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Edited Transcript of MSLH.L earnings conference call or presentation 15-Aug-19 8:00am GMT

Half Year 2019 Marshalls PLC Earnings Call

Huddersfield Aug 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Marshalls PLC earnings conference call or presentation Thursday, August 15, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jack Clarke

Marshalls plc - Group Finance Director & Director

* Martyn Coffey

Marshalls plc - CEO & Executive Director

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Conference Call Participants

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* Christopher James Millington

Numis Securities Limited, Research Division - Analyst

* Clyde Lewis

Peel Hunt LLP, Research Division - Analyst

* Gavin Jago

Peel Hunt LLP, Research Division - Analyst

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Presentation

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

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First of all, good morning, ladies and gentlemen, and welcome to Marshalls 2019 Half Year Results. What I plan to do today is I will cover the highlights first and then introduce Jack who's going to go through the financial performance of the business. And then I'll come back to talk about the market and also, again, to talk about our business strategy that we launched at the Capital Markets Day in June and give you an update on the progress that we're making on that.

First of all, if you look at the results, obviously, for the half year, we're very pleased with the results, really positive. Sales up some 15%. That's broken down as 7.5% positive like-for-like and 7.5% from the acquisition of Edenhall. So obviously, in a fairly flat to negative construction market at the moment, obviously, we're pleased with how we're performing. And we'll explain today why we think we're outperforming the market in that sense.

What that's led to is, obviously, EBITDA and operating profit and PBT all going up between 14% and 15%, which you see is really positive. And that's allowed, through the EPS growth, the interim dividend which we are announcing, some growth of 18% in that. So again, very positive.

The numbers that we're putting forward today in this table are before IFRS 16. But in that, obviously, we've now had to show the results in both formats. It's having little effect on the profitability; less than, I think, GBP 0.1 million. Obviously, it has effect on net debt as you bring those leases on, which Jack will talk about later.

But as you can see, the ROCE, looked in the same way, is obviously performing very well. That's positive. And our net debt has gone up, but obviously, that's because of the acquisition we made at the end of last year in Edenhall.

And effectively, what 2019 has done is make a continuation of the trend that we've seen all the way back from 2013. As we can see, the profitability, obviously, with the revenue and the EBITDA have all had significant growth in that period as the company has been able to expand and, obviously, perform in a different area. And that has all led through to, obviously, the dividend which we show in here. The growth with the dividend, that will represent a 2x cover. So obviously, as we've increased profits and carry on increasing in profits, that increases, obviously dividend, which, obviously, the shareholders enjoy.

So with that, I'd like to hand over to Jack who will take you through the financial numbers.

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Jack Clarke, Marshalls plc - Group Finance Director & Director [2]

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Thanks, Martyn. So today marks an important moment in the journey of the last 5 years, and the results that we're going to present this morning are pretty much a culmination of the 2020 Strategy in that we have just about hit our targets a little bit earlier. And what we're going to talk about later is the 2023 strategy and the evolution -- not revolution, but evolution of that. And Martyn will go into that in some detail. So these results are a clear demonstration and evidence that what we told you 4, 5 years ago has come to pass. And it should give comfort when we talk about what we're going to do in the future, that, that will come to pass also.

So we'll start with the revenue. You can see that there's been good growth across the group, both in our Landscape Products and in our other businesses. Revenues are up 15%. Obviously, Edenhall is in there. Edenhall contributed GBP 17.5 million. But even after that, we've got 7.5% organic growth, which is great given that the CPA is forecasting negative 0.3% growth this year. So we're really ahead of where the market is.

Why is that? Well, in summary, we're in the right areas. We're in new build housing, and we're in water management. But we'll go into that in some detail, but we are positioned in the right parts of the market and hence, the strong revenue growth during the period. But you see in some quite challenging and difficult markets, we continue to grow largely based on the fact that our 2020 Strategy, the investments in the CapEx, the R&D, the acquisitions that we've made, all of those are kicking in to these results.

Breaking the revenue down in a little bit more detail then. You can see that commercial has been a strong engine. It's up 21%. Obviously, that includes Edenhall, but it's up 10% organically. And again, that's largely around new build housing, which has remained really strong. It's around road, and it's around water management.

Domestic is up 3%. It's still positive. That's despite the CPA being in negative territory. International is up 14%. We've seen some strong growth there.

