Okay. Well, good morning, and Welcome to our Half Year 2022 Results. I'm Stephen Harrison, I'm the Chief Executive Officer of Forterra, and I'm joined by Ben Guyatt, our Chief Financial Officer. Look, I think Ben and I are very, very pleased to be able to present what are our best first half year results yet for our business. On the back of that, we're able to slightly increase the board's expectations for the full year. Good start to the year, and I should thank our employees first of all because, you know, when we're busy and we're in a period where labor's quite hard to come by, I think everyone in our business has worked hard and put a massive contribution in. Thank you to them. Our markets are robust and strong.
Our core markets are new house building and the home extension market, which is a subset of that RMI market, the repair, maintenance, improvement market. That home extension market remains strong and robust. In fact, all of our product sales have been very good and kept a really good momentum in the first half of the year. Perhaps I should just highlight our precast concrete business and the team there have done a really good job raising the margins and raising the performance of that business. We continue to see both high demand and capacity constraints, which has allowed us to pass on the cost inflation that we've seen come through, and we expect to be able to continue to do that.
Our business, as we've talked about many times, is very highly cash generative. On the back of that cash generation, you can see we've finished the first half with a strong cash position. Hopefully our strategy's pretty clear. We continue to organically invest to grow our business and add shareholder value. The project up at Desford in Leicestershire, where we're building a large new factory, is now nearing completion. We're also investing in two other factories, one at Wilnecote in Staffordshire and one at Accrington in Lancashire, where we're adding capacity and investing for the future. On top of our investments, we're also pleased to be able to announce today an interim dividend of 4.6%, or 4.6 pence, I should say, which is over 40% higher than the interim dividend we put forward last year.
With that, I'll hand over to Ben. At this point last year, I handed over to Ben with a picture of a crematorium, but I've upgraded him to a care home this year.
Morning, everyone. It does seem slightly strange actually. This is. I've been doing this job now for two and a half years, and this is the second time I've actually presented to you guys in person. The last time was at the 2019 year end, so it's great to be able to see so many of you again. Although I was hoping probably for a few more. I know a few of you have had problems with the rail strike this morning, that's a shame. For simplicity, we've reported against a traditional prior year 2021 comparative, although I will also make reference to the key 2019 comparators where appropriate. With that in mind, we have included additional slides comparing the result against 2019 in the appendix.
I will talk exclusively about adjusted numbers in this presentation, although again, we have provided a reconciliation to the statutory numbers within the appendix. The story of our first half is one of an excellent financial performance. We have seen sales volumes slightly ahead of the prior year, restricted by capacity and inventories, with revenue growth primarily driven by selling price increases, which despite strong cost control have been absolutely necessary in recovering the significant cost inflation we've continued to see. Our half one earnings per share of 13.5 pence represents an increase of 45% on the prior year, driven not only by the strong trading performance, but also with the benefit of the share buyback, reducing the number of shares that we have in issue. Our cash generation has always been a strength of our business, and that continues to be impressive.
Like our profit performance, our cash flow from operations of GBP 37.5 million is our best ever half one performance. We closed the period with a strong net cash position of GBP 24.1 million, having spent GBP 21 million on CapEx during the period, and having also returned over GBP 20 million to shareholders in the first half through our share buyback program. This all leads to a strong interim dividend, as Stephen said, of GBP 0.046 per share, 44% increase on last year's GBP 0.032, and we continue to use an approximate one-third, two-third split between our interim and final dividends. Picking out the key highlights for the profit and loss, our revenue has increased by 24% relative to the prior year off the back of similar sales volumes. This highlights the successful delivery of our price increases.
This dropped straight through to our PBT of GBP 37.3 million, which is an increase of 38% on the prior year, and tellingly, an increase of 14% on H1 2019. We've seen strong EBITDA growth in both of our segments, and it's particularly pleasing to see the improved Bespoke Products performance. Our EBITDA margin is slightly ahead of the corresponding prior period, but importantly, is well ahead of the 2021 H2 margin, which was 17.6%. We have a significant reduction in our financing costs driven by our balance sheet strength, meaning that we had to borrow very little money in the period. Also, our credit facility returned to a normal margin grid at the end of last year, basically ending a period of COVID driven variations that increased our finance costs. Just a quick word on tax.
I often say that we're a very simple UK business, and as such, we would expect our effective tax rate to be close to the statutory rate of 19%. That is as expected, so our effective tax rate was 19.7%, in line with those expectations. Last year, we had a slightly higher tax rate as a result of a deferred tax charge arising from the future change in the headline corporation tax rate, which is expected to increase to 25% next year, or at least it was until we have a Conservative leadership debate. It'll be interesting to see whether that increase of corporation tax rate actually happens next year. If we move on to look at the segmental results. First of all, Brick & Block.
The Brick & Block segment is the primary driver of the results in our business, and that's seen a strong performance in the period. Brick and block sales volumes were 3% ahead of the 2021 comparative and in line with 2019. May and June 2019 were particularly strong comparators. Product availability, driven by our capacity constraints, was the primary barrier to doing even better. We further depleted our inventory levels during the period with industry brick stocks still at record low levels. Demand has remained strong across all of our sales channels. Sales of our London Brick remain buoyant, demonstrating the continued strength of the home extension market as a subset of the much broader, wider RMI market.
