TIDMFORT
RNS Number : 3324H
Forterra plc
27 July 2023
27 July 2023
Resilient performance despite challenging trading conditions
Six months ended 30 June 2023
Adjusted results* Statutory
2023 2022 2023 2022
--------- ---------
GBPm GBPm Change GBPm GBPm Change
------ ----- --------- ------ ----- ---------
(17.8) (17.8)
Revenue 183.2 222.8 % 183.2 222.8 %
(32.5) (43.4)
EBITDA 31.1 46.1 % 30.0 53.0 %
EBITDA margin 17.0% 20.7% (370) bps 16.4% 23.8% (740) bps
(43.0) (54.2)
Operating profit (EBIT) 21.7 38.1 % 20.6 45.0 %
(48.5) (59.0)
Profit before tax (PBT) 19.2 37.3 % 18.1 44.2 %
(47.4) (58.1)
Earnings per share (pence) 7.1 13.5 % 6.7 16.0 %
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
(47.8) (47.8)
Interim dividend (pence) 2.4 4.6 % 2.4 4.6 %
------------------------------ ------ ----- --------- ------ ----- ---------
* Adjusted results for the Group have been presented before
exceptional items (2023: expense of GBP3.0m, 2022: income of
GBP2.3m) and with a weighted-average approach to carbon credit
allocation (2023: reduction of GBP1.9m, 2022: reduction of GBP4.6m)
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 GBP183.2m, a decrease of
17.8% relative to the prior year (2022: GBP222.8m)
-- Resilient H1 result broadly in line with management
expectations delivered against a backdrop of challenging trading
conditions
-- Adjusted EBITDA of GBP31.1m (2022: GBP46.1m) and adjusted PBT of GBP19.2m (2022: GBP37.3m)
-- Statutory EBITDA of GBP30.0m (2022: GBP53.0m) and statutory PBT of GBP18.1m (2022: GBP44.2m)
-- 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 GBP50.1m (2022 year end: GBP5.9m) 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 GBP95m 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 GBP10m
annually
-- Restructuring commercial and support functions to save
approximately GBP3m annually, bringing total annual fixed cost
reductions to GBP13m
-- 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 GBP95m, 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/).
+44 1604 707
ENQUIRIES 600
Forterra plc
Neil Ash , Chief Executive
Officer
Ben Guyatt , Chief Financial
Officer
+44 203 727
FTI Consulting 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 GBP10m on an annualised basis. A GBP3.0m
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 GBP3m
annually, with a restructuring cost of GBP1m 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 GBP183.2m
represents a decrease of 17.8% on the prior year (2022:
GBP222.8m).
Adjusted earnings before interest, tax, depreciation and
amortisation (EBITDA) for the first half of the year were GBP31.1m,
a decrease of 32.5% relative to the same period in the prior year
(2022: GBP46.1m). 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
GBP19.2m compares with a 2022 profit of GBP37.3m. Statutory profit
before tax of GBP18.1m compares with a 2022 profit of GBP44.2m.
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 GBP1.9m
(2022: GBP4.6m) 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 GBP3.0m 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 GBP2.5m. A profit on disposal of GBP2.3m was
recognised as an exceptional item in relation to this sale.
BRICKS AND BLOCKS
Adjusted results Statutory
------------------ -------------
2023 2022 2023 2022
GBPm GBPm GBPm GBPm
-------- -------- ----- ------
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 GBP27.8m compares to GBP44.3m 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 GBP30.4m (2022: GBP25.4m),
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
GBPm GBPm GBPm GBPm
------------ ------------ ------------ ------------
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 GBP41.9m, a decrease of GBP2.4m
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 GBP3.3m: (2022: GBP1.8m). 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 GBP5.6m 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 GBP3.0m (2022: net income
of GBP2.3m) comprising of GBP2.1m of redundancy costs and an
impairment charge of GBP0.9m 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 GBP2.5m. Taking into account asset net book
values and associated costs of sale, profit on disposal totalled
GBP2.3m.
EARNINGS PER SHARE AND DIVID
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 GBP16.3m in
the first half of the year (2022: cash generated of GBP37.5m),
driven by significant investment of GBP29.6m in inventory. At 30
June 2023 finished goods inventories totalled GBP55.8m, compared to
GBP25.4m 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 GBP15.3m with GBP9.2m
of this relating to our three ongoing strategic projects and the
remainder being business as usual maintenance capex. During the
period we spent GBP3.7m on Desford as the commissioning of the new
factory continued and the demolition of the old factory commenced,
taking the total spend to GBP89.8m, with the project still expected
to be delivered inside the GBP95m original budget. In addition,
GBP5.4m was spent on the Wilnecote refurbishment bringing the total
spend on this project to GBP12.4m. A small spend on the slips
project at Accrington in the period makes up the balance.
Closing net debt (excluding lease liabilities) was GBP50.1m (31
December 2022: GBP5.9m) with the increase in borrowing attributable
to a reduction in profitability, the GBP29.6m investment in
inventory and GBP15.3m of capital expenditure in the period.
At the beginning of 2023 we refinanced our banking facilities,
retaining the GBP170.0m 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 GBP68.0m leaving headroom of
GBP102.0m.
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 GBP2.5m (2022: GBP0.8m).
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 GBP35m which
will be spent over the next 18 months. Management currently
anticipates ending the current year with net debt (before leases)
of approximately GBP60-70m, 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 GBP200m of capital in strategic projects
over the next decade.
The construction of the new GBP95m 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
GBP25m 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
GBP30m. 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
GBP7m 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 GBP12m 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 GBP16.7m,
with GBP68.0m borrowed against GBP170.0m of committed bank
facilities, leaving undrawn facilities of GBP102.0m. 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
INDEPENT 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 YEARED 30 JUNE 2023 (UNAUDITED)
Year ended
Six months ended 30 June 31 December
2023 2022 2022
Note Unaudited Unaudited Audited
GBPm GBPm GBPm
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
GBPm GBPm GBPm
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 YEARED 30 JUNE 2023 (UNAUDITED)
Capital
Ordinary redemption Reserve for Cash flow Retained
shares reserve own share hedge reserve Other reserve earnings Total equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
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
------------- ------------- ------------- ------------- ------------- ------------- ------------
Capital
Ordinary redemption Reserve for Cash flow Retained
shares reserve own share hedge reserve Other reserve earnings Total equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
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
------------- ------------- ------------- ------------- ------------- ------------- ------------
Capital
Ordinary redemption Reserve for Cash flow Retained
shares reserve own share hedge reserve Other reserve earnings Total equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
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 YEARED 30 JUNE 2023 (UNAUDITED)
Year ended
Six months ended 30 June 31 December
2023 2022 2022
Unaudited Unaudited Audited
GBPm GBPm GBPm
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 YEARED 30 JUNE 2023 (UNAUDITED)
Year ended
Six months ended 30 June 31 December
2023 2022 2022
Unaudited Unaudited Audited
GBPm GBPm GBPm
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
------------ ------------ ------------
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
HALF YEARED 30 JUNE 2023 (UNAUDITED)
1 GENERAL INFORMATION
Forterra plc ('Forterra' or the 'Company') and its subsidiaries
(together referred to as the 'Group') are domiciled in the UK. The
address of the registered office of the Company and its
subsidiaries is 5 Grange Park Court, Roman Way, Northampton,
England, NN4 5EA. The Company is the parent of Forterra Holdings
Limited and Forterra Building Products Limited, which together
comprise the group (the 'Group'). The principal activity of the
Group is the manufacture and sale of bricks, dense and lightweight
blocks, precast concrete, concrete block paving and other
complementary building products.
