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Edited Transcript of MSLH.L earnings conference call or presentation 15-Sep-20 9:00am GMT

Half Year 2020 Marshalls PLC Earnings Call

Huddersfield Sep 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Marshalls PLC earnings conference call or presentation Tuesday, September 15, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jack Clarke

Marshalls plc - CFO & Director

* Martyn Coffey

Marshalls plc - CEO & Executive Director

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Conference Call Participants

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* Adrian Mark Kearsey

Panmure Gordon (UK) Limited, Research Division - Support Services Analyst

* Aynsley Lammin

Canaccord Genuity Corp., Research Division - Analyst

* Christopher James Millington

Numis Securities Limited, Research Division - Analyst

* Clyde Lewis

Peel Hunt LLP, Research Division - Deputy Head of Research

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Presentation

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Martyn Coffey, Marshalls plc - CEO & Executive Director [1]

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Good morning, and welcome to Marshalls' Half Year Results for 2020. Certainly, 2020 has been a challenging year, I think, for all businesses in the U.K.

Firstly, I think it's right that I would like to thank our employees for through their efforts and support and actions during, obviously, the pandemic and how we've responded since the pandemic.

It was unprecedented times. We saw a reduction in our volumes down to 15%. And the vast majority of our workflows, obviously, were also furloughed during that period. But we've survived. We've survived due to our workforce. And obviously, we've seen those volumes come back. We've had a very strong August to September as we see the volumes coming through, which we see is really good.

And as you'll hear today in our announcement that we put out earlier, we also believe we're in a position where we're going to make the payment back of the furlough money.

So today, what I want to do is to cover, obviously, the highlights, the actions we've obviously taken. Jack will cover the financial performance, and then I'll come back and talk about the market.

And importantly, also about our 5-year strategy, which we introduced last year and we've continued with, and we think it's more applicable now than it even was then. And I'll also talk about ESG, and obviously, the things we're doing there. And at the end, there's an opportunity for questions, where we'll be doing on a phone live into Jack and myself.

If we look at the numbers, obviously, as I said earlier, we saw a big, big drop in sales, as I said, down to 15%. It recovered in sort of May and June. But still, if you look at the year, we're some 25% down, at GBP 210 million. And as, obviously, what you're also seeing is the EBITDA, which has gone down. And obviously, the operating profit, which is still positive, but has obviously reduced in line with the sales drop-off that we've seen. And what we're also seeing from our point of view is management of the key part in all of this, I guess, was the net debt, and we'll talk about the actions we've taken there, but we can see that we've managed the net debt really in pre-IFRS terms to be slightly lower than it was this time last year.

And certainly, from our point of view, what we've also done in this year, which is unusual circumstances, an extraordinary restructuring cost of GBP 17.6 million, which Jack will talk about in a second.

If you come on to the actions we've taken, obviously, the #1 priority for the business was our health and safety of our employees. It was absolutely critical. We were able to run our business, maintaining the 2-meter gap. That we've actually carried on doing and all parts of our business were able to conform with that.

There has been some operation restructuring, and obviously, that's covering all parts of the business. There have been some selective site closures. This is where we've accelerated some of the potential plans to rationalize the sites and end up with less sites making the same production.

We changed shift patterns, particularly going from 7-day working to 5-day working. And in general, what that came back to is a redundancy program of some 15% of the workforce, who unfortunately had to leave the business in the middle of last year -- middle of this year, sorry.

But we have maintained a full national manufacturing and logistics capability, which was absolutely critical. With increased efficiencies, which will come through and obviously built in the flexibility. And we've continued to take all these steps really looking at the long-term interest, obviously, of the business and the shareholders and stakeholders.

The actions we also took from a finance point of view, which obviously finance was a critical part of this. The key was obviously liquidity. And what we were in a position to do is, yes, we took the tax deferrals with the government, we took the furlough schemes that I talked about earlier. But also we had great cost management in the business in all the different sectors and with obviously the employees.

And we took, obviously, a reduction from the Board and senior management in terms of salary during this period and a temporary suspension of the dividend.

We also were able to get better bank facilities. The RCF was increased by some GBP 90 million, and the total bank facility now stands at some GBP 255 million. We also had access to the CCFF facility of GBP 200 million. So we made sure that liquidity was not going to hold the business back, obviously, going into all of this.

What I'd now would like to do is to hand over to Jack, who'll take you through some of the financial numbers.