Cost inflation remains a continuing challenge, although we have demonstrated our ability to recover this with brick price increases of 16% in January and a further 12% in April. Taking prices to 30% ahead of the 2019 exit prices. The segment EBITDA of GBP 44.3 million was 17% ahead of the prior year, and whilst margins fell slightly relative to the corresponding period, they represent a significant improvement on the H2 2021 margin of 21.4%. With the second price increase, the 12% that we put through in April, only kind of been in place for half of the period, we've seen further margin progression in the last few months. Our forward purchasing of energy has partially mitigated the impact of rising energy costs in the period.
Energy prices have risen steeply again in recent weeks and even more steeply yesterday. Although we have secured 85% of our H2 requirements, substantially insulating us from this uncertainty in the shorter term. We've also purchased around 40% overall of our energy for 2023, with the greatest coverage in the first quarter. We do expect an increase of energy costs next year as our historic forward purchases that we made several years ago roll off. The magnitude of the increase will depend on the market and is therefore impossible to quantify at this stage. Moving on to our second segment, Bespoke Products. It's pleasing to see a much improved performance in the period. Revenue has increased by 19% year-on-year, despite the closure of the Swadlincote bespoke facility in the final quarter of 2021.
The improvement in performance, driven by the Bison Precast flooring business in particular, is attributable not only to our ability to cover cost inflation, but also from making the most efficient use of our now reduced footprint, allowing us to be more selective in the work that we take on. EBITDA, before overhead allocations, has increased to almost GBP 5 million in the half. I think I've explained before that this business, the overhead allocation, is fairly arbitrary and probably penalizes this business with the overhead that we attach to it. If it was a standalone business, it wouldn't need that amount of overhead. Therefore, given its modest capital employed, we feel that this business has delivered a really attractive return in the period. If we go and move on and have a little look at our cash flow.
As I said earlier, the consistent ability to generate cash flow has always been one of our strengths, and this is reinforced during the period with an operating cash flow of over GBP 37 million. Our capital expenditure in the period totaled GBP 21.3 million, with Desford accounting for almost GBP 16 million of this. Against this, we have realized almost GBP 3 million of proceeds from the sale of two disused pieces of land, demonstrating our ability to maximize the value we extract from our asset base. We returned just over GBP 20 million to shareholders in the period through our share buyback program, which when added to the small level of fees and stamp duty, gives us a total cash outflow of GBP 20.8 million in the period.
In addition, we have purchased a net GBP 6 million worth of shares for our Employee Benefit Trust, which will be used to satisfy our employee share scheme arrangements in due course. This is consistent with our preferred policy of not issuing new shares for this purpose. This is not an absolute cost. In the future, there will be an inflow, albeit at a lower amount from the company's Save As You Earn scheme, which allows employees to purchase shares in our company at a discount. If we move on to CapEx. This slide summarizes our CapEx guidance for 2022 and beyond. We have provided separate guidance on the three major strategic projects that we are currently running. We expect total capital spend to be around GBP 50 million this year and a little less than that next year.
In the second half of this year, we expect to spend a further GBP 14 million, which includes an element of capitalized commissioning costs on our Desford factory, which will bring the total project spend by the end of the year to just under GBP 90 million. This project is still expected to be delivered to the original GBP 95 million budget with the final GBP 6 million payable in 2023. The proactive rescheduling of the Wilnecote project has led to a rephasing of spend with 2022 spend now expected to be around GBP 6 million. The project to add brick slip manufacturing capability to our Accrington factory is progressing with the main equipment supplier now recently selected. We've previously guided that we expect to spend around GBP 12 million a year on maintenance CapEx over the longer term.
In 2022 rather, we expect that spend to be close to GBP 12 million. Although looking ahead, given the current levels of inflation that we're currently seeing, we've now increased that guidance to GBP 40 million going forward. Looking at working capital, just to draw out the key points on this slide. So our working capital remains tightly controlled, and while we have an expected seasonal increase in working capital relative to the year-end position, we have actually removed GBP 5 million from our working capital relative to the June 2021 position. While our inventories have increased by GBP 3 million relative to the year-end, this increase is driven by an increase in valuation due to rising costs of production. Looking at bricks specifically, the number of bricks in stock actually fell further during the period.
Given the strength of our current trading and our outlook for the rest of the year, there is little prospect of being able to replenish these inventories for the foreseeable future. Just the final slide from me, just looking at the balance sheet and our cash position. We closed the period with a very strong cash position with a net cash of over GBP 24 million, relative to the GBP 41 million at the end of last year. Our debt facility comprises of a GBP 170 million revolving credit facility, of which only GBP 10 million was borrowed at the end of June. Interest is charged on a margin grid, where interest is levied at SONIA plus 1.75%, assuming that our leverage remains below 1x EBITDA.
Our latest guidance for the year-end cash position is we expect a net debt before leases in the region of GBP 20-30 million, driven by the continued strong trading performance of the business. This will leave us well below our leverage target of less than 1x of EBITDA, affording significant flexibility going forward as we continue to pursue our pipeline of organic strategic projects where we have committed to expanding in excess of a further GBP 200 million after Desford over the next decade. In addition, we retain the optionality to deliver suitable bolt-on acquisitions should these opportunities arise. I will now hand you back to Stephen.
