Marshalls plc Revenue growth of 15%

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Marshalls plc (LON: MSLH), the specialist Landscape Products group, announced today its half year results for the half year ended 30th June 2019.

Financial Highlights

	Half Year ended	Half Year ended
	30-Jun-19	30-Jun-18	Increase
			%

Revenue	£280.1m	£244.3m	15
EBITDA – reported	£54.9m	£41.6m	32
EBITDA – pre IFRS 16	£47.3m	£41.6m	14
Operating profit – reported	£39.0m	£33.5m	16
Operating profit – pre IFRS 16	£38.4m	£33.5m	15
Profit before tax – reported	£37.1m	£32.5m	14
Profit before tax – pre IFRS 16	£37.2m	£32.5m	14

Basic EPS – reported	15.18p	13.24p	15
Basic EPS – pre IFRS 16	15.22p	13.24p	15

Interim dividend	4.70p	4.00p	18

ROCE – reported	19.30%	20.00%	Up 140 basis points
ROCE – pre IFRS 16	21.40%	20.00%

Net debt – reported	£97.7m	£48.9m
Net debt – pre IFRS 16	£55.6m	£48.9m

Notes:

The financial impact of IFRS 16 is summarised below and in Notes 2 and 3.
Alternative performance measures are used consistently throughout this Interim Announcement. These relate to EBITA, EBITDA and ROCE. For further details of their purpose, definition and reconciliation to the equivalent statutory measures, see Note 3.

Highlights:

· Revenue growth of 15% to £280.1 million (2018: £244.3 million)

· Operating margins slightly ahead to 13.9% (2018: 13.7%)

· Edenhall performed well in the period and its integration is on track and well advanced

· The Group’s strong cash generation has continued

· Net debt of £55.6 million (2018: £48.9 million) on a pre IFRS 16 basis

· Reported net debt of £97.7 million, after the inclusion of £42.1 million IFRS 16 lease liabilities

· Payment of £23.8 million final and supplementary dividends on 28 June 2019

· Return on capital employed for the 12 months ended 30 June 2019 of 21.4% (pre IFRS 16 basis)

· Trading since the period end has remained strong

The newly launched 5 Year Strategy to 2023, as outlined at the Group’s Capital Markets Day earlier this year, maintains the objective of delivering sustainable growth. The main elements are:

· Continued focus on organic growth and investment – capital expenditure of £23 million planned for 2019 to drive growth

· Increasing momentum in the delivery of the digital strategy through continued investment and continuous improvement

· Increase in research and development and new product development to drive sales growth

· Renewed focus on increasing the profitability of the Emerging UK Businesses

· Continuing to target selective bolt-on acquisition opportunities in New Build Housing, Water Management and Minerals

· Continued focus on customer service, brand, operational and manufacturing excellence and procurement efficiency

· Maintaining a strong balance sheet, a flexible capital structure and a clear capital allocation policy

· Maintaining a 2 times dividend cover policy, enhanced by supplementary dividends

Commenting on these results, Martyn Coffey, Marshalls plc Chief Executive, said:

“The Group continues to outperform the Construction Products Association’s (“CPA”) growth figures, despite ongoing political and Brexit uncertainty. The CPA’s recent Summer Forecast predicts a decrease in UK market volumes of 0.3 per cent in 2019, followed by an increase of 1.0 per cent in 2020, while the underlying indicators in the New Build Housing, Road, Rail and Water Management markets remain supportive. Post period-end trading has remained strong.
The Board believes that the Group’s new 5 year Business Strategy will continue to deliver sustainable growth, whilst maintaining a strong balance sheet and a flexible capital structure. The strategy is underpinned by strong market positions, focused investment plans and an established brand.
The Board is increasingly confident of at least achieving its expectations for 2019.”

INTERIM MANAGEMENT REPORT

Group results

Marshalls’ revenue for the 6 months ended 30 June 2019 grew by 15 per cent to £280.1 million (2018: £244.3 million). Trading has remained strong in the first half despite the poor weather in June. Key underlying indicators remain positive in Marshalls’ end markets. The Group’s positive cash generation has continued in the period, with operating cash flow being around 90 per cent of EBITDA for the year to 30 June 2019.

