Good morning. I'm joined this morning for the presentation by Justin Lockwood, our Chief Financial Officer, and we also have Simon Bourne, our Chief Commercial Officer, here for the Q&A too. I'll start with a brief overview of our half-year performance. From there, I'll focus in on our landscaping products business following the trading update we shared on the 25th of July. I'll talk through some of the challenges currently impacting our profitability and the encouraging progress we are making through our performance improvement plan, which is set to deliver a material uplift in profitability. After that, Justin will take us through the group's half-year financial results in more detail, and then I'll return to share an update on the early momentum we're seeing with our transform and growth strategy across the other business units outside of landscaping.
I'll wrap up with a short summary and outlook before opening the floor to questions. Just a quick reminder for the online participants, you can submit your questions at any point via the chat, and we'll read them out before responding. Let's move into the half-year summary. Back in November 2024, we introduced our transform and growth strategy, a clear roadmap for shaping a group where long-term profitable growth is driven by the combined strength of our diverse portfolio of market-leading businesses and brands. This approach ensures that our medium-term performance is not reliant on any one single business unit. In the first half of 2025, the group returned to revenue growth, up 4% year-on-year, driven by profitable growth across key areas. Roofing and building products delivered strong performances, up 11% and 6% respectively.
Encouragingly, we also saw a positive trend in landscaping products where revenue contracted by just 1%, and that's a marked improvement from the 11% decline that we saw in the second half of last year. Profitability improved in both roofing and building products . In roofing, Viridian Solar continued to perform strongly, benefiting from those regulatory tailwinds that are expected to increase the adoption of in-roof solar in England and Wales from around 10% - 80%. Marley Roofing also delivered a robust performance, gaining profitable share in clay tiles and timber battens, and holding its market share in concrete tiles, therefore reinforcing its market leadership position. In building products , water m anagement and mortars were the key drivers of profitable growth. Water management strengthened its position in new housing and secured more specified higher margin infrastructure projects, highlighting the significant market opportunity beyond residential new build for that business.
Our mortars business benefited from a moderate uplift in build rates across new housing sites, which favored our ready-to-use products. This was partially offset by a softer performance in our bricks business, where increased sector capacity and a slowdown in activity during quarter two intensified pricing pressure. In response, we made a deliberate strategic choice to protect margins rather than chase volume at lower prices. With landscaping profitability below expectations in subdued markets, we've taken decisive action to accelerate our performance improvement plan. These measures, which I'll return to in more detail shortly, will reduce costs, align capacity with current market demand, and deliver annualized savings of around GBP 9 million in 2026. We're also addressing a smaller, currently unprofitable part of our business, either by improving its performance or exiting it altogether.
Importantly, we've maintained a robust balance sheet through disciplined working capital management, with adjusting operating cash flow conversion at 94% and net debt reduced by GBP 4.2 million at the halfway point. Before Justin takes you through the detail of the results of the half-year, I wanted to focus in on landscaping products. In the first half of 2025, we've seen that improving revenue trend that I highlighted, and that reflects the work of the sales team in engaging with our customers and strengthening those relationships, with new trading agreements driving positive momentum and delivering volume growth and regaining market share in what are clearly subdued markets. However, our margins have been impacted by a combination of market, pricing, and product mix dynamics. Subdued markets and overcapacity are acting to suppress pricing.
The cumulative inflation in building materials over the last few years is driving value engineering of projects in both commercial and domestic sectors, and has resulted in a deterioration in product mix with a shift to more lower margin commodity products and away from value-add solutions. In the medium term, we do expect a market recovery and know that this will act to ease the challenges of overcapacity, supporting a shift back towards higher margin value-add solutions and reducing the pressure on pricing. With no improvement in market conditions expected in the near term, we are not relying on the market recovery and are accelerating key parts of our performance improvement plan. In June, we put this comprehensive plan in place, and we've been executing it at pace.
As a quick reminder, that improvement plan has four key priorities: strengthening our leadership and realigning the organization to drive specification, portfolio simplification to reset our portfolio to better meet the needs of our market and our customers, and drive operational efficiency through network optimization, reinvigorating and building long-term strategic customer and supplier partnerships, and investing in strengthening core commercial and operational excellence capabilities. The plan has not changed, and we remain confident that these initiatives will deliver a material improvement in profitability in 2026. Commercial actions we have taken are delivering a clear improvement in revenue trends, regaining market share, and we are starting to see an improved mix of product in our order intake. We've made good progress on portfolio simplification and network optimization in the first half of this year and are taking additional steps in the second half to accelerate these plans.
In the next few slides, I'll provide more detail on these actions. In the first half of this year, we took a significant step forward by partially closing one site, unlocking annualized savings of approximately GBP 3 million, around half of which will benefit 2025. Given the continued subdued market conditions, we are accelerating our plans to reduce costs and enhance operational efficiency. Actions are already underway to deliver an additional GBP 6 million in annualized savings. Around GBP 1.5 million of this will benefit in 2025. This is a substantial and strategic piece of work. It's involved a complete remapping of our landscaping manufacturing network and will result in relocating production of our core product ranges closer to our most profitable markets. Together, these two programs are expected to deliver total annualized savings of around GBP 9 million, with approximately GBP 3 million benefiting 2025.