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Jack Clarke, Marshalls plc - CFO & Director [2]

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Thank you, Martyn. So yes, I'd like to paint a picture of the revenue fall through, both in the period and subsequently. We'll then change -- turn to what -- how this has affected the profits and from that, the cash flow and where we sit from a liquidity and financial strength place to return to growth and ensure a strong recovery. So revenues, we were down, as this chart shows, 25% in H1. That was almost 100% as a result of the COVID-19 crisis.

The business inherently in its core markets, domestic, commercial, whether it's housing, newbuild, water management infrastructure, they're all inherently strong. It was literally an effect of the pandemic that took our revenues down. And I'm happy to report that this next slide shows that the group daily average turnover you can see that very -- the red line is 2019 by day, and the blue line is 2019 by day. You can see at the end of March-April, a significant drop-off in terms of average daily sales. We track that forward, and by the end of August, we were -- and above beyond where we were last year.

So that strong recovery, driven by a strong top line in terms of sales is there. The analysis that we always give in terms of end markets on the left-hand pie shows that public sector commercial is still 2/3 of the business. Domestic is increasingly important for us. The whole trend in the people staying at home and doing a lot more work around the house, that's really fueled our growth in delivery, and we see that trend continuing.

On the right-hand side, we can see somewhat interestingly that actually, the international operations have grown during this period, and that's primarily because of an extremely good turnaround in our Belgium operations that have seen true, absolute and real growth in real terms. Landscape Products makes up 80% of our business, that's a good place to be because we're a heavy volume manufacturer that really benefits from a profit perspective and a revenue perspective by lots and lots of manufactured little transactions. So that's where we want to be. How does this trend in revenues though and the return to recovery? How does that impact us from a profit perspective?

Well, you can see within the period, despite what happened and despite the record levels of fallouts, something we've never seen in any of our lifetimes, Marshalls was able to actually eke out a profit at the trading level. So we still returned a positive profit.

Obviously, the effects of COVID-19 and in order to reposition us and focus for the future, we've taken the decisions that have previously been communicated to restructure from an operational and an asset basis, we took a charge of GBP 17.66 million. So on a statutory basis, we made a loss of GBP 14.1 million. But importantly, at an operating level, on an ongoing basis, we still made a profit.

Turning then to these restructuring costs. You can see that GBP 3.2 million of that was from the closure of 1 large-scale manufacturing site and 2 smaller ancillary sites. We took 15% of the workforce as a reduction, enabling a charge of GBP 7.7 million, and we wrote down assets to the tune of GBP 6.7 million.

These reductions in costs will mean that we will get a GBP 1 million benefit per month going forward to the tune of GBP 12 million per year. So that's rebasing the cost profile of Marshalls. We don't intend this to be an ongoing cost exercise. This is very much a deep and thorough review. And we intend to reignite the workforce going forward so that we're well positioned to serve our customers and our other stakeholders well.

Moving then to the margin reconciliation. Very importantly, you can see if you do the drop through, the drop in revenue and the incremental drop in profits, you can see there's a 50% negative impact for every GBP 100 of revenue we dropped, and we did drop during that COVID-19 crisis. We also dropped GBP 50 of profit. Coming back into the recovery that we've shown at the end of August, that will come back the other way. So that's the real benefit of being a large-scale manufacturer with many, many transactions.

So you've seen the revenue, and you've seen how that's translated to profits, but despite the falloff in revenue and the subsequent recovery, we did manage to eke out the trading profits.

From a cash flow perspective, we lost GBP 18.4 million of operational cash flows, 100% due to the fact that sales were down in this period. However, we did mitigate with the cost reductions that Martyn talked about. By selling out of stock, we continued to sell right throughout the crisis, right throughout lockdown, our logistics was in place and stock came down by GBP 7.2 million, which again helped from a cash flow perspective.

So we mitigated the damage that was done from an operational cash flow perspective. And that's before getting to the big actions in terms of using the government support schemes, which we are now repaying our for so longed deferred taxes. We repaid all of our deferred taxes other than VAT by the end of June. We've deferred the dividend, suspended it, I will come to that later. We took CapEx write-down. Again, I'll mention that in a moment.

And we took a series of actions to make sure that probably one of the more interesting numbers on this sheet is that we came to GBP 53.9 million net debt at the end of 30th of June, we started the period at GBP 55 million worth of debt. We actually took debt down during arguably one of the most difficult times to face the U.K. and its economy.