Sales to the Public Sector and Commercial end market, which represented approximately 68 per cent of Group sales, increased by 21 per cent compared with the prior year period. Edenhall, which was acquired in December 2018, has continued to trade strongly and its integration is in line with our expectations and is well advanced. Excluding the impact of Edenhall, sales to the Public Sector and Commercial end market increased by 10 per cent compared with the prior year period. The Group continues to target those parts of the market where higher levels of growth are anticipated including New Build Housing, Road, Rail and Water Management.

Sales to the Domestic end market, which represented approximately 27 per cent of Group sales, increased by 3 per cent compared with the prior year period. The survey of domestic installers at the end of June 2019 shows continuing strong order books of 11.5 weeks (June 2018: 11.3 weeks; February 2019: 10.0 weeks).

Sales in the International business increased by 14 per cent in the 6 months ended 30 June 2019 and represented 5 per cent of Group sales. The Group continues to develop its global supply chains and infrastructure to ensure that international operations are sustainable and aligned with market opportunities.

Reported operating profit increased to £39.0 million (2018: £33.5 million). The impact of IFRS 16, which has been applied since 1 January 2019, has been to increase operating profit by £0.6 million. Post IFRS 16 EBITDA for the 6 months ended 30 June 2019 was £54.9 million, following the inclusion of an additional £7.0 million depreciation in relation to right-of-use assets. On a pre IFRS 16 basis, EBITDA improved to £47.3 million (2018: £41.6 million), an increase of 14 per cent.

Group return on capital employed (“ROCE”) remained strong and was 21.4 per cent for the 12 months ended 30 June 2019, on a pre IFRS 16 basis (30 June 2018: 20.0 per cent). On a reported, post IFRS 16, basis ROCE reduced to 19.3 per cent, following the inclusion of £42.1 million of additional debt from lease liabilities. ROCE is defined as EBITA divided by shareholders’ funds plus cash / net debt.

Net financial expenses were £1.9 million (2018: £1.0 million), including £0.7 million of additional IFRS 16 lease interest. On a reported basis interest was covered 20.2 times and, on a pre IFRS 16 basis, interest was covered 31.0 times (2018: 34.0 times). The effective tax rate was 19.0 per cent (2018: 19.5 per cent).

The impact on the Income Statement of transitioning to IFRS 16 has been marginal, with reported profit before tax of £37.1 million being only £0.1 million lower than the pre IFRS 16 figure of £37.2 million. The financial impact of IFRS 16 is summarised in more detail below and in Notes 2 and 3. Basic EPS on a reported basis was 15.18 pence (2018: 13.24 pence) per share, which represented an increase of 15 per cent.

The Board has declared an interim dividend of 4.70 pence (2018: 4.00 pence) per share, an increase of 18 per cent, reflecting the strong cash generation and the Group’s continuing progressive dividend policy. The Board will continue to adhere to the Group’s capital allocation policy and the policy of maintaining a 2 times dividend cover.

The Group continues to deliver strong operational cash flows through the ongoing tight control of inventory and effective management of working capital. As a consequence of the acquisition of Edenhall in December 2018 for £16.4 million, including £4.7 million of Edenhall debt taken on, the Group reported net debt of £97.7 million at 30 June 2019. This net debt figure includes £42.1 million of additional IFRS 16 lease liabilities and is £55.6 million (30 June 2018: net debt of £48.9 million) on a pre IFRS 16 basis. The half year-end net debt is after the payment of the 2018 final and supplementary dividends of £23.8 million made to shareholders on 28 June 2019.

Impact of IFRS 16

In adopting IFRS 16 from 1 January 2019, the Group has applied the modified retrospective transition approach and not restated comparative amounts for the year ended 31 December 2018. Right-of-use assets of £46.7 million and lease liabilities of £48.2 million were recognised as at 1 January 2019.

In terms of the Income Statement, the application of IFRS 16 resulted in a decrease in other operating expenses of £7.6 million and an increase in depreciation of £7.0 million for the 6 months ended 30 June 2019. The interest expense increased by £0.7 million due to additional IFRS 16 lease interest.