The Condensed Consolidated Financial Statements were approved by
the Board on 26 July 2023.
The Condensed Consolidated Financial Statements for the six
months ended 30 June 2023 and comparative period have not been
audited. The auditor has carried out a review of the financial
information and their report is set out on pages 13 and 14 .
These Condensed Consolidated Financial Statements are unaudited
and do not constitute statutory accounts of the Group within the
meaning of Section 435 of the Companies Act 2006. The auditors have
carried out a review of the financial information in accordance
with the guidance contained in ISRE 2410 (UK and Ireland) 'Review
of Interim Financial Information Performed by the Independent
Auditor of the Entity' issued by the Auditing Practices Board.
Financial Statements for the year ended 31 December 2022 were
approved by the Board of Directors on 10 March 2023 and delivered
to the Registrar of Companies. The Auditor's report was (i)
unqualified, (ii) did not include a reference to any matters to
which the Auditor drew attention by way of emphasis without
qualifying their report and did not contain a statement under
section 498 of the Companies Act 2006.
BASIS OF PREPARATION
The Condensed Consolidated Financial Statements for the half
year ended 30 June 2023 have been prepared in accordance with the
Disclosure and Transparency Rules of the UK Financial Conduct
Authority (DTR), and the requirements of UK-adopted IAS 34 Interim
Financial Reporting.
The Condensed Consolidated Financial Statements do not include
all the information and disclosures required in annual financial
statements and they should be read in conjunction with the Group's
Financial Statements for the year ended 31 December 2022 and any
public announcements made by the Company during the interim
period.
The Condensed Consolidated Financial Statements are prepared on
the historical cost basis.
GOING CONCERN BASIS
At the balance sheet date, the cash balance stood at GBP16.7m,
with GBP68.0m borrowed against GBP170.0m of committed bank
facilities, leaving undrawn facilities of GBP102.0m. 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.
2 ACCOUNTING POLICIES
The accounting policies adopted in the preparation of the
Condensed Consolidated Financial Statements are consistent with
those followed in the preparation of the Group's Consolidated
Financial Statements for the year ended 31 December 2022. The
accounting standards that became applicable in the period did not
impact the Group's accounting policies and did not require
retrospective adjustments. None of the standards which have been
issued by the IASB but not yet effective are expected to have a
material impact on the Group.
3 JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with
adopted IFRSs requires management to make judgements, estimates and
assumptions that affect the application of policies and reported
amounts of assets and liabilities, income and expenses. The
estimates and associated assumptions are based on historical
experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the
basis of making the judgements about carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
In preparing these Condensed Consolidated Financial Statements,
the significant judgements made by management in applying the
Group's accounting policies and the key sources of estimation
uncertainty were the same as those that applied to the Consolidated
Financial Statements of Forterra plc for the year ended 31 December
2022.
4 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
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.
Accounting for carbon credits
Under the UK Emissions Trading Scheme, the Group receives an
annual allocation of free carbon credits, which are used to satisfy
a portion of the Groups carbon emissions liability as incurred over
the compliance period, which falls in line with the accounting
period of the Group. These are recorded at nil value within the
Consolidated Financial Statements. As this allocation is less than
the total carbon compliance liability incurred by the Group over
the compliance period, additional carbon credits are purchased to
satisfy the shortfall.
The liability for the shortfall is measured, up to the level of
credits purchased, at the cost of the purchased credits. Where the
liability to surrender carbon credits exceeds the carbon allowances
purchased, the shortfall is measured at the prevailing market price
and remeasured at the reporting date.
The Group's free allocation of carbon credits is based on
expected emissions over the full compliance period, which is in
line with the Group's financial year. As such, management believes
a more operationally aligned method for measurement recognises
these free allowances over the full financial year using a weighted
average basis, aligned proportionately with production which drives
carbon emissions, in line with management reporting. Accordingly,
this has been presented within the adjusted results for the
period.
The results which are presented as statutory 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. As at 30 June 2023, the impact of
this alternative performance measure is to reduce statutory profit
before tax by GBP1.9m (2022: GBP4.6m). This only affects the
interim results and will have no impact on the full year
results.
Exceptional items
As detailed within Note 7, Exceptional costs in the period total
GBP3.0m (2022: net income of GBP2.3m) comprising of GBP2.1m of
redundancy costs and an impairment charge of GBP0.9m associated
with the mothballing of the Howley Park brick factory in response
to market conditions. Both these exceptional items are recognised
within cost of sales in the Statement of Total Comprehensive
Income. In the prior year, the Group completed the sale of an area
of disused land for total proceeds of GBP2.5m. Taking into account
asset net book values and associated costs of sale, profit on
disposal totalled GBP2.3m.
Reconciliation of alternative performance measures to statutory
results are as follows:
Six months ended 30 June 2023 Adjusted results Exceptional items Carbon accounting Statutory results
GBPm GBPm GBPm GBPm
------------------------------ ---------------- ----------------- ----------------- -----------------
Revenue 183.2 - - 183.2
EBITDA 31.1 (3.0) 1.9 30.0
EBITDA margin 17.0% 16.4%
Operating profit (EBIT) 21.7 (3.0) 1.9 20.6
Profit before tax 19.2 (3.0) 1.9 18.1
Six months ended 30 June 2022 Adjusted results Exceptional items Carbon accounting Statutory results
GBPm GBPm GBPm GBPm
------------------------------ ---------------- ----------------- ----------------- -----------------
Revenue 222.8 - - 222.8
EBITDA 46.1 2.3 4.6 53.0
EBITDA margin 20.7% 23.8%
Operating profit (EBIT) 38.1 2.3 4.6 45.0
Profit before tax 37.3 2.3 4.6 44.2
BRICKS & BLOCKS
Six months ended 30 June 2023 Adjusted results Exceptional items Carbon accounting Statutory results
GBPm GBPm GBPm GBPm
------------------------------ ---------------- ----------------- ----------------- -----------------
Revenue 143.3 - - 143.3
EBITDA 27.8 (3.0) 1.9 26.7
EBITDA margin 19.4% 18.6%
Six months ended 30 June 2022 Adjusted results Exceptional items Carbon accounting Statutory results
GBPm GBPm GBPm GBPm
------------------------------ ---------------- ----------------- ----------------- -----------------
Revenue 181.0 - - 181.0
EBITDA 44.3 2.3 4.6 51.2
EBITDA margin 24.5% 28.3%
BESPOKE PRODUCTS
The Bespoke Products segment did not contain exceptional items
in either the period ended 30 June 2023 or 30 June 2022. Further,
it is not captured under UK ETS and is therefore not affected by
accounting treatment for carbon credits. As such, there is no
difference between the Statutory and Adjusted results for this
segment.