What did we do? Well, we didn't panic. We quickly got into action when it was evidenced that the drop-off in sales was coming. We worked with our key relationship banks: HSBC, Lloyds and NatWest, who I have to thank for their avowed support and committed support. They extended and renewed their existing facilities, and they gave us a total of GBP 90 million additional facilities. The Bank of England was very forthcoming in terms of the CCFF at the time that we needed it with a GBP 200 million support line.

I can confirm, at the end of August, we have not used either the commercial or the government facilities because we've been able to manage it well. However, we took the steps necessary, should that have been the case. So we were prepared, but we didn't need to.

This financial firepower that you can see in terms of going forward over the next 5 years in terms of the facilities that we have, this allows us to renew and double down on the strategy that we've already outlined. We have the facilities in place. You can see that net debt-to-EBITDA is still at 1x, which is we're very comfortable with that. We've guided to that in the past. And even despite this crisis, we are still at that level.

In terms of the strategy, Martyn will talk much more about that, but in terms of how we're going to spend the money, we can confirm that organic growth has restarted in H2. We are investing in upgrades to our facilities, to our digital strategy, to the things that we outlined last year as part of our 2025 strategy.

On the R&D and NPD despite the fact that we've had this huge crisis, we are now at record levels of our sales coming from NPD 15%. We took the decision to repay the furlough monies, as Martyn has said, we will be reviewing the dividend in December this year. And form and give view as to whether we can recommence that and the Board can confirm that if it does recommence, we will look for our long-term's target over the cycle to be at 2x cover as it was previously.

We have a very well-developed pipeline of acquisitions. The capital can be deployed to these acquisitions. We're not changing strategy. It will be in newbuild housing, it will be in water management. Supplementary dividends will be discretionary and as and when.

So the strategy remains in place. Martyn will talk a little bit about ESG, but you can see that our debtor days and our creditor days deteriorated somewhat modestly, but they did deteriorate. We worked with our supply chain throughout this crisis to make sure that they could be funded. We worked with our customer base to make sure we could supply them the products. And I can confirm that we didn't write-off GBP 1 of customer debt during this period. And it's part of the way that Marshalls does business in a sustainable fashion. This is how we managed through this crisis.

You can see that the gearing has come down it would do and the profit of the operational gearing and the rocky it would do and at a time like this, we intend to get that right back up. And net debt, as I confirmed, has actually reduced. In terms of the longstanding company-defined benefit scheme, again, I can reiterate that the scheme is in surplus. It continues to be in surplus. We have not paid anything into the scheme. We don't need to. It's got a confirmed surplus. And ultimately, we will look to transfer out of this scheme.

So we're well placed on the dividend front to revisit this in December this year, and that's what the Board will do. But in summary, from a financial perspective, we are -- we have managed this crisis well, and we are in the position to renew and revisit our 2025 strategy, and we have the firepower to do that. So I'll hand you back to Martyn.

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Martyn Coffey, Marshalls plc - CEO & Executive Director [3]

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Thank you, Jack. What I'd like to do now is to cover obviously the market. First of all, we use the CPA in terms of our looking at the forecast, looking at the, obviously, what we expect to happen in terms of this chart shows, GDP. And CPA is really in the middle, it's not either extreme. So we think it's the right area, and it's the right focus from our point of view to use going forward.

There's a lot of talk about the recovery graph. You viewed about V-shaped, W-shaped, U-shaped, and obviously, there's a lot of speculation as to what will happen. I think it's fair to say that currently, we're in definitely a V-shaped. So we are seeing rapid recovery from the low base. We've seen that obviously in our numbers. We saw it in June. But July, August and September has continued that on. Obviously, to get to the full V-shaped, then people are speculating as what other events could happen. But that's where we are currently, we believe, in terms of the recovery.

If you look at the CPA in terms of the forecast, obviously, from a construction point of view, they're showing 20% reduction this year and 18% growth next year. Obviously, that's across many different areas. What you can also see from this ABI chart, this is shown, obviously, the delayed projects that started in March and rose, obviously, well up in terms of -- by the time of April to come. But that is now falling off as these projects that were stopped, they're actually restarting. And we can see from April onwards, we've actually started to see new projects starting. So the recovery in those senses is still very much there.

