Okay, good morning, and welcome to Marshalls', half year results, which we are presenting today. What we're gonna plan to do is I'm gonna take you through the highlights, obviously, of the numbers, and also talk, I think, in the beginning, about the key challenges that we're seeing in the marketplace, and also how the management in the company has responded to these challenges in the first half of the year. I'll then hand over to Justin, who's gonna go through the financial performance, and I'll come back to talk about our strategy, which is a slight change in the strategy as we presented before, and at then summarize the whole thing and obviously take questions.
Today is being recorded, we'll take questions in the room first, and then anybody who's obviously phoned in and wants to have a question will have an opportunity to. If we look at the highlights for the first half-year, obviously the financial results have been impacted in the short term by a weak market backdrop. What does that mean from our point of view? Obviously, we have to respond to the market. If there's less products being bought, then we have to take actions, and those actions, from our point of view, have been very much focused on reducing our costs, obviously improving the agility and managing cash, all of the time, trying to make sure we're not compromising our ability in the sort of medium term to respond when the capacity obviously picks back up.
We believe there's significant growth drivers in the midterm for many of the issues of construction that we actually represent, and I'll go into some of the detail of that. We do think the market is still gonna come back and come back strongly. Obviously, from our point of view, making sure we're well positioned for when those markets recover. If you take from our point of view, and I'll demonstrate this today, we've got some examples of why we believe we can double the profitability of this business, with volumes still coming back below, sort of to normalize volumes of 2019 by about 10%, and I'll try and show you that in a second. If you look at the financial highlights, obviously these have been impacted by the results of the business.
In here, what you've got is, obviously, for the first six months, is full trading with Marley. Last year we only had two months of that. Whilst the revenue is already, is up 2%, obviously like for like, it is down. That affects the other numbers in terms of the adjusting profit, the PBT and obviously the earnings per share. The dividend, which follows the two-times policy we've talked about before, has come down. The positive thing out, despite all of these numbers and obviously the difficulties that we faced, is what we've seen is a reduction of some GBP 23.5 million in the net debt number, with the net debt ending up at the moment about 1.6x EBITDA, but the net debt is coming down.
The business, as we've always said, throws off cash, and that cash is obviously helping us to reduce that number, and that will go on going forward. If you take the challenges, obviously in 2023, what we've seen is macroeconomic environment has been deteriorating throughout the first half of this year. If you go all the way back to the beginning of the year, the expectation was difficult first half, recovery in second half. What's really happened is that's just moved and shifted along. Inflation, and inflation numbers came out today, I think they reduced it to 6.8%, but inflation has been coming down slower than was predicted earlier in the year, and obviously what that's done is had an effect on the interest rates.
The interest rates being the tool that's been used by the Bank of England to reduce inflation is effectively been going up further, for longer, and is now forecast to be there for a longer period. That's meant that the swap rates and obviously the fixed rate mortgages have increased, and that's adversely impacting the housing demand, particularly for first-time buyers. The house builders, in response to this, have effectively reduced their activity levels significantly in terms of year-on-year volume reduction. At the beginning of the year, it was forecast to be double digit. That soon went up to near 20%. It's gone up to 25%, and obviously from that point of view, that is a big impact. The consumer confidence, it started in the big, for us, in the landscaping, probably April last year, and it's continued on.
If you take from the individual's point of view, their real income's been falling, interest rate rises have impacted, obviously, private housing as people fixed rate mortgages have unwound, and those people effectively are spending less on discretionary spend. What that all adds up to is the demand for the group's products has reduced. If you look at it from our point of view, in many cases, many of our products, the demand for them is about 30% less than they were a year ago. That increased competition has meant, from our point of view in pricing, whilst we've recovered all costs, there's not an opportunity to take that any further. Obviously, against that backdrop, that was why in a few weeks ago, we've been able to come forward in the marketplace and respond to the, obviously, the numbers and expectations for this year.
What actions have we taken, obviously, as a management team? The key from our point of view is looking at capacity. How do we reduce capacity while maintaining the ability to still respond when the market comes back? We've had a factory closure of our site in Scotland, in Carluke. We're preparing it in, in development terms of what we can do. We have a clay tile factory of Marley. We've taken out one of the tile lines there because the demand for clay tiles has dropped as people have moved over to the lower cost concrete tiles. We've had a reduction in shifts in many of our facilities and factories.
Obviously, from our point of view, the idea is, again, as I said at the beginning, improving our agility and reducing that cost base. This year, we've now identified GBP 9 million of cost saving we'll take out, which is net, of obviously making less product, and we'll get about 40% of that in this year. Obviously we'll get 100% of it for next year. We've tried to simplify the Marshalls commercial function, as we've said before, taking the lead from Marley, and we've been doing that in the particularly the landscaping area, bringing the commercial and domestic businesses together. It's resulted in a reduction of 250 jobs in the first half. This on top of the 150 jobs that we did at the end of last year.
400 jobs is about 13% of the sort of population within Marshalls, so it's a significant number. Obviously from our point of view, managing cash is important. We're very aware, obviously, the net debt numbers, the reduction in CapEx, we've now reduced to about GBP 19 million. We're spending money there, which Justin will go through what we're spending on, but things like the dual block plant are still going forward. We've also carried on selling surplus sites, sites we don't necessarily use, quarries we're not utilizing. This is about GBP 7 million it'll be in total this year. Obviously, we very much working capital. How do we manage that?
We've managed this first half of the year to have operating cash flow as a percentage of EBITDA of over 100%, so 105%. That has all contributed to why we've been able to reduce the debt by some GBP 23.5 million. The key is obviously, from our point of view, being in a position for when the markets normalize. When I say normalize, one of the reasons for this is we have three areas that we're exposed to as a business. The first is house building. As you can see in the chart in the left here, we've, we've failed nearly every house building target that's ever been set in this country for the last 30 years. That continues. Actually, when the number is posted for 2023, I now believe it'll actually be lower, the number, than it was in COVID.
