27 July 2023

Resilient performance despite challenging trading conditions

Six months ended 30 June 2023

	Adjusted results*				Statutory
	2023	2022	Change		2023	2022	Change
	£m	£m			£m	£m
Revenue	183.2	222.8	(17.8) %		183.2	222.8	(17.8) %
EBITDA	31.1	46.1	(32.5) %		30.0	53.0	(43.4) %
EBITDA margin	17.0%	20.7%	(370) bps		16.4%	23.8%	(740) bps
Operating profit (EBIT)	21.7	38.1	(43.0) %		20.6	45.0	(54.2) %
Profit before tax (PBT)	19.2	37.3	(48.5) %		18.1	44.2	(59.0) %
Earnings per share (pence)	7.1	13.5	(47.4) %		6.7	16.0	(58.1) %
Cash flow (used in)/generated from operations	(16.3)	37.5	n/a		(18.3)	37.5	n/a
Net (debt)/cash before leases	(50.1)	24.1	n/a		(50.1)	24.1	n/a
Interim dividend (pence)	2.4	4.6	(47.8) %		2.4	4.6	(47.8) %

* Adjusted results for the Group have been presented before exceptional items (2023: expense of £3.0m, 2022: income of £2.3m) and with a weighted-average approach to carbon credit allocation (2023: reduction of £1.9m, 2022: reduction of £4.6m) relative to statutory profit as explained in Alternative Performance Measures. There is no impact on the full year results.

H1 RESULTS

•     Group revenues for the period of £183.2m, a decrease of 17.8% relative to the prior year (2022: £222.8m)

•     Resilient H1 result broadly in line with management expectations delivered against a backdrop of challenging trading conditions

•     Adjusted EBITDA of £31.1m (2022: £46.1m) and adjusted PBT of £19.2m (2022: £37.3m)

•     Statutory EBITDA of £30.0m (2022: £53.0m) and statutory PBT of £18.1m (2022: £44.2m)

•     Selling prices have remained firm despite competitive market conditions, with cost base also remaining stable

•     Progressive signs of market improvement seen in May and June

•     Strong and flexible balance sheet with a net debt before leases of £50.1m (2022 year end: £5.9m) which is below 1x adjusted EBITDA on a last 12 months (LTM) basis

•     Interim 2023 dividend of 2.4 pence per share (2022: 4.6 pence) declared in line with established 55% pay-out ratio

 

KEY OPERATIONAL POINTS

•     Construction of new £95m Desford brick factory almost complete; commissioning ongoing with opening event held in May 2023

•     Decisive management action in response to market conditions. Howley Park brick factory mothballed, and other production reductions completed, together reducing fixed costs by £10m annually

•     Restructuring commercial and support functions to save approximately £3m annually, bringing total annual fixed cost reductions to £13m

•     Inventories rebuilt leaving us well placed to deliver the service levels our customers expect

 

OUTLOOK

•     Recent guidance of a full year 2023 EBITDA with a more balanced H1/H2 split remains unchanged

 

 

Neil Ash Chief Executive Officer commented:

 

"We are pleased to report a resilient performance in the first half, despite the challenging trading conditions faced in our markets.

 

"I joined Forterra in the belief that it was a great business with a bright future.  This sentiment has been confirmed in the three months since I became Chief Executive Officer.  I have been impressed by the dedication, ability and depth of talent of our people, and their desire to continually improve our business.  To do this we are focusing on three key areas: firstly, customer experience and commercial excellence; secondly, manufacturing excellence; and thirdly, innovation and sustainability.  This focus will further strengthen our core.

 

"After over three years of construction at Desford, and an investment which will total £95m, we were delighted to open the largest and most efficient brick factory in Europe in May.  This new factory will deliver a meaningful enhancement to Group results for years to come, through additional production capacity, improved efficiency and improved sustainability.

 

"During the first half we also took the opportunity to rebuild inventory levels allowing us to better serve our customers and meet their expectations.  Now done, we have been unafraid to take difficult decisions to ensure our inventory levels do not continue to grow excessively and are aligned to demand.

 

"As we enter the second half, the outlook continues to remain uncertain due to high inflation and rising interest rates.  These factors are likely to continue weighing on demand for new housing and therefore our products.  So, whilst we presently see tentative signs of improving trading, we are forecasting only a modest improvement in demand in H2 and our recent guidance of a full year 2023 EBITDA with a more balanced H1/H2 split remains unchanged.

 

"Looking ahead, we are optimistic that the Group's results will benefit from a number of positive drivers including: the efficiency benefits of Desford; an end to customer inventory reduction; the opportunity to substitute imported bricks; stabilising energy costs with approximately 70% of our requirement for 2024 secured; and the cost benefits of our restructuring actions.

 

"Beyond this, as market conditions normalise, we expect to benefit from the additional capacity offered by Desford along with our other organic development projects at Wilnecote and Accrington.  In addition, we have a strong pipeline of investment opportunities aimed to capitalise on the medium to long-term market fundamentals of a shortage of UK housing supply, a shortfall of domestic brick production capacity and cross-party political support for increasing housing supply."

 

A presentation for analysts will be held today, 27 July 2023, at 9.00am.  A video webcast of the presentation will be available on the Investors section of our website (http://forterraplc.co.uk/).    