Marshalls’ strategy: 5 years to 2023

The Group’s 2020 Strategy, launched 5 years ago, has delivered strong profit growth and has been firmly aligned with the Group’s aims and core values. In launching the new 5 year Business Strategy to 2023, our continuing objective is to deliver sustainable growth. Our strategic goal is to become the UK’s leading manufacturer of products in the Built Environment.

The core theme of our strategy for the next 5 years will be to extend and further develop the Group’s priority of driving growth. First and foremost, there will be a continued focus on organic growth and investment, with capital expenditure of £23 million planned for 2019. Further investment will drive an increasing momentum in the delivery of the Group’s digital strategy and new product development, whilst the new strategy will also see a renewed focus on increasing the profitability of the Emerging UK Businesses. We will also continue to target selective bolt-on acquisition opportunities in New Build Housing, Water Management and Minerals. The Group will continue to focus on service, quality, design, innovation, continuous improvement and sustainability.

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The strategy continues to recognise the importance of a strong balance sheet, a flexible capital structure and a clear capital allocation policy. These objectives seek to drive both long-term growth and shareholder returns. The Group will continue to support a progressive dividend policy, maintaining 2 times dividend cover enhanced, where appropriate, by supplementary dividends.

Operating performance

The reported operating margin was 13.9 per cent (30 June 2018: 13.7 per cent). Pre IFRS 16 operating margins were in line with the prior half year period at 13.7 per cent. Excluding the impact of Edenhall, the operating margin increased to 14.0 per cent. The operating margin at Edenhall has historically been lower than in Marshalls’ core business and this represents an opportunity. Both Edenhall and CPM have continued to deliver strong trading results and the half year performance is in line with expectations.

Revenue increased by £15.2 million and operating profit by £2.7 million in the Landscape Products business, which is a reportable segment serving both the Public Sector and Commercial and Domestic end markets. Operating margins within the Landscape Products business increased, reflecting the continued delivery of sustainable cost reductions and operational efficiency improvements as part of our previous 2020 Strategy programmes.

Revenue increased by £20.6 million and operating profit by £2.2 million in our other businesses, which now includes Edenhall. Increasing profitability in the Emerging UK Businesses remains a key priority and Landscape Protection, Mineral Products and Premier Mortars remain important growth drivers for the Group.

In the Domestic end market, the Group’s strategy continues to be to drive more sales through the Marshalls Register of approved domestic installers. This ensures a consistently high standard of quality, customer service and marketing support. The Marshalls Register is unique and comprises approximately 1,900 installer teams. We remain focused on providing outstanding customer experience by extending digitisation and our commitment to innovation. The aim is to ensure that Marshalls is the supplier of choice.

In the Public Sector and Commercial end market, Marshalls’ strategy is to offer sustainable integrated solutions to customers, architects and contractors, focusing on those market areas where future demand is considered to be greatest, including New Build Housing, Road, Rail and Water Management. Our “Design Space” office in Central London showcases the Group’s brand-leading capabilities and technical and design solutions. We are currently in the process of opening another “Design Space” office in Birmingham to service the growing market demand and the major redevelopment of the City.

The Group continues to focus on innovation and new product development to drive sales growth. Research and development expenditure in the 6 months ended 30 June 2019 was £2.5 million (2018: £2.2 million). This investment includes project engineering to enhance manufacturing capabilities, concrete and other materials technology innovations and extending the new product pipeline. New product ranges incorporating the Group’s new surface performance technology (“SPT”) have seen significant recent growth and new initiatives also include the low maintenance “vitrified paving” range. Technology advances are also building in additional resilience to our Landscape Protection products, such as the Super Shallow 100 Bollard. Revenue from new products in the core Landscape Products business has continued strongly and represented 13 per cent of Group sales in the 6 months ended 30 June 2019.

Continued investment is being directed at enhancing the Group’s digital capability. The aim is to provide a world-class experience throughout the entire customer journey and to ensure that customers receive the right data, at the right time, in the right format. The digital strategy is underpinned by continuous improvement and we are currently integrating artificial intelligence into key business systems. This will create a new artificial intelligence infrastructure upon which other business initiatives will be able to leverage.

