Edited Transcript of IBST.L earnings conference call or presentation 10-Mar-21 10:00am GMT

Dee Yonker

Full Year 2020 Ibstock PLC Earnings Call Leicestershire Mar 10, 2021 (Thomson StreetEvents) — Edited Transcript of Ibstock PLC earnings conference call or presentation Wednesday, March 10, 2021 at 10:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christopher Mark McLeish Ibstock plc – CFO & Director * Joseph Hudson Ibstock plc – CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Aynsley Lammin Canaccord Genuity Corp., Research Division – Analyst * Christen David Hjorth Numis Securities Limited, Research Division – Analyst * Clyde Lewis Peel Hunt LLP, Research Division – Deputy Head of Research * George Speak Exane BNP Paribas, Research Division – Research Analyst * Gregor Kuglitsch UBS Investment Bank, Research Division – Executive Director, Head of European Building & Construction Research and Equity Research Analyst * Jonathan Matthew Bell Deutsche Bank AG, Research Division – Research Analyst * Priyal Woolf Jefferies LLC, Research Division – Equity Analyst * Rajesh Patki JPMorgan Chase & Co, Research Division – Analyst ================================================================================ Presentation ——————————————————————————– Operator [1] ——————————————————————————– Good day, and welcome to the Ibstock results webcast and conference call. At this time, I would like to turn the conference over to Joe Hudson, CEO. Please go ahead. ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [2] ——————————————————————————– Thank you, Keith, and good morning, and welcome to the 2020 full year results presentation for Ibstock plc. I’m sorry, we’re having another virtual session today. Hopefully, we’ll be able to return to normality by the next time we present. As usual, Chris will take you through the financials for the year, and I will talk you through some of the operational highlights. I will then provide you with an update on our strategy and set out our vision for how we will invest and grow to capture value in markets, which we expect to play a transformational role in over the coming years. And then we’ll have time at the end for questions, as usual. Turning first to the overview. Against the unprecedented backdrop of COVID-19, I’m delighted to say that, not only have we been able to weather this storm presented by the pandemic, but also we’ve taken the opportunity to make significant strategic progress on a number of fronts. The resourcefulness and resilience of our people has been a source of huge pride for me, and I would like to pay tribute to them for the way they’ve delivered performance and progress through the year. In light of the impacts of the pandemic, we took decisive action to protect and upgrade our business, taking GBP 20 million worth of cost out whilst maintaining flexibility to scale up as demand recovers. Alongside these actions, we’ve seen resilience in our existing markets and an acceleration of many of the key trends that will shape our industry over the coming years including sustainability, off-site construction and digitalization. I’m excited about the opportunities that this presents to grow and diversify our business in the future. We managed cash exceptionally well, deleveraging strongly during the second half of the year. And in light of the strengthened balance sheet and the prospects for the business, we’re recommending a final dividend of 1.6p per share, representing a cover of 2.5x of the adjusted EPS of 4p. The 2021 year has started well, and we look to the future with a sense of confidence. Ibstock is now strongly positioned to play a leading role in our sector, reestablish positive earnings momentum and deliver sustainable, profitable growth over the medium term. And with that, let me hand over to Chris to take us through the financials. ——————————————————————————– Christopher Mark McLeish, Ibstock plc – CFO & Director [3] ——————————————————————————– Thanks, Joe, and good morning. Turning to cover the financial summary. Revenue reduced significantly in the period, falling by 23% versus a year ago. Whilst revenues were lower in both divisions, the reduction was most material in the clay division, down by 29% year-on-year. Adjusted EBITDA reduced by 57% to GBP 52 million, although the year was characterized by a strong recovery during the second half, with EBITDA of GBP 42 million in the second half compared to GBP 10 million in half 1. This sequential improvement reflected both the steady and sustained improvement in markets as well as the cost actions we took in response to the pandemic. We recognized GBP 36 million of exceptional costs, principally related to the impact of the pandemic and the actions we took to restructure our business, and I’ll come back to these in more detail later. Adjusted basic earnings per share reduced from 18.3p to 4.0p, reflecting lower adjusted EBITDA and an interest charge, which was GBP 2 million higher than the comparative period due to higher levels of gross debt during the 2020 year. As Joe mentioned, we delivered an excellent cash performance, with net debt reducing by GBP 16 million over the course of the year. This result was achieved through good cost management and an intense focus on managing fixed and working capital, meaning we finished the year at 1.5x net debt to EBITDA. Moving to revenue. We set out on this slide the progression of group revenue through the year. From late March, as our construction and housebuilding customers closed their operations, sales volumes declined sharply. Volumes in April were heavily impacted with clay and concrete volumes down 90% and 70%, respectively, versus the prior year period. Overall, revenues in Q2 were around 60% below the comparative quarter. From these lows, we have seen sequential improvement in both divisions over the remainder of the year, with volumes recovering steadily. Overall, pricing levels agreed with customers at the start of the 2020 year remained stable throughout the period. Turning now to cover divisional financial performance, starting with clay. Revenues were 29% lower, with lower sales volumes, partly offset by a modest benefit from price. Sales into the RMI channel proved more resilient in the second quarter during the peak impact of the pandemic, with new build housing volumes recovering as we moved through the second half of the year. Revenues have risen back to around 85% of prior year levels by the end of the year. This volume recovery, combined with completion of the restructuring actions during the final quarter of the year, enabled the division to achieve Q4 adjusted EBITDA margins of just over 30%, getting back close to the levels achieved in the prior year periods. Turning to cover concrete. Given the significant exposure to the broader RMI market in this division, activity proved relatively more resilient with revenues for the full