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Edited Transcript of IBST.L earnings conference call or presentation 31-Jul-19 9:30am GMT

Half Year 2019 Ibstock PLC Earnings Call

London Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Ibstock PLC earnings conference call or presentation Wednesday, July 31, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph Hudson

Ibstock plc - CEO & Director

* Kevin Sims

Ibstock plc - CFO & Executive Director

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Conference Call Participants

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* Christen David Hjorth

Numis Securities Limited, Research Division - Analyst

* Gregor Kuglitsch

UBS Investment Bank, Research Division - Executive Director, Head of European Building & Construction Research and Equity Research Analyst

* Priyal Jitendra Mulji

Jefferies LLC, Research Division - Equity Analyst

* Rajesh Patki

JP Morgan Chase & Co, Research Division - Analyst

* Robert Eason

Goodbody Stockbrokers, Research Division - Head of Research

* Yves Brian Felix Bromehead

Exane BNP Paribas, Research Division - Analyst of Building Materials

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Presentation

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Joseph Hudson, Ibstock plc - CEO & Director [1]

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Good morning and welcome to the Ibstock 2019 Interims. And also welcome to our new London Design Center. Just because this is the first time you've been here, a few housekeeping points. There are no fire alarms today. So if you do hear an alarm going on, it is a fire. There are 2 exits where you came in and to the left and to the bottom of the stairs. Conveniences are also at the bottom of the stairs on the right. So good. As usual, today, we have myself and Kevin, who will be presenting. Talk a bit about the overview. Kevin will go through the financials. I'll give some operational updates. And then we can get into some Q&A. And also, this is Kevin's last presentation today before he sails off to the sunset. On behalf of the group, I'd like to thank him for all of these contributions over the years. And I'm sure you'll wish him, like us, all the best in his future. And you don't have to clap.

So overall, it's been -- performance in the first 6 months of the year have been solid with good revenue growth in both clay and concrete and adjusted EBITDA in line with expectations. This reflects the fact that conditions in our key market, the new build housing sector, continue to be stable.

Operationally, it's been a busy 6 months, and we've made good progress with some of the strategic initiatives I laid out in March. And as you'll see in our release this morning, we've made some announcements to drive growth and -- in the business and deliver further shareholder returns. We've acquired Longley Concrete, an established family-owned flooring business, which is highly complementary to our existing business. And in addition, we've committed to pay our second supplementary dividend of 5p per share. So we'll talk a bit more about that later on. I'll hand you over to Kevin to go through the financials.

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Kevin Sims, Ibstock plc - CFO & Executive Director [2]

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Thanks, Joe. So for the final time, it's my pleasure to take you through our financial highlights, and this is for the 6 months at the end of June. Group revenue was up 6.1%, and that's been driven mainly from increased brick and roof tile sales. Our EBITDA rose 7.5%, but that has benefited from a GBP 3 million leasing adjustment. Our adjusted EBITDA '19 is broadly flat. However, our statutory EBITDA is down 1.9p. This is primarily a result of the property sales we achieved in the first half of last year. And additionally, our effective tax rate has also increased. This is as a result of the successful one-off adjustments mainly through the IPO and pension costs in previous years that have not been replicated.

Just on property, just to give an update, we announced just over 12 months ago that we anticipated sales of around about $25 million, of which we achieved approximately half of that during 2018. We are on track to deliver the balance of those sales, which you appreciate, there's multiple stakeholders involved in getting these deals across the line. So the exact timing isn't precise, but they are on track, and we will deliver on the balance of those property surplus sales.

Our ordinary dividend is 3.2p, which is 6.7% increase. And in addition, we've announced our second supplementary dividend of 5p. Our return on capital remains at 20%, with our net debt to adjusted EBITDA down to 0.5.

Looking at our revenue bridge. The group revenue increased by GBP 12 million to GBP 203 million. This is supported by the strong housing market. The increase in clay brick sales accounts for over 75% of this revenue growth. Volumes benefited from the new brick plant, which continues to ramp up to full capacity. Pricing in brick was in line with our expectations and previous guidance.