We're building less houses now than we have for a significant period of time, and yet we've got a housing shortage. Obviously, the issue at the moment is about affordability, affordability for the first-time buyer, and we believe that is obviously driven by interest rates, which is driven by inflation. You can see the link between all three. As the other two points correct themselves, then the country has to start building more houses significantly. We see, obviously, and wait to see what, if any, support is gonna come for the house building section in the autumn statement. It will come back, and it will come back, from our point of view, relatively quickly once that issue is addressed. The other part is RMI.
The housing stock in the U.K., 'cause we build so few houses, over 65% of the houses are effectively over 50 years of age. What that means is, if you think about it in roofing terms, a roof on average lasts 50 years, so there's a lot of product that's waiting, this RMI business. At the end of the day, you can put it off, but you can't actually not do it ever. I think from that point of view, obviously, we are confident that that's gonna come back as well. The third part of our business in what we call commercial infrastructure, has actually stayed strong, and we think that will continue on. We have to be obviously well-positioned for when these markets come back. The sales volumes, as I said, are down to...
Expected to be below 30% of where they were in 2019. That reduction in our capacity has been mainly temporary. As you remember, last year, we closed the facility in Sandy. Sandy has four block plants. We are maintaining those block plants with the view that we will bring them back when they're needed. Block plants can make either landscape products or concrete bricks. The facility is very close to our other facility in St. Ives, from St. Ives' point of view, we've moved some of the operators from Sandy, so putting them back would be quite simple.
Effectively, to take both factories up to volume, we'd have to recruit, but still, from our point of view, that would be significantly below the jobs that have been lost, probably at one quarter of the jobs that have gone out to bring us back to full capacity. The manufacturing sites, obviously, from our point of view, are well invested, and you get the drop-through margins, which I'll talk about in a second. We don't need to spend capital to get that capacity back. It's just a case of manning and making sure, from our point of view, that the, the machines are still maintained. The recovery in volumes will obviously have a significant positive impact on the profitability. What we've tried to do here is, is look from an illustration point of view.
If you look at the volumes for our business, and the red here is the consensus of the two house brokers, but it look, it's basically the consensus in the marketplace. If you take, from our point of view, if you put volumes back in at 20% from where they are in 2019, which is still 10% below where they were in 2019 sorry, what you've got is, you can see, is a significant change to the profitability. What this shows is you get a drop-through of 42%. That's because what we had lost on the way down. You could argue it should be stronger than that, but just using that as a conservative approach, you can see in the illustrative growth, you get 42% margin, which actually contributes the equivalent of 5% in the total group.
The profitability and EPS double. You effectively get back to margins over 15%, and the ROCE also comes back to 15%. If you look within the numbers as well, at the pro forma numbers, obviously, if you remember, Marley has never been with Marshalls for a full 12 months, but if you run the numbers for both 2021 and 2022, you can see we were at the GBP 120 million operating profit, which is what this is forecasting anyway. I think in that sense, what this is, is meant to illustrate, if you take it as an example, is even with a reasonable return to normal volumes, this business can double in terms of profitability and double very rapidly, and there's very few barriers to that.
Obviously, from our point of view, the ingredients that are in place there, the strategic goals in terms of doing that, and I'll talk about some of the strategy, and we intend to grow ahead of the construction market. Why? Because two of the three areas I highlighted earlier will come back stronger than the rest of the market, particularly obviously, new house building and RMI. If you look at obviously the higher volumes and efficiency improvements, the drop-through in a well-invested company like Marshalls will come through, and that's why the margins will go very much quickly back to 15%. The cash conversion, Marshalls and Marley, have always had very strong cash conversion, 85%-90% of EBITDA converted. As I said, for the first six months, we were over 100.
This business will throw off cash, and it will pay down that debt in its natural form. Obviously, the capital discipline and financial flexibility allows us to get back to the ROCE of 15%, and obviously, we carry on with our 2x dividend cover and the other parts of the priorities that Justin will cover. Now I'll pass on to Justin to talk about the finance.
Thank you, Martyn, good morning, everybody. I'm gonna talk through the financial performance for the first half of the year. That'll include a review of each of our reporting segments. I'll then talk you through the key features of the cash flow statement, give you an update on funding and liquidity and the balance sheet, and then I'll close with comments on our capital allocation policy. Starting with group revenue. The chart on this slide shows a revenue walk between the first half of last year and the first half of this year. Overall, our reported revenue increased by 2%. As Martyn mentioned earlier, revenue on a like-for-like basis contracted by 13%, and it did so with re-reduced revenue across each of our reporting segments.
That's been due to weakness in both private housing RMI and new build housing. The weakest performance was in Marshalls Landscape Products, that was due to the, that segment's exposure to those two key end markets and the fact that certain parts of its product range are relatively discretionary. Revenue contraction in building products and roofing products was more muted, the latter benefited from sales growth of Viridian Solar, which partially offset weaker volumes of traditional roofing products. Turning now to adjusted operating profit at group level. The first thing just to point out here is that these the profitability numbers throughout this presentation are stated after adding back adjusting items in order to show the underlying performance of the business.
It's these underlying numbers that are used by the board to evaluate performance and when contemplating dividend payments. Adjusting items in the first half of the year, charges against operating profit totaled about GBP 15 million, and principally comprised the amortization of intangible assets arising on acquisitions and the restructuring costs associated with the various exercises that Martyn touched on earlier. Of that GBP 15 million, about GBP 11 million is non-cash, and the balance of GBP 4 million represents cash redundancy costs. Coming back to the underlying numbers, the chart on this slide shows the component parts of the GBP 6.1 million reduction in operating profit during the period to GBP 41.9 million.