year just 5% lower on a reported basis which, in 2020, included a full year of Longley Concrete, which we acquired at the end of July 2019. Again, the second half was characterized by a sustained recovery. First half revenues were 15% down, and revenues in the final quarter were modestly ahead of the prior year period. Adjusted EBITDA margins moved above 16% in half 2, although they were held back by costs associated with reorganizing the manufacturing footprint and some limited impacts of social distancing on productivity at the more labor-intensive parts of the division’s operations. I will now turn to cover the exceptional items reported outside of our adjusted performance. The direct impacts of the pandemic on our business, as well as the actions we took to restructure our business in response, drove exceptional costs totaling GBP 36 million, and I provide a breakdown of these amounts on this slide. Cash costs totaled a net GBP 13 million, of which GBP 10 million was settled in the year. Within this number, the severance cost of GBP 9 million related to the cost of restructuring our operations. This cost was marginally below the GBP 10 million I guided to at the half year. We recognized a GBP 5 million charge related to losses on surplus 2020 energy positions, which we sold back into markets that had fallen sharply because of the pandemic. COVID-19-related costs included one-off costs to make our factories and offices COVID-secure as well as costs to enable homeworking and financing costs related to the covenant amendments negotiated in the summer. And we recognized exceptional income of GBP 3 million from the sale of land completed in the second half of the year. Noncash exceptional costs totaled GBP 23 million. This comprised write-offs of GBP 20 million related to the fixed assets and certain raw materials at the plants we closed as part of the restructuring program during the year, and pension exceptionals related to the buy-in transaction and the recent U.K. guaranteed minimum pension equalization ruling, which together totaled GBP 3 million. Moving now to cover cash flow. The business delivered an excellent cash performance, benefiting from strong focus on both working and fixed capital management. Adjusted operating cash flow totaled GBP 50 million representing 96% cash conversion on EBITDA of GBP 52 million. The most significant driver was lower inventory levels, which reduced by around GBP 20 million in the year as we managed the manufacturing network tightly. Capital expenditure of GBP 24 million included GBP 9 million related to the second year of our capital enhancement projects. The sustaining spend was materially below the recent trend, and I expect this number to be around GBP 20 million to GBP 22 million in the 2021 year, which will include the final elements of our existing capital enhancement projects. As noted earlier, exceptional cash costs paid in the year totaled GBP 10 million. Moving to the balance sheet. This excellent cash performance enabled us to strengthen our financial position and you can see on this slide the extent of our deleveraging through the second half of the year. At year-end, net debt was GBP 69 million, down from GBP 85 million at the start of the year, representing net debt-to-EBITDA of 1.5x. The closing position represents a reduction of GBP 34 million in the second half of the year. During the final quarter of the year, we agreed an extension to our GBP 215 million revolving credit facility, taking maturity out to March 2023 at rates modestly above the previous agreement. This represents liquidity headroom of over GBP 145 million. By way of reminder, under our capital allocation framework, which remains unchanged, we look to maintain leverage of between 0.5x and 1.5x net debt-to-EBITDA through the cycle. Before I hand back to Joe, I would like to briefly cover the moving parts of our guidance for the 2021 year. Our base case planning assumptions for divisional sales volumes are that clay volumes will be back to 85% of 2019 levels, in line with the CPA main scenario for private housing starts and consistent with the 2021 volume expectations of our larger housebuilding customers over the last few weeks. Within concrete, we anticipate like-for-like volumes to be modestly below 2019 levels. And on cash, in addition to the capital expenditure guidance I covered previously, I anticipate a modest increase in working capital, primarily through building back some of the inventory destocking we saw in 2020, and we will repay and recognize within adjusted earnings around GBP 2 million of the furlough cash we received in 2020. In terms of our EBITDA expectations for the year, while the demand backdrop and recent government policy announcements are encouraging, we remain mindful of the uncertainties associated with COVID-19, and as a result, the Board is comfortable with current market consensus expectations for adjusted EBITDA for the 2021 year. With that, let me hand back to Joe. ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [4] ——————————————————————————– Thanks, Chris. So let me turn firstly to how we responded to the pandemic. As we navigated through the year, the health and safety of everyone on our sites has remained our highest priority. When the initial impact of the pandemic became apparent, we completed an orderly shutdown of all of our production facilities in early April to support the national effort against COVID-19 and used the following weeks to develop new working practices and protocols that would allow us to open safely. I’m pleased that the steps we’ve taken continue to receive very positive feedback for our employees and have been effective in ensuring the safe and reliable functioning of our operations over the last 9 months. Although the pandemic has represented a considerable challenge, it has also acted as a catalyst for change with new ways of working, enhancing pace, agility and improved levels of collaboration across the organization. It’s through the unswerving dedication of our people that we’ve been able to keep operating safely and delivering improved performance, while ensuring we have always served our customers throughout the period. Let me move now to cover the progress we’ve made on our strategy in the year. Many of you will be familiar with the 3 pillars of our strategy, which we refer to as sustain, innovate and grow. These pillars define how we operate consistently over time, and the pandemic has confirmed that our strategy continues to be the right one. We’ve made strong progress this year in each of these areas, and we have a clear view of the priorities ahead. This slide sets out just some of the achievements through the year. Within the sustain area, the work we’ve done to mobilize people around health and safety supported the rollout of a COVID-secure practices very, very fast across the company. We sharpened operational