Thanks, Ben. Thanks. For those of you that are listening on the telly, it's now time to tune back in. Let me start by looking at our markets and first of all, the housing market. As I said earlier, our core markets are residential new build and the home improvement market, and both are forecast by the Construction Products Association to continue to grow. Not only have we got growth forecast for our markets, we also see the fundamentals, particularly for new housing, are very strong. Despite modest interest rate rises, we still have a shortage of quality housing in the UK. We have available credit, and we have high employment. We see fundamentals for our market remaining strong going forward.
One of the things for the home extension market that we track are residential planning applications, and what we can see is a consistently strong level of planning applications being put forward for home extensions, which I guess is unsurprising considering shortage of housing, valuations, mortgage availability, employment, et cetera. Particularly key for our London Brick sales and our London Brick product, which is exclusively as over 20% of England's housing stock are made from the London Brick, and we sell that as a matching product to the home extension market. It's also good for the sales that we make through builders, merchants, and distributors. We're encouraged by the remaining robust levels of planning applications going forward. Perhaps if I then move on to the brick market specifically.
We see brick stocks in the UK are at historical lows, and we see imports at historical highs, and actually still rising. We believe that we're very well-placed at the moment as we add next year 100 million bricks per annum of effective production capacity. That's 20% increase in our production capacity. We look at the number of imports coming in, we look at low inventory, and we look at the UK industry working at capacity, and we think we're bringing capacity on at the right time. Perhaps just to give a little bit of history to that, the pre-global financial crisis, the installed capacity in the UK was 2.6 billion bricks a year. That's now at around 2.1 billion.
With the capacity that we're adding and our competitors are adding, that'll go up to about 2.3 billion. If that's running at, say, 95% utilization, that means we can produce about 2.2 billion bricks in the UK. That's still considerably lower than the demand today of 2.5 billion bricks. We believe that as we add this more efficient capacity, which will produce less carbon per brick, we believe that we're still in a great place to service our customers and maintain the pricing tension that we need and maintain our margins. Let's go on and look strategically at our business. Every time we invest, we look to grow capacity, we look to improve efficiency, and we look to decarbonize. Hopefully, our strategy is pretty clear.
We've got sort of three pillars to our strategy, which I'll talk through briefly. The first one, strengthening our core business, that's really what we're doing with our Desford investment. We're adding 20% capacity to make bricks that we'll sell to volume house builders. Those bricks will be, they're in the right place. They're right in the middle of the country, so for easy distribution. They'll for each brick that we produce, we'll produce less carbon, emit less carbon. That is very much doing what we do well, but doing more of it and hopefully doing it slightly better. The second pillar to our strategy is around range expansion, and the project that we're doing at Wilnecote in Staffordshire is a good example of this.
While again, it's bricks, but it's a broader range, so we're gonna make blue bricks and different colored bricks. Bricks that we can sell to architects at a higher price point and expand the range of products that we offer to our customers and to the marketplace. We see that as expansion and a key part of our strategy. The third piece, I think, is around innovation development and new products. The project that we announced up at our factory at Accrington in Lancashire is a good example of innovation and product development, where we're going to make brick slips or thin bricks, as they're sometimes called, which we'll sell into the modular housing market. Probably more specifically, the high-rise building market to allow builders to put efficiently and effectively a lightweight brick cladding on high-rise buildings.
We believe our strategy is very clear and primarily focused on organic investment to grow our business and grow shareholder value. If I just we talked about the Desford project a few times now between us, and if I just do a reminder, we're spending GBP 95 million, and despite the cost inflation that we've seen, we at this point still expect to remain within our original budget. It will add, as I said, 20% to our effective manufacturing capacity, and by the time the factory is at full speed, we expect it to deliver an incremental annualized EBITDA of GBP 25 million a year. I should remind you that the barriers to entry in our business are pretty high. We own extensive clay reserves.
We've got some fantastic factory sites with all the utility connections in great parts of the country. Our strategy is very much about investing in those sites and investing in the clay reserves that we've got to really take advantage of that and drive shareholder return. The Desford project, we're going to commission in the fourth quarter of this year, and we expect that to be delivering bricks and delivering profits in 2023, and it'll reach full production in 2024. The first full year of financial numbers, you'll see that GBP 25 million will be 2025. You'll see growth from the end of this year right up to 2025 as we drive profit and cash generation from that factory.
I just mentioned cash generation, and as we both said, we are a highly cash generative business. We dig up raw materials for a lot of our business, and we convert them in factories that are generally paid for, which generates a lot of cash. That in turn allows us to further invest, and it's almost an ever-increasing circle as we further invest and we further grow our cash flows. We are well-placed to increase returns to shareholders as well as grow our business going forward. As I said, we'll start to see the impact of this strategy in 2023. In many ways, feels like this has been a long time coming, but that's the nature of organic investment and grow your own factories.
As from 2023, we'll start to see these projects roll through and the impact on the P&L. I've talked about the three projects, but we've still got a bigger pipeline of projects to follow that. We've said over the decade, on top of the Desford project, we expect to organically invest GBP 200 million in our business. I guess the pointer to that is that earlier this year, we spent just under GBP 2 million buying extra clay reserves up near our Swillington location, which is near Leeds, which allows us to secure another 4.5 million tons of clay. We are now looking at when we develop that site and working on that project.