That comprises reductions in profitability in both Marshalls Landscape Products and Marshalls Building Products, and that's partially offset by an additional three months, sorry, four months of contribution from Marley, which added GBP 13.4 million to operating profit. The downturn in performance in both Marshalls Landscape Products and Marshalls Building Products offset the benefit of the structurally higher margins that are delivered by Marley, and as a result, the overall group operating margin compressed by two percentage points to 11.8%. As Martyn touched on earlier, we've taken decisive action to reduce capacity and the cost base, and that has resulted in a reduction in annualized costs of GBP 9 million, which we'll see 40% this year. Turning now to the individual reporting segments, starting with Marshalls Landscape Products.
As a reminder, this includes the group's domestic and commercial landscaping businesses, landscape protection, and the international businesses. This segment has experienced some tough market trading conditions in the first half of the year due to weakness in both private housing RMI and new build housing. Against this backdrop, revenue's contracted by 20%, and that moderates slightly to 18% when we adjust for the disposal of our former subsidiary in Belgium. Now, within that revenue contraction, we saw a reduction in domestically, sales of domestically focused products of around about 25%, and a better performance from commercially focused products. That reflects the robust demand levels in the commercial and infrastructure end markets that partially offset the weakness in new build housing.
Segment operating profit declined by GBP 14.6 million during the period. That reflects the lower volumes and the impact that's had on both growth, gross profits and on the efficiency of our manufacturing and business operations. In addition, the business was impacted by a fall in market price for Indian sandstone, and that has resulted in compressed or negative margins that has delivered a one-off GBP 2.8 million cost in the P&L account, so that will be recurring next year. The impact of that lower level of profitability has clearly flowed through into the segment operating margin, which has compressed by 5 percentage points to 8.8%.
It's in this segment where we've permanently reduced manufacturing capacity and also taking costs out of the business, and that results in annualized savings of around GBP 7 million. Moving on now to building products, which comprises our Civils and Drainage, Bricks and Masonry, Mortars and Screeds, and Aggregates businesses. This segment principally supplies products into new build housing and commercial and infrastructure end markets, and very little exposure to private housing RMI. That weakness that we've seen in the new build housing market has impacted on revenues within this segment, particularly in respect of our aggregates and drainage business, and that's because they're relatively highly correlated to new housing starts.
The performance of our Mortars and and Bricks and Masonry business has been much better, with revenues being broadly flat year on year, and we grew our market share in bricks. Taken together, these factors resulted in a 9% reduction in revenues in the first half of the year. Segment operating profit reduced by GBP 4.6 million, and that's due to lower volumes and the impact those volumes had on both gross profits and on the efficiency of our manufacturing operations. That sped through to compression in the operating margin of four percentage points to 9.6%. We've taken action to reduce or to trim our manufacturing capacity through a reduction in shift patterns, so no permanent closures of any, any facilities here.
To reduce the cost base by about GBP 1.6 million on an annualized basis. Moving now on to Marley, which manufactures and supplies a range of concrete and clay roof tiles, timber battens, and integrated solar panels through Viridian Solar. Again, the challenging market in new build housing has resulted in lower volumes of traditional roofing products, which has impacted revenue. That's been partially offset by revenue growth within Viridian Solar, which is driven by the trend towards energy efficient solutions and the start of the benefit that we expect to see coming through, driven by changes in building regulations, and we expect that to underpin revenue growth going forward. Taken together, this resulted in a reduction in revenues of 7% for the segment.
Operating profit for the period was GBP 22 million, that represents a like for like reduction of 12%. Within that, you've got the profitability impact of low volumes of traditional roofing products, partially offset by growing profits within Viridian Solar. You can see that segment operating margins have remained very robust at 23.7%. Now, we have taken action in July to mothball some capacity that Martyn referred to earlier. We're doing that in order to reduce some costs, but also to manage working capital levels into the second half of the year. This next slide sets out the Profit and Loss account from adjusted operating profit through to earnings.
You can see here that profit before tax has contracted by 26%, and that's greater than the rate of contraction in operating profit, and that's driven through, been driven by an increase in finance costs. In the first half of this year, we had an additional four months of the Marley acquisition debt, excuse me, and the impact of higher base rates. Just as a reminder, the debt facilities are floating rate, but we have hedging in place for about 55% of the term loan, so about GBP 120 million at a SONIA rate of 3% plus the facility margin.
The effective tax rate increased by 3.9 percentage points to 23.2%. That's simply driven by the increase in the headline rate of corporation tax in the UK. Adjusted EPS contracted by 38%, reflecting the weaker operational performance, higher finance costs, the increase in the effective tax rate, and a higher weighted average number of shares in issue. Moving down to cash flow performance, as Martyn touched on earlier, we delivered a good cash conversion performance over the last 12 months, converting 105% of EBITDA into operating cash flow. The increase in finance costs and tax paid is driven by the higher levels of interest payments I've touched on the last slide.
These two factors, together with a reduction in adjusting items paid during the period, has delivered an improvement in net cash flow from operating activities of GBP 22 million year-on-year. Net cash from operating activities was GBP 23.8 million. From that, we spent GBP 6.7 million on a net basis on CapEx, which comprises GBP 10.4 million of gross CapEx, partially offset by GBP 3.7 million of receipts from site disposals, and we expect to deliver a similar amount from site disposals in the second half of the year. The acquisition disposals cash flows of GBP 4.4 million comprise a contingent consideration payment for Viridian Solar and the impact of the disposal of our business in Belgium.
Taken together, we've reported a reduction in net debt in six months of GBP 6.6 million. Turning now to funding and liquidity. In the first half of the year, we extended GBP 350 million of the group's syndicated debt facility by 12 months, and that means that we've now got secure medium-term funding in place until April 2027. Net debt at the half year, including leases, was GBP 230 million, and on a pre-IFRS 16 basis was GBP 184.6 million, and that reflects cash generation over the last 12 months of GBP 23.6 million.