5 SEASONALITY OF OPERATIONS
The Group is typically subject to seasonality consistent with
the general construction market, with stronger volumes witnessed
across the spring and summer months when conditions are more
favourable. The accounting policy adopted for the treatment of
carbon credits also has a seasonal impact on the business with a
higher compliance cost recognised in the second half of the year,
as explained in Note 4. Adjusted results have been presented as an
alternative performance measure to remove this variation.
6 SEGMENTAL REPORTING
Management has determined the operating segments based on the
management reports reviewed by the Executive Committee (comprising
the executive team responsible for the day-to-day running of the
business) that are used to assess both performance and strategic
decisions. Management has identified that the Executive Committee
is the chief operating decision maker in accordance with the
requirements of IFRS 8 'Operating segments'.
The Executive Committee considers the business to be split into
three operating segments: Bricks, Blocks and Bespoke Products.
The principal activity of the operating segments are:
-- Bricks - Manufacture and sale of bricks to the construction sector
-- Blocks - Manufacture and sale of concrete blocks and
permeable block paving to the construction sector
-- Bespoke Products - Manufacture and sale of bespoke products to the construction sector
The Executive Committee considers that, for reporting purposes,
the operating segments above can be aggregated into two reporting
segments: Bricks and Blocks and Bespoke Products. The aggregation
of Bricks and Blocks is due to these operating segments having
similar long-term average margins, production process, suppliers,
customers and distribution methods.
The Bespoke Products range includes precast concrete, chimney
and roofing solutions, each of which are typically made-to-measure
or customised to meet the customer's specific needs. The precast
concrete flooring products are complemented by the Group's full
design and nationwide installation services, while certain other
bespoke products, such as chimney flues, are complemented by the
Group's bespoke specification and design service.
Costs which are incurred on behalf of both segments are held at
the centre and these, together with general administrative
expenses, are allocated to the segments for reporting purposes
using a split of 80% Bricks and Blocks and 20% Bespoke Products.
Management considers that this is an appropriate basis for the
allocation.
The revenue recognised in the condensed consolidated income
statement is all attributable to the principal activity of the
manufacture and sale of bricks, both dense and lightweight blocks,
precast concrete, concrete paving and other complimentary building
products. Substantially all revenue recognised in the Condensed
Consolidated Financial Statements arose from contracts with
external customers within the UK.
SEGMENTAL REVENUE AND RESULTS: Six months ended 30 June 2023
Bricks & Blocks Bespoke Products Total
GBPm GBPm GBPm
Segment revenue 143.3 41.9 185.2
Intercompany eliminations (2.0)
-----
Revenue 183.2
EBITDA before exceptional items 29.7 3.3 33.0
Depreciation and amortisation (8.6) (0.8) (9.4)
--------------- ---------------- -----
Operating profit before exceptional items 21.1 2.5 23.6
Exceptional items (3.0) - (3.0)
--------------- ---------------- -----
Operating profit 18.1 2.5 20.6
Net finance expense (2.5)
-----
Profit before tax 18.1
-----
SEGMENTAL ASSETS: As at 30 June 2023
Bricks & Blocks Bespoke Products Total
GBPm GBPm GBPm
Property, plant and equipment 233.1 12.0 245.1
Intangible assets 15.9 2.3 18.2
Right-of-use assets 20.9 0.5 21.4
Inventories 68.0 4.6 72.6
--------------- ---------------- -----
Segment assets 337.9 19.4 357.3
Unallocated assets 78.4
-----
Total assets 435.7
-----
Property, plant and equipment, intangible assets, right-of-use
assets and inventories are allocated to segments and considered
when appraising segment performance. Trade and other receivables,
income tax assets and cash and cash equivalents are centrally
controlled and unallocated.
OTHER SEGMENTAL INFORMATION: Six months ended 30 June 2023
Bricks & Blocks Bespoke Products Total
GBPm GBPm GBPm
Property, plant and equipment additions 16.7 1.2 17.9
Intangible asset additions 3.5 0.4 3.9
Right-of-use asset additions 6.1 0.1 6.2
SEGMENTAL REVENUE AND RESULTS: Six months ended 30 June 2022
Bricks & Blocks Bespoke Products Total
GBPm GBPm GBPm
Segment revenue 181.0 44.3 225.3
Intercompany eliminations (2.5)
-----
Revenue 222.8
EBITDA before exceptional items 48.9 1.8 50.7
Depreciation and amortisation (7.5) (0.5) (8.0)
--------------- ---------------- -----
Operating profit before exceptional item 41.4 1.3 42.7
Exceptional items 2.3 - 2.3
--------------- ---------------- -----
Operating profit 43.7 1.3 45.0
Net finance expense (0.8)
-----
Profit before tax 44.2
-----
SEGMENTAL ASSETS: As at 30 June 2022
Bricks & Blocks Bespoke Products Total
GBPm GBPm GBPm
Property, plant and equipment 205.7 13.2 218.9
Intangible assets 14.2 1.6 15.8
Right-of-use assets 15.3 0.8 16.1
Inventories 31.5 4.8 36.3
--------------- ---------------- -----
Segment assets 266.7 20.4 287.1
Unallocated assets 95.8
-----
Total assets 382.9
-----
Property, plant and equipment, intangible assets, right-of-use
assets and inventories are allocated to segments and considered
when appraising segment performance. Trade and other receivables
and cash and cash equivalents are centrally controlled and
unallocated.