execution with upgrades to maintenance and capital management and the way we suspended and then restarted production at over 40 factories, bears testimony to this. And in the area of sustainability, we delivered another year of strong progress towards our 2025 sustainability targets, including a further material reduction in carbon emissions, and despite the impact of shutdowns and startups, we continue to track towards our 2025 carbon reduction target. In the area of ESG, I believe we can be a reference business for our industry, and I’m delighted that our progress, in this regard, was recognized by us being awarded with a AA rating from MSCI in the year. I’ll return to sustainability later in the presentation. I also see the area of innovation as a critical priority for us as a business, keeping at the forefront of our industry. We have continued to invest to enhance our offer with the Nexus XI facade system, a great example. Digitally launching in the final quarter of 2020, this product has received a strong initial response for the market and has strengthened our offering with a lightweight fireproof brick support system. We’ve also taken a number of important steps to enhance our customers’ experience, accelerating digital processes for inventory management and outbound logistics, which will be rolled out across the whole network in 2021. Much of this work done to improve supply chain processes has helped us to service customers with lower stock levels and improve cash management. At the same time, 2 of our major clay enhancement projects were completed. And these projects will enable us to bring more efficient and reliable capacity to serve the market over the coming year. And we’ve made great strides integrating the Longley business, which we acquired in 2019, combining it with our existing assets to create a single leading national flooring business. More on that later. Let me just make some remarks now on the market dynamics. I’d like to cover some perspectives on our markets, the industry and the drivers, which we expect to see playing out over the medium-term in these slides. Starting with new build housing. The first half of 2020 saw a sharp contraction in both housing starts and completions, with starts in H1 down by almost 40%. However, it is clear that end customer demand remained firm during the second half of the year, underpinned by help to buy and the stamp duty holiday. As you can see from the slide, our housebuilder customers were focused on completions in H2, which were covered to within 6% of prior year levels. The 2021 year appears to have started well for new build housing with strong forward order books and sales prices. This is likely to be sustained by the support announced by the Chancellor in last week’s budget. We anticipate strong recovery in 2021, with the CPA projecting a 26% increase in starts versus 2020. It is important to note that this still represents a 15% reduction to 2019 levels, with starts expected to be back in line with pre-COVID levels by 2022. But it is clear the momentum and the medium-term fundamentals for new build housing remain strongly positive. Turning now to industry inventory and production levels. On this chart, you can see monthly ONS stats for domestic brick production as a percentage of prior year. Total production of 1.4 billion bricks was around 10% below domestic dispatches as output was managed carefully against recovering customer demand. As a result, industry inventories reduced by over 25% over the course of 2020. Overall, we believe industry demand and supply remains well balanced. Turning now to focus on our own manufacturing base. As the economic impact of the epidemic became clear, we took decisive action to create a leaner and more flexible footprint and manage the supply and demand dynamics. In doing so, we scaled our cost base to the near-term demand view, whilst critically, in combination with the capital enhancement projects coming onstream this year, we retained the ability to reinstate output back to levels achieved in 2019 as demand recovers fully. Our inventory levels continue to provide an effective buffer to manage lead times associated with reinstating this capacity. As I will set out later in the presentation, we have further optionality to redevelop our asset base and bring capacity to the market in response to the anticipated growth we see over time. If I look at the midterm market drivers, we see a number of really positive demand drivers, which provide the basis for strong growth over the medium term, and the key ones are addressed on this slide. The structural undersupply of new housing, combined with low interest rates, continue to create a strong demand trend. The Chancellor’s announcement last week of new mortgage guarantee scheme is a recent example of the government’s intention to support broader access to homeownership. COVID-19 has caused people to prioritize the importance of home life and the work-from-home proposition is changing attitudes to the need for more space. We think this will continue to positively impact housing transactions and RMI, which benefits both our clay, brick and concrete products businesses. We believe build-to-rent will be an increasingly important area of new build residential growth over the next few years as will reclading activities. In both of these areas, our MechSlip, Nexus XI products provide excellent solutions. And finally, infrastructure spending will be a key element of public investment over the medium term. And our infrastructure business operates in a small number of niche product areas, which provides strong margins and attractive returns. Our proposition is well placed to meet these key construction trends. Moving now just to cover in a bit more depth strategy and growth. I want to share with you now how we see our future growth in development, and this slide will continue to summarize our long-term vision. We have a strong advantaged core business today across both our clay and concrete modular divisions. Our business delivers structurally high margins and generates strong free cash flow. As I outlined earlier, we have an operational strategy in 3 pillars that continues to work well, and I’ve mentioned some of the achievements in the current year. As we look forward with our priorities clearly spelled out, this will provide the framework for how we’ll execute over the coming years. And as we think about growth opportunities in front of us, we’ll deploy capital in a disciplined way in 2 distinct tracks. Firstly, in capacity, efficiency and sustainability enhancements to optimize the performance of our existing business; and secondly, on innovation and extension into new markets to diversify our revenue base within the U.K. construction market. Over the long term, we also see 2 strong forces of change that will transform the markets we operate in and intensifying