 

 

ENQUIRIES		+44 1604 707 600
Forterra plc
Neil Ash, Chief Executive Officer
Ben Guyatt, Chief Financial Officer

 

FTI Consulting		+44 203 727 1340
Richard Mountain / Nick Hasell

 

 

ABOUT FORTERRA PLC

 

Forterra is a leading UK manufacturer of essential clay and concrete building products, with a unique combination of strong market positions in clay bricks, concrete blocks and precast concrete flooring.  Our heritage dates back many decades and the durability, longevity and inherent sustainability of our products is evident in the construction of buildings that last for generations; wherever you are in Britain, you won't be far from a building with a Forterra product within its fabric.

 

Our clay brick business combines our extensive secure mineral reserves with modern and efficient high-volume manufacturing processes to produce large quantities of extruded and soft mud bricks, primarily for the new build housing market.  We are also the sole manufacturer of the iconic Fletton brick, sold under the London Brick brand, used in the original construction of nearly a quarter of England's housing stock and today used extensively by homeowners carrying out extension or improvement work. Within our concrete blocks business, we are one of the leading producers of Aircrete and aggregate blocks, the former being sold under one of the sector's principal brands of Thermalite.  Our precast concrete products are sold under the established Bison Precast brand, and are utilised in a wide spectrum of applications, from new build housing to commercial and infrastructure.

 

 

 

SUMMARY

 

The Group delivered a resilient performance in the first half of 2023 against a backdrop of challenging trading conditions.  Our sales volumes were in excess of 30% lower than the prior year across the majority of our product range.  Having increased selling prices at the beginning of the year, our prices remain firm in a challenging and competitive market.  Our cost base has stabilised and whilst inflation remains evident, this is less prevalent than previously and has been in line with our expectations. We have invested in replenishing our inventories, with stocks now at levels that will allow us to meet the service levels our customers demand allowing them to gain confidence that their needs can be served with domestically manufactured product.

 

OUR MARKETS

 

The period has seen weak market demand across our product range. This decline in demand is a result of a significant contraction in activity across both the new build housing and repair, maintenance and improvement (RM&I) sectors which directly drive demand for our products.

 

Figures published by the Department of Business and Trade show that domestic brick despatches were 32% lower than the prior year in the five months to May 2023, with the month of May showing signs of an improving trend.  This is further evidenced by our own despatches for June, although we now expect the improvement in trading conditions in the second half to be modest.

 

In addition to a reduction in underlying demand, we have been impacted by our customers reducing the quantity of our products they hold in stock.  It is widely understood that the availability of bricks in the UK has been constrained over much of the last decade as evidenced by the rise in imports and it is clear that our housebuilding customers in particular had increased their stock holding to guard against shortages. With the current softening of demand and with our products more readily available, we believe our customers are reducing the amount of inventory they hold. Figures published by the Department of Levelling Up, Housing and Communities support this theory, showing that private housing starts in the first quarter of 2023 were 17.8% lower than the corresponding period in 2022, a lesser decline than the fall in brick despatches in the same period.

 

With UK manufacturers capacity constrained in recent years, imports of bricks to the UK have risen significantly, reaching approximately 25% of UK consumption in 2022. With the substitution of imported product being key to our investment case for new production capacity, it is promising to see that brick imports fell by 42% relative to the prior year in the five-month period to the end of May, although they remain high as a percentage of total demand. 

 

Even prior to the current decline in market activity, and against a back-drop of continuing population growth, UK housebuilding consistently fell short of Government targets with recent figures highlighting that UK net migration reached a record 606,000 people in 2022, further contributing to the long-standing housing crisis. Accordingly, the Group remains well positioned to benefit from the substantial unfulfilled demand for high quality housing which will persist long after the current short-term cyclical market weakness passes. 

 

MANAGEMENT ACTIONS

 

In response to the challenging market conditions and growing inventories and with our brick production capacity increasing with the opening of the new Desford brick factory, we have acted decisively and mothballed our Howley Park brick factory which is capable of manufacturing around 50m bricks per annum, alongside other production reductions which will together reduce our fixed costs by around £10m on an annualised basis.  A £3.0m exceptional cost in respect of these actions is recognised in the period.

 

In addition, we are implementing a restructuring of our commercial and support functions, aligning them to anticipated market demand, which we expect to save approximately £3m annually, with a restructuring cost of £1m expected to be recognised in the second half of the year.

 

 

The demand for our products for the remainder of the year will influence our production decisions.  Agility is critical in times of suppressed demand so having replenished our inventories in the period we expect to limit our inventory growth in the second half of the year.  We will continue to take appropriate action to ensure that our output is aligned to demand.  Our strategy remains to maximise the ramp up of production at the new Desford brick factory, such that we can benefit from the market leading efficiencies it will offer once fully commissioned.  If necessary, we are ready to reduce production at other facilities to limit inventory growth.

 

RESULTS FOR THE PERIOD

 

Our revenues reflect the significant year on year decline in sales volumes, partly offset by the price increases delivered at the beginning of this period coupled with the full year benefit of price increases delivered in 2022.  Total revenue of £183.2m represents a decrease of 17.8% on the prior year (2022: £222.8m). 

 

Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) for the first half of the year were £31.1m, a decrease of 32.5% relative to the same period in the prior year (2022: £46.1m).  Group adjusted EBITDA margin of 17.0% compares to 20.7% in 2022 driven by weak market demand.

 

The effective rate of corporation tax before exceptional items in the period was 23.7% (2022: 19.7%) which is in line with expectations, reflecting the 6% increase in the rate of headline corporation tax from April 2023.  Adjusted profit before tax of £19.2m compares with a 2022 profit of £37.3m.  Statutory profit before tax of £18.1m compares with a 2022 profit of £44.2m.