If we look in our different markets, the public sector and commercial, we can see that from a market purchasing managers index, what you've got here is showing that sort of construction is the best in terms of in the different industries in terms of recovering, and we see that as positive. And the government very much said from their point of view, they want to declare these intentions effectively to build their way out to this current recession.

And we've seen some GBP 640 billion being put to one side for the next 5 years on capital investment projects. And these effectively are for schools, for hospitals, for roads, and from our point of view, that's all areas where Marshalls are obviously strong, and we'd love to do very well in those areas.

The other obvious area at the moment, everybody is talking about is spacing, place-making social distancing, obviously, the importance of public spaces for people to feel safe in. And obviously, they can accommodate numbers. So again, this is an area of big investment, an area that very much plays to the strength of Marshalls.

What we're also seeing is affordable homes, effectively a GBP 12 billion program here. And this affordable homes from our point of view sits along the normal newbuild housing. And all of these areas, whether it's in affordable homes or newbuild, need the infrastructure. They need the roads. They need the pavements. They need the roundabouts. So effectively, again, all strong areas from Marshalls' point of view.

And the other area we're seeing is obviously on the travel initiative with cycle lanes being put into many of the cities. Again, that tends to be used. Marshalls products can be used to achieve this. And we've seen a growth in those products, and we will see that ongoing in terms of going forward.

If we look in our other key area, obviously, domestic. I mean domestic has gone through a massive change in the last sort of 3 months, we've seen sort of 3 years acceleration. Whether it's the working from home, the buying from home, socializing or relaxing or even holidaying, everybody is understanding the value of spaces. And obviously, that means challenging the amount of spaces people have inside their house to outside, how can it be extended and we see that as really stimulating the demand in this area for the products, obviously, that we sell in the domestic market.

And when you look at this chart, which has come out from the Builders Merchants index, obviously, all products have been affected by COVID, but what it's showing is landscaping is down one of the least numbers in terms of, obviously, against all the different sectors that is in there, and we see that as a positive sign.

And consumer intentions, which we measure, obviously, every few months, you can see here that gardens and driveways were already high. And this is before we spent a large part of the summer, obviously, at home. And people being able to see the things they'd like to do, and we think that will only stimulate that demand.

And we've seen that work its way through effectively in the order book. So the order book went up to about 12 weeks. We believe, I've said this in the past that, that's almost like a glass ceiling because when it gets to 12 weeks, installers wouldn't even come out to do a quotation. So the order books are very, very full at the moment in domestic, and that is obviously fueling the domestic numbers and the recovery.

And one of the reasons to understand that, we believe that we've talked in the past about who the Marshalls' core consumers are. We've said it's house owners. 2/3 of the houses are owned by people over 55 years of age. They have definitely been the least financially impacted by COVID.

In fact, if you take the fact that people aren't going on holidays and aren't going out in the -- obviously, eating, they probably got more money available at the moment to make that investment than they've had in the past. So we see that the Marshalls' consumers are in quite a strong place, which is a good sign, obviously, for our business.

We've talked about our 5-year strategy. And the key from our point of view is we launched this last year, and it's become even more important. And we've carried on investing in it during the shutdown or effectively the COVID period. And what we've seen is, I think it's even more critical today than it's ever been before, and we obviously are going to continue to invest in it.

And I thought it's a good time to give an update on each of the different areas that we're in. From a specification point of view, what you've got here, obviously, is this graph you can effectively -- what you see is each of the projects in the U.K. are mapping out, and we followed each one of these in terms of in the CRM, and what we see right across the piece is every single specification that comes up, we identify which type of product is on it, whether it needs big models and we follow each one of those.

So every project that comes on to the U.K. is critical from our point of view for us as a business to sort of see. And I think it shows that clearly as we follow each one of them. If you're on the specification, you have more chance of winning that job.

If we talk about new product development. In new products, we continue to bring out new products, new ranges. What we've seen here is, again, obviously, that's continued throughout this sort of period of COVID. We've continued investment in those areas as many new products come in. And a long list of projects obviously, what we talk about is products, but we're also talking, in some cases, of services, here, we're product in terms of cleaning on installing. And this very much couples in terms of what people are looking for online as people are taking more and more DIY. It gives us an opportunity to sell these products as we come in through.

And coming on to online. Obviously, digital. I mean digital has changed for many, many people in terms of in the business. We've all seen that, and we're all doing it. And we're, again, in a good place from a Marshalls' point of view. Our websites are giving people more information than they've ever had before, and people are obviously able to use that.