focus on sustainability, and a new wave of industrialization of construction. I’ll say more about this shortly, but let me start by reminding you of our existing business today. We have a highly profitable base business, which gives us a strong platform in which to grow. This business holds leadership positions in growth markets across both divisions. We have a significant diversified asset base with unrivaled clay reserves and a unique geographically diversified network of production assets. And we deliver strong performance. In fact, over the last 4 years to 2019, our EBITDA margins averaged over 29% and our average return on capital over the same period was 20%. Over the last 5 years, we’ve generated over GBP 200 million worth of free cash flow, and this provides a superb platform from which to invest to drive sustainable profitable growth. We have a range of attractive organic investment options to optimize the existing business. By the nature, these options are typically low risk based on existing technologies and capabilities and provide predictable payback and can be implemented quickly. Consolidating older capacity and redeveloping existing sites with more efficient state-of-the-art technology provides significant cost and sustainability gains. The mothballed Atlas factory is an example of such a project, which could be delivered quickly. The project to deliver this — to redevelop Atlas, which is an existing wire factory in the West Midlands, adjacent to significant clay reserves, was paused in the first half of 2020 due to the uncertainty created by COVID. It will be relatively quick to commission around 2 years from a restart as attractive financial returns and will provide an industry-leading cost and sustainability profile. There’s also the advantage of recycling capital from older sites and surplus land bank to help fund this investment capital. As well as investing in our existing clay business, we will deploy capital to diversify our revenue base, and the concrete and modular businesses provide a good platform here. This could be through investment in adjacent product categories where we see clear synergies or in technology to leverage possibilities in the increasingly digitally integrated supply chain. Longley is a good example of how we accelerated our strategic progress through acquisition, integrating the business with our existing footprint and, in doing so, creating a leading national flooring business with a strong presence in all end market segments. Let me just move now to future trends. Going forward, we see 2 megatrends which will increasingly influence change in parts of the construction sector. We believe these trends provide opportunities for new sources of value creation for Ibstock. Firstly, sustainability. We recognize that the construction industry has a significant environmental footprint, and it will require strong leadership and radical action to deliver the step change we need. Alongside this, our industry will be judged by its ability to deliver positive social impact in the communities in which we operate. As I’ve said, Ibstock can be a reference business for our sector, ensuring we’re making investment and operating decisions in the service of this goal, and we’re already making great progress. In the area of plastic production, for example, we’ve reduced per ton plastic in 2020 by over 15% compared to the prior year. The solar park at our central site in Leicestershire is now operational and delivers over 25% of the power for one of our largest manufacturing sites. We continue to increase the proportion of revenues from sustainable new products, which increased to over 10% of our group revenues in 2020. And our investment in place-making and social partnerships, like the work we’re doing with Well North Enterprises and some of our key customers will ensure we’re at the heart of design conversations to build holistically. The second trend we see is around a new wave of industrialization in construction. Historically, productivity has been held back by skill shortages and other constraints on the way the construction sector works. We realize the importance of traditional construction methods in U.K. housebuilding, which will continue to be a mainstay of our business. But we also see incremental revenue streams in certain segments with the move towards modern methods of construction and are already exploring different forms of partnership across the value chain to develop more solutions here. We’ll come back to you and talk more about this — these critical themes again in the coming year. Overall, we see significant upside value to be captured in this transformed marketplace over time, and I’m very excited about what the future will hold for Ibstock. So just moving to the summary. The group delivered a resilient operational performance against an unprecedented backdrop of COVID-19. With another strong year of strategic progress under our belt, we’re clear on the priorities ahead. The new year started well with trading in the initial period of 2021, slightly ahead of run rate achieved in Q4. Looking ahead, market fundamentals remain supportive. And with a strong management team, clarity on our strategic drivers, continued recovery in our core markets, Ibstock is well placed to make a positive impact on our sector and to reestablish earnings momentum and deliver sustainable profitable growth over the medium term. And with that, Chris and I are going to be happy to take your questions. And we’ll hand back to Keith to organize that. ================================================================================ Questions and Answers ——————————————————————————– Operator [1] ——————————————————————————– (Operator Instructions) And we’ll now take our first question. It comes from Clyde Lewis of Peel Hunt. ——————————————————————————– Clyde Lewis, Peel Hunt LLP, Research Division – Deputy Head of Research [2] ——————————————————————————– A couple, if I may. One, I suppose, on your comments around sort of investment, both in existing kit and I suppose, in possible new plants as well. And I’m thinking partly at Atlas, but partly other opportunities on clay. How have, I suppose, sort of designs and changes and expectations in terms of sort of the cost of new equipment evolved through COVID? I mean have there been any changes that would materially impacted the capital cost that you would need to sort of add extra capacity? The other one I had was on surplus land. I think, Joe, you mentioned sort of partly being able to fund some of this investment through surplus land and you know dangled that little carrot out there. I’m just wondering whether you can give us an idea as to how much surplus land you think you might have in the group? And the third one was on pricing. Again, obviously, this time of the year, you have a lot of discussions with the housebuilders and the merchants. And I’m just wondering how those conversations have gone? ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [3] ——————————————————————————– Great, Clyde. So I’ll answer the first and the last one. We’ll give Chris the surplus land one. Yes, I mean, obviously, this period of pause that we’ve had when we suspended the Atlas project has given us some time to think. I wouldn’t say that there’s any major changes to any capital costs that we didn’t anticipate before the pandemic, but we have been able to look at various projects differently to probably get down, even further down the sustainability curve to reduce further the environmental footprint, specifically around carbon emissions. So we’re quite excited about that. As you know, Ibstock has got quite a wide fleet. So we’ve already done enhancement projects but we’ve got further opportunities to continue to invest in existing sites because of our clay reserves. In terms of pricing, yes, pricing is, I’d say, is being concluded. We typically have lots of conversations with our customers towards the end of the year, and we’ve concluded pricing and that’s gone well. That’s already landed. And I’d say, we’ve covered our inflationary costs with low mid-single digits price increase. ——————————————————————————– Christopher Mark McLeish, Ibstock plc – CFO & Director [4] ——————————————————————————– And Clyde, the question around land. I mean we’ve said that we expect to get GBP 10 million to GBP 20 million over the medium term. It’s worth noting that in 2020, we actually had cash proceeds from land disposals of around GBP 4 million. So that was a pretty typical year in terms of that run rate. But we expect to cycle cash back from the land bank over time. And it’s a really helpful contribution to the investment capital that we’re able to put into the business. So that’s the way to think about that. ——————————————————————————– Operator [5] ——————————————————————————– And we’ll now take our next question. It comes from Rajesh Patki of JPMorgan. ——————————————————————————– Rajesh Patki, JPMorgan Chase & Co, Research Division – Analyst [6] ——————————————————————————– I’ve got 3 questions, if I can. I think you mentioned about covering inflation with low single-digit pricing. If you can give us some color on the energy inflation through the second half of last year and how that impacts your energy bill this year? And within that, also, if you could remind if there is any impact from the exceptional charges that you had taken for last year? The second question is, again, coming back to pricing. If you can provide some color on — if you’re seeing any competitive pressures on the clay or the concrete products? And lastly, if you can provide color on how the import dynamics in the industry has changed during last year, and if you’re seeing any pattern shifts due to Brexit-related friction so far this year? ——————————————————————————– Christopher Mark McLeish, Ibstock plc – CFO & Director [7] ——————————————————————————– Yes. So Rajesh, I’ll kick off with the energy question and then pass the second and third on to Joe. In terms of energy costs view into ’21, we layer in cover on both gas and power over a sort of 18- to 24-month period. And so actually, the sort of cost experience has been broadly flat to 2020. So there isn’t a huge amount of cost inflation that will come through. Now we’ve covered between 75% and 80% of need, both on gas and power. So we’ve got decent levels of coverage, and that’s what underpins that confidence around our ability to cover that cost inflation. In terms of the question on exceptionals, we recognized in 2020 a charge of around GBP 5 million. And as we talked about at the half year, that was a function of having decent levels of cover coming into 2020 and then taking the network down through the second quarter and leaving us with significant long energy positions in a market that had fallen very, very significantly. So the GBP 5 million exceptional deals with that. We are now in an environment where we have cover that we will use as we run the factories and so there will be no recurrence of that. That was a function of the very sharp dislocation in production activity through that second quarter. ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [8] ——————————————————————————– Rajesh, on pricing and competitive pressures, I mean, I think we’ve seen this is a function of supply and demand. We’ve got quite a balanced position at this stage. So we’re not seeing any major competitive pressures around volumes. The market has got quite healthy lead times at the moment on both businesses. In some products, quite long lead times. So we need to make sure we’re servicing the customers, but pricing has been favorable at this stage. In relation to imports, I mean, as you saw, imports proportionately reduced last year and their market share reduced slightly. There’s probably a little bit of stocking up towards the end of the year prior to Brexit because there was a lot of uncertainty around what would happen. So we probably see January, February numbers being a bit lower. But imports — there’s a cost element to them as well in terms of the length and the distance they travel as well as the sustainability footprint. They’ll always be around — they provide a buffer, and we see them being proportionately sort of reduced this year. But let’s see — let’s wait and see how the trend continues. ——————————————————————————– Operator [9] ——————————————————————————– And we’ll now take our next question. It comes from Aynsley Lammin of Canaccord. ——————————————————————————– Aynsley Lammin, Canaccord Genuity Corp., Research Division – Analyst [10] ——————————————————————————– Just 2 for me. Wondered if you could give just a bit more color on the trading you’ve seen year-to-date. So whether you can give kind of like-for-like versus either this time last year or 2019, what you’re seeing on the RMI side? Is there kind of merchant stocking up in the new housing side? So just a bit more color will be useful. And then secondly, obviously, you took the cost out last year and the restructuring. And on your kind of base case, you’ve taken, I think, 85% of revenue for ’19 for the clay business and like-for-like is low in concrete. Would you have to scale up or put any more cost in to support that level of volume, is that what actually happens this year? Or do you just see all that drop-through to the bottom line incrementally? ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [11] ——————————————————————————– So yes, trading is positive. As we said in the RNS, we’ve moved forward from Q4 levels where we’re at about 85%, and we’ve moved forward slightly there sort of in between 85% and 90% levels on the clay side. On the concrete side, it’s a bit more higher up, close towards 100%, where we’ve got a fairly active parts of the RMI. We’re not seeing any major sort of stocking up or anything. I think there’s a healthy flow of inventories through the merchants at this stage. They’re selling out well. We’re not seeing lots of stocking up. I think they’re trying to keep pace with their markets. So at this stage, it’s positive. But obviously, there was a bit of uncertainty to see how COVID-related factors play out throughout the year. But at this stage, we’re fairly optimistic. ——————————————————————————– Christopher Mark McLeish, Ibstock plc – CFO & Director [12] ——————————————————————————– And Aynsley, in terms of the question about cost and capacity. If you think about the pathway to get that GBP 20 million of cost out, essentially, it comes out in 3 blocks. So in the clay business, we permanently closed some sites, we’ve mothballed one site and then we’ve idled certain other factories. And broadly, they give you a reduction in fixed cost of broadly similar magnitude. Our base case, as we come into ’21, as we’ve said, is predicated on 85% run rates in clay. And therefore, we feel that the capacity that we’ve got active and operating is balanced pretty well to that demand view. Now as we come back up, we’ve got both the mothballed and the idled capacity to come back into the network. And we’ve also got, as Joe alluded to, certain capital enhancements that once they come on and stream into the network through ’21, give us some further capacity. And that’s what, in aggregate, keeps us whole relative to the position that we were in prior to the actions that we took. So the mothballed and idled capacity will bring back some level of fixed cost and will be run in a configuration broadly similar to the way that they were before we went down. The capital enhancement, because that’s all predicated on reliability and performance, essentially brings no further fixed cost with it. And so that’s essentially the element that over the medium-term as we go all the way back up to 100%, gives us the prospect of some margin accretion. So that’s really the way to think about how we get back there and the costs associated with it. ——————————————————————————– Aynsley Lammin, Canaccord Genuity Corp., Research Division – Analyst [13] ——————————————————————————– Great. And just one extra one actually, Chris, if you don’t mind. Just on the corporation tax for ’23, will it be correct just to put 25% in, there’s nothing funny in there should we be thinking about? ——————————————————————————– Christopher Mark McLeish, Ibstock plc – CFO & Director [14] ——————————————————————————– No. That’s right. I mean the sort of statutory tax rate in ’21 is actually going to be a very high rate because what you’re going to need to do is essentially revalue a significant deferred tax liability up to the 25% rate. But in an underlying sense, we’d certainly expect this year to be at a sensible kind of a number, a matter of basis points above the statutory rate. As we get to ’23, as you rightly say, we’ll essentially adopt that corporation tax rate of 25%. So there will be a statutory impact on the way there in ’21, but it won’t affect cash tax to be clear. ——————————————————————————– Operator [15] ——————————————————————————– And we’ll now take our next question. It comes from Gregor Kuglitsch of UBS. ——————————————————————————– Gregor Kuglitsch, UBS Investment Bank, Research Division – Executive Director, Head of European Building & Construction Research and Equity Research Analyst [16] ——————————————————————————– Sort of touching on that question on capacity, and maybe I want to tie it into earnings power. So if I look at your EBITDA, sort of, if you want to call it the peak in 2019, it was, give or take, GBP 120 million. You’re saying that perhaps 1/3 of the GBP 20 million is permanent. In other words, when volumes come back, you can — you should be GBP 6 million, GBP 7 million higher, I guess, if I understood correctly. So that gets us maybe, I don’t know, GBP 125 million, GBP 130 million. And then, I think in the past, you’ve talked about Atlas, if you do decide to proceed, and I appreciate you haven’t announced that today, but if you do decide to proceed from memory, and maybe this number is wrong, with an incremental GBP 7 million. I just want to understand if those moving parts are right? Or is there anything we need to think about? I mean I appreciate that’s assuming volumes potentially go back to ’19, which may or may not happen. But with that assumption, is that the right way to think about the earnings power? ——————————————————————————– Christopher Mark McLeish, Ibstock plc – CFO & Director [17] ——————————————————————————– Yes. So I’ll deal with the best part, Gregor, and Joe will pick up on your question around Atlas. Yes, I mean, your modeling of that is the right way to think about it. If you look at where the clay business is, we delivered about 21% EBITDA margin in 2020. But actually as we move through the year, that EBITDA margin improved strongly. And we merged at the end of the year with an exit EBITDA margin of sort of 30%, 31%, something of that order of magnitude. Now the path from that to get back to the levels of EBITDA margin that we had prior to COVID, as you say, the function of a couple of things. Firstly, it’s the operational leverage that comes from moving the network all the way back up to where it was. And secondly, although the impact is more significant in concrete, there are still some minor productivity impacts in the network as a result of COVID. So as we move through that, and as the network moves all the way back up, you’re right. Our belief is that the margin structure of that business is absolutely as it was prior to COVID. And our challenge, as you rightly say, will be to hold on to some of that fixed cost saving as we move back through there as well. But you’re thinking about things the right way. ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [18] ——————————————————————————– And Gregor, I think we’ve obviously had some time to reevaluate the Atlas project. We haven’t announced anything today. And we still got some discussions with the Board around that. So it will be far too early to put anything in any models or it’d just be too early to comment on that. But we’ll certainly be coming back to you on it before long. ——————————————————————————– Gregor Kuglitsch, UBS Investment Bank, Research Division – Executive Director, Head of European Building & Construction Research and Equity Research Analyst [19] ——————————————————————————– Okay. And then maybe a final question on CapEx. So this year, you’re saying 21 — I think, GBP 20 million to GBP 22 million, including some enhancement projects suggest that your underlying maintenance is sub GBP 20 million. Is that sustainable? Or do you think obviously, it’s been the running a bit higher than that for the last few years? So I guess, I’m interested in the underlying kind of sustainable maintenance CapEx. And obviously, if Atlas