Obviously, we're not ready to announce a timetable, but the fact that we're spending money on clay reserves indicates that we're pretty serious about this pipeline of future development. Let's move on to sustainability. Look, I've talked about decarbonization already. It's a key priority for us. Perhaps as well as decarbonization, I highlight a couple. I mean, one of them is around developing people and skills. There are skill shortages in the U.K., there are skill shortages in our business, and we have to make sure that we're continually bringing people on and developing the skills that we need. That's a big priority, and that sits under the people pillar of our sustainability strategy. Obviously, planet, a lot of that's about decarbonization.
Perhaps if I move on to the product pillar again, we've over the years used a lot of plastic to wrap our products, and at the moment, we're putting a lot of effort into how can we use a lot less plastic. There's a lot of really key things here on top of on top of decarbonization, which we're working on within our sustainability agenda. I think if I look at some areas of progress this year, we have reduced our carbon emissions since we set the targets, since the benchmark of 2019.
We announced that we've entered into a 15-year power purchase agreement to fund a solar farm, which will generate 70% of our electricity, so that we're in control not only of our electricity generation, but also the price that we pay for our electricity, which has probably become more important on a daily basis. We've recently announced a combined investment of just over GBP 4 million to put solar on the two new factories, the roofs of the two new factories at Desford and Wilnecote, which allows us to generate electricity on-site, which not only gives us electricity, but also takes away some of the transmission costs of delivering the electricity.
I talked about plastic packaging a moment ago, and from August, we shall stop wrapping our bricks up at Accrington in plastic, and instead just use a little bit of plastic around the middle to hold the pack together to make sure it's secure when we're transporting it. Quite a big change for us here and dramatically reduces the amount of plastic that leaves our factories. That will then roll out at our other factories, in time. We're running trials this year at firing bricks with hydrogen, and this is an experiment. We've not done this before. We need to know what it does to the brick. We need to know what it does to the kilns. It's a pretty exciting thing to be working on. Lots of work going on that.
We're also looking at carbon capture, and we're partnered with an organization at the moment, looking at how we can bring some technology into one of our brick factories and running a feasibility study on that. There's lots of technology out there for decarbonization and carbon capture, but there's not a lot of it that's been industrialized, and it is down to companies like ours to actually take that technology and industrialize it. Some exciting projects that we're working on. We're looking at the use of cement substitutes, including calcined clay, which has a cementitious property, and we're buying different cements from our cement manufacturers, cement suppliers, which have a limestone contribution and less clinker and therefore less carbon emissions per ton of cement that we buy.
Lots of progress going on within our business on the sustainability agenda. Then finally, perhaps, just finish on outlook. Look, we're confident that our market will continue to perform in the second half of this year and going forward. The performance will be slightly weighted towards the first half of the year as we close Wilnecote later on in the year and obviously lose the revenues from that. Also, we've got some closure costs around the old Desford factory. Nonetheless, we still anticipate our full year results will be slightly ahead of the expectations that we'd previously set ourselves. With that, I'm gonna hand over to questions, and I think we'll start with the room, and then we'll move on to the telly. Priyal Woolf.
Morning.
Morning.
Is this on? Yeah, Priyal Woolf here from Jefferies. Just two questions from me. The first is just on inventory levels. Obviously these just keep seeming to go further and further down. I can see why it might be a good problem to have, but, is there any feedback from your bigger customers in terms of, you know, worries over short supply? 'Cause it does sound like there's very little flex now, if they do want to tweak their orders upwards. The second question is just with regards to some of your customers. We obviously get a sense of what's going on with the bigger house builders, most of them are listed, but, any sort of further color on what's going on with some of the smaller house builders, any signs of stress there at all?
Yeah. Let's start with inventory. Look, low levels of inventory do impact customer service to some extent. We can't get away from that. The only way of building inventory is to supply less and build the inventory, which wouldn't be a popular thing either. I think it's generally accepted that the inventory levels are low because the market is strong, and I think the feedback we get from our customers is, "Bring on your extra capacity, and can we get it faster?" You know, we're investing significantly into our business in three of our brick factories today, to bring that extra capacity on. It is a challenge, but it's not one that we can do a lot about other than invest and grow our manufacturing footprint, which we're doing.
You know, we're in a great position in that we've got a profitable business that's generating cash and shareholders are supporting us to reinvest so that we can supply our customers with more product. On the house builder side, yeah, look, I think clearly the large builders are generally well-funded, well-capitalized, they've got great land banks. I think there are some of the much smaller builders that are perhaps slightly nervous in terms of do they know what their cost base is going to be, and if it's their own money they're pouring into it.
I am hearing a little bit around the edges of a degree of caution for some of the very small businesses that are perhaps slightly less well-funded going into this, but generally the feedback from our distributors who would deal with the smaller house builders is strong. I actually spoke to one of our distributors this morning, and he said that he is still very positive and that the house builders he's supplying are still building and still, you know, still doing well. But I think the very small house builder that builds one or two is probably a bit more nervous. The house builder that builds a few hundred units a year, I think is still moving well. Aynsley.
Thanks. Aynsley Lammin from Investec. I think I've got 3 actually. Just firstly on the imports, obviously at a very high level now, I wonder if you could give a bit more color where they're coming from, what's the price premium in the market, and I guess how easy is it to displace this with the Desford in terms of that price kind of delta. Secondly, just on the energy costs, appreciate very difficult to gauge kind of what that how much higher that might be next year, but maybe if you could just give an indication with the 40% you've already covered, what that kind of price increase is relative to what you had for the first 40% of this year, maybe. Thirdly, just on the price increase, you obviously had 2 price increases in bricks.
