Good morning , and thank you for joining us. Welcome to Forterra's 2025 half-year results. My name is Neil Ash, and I'm the CEO of Forterra. I’m joined today by Ben Guyatt, our CFO. 2025 has started well, and I’m pleased to announce a strong set of H1 results that give us the confidence to raise our full-year expectations. I’d like to take a moment to thank our employees, whose hard work underpins these strong results. Our revenue increased by just over 20%, driven by volume growth and modest selling price progression. The UK brick market grew by 14% year to date through the end of May, with recovery in demand primarily from housebuilding, while RMI activity remained subdued. Our exposure to volume housebuilders has led to market share recovery, though our share remains below 2022 levels.
Profitability was strong with EBITDA growth outpacing revenue and reaching just under £30 million. Operating cash flow exceeded expectations, supporting better than expected debt reduction. Net debt before leases reduced to £69.4 million, equivalent to 1.4 times adjusted EBITDA. Our interim dividend will increase to £0.019 per share, reflecting both improved trading and the strong reduction in debt. I will now hand over to Ben who will present the financial review.
Thanks, Neil. Morning, everyone. It's good to see you all here again. Delighted to be here for our first time actually at Investec, delivering a strong set of H1 results that reflect the benefit of improved demand for our products, particularly from the house building sector. Firstly, as always, just to clarify that, unless otherwise stated, I'm talking about adjusted financials. These adjustments are made to give the fairest and most comparable assessment of our underlying trading performance. There's a slide in the deck where I explain the adjustments to the statutory numbers. Turning on to the performance, we are seeing improved demand across our product range and are reporting a 20% increase in revenue in the period. We're reporting a 23% increase in H1 adjusted EBITDA at £29.9 million with a 30 bps improvement in our EBITDA margin.
With a broadly fixed depreciation charge and falling borrowing costs, this drops through to an adjusted profit before tax of £16.6 million, a healthy 82% increase on the prior period, with our EPS also showing a similar level of increase. We've delivered a strong adjusted operating cash flow of £30 million in the period, with this driven not only by our strong trading performance, but also continued disciplined management of working capital. Encouragingly, we have reported a further meaningful reduction in our net debt before leases, with this falling to £69.4 million from the year end figure of £84.9 million, countering the normal H1 seasonal trend. This performance, along with our expectations for the remainder of the year, allows us to declare an interim dividend of £0.019 per share, which is an increase of 90%.
Moving on to the P&L, As always, this slide gives me the opportunity to clarify a few of the more technical aspects of our numbers. Depreciation will increase slightly in H2 as we begin depreciating the new assets at Wilnecote and Accrington, with an expected full-year charge of £21 million. Finance expense of £3.4 million has fallen from £4.9 million in the prior period due to reductions in both the level of borrowing and the interest rate paid. Our finance expense is stated after capitalizing borrowing costs of £1.4 million attributed to our projects at Wilnecote and Accrington. The capitalization of borrowing costs will cease in H2 2025 as both factories become fully commissioned.
Reduced debt levels, a lower margin payable on our facility as the leverage reduces, and expected future reductions in interest rates are all expected to lead to an H2 borrowing cost which is close to or slightly above the H1 figure. Our effective rate of corporation tax was 26.1%, which, as expected and in line with our normal trends, is slightly above the statutory rate of corporation tax of 25%. Moving on to the adjustments to statutory results, this slide clarifies these adjustments in getting to the adjusted financials that we're presenting today. As you can see, the net upward adjustment to the statutory result in the period is £6.7 million.
With the adjusted result being higher by this amount, we’ve added back £4 million of exceptional costs associated with our cash- and margin-accretive proposals to close the loss-making, non-core businesses of Bison Bespoke Precast and Formpave, which manufactures block paving. Together, these businesses contribute less than 5% of group revenue, and neither has been profitable in recent years. Closing Formpave removes the need to invest over £2 million of capital expenditure with no certainty of return, while the exit from Bison Bespoke Precast creates the opportunity to realize significant land value. In addition to the mainly non-cash closure costs recognized to date, we expect to record cash redundancy payments of approximately £1.7 million in the second half. As previously discussed, the energy adjustments remove volatility from the fair valuation of energy derivatives, where reduced output meant we had contracted for more energy than we ultimately needed.
In essence, that’s simply a timing adjustment. As always at the half-year, we make an adjustment to spread the benefit of our free carbon allowances across the full year in line with production, whereas the statutory results account for all of the free carbon allowances in H1, creating a somewhat false imbalance in our results. Now, looking at our operating segments, we can examine the trading performance in more detail, where as always bricks and blocks remain the primary drivers of the Group’s performance. We’ve seen a significant improvement in trading during the period, with demand for all our core products increasing compared to the prior year. As mentioned earlier, the improved demand is driven by house building, with RMI activity remaining subdued.