In addition, we're addressing a small unprofitable part of our product portfolio, and our focus is clear: either return it to profitability or exit it altogether. The new landscaping leadership team is now fully embedded and successfully led a business reset, strategically positioning the business to deliver improved margins on the back of volume growth and increased market share through the remainder of this year and into next. At the Capital Markets event last November, we acknowledged the need to reinvigorate our customer relationships. Since then, we've made significant progress in engaging at every level, positioning Marshalls as the preferred strategic partner, creating value for both our customers and ourselves. We now have multi-year trading agreements in place with our key customers, which are driving a notable uplift in brand presence and share of voice across our distributor network.
The images you can see on screen are just a snapshot of hundreds of examples on the ground: impactful displays, deeper engagement at branch level, and joint marketing campaigns. In our top three distributor partners alone, our share of voice now exceeds 75%, and in one of these, it is around 90%. It's not just about distributors. The relaunch of the Marshalls Accredited installer scheme has boosted engagement, ensuring that our products are being promoted and installed by the highest quality professionals in the industry. While overall market activity remains subdued, we are winning business in the near term and are increasingly well positioned to capitalize on rising demand as and when market conditions improve. Now, whilst the revenue trend is encouraging, margins came under pressure in the first half of the year due to a less profitable product mix with a shift towards commodity products.
However, we're beginning to see signs of recovery in the commercial landscaping sector, which represents approximately 2/3 of our landscaping business. It's important to remember that commercial projects typically have a gestation period of anywhere between three and 18 months. Against that backdrop, the positive impact of our sales team's effort on the specification pipeline is particularly encouraging. Their focus, supported by targeted incentives to drive an improved product mix, is delivering results. Between April and July, we recorded an 8% increase in the order intake of value-add products, signaling strong momentum and strategic alignment. To further support our sales teams and customers, we're simplifying our product portfolio, a clearer range architecture structured around good, better, best. We'll ensure the right product ranges are positioned at the right price points, and this will create a stronger platform for value-add growth and improve profitability across both commercial and domestic sectors.
We'll be actively working with our customers to transition volumes from discontinued ranges, and we're enhancing our better tier offering through focused new product development, leveraging the capabilities of our dual block plant technology at St. Ives. This transformation is progressing at pace. While it's difficult to fully appreciate the scale of the work underway, it will result in a 28% reduction in SKUs. To bring this to life, we'll be removing 16 ranges and across the remaining portfolio, removing overly complex combinations of sizes, colors, and finishes, making our offer clearer, more compelling, and easier to navigate for both our teams and our customers. That combination of self-help measures and the actions we are taking to reset the business are already gaining traction, positioning our landscaping products business for a material improvement in profitability in 2026.
I'll come back after Justin has talked through the financial results for the first half of the year to briefly update you on the early progress we are seeing with our transform and growth strategy across our other business units. Justin.
Thank you, Matt, and good morning, everybody. I'm going to take you through the detail of our financial results for the first half of the year, and that'll include an update on each of our reporting segments, as well as our cash flow performance. I'll then give you an update on the strength of our balance sheet before running through a recap of our capital allocation policy. This slide sets out the key financial headlines for the year. Revenue grew by 4% to GBP 319.5 million, but operating profit contracted by 16% to GBP 28.4 million, and that reflects a weaker performance in our landscaping products business. That fed through to a reduction in earnings per share of 16% to GBP 6.6 per share, and we've applied our dividend policy of maintaining 2x cover, and that's resulted in a 15% reduction in the interim dividend to GBP 2.2 per share.
We've continued our disciplined approach to cash management during the period, and as a result, our pre-IFRS 16 net debt closed the half-year at GBP 152 million, which is a GBP 4 million improvement compared to June of last year. I'll now run through the key drivers of performance at a group level, starting with revenue. The chart on this slide sets out a year-on-year revenue bridge from the first half of 2024 to the first half of 2025, and it's split between our reporting segments. As mentioned on the last slide, we reported revenue growth of 4% year-on-year to GBP 319 million, and that's against the context of continued subdued levels of market activity. It also compares to a contraction of about 2% in the second half of last year, showing encouraging trends in both landscaping and building products and a continued good performance in roofing.
In landscaping, revenue's contracted by 1% in the first half of the year, and that's a significant improvement on the 11% rate of contraction in the second half of last year, with volume growth being offset by targeted price investment and an impact of a shift in product mix which reduced revenues. In building products , revenues grew by 6%, and that's a step up from the flat revenue performance in the second half of last year, and it was led by improved performances in water management and our mortars business units. In roofing, we reported revenue growth of 11% in the first half, and that's comparable to the 13% that we reported in the second half of last year.