Do you need any more for the rest of the year? Have you got any more planned surcharges or anything? Thanks.
Well, let me pick up imports and then I'll let Ben have a go on energy and price increases and cost increases. I think the imports, they're coming from further afield. We know that. Historically imports, you know, if you look historically, we've seen bricks imported from Belgium, Netherlands, Northern Germany, and they are where they've got clays that make a broader range of sizes, textures, colors, et cetera, that we don't have the clays for in the UK. That's probably GBP 150 million of the imports coming in of the GBP 500 million. What we've seen is the imports grow just because we haven't got the manufacturing capacity in the UK to produce a sort of regular brick that would be used in volume house building.
They are coming from further afield, so we know there are bricks coming from Portugal, for example. We know that the cost of transportation from Portugal, transportation alone is more than it would cost us to make a brick. That also hopefully explains the price differential and the cost differential. It's significant, and we're seeing transportation costs going up, and actually we're seeing energy prices in Europe are probably even more volatile, if that's possible, than they are in the UK. When it comes to the price differential, I still think it's a significant premium, which again, underpins our ability to pass our, I'm taking part of Ben's answer there, but underpins our ability to price on cost inflation.
Yeah, something like on energy costs, we forward buy a portion of our energy, and then we kind of layer additional purchases in due course, and then we have the option of buying on the spot market at a time as well. If we sit here at the moment, I think we know we will have a significant increase in energy costs next year, but trying to quantify it is frankly impossible because you're relying on a forward curve that is up and down literally massively on a daily basis. I'm not sure it's enormously helpful to kind of quote part of our energy cost the next year versus a blended rate for this year or whatever. I think it's quite confusing. I think there is gonna be an increase of energy costs. The magnitude of it really depends on what the market does.
As I said, we've got pretty good coverage actually until the end of the winter. It's next summer where we have the biggest open positions, and so that's still a year away. I think it's not helpful to speculate based on a forward curve today, which was completely different yesterday and will completely different again tomorrow, what our cost is gonna be next year. I think we know there's gonna be an increase all we can say. In terms of pricing and surcharges, so look, we are comfortable with our pricing at the moment. We last increased our brick prices on the first of April. Price inflation, cost inflation probably did calm a little bit. Through April through to June, actually it started to calm down. We weren't seeing any big increases.
What we've seen in the last few weeks is we started to get notifications from suppliers of further increases to come kind of October, September time. We're also seeing increases in energy, although we're well covered. Not sure all of our suppliers and people in our supply chain will have the same energy coverage, and energy drives the price of most things. If energy prices increase, whether it's packaging, whether it's transport, whether it's cement, that will all increase in due course. I think we are mindful that there might be a further rise of costs in the second half. The other piece is labor inflation. Everyone's very focused on our energy costs.
At the moment, our labor cost is double our energy cost, and we only need to look at the fact that some people couldn't get here today because the trains are on strike. It's like there's a lot of upward pressure on wages, and it'll be interesting to see where that goes for the rest of the second half. We definitely expect cost increases over the coming months. It's just a case of exactly when that hits and exactly when we need to go to our customers to increase our prices.
We still remain confident that we will be able to recover the rising cost by passing that on to our customers, but it's a little bit early to kind of speculate exactly when we will have to kind of move our prices next, but there is certainly gonna be upward pressure as we go through the next six months and into next year.
Abby?
Abigail from Citi. Just two for me. Like as we think about the cost inflation that you just touched upon and expectations of further brick price increases next year, I'm wondering what sort of discussions are you having with house builders in terms of are they looking at, is there scope for substitute and are they looking at re-spec-ing the current build to reduce the brick intensity? The second one is on energy costs. With energy costs as high as they are, I'm guessing the gap between old inefficient kilns and the new ones is widening.
What percentage of your capacity can you kind of allude to where there are obvious benefits of further upgrades beyond the ones that are already in the pipeline?
Shall I take the first one?
Yeah, you do the first one, I'll do the second one.
Look, I think it's too early to know what level of price increase that we'll need next year. You know, if we sit here today, we expect there to be labor cost inflation in the U.K. economy as we go into next year. I think everyone would expect that. If the cost of living is going up and we're at full employment, that would be a reasonable assumption. Therefore, I think across the economy and our sector, we'll see some cost inflation. I think when it comes down to bricks specifically, the house builder still needs to clad a house with a product, and it needs to be something that is durable, long-lasting, that the consumer will like, and that the planner will like. The alternative is often a painted render.
Well, the cost increases for the concrete and the cementitious products and the paints are also fairly significant. I think in terms of cladding a building or the façade of a house, then we'll see cost increases across the board. I'm not sure that we'll switch the market off brick. In fact, I don't expect that at all. You know, brick is still the cheapest way to get a durable, long-lasting, maintenance-free, good-looking façade on a house, and I don't see that changing just because of a little bit of inflation in the U.K. economy.