Within concrete, we have experienced a slightly different picture. Roofing sales, mainly supplying into the new build housing market, have been strong. However, some of our other concrete products, such as rail, have been softer than we would have anticipated. And pricing, particularly in the Southeast, has been weaker for some of our other concrete products.

Looking at our adjusted EBITDA, which increased by just over GBP 4 million. A strong clay sales supported solid growth in the brick operation. This was despite a double-digit cost increase in energy. With the exception of some raw materials, the majority of our other input costs were in line with inflation, while increased maintenance costs previously announced are in line with expectations.

Looking forward, I can also confirm we will continue with our policy of locking in energy requirements for 2020 before the year-end. In concrete, first half profits moved backwards, phasing of some of our roofing maintenance partly contributed to this. But the tighter pricing environment, a more difficult rail and RMI markets, have been the main contributors. Although our PLC costs have risen by GBP 1 million, this is the main reflects lower R&D credits. We have also invested in strengthening the management team, which Joe will address shortly.

Finally, as previously outlined, EBITDA has benefited from the GBP 3 million leasing adjustments, which will be slightly more than double lifts in the full year.

Looking at our cash generation, which remains a key strength in the business. Cash generated on our EBITDA of GBP 59 million is impacted by a GBP 20 million increase in working capital. Seasonality in the business means that in the first half, cash generation will always have a larger outflow of working capital compared to the full year position. However, overall working capital movement is in line with expectations and previous year's movements. Cash tax reflects the increasing effective tax rate, although this increase is offset by the reduction in our post-employment benefit. For the half year, our effective tax rate was 19.5% and full year guidance will be along the same number. As stated, the EBITDA benefited from a GBP 3 million noncash leasing adjustment, and therefore, we have reversed the impact of this in arriving at our operating cash of GBP 27 million, a slight increase than last year.

CapEx spend is impacted by spend on some of our enhanced projects previously announced. Full year CapEx will be roughly in line with previous guidance, but will be subject to the timing of some enhanced projects. Leverage is at the lower end of our range, and we expect this to remain in the position at the year-end despite the outlay on the Longley acquisition and the supplementary dividend announced. Back to Joe.

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Joseph Hudson, Ibstock plc - CEO & Director [3]

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Thanks, Kevin. So back in March, I took you through several areas that we were focusing on in the coming years to improve the performance of our core business and deliver growth. So I'll just touch base on a few of those things now. So as you know, we are now a U.K.-focused business, having disposed of Glen-Gery with 2 distinct divisions, both with leading market positions and good product portfolios.

We've rebranded the business at group level to refresh our brand in the market and reflect our organization. We will maintain the individual company brands, which have strength and brand equity, but we've also got a more coherent go-to-market strategy now with our new look. The rebranding is in conjunction with our new London design center, which opened earlier this year, and you're sitting in it now. We'll show you around some of the technology later on, if you'd like to, and this will help us to work more closely with architecture, architects, specifiers, large customers. So we can also drive some cross-selling opportunities.

Moving on to our clay division. There really hasn't been a lot of change in terms of the market dynamics. We've seen the market being quite stable in the period, as I said earlier. Demand still outweighs domestic supply, fueled by -- primarily by the new build housing in the country. We did see an increase of imports in the first 3 months, coming in mainly from Europe. However, this did tail off a little bit again in May. So we think that was probably a little bit of timing effect of pre-Brexit stocking up. Against that backdrop, the performance of the clay division has been solid in the first 6 months. With mid-single-digit revenue and similar adjusted EBITDA growth, clay margins are stable at 32%, excluding the impact of IFRS 16.

This performance reflects the benefit of production from the new Eclipse factory and price improvement partially offset by higher energy costs and the previously announced maintenance program. The maintenance program is progressing well. And largely, it's done. In the coming months, we expect the plants to come back on stream. However, this remains a focus, a cultural focus for us as a business. As a reminder, we announced some further $25 million of enhancement capital projects to drive incremental volume growth. I can tell you today that these have started in earnest now and already underway. As some of you may also know, Kate Tinsley has now joined Ibstock from Grafton, where she was the CEO of Buildbase, and she'll be leading the division and helping us move forward with our strategic initiatives. And Kate is here today, so please say hello to her, and make yourselves -- she will have a chat with you later on.