 

OUTLOOK

 

The forward outlook remains uncertain, driven by the macro-economic headwinds of high inflation and rising interest rates that are likely to continue weighing on demand for new housing and therefore our products.  Whilst we do presently see tentative signs of improving trading, only a modest improvement in demand is expected in H2 and our recent guidance of a full year 2023 EBITDA with a more balanced H1/H2 split remains unchanged.

 

The outlook for 2024 is particularly unclear although beyond prevailing market conditions, we are optimistic the Group's results should benefit from an end to customer inventory reduction; the efficiency benefits offered by the new Desford brick factory; the recommissioning of the Wilnecote brick factory and the efficiency benefits and range expansion it will offer; along with stabilising energy costs with approximately 70% of 2024 requirements secured; our close control of our cost base and the opportunity to substitute imported products.  

 

Notwithstanding the market weakness in the short-term, looking further ahead, the Board remains confident that the Group remains well positioned to benefit from attractive market fundamentals of a shortage of UK housing supply, a shortfall of domestic brick production capacity and cross-party political support for increasing housing supply.

 

ALTERNATIVE PERFORMANCE MEASURES

 

The Group uses alternative performance measures (APMs) which are not defined or specified under IFRS. The Group believes that its APMs provide additional helpful information on how business performance is reported and assessed internally by management and the Board.

 

Adjusted results for the Group have been presented before: i) exceptional items and; ii) with a weighted average approach to the utilisation of the Group's free allocation of carbon credits.

 

The statutory results consider carbon credits as being utilised on a first in, first out basis. Under this method, the Group's free allocation of carbon credits is utilised before recognising any liability to purchase further credits, which has the effect of weighting the cost of compliance into the second half of the year rather than spreading the cost more evenly across the full year in line with production.

 

The Group's free allocation of carbon credits is based on expected emissions over the full compliance period, which is aligned to the Group's financial year. As such, we believe a more operationally aligned method for measurement, consistent with our management reporting, is to recognise the cost of carbon compliance over the full financial year using a weighted average basis, aligned proportionately with the production that drives our carbon emissions. Accordingly, this has been presented within the adjusted results for the period.

 

We believe this approach provides users of the interim accounts with a more representative presentation of underlying trading performance in the first half of the year. As at 30 June 2023, the impact of this is to decrease adjusted profit before tax by £1.9m (2022: £4.6m) relative to the statutory measure. This only affects the interim results and will have no impact on the full year results. 

 

During the period the Group incurred redundancy costs and impairment losses totalling £3.0m in respect of production rationalisations in response to weak and uncertain market demand which have been treated as exceptional items. During the prior period the Group completed the sale of an area of disused land for gross proceeds of £2.5m. A profit on disposal of £2.3m was recognised as an exceptional item in relation to this sale.

 

BRICKS AND BLOCKS

	Adjusted results			Statutory
	2023	2022		2023	2022
	£m	£m		£m	£m
Revenue	143.3	181.0		143.3	181.0
EBITDA before overhead allocations	37.1	56.9		36.0	63.8
Overhead allocations	(9.3)	(12.6)		(9.3)	(12.6)
EBITDA after overhead allocations	27.8	44.3		26.7	51.2
EBITDA margin before overhead allocations	25.9%	31.4%		25.1%	35.2%
EBITDA margin after overhead allocations	19.4%	24.5%		18.6%	28.3%

 

The result of the Bricks and Blocks segment reflects a significant weakening of demand during the period. Industry domestic brick despatches fell by 32% relative to the prior year in the five months to May 2023 with our own despatches down by a greater percentage as a result of customer mix and our exposure to volume house building. Despatches relative to the prior year comparative were consistently down in the months of January to April although there have been signs of an improving trend in recent months. 

 

Segmental adjusted EBITDA of £27.8m compares to £44.3m in 2022 with the 2023 H1 EBITDA margin of 19.4%, as stated after overhead allocations, falling short of the H1 2022 equivalent of 24.5% as a result of the material reduction in sales volumes.

 

Overhead allocations have reduced relative to 2022 due to a reduction in expected variable remuneration, being both bonuses and share-based payments, in addition to disciplined cost management.

 

Whilst our cost base has stabilised, we have still seen continued cost inflation although this is now less severe and remains in line with our expectations. Inputs including cement have seen continued cost increases and we agreed a pay award with our workforce which equates to around 6.5%, with the largest increases awarded to the lowest paid.

 

2023 also sees a well signposted increase in our energy costs relative to 2022, with 2023 expected to represent the peak in our costs.  We have gained cost certainty by forward purchasing the majority of our 2023 gas and electricity requirements although this has precluded us from taking greater advantage of the current lower spot prices. Looking ahead, we have secured approximately 80% of our requirements for the second half of the year although this percentage will depend on our production levels. Our combined spend on gas and electricity in the period was £30.4m (2022: £25.4m), which also reflects an approximate 10% reduction in production relative to the prior year.

 

With these continuing increases in our cost base, it was necessary to implement further selling price increases at the beginning of January. The level of these price increases are specific to each product and the constituents of its cost base, as well as the period of elapsed time since the previous increase. With trading conditions being extremely competitive there was robust negotiation with our customers before these increases were agreed. We sought brick price increases averaging 10% and were successful in landing around half of this. In Aircrete block, where many prices were held through 2022, we were successful in delivering price increases of over 15%.

 

Notwithstanding continued weak demand and competitive trading conditions, our pricing remains firm. We have seen evidence of our competitors making production reductions, demonstrating that the industry retains its rationality. We expect to see the continued balanced deployment of new capacity in the industry with older and less efficient capacity being retired as new capacity is commissioned.