And we've now even introduced digital trading that we do through our merchants, where you can come on to our website, and you can actually procure our products, which we deliver directly to your home. So that has obviously carried on.

Logistics. Logistics is a key part for us in the business. We never stopped, as Jack said earlier, we kept on delivering to our customers throughout even the period of sort of a March 23 onwards. And what we've seen is all of the time trying to find ways. Our drivers are obviously well-trained in terms of from a health and safety point of view and making sure they also keep the customer safe.

The paperwork has been removed. We've gone to far more digital in terms of how we trade with them. And what we've seen throughout this period and continue is, I guess, what we've seen for the last few years, is that the actual deliveries to site are still growing. And that is a big differentiator for Marshalls compared to the competition who haven't the ability to do this.

From an operations point of view, I said earlier that, unfortunately, we had a restructuring in the period. We took the decision that we would actually go ahead with the operations plan over the next 5 years and bring forward some of those closures and relocate the capacity to other factories. So eventually, what we'll end up with is the same amount of sales through less facilities. And that's what we're transacting now by moving equipment around.

And that has obviously carried on, and we see that as a critical part for the business in terms of increasing its efficiency.

Sustainable materials is obviously important for all companies today, and we're no difference in Marshalls. First of all, we introduced in terms of our plastics and packaging. You can see on the left-hand side, we reduced by some 60% the amount of plastics we were using on our packaging. We've now got a project that's going ahead, which will have a further 85% reduction to that. And that carries on, again, being driven from our point of view, you're looking at health and safety, you're looking at legal, but you're also looking at how do you use less of these materials as people are trying to get rid of them.

And then you've got the customer centricity. We've talked in the past about we want to get to the point of where 9 out of 10 customers recommend Marshalls. We're at about 8.3% in both in our domestic and commercial, we've seen improvements in these areas, and we will continue to invest in those. It's critical from the customers if they're recommending us, then also obviously going to help us grow our business.

And then coming lastly on to emerging businesses. The emerging businesses are obviously important to us. Our civils and drainage business. We have the right products, we have the infrastructure investment, which is going to be one of the growth areas in the country. We have the right product to put into these areas, and we think that's obviously going to grow, and that's really important, both infrastructure and housing. And also from our point of view in terms of on the concrete bricks, I mean, it's never been a better time for the concrete brick business to grow with this low carbon walling that we're able to offer. Obviously, it gives the customer and the consumer a different choice.

And I think that's absolutely critical as it goes forward. And we also, obviously, financially are in a position where we have the funds available to make further acquisitions, as we mentioned earlier, and we will continue to do that.

ESG. I've talked about it in the past. And obviously, ESG is growing in importance for everybody, but I think it's always been there from Marshalls' point of view. Marshalls have led the way in this area, in the construction sector for a number of years, and I think they will continue to do that.

If you take, we've carried on with our ratings. We've got AAA rating in terms of, as you can see here on ESG. And that's the top 3% of companies in this area. We've carried on with FTSE for good where we've got the membership that's been there. And again, a number of years. And the key, really, from our point of view is making sure you've got the priorities right on the key areas. I can show social value, environment, modern slavery. In each of those there is action plans to actually do things and get the benefit of it.

And one of the key from our point of view is we became the first manufacturing company in construction to actually sign up to science-based targets. So we commit then here to reduce scope 1 and 2 of greenhouse gas emissions. And we will be measured on this. So these measurements will be out there in the public domain and external companies will be coming in and seeing how Marshalls are doing. And as I said, we're the first company to really sign up for this.

We've also been well placed with sixth year for getting the fair tax mark in the U.K., and we've obviously gone with that with -- and really proud of what we've achieved in the area. And also, as I mentioned earlier, the Board have decided to actually make a repayment of the furlough money.

The furlough money was critical. I mean when the business was down at 15% of turnover, I think it was essential that the government made these funds available. But obviously, from our point of view, we've seen recovery in the third quarter. We're seeing the market recover. And we think the right thing to do from a Marshalls' point of view is to pay back the money. And that's what we plan to do. And obviously, we pay it back and then we're in control effectively of our own destiny going forward. So in summary, obviously, from our point of view, it's been a very, very challenging time as it has for many companies. Marshalls survived it, and Marshalls have come through it. And we've maintained our financial flexibility.