The business now splits quite neatly. 3/4 of it is the main engine, the Landscape Products, but significantly 1/4 of the business now is other businesses and international businesses. So it's an important leg to the balance of Marshalls as a group now. It's become that.

So you can see this strong revenue growth having come through based on the 2020 Strategy. How has that translated through then into the margin? Well, the margin's up at 13.9% even after Edenhall, which has a lower margin, although we're looking to push that up over time. So that's pushed up. We've mitigated our cost base quite effectively during the period. We have managed to push through some modest price increases.

Our gross margin for the business -- for the landscape business remains above 30%. In fact, it's north of 30%. And the emerging markets, that's at 15%, which, again, continues the upward trend. The operating margin -- the operating profit has increased by 15% and the EPS by 15%. So you can see that the strong revenue growth is translating through into profit delivery.

These numbers -- and I'll reiterate this, I've mentioned it a few times in the past. These numbers have got no exceptionals in them, no restructuring. In the last 5 years, we've never had anything like that, and we don't intend to. So these are clean numbers.

Looking then at how has that actually flowed into the cash then. Well, you can see that we generated an OCF at 90%. Which -- in the first half of the year, typically, that's when we're building up the business, ready for the summer season, et cetera. It will be 100% at the year-end. Debtors and stock have increased because, obviously, we've brought on Edenhall, but the ratios, the KPIs of debtor days, stock turns, et cetera, have maintained at the levels they were. So we continue to sweat the balance sheet and the working capital and flow it through to cash.

What then are we doing with this cash? Well, we're very much continuing the journey that we've set out on about the organic growth. We've continued to invest significantly in CapEx projects. Just to put some color on that. In Eaglescliffe, which is one of our flagship plants, we've just put in a GBP 900,000 carousel to speed up the production. At Pollington, which is one of our 2 major CPM sites, we've just put groundworks in to support the growth of the business for GBP 700,000.

We've put in a KVM block machine, a mini one, in Halifax. We've bought some land in St Ives to actually -- for future growth. We're going to develop that -- that's our super site, and we're going to develop that even further. We've put a new robot in, in Newport, and we've consolidated the wet casts across the group into West Lane, in Halifax. That's just some of the color. There are many other projects beyond that, but we continue to invest in the business, and we see that as our -- the best route to growth, the one that we're in control of. That organic growth will continue to be a big part of how we deliver the next journey in the strategy.

Looking then at the continued strong cash generation. All of this is being done whilst we maintain a very conservative balance sheet. Our net debt-to-EBITDA remains at 0.6. That's despite having made the acquisition, that's despite having increased the dividends, that's despite having the increase to CapEx because we've got the strong revenue growth flow through to the profits, generating the additional cash that allows us to do all these things. And of course, you get a compound effect through time, which pushes your margin up. So that's really what 2020 has been all about. But we will always maintain, the Board is committed to keeping that net debt-to-EBITDA below 1. So you have a well-run conservative company that can mitigate its risks as it goes forward.

I note that there are a couple of the banks in this morning, and it's very nice to see your continued support. And we have a great relationship with our relationship banks. We've actually increased our facilities. Why have we increased our facilities? Well, Martyn's going to talk about the growth that we're going to go on in the next few years. That's going to involve some even bigger investments and perhaps a few more acquisitions. So we're ready, we're locked and loaded, and we've got the money ready to go. And it's literally in the bank.

We stress test our balance sheet every year. So we stress test it at 25%. If there was a drop in revenues of 25%, would we be able to meet our liabilities on a monthly basis? And I can tell you that we can, and we've got quite a bit of headroom on that. That's important in a cyclical business. So again, it's a very conservative, well managed, robust balance sheet.

This slide, many of you have seen before. It is the 2020 Strategy in a nutshell. You can see that we -- I've talked about the capital investments that we keep making. Research and development, we'll talk more about that, but 13% of the revenues in this period came from new product development.

We've maintained the ordinary dividend at 2x. In fact, it's up 18%, the interim dividend. The acquisitions: Edenhall is going extremely well and being integrated, CPM is fully integrated. And supplementary dividends, we will continue to look at. So that 2020 Strategy, you can tick each one of those boxes, they've been delivered.

Here's some of the key ratios and metrics. I'll just draw one out, which kind of summarizes a lot of this -- I'll draw 2 out actually. The liquidity ratio is at 1.5%. That's very healthy. So our current assets to current liabilities, we have a good margin. We are very liquid.