We got comfortable cover against our, the covenants in the bank facilities, so interest cover at 7.8x, and that compares to a minimum level of 3x, and net debt to adjusted EBITDA of 1.6x, and that compares to a covenant level of a maximum of 3x. A significant headroom against our debt facilities of GBP 117.5 million at the half year. This slide sets out a variety of measures on working capital, returns, and balance sheet strength, and you can see that debt to days, credit to days, and inventory turn are all broadly similar to this time last year.
However, return on capital employed has reduced during the period by 2.8 percentage points to 10.6%, that reflects the impact that the weaker market has had on the business's performance. As I mentioned on the last slide, net debt to EBITDA is 1.6x, cash generation during the last 12 months is GBP 23.6 million. It's that cash generative nature of the group's business model that will support progressive deleveraging of the balance sheet as we move forward. The balance sheet remains robust, net assets at the half year of GBP 680 million, and significant holdings of freehold land and buildings that are held on that balance sheet at historic cost. Now turning on to capital allocation policy.
You may recall that the board updated the group's capital allocation policy in the second half of last year in order to prioritize de-leveraging over any significant M&A activity, and there've been no further changes to the policy since that time. Our first priority is to continue to invest in profitable growth opportunities, and this year we expect to spend around about GBP 90 million. Within that, the largest single item is completing the dual block plant at St. Ives, and that's be somewhere between GBP 7 million- GBP 8 million that will go out. We've got a key efficiency project, which we're midway through delivering, which will reduce the cement content of our products and take some cost out of out of the mix.
We're continuing to spend on IT investment to support one of the strategic objectives of being easy to work with, and Martyn will talk through the details of that later. The balance of expenditure is all about maintaining the existing capital base of the group. Our second priority is R&D and new product development expenditure, and that's focused on low carbon and energy efficiency products. We aim to maintain dividend cover of 2x adjusted earnings, the dividend for the interim of 2.6 pence per share is in line with that policy. As mentioned earlier, the board is aiming to reduce the amount of leverage in the balance sheet, we're targeting for leverage to be 1 times EBITDA by December 2025.
That's 12 months later than our previous plan, and that reflects the impact that the weaker market is having on the business's performance. Finally, we will continue to look at selected bolt-on acquisition opportunities, where we see attractive businesses in attractive markets that will add value to our customer offer and to our shareholders, but there'll be no significant M&A until the balance sheet is de-levered. With that, I'll hand back to Martyn.
Thanks. Thanks, Justin. What I'd like to do now is to cover, obviously, the strategy. We've done two five-year strategies in the time I've been here, and both of those have had significant growth in EBITDA. I'm confident that this strategy, as we've developed it for the new group, will work in the same basis. Not big a change in terms of it starting off, obviously, from our purpose. We've seen before, about creating better places and to be the U.K.'s leading manufacturer of sustainable solutions for the build environment. There are five pillars to this. First of all, as we've mentioned many times before, the way in which we do business is very much about what we call specification selling, so obtaining and delivering those specifications for products and solutions.
From our point of view is innovation, obviously optimizing the products and solutions, then improving the cost effectiveness of the business. Obviously, how we operate with people is a key priority for us as a business. Our people are the big differentiator from any business, and obviously to be easy to work with. What I'd like to do is to go through each one of these. First of all, when we talk about obtaining and delivering specifications, we believe that if you can get on the specification before it comes out, obviously to bid, then you're in a much stronger position to obtain and hold that order, and that's the way in which we've been doing business for a number of years. If you take, how does that really work?
Obviously, within building products, we do design work for house builders, where we would do the drainage systems for them, try and get our products, obviously, specified in there. We do work with house builders to look in at where concrete bricks can help them, obviously from a carbon point of view, in that design work before they even come out for tender. In the roofing products, from our point of view, Marley is unique in the marketplace. It's the only business that can actually offer a full roof solution. Other people can do the tiles. We effectively do the tile, the battens, the accessories, and now we've obviously got the in-roof solar system. We can go and give this to our customers, sell this in advance.
Obviously, if you think of social housing, you think of RMI, and give a 15-year warranty, which people obviously have big benefits by, and see that as a big opportunity. Obviously, with solar, and the growth of solar is already, as we said, 30% up this year. It's gonna go much, much higher than that by the end of the year as it kicks in through Part L with the new build. We can do lots of work with house builders there, making sure the specifications are correct. We've also talked, obviously, in landscaping. We've worked for years in terms of on landscape products in the commercial world.
If you think of Battersea and you think of Nine Elms, which completely transformed those areas, we were working on those projects five years before they even came out to tender, and we will do that with architects to make sure we're specified. Obviously, in the domestic side, we work with the Marshalls Register, the Marshalls Register, what we're trying to do is work with them and give people choice, give people the ability. One of the tools we've been working on is in visualization, which I'll just show you in a second. We've got an app that anybody can download. You download effectively to your phone.
What this app allows you to do is to go into your area, so your garden. You can see here somebody's using an iPad, and that's all they're doing is scoping out the area that they would like to put, transform, and change into a patio. In quite simple terms, you go around the area, you click, you effectively close that off. You've now got an area. It can give you the measurement of that area. Now your choice in terms of what are you gonna put in the area. You've got the full ability to go through all of Marshalls' products, so every product that we supply in the marketplace, you can choose whichever one you want.
You then, having chosen it, decide on the laying pattern that you actually wanna do, and then you decide on what you want in terms of, from a point of view, the mortar. As you can see, effectively, you're standing in your space, in your garden, and you're looking at a real patio and what it would look like in that space. That is unique today in the marketplace. It allows our registered installers the ability to go with the customer, or they can use it themselves. An accurate quote, you know what it is, and gives you an idea of what the price is. Again, unique in the marketplace.