We've got significant headroom, obviously, going forward with that. We reduced the cost, but we also still invest in it. We see the markets actually recovering in the public sector. Commercial is coming. The domestic has been very strong, and I think will continue to be very strong as people are obviously paying in that area. We said in Belgium, the Belgium business has returned to profitability for the first time, which is obviously very good.

The company is in a good position that we think we are confident we can repay the -- obviously, the furlough money going forward. The business is gaining ground and well placed. And obviously, next year is going to see growth over this year. And the question all the time is obviously how that's going to come through.

But our 5-year strategy, the objectives have not changed. We've carried on investing in it, and we will continue to do that. The ESG, as I said, is embedded throughout the business. I mean we're saying with this, we're going to actually reinstate the guidance. Obviously, we had to remove that at one point when we weren't so sure. We now got a better handle on that. So that will be introduced back into it.

But we do believe and remain confident from a Marshalls' point of view and the Board that the 5-year strategy will continue returning to Marshalls to where it's been for the last few years in terms of driving growth and shareholder returns. That's the end of the formal presentation. What we'll now have is an opportunity for any phone questions-and-answers to take place. I'd now like to hand over to the operator, who will facilitate the calls. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Aynsley Lammin from Canaccord.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [2]

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Just 2 questions for me, please. First of all, quite a clarification on the consensus. I think the guidance is the EBIT to be in line with consensus. Just wondered if we look at the PBT number I think it's about GBP 27 million underlying PBT for the full year. Is that the kind of level you're happy with at the PBT level?

And then secondly, just on recent trading, really, if you could just provide a bit more color and information on the end markets? What you've seen in the RM&I market, new house and infrastructure for September continue to be good and improvement as well?

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Jack Clarke, Marshalls plc - CFO & Director [3]

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I'll take the first one, Aynsley. This is Jack. PBT, the consensus is actually about GBP 20 million on a trading basis at the moment, and that's pretty furlough -- after furlough rather, yes. So that's where we're at with that and we're comfortable with that. Obviously, these are still somewhat uncertain times. We'll see how the next few months develop. But we think that's the right level to pitch out at this stage.

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Martyn Coffey, Marshalls plc - CEO & Executive Director [4]

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Yes. I think on the other part, Aynsley, I'll just pick up, yes, if you look at the marketplace, I think the last really to return to some sort of normality was housebuilding, that we've seen recovery really from, I guess, once the decision was made on stamp duty, the housebuilders are now building out and also starting. So that's definitely there.

The road work has actually been quite a positive throughout, I guess, that's because of the lack of vehicles on the road. And the infrastructure work, which will take, in our view, a little bit longer to really mobilize there's all the right noises, the inquiries and business are there, but that will take a little bit of time, but that has still been relatively strong throughout.

And so I think the commercial has been slower than the domestic, but it's certainly catching back up and certainly already at similar levels as to last year. And as we've said throughout on the domestic side, domestic has been strong. And domestic is ahead of last year, and that is carrying on from a domestic point of view. And in fact, in some cases, if we could get more product coming in effectively, particularly from India, and then I think we'd see even a further advance in the sales.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [5]

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Great. Just -- it was a bit quiet on the line my end, but the PBT, Jack, so that was the GBP 20 million underlying PBT was after paying back the GBP 9 million or so furlough?

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Jack Clarke, Marshalls plc - CFO & Director [6]

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That's correct, Aynsley, yes.

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Martyn Coffey, Marshalls plc - CEO & Executive Director [7]

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Yes.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [8]

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Right. Excellent.

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Operator [9]

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We will now take our next question from Chris Millington from Numis.

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Christopher James Millington, Numis Securities Limited, Research Division - Analyst [10]

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A few, if I may, please. Firstly, I'd just be curious to hear what your competitors have been doing through the situation? I understand you've got a dominant position there. But whether or not they've actually put any resource into their digital capabilities or that potentially is an opportunity to pull further away?

Second one is just really about the installer order book. Martyn, you mentioned that once you get to the 12 weeks, it's difficult for it to kind of move on further. Just what kind of the likelihood is of getting an increased number of installers through, through the course of, maybe 2021?

And then the final one is just around the concrete bricks. I wonder if you could just kind of talk around partly to do with the ESG agenda, the carbon reduction you get versus clay bricks. And whether or not you're seeing any underlying change of preference in the housebuilders to take on concrete over clay bricks because of that?