 

BESPOKE PRODUCTS

	Adjusted results			Statutory
	2023	2022		2023	2022
	£m	£m		£m	£m
Revenue	41.9	44.3		41.9	44.3
EBITDA before overhead allocations	5.6	4.9		5.6	4.9
Overhead allocations	(2.3)	(3.1)		(2.3)	(3.1)
EBITDA after overhead allocations	3.3	1.8		3.3	1.8
EBITDA margin before overhead allocations	13.4%	11.1%		13.4%	11.1%
EBITDA margin after overhead allocations	7.9%	4.1%		7.9%	4.1%

 

Having rationalised our precast concrete assets in recent years our objective is to progressively improve our margins within this segment in order to deliver profit growth.  Despite a softening of market conditions, our Bison flooring business, which is the largest component of this segment delivered an excellent performance with an adjusted segmental EBITDA before overhead allocations ahead of the previous year with a pleasing 230 bps improvement in EBITDA margin. 

 

Revenues in the period totalled £41.9m, a decrease of £2.4m or 5.4% relative to 2022 with declining sales volumes offset by year-on-year pricing benefits.  Our strategy of being more selective in the work we take on whilst maximising the utilisation of our assets continues to pay dividends.  Our precast concrete flooring business has performed particularly well with current despatches only around 20% behind the prior comparative with current order intake running ahead of this.  Whilst there is currently significant uncertainty as to the short-term demand outlook for all of our products, with the floor of the property being installed at the beginning of the construction process, activity in this area can be seen as a potential positive leading indicator for an improvement in brick and block demand looking forward.

 

Segmental adjusted EBITDA, after allocated Group overheads, totalled £3.3m: (2022: £1.8m). EBITDA margin prior to allocation of Group overheads was 13.4% compared to 11.1% in 2022.  We have disclosed previously that the method of allocation of overheads places an additional burden on this segment than would be required if it was a stand-alone business.  Before overhead allocation, the EBITDA contribution of £5.6m for the period represents an excellent result delivered against a challenging market backdrop and an attractive level of return on capital employed given the modest asset base of this segment. 

 

 

EXCEPTIONAL ITEMS

 

Exceptional costs in the period total £3.0m (2022: net income of £2.3m) comprising of £2.1m of redundancy costs and an impairment charge of £0.9m associated with the mothballing of the Howley Park brick factory in response to market conditions. In the prior year, the Group completed the sale of an area of disused land for total proceeds of £2.5m.  Taking into account asset net book values and associated costs of sale, profit on disposal totalled £2.3m.

 

EARNINGS PER SHARE AND DIVIDEND

 

Adjusted earnings per share (EPS) in the period of 7.1 pence represents a decrease of 47.4% relative to the 2022 equivalent EPS of 13.5 pence.  EPS is calculated based on the average number of shares in issue during the period, adjusted for the shares held by the Employee Benefit Trust.  The primary driver for the decline in EPS is the reduction of trading profit as a result of the current weakness in our key markets.

 

The Board has elected to maintain its dividend pay-out ratio of 55% of earnings.  In line with this policy and based upon its expectations of full year 2023 earnings, the Board has declared an interim dividend of 2.4 pence per share with the distribution approximating to 1/3 interim, 2/3 final.  The interim dividend will be paid on 13 October 2023 to shareholders on the register at 22 September 2023.

 

CASH FLOW, BORROWINGS AND FACILITIES

 

Cash used in operations before exceptional items was £16.3m in the first half of the year (2022: cash generated of £37.5m), driven by significant investment of £29.6m in inventory. At 30 June 2023 finished goods inventories totalled £55.8m, compared to £25.4m at the end of 2022.  Whilst the opportunity to re-build our inventory arises from the temporary weakness in our key markets, it was always our intention to replenish our inventories after several years of operating with sub-optimal stock levels with capacity constraints precluding any build of inventory whilst demand remained strong.  Increasing our stock levels to longer-term norms allows us to provide the levels of service our customers demand, offering reassurance that they can rely on us to supply high quality domestically manufactured bricks when they are needed without relying on imports.   

 

Capital expenditure in the period totalled £15.3m with £9.2m of this relating to our three ongoing strategic projects and the remainder being business as usual maintenance capex.  During the period we spent £3.7m on Desford as the commissioning of the new factory continued and the demolition of the old factory commenced, taking the total spend to £89.8m, with the project still expected to be delivered inside the £95m original budget.  In addition, £5.4m was spent on the Wilnecote refurbishment bringing the total spend on this project to £12.4m.  A small spend on the slips project at Accrington in the period makes up the balance.

 

Closing net debt (excluding lease liabilities) was £50.1m (31 December 2022: £5.9m) with the increase in borrowing attributable to a reduction in profitability, the £29.6m investment in inventory and £15.3m of capital expenditure in the period.

 

At the beginning of 2023 we refinanced our banking facilities, retaining the £170.0m revolving credit facility but extending the maturity date to January 2027, with an option for a further 18-month extension subject to lender consent.  Borrowings on the facility at 30 June 2023 stood at £68.0m leaving headroom of £102.0m.

 

Our credit facility is subject to covenant restrictions of net debt/EBITDA (as measured before the impact of IFRS 16) of less than three times and interest cover of greater than four times.  The business has traded comfortably within each of these covenants throughout the period with current leverage below one times on an LTM basis.  The facility also includes a restriction prohibiting the declaration or payment of dividends should leverage exceed three times EBITDA.