If you take the other areas, from our point of view, is innovation, obviously from our products and solutions, and as we said, the big key here is, from our point of view, how do we actually get the carbon footprint effectively of what we are trying to generate in products into a commercial environment where we get actual benefit from them? What we're talking about is we got EPDs, which are Environmental Product Declarations. This will become normal for all construction products. They will effectively have to say how much carbon is in the product that they manufacture. Now, from our point of view, we believe we have massive advantages over all of our competitors. It might be the location of our facilities to the actual customer. It might be because we put less cement in our products.
It might be because of lots of the things we're doing with sequestration. It's how you commercialize that and take that to market, gives the group a big benefit, obviously, from a margin point of view. Our dual block plant, a dual block plant is coming on stream in St. Ives. This will make products, innovative products, that aren't available in the marketplace, particularly to replace stone, which is imported from all around the world. We've got a granite solution. Instead of bringing granite from China, we manufacture the product here. That is for 20% of the carbon footprint of that material, so giving us a big, big benefit. The CarbonCure technology, we've talked about sequestration in the past.
We're now using this in one of our brick factories, where we're actually pushing carbon into the product at the early stage, offsetting the carbon that's in there, obviously, from the cement point of view. We roll out this lower cement content that Justin was talking about with our capital investment plans. All of those giving big advantages, and obviously in Viridian Solar, we've launched the most powerful solar panel we've had, and also we've designed and patented something called an Arc Box, which effectively is the connection from that system to your house and your electricity. One of the big issues you've got is arcing, where you've got a spark, effectively, and the last thing you can imagine you want is a spark going in the loft of your house, which can obviously give all sorts of fire issues.
Here, Viridian have invented the Arc Box system. It's gone down very well. We've had many awards for this, and this gives a safe way of connecting, effectively the solar system to your, your electricity within your house. This innovation has given us, again, big, big advantages in the marketplace. We talked about the cost base. We talked about obviously taking out. We, we've said we got GBP 9 million cost reduction. This is in the core base. This will not be put back in in many cases, so again, we should have a bigger drop-through than what we saw coming out before. The capacity has been reduced, but the capability is still there. We will keep maintaining the machines in the mothballed facilities, and we will keep the ability to actually bring them back and bring them back very, very quickly.
We're talking about weeks. We're not talking about big investments. Obviously, the capital expenditure plans, we've brought them back as we should do, but we're still prepared to spend money where we can see efficiencies and where, from our point of view, making sure we are improving the product range and everything we're offering. Obviously, working capital is absolutely critical. We've taken the decision, even though it's financially painful in the second half of this year with the forecast that are in, that we will actually take the inventories down by the year end, so when we exit the year, we'll be at the right element for obviously going forward. We could have carried on manufacturing, but we think that's the wrong use of cash. We've obviously talked about operating in a safe pace where people are obviously the key priorities.
We have a clear roadmap in terms of on for safety, and safety is taken very seriously in the company and also continuous improvement is. How do you keep reducing that cost base? We have employee voice groups, which have been operating now for a number of years, which are very good tools for getting actually what the organization wants and listening to, obviously, any of the concerns. We do group-wide employee surveys, again, giving opportunities, and we've rolled that out in terms of as we've acquired companies to understand the feeling within those companies. We have a group code of conduct. Everybody goes through the training on an annual basis to make sure they understand what the company is saying we should be doing and how we should be responding, and obviously, continued investment in apprenticeships.
If you take today, there are some parts of our business, like many people are finding, if you want engineers, as an example, it's very, very difficult to go out and recruit engineers. The alternative is you bring apprentices in on an annual basis, and we grow in those. We have over 50 a year, and we will continue to do that and putting those into the business, having trained them, and obviously then hope to retain and keep them. We talk about being easy to work with. It's an easy statement to make, but I think it's really important. We're shifting more and more of our transactions to electronic, whether people are doing it through EDI or they're actually doing it through apps and drop ship, where we actually ship directly for customers.
This is helping us because previously we were receiving orders and manually entering them into our systems. This is both time-consuming, and it takes cost and is lots of potential errors, so a big change there. As we said, we are still investing in migrating the Marshalls business systems. All of them will go into the cloud, and we think, again, that's a better and more efficient system. We're introducing a digital channel in roofing products. I mean, if you take the range of products now for the end user, I mean, on the back of solar, what you can have is car charging units, battery units, and we're starting to obviously brand those as Marley and sell them in the marketplace, and the ability of those will grow and grow.
As I showed you earlier, the rolling out of the visualization software, we've used this commercially for some time. I think domestically it can be a game changer because today you're asking people to spend, you know, upwards to GBP 10,000-GBP 15,000. You would never spend that in a bathroom or effectively in a kitchen or even in a car without seeing it. This is trying to bring that to, to people's homes where they can see what it would look like in their space. In summary and outlook, obviously, you know, The weaker market demand has affected volumes, as we said, down some 30%, and obviously, that has an effect on the financial numbers. The management have taken action.
We think it's decisive action. When that has made a change, and we think that change will obviously a benefit in the long term as well. We've seen reduction in debt. Despite all the challenges, we've still taken GBP 23 million, which is, again, testament to how the company throws off cash. The market conditions, we are saying we're not building in an expectation of improvement in the second half of the year. We do believe this market's gonna improve. Obviously, when it's gonna improve is, is the big key. It's not something we are driving. It's obviously, today's announcement, it's inflation, which is gonna affect interest rates, which in my opinion is gonna affect confidence, whether it's confidence to build or confidence to spend.
In the medium term, certainly in the U.K. construction market, we think there's strong structural growth is to come. We do not build enough houses in this country, and we've got a housing shortage. The two are almost a contradiction of each other, and as that gets corrected, then there is obviously the ability to build a lot more houses, and the demand is there for them. The housing stock is only aging, and we're not- we're adding to it very slowly, as you can see, over the last 20 years. There will become a demand more and more for RMI. Obviously, the infrastructure, as we said, is, is, is at the moment good. I think everybody acknowledges that's got to be invested in for a number of years to come.