Just to add to Stephen's point on that cost dynamics, it isn't just bricks. I mean, there's the same cost inflation pressures on blocks, cement, everything else. Every material that the, kind of the house builders are using is gonna face the same challenges. I don't think it's kind of gonna be targeted at brick. I think your question on energy costs is a very good one. Yes. I think, look, there is this big incentive to invest in new capacity, and there are a number of benefits of that.
I mean, we've talked about this all the way along that we don't really have a cost of sustainability, so being more sustainable isn't gonna cost us money because as we invest in new capacity, like we've done at Desford, like we're gonna do at the other projects in our pipeline, then you're not only getting kind of the new capacity, but you're basically, you're using less gas. At the moment, that saves you a fortune. You have to buy less carbon credits. I mean, something we've not talked about in too much detail, but our carbon compliant cost, carbon compliance cost has increased about fourfold since 2019. So if you actually become more sustainable, you buy less gas, you have to pay for less carbon, it increases your profit.
Yeah, I mean, we've got a program, a pipeline of investments over the year, over the next decade, where we're gonna renew capacity and add additional capacity, and that will improve our efficiency. Our whole strategy is not just adding capacity, but to improve the efficiency of our existing capacity. It's very hard to give you a specific number of plants or whatever that will benefit from renewal. The older the factory, as you say, the more benefit you'll get from a new factory, which will be more energy efficient. It'll be all more automated, so it needs less labor. There is big efficiencies to be had, and that's sort of our, under our sort of strategy, our ethos of manufacturing excellence. We want to continue to renew and enhance our manufacturing footprint, and that's key to our strategy.
Alastair, you've been waiting patiently. Or maybe not patiently.
No, being patient. Alastair Stewart, Progressive Research. A couple of questions. The first one, relating back to the first one on inventory levels in customers. Has there been any meaningful shift in the proportion of volumes that in Brick & Block that go direct to the house builders, which are the larger ones generally versus the merchants that deal with more of the medium and small end of the spectrum? That's the first question. Second question, echoing Ben's point, yes, it's pleasing to see the turnaround in Bespoke Products. Looking, you know, where do you see the sort of ideal margin and how long do you think it will get in that division to get to an idealized margin?
Let me quickly answer the first one, because I don't think it has changed massively. I think
versus 2019, for instance.
Versus 2019, I don't think it's terribly different. I mean, if you go back over the last probably 20 years, you've seen volume house building as a greater proportion of the brick market.
Yeah.
I think in the last few years, I don't think it's changed dramatically.
I mean, I think that the Bespoke Product business is doing really well. That's driven primarily by the precast concrete flooring business, which is the largest part of that segment. I think we're very happy with the performance in the past. We've made best part of GBP 5 million in the period before allocation of overheads. Actually, I think that's a decent level of return for that business. We would like to push it further, but I think we've got to be mindful that it's got a pretty low capital employed, and actually we're pretty happy with it as it is in the flooring side.
Yes, I think there's more to do on the more bespoke side, and as we look to do more façade products and basically leverage the investment we're making in slips, as we look to kind of put the brick façade back onto high-rise buildings and things, I think that's an area of growth. I think the area of possible growth in progression is more around the wider façades business. I think the flooring business, I think it's doing brilliantly. If we can kind of carry on nudging it forward, great. Based on its asset kind of base that it employs, I think the current return is a good return for that business.
I think the depends how you look at it, 'cause we tend to, in this environment, look at metrics and percentages of revenue. If you look at it the other way and you say, our flooring business is one large site, employs a couple of hundred people, and it's returned the thick end of GBP 4 million in the first half of this year. Actually, that's pretty healthy. When you start looking at it as a percentage of revenue compared to some of our other products, it perhaps the metrics don't look as good, but actually the performance for that factory site is good.
In terms of the margin on revenue, you know, you've made the big step forward, and it's more one or two percentage points maybe over time as the other non-flooring products.
Yeah. I mean, it'll always have a lower margin than the Brick & Block business. It's a different market dynamic, and also on the precast concrete flooring business, a big part of our actual revenue is just buying in polystyrene and then selling it on again as part of the flooring systems. You're never gonna get the same margin on that as you do on the manufactured product. As I say, look, we want to improve the margin in all of our businesses, and we work extremely hard to do that. As I say, I think the levels that we're at are a decent return, and anything above that on the flooring side would be a benefit. I think there is more work, and there's kind of more to go out in the coming years as we try to develop a façades business.
Sure.
Kristian.
Thanks, Tim. Kristian from Numis. Three questions, please. First of all, on Desford and the ramp-up profile, to what extent is that driven by sort of demand? In other words, if the market is like the market is right now, could you get, you know, to full capacity utilization quicker? The second one just on margins in the second half, and I think guidance sort of suggests a bit of a step down versus H1. Clearly, there are a few moving parts there around with the old Desford plant, et cetera. Just, you know, if you could help us sort of bridge the move from H1 margins to H2 margins based on guidance. The third one, just thoughts around share buyback as we move into 2023.
Obviously nothing decided yet, but just the general thought process behind it.
Well, let me start the first one, and then I'll pass over to Ben. I think there's often a bit of a misconception that with a factory, you just flick a switch and nip off for a cup of tea and a Hobnobs, and everything comes flying out. It's never quite that simple. We're dealing with a natural raw material. We're running two kilns, so we will first, and the first kiln that we're commissioning in quarter four will be the first one. We can't turn the second one on until we've turned the old factory off because the site's only got so much energy supply coming into it. It'll be a case of gradually ramping up the first kiln and then the second kiln, which will take a bit of time.