Our ROCE continues to be north of 20%. In our industry, that's a good achievement, and we will look to keep pushing that. So not only are we growing the profit that's helping the ROCE, but we're also managing the balance sheet in a very efficient way.

Most of you know that we've got a defined benefit pension scheme. It's closed obviously, has been for many years, both to new members and to new contributions. But we've had a triennial valuation of the pension scheme, and the assets have actually increased. The surplus has gone up to GBP 20 million now. So it's a very well-funded scheme.

The company doesn't contribute to it, no likelihood of contributing to it in the near term. And the idea between trustees and the company is that we could do something different with this. Somebody else may be able to better manage it. That's becoming more likely as the scheme continues to be well managed.

Lastly then and very important for our investors, we said that we'd have a progressive ordinary dividend policy, and you can see that the interim dividend's up to 4.7 pence, that's up 18%, progressively growing, in line with the earnings. We've maintained that target cover of 2x. Supplementary, we continue to look at. The CAGR on the dividend is 18% over the last 5 years. That's quite some growth. But we will always do this and maintain our capital allocation policy and the strength of the balance sheet while we're doing it.

So with that, I'll turn it back to Martyn.

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

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Thanks, Jack. So what I'd like to do is now to talk about, obviously, the marketplace and how, obviously, all the indicators are looking.

First, you heard us talk about the CPA. This is the latest CPA forecast which has come out for the summer. And as you can see, in 2019, they're now forecasting actually negative growth. It was slightly positive before, so it's obviously deteriorated. One thing I would point out is this is not a forecast placed -- based on a no-deal Brexit. So obviously, there's potential for this to be potentially worse than what they're actually putting in here. And again, limited growth in 2020.

But if you look at that, obviously, when you look at the CPA forecast, it's not right to say it's 0.3% for all of construction because it's made up of many different parts of construction. And the key from Marshalls' point of view is which areas we are focusing on. So if you look at the next 3 years in this forecast, you can see that infrastructure and also in terms of housing are going to grow in the next few years. And we obviously tried to aim at those sectors to make sure that we're well placed in them to enjoy that growth. So even though the overall market might not be positive, there are still areas of growth within it.

And if we look at the different sectors we operate in, look at the Public Sector and Commercial, again, in this, we've seen the ABI now has been for some time flat and slightly negative. And obviously, from our point of view, that is, I think, what people are seeing in the marketplace, in the commercial market as people are explaining that the market has got a little bit tougher.

And also, if you take from the CPA's point of view on housing, they are actually forecasting less housing starts this year now than the previous year. We think that might be a little bit pessimistic, and the housebuilders we interact with, we think most of them are building at least what they built in the previous year, if not a little bit more. So that might be a little bit positive. But again, we do see, particularly outside of London, some strong areas in terms of housebuilding and where that's growing.

If you take Crossrail, Crossrail, I don't think any of you are actually going to be getting on this any time shortly. There's still a fair bit of work to be done. Obviously, we're at the end of this. So when Marshalls finish, effectively, the station, that's when it'll be ready. And we've transacted about over GBP 4 million of sales. We think we'll end up doing about GBP 10 million. I think the current plan is to open it in the center first and then open it out, but there's still a lot of work to be done to finish off this project. But from our point of view, again, it's been successful in how we've been doing that.

So you could ask, if you take all of those things in commercial, how are we performing at this 20-odd percent up in comparison to a market which is really flat. And we think one of the reasons behind this is, again, unfortunately, to use the word pedestrianization. In cities today, we've used this graph just to demonstrate. From 2002 to 2015, you've seen significant growth, in a number of the cities, of population, over 100% in many of the major cities like Liverpool, Leeds, Manchester. And obviously, whilst London is 22%, it's 22% of obviously a much bigger number.

So what is happening is more and more people are living in city centers. The city centers are responding to that by trying to remove traffic from public spaces. And effectively, when you remove traffic, you remove roads, you end up paving them. And we've seen that here in London recently with Bond Street, which has been dramatically reduced from 2 lanes to 1 lane and doubling all the paving, which has been over GBP 1 million of business for Marshalls.

We're well advanced in discussions to do with how Oxford Street is going to be developed, probably down a similar vein. But again, this is giving more and more business. So we think one of the reasons in commercial we outperform in the market is because of this area, which is coming towards us and really plays into a strength of Marshalls, high-specification work in centers, and we would expect to pick up a fair amount of this business. So we think that's behind part of our performance.