UK brick industry dispatches to the end of May increased by 14% relative to the prior year, although they still remain 27% below 2022 levels. Due to our greater exposure to house building, Forterra has outperformed the wider brick market during the period, reversing the pattern seen in 2023, though our market share is still below 2022 levels. Maintaining our pricing discipline amid continued competitive market conditions, we implemented necessary price increases across our product range to broadly offset cost inflation. Price increases varied by product, with aircrete blocks where supply and demand dynamics are most favorable seeing the highest level of increase. While we often focus on brick, it’s worth highlighting the strong aircrete performance during the period. Brick pricing in the period was affected by customer and product mix, with increased demand...
With increased demand for cheaper extruded bricks favored by our large house building customers, with extruded or wire cut bricks, as they're also known, representing around two thirds of our production capacity, and with government support for increased house building focusing on the affordable end of the market, we are well positioned to meet future demand. Our cost base remains consistent with our previous expectations, with underlying low single digit cost inflation coupled with the increase in employers' national insurance contributions. Energy prices remain stable, with the group now accessing the full financial benefits of the 15-year solar power purchase agreement from April 1, 2025.
Energy markets have generally stabilized, and we have taken advantage of this by securing good coverage of our gas requirements for the next three years. We have also recently extended our contractual arrangements, giving us the flexibility to secure gas out to 2030 as market opportunities allow. We increased production of aircrete blocks during the period, with brick output expected to rise in H2. Our H1 results demonstrate the early benefits of our operating leverage, though our cost base still reflects some inefficiencies as we ramp up production, including training new staff members. Additionally, we will incur some extra costs in 2025 as we postpone certain non-time-critical expenditures from 2023 and 2024, with current demand still varying significantly by market sector.
Until demand improves across our entire product range, including our RMI-focused London Brick range our ability to fully benefit from operating leverage will remain partially constrained. Moving on to bespoke products, our precast flooring business represents the majority of this segment and sells almost exclusively into new-build housing. Consequently, it has also experienced a significant uplift in demand during the period. Floor beam sales have benefited from the strongest volume recovery in our entire product range, alongside improved demand for hollow-core flooring. Since floor beams are not generally stockpiled, this provides confidence that the increased brick demand we’re seeing is supported by actual construction activity rather than simply a restocking of housebuilder inventories.
Again, we have implemented modest selling price increases on a customer-by-customer basis during the period, and, like bricks and blocks, the cost base in this segment has remained broadly stable. In response to stronger demand, we increased production output, enabling higher dispatch volumes as we move into H2. Bison Bespoke Precast generated £6.2 million in revenue during the period, and although revenue rose by 18%, the business remained loss-making. The proposed exit of this business will add around 2% to the segmental EBITDA margin before overhead allocations. Moving on to working capital, as mentioned earlier, we maintained disciplined management throughout the period. Stronger product demand enabled us to reduce brick stocks, contributing to a total inventory reduction of £5.9 million during the period.
This helped us offset the normal seasonal pattern of increasing working capital in H1, resulting in a broadly stable working capital position compared to the previous year-end. Moving on to CapEx investing through the cycle and addressing our brick capacity constraints we have spent approximately £140 million on strategic projects since 2019. With these projects now nearing completion, we are seeing a significant reduction in our current level of capital spending. During the first half, we spent a total of £7.3 million in CapEx, of which £5 million related to strategic projects. Our maintenance CapEx remains tightly controlled, with £2.3 million spent during the period. We expect a higher spend of around £5 million in H2, driven by the timing of factory shutdowns.
We anticipate a total capital expenditure of approximately £17 million for 2025, leaving just over £9 million to be spent in the second half. Around £9.5 million of our total 2025 CapEx will be directed toward completing our three strategic projects at Desford, Wilnecote, and Accrington, though there remains some uncertainty around the timing of these final payments. In future years, we expect maintenance capital expenditure to reach a maximum of £14 million per annum, although this will vary considerably year to year. At this stage, we have not committed to additional strategic spending, but organic investment remains a key component of our strategy. Given the timing of various projects, we expect future capital expenditure to be uneven in nature; however, we do not anticipate returning to the elevated levels of spending seen in recent years.
Looking at our cash flow performance, the strength of our first-half results is further highlighted by our cash generation. Adjusted operating cash flow rose to £30 million an increase of 126% compared to the prior period representing a 100% conversion to adjusted EBITDA. We also recorded a net cash inflow from adjusting items, primarily due to the sale of surplus energy. In the second half, we expect a cash outflow of around £1.7 million related to the planned exit from non-core businesses. Ultimately, both exits are expected to be cash positive, either by freeing up land for potential disposal or by avoiding further capital expenditures. Interest payments compared to the prior period were affected by timing differences, though they benefited from lower borrowings, reduced margins due to lower leverage, and declining interest rates.
Whilst we only paid a net £600,000 of corporation tax in the first half, this reflects the receipt of a £2.3 million prior-year tax refund. We expect a tax outflow of around £4 million in the second half, bringing the full-year net outflow to just over £6 million. This results in a £15.5 million decrease in net debt before leases during the period, at a time when seasonal trends would typically suggest a smaller reduction. Looking at the balance sheet, as previously mentioned, we ended the period with net debt before leases of £69.4 million, down from £84.9 million at the end of the previous year. Borrowings stood at £85 million, £15 million lower than December 2024, with exactly half of our facility drawn at the period end.