comes or not, we can obviously add it on top in due course. ——————————————————————————– Christopher Mark McLeish, Ibstock plc – CFO & Director [20] ——————————————————————————– Yes. So you’re right. GBP 20 million to GBP 22 million is the sustaining load. It’s got about — think of it as about GBP 4-or-so million of spend to complete the final capital enhancement. So yes, I mean, in underlying terms, we’re a little bit less than GBP 20 million. I mean, I think I’d make a couple of points. Clearly, we’ve taken action on a couple of factories, which reduces the maintenance CapEx burden. But I think equally, we’ve talked about somewhere in the region of GBP 20 million to GBP 25 million is a sensible sustaining load going forward that allows us to continue to maintain and move forward the green credentials of the factories as we go forward. So I think you’re in that sort of ballpark. It’s perhaps to the lower end of GBP 20 million to GBP 25 million as we think about going forward. ——————————————————————————– Gregor Kuglitsch, UBS Investment Bank, Research Division – Executive Director, Head of European Building & Construction Research and Equity Research Analyst [21] ——————————————————————————– Okay. And then maybe finally, if you care to comment any — if there’s anything you’re seeing on sort of the M&A pipeline. Is there anything — and I appreciate you haven’t announced anything, but in terms of stuff coming forward, obviously, last year was think decrease in M&A land. Is there more things that could happen? ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [22] ——————————————————————————– I mean there are more things that could happen, Gregor. We always are evaluating different options, but it depends on valuations. It depends on the strategic fit with the business. But yes, we’ve got a strong cash platform to grow from. So we always keep our eye open for that. But we’re not going to do anything that would — we want to do things that are accretive to our business. We’ve got a very, very valuable business, and we wouldn’t want to do anything that would take away from that. ——————————————————————————– Operator [23] ——————————————————————————– Our next question comes from George Speak of Exane BNP Paribas. ——————————————————————————– George Speak, Exane BNP Paribas, Research Division – Research Analyst [24] ——————————————————————————– So just circling back to pricing. Clearly, we’re talking about these capacity reductions and you also spoke about the reduction in inventories in the year. So I was just wondering if there’s a scenario in which pricing surprises positively, particularly if demand normalizes faster than we’re anticipating? ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [25] ——————————————————————————– Yes. I mean we always try to look at making sure that we cover our costs to maintain our margins, George. We also have to balance — we’ve got decent margins. We have to balance our customers as well, their costs and look at long-term relationships. So we’re not going to do something that would jeopardize the long-term sustainability of this business. We want to keep making sure we maintain our margins. It’s a favorable pricing environment, but we don’t want to kill the golden goose. So we try to maintain that going forward. ——————————————————————————– Operator [26] ——————————————————————————– Our next question comes from Christen Hjorth of Numis. ——————————————————————————– Christen David Hjorth, Numis Securities Limited, Research Division – Analyst [27] ——————————————————————————– Three questions for me, please. First of all, on your sort of organic investment side, I just wonder how much the super deduction in terms of tax allowance, et cetera, is on the mind and potentially whether we could see acceleration of organic investment in that scenario? The second one, you have pointed to industry inventory levels being very low. Just wondering if that’s sort of have any impact on customer service or maybe related to some action there? So just any comments on that. And then just finally, related to sustainability. I know there’s a bit of a debate out. You gave us concrete, brick sustainability comparisons. Just your sort of taken any views on that would be greatly appreciated? ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [28] ——————————————————————————– Okay. So I’ll let Chris take the news of the government’s incentives, and I’ll take the second 2. ——————————————————————————– Christopher Mark McLeish, Ibstock plc – CFO & Director [29] ——————————————————————————– Yes. So Christen, just in terms of the super deduction and the impact on cash tax, I mean that’s — it’s certainly a helpful development. It accelerates the — our enablement to claim capital allowances and therefore, brings forward some of the cash that we would otherwise claim through capital allowances over time in the structure that previously existed. So if you look at it on a CapEx load of, say, GBP 20 million, which is the number that we’ve talked about, not all of that would qualify. And so therefore, you’re looking at the portion that would qualify for that super deduction being a portion of that. But clearly getting a full deduction on that in the year would give you sort of GBP 2 million to GBP 3 million of favorable cash tax. Extrapolate that onto a larger project and the same thing applies. So it does benefit the economics by giving you access to cash tax allowances earlier than you otherwise would do. But ultimately, the project has got to justify itself on the sort of pretax economic credentials as well. So that’s the basis of probably we’re looking at it, but it’s not unhelpful. ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [30] ——————————————————————————– Christen, I think in terms of inventory, yes, inventory levels are quite low at the moment. We’ve been focused in our own company of working very closely with customers and improving our supply chain sort of methodologies. The brick industry traditionally was quite poor at this with lots of cancellations and over ordering, and we’ve been getting much more accurate schedules working proactively with our customers. And so we’ve been able to cope quite well with reduced operating working capital and stock. Obviously, there will be at certain factories, certain products when you’ve got about 400 SKUs, you’re always going to have a few issues. But by and large, we feel we’re doing quite well. But yes, the inventory levels could be a bit higher across the whole industry. In terms of sustainability, we’ve got a concrete business. So I’m not going to sort of downplay concrete. It’s a really important part of the construction ecosystem. I think when you look at the sustainability credentials within clay, firstly, we probably lead the industry in terms of our carbon footprint for our brick. But you have to look at this more over the life cycle. So a brick typically