If we look at the Domestic business, Domestic, we have grown some 3% this year, which has been down in previous years. Obviously, with the weather, it does have an impact in Domestic far more than it does in commercial. In Domestic, we've seen, obviously, a wet June. I think if you were here yesterday, you'd have seen the rain hammering down. So it hasn't gotten a lot better, but we've still had growth obviously in that area.

The interesting thing for us in this space is that the installer order book has stayed virtually the same now with double digits all the way since 2013. So that's 6 years. And we're starting to believe that this is very much a glass ceiling created by the installers. So effectively, they can only become an order if the installer goes out and gives a quotation. And as the installer is busy, they go out to do less quotations. And we've seen that recently because we get -- obviously, people go on our website. We advise them towards registered installers, and they don't always phone them back or come out to do a quote.

So we're trying to do some work with the installers, and the challenge is how do you increase the installer capacity and how do you get a bigger share of it. So we're going to do some work. We are going to get involved ourselves in things like quotations for them. Can we help them in terms of selling and collecting money, which gives them more free time to do, obviously, the business? But we are determined to give customers who go through the effort to come on our website a better service in making sure they get a quotation.

Ultimately, we want to try and convince the installers that if they increase capacity, it would actually be ongoing because what we can't find out with this ceiling is whether there's even more demand behind this. If you wanted a patio today, you've got to wait 12 weeks. The temptation is, "I'll wait until next year." So from our point of view, we're going to do some work, and that, I think, is critical.

But again, every survey we see and you look at what people want to do, who are homeowners, the overwhelming thing is to invest effectively in the property, either investing in the home or in the garden for their enjoyment. So we see an ambition that people want to carry on doing this, and we think that, that's obviously important and, therefore, still fuels a significant demand in that area for us.

I mentioned earlier that we obviously want to talk about the business strategy. And in June, we announced we had the 2020 plan, which was launched, I think, back in 2015, which has very much come to fruition. And we've achieved all the things we've talked about a number of years ago.

And obviously, the business has to say, "Okay. Where's -- what's the direction for the next sort of 5 years?" And it's not a dramatic change from where we were before, but there are some modifications. And as we launch that, I thought it would be appropriate to give you an update in terms of how we do it.

We've said that, obviously, our strategic goal is to become the U.K.'s leading manufacturer of products for the built environment, and we really see this as 8 pillars of activity that we are going to keep, obviously, pursuing, which we think keeps moving that business forward. Obviously, that's enabled by people, we're trying to do more development of the people, invest in our people and, obviously, bring them forward particularly in what we call the Marshalls way of doing business, which is doing it the right way.

If I go through those 8 parts, the first is specification. We have the biggest specification team effectively in the industry today in our field by a long, long way, and the specification team's job is to work with architects, designers and make sure that we help in, obviously, the designs. But we obviously introduce in our products into those designs. If the job comes out to the groundworker or the contractor, by the time they get to place the order, and Marshalls is already specified, then obviously, that increases our opportunity to win that job. It's not 100%, but obviously, it increases that.

So we have more people working on specification than we do actually on selling. And we think that's really critical and important, and that is a big differentiation for us.

This chart here looks at overall brand preference, which, obviously, we measure; and how we effectively are 10x more known than our -- next brand that we are competing with. So it is worth investing in that area, and it is worth making sure that, obviously, the customers are fully aware. And we intend to keep on with that.

New product development is absolutely critical. Marshalls have brought more products out in the domestic and commercial in the last 5 years than anybody in this industry. And obviously, they have increased in our sales, as you can see in both charts. But also, what is important is what's planned in the next 5 years. We have a big catalog of products that we're going to be bringing to market that, again, we'll be the first to bring to market that we think will enhance our sales. New product development for us usually means more margin, a better margin when it's launched. Obviously, that can be because it's a new product altogether or it can be a product that is easier to install or is obviously something that appeals to customers. So new product development, we're spending more money in this than anybody else and continuing. We believe that will grow and differentiate us even further.

Logistics is a big critical part for us. Obviously, from a logistics point of view, we have some 268 vehicles which we use to deliver from all of our sites. 60% of what we deliver is delivered in-house, and we complement that with third-party haulers. Particularly when we do direct-to-site deliveries, we tend to use our vehicles, where we will go that extra yard in terms of -- for the customer.