This leaves facility headroom of £85 million against our £170 million revolving credit facility, supported by our lending banks. We exercised a 17-month extension option during the period, extending our committed facility to the end of June 2028. Closing leverage, on a pre-IFRS 16 banking basis, was 1.4 times down from 1.9 times at the previous year-end. We expect to continue deleveraging in the second half, with leverage projected to fall to just above 1x adjusted EBITDA on a banking basis by year-end. This concludes the financial section of the presentation, and I’ll now hand back to Neil, who will discuss our markets, continued strategic delivery, and outlook for the remainder of the year.
Thank you, Ben. Moving on to our markets now, we all recognize that the UK urgently needs to build more homes, and based on CPA forecasts, housing starts are expected to rise steadily over the coming years. It’s encouraging to see year-to-date growth in activity, driven mainly by medium and large housebuilders. According to NHBC data, housing starts to June year-to-date are up 12% compared to the same period last year. Excluding flats and apartments, homes with individual entrances are up 26% year-on-year. As I mentioned earlier, brick volumes are up 14% compared to last year, with extruded brick showing even stronger growth. The table on the right highlights that imported brick volumes have remained stable as a share of the total market on an MAT basis.
However, if you compare May year to date 2025 with the same period in 2024, imports have increased by only 9%, which is below the 14% growth in domestic brick sales. Encouragingly, imports have lost market share over the last five months. Ben, can I borrow your clicker? Thank you. Let’s hope this works yes, good. Now, focusing on brick capacity, if you look at the chart on the left, you can see how domestic brick capacity has evolved since 2007. UK installed capacity reached a low of 2 billion bricks before subsequent investments raised installed capacity to 2.2 billion. On this chart, two dotted lines appear: the blue line represents 2022 demand, when the UK built just over 200,000 homes.
The black line shows the estimated number of bricks required if we were to build around 300,000 homes per year. It’s clear that domestic capacity would be more than saturated once we return to 2022 demand levels. Moving to the chart on the right, it illustrates Forterra’s capacity evolution since 2021. Due to the recent slowdown, we are currently operating at 66% active capacity. As the market continues to recover, our first step will be to fully utilize our existing active capacity including ramping up Desford before reactivating Clafton, our mothballed brickworks. Another key takeaway from this slide is that, through our investments in Desford and Wilnecote, we have expanded our installed capacity by 15%. No other UK brick manufacturer has added this level of new capacity, positioning us strongly as market conditions improve.
If we take a look at strategic imperatives now. our strategic imperatives these are centered on two main areas. The first is strengthening the core. We already have a fantastic business, but there’s always room for improvement. We’ve made major capital investments to reinforce our core operations and have also evaluated parts of the business, leading us to consider closing Colford and Summercodes. Alongside this, we’re advancing our Commercial Excellence and Operational Excellence programs. The second imperative is growing beyond the core developing products and solutions for the buildings of tomorrow to support our long-term growth ambitions. We also have what we call strategic enablers, and I’m pleased to report continued improvement in both safety and employee engagement results. Additionally, we’re making solid progress in sustainability, with further updates to be shared during our full-year results presentation.
As already announced, we are preparing to increase the output of Desford by running both kilns at the same time. This is expected to start from September this year, and having already run both kilns individually, we're confident in achieving this next important milestone. This will be a key step in Desford's ramp up on its way to produce 180 million bricks. To be clear, due to market demand in 2025 and 2026, we will not need all of that capacity just yet. At Wilnecote, I'm delighted to say we've lit the kiln and started commissioning the Extruded side of the factory, and we expect to be producing saleable product in Q4 of this year. At Accrington, the slip line commissioning went incredibly well. Activity is currently focused on range design, with an initial launch of 14 slips expected in the second half of this year.
We will also be launching Omnia, our new brick rail system which is completing its external testing and certification in the coming weeks. Omnia delivers faster installation compared to our previous Shore Brick system. Moving to capital allocation, with a stronger balance sheet, our capital will be focused on several key priorities: strategic organic investments offering compelling returns, and I’d highlight that our brick operations are now very well invested. Our current pipeline includes a potential new Aircrete factory, and we’re actively exploring opportunities in Calcined clay. We’ll provide an update on our dividend policy during the full-year results and remain committed to maintaining it as attractive to investors. Additionally, we’ll consider bolt-on acquisitions in adjacent or complementary markets, as well as supplementary shareholder returns where appropriate.
Looking ahead, we're encouraged by the group's year-to-date performance and pleased to see the demand of almost all products ahead of both the prior year and previous expectations. We expect H2 adjusted EBITDA will be modestly ahead of the H1 figure and therefore full year 2025 adjusted EBITDA to be exceeding our previous expectations. This will translate to adjusted PBT being significantly ahead of the previous expectations due to the broadly flat depreciation and amortization and reducing financial costs. While we currently anticipate the present demand pattern to continue in the coming months, we remain cautious as to the fragility of the UK economy and the impact it may have on the new housing market.