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Martyn Coffey, Marshalls plc - CEO & Executive Director [11]

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Yes. Okay, Chris. The first question, I think you talked about the competitors. We haven't really seen any significant change. I think the differentiators for Marshalls, which we've always pointed out are things like digital, our logistics fleet really did serve us well throughout, obviously, all of the issues because at some point, as you know, that some of the market was actually closed down. And so for our customers, particularly our domestic installers to precede product, they had to get it from us because there wasn't any other option.

So I haven't seen anything different. We believe we actually accelerate in some of what we're trying to do in those areas. But I wouldn't say there's been anything really being seen from a competitive point of view. And in some cases, perhaps some of them came back a little bit slower than we did. But nothing substantial, I would say, in terms of in that area.

The second question was the -- what's your second question, Chris, sorry?

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Christopher James Millington, Numis Securities Limited, Research Division - Analyst [12]

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The second question was about installer numbers. And whether or not (inaudible) to a point where you're roughly going to the 12 weeks?

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Martyn Coffey, Marshalls plc - CEO & Executive Director [13]

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Yes. The installer numbers, I mean, just to reiterate, the 12 weeks, we believe, when people get that busy and somebody will quote for a -- or phone up for an inquiry, they literally won't come off the tools to go and do it. So it is -- that's why we keep saying it's a false ceiling because I think it points you towards that number, which from that point of view, I don't think it ever really goes above.

In terms of what we've seen, I think we have seen an increase in capacity. And it's been interesting to try and gauge what it is because, obviously, some people have been furloughed from the commercial area, particularly housebuilders and those who were doing groundwork in the beginning. And logic would say that they would be more than capable of turning around in terms of from their point of view to do that domestic work.

The interesting thing will be, will they stay doing it? Because obviously, the order books are full, the demand is very high, people have been spending many days and weeks in the gardens. So we hope, yes, to see an expansion of that capacity. And likewise, if the country starts to see employment issues, which I think everybody is anticipating, it could well be opportunities for people to reskill into those areas where there is more demand.

And the domestic today is definitely showing that higher demand.

The third question, certainly on concrete bricks. I think the ESG agenda is all companies are now taking this more and more seriously. The reality today is even with the impact of cement, concrete brick is effectively about 50% less carbon embedded in it than clay brick. So that has certainly been an interesting point to start discussions with all the housebuilders. And I think what we are seeing is a much broader portfolio of customers with most, if not all, of the national housebuilders now using some concrete bricks. And obviously, our plan is to expand that out. They're competitive financially. And obviously, now they've got a special attribute they've never had in the past, which we obviously intend pointing out to the housebuilders. But yes, we're pleased with how that's moving forward.

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Operator [14]

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We will now take our next question from Clyde Lewis from Peel Hunt.

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Clyde Lewis, Peel Hunt LLP, Research Division - Deputy Head of Research [15]

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A couple of questions, if I may. One on, I suppose, the sort of domestic pattern of orders. Have you seen sort of a change in what the domestic consumers are sort of buying? Have they been shifting up the, again, that added value curve that you've seen in the past or has that sort of changed at all during lockdown?

The other one I had was on, I suppose, sort of your inquiry levels for sort of, I suppose, in particular sort of infrastructure work. Is that as a sort of a real guide to sort of how work levels might be sort of about to change over the next sort of 3 to sort of 6 months in terms of sort of ongoing work?

And the other one, I suppose, if I can slip in a third is sort of, I suppose, as you look at sort of lockdown and you look at how you might run the business, obviously, you closed Falkirk and you've made some other changes in terms of the restructuring, what sort of other patterns or sort of work do you think in terms of sort of people in offices as opposed to factories, what -- how might the business sort of look at sort of making other changes there going forward?

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Martyn Coffey, Marshalls plc - CEO & Executive Director [16]

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Clyde, yes, if we take those. The domestic orders, I think, as we said, the demand has been high. I don't think we've seen a massive change in the mix. What we have seen is a lot more use of our websites. And really what that's become is an opportunity for us to sell not just the products but other services, as we talked in the video about cleaning services, about grounding services and finding people that are actually buying them online directly from us.

So I think the domestic customer is, I guess, like everybody is becoming more used to looking online, getting more digitally aware. And I actually think that will be a good thing in the long-term because it's then down to us to sell the higher value, the higher end product, which they definitely move towards when they actually take the time to look at it. Because, as we've said in the past, you can have the best-looking product, for not necessarily that much more money than the lower-value product because obviously, installation is the big cost.