OTHER SEGMENTAL INFORMATION: Six months ended 30 June 2022
Bricks & Blocks Bespoke Products Total
GBPm GBPm GBPm
Property, plant and equipment additions 19.0 2.8 21.8
Intangible asset additions 3.1 0.6 3.7
Right-of-use asset additions 2.0 0.1 2.1
SEGMENTAL REVENUE AND RESULTS: Year ended 31 December 2022
Bricks & Blocks Bespoke Products Total
GBPm GBPm GBPm
Segment revenue 370.2 90.1 460.3
Intercompany eliminations (4.8)
------
Revenue 455.5
EBITDA before exceptional items 85.5 3.7 89.2
Depreciation and amortisation (15.0) (1.5) (16.5)
--------------- ---------------- ------
Operating profit before exceptional items 70.5 2.2 72.7
Exceptional items 2.3 - 2.3
--------------- ---------------- ------
Operating profit 72.8 2.2 75.0
Net finance expense (2.1)
------
Profit before tax 72.9
------
SEGMENTAL ASSETS: As at 31 December 2022
Bricks & Blocks Bespoke Products Total
GBPm GBPm GBPm
Property, plant and equipment 222.6 11.1 233.7
Intangible assets 21.7 1.9 23.6
Right-of-use assets 17.6 0.5 18.1
Inventories 36.8 6.2 43.0
--------------- ---------------- -----
Segment assets 298.7 19.7 318.4
Unallocated assets 79.2
-----
Total assets 397.6
-----
Property, plant and equipment, intangible assets, right-of-use
assets and inventories are allocated to segments and considered
when appraising segment performance. Trade and other receivables,
income tax assets, cash and cash equivalents and derivative assets
are centrally controlled and unallocated.
OTHER SEGMENTAL INFORMATION: Year ended 31 December 2022
Bricks & Blocks Bespoke Products Total
GBPm GBPm GBPm
Property, plant and equipment additions 40.2 1.2 41.4
Intangible asset additions 11.4 1.1 12.5
Right-of-use asset additions 6.6 0.2 6.8
7 EXCEPTIONAL ITEMS
Six months ended 30 June Year ended 31 December
2023 2022 2022
GBPm GBPm GBPm
Mothballing of Howley Park (3.0) - -
Sale of disused land - 2.3 2.3
-------------- ---------- ----------------------
(3.0) 2.3 2.3
-------------- ---------- ----------------------
Exceptional items 2023
During the year, the Group announced the mothballing of its
Howley Park brick factory. Redundancy costs of GBP2.1m and an
impairment of tangible fixed assets of GBP0.9m have been recognised
in these financial statements as a result of this action.
Exceptional items 2022
In March 2022 the Group completed the sale of an area of disused
land for total proceeds of GBP2.5m. Taking into account asset net
book values and associated costs of sale, profit on disposal
totalled GBP2.3m.
8 FINANCE EXPENSE
Year ended
Six months ended 30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
Interest payable on loans and borrowings 2.2 0.6 1.6
Interest payable on lease liabilities 0.3 0.2 0.4
Other finance expense - - 0.1
------------ ------------ ------------
2.5 0.8 2.1
------------ ------------ ------------
9 TAXATION
The Group recorded a tax charge of GBP4.3m (2022: charge of
GBP8.7m) on pre-tax profit of GBP18.1m (2022: profit of GBP44.2m)
for the six months ended 30 June 2023. This results in an effective
tax rate (ETR) of 23.6% (2022: 19.7%) including the impact of the
change in rate of corporation tax from 19% to 25% in April 2023,
and therefore the increase in the deferred tax rate.
Year ended
Six months ended 30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
Profit before taxation 18.1 44.2 72.9
Expected tax charge 4.3 8.4 13.9
Expenses not deductible for tax purposes - 0.1 (0.3)
Effect of prior period adjustments - - 0.2
Effect of change on deferred tax rate - 0.2 0.3
------------ ------------ ------------
Income tax expense 4.3 8.7 14.1
------------ ------------ ------------
The UK main rate of corporation tax has increased from 19% to
25% with effect from 1 April 2023. The expected tax charge is
calculated using the statutory tax rate of 23.5% (2022: 19%) for
current tax. Deferred tax is calculated at 25% being the rate at
which the provision is expected to reverse.
10 EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing the
profit for the period attributable to shareholders of the parent
entity by the weighted average number of ordinary shares
outstanding during the period. Diluted earnings per share
additionally allows for the effect of the conversion of the
dilutive options.
Six months ended 30 June Year ended 31 December
2023 2022 2022
GBPm GBPm GBPm
Operating profit for the year 20.6 45.0 75.0
Finance expense (2.5) (0.8) (2.1)
------------ ------------ ----------------------
Profit before taxation 18.1 44.2 72.9
Income tax expense (4.3) (8.7) (14.1)
------------ ------------ ----------------------
Profit for the year 13.8 35.5 58.8
------------ ------------ ----------------------
Weighted average number of shares (millions) 206.4 222.1 216.2
Effect of share incentive awards and options (millions) 2.0 2.5 3.2
------------ ------------ ----------------------
Diluted weighted average number of shares (millions) 208.4 224.6 219.4
------------ ------------ ----------------------
Earnings per share:
Basic (in pence) 6.7 16.0 27.2
Diluted (in pence) 6.6 15.8 26.8
Adjusted basic earnings per share (in pence) 7.1 13.5 26.2
Adjusted earnings per share (EPS) is presented as an additional
performance measure and is calculated by excluding exceptional cost
of GBP3.0m (HY 2022: net income of GBP2.3m, FY 2022: net income of
GBP2.3m) (Note 7), the effect of accounting for carbon credit
liabilities on a weighted average basis of GBP1.9m (HY 2022:
GBP4.6m, FY 2022: GBPnil) (Note 4) and the associated tax increase
of GBP0.3m (HY 2022: reduction of GBP1.4m, FY 2022: reduction of
GBP0.4m).
11 DIVIDS
A dividend of 10.1 pence per share that relates to the period
ending 31 December 2022 was paid on 7 July 2023, making a total
distribution of 14.7 pence per share for 2022.
An interim dividend of 2.4 pence per share (2022: 4.6 pence per
share) has been declared by the Board and will be paid on 13
October 2023 to shareholders on the register as at 22 September
2023. This interim dividend has not been recognised as a liability
as at 30 June 2023. It will be recognised in shareholders equity in
the Consolidated Financial Statements for the year ended 31
December 2023.
12 LOANS AND BORROWINGS
As at
As at 30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
Current loans and borrowings:
- Interest 0.3 0.2 0.2
Non-current loans and borrowings:
- Unamortised debt issue costs (1.5) - -
- Revolving credit facility 68.0 10.0 40.0
--------- ------ ------------
66.8 10.2 40.2
--------- ------ ------------
The Group refinanced its banking facilities in July 2020
securing a facility size of GBP170m, until July 2024. The facility
agreement included the option for the Company to request, subject
to bank approval, an additional extension for a further year to
July 2025. The extension was approved, with the facility then
committed until 1 July 2025. The interest rate is calculated based
on SONIA plus a margin adjustment spread.