Looking beyond the current financial year, the board remain confident that our recent investments in new production capacity leave the group in an excellent position to benefit from the market recovery in the key markets we operate in. We'd now like to move to questions and answers for the purpose of the recording. Please state your name and where you're from. Thank you. First off, blocks, the gentleman there was very quick. Just on the right-hand side.
There.
Lewis Roxburgh, Goodbody. Just on your expectations of H2 being ahead of H1, I was just wondering what the key drivers of that are. Is it a further volume acceleration in new build, or is it an improvement in the efficiency capacity ramp up? The second part to that, in neating out those sort of operational inefficiencies, just kind of see what your thoughts are on what an optimum margin can look like given normalized level of demand. Secondly, just more volume growth being helped by the volume house builders. I just wondered if you've noticed the kind of shift in your customer mix and what that kind of feeds through to in terms of pricing.
Thanks.
Thank you. I'll take the one around kind of the Bassey half one assumptions and maybe you cover off the margin and I'll come back to customer mix, Ben. The market has started very, very well and we are very exposed to the large and medium sized householders and our strong position is in extruded brick. As I mentioned earlier, that is ahead more than the overall brick market. We expect that to continue for the rest of the year. We don't expect further increases, but we expect the current levels to carry forward for the remainder of the year. Not everything is absolutely perfect. As we mentioned, the RMI market where we have our iconic London Brick is still quite depressed.
Overall, from a pricing point of view, although we've increased prices of products to cover price over cost, we haven't achieved our overall price because of the change in mix of the profitability of products. That kind of touches on your third question a little bit. I'll pass over to Ben who maybe wants to talk about operational margin in drop free.
Yeah, of course. What we're seeing so far is just the start of our operational leverage. Most of the extra volume we've sold this year was product that was made previously at higher cost of production. We've started ramping up production. In the period we ramped up aircrete in two stages, and we also increased production of concrete floor beams right at the end of the period. In the brick business, we get the big uplift at Desford in September. This is going to take a while for this operational leverage to come through. In terms of optimal margins, I'd sort of refer you back to 2022 levels and then add a little bit for Desford on top of that. We're a long way away from that. You will see further kind of operational leverage through this year and into next year as we increase production and gain efficiency.
Just on customer mix, I kind of touched on it earlier. We don't have the highly profitable, high price London Brick sales that we would like because of the depressed market. Also, Soft mud isn't performing in the same way as Extruded brick. Whereas we're quite strong in Extruded brick, we do have a Soft mud business as well. That's where pricing has been a little bit more challenging because the type of house builders who are building more homes at the moment are generally looking at cost, and they're choosing to use an Extruded brick rather than a Soft mud. It's a bit of a pattern we're starting to see.
Our advantage, is that two-thirds of our production capacity is extruded. Looking ahead, the government’s push to build more houses will likely focus on the affordable end of the market. We’re well positioned to meet that demand with our extruded brick footprint moving forward.
Ainsley, I think you were next in all there too.
Thanks. Thanks to the number of investors.
Just two for me.
Just on the imports being displaced, is that just kind of the economics, they're not particularly favorable or imports more soft mud? Just any color on the kind of dynamic there, and then I think you'd previously spoken about Desford at an incremental £25 million of EBITDA.
Is that still what you would expect as the kind of recovery comes through and matures? Thanks. Okay, I'll take the imports then you take the Desford question. The imports, a lot of the imports coming in are soft mud. As I mentioned just now, that's been quite a competitive part of the market and it's not where the volume growth has really been coming from. We're seeing that growth, like I said, in extruded brick. That's where imports probably from a price point probably struggle to get to. That's not because it's a low price, it's just a domestically produced product in a cost effective way. We're putting that down to it also. As we move through the cycle, a lot of the imported products were going into not only housing high end, but also some commercial buildings.
The commercial side of the business is still lagging behind housing in terms of recovery. We’re not heavily exposed to that market from a brick perspective. I think that’s where most of the noise around imports comes from. Ultimately, our volume customers prefer reliability over complexity. They want a dependable supplier who can provide consistent volume as their business grows. That’s exactly what we offer, supported by our recent round of capital investments.
To add to Neil’s point, large house builders generally avoid the complications of using imports. It was mainly the merchanting sector that engaged in importing and speculative buying. As we’ve discussed, that sector is struggling right now, which is likely contributing to the reduced imports. On your second question regarding Desford’s £25 million, our target remains that Desford will add an incremental £25 million to our business. The timing has been delayed since the factory opened, primarily due to market conditions.
Not with standing the fact that we have had a few teething problems and challenges, we did a detailed kind of exercise earlier this year and we still maintain that all of the challenges and complications we've seen, we're working through them and none of them change that. The actual end goal will be that we still believe that factory will add £25 million to EBITDA. The unknown bit is when, because we need the supportive market to warrant that level of production. As Neil said, we're going to increase production. We're going to run two kilns simultaneously for the first time, but we still won't need 180 million bricks a year. There'll still be some latent inefficiency in the operating, but it's a good step in the right direction. I want to go to Ami next to Ainsley, just to pass it Ami.