So I think there will be a movement. I don't think it's been massive so far, but I think it'll accelerate. I think in the infrastructure, we are seeing some shovel-ready jobs accelerated. So things certainly with bike cleansing and we've seen that come in very quickly. In terms of -- obviously, you can see even businesses -- everyone today wants to have outside space in the business for people to be feeling safe. And therefore, that's led to future investment in that.

The pipeline is still pretty strong, certainly in the major cities, Birmingham is going through massive transformation, London. So I think the awareness of public space will only grow. So that's pretty good and inquiries are good.

The work patterns, I think, is interesting. Obviously, from a -- when you have a factory, it's more challenging. People can't work from home, they have to come in and so the first key was making sure that was all safe, which we did, and people are able to work.

We've changed shift patterns. So for instance, not all of the people would have a shift changing over at the same time. You'd actually make that into different 15- or 30-minute slots.

In terms of the offices, we've operated really working from home all the way through. It's anticipated we will start office work in probably near to January now. I think from our point of view, we did prove, and I think this was a big advantage potentially over a number of our competitors. We were able to run the business effectively from an IT point of view. It's a fantastic response from our IT department. It's set up the whole business, we could take orders and even though when we talk about orders and sales coming back to last year, because domestic is higher, it's actually the order count can be even greater.

So I'm thinking the future, what we'll have is a mix between some office work and some home work, which is what I think people were wanting in the beginning anyway, but it would be very difficult now to argue against because, obviously, we've been able to do both.

I don't think everybody would want to permanently work from home because I think the business misses out on that interaction of people, which is obviously important. But I think there is -- there will be a permanent change in some degree, I believe.

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Operator [17]

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(Operator Instructions) Our next question comes from Adrian Kearsey from Panmure.

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Adrian Mark Kearsey, Panmure Gordon (UK) Limited, Research Division - Support Services Analyst [18]

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Apologies if this has been asked already, I had a technical issue halfway through the Q&A. So I sort of dropped off. The stock levels were down sort of circa GBP 7 million in the first half. How quickly will they -- how quickly -- how long will it take for them to recover?

And generally, could you give us some sort of guidance in terms of what kind of working cap movements do you expect, not just in the next 6 months, but over the next 18 months?

And sort of related to that, how are you going to treat the repayment of the furlough in terms of the P&L?

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Jack Clarke, Marshalls plc - CFO & Director [19]

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Yes. So the first one, going to the furlough first. I mean, that is a charge in the way that it was taken as a credit in the first half, it's a charge in the second half. Hence, the delta between a GBP 20 million and GBP 30 million PBT. The furlough was roughly GBP 9.4 million.

Secondly, then, in terms of working capital, in the short-term, Adrian, we are experiencing very high order levels at the moment. And it's been our anticipation to try and put some more stock on the ground before the year-end as we caught up with the backlog. I think actually, that's going to push through into January-February next year before we start putting meaningful stock down, which is a good thing in terms of short-term cash flows we'll have. Obviously, we'll be selling through on that and actually gaining the cash and not putting the stock down.

So if anything, the net debt, which is predicted to go down this year to roughly GBP 35 million, there could be an upside on that, just due to that level of orders.

Over the broader term, next year, I would anticipate that working capital will increase as we start to put more stock on the ground. We are not absolutely comfortable with having the levels of stock we have now. We prefer to have more. It's just a question of we were selling all the way through the lockdown and the orders have been ever so strong since, and we're playing catch up, so I do anticipate that in terms of what we had pre lockdown in terms of working capital models, it will probably push up probably GBP 10 million next year.

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Martyn Coffey, Marshalls plc - CEO & Executive Director [20]

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Yes. I think the permanent thing we did, Adrian, is we've proven that we can run on lower stock levels than what we used to run. So as Jack said, they'll go up from where they are, but probably not go back up to where they were.

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Jack Clarke, Marshalls plc - CFO & Director [21]

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Yes.

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Operator [22]

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(Operator Instructions) There are currently no further questions in the queue.

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Martyn Coffey, Marshalls plc - CEO & Executive Director [23]

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Okay. Well, if there's no more questions, I'd like to thank everyone for giving up their time. I mean it's been a different way of doing the results. But obviously, hopefully, everybody got the messages they've got. And we'll obviously be doing our virtual tour and some virtual meetings in the next few days, so hopefully catch up with a number of the investors. Thank you very much for your time.