 

The margin grid that determines the rate of interest payable has also been adjusted such that the grid commences at SONIA plus 1.65% whilst leverage remains under 0.5 times EBITDA, increasing to a margin of 2.75% should leverage exceed 2.5 times.  At a leverage of between 0.5 and one times a margin of 1.75% is applicable and will apply in H2.

 

Finance expense for the period totalled £2.5m (2022: £0.8m). Interest charges in the period were calculated by applying an average margin of 1.65% above SONIA.  A commitment fee of 35% of the applicable margin on unborrowed funds was also payable.

 

The amended facility is now linked to our sustainability targets with the opportunity to reduce the margin by 5 bps subject to achieving annual sustainability targets covering decarbonisation, plastic reduction and increasing the number of employees in earn and learn positions.

 

STRATEGY AND CAPITAL ALLOCATION PRIORITIES

 

Our strategy is formed across three pillars that will drive sustained earnings and cash flow growth through:

•     Strengthening the core (expansion of capacity, enhanced efficiency and sustainability)

•     Range expansion

•     Product innovation and development

 

Each of these pillars is represented by one of our current ongoing strategic capital projects at Desford, Wilnecote and Accrington respectively.  This, along with our capital allocation policy which is centered on delivering compelling returns to shareholders, leaves the Group well positioned to deliver long-term shareholder value.

 

The Group's capital allocation priorities are summarised as follows:

•     Strategic organic capital investment to deliver attractive returns

•     Progressive ordinary dividend with the pay-out ratio of 55% of earnings

•     Bolt-on acquisitions as suitable opportunities arise in adjacent or complementary markets

•     Supplementary shareholder returns as appropriate

 

Despite the present challenging market conditions, the Group continues to benefit from a strong and flexible balance sheet with leverage on an LTM basis below one times.  Committed capital spend on the current strategic projects totals approximately £35m which will be spent over the next 18 months.  Management currently anticipates ending the current year with net debt (before leases) of approximately £60-70m, still close to one times leverage, leaving the Group with financial flexibility looking forward.

 

STRATEGIC ORGANIC CAPITAL INVESTMENT

 

Our programme of organic investment is at the core or our strategy and in addition the new Desford brick factory, we expect to deploy in excess of £200m of capital in strategic projects over the next decade.

 

The construction of the new £95m Desford brick factory is almost complete and we held a successful opening event in May 2023.  It is important to emphasise that the factory remains in its commissioning phase ramping up both the speed of production and increasing the range of products. We have faced some challenges in consistently replicating the existing product range, which we are overcoming. We expect this process to continue throughout 2023 and into 2024 with full run rate production of 180m bricks per annum achievable in the second half of 2024. 

 

In this period of weaker market demand our strategy remains to fully commission Desford to maximum output as soon as possible to realise the industry leading efficiencies this facility will offer.  If market conditions dictate that we need to make reductions in output elsewhere then we will not hesitate to do so. 

 

Delivering upon the first pillar of our strategy, the new Desford brick factory will provide:

1)   Additional production capacity

2)   Improved efficiency reducing our unit cost of production

3)   Improved sustainability credentials with a 25% reduction embedded carbon per brick relative to the old factory it replaces

 

Desford will manufacture a range of bricks suitable for volume housebuilding, providing an effective 22% increase in our brick production output, which we expect to deliver incremental EBITDA of £25m in the coming years, although the timing of which is now dependant on a normalised market.  We remain confident that the factory is well positioned to benefit from the attractive medium to long-term fundamentals of the UK housing market with a long- term housing shortage as well as constraints on the availability of domestically produced bricks from which to construct these much-needed homes.

 

Our second major project, the redevelopment of our Wilnecote brick factory will provide range expansion as well as improved efficiency and sustainability along with a modest increase in capacity.  This investment is now expected to cost approximately £30m.  Commissioning is likely to be delayed by around six months from Q4 2023 to H1 2024 as a result of recently identified engineering challenges which were only discovered upon removal of the existing kiln, as well as other supply chain related delays.  Ultimately, we expect this new factory to contribute approximately £7m of incremental annual EBITDA to Group results, the timing of which again will be influenced by the prevailing market conditions.

 

Whilst both projects are underpinned by our commitment to manufacturing excellence, Wilnecote represents a very different investment to Desford.  Wilnecote services the architect-led commercial and specification market which includes residential, commercial, school and hospital developments; a sizeable market of around 400m bricks per annum (based on 2022 and approximately 18% of the UK brick demand) and a market segment where Forterra has historically been under-represented.  This investment will expand the product range manufactured at the factory providing a degree of diversification, reducing our reliance on mainstream housebuilding whilst increasing our total brick production capacity by around 1%.

 

Our third ongoing strategic investment is an innovative project to manufacture brick slips, or 'thin bricks' as they are sometimes known.  An investment of approximately £12m at our Accrington brick factory will facilitate the manufacture of up to 48m brick slips per annum. Minimising our investment through utilising an existing factory with only a small reduction in the number of bricks that will continue to be manufactured alongside the new slips.  The UK market for brick slips is currently estimated at around 120m units annually with significant growth expected to be driven through growth of the modular construction market along with growing demand for fire-safe façade solutions suitable for use in high rise construction.

 

Manufactured brick slips also offer several sustainability benefits, reducing raw material and energy usage relative to the manufacture of traditional bricks, and with many slips currently being cut from traditional bricks, they can significantly reduce wastage.  We currently expect to manufacture our first slips in the first half of 2024 although the ramp up to full production could take a number of years as we increase our share of what we expect to be a developing market.  