Now moving on to concrete. As Kevin said, it's been more mixed performance, market dynamics and performance have been mixed. Overall, it has been a softer market backdrop in the RMI, particularly in the Southeast, where our concrete division has more exposure. We still managed to deliver reasonable revenue growth in the period, helped by our roofing business, which has got very good activity levels because of the new build housing sector. Other product areas, however, have been softer, including our higher-margin infrastructure products, which has had a negative impact on sales mix. For example, in rail, we've seen lower-than-expected volumes as we've moved into control period 6 from control period 5, we do expect that to unwind.

Kevin mentioned, we have also had a planned outage in our main roofing manufacturing facility at Leighton Buzzard. This involved an investment in material handling, and we expect to see some benefits in the second half of the year with that. Some of these margin impacts are temporary and should, therefore, lead to an improvement in the second half. Overall, this division delivered strong performance with high-teen returns on net assets over the last few years, and so we see it as an attractive business to be in and to continue to invest in.

Just a word about Longley Concrete. It's a well-established family run business been going since 1947 and has a leading national position in T-beam flooring. Historically, our business has had a stronger presence, as I said, in the Southeast and more exposed to the merchant channel. So this deal creates a leading national flooring business and also provides more of a balance with channel mix as Longley has a greater proportion of direct distribution into the housebuilders. The business also has planning permission for a new factory at Dewsbury, which gives options for capacity expansion and manufacturing footprint consolidation, and therefore, margin improvement over time. Overall, this is a great opportunity to support the growth of our concrete division going forward, and we're delighted that the management of Longley share the vision and are going to stay with the business.

You remember that we provided an overview of some of the sustainability activities back in March, and I'm pleased to report we've made some good progress there as well. We'll shortly publish our sustainability road map with targets out to 2025, setting a clear direction of travel for the business across areas of environmental and social impact. We've partnered with Shelter as our national charity champion and all sites in the business will get involved in fundraising to help projects to support the work of eradicating homelessness. Our continued progress in the sustainability space has again been recognized, and we got an external award, the Insider Made in the U.K. most sustainable and ethical manufacturer this year. And I'm also excited to announce that we're forming a partnership with Well North Enterprises. This is a body set up to support long-term investment in communities across the north of the country, and we hope this partnership will help our exposure into connected communities in place making and give us more influence in social and affordable housing, which has very good growth potential in the coming years.

So let's recap. We've had a solid start to the year and are making good progress with our strategic initiatives, which I set out in March. These initiatives, our customer focus and the strengthening of our management team will help us to enable our industry-leading margins going forward. Notwithstanding Brexit and some headwinds in the RMI, the fundamentals of our key markets, new build housing are very positive. With our strong balance sheet and cash flow generation, we're well positioned to deliver growth and value creation in the coming years.

So with that, we'll move on to some questions. (Operator Instructions)

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Questions and Answers

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Priyal Jitendra Mulji, Jefferies LLC, Research Division - Equity Analyst [1]

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Priyal from Jefferies. I've got 2 questions on the Longley acquisition. Firstly, you just talked about some pricing dynamics in the Southeast being quite difficult in concrete. Do you have any idea of what the pricing dynamics are in those areas where Longley operates, which is obviously more in the north and the midlands? And secondly, where does this take your combined market share in pre-cost flooring? What's your market [possession]? And how fragmented is the rest of the market? And who are the main competitors there?

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Joseph Hudson, Ibstock plc - CEO & Director [2]

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So last question first. This makes us a leading player in the flooring market. This takes our business of flooring and lintels to about GBP 45 million, which is a significant player in the industry. It also gives us a geographical footprint. In terms of pricing dynamics, it's difficult to say because you have different product mixes with the different products going into housebuilding or merchants. And -- but by and large, this gives us an ability to drive margins over time by consolidating this business.

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Kevin Sims, Ibstock plc - CFO & Executive Director [3]

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I think, generally, pricing, (inaudible).