It was led by continued very strong growth from Viridian Solar as housebuilders continued to adopt its market-leading products alongside a slower rate of growth in Marley , built on its market-leading position and increased revenues in a subdued marketplace. Now moving on to operating profit. The chart on this slide sets out the component parts of the 16% reduction in operating profit to GBP 28.4 million. You can see clearly from the slide that we reported growth in profits in building products and roofing products , but that's been offset by a significant reduction in profitability in our landscaping products business. There's a similar story from a margin perspective with a modest improvement in margins in building products , continued strong margins in roofing , but a significant reduction in the margin in landscaping. As a result, the group operating margin contracted by 2.2 percentage points to 8.9%.
We continue to have a medium-term target for that margin to recover to around 15% as we benefit from operational leverage generated from incremental volume from the execution of our transform and growth strategy and a recovery in market volumes. I'll now talk through the drivers of performance in each of our business units, starting with landscaping products. As mentioned earlier, revenues contracted by 1% year-on-year, and that's against the context of subdued market activity levels with sector-wide volumes being materially below historic norms. As Matt mentioned earlier, we returned this business to volume growth during the year, and that volume growth was 6%, driven through improved customer engagement and the new trading arrangements that we put in place with key distributor partners.
That was offset by targeted price investment, which was around 2%, and a shift in product mix, which had the impact of reducing revenues by about 5%. Of that shift in mix of products, about half of it was driven from a shift from value-add to commodity products. Those value-add products have got significantly higher revenues and significantly higher margins than the commodity products. Moving on to the operating profit performance, operating profits contracted by GBP 8 million, and as a result, the reporting segment was broadly break-even in the first half of the year. A number of drivers of that reduction in profitability, the first of which is the targeted price investment, which clearly flows straight down to the bottom line. We've seen the impact of that shift from value-add to commodity products, which has resulted in a less profitable product mix.
Those two factors are partially offset by the benefit of additional volumes. In addition to that, though, the business has been impacted by cost increases, the largest of which has been labor-related from cost of living increases and increased national insurance contributions that have not been recovered through price increases during the period. In addition, our manufacturing efficiency has reduced year-on-year, particularly in our natural stone business. In response to this, we've decided to accelerate the network optimization element of our landscaping improvement plan. As Matt touched on earlier, we expect that to deliver annualized savings of GBP 9 million, with GBP 3 million being delivered in 2025. We're confident that will create a more agile and flexible business that will facilitate a material improvement in profitability in 2026. Now moving on to building products , which, as I mentioned earlier, delivered revenue growth of 6% year-on-year.
That was driven through growth in both water management and mortars, partially offset by lower revenues in bricks and aggregates. In water management , we saw good growth in both our core housing market and in the wider infrastructure market, aided by improved inventory availability and good service levels. In mortars, we benefited from some increase in activity levels, but the relatively slow build rates on housing developments, which favor our ready-to-use mortars product. In bricks, in a very competitive marketplace, we chose to prioritize price over volume in order to protect our gross margins, and as a consequence, revenues dipped slightly. In aggregates, we saw lower demand in our regional marketplace. Profitability grew by 8% to GBP 6.9 million in the period.
That profit growth was driven by water management , where we saw the benefit of increased volumes and a stronger product mix, and in mortars, where we benefited from higher activity levels and strong price and discipline. That was partially offset by lower profitability in bricks due to the lower volumes. Now moving on to roofing products, where we had revenue growth of 11% during the period. That was principally driven through very strong revenue growth in Viridian Solar of around about 50%. That, as I mentioned earlier, is reflective of housebuilders continuing to adopt the business's market-leading products as part of their response to changes in building regulations that require increased levels of energy efficiency. It is also worth highlighting that we do expect the rate of growth in this business to moderate in the second half of the year as the comparatives get tougher.
Marley Roofing augmented that performance by building on its market position and gaining share in concrete plain tiles and timber battens and holding share in concrete tiles. That resulted in an increase in revenues. Operating profit increased by 7%, and that was driven by Viridian Solar with incremental volumes and its disciplined pricing strategy, resulting in improved profitability. Profits were modestly lower in Marley, where we saw weaker manufacturing efficiency and some targeted investment in customer engagement and commercial capability. We've chosen to increase the level of capital expenditure in this business during 2025, with a focus on improving manufacturing efficiency and product quality. That will put the building blocks in place for long-term revenue delivery and margin performance. This slide sets out the profit and loss economy from operating profit through to earnings. As mentioned earlier, operating profit contracted by 16% to GBP 28.4 million.
Finance costs were lower year-on-year by about GBP 1 million due to lower borrowings and the reductions in base rate. Profit before tax contracted by 17% to GBP 22 million. The effective tax rate we've applied at the half-year is 24%. That's in line with the full-year effective tax rate from last year. It includes the benefit of a patent box arrangement. Adjusted earnings per share reduced by 16% to GBP 0.66 per share, reflecting the weaker operational performance. Now turning to our cash flow performance and the movement in net debt, the chart on this slide sets out the movement in the component parts of the movement in net debt from the December 2024 year-end to the June 2025 half-year. It illustrates the seasonal nature of our working capital requirements. You can see that working capital line there, which absorbed about GBP 26 million during the first half.
