increase
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 continue to be low across our business. 2020 saw a significant
customer's needs. Many of our product ranges are manufactured at single destocking as we emerged from the pandemic which due to continued strong
facilities where there are low buffer stock levels and high-capacity demand across 2021 we have been unable to address this year, presenting a
utilisation. A breakdown can cause product shortages and have a detrimental short-term risk in meeting our customers' expectations, especially if there
impact on performance and reputation. was further growth in demand.
Maximising efficiency through utilising longer production runs necessitates Strong customer relationships and some degree of product range substitution
higher levels of inventory to maintain customer service. If these inventories can mitigate this risk although the ongoing pressure upon our inventories has
are not present, shorter and less efficient production runs will be required led us to increase this risk.
to maintain levels of service.
A shortage of available transport capacity could also impact our ability to
deliver our products to customers, although we mitigate this risk by operating
our own distribution fleet, however, the wider constraints in the haulage
market appeared to have eased by the year-end.
We are also aware of shortages of materials throughout the construction supply
chain, and we are watchful to the fact that if our customers cannot secure
materials and products they require from other suppliers then this may delay
build programmes and impact demand for our own products.
Executive sponsor: Adam Smith, Steve Jeynes and Darren Rix
7. CUSTOMER RELATIONSHIPS AND REPUTATION Gross change: Increase 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
for our customers. By delivering excellent customer service, enhancing our
brands and offering the right products, we seek to develop our long-standing
relationships with our customers. Regular and frequent review meetings focus
Where a customer relationship deteriorates there is a risk to revenue and cash on our effectiveness in this area.
flow.
Our service proposition during the pandemic was well received by customers
across all channels and served to strengthen these relationships, continuation
of which, combined with strong communication with customers remains paramount
to our success. We are aware that a number of the current risks we face could
manifest themselves in damaged relationships with customers be it 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. 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. AVAILABILITY OF RAW MATERIALS AND ENERGY Gross change: Increase Net change: Increase
Principal risk and why it is relevant Key mitigation, change and sponsor
Whilst availability of raw materials can vary at times, recent shortages During 2021 we have seen shortages of raw materials above those seen for many
across both our industry and the wider economy have become more commonplace, years and this has the potential to impact production.
threatening our ability to manufacture and ultimately to meet customer
expectations.
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
Our production processes depend on energy and fuel and should supplies of we stockpile additional materials as we did in some cases ahead of Brexit
these be interrupted production would be impacted; at a time when our business though many of our key materials are needed in such large quantities this
is operating at full capacity there is no scope for recovering lost isn't possible.
production.
We regularly review our production processes to reduce reliance on materials
In the longer term these risks may be exacerbated with climate related matters that are in short supply and in the longer term we may seek to adjust our
impacting availability of materials, management of which has been a priority production processes to utilise materials which have a lesser impact on the
for a number of years. More recently shortages have arisen in line with the environment.
end of the Brexit transition period and the faster than expected recovery of
demand following the pandemic.
Security of energy supplies has not been identified as a key risk previously
although recently this has become an increasing concern, exacerbated by the
conflict in Ukraine.
Shortages of gas and electricity have driven prices higher leading to concerns
that should these pressures persist, particularly in winter months, supplies
to industrial users could be constrained to prioritise domestic users.
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
15 years from 2025 through the construction of a dedicated solar farm,
reducing our reliance on the grid as well as providing price certainty.
Changes in industrial processes required to address the climate risks have
impacted the availability the price of certain raw materials and we have taken
action to mitigate these; sourcing from alternate suppliers or making
adjustments that allow us to work with alternate 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: Increase Net change: Increase
Principal risk and why it is relevant Key mitigation, change and sponsor
We utilise a wide range of inputs in our business from raw materials to energy We seek to manage our costs by putting in place annual pricing agreements with
and labour. our suppliers, although in recent times we have seen a number of these being
broken.