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [4]

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Christen Hjorth from Numis. So 3 for me, if that's okay. First of all, on this re -- rebrand I suppose where we're sitting today, is that a focus more on the specification market, which I assume is higher margin? And if so, given you're selling everything you produce, does that mean perhaps a shift away from some of the more traditional markets? That's the first one. And the second I suppose is (inaudible) most in the financials. I'm just trying to understand the impact that Leicester had on EBITDA year-on-year in H1 and also the incremental maintenance costs. I know you said they netted off, but a [distance of how millions]? And also, if we look forward to H2, what expect -- what impact year-on-year should we expect in terms of Leicester on EBITDA? And also, I assume a positive in regards to maintenance costs.

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Joseph Hudson, Ibstock plc - CEO & Director [5]

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I'll take the first one and I'll let Kevin take the second one. In terms of the specification market. I mean, I think we needed for all of our product portfolios, we needed to do a refresh. A lot of customers don't know actually that we have a wide variety of products to put into the housebuilding market. And all these different brands were operating a little bit in isolation. So a common go to now. People understand more that this is an Ibstock company, even if it has its own specific product brand. In terms of specification, that's a long-term game. We have already specification products going into the market, but we see this as a long-term area to have more influence in. There's a lot more high-rise residential buildings coming up, commercial buildings. And we need to make sure that we're at the center of those design conversations going forward because it is profitable work. And it's -- we're -- that's what we want to be doing.

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Kevin Sims, Ibstock plc - CFO & Executive Director [6]

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In terms of Leicester and the maintenance. So for the first half of the year, in a straight comparison with the numbers. As you're aware, we were ramping up Leicester at the beginning of last year. So there is a GBP 2 million to GBP 3 million of benefit in the first half results, '19 over '18. We've previously indicated, and we're still on track to deliver about GBP 7 million of benefit -- additional benefit from Leicester in 2019 and a sort of GBP 6 million to GBP 7 million in terms of the maintenance for the second half of the year.

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Operator [7]

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It's Gregor Kuglitsch from UBS.

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Gregor Kuglitsch, UBS Investment Bank, Research Division - Executive Director, Head of European Building & Construction Research and Equity Research Analyst [8]

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So actually 3. So the first one is just on CapEx. So I think you're kind of currently running at around GBP 30 million. I think you stopped now splitting between kind of pure maintenance and sort of debottlenecking projects and so on. I just want to understand do you think that's kind of also a longer-term number. I appreciate, I think, before, you said next year will be the same, but is it effectively now going to be that kind of level, assuming kind of no major plant expansions, obviously, which would come on top? Second is, can you just outline your thinking on the special dividend? I mean, I appreciate that you've decided to -- the supplementary dividend, excuse me, is slightly lower year-over-year because of the announced transaction? But the reality is that GBP 6 million of saving, I think, if I calculate correctly. So I guess, it wouldn't have made a big difference. So I just want to understand what the thinking is? Are you just keeping the balance sheet at a conservative level? And then just to come back on the answer you've just given on the EBITDA. So are you saying that -- so backward calculating from this, you should have around GBP 4 million from Leicester, GBP 6 million, GBP 7 million from maintenance, maybe concrete recovers a bit. Are you saying a GBP 10 million increase? It's sounds a bit much, but I just want to check that I'm not -- I don't get the math wrong here.

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Joseph Hudson, Ibstock plc - CEO & Director [9]

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Thanks, Gregor. I'll take the first couple and -- so Kevin will help with my answer. In terms of CapEx, we said that we're going to spend GBP 25 million extra over the next couple of years on enhancement capital projects. So yes, about GBP 30 million to GBP 32 million this year would be normal with the other maintenance CapEx on top of that. So GBP 12 million this year and the rest of the balance being maintenance CapEx. Obviously, going forward, those enhancement projects won't be in place. So that will probably come off, but then you may have some other opportunities. For example, the Longley acquisition has planning permission, and we were looking to build a new factory there once we're in, and we've got the final plans in place. So that could also be some additional CapEx timing-dependent. The special really were -- it is to try and make sure, with the combination of the acquisition and the supplementary dividend, we maintain a conservative balance sheet at the lower end of the range by the deployment of this capital. So that's the main reason there. I don't know if you want to add anything to that, Kevin, or talk about the EBITDA from the year.