I don't at the moment see that it's the market that's preventing us from doing that. Therefore, we will commission our factory as quick as we can. You know, we've got new employees coming in. We've got new equipment, new systems. We've got to learn how the clays perform with the different bricks in the new kilns. It's not an overnight exercise, but it is something that clearly we have an advantage from doing as fast as we effectively can while still providing a high quality product to our customer.
Moving on to the margin point, so Kristian, you quite rightly point out that we expect the result to be slightly weighted towards the first half. I think that's more a function of our business and our capacity constraints and the things that we've got going on rather than any interpretation on the market that we see remaining strong. As you talked about, we've got the old Desford factory is kind of nearing the end of its life, and we are effectively nursing that factory to its kind of expected retirement at the end of the year. We've had to cut production to do that and say, when you get a factory that's gonna be pulled down in five months' time, then you're not gonna spend large amounts of capital to enhance it and to keep it kind of in prime condition.
We've got to make every decision based on a payback in the next few months. That will just see production fall a little bit. I think we've well publicized the closure of the Wilnecote factory for its refurbishment, so that's closing in September. That will kind of have an impact of sort of GBP 1.5 million of profit off the second half of the year. Alongside going back to the old Desford, there will be some costs of closing that factory. Not all of the workforce, for example, are gonna move across to the new factory. Then there's just the volume constraints that we've talked about previously. We are kind of at low levels of inventory with those challenges.
I'm not sure we can actually sell quite as much in the second half as we can in the first half. We're talking about small percentages, but there is a slight kind of likely drop off in sales. Yeah, that's why we think the second half result will just be slightly lower than the first half. As I say, it's very much a reflection on our capacity constraints and ultimately the Desford and Wilnecote investments that we're doing to in the longer term improve our business. There's just a short-term bit of pain associated with that in the second half. As I say, it's no reflection on the wider market. The final piece was the share buy, the share buyback, and are we likely to do anything further?
I mean, I think first of all, we're only just about halfway through the current one, so we don't want to get kind of carried away. That's our priority to finish that. We've talked about our capital pipeline, where we want to spend in excess of GBP 200 million after Desford over the next decade. The nature of these capital projects is that they are quite lumpy with kind of the timing of the outflows might not be evenly spaced. Some of those projects are entirely under our control, so we can do them when we want. Other ones, for example, require us to secure raw materials or to find factory sites or whatever, which might not be entirely under our control. So I think that our future kind of approach to shareholder returns will depend on the timing of those projects.
If we've got kind of cash that we're not using efficiently, we can look at returns, but if we've got a big capital project going on that needs the money, then we're likely to prioritize that first. I think over the next decade, there's a good chance of doing further returns, but we're not in a position to kind of speculate as to when that timing might be.
Thank you, Clyde.
Clyde Lewis at Peel Hunt. I think I've got 3, possibly 4.
Blocks. Yeah, I think in the statement you referred to sort of, I think, operational inefficiencies, I think you flagged, and I'm sort of, I suppose, wondering if you could say a little bit more around that, and I suspect there may be some raw material issues there. That was the first one. The second one was on the planning application chart that you put up. When you compare that with the London Brick demand profile, what does the lag look like in terms of sort of months between planning applications and upwards or downward movements in London Brick shipments? The third one was on soft mud imports, or I suppose imports being largely soft mud-focused.
I think I'm correct in saying that, but obviously, most of the new capacity coming on in the industry is wire-cut, so is there a difference around, you know, the new supply versus the import substitution issues, I suppose, and will the house builders shift ultimately from using soft mud to domestically produce wire-cut? I suppose that's the question. Then the last one was really around the gas hedging, that 85% that you've got for the second half.
I mean, again, maybe it's too secret squirrel, if you like, in terms of sort of giving the information away, but are you sort of well covered, sort of, you know, August, September, October, and then you've got big issues come November, December, and how does that play around any sort of plant maintenance issues or plans that you've got for the second half of the year?
Okay. Thanks, Clyde. Let me take the first three fairly quickly. Look, blocks. There are some operational issues at particularly one of our block plants. Part of it's raw material, part of it's labor availability, but also we are conscious that particularly one of our factories is now getting on a bit, and when we look at our pipeline of investments, we do want to. We talked a lot about bricks today, but we want to invest in our block business as well. We do see a need for capital expenditure and further organic investment in our block business. I think the planning applications, I think the lag is reasonably long. I would very much look at that as a leading indicator.
You know, we sell London Brick to the merchants. They tend to reorder at the point that they've got no stock in the yard. We don't have an order book like we might for a house builder, where if they're building 1,000 houses and we know which bricks they're gonna use and it might take several years, it is slightly different. We very much see that as a leading indicator for what's coming. But the lag would be quite long 'cause there will be, you know, once people have got planning consent, they need to find a builder, et cetera, et cetera. We don't see that as something that would happen particularly quickly. Soft mud.
Look, I think, to an extent, the message we're getting off some of our customers is they're buying bricks that they may not choose to buy, but they're buying what's available. I think, where we're investing in Desford, that is very much focused at volume house building, particularly in the Midlands, because that's where the factory is, but obviously it can distribute all over the country. Other than the very south, most of the country is wire-cut bricks. If you look at Midlands and North, there are bricks being used today that perhaps haven't always been used 'cause that's what's available. That isn't to say there won't be further capacity added in soft mud bricks. I'm sure there will.