On 30 January 2023 the Group completed on a refinancing of its
existing banking facilities. The facility remains at GBP170m until
January 2027 with an extension option, subject to bank approval,
extending the facility to June 2028. The interest rate is
calculated using SONIA plus a margin and the credit spread
adjustment has been removed. A new rachet has been added to the
margin grid at the bottom end giving a 10bps reduction when
leverage is 0.5:1 making the lowest level or margin 1.65% extending
at a margin of 2.75% when leverage exceeds 2.5:1. Arrangement fees
of GBP1.8m were paid in respect of this refinancing.
The amended loan facility is now sustainability linked and
subject to a margin adjustment of 5 bps if the annual
sustainability targets are met. There has also been a change to the
lenders with Santander being replaced by Banco De Sabadell and
Virgin Money (Clydesdale Bank plc).
The facility remains secured by fixed charges over the shares of
Forterra Building Products Limited and Forterra Holdings
Limited.
13 NET (DEBT)/CASH
As at
As at 30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
Cash and cash equivalents 16.7 34.3 34.3
Loans and borrowings (66.8) (10.2) (40.2)
Lease liabilities (21.3) (16.0) (18.0)
------- ------ ------------
Net (debt)/cash (71.4) 8.1 (23.9)
------- ------ ------------
RECONCILIATION OF NET CASH FLOW TO NET (DEBT)/CASH
Year ended
Six months ended 30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
Operating cash flow before exceptional items (16.3) 37.5 89.0
Payments made in respect of exceptional items (2.0) - -
------------ ------------ ------------
Operating cash flow (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 from investing activities (15.3) (18.5) (41.2)
Dividends paid - - (24.2)
Purchase of shares by Employee Benefit Trust (1.8) (6.3) (12.2)
Proceeds from sale of shares by Employee Benefit Trust - 0.4 0.4
New lease liabilities (6.2) (2.1) (6.8)
Payments made to acquire own shares - (20.8) (40.3)
Other movements (0.2) 0.4 0.4
------------ ------------ ------------
Increase in net debt (47.5) (16.3) (48.3)
Net (debt)/cash at the start of the period (23.9) 24.4 24.4
------------ ------------ ------------
Net (debt)/cash at the end of the period (71.4) 8.1 (23.9)
------------ ------------ ------------
Capital expenditure commitments for which no provision has been
made were GBP42.6m as at 30 June 2023.
14 SHARE-BASED PAYMENTS
On 03 April 2023, 1,416,395 share awards were granted under the
Performance Share Plan (PSP) to the Executive Directors, other
members of the Executive Committee and designated senior management
which vest three years after the date of grant at an exercise price
of 1 pence per share. The total number of shares vesting is
dependent upon both service conditions being met and the
performance of the Group over the three-year period. Performance is
subject to both TSR and EPS conditions, each weighted 40%, with the
remaining 20% determined by sustainability-based targets of
decarbonisation and a reduction in the use of plastic
packaging.
On 16 March 2023, a grant of 153,528 was granted to the
Executive Directors under the Group Deferred Annual Bonus Plan.
These awards represent the deferral into ordinary shares of part of
the Executive Directors' 2022 bonus entitlements under the rules of
the Scheme and will vest after three years subject to service
conditions. Upon Stephen Harrison leaving the business in May 2023,
all open shares held by him under DABP awards vested immediately in
full.
15 RELATED PARTY TRANSACTIONS
The Group has had no transactions with related parties in the
periods ending 30 June 2023, 31 December 2022 and 30 June 2022.
16 POST BALANCE SHEET EVENTS
No events have occurred since the balance sheet date that would
merit separate disclosure
PRINCIPAL RISKS AND UNCERTAINITIES
Overview
Effective risk management is critical to successfully meeting
our strategic objectives and delivering long-term value to our
shareholders. Instilling a risk management culture at the core of
everything we do is a key priority. Our risk management policy,
strategy, processes, reporting measures, internal reporting lines
and responsibilities are well established.
Faced with a host of macro-economic risks of which persistent
core inflation and the associated increases to interest rates are
currently the most visible, we remain watchful of the impacts to
our core markets and shorter-term demand for our products.
We continue to monitor this alongside numerous other rapidly
evolving business risks; implementing mitigating controls and
actions as appropriate. Details of our principal key risks are
shown further in the table below.
Our risk management objectives remain to:
-- embed risk management into our management culture and cascade
this down through the business;
-- develop plans and make decisions that are supported by an
understanding of risk and opportunity; and
-- anticipate change and respond appropriately.
Sustainability
Sustainability continues to be a core focus within our business
with the increasing need to make Forterra more resilient against
the potential effects of climate change, and evolving
sustainability driven risks are highlighted within the extensive
disclosure in our most recent annual report. These reflect both the
impact of our operations on the environment but also the
challenging targets we have set to reduce this, targeting Net Zero
by 2050 in line with the Race to Zero.
The Board is committed to compliance with the requirements of
the Task Force on Climate Related Financial Disclosure (TCFD) and
comprehensive disclosure on both short and long-term climate risks
are included in our Sustainability Report. The Board's Risk and
Sustainability Committee continue to provide oversight and
governance over the most significant risks the business faces in
the short, medium and long-term.
Key risks
Key risks are determined by applying a standard methodology to
all risks, considering the potential impact and likelihood of a
risk event occurring before then, considering the mitigating
actions in place, their effectiveness, their potential to be
breached and the severity and likelihood of the risk that remains.
This is a robust but straightforward system for identifying,
assessing and managing key risks.
Management of key risks is an ongoing process. Many of the key
risks that are identified and monitored evolve and new risks
regularly emerge.
The foundations of the internal control system are the first
line controls in place across all our operations. This first line
of control is evidenced through monthly Responsible Manager
self-assessments and review controls are scheduled to recur
frequently and regularly. Policies, procedures and frameworks in
areas such as health and safety, compliance, quality, IT, risk
management and security represent the second line of controls and
internal audit activities represent the third.
Management continue to monitor risk closely and put procedures
in place to mitigate risks promptly wherever possible. Where the
risks cannot be mitigated, Management focus on monitoring the risks
and ensuring the Group maximises its resilience to the risks,
should they fully emerge.
Risk appetite
The Group's risk appetite reflects that effective risk
management requires risk and reward to be suitably balanced.
Exposure to health and safety, financial and compliance risks are
mitigated as far as is reasonably practicable.
The Group is however prepared to take certain strategic,
commercial and operational risks in pursuit of its objectives;
where these risks and the potential benefits have been fully
understood and reasonable mitigating actions have been taken.