None of our competitors have their own fleets in this area. They use third party. If you use third party, you're obviously tied into what delivery service they will give. We can offer 24/7. We can offer deliveries wherever people want it in the U.K.

Obviously, one of the big issues in driving today, you'll hear about shortages in drivers. The driver community in Marshalls is very stable. Obviously, from our point of view, we invest in the vehicle, so they have state-of-the-art vehicles. The job tends to be a daytime job, so he's not delivering at night. He's not delivering like retail to set delivery times, which cause much frustration.

So again, we have a stable amount of drivers in that place. And obviously, we deliver a lot of the products, as I said, state-of-the-art equipment, from a safety point of view and everything. And we have lots of third-party accreditation for that. It's a big differentiator when you go to a contractor who's doing big jobs like Crossrail or like these jobs in a major city if they know you can deliver direct to site, when you say you're going to deliver because for them if they don't have the product, then they're going to waste a lot of money.

Obviously, operations has to be one of these 8 pillars. That is absolutely critical to us as a manufacturing company. And we see that in 3 areas: the people, the process and the plant. And obviously, from our point of view, we want to achieve excellence in all of those areas.

In terms of people, we have done some recruitment in key areas, where we've added in skills that we didn't necessarily have, which are able to look at operations in a different light and take it to another level. That means developing the people. It means clear objectives so everybody knows what their jobs are, the training is right. And we need to do more in terms of on people development, and those plans have very much progressed.

In terms of on the process, in the last few years, Marshalls have made, as you can see here, up to 13% more volume with the same amount of people. You can only do that if you're doing that through productivity improvements. We use OEE, which is an efficiency measurement, and it's up 4%, which is really positive. And obviously, you can imagine, that makes a big contribution to margins if you're effectively able to make more product with less hours.

And obviously, on plant. The plant is critical from our point of view and as we talked in detail at the Capital Markets Day, we see opportunities here to make further investments. If you take today with some of the equipment we have, we have 48 block -- plants which deliver 48 blocks in 10 seconds. You can go out with the new machinery potential, you can do 96 blocks in 10 seconds. That gives us the opportunity to invest in some of our plants, make them bigger capacities and potentially look at how many plants we actually need to service the marketplace, and that gives us big opportunities and obviously from our point of view, that organic investment can lead to, again, margin improvement.

Materials also has to be one of our pillars. If you take in the U.K., obviously, we need materials to make our products. Today, as a country, we import cement, we import aggregates and we import sand, and that is only going to get bigger. So one of the analyses we have to do is to make sure we got a robust material supply. There's no point investing in a factory in a certain part of the country and then finding out you can't serve [sustainable] materials. So our strategy is to produce close to customers. Obviously, from that point of view, means we've got to make sure we've got the supply of materials coming in. We do a lot of work in that, and that is ongoing to make sure the business grows.

Digital. I think any business today that's not talking about its digital strategy is making a big mistake. If you take from our point of view, we've made a lot of investment in digital, particularly on data and our ERP systems. If you haven't got data, you can forget about your digital strategy. It's not going to work. So we've had to do a lot of investment, making sure the product is obviously in the right place. We have the right parameters. So if you're an architect and you want to go in, you can drop our product into their designs, their drawings. It has all the attributes. And we've been doing that for some time and that, we think, that makes us very well placed. And making sure that all of our products obviously are available in this form is critical. Now what we're doing is trying to interact with customers and making sure how do we make the customer journey much easier and much simpler? How are they placing orders? How do they -- when they obviously tracking deliveries.

We've also brought in artificial intelligence. We've been doing some trials. We do about 300 jobs a day in terms of quotations in the commercial world. And from our point of view, obviously, we can feed all of the data into the computer about what was the previous projects, what were the previous prices, what were the volumes. And that enables us to effectively come up with a quotation for future business. What we've seen so far in the trial we've done is we've ended up with a 1.3% better margin from the computer than we would have done by human. Obviously, interacting the 2 things together gives us big productivity improvements in the future and potential margin enhancement.

The customer. I think it'd be wrong to have any of your strategies if it didn't include customers because they're absolutely critical to the business. So we've launched a company-wide project, looking at how do we become more focused on the customer, customer centricity? We use a measurement we call Net Promoter Score and here it's risen now to plus 54, which is really positive. What does that mean? That means about 8.5 people out of the 10 that we service would actually promote us to anybody else to say, "You should go to Marshalls. We've had a really positive experience."