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Kevin Sims, Ibstock plc - CFO & Executive Director [10]

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Yes. Well, exactly, as Joe said, in regard to the supplementary is just keeping the balance sheet tight until it's the bottom end of the range, certainly, for the remainder of this year, and then we'll look at it as we go forward. In returns to just the pure numbers, yes, you're correct in the summation. Just on the concrete side, I think we're saying that there might be a slight improvement against the first half of this year as opposed to the second half of last year. But yes, they're the benefits that we would anticipate getting out of the maintenance and Leicester projects, but not everything moves in the same direction. So overall, this is -- that's where we've guided in terms of the numbers, which would be slightly less than the summation of the GBP 10 million that you've arrived at.

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Operator [11]

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[Kevin Cannock] from [Syncroft].

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Unidentified Analyst, [12]

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Two for me, please. Firstly, if we take into account the maintenance program, the upgraded programs, et cetera, should we be aware of any increase in the gross capacity at the end of this exercise. And if so, what would that -- what would your current year equivalent be on a sort of utilization basis? And the second question I had was just regarding the Marketing Director appointment. Is there any different ambition the business has as to how it's going to drive itself from a front-facing point of view over and above the comments you've already made, Joe?

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Joseph Hudson, Ibstock plc - CEO & Director [13]

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I think we just go back to what we've said in for the enhancement projects, where we would invest GBP 25 million over 2 years, and that will bring a little bit of extra capacity. We said GBP 5 million of EBITDA by 2021. Obviously, that's predominantly its brick capacity. We're running pretty full tilt on all of our factories now, notwithstanding the maintenance that we've already done. So we're pretty maxed out. I mean, in terms of -- we would like to be more market-led as a company. We've got a great manufacturing industrial base, but the market is moving fast, and there's a lot of dynamics that are changing. So we just want to be at the front of those design conversations. We've already got a lot of products and solutions for off-site manufacture in our Kevington business and a combination of that and understanding how the market is moving and our customer-focus will help us just keep pace for that. So it isn't -- we're not looking to do things vastly different. We're just trying to have a much more coherent go-to-market strategy and a little bit of innovation with the needs of the market.

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Unidentified Analyst, [14]

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Okay. Sorry, just going back to the capacity issue. I mean, from what you're saying, in -- at the completion of this program, you may tweak what another 5 million or 10 million a year, but they're relatively no numbers -- low numbers, you're not anticipating having a 10 million plus additional theoretical capacity through this.

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Joseph Hudson, Ibstock plc - CEO & Director [15]

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10 million wouldn't be that much additional capacity, 10 million bricks. I think we did say 30 million to 40 million bricks through this enhancement CapEx project. So that is a healthy number, especially where the market is abiding point at the moment.

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Unidentified Analyst, [16]

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And how far down that journey are you then? If the end result line is 40 million, where would you be now?

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Joseph Hudson, Ibstock plc - CEO & Director [17]

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So we won't realize any of that capacity this year. It will be towards the late end of next year, where these capacity increases start to come and fully in 2021.

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Kevin Sims, Ibstock plc - CFO & Executive Director [18]

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And I think in addition, with some of the projects that you actually -- you're going to have to take time out of the factory, where those projects have been run. So the net impact, which is why we've guided to 2021, it is certainly not thinking next year because it's going to be a net figure. You will see the benefit in 2021 from a volume perspective.

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Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [19]

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Robert Eason from Goodbody. Just on the clay side, can you just talk through your thoughts on pricing and just give us an indication of the 6% in clay, how much of that was pricing versus volume? And following your comments on the imports that they were softer in the second quarter, will that provide an opportunity for the domestics to up the ante, maybe, if there's some pricing as we go into the second half? So just a general comment around pricing. And if I can just take on one part of your outlook that's kind of just struck me. Just it's a bit counter to what we've heard from others, the softness in July from the merchants, we seem to get an indication that July was better than June and May from others.