The big key is the group, I believe, is well positioned to take benefit, obviously, of that growth when it comes. Obviously, the manufacturing capability is there, looking at, what we can respond to. We, we still look at 2018 and 2019 as a normal market, and certainly believe we can respond to that. Obviously, the significant operating leverage we've built in, in the illustration, 42%, it should be higher because of the cost reduction things and, and, and the points we've done. I think the key part for me is, at the end of the day, we know we're in construction, we know we're in a cyclical business, and we know we're in different cycles. This is probably the hardest cycle we've had for probably 10 years in this business.
This business, when the last cycle came, lost money, and obviously today, whilst the numbers are down from where they were, we're still making GBP 52 million and generating cash. I think we're in a completely different position, and I think that'll be demonstrated as when the market returns. With that, I'd like to go to questions. Justin, come up. There's a microphone in the room, so if you put your hand up and.
Hi, Rob Chantry, Berenberg, thanks for the presentation. Just three questions from me. I suppose firstly, in terms of capacity, could you just put some numbers in terms of volume or productive capacity or however defined, around what that capacity was at the start of the year versus today?
Can we take the questions one at a time? 'Cause-
You can.
I've fallen for this before, if you get to 30, you get them.
You know, you can have 10 rounds of three questions, I think.
Yeah. I mean, if you take capacity, the way we'd look at it today is we tried to run the factory 75%-80% capacity. That's what we'd be doing out of how we currently man it. If you took it and you included unmanned capacity, we'd probably be nearer to 50%-55%. It depends what the manning you put in, and obviously, the mothball factory is a big part of that, but that's roughly in the, in the air.
That's very helpful. Thank you. Then secondly, I was, I was looking today, I guess, at the performance of Marshalls over, like, a 15, 20-year view, and obviously you came into the business after the last financial, financial crisis. Just looking for some kind of insight in terms of the practical differences in market dynamics today and response to the business versus the kind of 2011, 2012, 2013 period.
Yeah. I mean, for me, today, Marshalls, the Marshalls business you refer to is one third of what we are today showing. You've got three divisions. Marshalls Landscape Products was Marshalls, you add on to that, you've got the drainage business, the Marshalls Building Products, the, the bricks, and obviously with Marley. For me, it's a much more diversified, it's a stronger group. It's in a different place, what you find in, in my experience in construction, is markets change and fluctuate at different areas. The most difficult area for us for the last 18 months has been domestic landscaping, in 2021 was the best domestic landscape year we've ever had.
You have to be flexible and, and move with the different parts, and I think that range between the three different divisions we have has put us in a different place and can respond. Obviously, ultimately, if you've got less products to make, you're going to be less profitable. As the market comes back, I think we'll be in a very strong position and more flexible to take advantage of it.
Thanks. Then the last question. In terms of your kind of strategic objectives and talked about the kind of focus on specified sale, et cetera. W-what exact proportion of the business is specified or solution sale at the moment versus non-specified or kind of product sale, and where do you kind of see that getting to?
Yeah, I mean, it, it varies obviously by the different types of the business that we've got. I, I'd say in general, probably if you take in total, our specifications is probably up to about 35%-40% of what we do, where I'd say it's specified before it's come to market, and we're trying to grow that further each time. In some parts of our business, that could be as high as 60%, so it does depend on the different parts of the business.
Thank you.
Morning, Chris Millington at Numis. At the start of the presentation, Martyn, you mentioned a slightly tougher pri-pricing backdrop in light of competition. I just wonder if you could kind of add to that. It doesn't come as a massive surprise, but love, love to hear a bit more about that. I'll do one at a time.
Yeah, I, I think on pricing, I mean, what you've seen today is, you've obviously got pressure because it's not the same volume. If I go back to 2021, it was almost availability was the biggest issue of product, and people were just fighting for everything. That, that is not the case. If you take in our products in general, because of the cost, One of the big cost drivers of our business is cement. Cement costs have not come down, and there's no sign of them coming down. What that's tended to mean is everybody's had to respect the prices. I don't think you've got prices dropping out there, but obviously each price increase you have is more discussed and more thought over than they were previously.
I think you're entering back to a more normalized situation, where price increases of the likes of 3% or 4% or double-digit will be the future. What you do see in the marketplace sometimes is customers looking for lower cost. They're not necessarily getting the same price, same product for less price, but they may, may switch. We've seen it, for instance, in roof tiles, where the people are taking concrete roof tiles over clay roof tiles where they can, 'cause it's lower cost. We've seen it in some of the products from ourselves with stone, where people have been taking concrete. That doesn't always mean lower margins for us, but it can mean a different change in the mix for us.
That's helpful. Next one's just on natural stone. You obviously pull out the headwind it was in the first half. Have you seen demand return now, pricing has normalized and, and got to a better place relative to, to ceramics?
I don't think we have yet seen it, and the reason for that is there was so much stone in the supply chain. I mean, some merchants had 50 week stock of stone. What happened was stone doubled in price, and effectively, from our point of view, went down by 45% in volume. That was throughout the whole supply chain. I think, as Justin said earlier, our suppliers, our stock of stone is now down to the levels we'd be comfortable with going forward, and it's at the cost, that is the market cost. That is sorted. It has taken some time to sell through the merchants. I would anticipate in the end of the third quarter, it'll return to normal.
The question is, will stone take back its share that it probably lost to ceramic and become more affordable? 'Cause stone today is selling out at 2019 prices, not what they were 12 months ago.
That's helpful. Sorry, just two quick other ones, concrete-
Can you use the mic?
Sorry. Concrete brickshare, just wondering where you are. You said it had increased, and are you follow-
A little over 7%, so it's up by about a percentage point in the first half of the year.
And you're still following the pricing actions of, of the, the, the clay brick manufacturers, or is there any change there?