This exercise has been really interesting. We didn't think we gave bad service, but you learn other things about what customers really want. Gone are the days when you can say "I'm going to deliver the product on a Tuesday." People want to know what hour, when -- they want to have a text of when it's arriving, and they want to be able to have an interaction obviously, with the customer. So we are investing. We think that's absolutely critical to the business.

And the eighth and last pillar for us is about the emerging businesses and in here, we have also coupled what we call, obviously, the acquisitions. The first half of 2019 have been the best half we've seen and this is the investment we've put in these areas. CPM business is going really strongly. Sales up 14%, profit 11%. And obviously, that allows us to grow that business. These are at record levels ever since acquisition, it's grown.

Edenhall has been a great new acquisition to the business, obviously, it's all -- additional sales and profit. But at the half year, we again were at record levels on where that is, and we think there's massive opportunities for the concrete brick, and we think there's an opportunity for us to invest as Marshalls into that area to grow that and to grow it relatively quickly.

The Minerals & Mortar, whilst it doesn't show sales growth, that's because if you remember, we came out of the Cladding business last year. So the sales, we lost but since it wasn't making any money, the profit level has gone up, as you can see by some 46%.

Landscape Protection, our old Street Furniture business, is doing very well, again expanding. We have sales growth, but we've seen a lot of interest from places like North America in our products. Obviously, it's a global type product and it's needed everywhere and we see that as positive and now we've changed that Street Furniture model, we've seen significant profit growth.

Recon Walling. We've seen growth, obviously, of that product and particularly in the profit. And then Natural Stone Paving, which is very much aligned with this pedestrianization I talked about earlier. They're having big benefits as these schemes are operating, obviously, within major cities.

What it means from our point of view when you pull all that together, and we've talked in the past about what we would do in acquisitions and we said we wanted to get into the new house building. You can see here that we obviously traditionally used to supply effectively Landscape Products, but now we're able to look at drainage products right across the [piece]. We're looking obviously from point of view, facing bricks to go with the Recon Walling. The screeds, so we're able to go to house builders, which we see as a growing and sustainable business and taking that forward, obviously, for us is really positive.

So in summary, overall, from the business point of view as we said at the beginning, we think a very strong performance in the current market. Obviously, we -- there's a number of things out there which are not helping in terms of the marketplace, but a strong performance with revenue of 15% and like-for-like up 7.5%. That's led obviously to profit improvement and the margins have gone up again, and that's despite the fact that the growing businesses are at lower margin than the core business, so overall that's really positive and they've got areas to grow. It's still generating cash, which is really positive, over 90% conversion of EBITDA to cash. The ROCE has stayed obviously above 20% in the old measurement. And we still think the key of this is focusing on the markets that aren't just growing today but are going to grow for the next 3, 4, 5 years. We do increase market share not by chasing price but because of the products and the service we offer. The acquisitions have gone very well. We are happy with both of them. CPM is integrated in on our systems, on our computer systems and also our reporting financially. And Edenhall integration is going well and that will be fully integrated in by the end of the year as well. So we think we're in a good place. We think we -- a good place to carry on, obviously, delivering the growth in operational profit. We're maintaining our 2x dividend cover, which sees dividends grow as profits grow. And the Board, as we put down here, which is increasingly confident of the results. I think that's sort of corporate speak for saying we think we're doing okay for this year. And obviously, with the 5-year strategy, we think it will continue to drive the growth and therefore the shareholder returns.

So that's the end of formal presentation, if we'd like to open the floor for questions and answers. (Operator Instructions) I think there's a microphone for the people who aren't here so if you'd just wait a second and if you can say who you are and ask the question. There's a few here at the front.

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Questions and Answers

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Christopher James Millington, Numis Securities Limited, Research Division - Analyst [1]

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Christopher Millington, Numis. I'll ask 3 if I can, please. Could you just firstly talk us through kind of how the competitors are reacting. Your revenue performance is so far ahead of the market. It does look like there's probably some influence from market share there? Second one is just about margins on emerging businesses. I get the feeling that below the core landscaping business, perhaps you could just give us a feel as to kind of what you're doing there and how you could improve those. And the final one is just on the concrete brick market. Are we seeing pretty similar trends to the clay brick markets or do you think there is some sort of gradual market share gain there for concrete bricks?.