Right at the moment, we're very confident that market's there for the wire-cut, particularly for the volume house builder that might be a little bit more price conscious on the type of bricks that they're buying. I'll let Ben pick up the last one.
On the gas hedging, no, I mean, there's no secret squirrel. We're pretty much kind of evenly covered. That 85% is pretty much representative month-on-month for the rest of this year. We're not really looking to secure any more energy for this year. We never want to go much above 90% anyway because it's quite hard to predict exactly your energy usage. You only need a bit of a plant outage or a change in a shutdown plan or something like that, and you end up with too much energy, and we found out to our expense that that's not a great thing kind of during the pandemic. As I said, for next year, yeah, we've got pretty good coverage until the end of March.
We have the lowest level of coverage in the summer, and then we've got decent coverage again next kind of winter 2023. It's kind of the summer is the kind of the open position for us at the moment. Beyond that, look, we've made competitive energy price purchases in the last six months or so, for 2024, 2025 and even into 2026, we've been forward buying energy. Just the market for 2023 over the last year, and even more so now, has been difficult, so trying to find value in 2023 has been a challenge. There is value, or there was until fairly recently, value on the forward curves further out after 2023.
The risk premiums, as you know, are very, very high. You've got to balance how much risk premium are you willing to pay. Stephen.
From Arden Partners. Three, if you don't mind. Seems to be the standard level. Just three things. Firstly, you make a comment in the text about extending your own fleet, not only to deliveries but also to inbound raw materials. Could you just talk us through the trade-offs that the board considers in and around that? Because in a business that's already highly operationally geared, clearly having your own fleet only adds to that gearing. Just sort of help me out with a thought process on that one. Secondly, with regard again possibly to fleet and the HGV driver crisis seems to have gone away, but a number of sector companies have talked about a supplementary payment to some of the lowest paid people in their organizations in the next six months.
Is that something that is being considered by your organization? Thirdly, in terms of the slips, you talked in terms of facades, and I was a little curious as to whether the thought process is that you might go into the manufacture of brick-faced facades for at some point. Is that part of the thinking or is that such a long way off now with maybe it's tomorrow's issue, not today's?
Well, let's start with the fleet. Look, we deliver probably about 60% of our total output on our own fleet. So it's not all on our own fleet. It would be slightly higher for Brick & Block. But nonetheless, there is some buffer there. In terms of inbound raw materials, it's about finding haulage, and we need something that's very regular. So it's a bit of a milk round. You're literally sending a truck. Maybe it's doing 4 trips a day between raw material source or more. It might be more raw material source in our plant, and you just want that consistency. At the moment, it's been challenging finding people to do it, and certainly finding people to do it at an acceptable cost. We have the operator's licenses.
We operate a fleet. We know how to do it. To add a handful of vehicles and trailers onto our existing fleet to do inbound, just, it just makes logical sense. We're not gearing ourselves up to the point of causing ourselves a problem going forward, 'cause there is still plenty of both inbound and outbound that's done externally.
Just to add to that, it's about resilience. If, for example, we suddenly have a hauler let us down. Or say with the Aircrete factories, we're taking materials from seven different locations. If we've suddenly got to move to a different location, trying to find hauling externally can be challenging. If we've got our own vehicles that we can respond as a surge, it gives us greater resilience. This is not a major investment. We've already got 180 HGVs. We often describe ourselves sometimes as a logistics business with a brick maker on the side. Having different trailers that you can put on the tractor units we've already got to give ourselves resilience and make sure we can keep our factories open is a pretty small investment, but kind of can have a big return if it keeps the factory open.
Yeah, it's not a major thing, and it's certainly not gonna massively change our operational gearing.
You talked about the HGV crisis. Yeah, look, last year we gave an industry-leading pay award to all of our employees, and we also looked at the terms and conditions that our 200+ HGV drivers work on to make that more attractive. We are conscious, though, I think that as we go into quarter four and household energy prices go up dramatically, that the lower paid will suffer the brunt of those extra costs. You know, as a responsible employer, yeah, we need to look at it. It's too early to say exactly what we're gonna do, but it is on our radar as something that we need to think about.
We need to make sure that people can come, do a good day's work, and can still afford to feed their family and heat their homes. I think that's important. Facades. Well, we are making some brick-faced facades, so there's nothing new in that. We do some. We've done a couple of large jobs, actually, for the Ministry of Justice on a couple of prison projects, whereas I don't wanna roll out my old joke about concrete walls in prisons, but there are plenty of them. The external walls are brick-faced, already factory-made, but we think that might be an area that we can grow.
Also with the thin brick or the brick slips systems, different ways of attaching brick slips onto buildings, particularly high-rise buildings, to create a secure, you know, fire safe facade, I think is an area that, well, it is an area that we're working on, and we're looking at different ways of how can we attach our product to the outside of buildings. Should we, if that's the room done, should we move to questions from the web with a few jokes or something now 'cause there's-
Didn't prepare a script.
So far, there are no questions coming through, active.
No. We done? Okay. Look, thanks very much, and thanks very much for everyone that's dialed in to listen. Appreciate it.
Thank you, everyone. Cheers.