No, I mean, clay brick manufacturers obviously set the prices in the marketplace. We tend to follow those. I'd like to think what we stand to see the growth of our share, and I think it'll continue, will be on the carbon story. At the end of it, it's not just an alternative brick, it's a brick with half of the carbon content.
Thank you. The, the last one was just about the, the mothballing of the clay tile line. I, I don't know if you can remind us how much of Marley was clay tiles. I, I vaguely remember it being slightly higher margin and slightly surprised at the RMI side, which I imagine that's bigger in, has probably weakened to the extent you've mothballed. I just wonder if you could just talk around that, that subject matter a bit more.
Yeah. The, the, the clay drop off, I think, is more coming from like in social housing and, and that like, where they've gone for a lower price product. If you take the clay tiles as a, as a total for the Marley business, it's a relatively small... I, I think it was about 10% or 12% of the turnover was clay tiles. It's a smaller part of the business. It's not, in RMI terms, people, people do still tend to replace what they had with, with what they had. I know, because my neighbor's just done his clay roof tiles with Marley. If, if you take in that context, I think it's more in, in the social housing where they've looked at the cost.
Because of the increase in, in gas costs, the differential between clay and, and, and concrete has got quite significant. That doesn't mean from our point of view, the margins are, are that different. It's just the prices-
That's great.
... driven by the cost.
Thank you.
Morning, yeah, Sam Cullen from, from Peel Hunt. You talked a bit about the kind of the recommissioning of, of plants should volumes come back. Can you talk about the labor aspects of that and how that changes if, if they're mothballed for a longer period of time to your former workers go off and do something else and decide not to come back to be plant operatives? How long does it take to upskill?
The plan that's been, that's been mothballed in Landscape Products is at Sandy. Sandy's in Bedfordshire. It's very close to our site at St. Ives, and as Martyn said, we've taken. At the same time, we mothballed the Sandy site. We're also starting to commission the dual block plant at St. Ives, so we've moved some labor from Sandy to St. Ives. It gives us the opportunity then to use that core of labor, core of experienced labor, to see a recommissioning of the Sandy site.
Across the other sites, the reduction in capacity has really been driven by reducing the number of shifts, and therefore, you've got that core of experience that's there, and you're effectively adding to it. We tried to do this in a way, when we thought about which site we would take out of the network, we had it in mind that at some point in time, we're gonna bring that back online, and therefore, how do we do that? There's a plan that we have, and we're confident we can deliver that.
I mean, if you take most machines, they're manned by two, three, four or five people. The key is the driver, having the experience would be the job that takes the longest to train. If you've got the drivers, which we think we'd have, back filling with the support staff is much quicker to be able to do. You're talking weeks.
Okay, thanks. The second one was just on a bit more color, maybe on the Viridian growth rate in the first half, and, and the margins. Are they comparable to the rest of the Marley division?
The growth rate in Viridian was 30% in the first half of the year, and we saw an improvement in margins. Not quite to the level of the traditional roofing products, but in the range of the 20%.
Thanks.
Thank you. Clyde Lewis, Peel Hunt, I'll do one at a time as well. The GBP 7 million of asset sales, property sales you're talking about this year, does that include Carluke, or is Carluke gonna drop into 2024?
No, it, it doesn't, it doesn't include Carluke. Carluke may drop into 2024. It may be, it may be a longer term. What we're doing with that site is to assess the opportunity to change the, the, the planning consent from industrial to, to residential. If we go down that route, then it may take a number of years to get that and to sell it, and we do that if, if that's the, the best way we can generate value for shareholders. If not, then there would be a shorter time period for selling the property.
The, the asset disposals this year are principally, things like dormant quarries and other surplus sites that we've got around the network, which, which really, you know, we took the opportunity to think about whether we generated commercial return or whether we're better just selling the assets and putting the money in the bank, and it's, it's that type of disposal that we're executing this year.
I won't ask you for an estimated value of Carluke, but how many acres is it?
Let me come back to you, Clyde, on that to give me some.
Well, yeah, go the reverse route.
I'm trying my mouth in something out here, but I'm not sure it's that, that number.
The Marley question would be easier.
When you acquired Marley, you were certainly talking about possibly rationalizing some of the other group sites, either putting up, you know, Marshalls operations on Marley sites. Where have you got to in that? .. thought process and, and that evolution.
It, it is still something we're looking at. I think there are- I think it's fair to say we still believe, as a group, we've got more sites than we need longer term. What we need to do is to organize and plan how that will happen, and, and that is underway at the moment. I do believe that there are opportunities for us to rationalize the sites we've got and obviously to sell the surplus sites. That is something that's active at the moment.
Okay.
It's difficult to tell you which one is obvious.
Viridian, is it fair to assume at the moment that your sales of batteries, inverters, car chargers, is effectively nil?
It's not significant at this point in time. The range of inverters and batteries is being launched as we speak, and we've been selling the EV chargers for most of this year. We believe that'll be a. It's part of it. It'll be part of a system sell going forward.
I'm trying to get at the, I suppose, the element of the panels versus the value of the other parts. You know, what, what, what's the sort of, I suppose, scale of, of the add-on products compared to the solar cells? Would it be 20, 30, 40%, or would it be actually more as a, as a percentage of the total sale?
I think it would be more in the 15%-20%.
I, I think the big, big issue with that isn't just about the sales of those items. The, the existence of those items, the batteries and converters, inverters, effectively change the payback considerably for that, for this investment. I think what you head towards is, why would you have a roof without putting solar panels on it? If you can store what you're effectively collecting in the daytime, not have to sell it back to the grid for peanuts, then it becomes a completely different financial payment. Whilst we would like to sell some batteries, inverters, our big game changer is the existence of those, a cost-effective way makes the whole system that much more appealing.
I've got two more. I'm nearly there. GBP 19 million of CapEx this year, where do you think 2024 is likely to be in terms of up or down? I mean, clearly, a lot of piece of string in terms of the marketplace, but is that GBP 19 million-GBP 20 million a sort of good guide for current expectations for CapEx next year?