RISK MANAGEMENT AND KEY RISKS
1. HEALTH AND SAFETY
------------------------------------------------------------------- ----------- ----------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
------------------------ ----------------------------------------- ----------- ----------------------
We continue to Safety remains our number one priority. Gross Safety first
work to ensure We target an accident-free environment change is embedded
the safety of employees and have robust policies in place No change in all decision
exposed to risks covering expected levels of performance, making and
such as the operation responsibilities, communications, Net change is never compromised.
of heavy machinery, controls, reporting, monitoring No change Reducing accidents
moving parts, noise, and review. and ill-health
dusts and chemicals. Our safety focus in 2023 continues is critical
to be around effective employee to strategic
engagement and communication focused success.
on our Golden Rules and Zero Harm.
In the period we have delivered
a further programme of behavioural
safety awareness training emphasising
the importance of our safety related
golden rules.
2. SUSTAINABILITY / CLIMATE CHANGE
-------------------------------------------------------------------------- ----------- --------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
----------------------------- ------------------------------------------- ----------- --------------------
We recognise the We recognise the positive impact Gross Focus from
importance of sustainability that our products have on the built change all stakeholders
and climate change environment across their lifespan No change has been maintained
and both the positive and are keen for the durability, in 2023 and
and negative impacts longevity and lower lifecycle carbon Net change sustainability
our products and footprint of our products to be No change remains a
processes have championed and better understood. high priority
on the environment. Short-term transitional sustainability for management
risks include increasing regulatory in the short,
burden or cost, an inability to medium and
adapt our business model to keep long-term.
pace with new regulation or customer
preferences changing more quickly
than anticipated or too quickly
for our R&D to keep pace.
Several longer-term physical risks
could have a material impact on
the business. These risks include
more severe weather impacts, such
as flooding, and potentially changes
to the design of buildings in order
to adapt to different climatic conditions.
A comprehensive sustainability report
is included within our last Annual
Report and is also available as
a separate document, providing detailed
disclosure of the sustainability
related risks faced by our business.
Our desire to reduce our impact
upon the environment sits hand in
hand with maximising the financial
performance of our business; by
investing in modernising our production
facilities not only do we reduce
energy consumption and our Co2 emissions,
but we also benefit financially
from reducing the amount of energy
and carbon credits we need to purchase,
both of which are becoming increasingly
expensive.
3. ECONOMIC CONDITIONS
-------------------------------------------------------------------------- ----------- ------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
---------------------------- -------------------------------------------- ----------- ------------------
Demand for our Understanding business performance Gross Macro-economic
products is closely in real-time, through our customer change conditions
correlated with order book, strong relationships Increase have deteriorated
residential and across the building sector, and since the
commercial construction a range of internal and external September
activity. Changes lead indicators, help to inform Net change 2022 mini
in the wider macro-economic management and ensure that the business Increase budget and
environment can has time to respond to changing demand for
have significant market conditions. our products
impact in this Whilst the deterioration of macro-economic has fallen
respect and we conditions and associated rising as a result.
monitor these closely interest rates has impacted the Management
as a result. current demand for new homes, we will continue
continue to operate in a market to consider
characterised by a structural undersupply this risk
of housing driven by continuing when making
population growth and significant strategic
brick imports entering the country. decisions.
As demand falls we expect brick
imports to reduce ahead of sales
of domestically manufactured bricks
as they have in prior cyclical downturns,
providing some degree of insulation
from the effects of a market slowdown.
Our ability to flex output and slow
production when customer demand
weakens was effective in 2020, and
in May of 2023 we took the decision
to mothball our Howley Park brick
factory and implemented other production
reductions in order to align our
output to the demand levels we are
currently seeing.
Accepting the cyclical nature of
the new housing and the repair maintenance
and improvement markets, Forterra
remains well positioned to take
advantage of attractive market fundamentals
in the medium to long-term.
4. GOVERNMENT ACTION AND POLICY
----------------------------------------------------------------------- ----------- --------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
-------------------------- ------------------------------------------- ----------- --------------------
The general level We participate in trade associations, Gross We continue
and type of residential attend industry events and track change to invest
and other construction policy changes which could potentially Increase significantly
activity is partly impact housebuilding and the construction in growth
dependent on the sector. Such policy changes can Net change - in terms
UK Government's be very broad, covering macro-economic Increase of both capacity
housebuilding policy, policy and including taxation, interest and range.
investment in public rates, mortgage availability and This investment
housing and availability incentives aimed at stimulating is made despite
of finance. the housing market. the uncertainty
Changes in Government Where identified, we factor any presented
support towards emerging issues into models of anticipated by changes
housebuilding could future demand to guide strategic made to Government
lead to a reduction decision making. incentives
in demand for our Through our participation in these such as Help-to-Buy
products. trade and industry associations as the timescales
Changes to Government we ensure our views are communicated associated
policy or planning to Government and our management with adding
regulations could often meet with both ministers and additional
therefore adversely MP's. capacity are
affect Group performance. Government have demonstrated that significant
they remain committed to home ownership and long-term
and housebuilding and this cross-party planning is
political agenda has been evidenced vital to achieving
by positive statements around future our strategic
house building from both major parties objectives.
in recent times. The impact
Recent changes in monetary policy of recent
and the rapid associated increase changes to
to interest rates has had a significant monetary policy
impact on mortgage affordability, have lead
an additional challenge in a period to this risk
that has also seen the end of the being increased
Help-to-Buy scheme. We therefore at June 2023.
consider a lack of broader support
in the longer term unlikely should
it risk a reduction in the supply
of new high-quality homes where
a significant shortfall still exists.
Government policy around planning
reform also has the potential to
influence demand for our products
and we remain watchful as to any
potential changes in this area and
their impact on the construction
of new homes.
5. RESIDENTIAL SECTOR ACTIVITY LEVELS
----------------------------------------------------------------------- ----------- --------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
-------------------------- ------------------------------------------- ----------- --------------------
Residential development Government action and policy as Gross Serving the
(both new build laid out above continues to be a change residential
and repair, maintenance key determinant of demand for housing. Increase construction
and improvement) We closely follow the demand we market lies
contributes the are seeing from our key markets, Net change at the core
majority of Group along with market forecasts, end Increase of our strategy.
revenue. The dependence user sentiment, mortgage affordability Whilst we
of Group revenues and credit availability in order will seek
on this sector to identify and respond to opportunities opportunities
means that any and risk. Group strategy focuses to broaden
change in activity upon our strength in this sector our offering,
levels in this whilst also continuing to strengthen we continue
sector will affect our commercial offer. to see residential
profitability and The impact of increasing interest markets as
in the longer term, rates and the wider macroeconomy core.
strategic growth on this sector has been notable
plans. and we remain watchful as to how
demand levels will materialise across
the remainder of 2023.