Gala from Citi, few from me. The first one was just as we think about the sort of medium term recovery, at least back to 2022 levels of brick demand for the industry. I wonder if you could give us some sort of color in terms of how much potentially is there risk of, say, mainstream bricks being dislodged because house builders will use more timber frame? Is that at all a risk that we need to consider? Also, as we think about the current consumption, how much inroads has concrete bricks made in the market to date? My second question was just on energy costs. Now that we got the visibility, can you give us some guideline or colors to how should we think about the energy cost line over the next two to three years?
The last one was on brick slips and the new product that you've been launching in the system, the system side of it, how is the actual process of specification or marketing that product? Is there a separate channel that you're pursuing to kind of get that specified more intensively as you think about the market ahead? Right, I'll talk about one and two. Ben Guyatt will take three and I'll come back to me for four. Look, the midterm recovery 2022.
We.
Don't really see any kind of change around what people are using to build homes. You're absolutely right to say timber frame is increasing its penetration and that gives us a slight challenge for aircrete, but we should consider a lot of aircrete is used below ground and timber frame buildings or homes still have aircrete in the foundations below ground. We spent a lot of time talking to the house builders and trying to get involved with their innovation plans and what they're looking to try and see how they build the homes of tomorrow. It's part of our Beyond the Core strategy and we're comfortable today that we don't see a massive swing or change away from traditional brick. You could say what would drive a change. It could be cost, it could be labor.
Many of the house builders are very convinced that we can get back to the 2022 levels without having to address too much the labor challenge. People have moved away from the industry and they'll move back in. Concrete bricks, you know, they found a little bit of a place in the market. There are some house builders who believe in them. We've done some in-depth studies from our side that see the complexity required in terms of building with concrete bricks is not impossible, but it's more challenging than clay brick, expansion joints and all those types of things. There's some questions about ongoing longevity of the facade, the color and all those types of things. I think what we see is many customers actually sticking with traditional clay brick. Even with Marshalls' recent announcements, they touched on that a little bit.
We've also had one house builder switch away from concrete brick to go back to a clay brick product because they want to go back to that pleasing aesthetic. We really believe in the merits and the value of concrete bricks from that point of view. Ben, do you want to pick up the third one?
Yeah. As we said in my script, energy prices have broadly stabilized. We don't see a return in the short term to the spikes that we've seen over the last few years. We've got good energy coverage looking forward. On the electricity side, effectively the solar farm de-risks that for the next 15 years. We've got good certainty on our electricity, and on gas, we've got the forward contract. We've forward purchased. We're pretty much fully covered for this year, we're about 75% covered for next year, and then about 60% covered for the year after. That takes us into 2028. As I said, we've literally just extended our contract and we're looking at the opportunity to buy gas for 2028 and 2029 now because you can buy it at pretty competitive prices, which, if you strip out the inflation element, kind of take you back to pre-Covid prices.
We've always benefited from forward purchasing. Where we've been able to forward purchase a long way in advance, we've generally done pretty well and you can eliminate a lot of risk. Where we got caught, along with a lot of other people, was the post-Covid into Ukraine period where we didn't have the forward coverage. We see energy being relatively stable. As long as you manage it well and forward purchase, we don't see a repeat of the challenges we've had over the last couple of years.
To come on the last question around brick slips and how we take them to market, our first range will be relatively narrow, 12 or 14 slips, and predominantly we'll sell those to the EWI providers, the external wall insulation type companies. Think of Krend, who were recently bought by Saint-Gobain Weber, which is a Saint-Gobain company. Those types of businesses where they're renovating the outside of the existing buildings to improve the thermal performance and they're stuck on. We will sell directly to those EWI providers, but we will also specify and try and get slips into probably new build rather than renovation, multi-residential high-rise buildings. You're absolutely right, we will need to develop and build a specification muscle because today we push bricks to a customer base who are very, very used to bricks and know and understand how to install them and how to specify them.
We've already recruited a team of specification specialists who’ve been with us for the last six months, building the pipeline and generating sales through specification. That’s where Omnia, our rail system, comes in. For high-rise buildings, certain fire safety requirements mean you generally can’t use stuck-on bricks; instead, you must use a rail system. That’s why system performance and testing are crucial. We expect accreditation for this within the next couple of weeks, after which we can push forward on the specification side. The specification slips will be extruded from Accrington, and in some cases, we’ll also supply cut slips from our existing range.
Alistair Stewart from Progressive. Only one question. What was the drag on RMI during the period? Was it mainly interest rates or wider economic uncertainty? What do you think could be the, what could kickstart or revive demand there, particularly for your higher margin London Brick product?
Yeah, it seems. Anyone maybe take that one together? Ben, you contribute to anything you feel I miss. I think the thing which is holding back the RMI side of things for us is we're mainly in the extension market, which is quite an expensive investment for homeowners. I think consumer confidence has been a challenge around there. All the uncertainty we hear when we turn on the news. Also, very often those extensions are funded by maybe taking a little bit of equity out of your home to increase your mortgage. Interest rates have been a little bit high of late, so people are probably watching and stepping back and saying, do I want to invest in that right now? I think those are the things which somehow will have to start to change for us to see a pickup in our side of RMI.