That's normal, and it reflects higher levels of trade accounts receivables from customers. You can see that it absorbs a reasonably significant part of the EBITDA generation during the period. It's the principal reason why net debt has increased by GBP 18 million since the year-end. Our operating cash flow conversion continues to be very strong at 94%. It reflects our continued focus on working capital management. I'll touch on that a little bit on the next slide. Finance and taxation cash flows totaled GBP 12 million in the half-year. That's a little bit higher than it was this time last year due to a normalization of the timing of interest payments and some front-loading of taxation payments in 2025. Net capital expenditure was GBP 8.9 million, and that comprises gross CapEx of GBP 9.7 million, less the proceeds from a site disposal of GBP 800,000.
We continue to tightly control capital expenditure, given that we don't need any more incremental capacity as things stand today. We also made the final contingent consideration payment in respect to Viridian Solar, which was at a cost of GBP 6.6 million in the first half of the year. We closed the half with net debt at GBP 152 million, which is GBP 4 million better than 12 months earlier. This slide sets out a number of measures focused on working capital management, returns, and balance sheet strength. As mentioned on the last slide, we continue to take a proactive approach to working capital management, with both debtor days and creditor days improving year-on-year, and average in-route return being flat. Returns dipped by 0.3% to 7.3%, and that reflects the weaker earnings during the period.
We do have a target to return on capital employed to around 15% in the medium term, and that'll be driven through operational leverage underpinned by a transform and growth strategy and a recovery in market volumes. The balance sheet continues to be robust, with leverage stable at 1.8 x, the same as it was this time last year. We've got very significant liquidity against our bank facilities of GBP 145 million, which provides the liquidity and capital to execute our growth plans. Finally, just moving on to a recap on our capital allocation policy. Our first priority is to continue to invest in organic growth opportunities, no changing our view that our strategic plan will require between GBP 20 million and GBP 30 million of spend in the medium term, but our spend this year is expected to be slightly below the bottom end of that range.
We'll continue to invest in those areas which will enhance the group's competitive advantage, being carbon leadership, leading brands, and our best-in-class technical and design support. Our dividend policy remains unchanged, maintaining 2x cover of adjusted earnings, and the interim dividend is in line with that policy. At the start of the year, I guided to net debt being unchanged in 2025, and that continues to be our current view. Whilst our expectations of EBITDA generation have reduced, we'll have lower taxation cash flows, lower dividend cash flows, and there'll be a bit less investment in working capital and capital expenditure than we originally assumed. We continue to expect to see reductions in net debt from 2026 onwards due to the cash-generative nature of our business. We're still targeting leverage in the range of 0.5 x- 1.5 x EBITDA, which will provide optimal flexibility.
Finally, we will continue to consider selective bolt-on M&A opportunities that will accelerate our transform and growth strategy. I'll now hand back to Matt, who'll take you through the strategy update.
Thanks, Justin. It's clear that against a backdrop of macroeconomic uncertainty and continued subdued activity across our key markets, we've delivered a performance that underscores the strength of our broad product offering. It's a direct result of the group's diversification strategy and highlights the potential for a successful turnaround of our landscaping products business. Now let's turn to transform and growth strategy, and I'll give you a brief recap and share some of the early progress we're making across our other business units outside of landscaping. With customers at the heart of our strategy, we're building on a common set of capabilities that we know they value, from carbon leadership, best-in-class technical and design support, and our market-leading brands.
Our transform and growth strategy is establishing that clear pathway forward to shaping a group where long-term profitable growth is driven by the collective strength of our diverse portfolio of market-leading businesses that ensures medium-term outperformance is not reliant on any one single business unit. Our medium-term goals are clearly defined. They are built on delivering market-out performance across our businesses and leveraging the financial strength of the group to support sustainable growth. Our successful diversification strategy has created a more balanced exposure across our end markets. We're building a group with three more evenly contributing reporting segments across landscaping, building, and roofing products. In the near term, activity levels on our key end markets remain subdued. However, commercial and infrastructure representing around 30% of group revenues has shown greater resilience.
The government's 10-year infrastructure strategy and commitment to major infrastructure investment alongside the AMP8 investment cycle in water is expected to drive increased activity in the coming years. New housing, which accounts for around 45% of group revenues, continues to face relatively low activity levels. While there is a clear structural need for more homes, near-term economic uncertainty is dampening confidence, despite improved mortgage affordability following successive cuts to the Bank of England base rate. The government's ambition to accelerate house building during this parliament, supported by planning reforms and the GBP 39 billion Affordable Homes Funding Programme, with a commitment to build 300,000 new affordable homes, is encouraging. These measures will take time to translate into increased activity. Housing RMI makes up the remainder, about 25% of group revenues. Repair and maintenance remains more resilient, which is reflected in the strong performance of our Marley Roofing business.