I think much of it will depend on, on the opportunity to spend money on efficiency CapEx. I, I don't think there'll be any need for, for any, expansionary CapEx at all. As a guide, for planning purposes, I'd work on sort of GBP 15 million-GBP 20 million. We'll spend where we see good opportunities, and we will continue to apply the, the three by three-year payback rule that we use for all our factories.
There may be some enabling capital to accelerate some of the site opportunities, but they would still be within that category of expenditure.
Okay, perfect. Last 1, just, it'd be really useful to get a bit of an update around some of the commercial infrastructure markets. I mean, you talked about infrastructure and obviously the, you know, the, the requirement that we need to continue spending in the U.K. It'd be useful to sort of update on some of the big projects that you're exposed to. Presumably, HS2 is not yet featuring anywhere in, in, in, in the revenue line, but also to update maybe on where local authorities are in terms of their spending plans and, and what they're doing.
Yeah. I mean, the, the, the category we call commercial falls into a number of different areas. I think one of it is what we've said in the past, is the pedestrianizing of city centers. That is carrying on in most cities now, I'd say, in the U.K. What you're seeing, as I mentioned earlier, Battersea and Nine Elms, is about creating more public space that people want to utilize, and traffic isn't it. That is great from a Marshalls' point of view in landscaping. That is happening in Manchester, Leeds, Liverpool, as well as, obviously, Birmingham, big time.
At Bank Station. If you walk around Bank Station, well, certainly yesterday afternoon, there's, there's a lot of our products around the pedestrianization of that area.
You've got that element. I think then you've got roads, which are carrying on. Obviously, there's still investment. The Smart Motorway Programme we know has been curtailed, but obviously, the investment, even in central reservation, still need drainage products and the like, so that's carrying on. HS2 will come in, and HS2, for us, will be... What we see from HS2 today is most indirect, I'd say, is Birmingham. The redevelopment of the Birmingham area, where the, it's coming in and that surrounding area, is giving lots of work opportunities, so that's positive. Local authorities, I guess, we see most from the roof point of view, and what solar is giving now is a solution where you can address fuel poverty.
Whereas people used to have programs of replacing roofs every 50 years or whatever, they're now looking at if they brought some of that forward and actually changed it, and with solar panels, they can sort out or make massive improvements on fuel poverty. You're seeing more and more quotes coming out. In fact, that 30% growth in solar is probably more coming from that area than new build. New build, by the end of the year, when Part L is there, is gonna have a big kick.
Carluke is 36 acres.
36 acres. We hear from the from the site.
Thanks. Toby Thorrington from Equity Development. I have a quick supplementary on Carluke, then. Do you know where it's in the books at, at the moment?
It's in the books at about GBP 1 million. Yeah.
First one, what's your take currently on the installer network? I think I saw that order, counterintuitively, order books have gone up again. What's happening there?
You'll notice today that we didn't use the slide on, in, on installer. I, I thought last time when I was putting the number up, how, how can you have a 30% fall in demand? It showed that... it's not a KPI that's obviously showing the overall demand. If you take it today, the frustration that we have and share is still at the top end, where people obviously haven't got debt and want to spend money. The frustration we get more than anything else is the lack of labor to do that work.... I was hoping, and we may still see it, that obviously with the, the downturn at the moment in house building, there's obviously ground workers out there who have got the ability to do the patios without any doubt.
It's how they get in touch with the customers and how 'cause they're not businesses. Now, they may do it for somebody they know, but they're not doing it commercially. The demand there is, is unbelievable. It's still at the 17, 18 weeks. It's at levels we've never seen, and it's never come down. It's not obviously covering the whole of our business. Yeah, at the top end, it's still there, and you see it firsthand when you talk to people. I mean, you know, people have come across landscape owners who have over 12 months' worth of work, and therefore, look when to fit them in, usually depending on how big the area they want.
Are you seeing churn in the installer network then?
I wouldn't say any more than you've seen before, but a lot of them, if you go all the way back, a number of these people got burned. I mean, these are small businesses. You know, these are four, five people. A number of them will still talk back to in 2008, 2010, when they had two or three teams working on this, everything was great, and then it collapsed, and they had to lay off friends there. A lot of them have taken the view: "I'll stay as I am. I've got a big order book. I'm happy. I'm making reasonable money." In lots of cases, when they doubled and tripled the crews, they didn't make double and triple the money. They just had double or triple the hassle.
That's our challenge, is how do you get more people to see this as, as an opportunity? 'Cause the order books are tremendous.
Mm. Okay, thank you. Come for Justin on cash, please. Net net, it sounds like adjusting items will be cash slightly positive this year.
Adjusting items will be cash negative because of the redundancy payments.
But asset sales?
Well, asset sales are netted down again. The net CapEx that I quoted, of, of, of GBP 6.7 million is net of those asset sales. Gross CapEx for the year of about GBP 19 million and GBP 7 million of, of asset sales, there or thereabouts.
Yeah.
Depending on which way you want to cut it, then if you want to include those in there, then, yeah, you'd be about GBP 3 million cash positive.
Yeah. Okay. Thank you. I'd like to have us that way, you think net debt might be at the end of the year?
We think it'll be a little bit lower than, than it is now.
Small
... sort of GBP 5 million- GBP 10 million lower.
Got it. Thanks very much.
Says he recovered.
Thanks for your support, Mark.
You just made sure I didn't answer. Okay, any more questions? If there's none in the room, can we ask if there's any online, please?
Thank you, sir. Ladies and gentlemen, if you'd like to ask an audio question, please press star one. Just star one to ask a question. We don't have anybody queuing at this time, sir.
Okay. Okay. Like I said, thank you very much for your time. If any of you want to download the app, we can show you where to get it in the Apple Store. Anyway, thanks for your time. Thank you.