will last over 150 years. And if you look at the embodied carbon over that whole 150 years, it’s actually very, very competitive compared to concrete. But we also have a concrete business. So we’re not — we don’t want to have a — the whole industry, bottom line, needs to move forward with reducing carbon and to impact climate change. And we’ve got a — we’re all trying to make efforts to do that. And I think we want to lead the way. So we’ve got a lot of good ideas there. ——————————————————————————– Operator [31] ——————————————————————————– Our next question comes from Jon Bell of Deutsche Bank. ——————————————————————————– Jonathan Matthew Bell, Deutsche Bank AG, Research Division – Research Analyst [32] ——————————————————————————– I think I’ve got 2, if I may. Now the first one is, I wonder whether you’re seeing any trends that point towards a soft mud brick or a wire cut brick, the market trends and the extent to which this might impact your future expansion plans? And the second one really is around the future home standard, how you feel it might impact your business in the medium term? ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [33] ——————————————————————————– Yes. Jon, so I think in terms of soft mud, wire cut, I think with the increase in house building, housebuilders tend to want to have more wire cut bricks. So we see that as a positive trend. But we also see that RMI and facades, cladding, the more specified sort of architectural-led applications, which is a growing market, they want soft mud. So we still see a growth in both areas, and we think we’ve got a healthy balance in Ibstock with our capacity. We’ve got a broad footprint, probably the broadest in the market. So we feel okay about both trends. And we think both will have to grow. Future home standard, I think, really, that’s around a lot of things around the environment, around quality for customers, around placemaking. So this is really aligned with our business. It’s part of the reason why we believe — sustainability is not just about purely environmental issues. It’s about holistically doing things better, which is quality, place-making as well as sustainability. So we think it’s very aligned. And you’ve seen perhaps some other people as well, other competitors, people are really focused on this topic now, and the industry is moving in a positive direction. So I think it’s good for everyone. ——————————————————————————– Operator [34] ——————————————————————————– Our next question comes from Priyal Woolf of Jefferies. ——————————————————————————– Priyal Woolf, Jefferies LLC, Research Division – Equity Analyst [35] ——————————————————————————– I think I’ve just got 3. So the first one is on balance sheet. I think you previously said 0.5 to 1.5x net debt-to-EBITDA is the reasonable sort of leverage range for this business. Is this something that you’ll reassess post pandemic? Or is it still the correct sort of capital structure going forward? The next question, sort of linked to that. Obviously, Ibstock has previously had a history of paying supplementary dividends, albeit it seems to have been downplayed a little bit more recently. Is it something you’d aspire to move back towards going forward? Or are we sort of starting from a clean slate? You’ve obviously talked about CapEx projects for growth and diversification. So is that more just TBC as we go forward? And then the last question is just in terms of trading, we’ve obviously got a good sense of what the listed housebuilders are up to. Is that reflected in what you’re seeing from some of the smaller builders as well? ——————————————————————————– Christopher Mark McLeish, Ibstock plc – CFO & Director [36] ——————————————————————————– Thanks, Priyal. Chris here. I’ll start and give Joe, the third one. So yes, I mean, the balance sheet leverage range of 0.5 to 1.5x was in place prior to COVID. So really, the framework and the ambition around balance sheet strength remains unchanged. We think that’s the right place to be. We have as a Board and as a company, a belief in a strong balance sheet to underpin the business, and I think that will remain. So it remains in place. Of course, we come back to that and continue to debate and challenge that over time, but I would expect that to remain a basis for guidance around balance sheet strength going forward. In terms of the question on supplementaries, again, in the statement that you’ll have seen this morning, we set out the capital allocation framework, which again hasn’t changed. We talk about investing to sustain and maintain assets, we talk about the payment of an ordinary dividend, we talk about investment for growth, and then we talk about returns of surplus capital to shareholders. And that’s very much the way we continue to think about it. We’ve got clear and exacting criteria, both strategically and financially to screen investments, and we’ll continue to do that in a disciplined way. And where we don’t think that we have good uses for that capital, we will return it to shareholders. So it isn’t a change in policy, it isn’t a change of posture towards that policy. It remains as is. And we do have, as Joe’s alluded to, a series of what we think are attractive options that we’re currently appraising. So more to come on that, but that’s really the way we think about the capital allocation framework. ——————————————————————————– Joseph Hudson, Ibstock plc – CEO & Director [37] ——————————————————————————– Yes. Priyal, and I guess, to your last question around smaller builders, certainly, last year, as things ramped up, you saw smaller builders moving a bit faster. Obviously, larger companies have got to organize their policies and their COVID-secure systems, and we saw the smaller builders go faster. And that — they typically are supplied through the merchants and so the merchants were more active. At this stage, I would say the trends sort of equal, but it’s early because we haven’t seen a lot of the housing data coming out from some of the core data, which is about a quarter behind. So we’ll have to wait and see. But I would expect the trends to be kind of equal, everyone’s moving back up now and I wouldn’t say there’s any big differences between smaller and larger ones now. Great. Well, I think that’s it, everyone. Thank you very much for your participation today and all of your questions. As I said, we’ve come through a really tumultuous year really well, and we’ve shown the strength of Ibstock to weather that storm. We’re very encouraged by the resilience of the markets we’re seeing at the moment. And we look forward to talking to you again, hopefully, face-to-face next time in the months to come. Thank you very much. ——————————————————————————– Operator [38] ——————————————————————————– This concludes today’s conference. Thank you for your participation. You may now disconnect.

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