However, the improvement segment of RMI continues to operate at historically low levels, with homeowners cautious about committing to more significant renovation and improvement projects in the current climate. While near-term market conditions remain challenging, the medium-term fundamentals are encouraging and support our confidence in the group's strategic direction. With our portfolio of market-leading brands and differentiated propositions, the group is positioned well for sustainable growth across all its businesses. In landscaping, roofing, and solar, where we have enviable market positions, and in water management and bricks , where we have significant headroom for growth. At the Capital Markets event in November, we outlined the clear role and strategy for each of our businesses to drive growth and outperformance across our two brand powerhouses, Marshalls landscaping and Marley Roofing, and our three growth engines of Viridian Solar, Marshalls water management, and Marshalls bricks and masonry.
Let's briefly touch on the early progress with transform and growth beyond our landscaping business. Marley Roofing has reinforced its market leadership position in the first half of the year, and the business is investing around GBP 5 million in capital projects that will enhance both product quality and manufacturing efficiency at two of our concrete tile manufacturing sites. In addition, we're investing in developing bespoke software that will support our specification selling strategy by enhancing the customer experience and increasing product attachment rates. Progress continues on integrating the solar roof system into Marley's full roof offer, with a defined strategy and ongoing discussions with selected house builders ahead of a wider rollout.
Through the first half of this year, Viridian Solar grew in line with expectations, driven by the increasing penetration of housing built to Part L regulations, regulations that present a market opportunity of GBP 77 million a year per 100,000 new homes built, and where Viridian Solar has around a 40% - 45% market share. The team has continued to strengthen its position with key house builders, signing a two-year extension to a solar deal with its largest customer for its Clearline Fusion roof integrated solar panels. Viridian Solar's outlook improved further during the first half of 2025 following the government's announcement on the Future Home Standard, which will make solar panels mandatory on most new homes.
The impact of the new standards announced will drive an increase of penetration of solar on new homes to around 90%, and combined with the requirement to increase the solar power output per home, has the potential to double the business's addressable market to around GBP 162 million per year per 100,000 new homes built. The implementation times are expected this autumn and will fuel further market growth after the current Part L regulations are fully embedded in 2026. As you'll hopefully remember from Viridian Solar, they also launched the ArcBox product, a patented product that acts to mitigate arcing in solar connections, thereby reducing the risk of fires and can be used with any solar panel connection. Sales of ArcBox have grown over 135% in the first half of this year, primarily in the U.K., but also in Europe, where we've appointed three wholesale partners in Spain.
Water management has delivered a strong performance in the first half of the year, with growth in both its core housing market and by winning business in the wider water management and infrastructure business. We've invested in new design software and training programs across our engineering and commercial teams, which is enhancing engagement with key specifiers. We're on track to deliver over 3,000 project designs in 2025, an uplift of over 25%. Importantly, more of these projects are for larger, more complex design schemes. One example of this is the Top Brooks Billway project, where the reservoir threatened the town of Whaley Bridge in the Peak District and was widely reported on the news. Our structural engineering team provided the solution with a combination of our Redi-Rock retaining wall system, which is a bit of a mouthful, and our window drainage network solutions.
The team have also won further high-value infrastructure business, with further work on the HS2, Hinkley Point C nuclear power station, and numerous projects across motorway junction improvement and major A-road schemes. The team has also established framework agreements with key Tier 1 contractors and built relationships with design consultancies, building a very strong foothold ahead of the AMP8 cycle, with water infrastructure design work up 35% year-on-year. We expect feasibility and design work to continue to ramp up further through the latter part of 2025, and construction on projects to commence from mid-2026 and continue to grow in number throughout the AMP cycle. To support this growth, we've also undertaken a detailed capacity and capability review to inform a targeted capital investment plan, which we'll evaluate in the coming months to align our future investment with the highest value and growth opportunities.
Finally, in bricks, as you've heard earlier in the presentation, the first quarter of 2025 saw encouraging demand from house builders. However, increased sector capacity and softening activity levels in the second quarter intensified price competition. In response, we made a deliberate strategic decision to protect margins by focusing on the differentiated value of our low-carbon brick offering, competing on quality, sustainability, and long-term performance rather than price. On the left-hand side of this chart, you'll see that we're launching a major advocacy campaign in the second half to reinforce our carbon leadership, positioning our lower carbon bricks as a sustainable choice for U.K. construction. Just one of many compelling facts I could share is if all the new dwellings built in 2023 had been built with lower carbon concrete bricks, it would have saved around 215,000 tons of carbon dioxide.
When it comes to myths about concrete bricks in regard to limited range, on the right-hand side of this chart, you can see the comprehensive range of formats, aesthetic finishes, and over 200 colorways that we have today to meet the needs of our house builders, with further MPD being worked on with our house builders that will be launched later this year to enhance this offer. I hope this provides you with a brief update on the early progress of transform and grow across our business units and demonstrates the significant opportunity we have for growth and value creation. Now let's turn to the outlook and summary before we join the Q&A. As we look ahead, we remain mindful of the ongoing macroeconomic uncertainty and at this stage do not anticipate any meaningful improvement in market activity levels through the remainder of this year.