Ben, I don't know if you want to add anything to that or. No, no. Okay, good stuff. Thank Alistair, Kristen at the front.
Thank you, Mr. York from Deutsche Bank. Three questions for me.
First of all, just on sort of.
House building, you know, getting mixed messages.
You know, new outlets seem to be.
A bit of a challenge, but brick.
Sales are up significantly. What are your house builder customers saying to you in terms of volumes as you look forward? Are you sort of slightly worried?
About an air pocket at some stage.
With a lack of new outlets opening? The second one, just quickly, just touched on current trading, which would be quite helpful given the guidance. Finally, just on the aircrete market, just a bit more detail in terms of what's going on there and perhaps sort of moving into.
You touched on a bit of a.
Negative for aircrete from timber frame.
You also touched on new capacity.
Just squaring that circle as well.
Would be super helpful.
Thank you. Okay, do you want to. I'll take one and two, Ben. Then you come in at the back end of two and three, you take them off like that. Yeah, mixed messages from house builders. I would say when we talk to the house builders away from the city in terms of the pipeline and volume in terms of their build programs, we've got a very, very strong pipeline of volume coming through. From that point of view, we're quite confident that as long as their build program sticks for the remainder of the year and they don't start having cancellations, etc., we're confident about where we're going there. We're already booking volume next year, so people have started to realize that they need to use more bricks and buy more bricks.
I think the other thing which is coming through is we're seeing this real change into the sweet spot of our products and our business and where our share is. As we mentioned already, we're not massively exposed to housing in London and the southeast. That's the most depressed part of the market from the house building or the HPC starts point of view. We're very exposed to the extruded bricks. We're seeing the enjoyment from that point of view and we've got overall confidence that the market will continue. If suddenly there's a change, we know that the house builders can stop very, very quickly. We're measured and guarded around that. We're not looking at a further uptick. We're just looking at a continued demand that we've seen repeated in the second half of the year. Current trading. Ben, do you want to pick up on current trading?
I mean, month to date in terms of volumes? We're doing very, very well. We have a revised forecast and we're on target. Revised forecast for the month. Anything else on current trading, Ben?
Yeah, I mean, I was just going to say just on the house building kind of. Is there a void? The other thing is I sort of mentioned that our sales of floor beams are particularly strong and that floor beams are built by ground workers. They don't have the cash, resources or anything to start hoarding floor beams. Unlike in the past where people stockpile bricks, there's no real concept of stockpiling a floor beam. That's a kind of reassuring point as well. The other thing is just to look at the data, you gotta remember that housing starts fell by a lot more than housing completions through 2023 and 2024 and brick dispatches fell by even more than housing starts.
As it starts to recover, it's not illogical that you do get a bit more of an uptick in brick demand than you do in housing starts and that housing starts increases again by more than completions. Yeah, in terms of current trading on top of that, we're still seeing kind of a continuation of the trading conditions we've seen through the last three months. If you look at brick, I think relative to the prior year comparator, I think June was the second strongest month in the first half of the year. July looks equally strong in terms of the volumes that we're seeing. We're only a couple of days away from the end of the month. As we sort of said, our outlook for the rest of the year is based on a continuation of these trading conditions up to November.
Obviously you always get a tail off into December, but yeah, we're just expecting to see what we've currently got continue for the rest of.
Of the year. Maybe before we go to aircrete, just on that is the other thing, which is quite interesting, which gives us the confidence. I mean, Ben mentioned about the Bison flooring side of the business, but although we endeavor to get all our product on time in full within the customer expectations, if we happen to be late, customers start screaming, where are my bricks? It's not that they're taking these bricks and kind of putting them in the field for the future, they're actually genuinely wanting them. They've got people waiting to start laying them. That also gives us some reassurance that this is actual demand rather than a bit of stock building. Aircrete. Benjamin, do you want to kick things off and I'll follow up?
Yeah, I mean, as I think Neil's already talked about, we're seeing strong performance in aircrete. We've already invested £140 million in our brick business, so we've got a very well invested brick business. The aircrete business in the UK is not. There's a lot of old factories, and we've got one that could ideally need replacing. The efficiency benefits of actually replacing that old factory are really significant. You have to look at the market, and as we said, yes, there is a threat from timber frame, but on the counter to that, the latest building regulations in terms of part of the building code mean that actually you need more aircrete underground to get the necessary thermal performance. Although you lose a bit on the timber frame, you gain a bit on the new energy kind of the building regulations.
Coupled with a significant efficiency benefit in terms of replacing an old and tired factory, we do see a significant opportunity there. Unlike bricks, where we've previously talked about, we've got an oven-ready site at a place called Swillington where we could start building a brick factory this afternoon if we wanted. Aircrete is a little more challenging because we have to make sure we've secured the raw materials. Currently, we make all our aircrete with PFA, so kind of ash from power stations. Obviously, there are no coal-fired power stations in the UK anymore, so we're currently excavating kind of historically stockpiled ash. I think if we build a new factory going forward, whereas it may still use ash, we'll also want a secure supply of sand. Sand is another way of making aircrete, and obviously we think that's the future.