 

Beyond the three strategic projects detailed above, we continue to progress our pipeline of future projects both in brick and concrete products although the timing of any future announcements on these projects will be determined by a range of factors, including market conditions. 

 

SUSTAINABILITY

 

Sustainability continues to grow in its importance and our focus on Planet, People and Product is central to our strategy.  Between 2010 and 2019 we reduced our carbon emissions per tonne of production by 22%. Since then, we have set an ambitious target to reduce our emissions by a further 32% by 2030 and we are making demonstrable progress against this.

 

Whilst our primary focus during the period was our response to the challenging market conditions we presently face, we have continued to deliver on our sustainability commitments. 

 

We continue to partner with suppliers to progress our understanding of innovative breakthrough technologies including carbon capture, alternative fuels including hydrogen, synthetic gas, and biomass and how we can benefit from each of these in our current and future factories.  During the period, in a project that has been delayed by the availability of hydrogen, we successfully completed the first firing of bricks partially fuelled by hydrogen. We expect to continue these trials increasing the rate of substitution of natural gas for hydrogen.  As well as focusing on alternative fuels we also continue to research alternative and more sustainable raw materials from which to manufacture our products including cement substitutes.  Work is also ongoing to provide our stakeholders with greater visibility of our scope 3 emissions and we expect to provide an update on this in our 2023 sustainability report.

 

We are now only nine months from benefiting from our ground-breaking commitment to solar power by way of the Power Purchase Agreement that will provide c.70% of our electricity through a dedicated solar farm from 2024 albeit, with the full financial benefits being realised from 2025.  Further to this, the installation of the roof-mounted solar arrays at our new Desford factory is nearing completion with these expected to generate 16% of the factory's electricity requirement.  On site renewables, whilst often limited by their scale, offer further cost savings by avoiding the significant transmission costs which in the first half represent approximately 50% of the cost of electricity supplied through the grid, demonstrating how being more sustainable can also improve profitability.

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

The principal risks and uncertainties facing the business have been appended to this interim statement and include a summary of risks emerging and an update to each of the risks recently presented in the 2022 Annual Report and Accounts.

 

GOING CONCERN

 

At the balance sheet date, the cash balance stood at £16.7m, with £68.0m borrowed against £170.0m of committed bank facilities, leaving undrawn facilities of £102.0m.  The Group meets its working capital requirements through these cash reserves and borrowings, and closely manages working capital to ensure sufficient daily liquidity, preparing financial forecasts and stress tests to ensure sufficient liquidity over the medium-term. The Group has operated comfortably within all its banking covenants throughout the period, with funding secured through an RCF facility extending until January 2027.

 

The Group continues to update internal forecasts, reflecting current economic conditions, incorporating management experience, future expectations, and sensitivity analysis.  As at 30 June 2023, management are confident that the Group will remain resilient under all reasonably likely scenarios, whilst supporting the funding of the ongoing capital projects outlined in more detail in this announcement, and will continue to have headroom in both its banking covenants and existing bank facilities.  We have modelled two plausible downside scenarios which sensitise volumes and margins.  In both these downside scenarios, there is headroom against our covenants and available liquidity.  We have further modelled a breach scenario to assess the fall in EBITDA required to breach the covenants within the credit facility in the period to 31 December 2024, and we believe, given the reduction in EBITDA required, that the probability of such a scenario is remote.  Even if such a scenario was to occur, we have identified mitigations including capex, dividend reductions and operational cost savings which we would implement.

 

Taking account of all reasonably possible changes in trading performance and the current financial position of the Group, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the going concern period to 31 December 2024. The Group therefore adopts the going concern basis in preparing the Condensed Consolidated Financial Statements.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements in this half-yearly report are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be correct. Because these statements contain risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE INTERIM REPORT

 

We confirm to the best of our knowledge:

 

•     the Condensed Consolidated set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the UK;

 

•     the interim management report includes a fair review of the information required by:

a)   DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the Condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)   DTR 4.2.8R of the Disclosure and Transparency Rules, being material related party transactions that have taken place in the first six months of the current financial year and any material changes in the related party transactions described in the annual report.

 

 

By order of the Board

 

 

 

Neil Ash		Ben Guyatt
Chief Executive Officer		Chief Financial Officer

 

 

26 July 2023

 

INDEPENDENT REVIEW REPORT TO FORTERRA PLC

 

CONCLUSION

 

We have been engaged by the Company to review the Condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 which comprises Condensed Consolidated statement of total Comprehensive Income, Condensed Consolidated Statement of Financial Position, Condensed Consolidated Statement of Changes in Equity, Condensed Consolidated Statement of Changes in Cash Flows and related notes 1 to 16.  We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

BASIS FOR CONCLUSION

 

We conducted our review in accordance with International Standard on Review Engagements 2410 (UK) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

As disclosed in Note 1, the annual financial statements of the Group will be prepared in accordance with UK adopted international accounting standards.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting".

 

CONCLUSION RELATING TO GOING CONCERN

 

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis of Conclusion section of this report, nothing has come to our attention to suggest that management have inappropriately adopted the going concern basis of accounting or that management have identified material uncertainties relating to going concern that are not appropriately disclosed.

 

This conclusion is based on the review procedures performed in accordance with this ISRE, however future events or conditions may cause the entity to cease to continue as a going concern.