The investment in the refurbishment
of the Wilnecote brick factory which
will focus upon the commercial and
specification market will provide
a degree of diversification away
from residential construction.
6. INVENTORY MANAGEMENT
-------------------------------------------------------------------- ----------- -------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
------------------------ ------------------------------------------ ----------- -------------------
Ensuring sufficient After a long period of historically Gross Managing capacity
inventories of low stock levels commencing in 2020 change sufficiently
our products is with significant destocking as we Decrease to prevent
critical to meeting emerged from the pandemic, the recent tying up excessive
our customer's softening in demand has allowed Net change amounts of
needs, though this these stocks to be replenished. Decrease working capital
should not be at Strong customer relationships and in stock but
the expense of some degree of product range substitution ensuring that
excessive tied have historically mitigated the customer demand
up working capital. risk of inventory levels being too can continue
Many of our product low, and now that levels are growing to be met
ranges are manufactured these relationships remain key, are crucial
at single facilities ensuring that visibility of our to our success.
where maximising customers' needs and demand levels This risk
efficiency through can accurately be matched to our increased
utilising longer production levels. during 2021
production runs Where demand does fall, we have and has now
necessitates higher historically demonstrated our ability been reducing
levels of inventory to flex capacity effectively, ensuring as a result
to maintain customer optimum efficiency and utilisation of the present
service. If these of our operational footprint. This softening
inventories are has been further exemplified in of demand.
not present, shorter the period with the mothballing
and less efficient of our Howley Park brick production
production runs facility, reducing our fixed cost
will be required base whilst ensuring our customers'
to maintain levels needs can still be met.
of service.
Where excessive
inventory starts
to be built, Management
must ensure that
production is aligned
to forecast demand.
------------------------ ------------------------------------------ ----------- -------------------
7. CUSTOMER RELATIONSHIPS AND REPUTATION
------------------------------------------------------------------------- ----------- -------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
-------------------------- --------------------------------------------- ----------- -------------------
Significant revenues One of our strategic priorities Gross Customer focus
are generated from is to be the supply chain partner change is a core
sales to a number of choice for our customers. By No change value and
of key customers. delivering excellent customer service, progress against
Where a customer enhancing our brands and offering Net change objectives
relationship deteriorates the right products, we seek to develop No change in this area
there is a risk our long-standing relationships is a priority
to revenue and with our customers. Regular and for all employees.
cash flow. frequent review meetings focus on Continued
our effectiveness in this area. demand seen
Having sought to strengthen these through 2021
relationships across all channels and 2022 led
through recent periods of high demand, to an increase
strong communication with customers in this risk,
in combination with these relationships which in a
remains paramount to our success softening
as a number of additional factors market remain
prevail. equally heightened
In a softening demand environment, in 2023.
an inability to maintain these relationships
could manifest itself in loss of
market share, and if not managed
correctly, be detrimental in the
longer term in periods of stronger
demand.
To mitigate these risks we remain
in constant communication with our
customers ensuring they are well
informed of the challenges faced
by our business. We remain particularly
conscious of potential impacts on
our customer service and selling
prices as we aim to retain our margins
in a time where our customers are
also facing challenging conditions.
8. SUPPLY CHAIN: AVAILABILITY OF RAW MATERIALS
AND ENERGY
----------------------------------------------------------------------- ----------- -----------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
------------------------ --------------------------------------------- ----------- -----------------------
Whilst availability Shortages seen in recent years have Gross Sufficient
of raw materials eased in the current period against change energy supply
can vary at times, a backdrop of wider macro-economic Decrease and quantities
recent shortages uncertainty and softening demand of raw materials
across both our for a number of products. Net change received at
industry and the Ensuring supply remains key however, Decrease the right
wider economy threaten and where materials are in short time and at
our ability to supply, we seek to limit our risk the right
manufacture and by utilising more than one supplier price are
ultimately to meet and by developing new sources of critical to
customer expectations. supply. Where possible we stockpile Group operations.
Our production additional materials as we did in We have prioritised
processes depend some cases ahead of Brexit, though risk mitigation
on energy and fuel many of our key materials are needed to bring risk-exposure
and should supplies in such large quantities this isn't and risk appetite
of these be interrupted possible. in line. In
production would We regularly review our production light of our
be impacted. processes to reduce reliance on proactive
In the longer term materials that are in short supply approach to
these risks may and in the longer term we will seek hedging price
be exacerbated to adjust our production processes exposure in
with climate related to utilise materials which have the energy
matters impacting a lesser impact on the environment. markets and
availability of This easing of supply chain concerns an easing
materials, management includes the energy market, which of volatility
of which has been despite the continuation of the in this area,
a priority for Russia Ukraine conflict has seen this risk
a number of years. pricing ease, albeit not back to has been reduced
historical levels with our forward as at June
purchasing meaning that 2023 energy 2023.
costs are expected to represent
a peak. Given the political instability
seen in key energy markets, shortages
of gas and electricity and their
impact on pricing, particularly
in winter months, remain a key consideration
for management.
In the longer term our focus on
sustainability will see investment
in factories to reduce energy consumption,
and we have entered into a Power
Purchase Agreement (PPA) which will
secure c.70% of our electricity
needs for the next 15 years through
the construction of a dedicated
solar farm, reducing our reliance
on grid capacity (though still supplied
through the grid) as well as providing
price certainty.
Changes in industrial processes
required to address climate risks
have impacted the availability and
price of certain raw materials and
we have taken action to mitigate
these; sourcing from alternate suppliers
or making adjustments that allow
us to work with alternate raw materials.
We continue to focus on ensuring
supply risks are understood, forecast
and where possible mitigated.
9. COST INFLATION
---------------------------------------------------------------- ----------- ------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
---------------------- ---------------------------------------- ----------- ------------------
We utilise a wide We seek to manage our costs by putting Gross Managing cost
range of inputs in place annual pricing agreements change within our
in our business with our suppliers, although in Decrease supply chain
from raw materials recent times of higher inflation is core to
to energy and labour. this has become far more dynamic Net change maintaining
Increases to the across our supply chains. Decrease profitability
cost of our inputs We aim to maintain a range of suppliers and providing
will have an adverse such that we avoid becoming dependent optimum value
effect upon our on any single supplier although to shareholders.
margins if we are like our own markets, parts of our The unprecedented
unable to pass supply chain are highly consolidated inflationary
these cost increases and as such alternative suppliers environment,
on to our customers. may be scarce. particularly
Sudden fluctuations We also seek to manage our energy with respect
in our cost base cost exposure by forward purchasing to energy,
makes budgeting an element our energy requirement has eased
difficult and exposes providing price certainty. However, across 2023
us to risk as cost as happened in 2020, if our requirement and led to
increases are unable for energy is lower than expected a decrease
to be passed on we are exposed to commodity risk in this risk.
to customers without and having to sell pre-purchased
some time delay. surplus energy back to the market,
potentially at a loss.