Capital investment in property, plant and equipment in the 6 months ended 30 June 2019 totalled £10.0 million (2018: £14.1 million) and this compares with pre IFRS 16 depreciation of £7.7 million (2018: £7.4 million). The Group’s self help investment programme remains an important part of our strategy and total capital expenditure of £23 million is planned in 2019. A number of major manufacturing projects are currently in progress across the network. CPM’s new precast factory at Mells in Somerset was completed in 2018 and has increased the manufacturing capability for bespoke water management solutions. Edenhall has recently commissioned a new £6 million state-of-the-art factory in South Wales. Manufacturing is now well underway and the new facility will drive growth and have the capacity to deliver 100 million brick equivalents per annum.

Balance sheet and cash flow

Net assets at 30 June 2019 were £278.2 million (June 2018: £244.6 million).

Cash generation remains strong, and reported net cash flows from operating activities were £24.3 million in the 6 months ended 30 June 2019. On a pre IFRS 16 basis net cash flows from operating activities were £16.6 million (2018: £14.0 million). The Group continues to focus on robust capital disciplines, with strong cash management continuing to be a high priority area. The Group operates tight control over business, operational and financial procedures, and continues to focus on inventory levels and the close control of credit management procedures. The Group maintains credit insurance which provides excellent intelligence to minimise the number and value of bad debts. The Group does not engage in debt factoring.

The Group’s existing bank facilities provide headroom against available facilities at appropriately conservative levels. In addition to our short-term working capital facilities with RBS, we maintain a policy of having a range of committed facilities in place with a positive spread of medium-term maturities, which now extend to 2024. In August 2019 we also increased our committed facilities by entering into a new revolving credit facility of £35 million with HSBC. This has increased the capacity within our banking facilities to fund organic investment and selective “bolt-on” acquisitions.

The balance sheet value of the Group’s defined benefit pension scheme was a surplus of £20.6 million at 30 June 2019 (December 2018: £13.5 million surplus; June 2018: £11.5 million surplus). The surplus has been determined by the scheme actuary using assumptions that are considered to be prudent and in line with current market levels. During the last 6 months the AA corporate bond rate has fallen from 2.75 per cent to 2.35 per cent and this is in line with market movements. The expected rate of CPI inflation has remained at 2.15 per cent. The balance sheet value continues to benefit from the high proportion of liability-driven investments whose performance matches the liabilities.

Dividend

The Group has a progressive dividend policy with a stated objective of achieving up to 2 times dividend cover over the business cycle. The Board has declared an interim dividend of 4.70 pence (June 2018: 4.00 pence) per share, an increase of 18 per cent, which reflects the Group’s strong cash generation. This dividend will be paid on 4 December 2019 to shareholders on the register at the close of business on 18 October 2019. The ex-dividend date will be 17 October 2019.

Risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group’s performance over the remaining 6 months of the financial year and could cause actual results to differ materially from expected and historical results. The Board does not consider that the principal risks and uncertainties have changed since the publication of the Annual Report for the year ended 31 December 2018. A detailed explanation of the risks, and how the Group seeks to mitigate these risks, can be found on pages 23 to 27 of the 2018 Annual Report, which is available at www.marshalls.co.uk/investor/annual-and-interim-reports.

Going concern

As stated in Note 1 of the 2019 Half Year Report, the Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the Half Year Report.

Outlook

The Group continues to outperform the Construction Products Association’s (“CPA”) growth figures, despite ongoing political and Brexit uncertainty. The CPA’s recent Summer Forecast predicts a decrease in UK market volumes of 0.3 per cent in 2019, followed by an increase of 1.0 per cent in 2020, while the underlying indicators in the New Build Housing, Road, Rail and Water Management markets remain supportive. Post period-end trading has remained strong.

The Board believes that the Group’s new 5 year Business Strategy will continue to deliver sustainable growth, whilst maintaining a strong balance sheet and a flexible capital structure. The strategy is underpinned by strong market positions, focused investment plans and an established brand.

The Board is increasingly confident of at least achieving its expectations for 2019.