We've got a lot more moving parts before we can kind of commit to an aircrete factory, but it's certainly something we're very interested in.
The only thing I would add to that is, you know, we've looked and mapped the dynamics of what the house builders are invested in timber frame capacity. We've got a pretty clear understanding of where they will be and where they will saturate and also the type of homes that lend themselves to being built from timber frame. Last time I wasn't in the business, but the technical team informed me that in the past there wasn't enough aircrete to go around in 2022. People were using aggregate block and they could do that because regulations hadn't changed. Fast forward. Today the regulations have changed. They can't use aggregate block in the same ways as they were using below ground.
There will be growth in the market, but it won't grow to the same extent as the total number of new homes built because there will be a growth of timber frame. We've modeled that. We're not ready to commit yet, but we're starting to build a compelling case that the investment makes sense. Tina Stephen Rodinson from Applied Value. Just one question from me. You built up inventory in the first half of last year, £97 million. It's come down quite considerably and obviously in terms of inventories to sales ratio, it's quite low compared with where we were last year. We know some of the reasons behind that. What is considered the optimum inventory level, as I say, a percentage of revenue, and that's a broad brush figure. During the second half you'll probably be building up stocks as Desford goes on.
Second kiln comes on, capacity, Accrington comes on. You'll be building that up. I'm looking partly in the inventory level, but partly also at year end net debt and the impact of more inventory that might be coming through. The danger that you've outlined as, the market is a bit fragile. Just talk us through your thinking on that if you can, just in case that there is an inadvertent increase in inventory again in the second half. I hope not, but you never know. Do you want to pick that one up?
Yeah, yeah. I mean, in terms of what's an optimal level of inventory, it depends on what part of the business you're looking at. In brick, we'd normally say three months of inventory, so I guess that's 25% of sales if you're looking on a full year basis. At the moment, the strong demand for extruded brick means we've got significantly less than three months already. If you look at, for example, London Brick, we've got more than three months. At the moment our inventories aren't balanced in terms of Desford. The intention is bringing Desford back on is not to build inventory; if we don't bring it back on, we will be letting customers down because there's that really strong demand for extruded brick. We're certainly not intending to build significant inventory in the second half. We have some flexibility in that.
For example, we have factories that are still not running for the full 12 months a year, so that's very easy to flex in terms of if you want to run a factory an extra two months or not. Even with Desford, as I say, we're not bringing it back and we're not going to run it at 180 million bricks a year. There is some ability to flex that. Yes, there is a bit of cost inefficiency the less you make, but we've worked really hard to manage our working capital to get our inventory down, to get our debt down. We're not talking about doing anything that would see us back in 2023 levels of inventory build or anything. I think at the moment, if we don't increase production, we'll be actually losing sales.
On the concrete side of the business, generally inventories are lower anyway, kind of one to two months inventory is generally what we'd carry on the concrete side of the business.
Stephen. Morning. Sam Cullen from Peel Hunt. I've got a couple. Just a follow-up to Neil on your points around the mix shift that you're seeing in terms of extruded. Just to clarify what you're saying, are you saying is this purely a reflection of geographical demand and product demand in terms of tenure, or are you seeing house builders where they can, subject to planning, value engineering and moving away from soft mud towards extruded brick as a cheaper product to try and take cost out of the build process? That's the first one. Ben, I think you mentioned a land value in terms of the Bison Bespoke Precast site. Can you put a number on that? Is it significant? Okay, this mix shift in demand and mainly around the soft mud side of things and discussion with house builders.
Soft mud as a percentage of the market isn't dropping away massively, but with the discussions we're having with house builders, we've been going in because actually the one thing we're not selling enough of at the moment is soft mud. Our mission factory isn't running all year, flat out. When we have discussions to try and improve our mix, the response of the house builder is very, very often when we're looking forward, we're looking to see if we can use less soft mud and more extruded products. We're not seeing that in actual sales yet. That's discussion that's coming through from our discussions with the customers.
In terms of land value, I'm not going to give you an exact number because it's commercially sensitive and the people we might want to sell the land to might be listening. It's certainly worth north of £5 million, maybe significantly north of £5 million.
Next, Clyde Lewis at Peel Hunt. A couple of questions as well, if I may. The businesses you're shutting. I think you gave the first half number for Bison. How much bigger is or smaller is Formpave? I'm trying to get a total. When we're sort of looking at models for next year in terms of the change, in terms of the strategic investment, as you flagged, you haven't got any major plans on the books at the moment. Obviously it sounds very much like aircrete is maybe the first one out of the blocks. Can you maybe give us an idea as to what would be the catalyst to make it, you press the go button on that? And what sort of scale and timing are we looking at there? Do you want to do the.
Yeah. Formpave is smaller than the Bison Bespoke Precast business. Full year Formpave would generate about £5 million or £6 million of revenue. On a half year basis, it's kind of £2 million, £2.5 million of revenue, and it's really not that large at all. Neither business was profit making. They both made small losses. Profitability wise, fairly inconsequential for your model. Over the year, you're probably losing £17 million of revenue across the two businesses, which is still less than 5% of the group number.