That said, we are clearly focused on the plans and actions within our own control. We continue to be encouraged by the medium-term outlook supported by the government's commitment to more new housing and infrastructure investment throughout the Parliament. Our transform and growth strategy is positioning the group well for sustainable growth across our diverse portfolio of businesses. We remain confident in the ability to deliver a material improvement in profitability and returns over the medium term. In summary, at the half-year, performance reflects the encouraging progress of the group. We've returned to revenue growth despite subdued market conditions, demonstrating the early impact of our strategy. We've delivered improved profitability in both building products and roofing products, and we've continued to execute our landscaping improvement plans at pace, taking decisive action to accelerate the optimization of our national manufacturing network and reduce costs.
We've retained a robust balance sheet underpinned by disciplined working capital management. With that, I'll ask Simon and Justin to join me for Q&A. Thank you.
Thank you all. We have had a number of questions pre-submitted and submitted live. As a reminder, if you would like to ask a question, please type them into the Q&A box situated on the right-hand side of your screen. Our first question this morning, regarding landscaping's profits, what makes you sure that 2026 will really bring the turnaround you're talking about?
Thanks, Danielle. You can see from the presentation there are a number of plans that we're driving to improve the performance of landscaping, not least of which is addressing the cost base of the business. You'll have seen in that presentation that we are aiming to deliver GBP 9 million of annualized savings, with GBP 3 million of those being delivered in 2025 and the remainder in 2026. Also, addressing a smaller or unprofitable part of the business, which will either improve the profitability or exit that by the end of the year, will probably deliver somewhere between a GBP 2 million - GBP 2.5 million benefit as we travel into 2026. Those are things that are in our control, and they'll start to rebuild the base profitability of landscaping as we go into 2026.
All of the actions that were outlined there that we're taking at the front end of the business with our customers, as you can see, are starting to pay dividends. The order intake in our commercial business, which is 2/3 of our landscaping business, order intake was up +8% between April and July in terms of value-add mix. Just to put that in context, in the first quarter of the year, it was -8%. That's all the actions that we're taking with the sales team to incentivize them to drive a value-add mix and to drive margin. They are incentivized in margin rather than revenue. All of those actions help to rebuild the revenue and the margins in the top half of the business. I think, thirdly, the other part that will help as we travel into next year, we believe the sector is ready to take price increase.
The sector hasn't taken any price increases for the last two years. We've been resetting our premium with a new portfolio to get it back in line with our competition so that our premium today will be between 5% and 10% rather than a year ago where we had some parts of our portfolio over 20%. We're now in a position where we've seen other competitors look for price. The sector needs to reinflate and will look to recover cost input inflation, particularly people costs, which have risen strongly over the last couple of years in terms of cost of living and the impact of national insurance contributions, which are about GBP 3 million in terms of a cost to the business. All of those things together give us confidence that we'll be rebuilding and driving a more profitable landscaping products business as we go into 2026.
Justin or Simon, I don't know whether you want to add anything to that.
No, I think it's a really good summary. I think all the parts of the plan are in play. The only thing to say with regards to that is that the plan is still the plan. We'll continue to kind of work through that. The only thing that we're accelerating within that is the network optimization piece. The plan's a plan and a good summary.
Okay.
Thank you. Our next question. You've grown revenue 4%, but profits are down. When do you see that gap closing?
Yeah, revenue is up 4% year-on-year for the group as a whole. In two parts of the business, in roofing and building products, revenues in roofing products are up 11%. Profits there are up 6%. In building products, revenue was up 6% and profits up 8%. We've got two parts of the portfolio performing well. I think that the plans that we have in landscaping, which I've just referred to, start to improve the profitability of that business as well. We see some material profit improvement for the group as a whole as a result of that landscaping turnaround and the continued progress in roofing and building products.
How do you expect margins to evolve in the face of input cost inflation and ongoing supply chain challenges?
Justin, do you want to take that one?
Yeah, yeah. Good morning, everybody. I think Matt's just covered a number of factors about the evolution of margin going forward. I guess for us specifically here, just thinking about the nature of cost inflation that we're currently facing and that we expect to face next year based on our current market intelligence. It's really labor-related costs. Cost of living increases. Our cost of living increase for 2025 was 4%, and that was on the back of no increase in the preceding year. Looking at what the Bank of England was talking about last week with inflation, expected to be in the region of 3% - 4% as we go through the back end of this year.
I expect to see continued pressure on wage inflation and any services that we're buying that have got significant people components where those operators or our suppliers will be looking to recover their cost. It's our job now to, as Matt said, to ensure that we recover those costs in the supply chain and we're building more confidence around that than certainly we would have been 12 months ago. The margin growth in the business is underpinned by all the actions that Matt spoke about from a cost perspective in landscaping and also improving the product mix in landscaping. Value-add products are more valuable from a profitability perspective. The gross margins are significantly higher than they are on commodity products. Delivering a shift towards value-add will be beneficial.