 

RESPONSIBILITIES OF THE DIRECTORS

 

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

In preparing the half-yearly financial report, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

 

 

AUDITOR'S RESPONSIBILITIES FOR THE REVIEW OF THE FINANCIAL INFORMATION

 

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report.  Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

 

USE OF OUR REPORT

 

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

 

 

 

 

Ernst & Young LLP

 

Luton

 

26 July 2023

 

 

CONDENSED CONSOLIDATED STATEMENT OF TOTAL COMPREHENSIVE INCOME FOR THE HALF YEAR ENDED 30 JUNE 2023 (UNAUDITED)

 

		Six months ended 30 June			Year ended 31 December
		2023		2022		2022
	Note	Unaudited		Unaudited		Audited
		£m		£m		£m
Revenue	6	183.2		222.8		455.5
Cost of sales		(123.1)		(136.3)		(292.9)
Gross profit		60.1		86.5		162.6
Distribution costs		(24.9)		(28.4)		(57.7)
Administrative expenses		(14.8)		(16.2)		(33.6)
Other operating income		0.2		3.1		3.7
Operating profit		20.6		45.0		75.0
EBITDA before exceptional items		33.0		50.7		89.2
Exceptional items	7	(3.0)		2.3		2.3
EBITDA		30.0		53.0		91.5
Depreciation and amortisation		(9.4)		(8.0)		(16.5)
Operating profit		20.6		45.0		75.0
Finance expense	8	(2.5)		(0.8)		(2.1)
Profit before tax		18.1		44.2		72.9
Income tax expense	9	(4.3)		(8.7)		(14.1)
Profit for the financial period attributable to equity shareholders		13.8		35.5		58.8
Other comprehensive (loss)/profit
Effective portion of changes of cash flow hedges (net of tax impact)		(0.8)		-		0.8
Total comprehensive income for the period attributable to equity shareholders		13.0		35.5		59.6
Earnings per share:
Basic (in pence)	10	6.7		16.0		27.2
Diluted (in pence)	10	6.6		15.8		26.8

 

The notes on pages 21 to 32 are an integral part of these Condensed Consolidated Financial Statements.

 

All results relate to continuing operations.

 

 

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2023 (UNAUDITED)

 

		As at			As at
		30 June			31 December
	Note	2023		2022		2022
		Unaudited		Unaudited		Audited
		£m		£m		£m
Assets
Non-current assets
Intangible assets		18.2		15.8		23.6
Property, plant and equipment		245.1		218.9		233.7
Right-of-use assets		21.4		16.1		18.1
		284.7		250.8		275.4
Current assets
Inventories		72.6		36.3		43.0
Trade and other receivables		61.1		61.5		44.3
Income tax asset		0.6		-		-
Cash and cash equivalents		16.7		34.3		34.3
Derivative asset		-		-		0.6
		151.0		132.1		122.2
Total assets		435.7		382.9		397.6
Current liabilities
Trade and other payables		(112.3)		(104.0)		(89.6)
Income tax liabilities		-		(0.8)		-
Loans and borrowings	12	(0.3)		(0.2)		(0.2)
Lease liabilities		(5.2)		(4.3)		(4.7)
Provisions for other liabilities and charges		(7.7)		(7.8)		(14.3)
Derivative liabilities		(0.2)		(0.2)		-
		(125.7)		(117.3)		(108.8)
Non-current liabilities
Loans and borrowings	12	(66.5)		(10.0)		(40.0)
Lease liabilities		(16.1)		(11.7)		(13.3)
Provisions for other liabilities and charges		(10.0)		(8.9)		(10.0)
Deferred tax liabilities		(5.9)		(3.8)		(5.0)
		(98.5)		(34.4)		(68.3)
Total liabilities		(224.2)		(151.7)		(177.1)
Net assets		211.5		231.2		220.5
Capital and reserves attributable to equity shareholders
Ordinary shares		2.1		2.2		2.1
Capital redemption reserve		0.2		0.1		0.2
Retained earnings		226.4		239.1		233.4
Cash flow hedge reserve		(0.2)		(0.2)		0.6
Reserve for own shares		(17.0)		(10.0)		(15.8)
Total equity		211.5		231.2		220.5

 

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE HALF YEAR ENDED 30 JUNE 2023 (UNAUDITED)

 

	Ordinary shares	Capital redemption reserve	Reserve for own share	Cash flow hedge reserve	Other reserve	Retained earnings	Total equity
	£m	£m	£m	£m	£m	£m	£m
Current half year:
Balance at 1 January 2023	2.1	0.2	(15.8)	0.6	-	233.4	220.5
Profit for the financial period	-	-	-	-	-	13.8	13.8
Other comprehensive loss	-	-	-	(0.8)	-	-	(0.8)
Total comprehensive (loss)/income for the period	-	-	-	(0.8)	-	13.8	13.0
Dividend payable	-	-	-	-	-	(20.9)	(20.9)
Purchase of shares by Employee Benefit Trust	-	-	(1.8)	-	-	-	(1.8)
Share-based payments charge	-	-	-	-	-	1.3	1.3
Share-based payments exercised	-	-	0.6	-	-	(0.6)	-
Tax on share-based payments	-	-	-	-	-	(0.6)	(0.6)
Balance at 30 June 2023	2.1	0.2	(17.0)	(0.2)	-	226.4	211.5
	Ordinary shares	Capital redemption reserve	Reserve for own share	Cash flow hedge reserve	Other reserve	Retained earnings	Total equity
	£m	£m	£m	£m	£m	£m	£m
Prior half year:
Balance at 1 January 2022	2.3	-	(4.6)	(0.2)	23.9	213.4	234.8
Profit for the financial period	-	-	-	-	-	35.5	35.5
Total comprehensive income  for the period	-	-	-	-	-	35.5	35.5
Dividend payable	-	-	-	-	-	(14.5)	(14.5)
Movement in other reserves	-	-	-	-	(23.9)	23.9	-
Purchase of shares by Employee Benefit Trust	-	-	(6.3)	-	-	-	(6.3)
Proceeds from sale of shares by Employee Benefit Trust	-	-	0.4	-	-	-	0.4
Payments made to acquire own shares	(0.1)	0.1	-	-	-	(20.8)	(20.8)
Share-based payments charge	-	-	-	-	-	2.0	2.0
Share-based payments exercised	-	-	0.5	-	-	(0.5)	-
Tax on share-based payments	-	-	-	-	-	0.1	0.1
Balance at 30 June 2022	2.2	0.1	(10.0)	(0.2)	-	239.1	231.2