From the Aircrete investment point of view, if I kind of break your question down to what's the trigger, when do we go with it, I think it's very much around raw material supply and location of the factory, rather than the dynamics of the market and how it will develop and grow. We've done a lot of work on that. We did a deep dive study last year, in fact, on timber frame and the evolution of it. It's just around where do we put it, what's the right location for delivery costs. We plan to use an existing site that we have, is our intention today, so no land purchase from that point of view and the raw material, and it kind of lends itself to another part of our capital allocation and strategic projects around Calcite and clay.
What we've discovered from the calcite and clay side of things is as an SCM, ash will become more and more in demand because the cement players will also want to use it. We're really considering at this stage whether it's time to switch away from ash in the new factory and go with sand. Those are the kind of things we're trying to work through, Clive, from that point of view.
Add to the point in terms of a capital investment for a new Aircrete factory, maybe £50 million, £55 million. It's worth adding that the current old Aircrete factory that we've got, which we would close if we did this, is sat on a pretty valuable piece of land. Actually, the net spend would be a lot lower than that. You might be looking at a net spend in the region of £30 million over a period of a few years. I think the point we're making is kind of don't assume there will be zero strategic spend going forward. It won't be anything like the £140 million that we've done over the last five years. We've still got the balance sheet.
The kind of the cash generation of the business easily allows us to kind of make that sort of £30 million or so investment, recovering the cost of the old factory land, reducing the net outlay. It's kind of easily affordable for us.
Thank you, Harry Dar from Rothschild and Co Redburn. Just on the volume comment for June and July, should we read that as a similar year on year growth rate or kind of the activity stayed at a similar level, because I know the comparison base, I think maybe toughens as we go through the year, clarification on that and then how that sort of intertwines with H2 at the kind of EBITDA level, maybe only being modestly better than the first half.
If the kind of operating leverage is maybe improving as well in the second half and the volumes are still pretty strong, and then if I think you maybe mentioned that the operating leverage is being kind of pulled down by some products, maybe predominantly the RMI focused ones as well, should we therefore maybe expect in 2026, for example, if we hope maybe we get a bit of an RMI recovery, that operational leverage be higher than usual, given that maybe in the first half. I think the implication for this year the operational leverage is maybe lower than maybe we would have expected. Thank you, Ben. There's a lot of numbers behind there. Do you want to do those on?
Maybe try and work in terms of, look, the volumes we're seeing at the moment, we've seen a consistent run rate from the last three or four months. As I said, I think June was the second best month of the year so far, year on year. You do make the good point that comparatives do improve in the second half of the year, so the year on year delta will narrow. That's pretty certain. At the moment what we're saying is we've based our expectations on this current level of trading that we're seeing continuing as we run up towards the end of the year. In the second half of November and into December, it'll slow down. Until then, we're kind of expecting a similar run rate to what we're seeing today in terms of operating leverage. You picked up on a couple of points there.
We won't get operating leverage, it takes time. For example, we've got the costs of inefficiency. At the moment we're employing people at Desford to run this extra kiln. Kiln's not going to start running until September, but we're paying some of them now because they've got to be trained. They've got to basically get the skills. Very important from a health and safety point of view that everyone's obviously fully trained, so you carry that inefficiency. Similarly, we did the same in the first half of the year when we ramped up the Aircrete factory in two stages. You've always got cost beforehand before you get the efficiency. We've factored that into our numbers and that's obviously one drag on why you get a drop through that might be lower than you anticipate.
The other one is that actually, look, this business was in a fairly tight space kind of 15 months ago. We were worried about covenants. We'd had to get covenant relaxations. We managed our spend accordingly. We did have some non-urgent spend that we didn't spend in 2023 and 2024 that we're now more confident in spending again. This is just stuff that kind of wasn't critical, but in terms of keeping the business well invested and assets repaired over the longer term, we're now catching up a bit on that. There's a bit of extra spend in 2025 because of that, which again will weigh on the kind of the perceived drop through that comes through.
In terms of, as we put a statement in the announcement, a sentence in the announcement in terms of, we will only get the full benefit of operating leverage as all of our markets recover. For example, at the moment we're in a slightly unique position whereby we're increasing production at Desford, so we've got a shortage of extruded bricks. If we don't increase production, we'll run out of extruded bricks. Frankly, we've still got too many London Bricks and we might have to, if the RMI market doesn't improve soon, we might even have to make further adjustments at the London Brick factory which incur additional efficiency. It might end up being that, yeah, we get more efficiency next year from the kind of the housing focus side of the business. Until the RMI and the London Brick catches up, we might have some inefficiency that offsets it.
There are a number of moving parts and we've got to see the whole business and all of our markets recover until we get the full benefit of our operating leverage.
Thanks, Harry. Any other questions? No, it looks like we're done for, so thanks for coming along. For those of you who haven't had summer holidays, enjoy your summer and we'll see you in the next update. Thank you very much.
Thanks, everyone.