The unprecedented increases in energy
costs driven by global markets and
the invasion of Ukraine in 2022
have eased in 2023, however whilst
our forward purchasing provided
partial mitigation, the prices seen
across that period ultimately shifted
our appetite for risk in this area
and we continue to seek greater
forward coverage of our positions
as the markets allow.
10. ATTRACTING, RETAINING AND DEVELOPING EMPLOYEES
------------------------------------------------------------------- ----------- ------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
---------------------- ------------------------------------------- ----------- ------------------
We recognise that We understand where key person dependencies Gross Our people
our greatest asset and skills gaps exist and continue change have always
is our workforce to develop succession, talent acquisition, No change been pivotal
and a failure to and retention plans. to our business,
attract, retain We continue to focus on safe working Net change and we must
and develop talent practices, employee support and No change remain cautious
will be detrimental strong communication / employee of the previously
to Group performance. engagement, investing in HR and increased
payroll systems, with significant risk associated
resource now in place to see this with ensuring
investment through to delivery. we attract,
Challenges associated with labour retain and
shortages are presently faced across develop our
the business in particular around employees.
the availability of engineers.
---------------------- ------------------------------------------- ----------- ------------------
11. INNOVATION
----------------------------------------------------------------- ----------- --------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
----------------------- ---------------------------------------- ----------- --------------------
Failure to respond Strong relationships with customers Gross The Group
to market developments as well as independently administered change is willing
could lead to a customer surveys ensure that we No change to invest
fall in demand understand current and future demand. in order to
for the products Close ties between the strategy, Net change grow where
that we manufacture. operations and commercial functions No change the right
This could in turn ensure that the Group focuses on opportunities
cause revenues the right areas of research and present themselves.
and margins to development. We have invested
suffer. In a period of softer demand for in the appropriate
our core products, providing innovative skills so
products for both our core markets that opportunities
and the wider construction market can be identified
is of increased importance and we and progressed,
strive to ensure that we are in and we are
a position to do so. committed
New product development and related to deploying
initiatives therefore continue and R&D to reduce
we continue to commit to further the environmental
investment in research and development footprint
with clear links between investment of our operations.
in R&D and the work undertaken in
relation to sustainability.
12. IT INFRASTRUCTURE AND SYSTEMS
---------------------------------------------------------------------- ----------- -------------------
Principal risk Key mitigation, change and sponsor Change Rationale
and why from Dec for rating
it is relevant 22
-------------------------- ------------------------------------------ ----------- -------------------
Disruption or interruption We have undertaken a period of investment Gross Investment
to IT systems could in consolidating, modernising and change in IT has
have a material extending the reach of our IT systems No change been a priority
adverse impact in recent years, maintaining ISO in recent
on performance 27001 Information Security accreditation Net change periods to
and position. since 2019. This investment has No change mitigate risk.
further allowed our office staff The downside
to work remotely where required to IT risks
whilst continuing to effectively significantly
service our customers. outweigh any
This risk was increased in 2021 upside and
as a result of a significant cyber our risk appetite
security breach. We continue to reflects this.
increase our resilience in this Our assessment
area, ensuring that our people understand of the risk
their role in any attempt to compromise in this area
our cyber security and regular training remains unchanged.
and tests are carried out as such.
13. BUSINESS CONTINUITY
---------------------------------------------------------------------- ----------- --------------------
Principal risk Change
and why from Dec Rationale for
it is relevant Key mitigation, change and sponsor 22 rating
----------------------- --------------------------------------------- ----------- --------------------
Performance is Having made plans to allow key Gross Using business
dependent on key centralised functions to continue change continuity plans
centralised functions to operate in the event of business No change in response
operating continuously interruption, remote working capabilities to the pandemic
and manufacturing have been maintained and continually Net change provides real
functions operating strengthened since significant No change life evidence
uninterrupted. utilisation across the pandemic as opposed to
Should we experience ensuring the business is able to a desktop exercise.
significant disruption continue operating with minimal In 2023, this
there is a risk disruption. risk remains
that products Wider disruption risk remains unchanged unchanged.
cannot be delivered although some greater resilience
to customers to is provided by the now tried and
meet demand and tested ability of office staff
all financial to work from home.
KPIs may suffer. Where a scenario without a pre-envisaged
plan is faced, our business continuity
policy allows managers to apply
clear principles to develop plans
quickly in response to emerging
events.
We consider climate related risks
when developing business continuity
plans and have learnt lessons from
weather related events in recent
years which inform these plans.
Loss of one of our operating facilities
through fire or other catastrophe
would impact upon production and
our ability to meet customer demand.
Working with our insurers and risk
advisors we undertake regular factory
risk assessments, addressing recommendations
as appropriate. We accept it is
not possible to mitigate all the
risks we face in this area and
as such we have a comprehensive
package of insurance cover including
both property damage and business
interruption policies.
14. PROJECT DELIVERY
-------------------------------------------------------------------- ----------- -----------------------
Principal risk Change
and why from Dec Rationale for
it is relevant Key mitigation, change and sponsor 22 rating
----------------------- ------------------------------------------- ----------- -----------------------
We have an extensive The Desford brick factory represents Gross Management and
program of capital the largest capital investment change the Board are
investment ongoing that we have ever made, with commissioning Increase closely monitoring
within our business currently ongoing with the current expansion projects
over the next focus on increasing output and Net change at Desford,
decade which will replicating the product range. Increase Wilnecote and
see a number of Management closely monitor all Accrington.
large projects three current strategic projects External project
to add production for potential challenges, cost management expertise
capacity. over-runs and delays and act promptly has been engaged
Ensuring these to ensure that risks are mitigated. on Desford from
projects are delivered It is likely that unexpected engineering the outset recognising
as intended is challenges coupled with supplier learning from
essential to the delays will delay the recommissioning previous major
future success of the new Wilnecote factory into projects.
of the business. 2024 with management actively liaising
with suppliers to ensure delays
are mitigated wherever possible.
As further projects are announced,
management recognise the additional
risks posed by running concurrent
major projects. To mitigate, separate
project management structures are
in place for respective projects
and where common suppliers are
involved procedures are in place
to ensure they retain sufficient
capacity to deliver on both projects
without significant risk.
We recognise that we will need
to increase the resources in our
business to support multiple major
expansion projects, exemplified
by the creation of a designated
Technical Projects Director role
sitting on our Executive Committee.
----------------------- ------------------------------------------- ----------- -----------------------
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END
IR UNSRROAUBUUR
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