 

 

	Ordinary shares	Capital redemption reserve	Reserve for own share	Cash flow hedge reserve	Other reserve	Retained earnings	Total equity
	£m	£m	£m	£m	£m	£m	£m
Prior year:
Balance at 1 January 2022	2.3	-	(4.6)	(0.2)	23.9	213.4	234.8
Profit for the financial year	-	-	-	-	-	58.8	58.8
Other comprehensive income	-	-	-	0.8	-	-	0.8
Total comprehensive income for the year	-	-	-	0.8	-	58.8	59.6
Dividend paid	-	-	-	-	-	(24.2)	(24.2)
Movement in other reserves	-	-	-	-	(23.9)	23.9	-
Purchase of shares by Employee Benefit Trust	-	-	(12.2)	-	-	-	(12.2)
Proceeds from sale of shares by Employee Benefit Trust	-	-	0.4	-	-	-	0.4
Payments made to acquire own shares	(0.2)	0.2	-	-	-	(40.3)	(40.3)
Share-based payments charge	-	-	-	-	-	3.4	3.4
Share-based payments exercised	-	-	0.6	-	-	(0.6)	-
Tax on share-based payments	-	-	-	-	-	(1.0)	(1.0)
Balance at 31 December 2022	2.1	0.2	(15.8)	0.6	-	233.4	220.5

 

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS FOR THE HALF YEAR ENDED 30 JUNE 2023 (UNAUDITED)

 

	Six months ended 30 June			Year ended 31 December
	2023		2022		2022
	Unaudited		Unaudited		Audited
	£m		£m		£m
Cash flows from operating activities
Profit before tax	18.1		44.2		72.9
Finance expense	2.5		0.8		2.1
Exceptional items	3.0		(2.3)		(2.3)
Operating profit before exceptional items	23.6		42.7		72.7
Adjustments for:
Depreciation and amortisation	9.4		8.0		16.5
Loss/(profit) on disposal of property, plant and equipment and leases	0.2		(0.5)		(0.4)
Movement on provision	(6.8)		(3.8)		4.1
Purchase of carbon credits	(3.5)		(2.6)		(10.3)
Settlement of carbon credits	8.3		5.0		4.7
Share-based payments	1.3		2.0		3.4
Other non-cash items	(1.0)		0.4		(0.8)
Changes in working capital:
Inventories	(29.6)		(3.5)		(10.2)
Trade and other receivables	(16.8)		(22.4)		(5.2)
Trade and other payables	(1.4)		12.2		14.5
Cash (used in)/generated from operations before exceptional items	(16.3)		37.5		89.0

 

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS FOR THE HALF YEAR ENDED 30 JUNE 2023 (UNAUDITED)

 

	Six months ended 30 June			Year ended 31 December
	2023		2022		2022
	Unaudited		Unaudited		Audited
	£m		£m		£m
Cash (used in)/generated from operations before exceptional items	(16.3)		37.5		89.0
Cash flows relating to operating exceptional items	(2.0)		-		-
Cash (used in)/generated from operations	(18.3)		37.5		89.0
Interest paid	(2.1)		(1.2)		(2.4)
Tax paid	(3.6)		(5.7)		(11.0)
Net cash (outflow)/inflow from operating  activities	(24.0)		30.6		75.6
Cash flows from investing activities
Purchase of property, plant and equipment	(14.9)		(20.1)		(42.1)
Purchase of intangible assets	(0.4)		(1.2)		(2.0)
Proceeds from sale of property, plant and equipment	-		0.3		0.4
Exceptional proceeds from sale of property, plant and equipment	-		2.5		2.5
Net cash used in investing activities	(15.3)		(18.5)		(41.2)
Cash flows from financing activities
Repayment of lease liabilities	(2.9)		(2.6)		(5.3)
Dividends paid	-		-		(24.2)
Drawdown of borrowings	77.0		10.0		40.0
Repayment of borrowings	(49.0)		-		-
Purchase of shares by Employee Benefit Trust	(1.8)		(6.3)		(12.2)
Proceeds from sales of shares by Employee Benefit Trust	-		0.4		0.4
Payments made to acquire own shares	-		(20.8)		(40.3)
Financing fees	(1.6)		-		-
Net cash generated from/(used in) financing activities	21.7		(19.3)		(41.6)
Net decrease in cash and cash equivalents	(17.6)		(7.2)		(7.2)
Cash and cash equivalents at the beginning of the period	34.3		41.5		41.5
Cash and cash equivalents at the end of the period	16.7		34.3		34.3