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Kevin Sims, Ibstock plc - CFO & Executive Director [20]

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I'll take the price, Joe, and you take the market. Yes. So in terms of the pricing, in terms of volumes, they're reasonably flat year-on-year, although the mix is better for us. We'd like to comment on that not in soft mud I think we've mentioned to you before, there is price differential between soft mud and wire cut. So we do get a bit of a benefit from that, with the balance coming out of our pricing, which was mid-single digit and that's held. In relation to imports. I mean, there's 2 things. I think if you actually look back, the imports would tend to peak in the first quarter, because I think we've mentioned before, they tend to be batch produced and then people are paid for them, and then they'll draw them down. So they'll be held in a dock in Amsterdam or in the U.K. So I would have anticipated the number would automatically flatten out. In terms of the pricing opportunity, I'm not quite sure, Robert, where you --

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Joseph Hudson, Ibstock plc - CEO & Director [21]

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We tend not to do price increases twice a year. We tend to have a fixed price negotiation discussion at the end of the year ready for the following year. So we won't go back in this year. Yes. And I think just on -- in terms of the slight softening in the merchant channel, which we've seen, that could be related to inventory levels on job sites. It could be -- we're not worried because the fundamentals haven't changed. It is an undersupplied market here, and any slight softening you see for a couple of months, we can tend to recalibrate, it takes a bit of time, but you'll recalibrate, and imports would be recalibrated over the midterm as well.

I think we've still got another question, 2 questions online.

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Operator [22]

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Yves Bromehead from Exane.

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Yves Brian Felix Bromehead, Exane BNP Paribas, Research Division - Analyst of Building Materials [23]

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Two on my side. The first is on cost inflation. You said that you're already looking to lock some of your costs for 2020. Does that mean that you haven't yet done so? Or have you already been able to lock some of those input cost inflation in terms of energy? My second one is on the acquisition related, I would guess and strategy-wise, you've obviously acquired Longley, which is a precast concrete business. Does that mean that you'll try to increase your exposure to multi-family, high-rise dwelling? Or could we also look and think that you can get into the inner leaf wall segments in single-family as well? Example would be [AirCrete], for example.

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Joseph Hudson, Ibstock plc - CEO & Director [24]

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Yes. I think your question on cost is, we tend to manage the risk profile of our energy now. That strategy is changed a little bit after last year. So we'll continue to hedge or forward by going forward. We're not trying to play the energy markets. We're just trying to manage our risk profile, and we'll continue to do that into next year. And price discussions will reflect that, obviously. In terms of precast, so most of the T-beams will actually go into housebuilding with Longley's and that's part of the strategy of acquiring Longley's, both the geographical and the route to market. At this stage, we have -- we're not looking to acquire anything in the inner leaf, but we're always open for looking at different pipelines and different opportunities as they arrive. The last question on the phone.

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Operator [25]

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Rajesh Patki from JPMorgan.

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Rajesh Patki, JP Morgan Chase & Co, Research Division - Analyst [26]

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Two questions for me, please. First one, can you give us some color on the timing of the supplementary dividend? And by having at the midyear stage, does that reflect the pipeline for potential M&As during the remainder of the year? And the second one is, just wanted to understand how you're thinking about the softening trend for volumes in the merchanting sector. Do you see any reasons to be concerned here?

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Kevin Sims, Ibstock plc - CFO & Executive Director [27]

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So on the dividends, just we can reiterate, really, what we said before. In terms of the quantum of it, together with the acquisition of Longley's, we're quite comfortable about keeping our debt position at the lower end of our range. We're happy to do that for this year. We came up with the right decision. It does give us further opportunity for investments in the business either organic or through acquisition. And we are comfortable with where we're likely to end up on a net debt position at the year-end.

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Joseph Hudson, Ibstock plc - CEO & Director [28]

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Yes. And as to the -- there is a slight softening, but we don't know if that's going to be prolonged. That could be just a very temporary thing. We've seen it, so we have to mention it. Certainly, in the midterm, I'm not concerned. There's a undersupplied market. And the fundamentals are still there, where demand levels are high, there's -- liquidity is good, affordability for mortgages is good. And there's a need to build a lot more houses in this country. So I think we'll sell all of our bricks. If we have to recalibrate 1 or 2 months, no problem, because we'll sell all of our bricks in the coming years.

More questions? No. Okay. So thank you very much for your questions, and we can -- if you want to have a little chat afterwards, please, come and have a chat with me and Kevin.