In the non-medium term, we'll be looking for some market growth in market volumes that continue to be materially below historic norms and will benefit from operational leverage there, which will drive up the overall operating margins.
Thank you. You've got the interim dividend. Is this a one-off, or are we looking at a lower payout for the next couple of years?
I think this is probably another one for me to pick up on. In the presentation that you've just seen, I've talked a little bit about capital allocation policy. Within that is our dividend policy. It's our policy to amend 2x cover of adjusted earnings. In simple terms, we pay half our profits after tax out to our shareholders. Therefore, if our profit after tax grows, the dividend increases. Unfortunately, if the profit after tax falls, the payout to shareholders falls with that. That is the policy. Future dividends will be based on, will reflect the financial performance of the business.
Thank you. A couple of questions now. How is the company positioning itself in the face of rising demand for sustainable and eco-friendly building materials? Also, with Viridian Solar's growth linked to upcoming Future Home Standard regulations, what's your contingency plan if the government delays or changes the implementation?
Okay. Simon, do you want to take the first of those questions? Justin, do you want to take the second?
Yeah. Okay, Matt. Thank you. There's a number of levels in terms of positioning ourselves from a sustainable and eco-friendly perspective. I think the first one is working closely with our raw material supply partners to reduce carbon from the input materials that we buy. A good example of that would be working with people like Heidelberg Cement. We move on to what we do internally, which is we're always looking at our mix designs for our products, and we're continually looking to reduce carbon within those. That is primarily through cement reduction into our products. We've got some success with that. We did a project, a tri-blend project, where we removed cement out of the mix designs and replaced it with alternatives. We've got demonstrated capability in that area.
I think the other thing to call out is the national network and the advantages that gives us in terms of our delivered miles and the carbon miles advantage that brings. Our products are produced much closer in terms of proximity to our customers than our competition. That gives us an advantage. Specifically, when you look at our lower carbon bricks, the performance of our facing bricks is, over its lifetime, it's 49% better than its clay alternative. We've got lots of demonstrated capability in this area to position ourselves for the future.
Thanks, Simon. Okay. Thanks, Simon. I'll pick up on the Viridian Solar point. I guess there's a couple of different pieces of legislation which are relevant here. The first one of which is a change to Part L of the building regulations, which was enacted in 2021. It's that piece of legislation which is currently driving the growth that we're seeing in Viridian Solar. As Matt said out earlier, we expect around 80% of new homes to have solar and around 80% of the 80%, so about 2/3 of all new homes, to have roof integrated solar. Roof integrated solar is a product that we supply. What we're currently benefiting from is a piece of enacted regulation, and it's tracking along the path that we expect it to track along, and it will drive further growth, albeit at a slowing rate in the second half of this year.
Again, into 2026, there'll be continued growth, albeit increasingly modest. The Future Home Standard will be published in full, assuming the government hits its own deadlines at some point in the autumn. The government announced a couple of months ago that the Future Home Standard would mandate solar in all new build housing going forward. Just as a comparator, the Part L of the building regulations that's currently impacting the industry doesn't mandate solar. It just requires increased levels of energy efficiency, which basically can be met by either solar or by an air source heat pump. We think that not all homes will be built with solar because there are some exemptions, but we think maybe there's an increase from 80% of homes to 90%. That gives an increase in market size.
The other factor to take into account is that it actually now specifies the amount of solar power that needs to be generated by a house. It's a calculation which is made by reference to the square footage of the house. What that means, as Matt touched on earlier, is that if we assume that there's no increase in power output from panels, then the market size doubles as a result of the Future Home Standard. In reality, there will be some, I'm sure there'll be some improvement in panel output, and therefore you'll need fewer panels to hit the power output that's required under the standard. Either way, we expect a significant increase in the market size. Now, this is not built into any forecast at the moment, and that's because it's relatively new news because it was only announced a couple of months ago.
The other point is we don't understand what the implementation timeline looks like. When the Future Home Standard's been announced, we'll be able to look at the implementation guidance, and then we'll be able to start making some estimates about what we think it will mean for the market. Clearly, it's our job to take share of that market as and when it arises. I certainly see this as being a future opportunity for the business, but it's not something which is driving growth today. The risk of the government changing their mind on it, of course, that may happen. I think if they've already announced it, they've decided to front-run it ahead of the rest of the Future Home Standard, that would appear unlikely.
I think it's more a concern about how long it takes for this thing to actually become a real regulation and then to actually drive building activity on the ground.
Yeah, I think the other part of that question was whether there's any capital required in order to fuel that growth, and the answer to that is no. We source a lot of our product from China, and we certainly have no issues with being able to facilitate the growth that will come through both through the Part L building regulations running through the business, but also the Future Home Standard as we travel.
Yeah, just to, there'll be no fixed capital. Clearly, if the business continues to grow, we need to make sure we've got the inventory on the ground to be able to supply the market, and therefore you would anticipate an increase in inventories and working capital just in line with the growth of the business.