Increases to the cost of our inputs will have an adverse effect upon our
margins if we are unable to pass these cost increases on to our customers. We aim to maintain a range of suppliers such that we avoid becoming dependent
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 at a loss.
In recent months we have seen unprecedented increases in energy costs driven
by global markets 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: Increase Net change: Increase
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.
Throughout the Covid-19 pandemic we have prioritised the increased health and The Covid-19 pandemic has focused our attention on establishing safe working
safety risk for the workforce along with overall employee welfare. practices for return to work, employee support and strong
communication/employee engagement. We continue to invest in HR and payroll
systems, with significant resource now in place to see this investment through
to delivery.
Staffing risks relating to the end of the Brexit transition period remain a
concern although a wider shortage of labour following the pandemic is of
increasing concern.
Challenges associated with labour shortages are presently faced across the
business, in particular around the availability of engineers and drivers.
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.
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 ensure that we understand current and
the products that we manufacture. This could in turn cause revenues and future demand. Close ties between the Strategy, Operations and Commercial
margins may suffer. functions ensure that the Group focuses on the right areas of research and
development.
New product development and related initiatives therefore continue and in
announcing our strategy we are committing to further investment in research
and development and there also are clear links between investment in R&D
and the work undertaken in relation to sustainability.
Executive sponsor: Stephen Harrison
12. IT INFRASTRUCTURE AND SYSTEMS Gross change: Increase Net change: Increase
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, attaining ISO 27001
Information Security accreditation in 2019. Further investment in 2020 in new
telephony and communication systems allowed us to successfully cater for
strong customer demand whilst office staff continue to work remotely.
An increase in cyber risk is evidenced by increasing instances of malicious
attacks globally and has driven our continued investment and training around
cyber security. We are not immune from this heightened global cyber risk and
have experienced an event during the year that neither resulted in disruption
to our business or significant cost.
Executive sponsor: Matthew Day
13. BUSINESS CONTINUITY Gross change: Decrease Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
Performance is dependent on key centralised functions operating continuously Having made plans to allow key centralised functions to continue to operate in
and manufacturing functions operating uninterrupted. the event of business interruption, we were able to establish remote working
capability effectively as the Covid-19 pandemic developed. These capabilities
have been retained through 2021 with the business able to continue operating
with minimal disruption.
Should we experience significant disruption there is a risk that products
cannot be delivered to customers to meet demand and all financial KPIs may
suffer.
With the pandemic seemingly receding and with the wider economy re-opening we
see the risk of business disruption as a result of Covid-19 diminishing and
have reduced this risk accordingly. Non Covid-19 related disruption risks
remain unchained although some greater resilience is provided by the now tried
and tested ability of office staff to work from home.
Where a scenario without a pre-envisaged plan is faced, our business
continuity policy allows managers 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
14. PROJECT DELIVERY Gross change: Increase Net change: Static
Principal risk and why it is relevant Key mitigation, change and sponsor
This risk was recognised for the first time in 2020 in recognition of the The Desford brick factory represents the largest capital investment that we
scale and complexity of the Desford construction project. have made. Following the signing of contracts with a new equipment supplier in
early 2021, the project has progressed to schedule. The ongoing pandemic has
had little impact in this respect during 2021 however with manufacturing
equipment being supplied by a European supplier, management have remained
We have now announced an extensive programme of capital investment within our watchful of travel restrictions and any potential corresponding delays.
business over the next decade which will see a number of large projects to
add production capacity
Management closely monitor the project for potential challenges, cost
over-runs and delays and act promptly to ensure that risks are mitigated.
Lessons have been learnt from the construction of the Measham brick factory
which was completed in 2009 and with dedicated project management in place and
groundworks largely complete, notable risks have already been mitigated
With the announcement of the Wilnecote factory redevelopment project,
management recognise the additional risks posed by running two 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 that we will need in increase the resources in our business to
support multiple major expansion projects and recruitment of this resource has
commenced.
Executive sponsor: George Stewart
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