Okay, thanks, Justin.
How do you decide where to spend the company's money on new projects, paying down debt, or rewarding shareholders?
Justin, do you want to pick that one up?
In my presentation, I set out the group's capital allocation policy, which is really focused on what we do with capital. Just as a reminder, the first priority there is to invest in capital expenditure and projects which will drive organic growth for the business. In reality, our capital expenditure is split between what I'd describe as growth capital, which is capital which generates a defined internal rate of return, and we look to be achieving an internal rate of return of 15%. There's also a proportion of our capital expenditure, which is maintenance capital expenditure, which is there to sustain the spend in the rest of the continued good operation of our capital equipment. The next priority is to invest in those areas which we believe will continue to underpin our strategy going forward. That's best-in-class technical and design support, carbon leadership, and our brands.
As we touched on earlier, we pay ordinary dividends with 2x cover, so half our earnings go to shareholders. Our focus is on reducing levels of net debt. We're targeting a range of 0.5 x-1.5x EBITDA, and we're slightly higher than that range at this point in time. Finally, we'll look at M&A opportunities, which are likely, certainly in the short term, to be bought on deals.
Thank you. Are certain parts of the market, like house building or infrastructure, doing better than others for you?
Yeah, thanks. I'll pick this one up. I think it's on, I think it's slide 24, you can see our market exposure by revenue. If you look at the business, about 45% of the group is exposed to new housing. New housing is probably operating around 20% - 30% below a more normalized market, so it's still challenging. 30% of group revenues are sitting in commercial and infrastructure, and that's proved to be more resilient during the last few years, still down from the kind of more normalized market. Housing RMI, whilst again it is down, but repair and maintenance is probably more resilient within that, whereas the improvement sectors I referenced in the presentation. When you look at that, particularly when you think about landscaping, it's about 40% - 50% down versus the peak. Still operating in subdued markets as we travel.
I think it's probably important to remember that we still have a good deal of retained capacity within our businesses, which is unmanned in order to satisfy recovery as and when it materializes.
Over what period of time is your base case to build margins up to 15%, and what proportion is driven by market improvement versus self-help initiatives?
In our transform and growth strategy, it is set out over the medium term, so you could take that as around five years, not fifteen, five years. It is predicated on returning the group to a 15% return on sales over the medium term, and that's split across the three business units that we have. That's the medium-term target. I mean, how much of that is predicated on self-help and the market recovery? Over the medium term, this is about growing the businesses in line with our strategy and outperforming the markets, and we've got defined market outperformance for each of our business units. Some of that is through the growth work that we do, but you also expect that the market recovery at a point in time will also help and play to the operational leverage of the group.
I wouldn't sit there and define the split between the two, but it's a medium-term plan that expects markets to normalize and for us to outperform those markets.
You've said that the market will stay quiet for the rest of 2025. What would make you change your view?
I think we'd sit here and say we started out the year feeling more optimistic about the market and expected to see some improvement that would strengthen through the second half of this year. Clearly, from what we can see and the indicators we have, that's not the case. I wouldn't want to sit here and try and forecast when the recovery is. I think there are quite a few things weighing on both individuals and business confidence, not least of which the budget in November, with much talk around further tax increases or spending cuts, and I think that's weighing on people's minds.
Probably from my point of view, the medium-term fundamentals that I talked about in the presentation, the government's 10-year infrastructure strategy and significant investment in infrastructure, the plans to build many more new homes, whether the 1.5 million is a little bit high, but the ambition is there. If you can get to the run rate of building 300,000 new homes, that'll obviously drive the markets forward as well. The GBP 39 million going into the Affordable Homes Funding Programme, alongside the AMP8 investment cycle, all of those things give me encouragement and the business encouragement for the medium term. Near term, unless we see potentially some stimulus in new housing, which is being much voiced by house builders to help stimulate that market, I don't think much would change the view at the moment in the outlook for the remainder of this year.
We are now moving on to our final question. If we did not get to your question today, please email investors@marshalls.co.uk and the Marshalls team will respond to any questions that weren't covered this morning. Finally, is AI important or a consideration for the business? Are there any examples?
I think AI is a consideration for all businesses as they embrace technology and the future. There are parts of our business where we work with AI as part of our information technology strategy. Specific examples, and Simon, I don't know if there's anything on the commercial side that we can talk around, but it is one of those things that we have to embrace as a business.
Yeah, I think it's developing, Matt. I think that's the honest answer. It is something that we will use moving forward as we develop the insight and intelligence and data that we get from the markets. That's about continually improving what we do and making sure that we feed that into making progress in terms of driving value back into the business and indeed into the market.
There are a couple of specific areas that we have trialed, one of which is in pricing and the other one of which is in production planning. We'll continue to evaluate other opportunities for the application of AI in due course.
Thank you for joining us today. That concludes the Marshalls plc Investor presentation. Please take a moment to complete a short survey following this event. The recording of this presentation will be made available on Engage Investor. I hope you enjoyed today's webinar.