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Martyn Coffey, Marshalls plc - CEO & Executive Director [2]

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If I take the first one and talk about the competitors. I mean, we have competitors. We have some good regional competitors, in my view, who obviously are there in the -- in their own areas. That means that they're strong. We haven't necessarily got such strong competition in the national picture. So again, what Marshalls is trying to do is to invest in areas and to further differentiate ourselves, whether it's in new products, whether it's in the digital, whether it's in the efficiency. We think we can carry on plowing on with that investment there. To put it in perspective, if you go back to 2013, I think the company made something like GBP 7 million or GBP 8 million of profit and paid out GBP 11 million in dividends. So the options of self-investment were nonexistent. If you take today, I mean, even when we do the 2x cover, it is still giving us some GBP 30 million plus our depreciation to reinvest back into the business. So those options, for me, rather than focusing necessarily on the competitors, I think we just keep focusing on ourselves and differentiating ourselves, I think, from the others. Do you want to talk about margins?

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Jack Clarke, Marshalls plc - Group Finance Director & Director [3]

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So you're right, Chris. The emerging markets have a gross margin of roughly 15% and landscape is sort of 30% or north of 30%. And that's really predicated around the gearing levels. So obviously, the landscape business has a high degree of revenue and therefore you get a really good drop through. The emerging businesses are all relatively small in their space, and therefore the fixed costs make up a much higher percentage and lower the GM. That will change as we grow those businesses. So for example, if we were to double Street Furniture, which in effect, we have, then the margin will rocket. And so Street Furniture's actually got the highest margin of any business across the group. And that's purely because we've managed to grow the top line. And the trick will be, with all those emerging businesses, if we can push the top line up, the revenue line, then the margin will rapidly increase.

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

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I think your third question on the concrete bricks? I mean, yes, the exposure they have is to the whole brick market. As we've got more familiar with the product, I think 2 comments I'd make. One, the machine effectively can make concrete bricks. So it's probably about 85% the same machine as you make paving blocks and that gives massive opportunities for us. I mean, it's just a modification of the head. So we are looking, for instance, in our Maltby site, which has been mothballed for the last 7 or 8 years. With fairly modest investment, we can create another concrete brick factory very quickly and looking at doing that. So we see concrete bricks I think in the past have tended to be viewed as sort of inferior to clay bricks. I don't totally agree with that. And if you take the new concrete bricks with their -- from their point of view, they're virtually the same weight as clay or they are the same weight as clay. They're the same color, the issues of color for me are gone. And obviously they have a significant better carbon footprint than clay bricks. So I think they have attributes to push. We're still importing an incredible amount of bricks at a premium price in the U.K., so the opportunity to invest and grow is substantial. And we will.

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Gavin Jago, Peel Hunt LLP, Research Division - Analyst [5]

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My name is Gavin Jago, Peel Hunt. I've got 3 as well if I could, please. First one is just around the registered installers. What's the kind of the sense of confidence amongst the group because I think Martyn, you were talking a couple of years ago about taking on new people. But as we're in this environment at the moment politically and economically, what's the sense amongst the group at the moment? The second one is again related to Brexit. What's going on with the material supply and any discussions you've had with your key suppliers? And then finally, have you seen any divergence between, I guess, the confidence amongst the top [tier highest] players, the listed players, and then maybe some of the smaller Tier 2 players in terms of what they're doing in terms of growth expectations?

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Martyn Coffey, Marshalls plc - CEO & Executive Director [6]

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Yes. I mean if you take in terms of in -- perhaps to those in reverse -- in terms of confidence I think we'd be silly to say that this current political situation doesn't affect people. It does have an effect. And I think therefore my view is if we sorted all this out, you'd have an acceleration of where we are. There's a number of projects we've bid for, a number of which we've won, which is still being held. So I think until that confidence changes, you've still got it there. I think some of the local housebuilders, particularly outside of London, are actually doing very, very well. And they're plowing on. So they are building, without any doubt. Most of the nationals are saying that they going to expect to build more than they built last year. So I don't think -- there is a demand that's there, but it's wrong to say it's not being affected in some respects by confidence. From the material side of it, I think if you take it, we are a big player, I guess, as a UK company. 95% of our sales are here, about 90% of our materials come from here and the ones that don't tend to come from India and China more than necessarily Europe. I mean, so I don't think we're directly affected. We can see obviously some impact. There might be some things we've done on in terms of parts for say, machines, which might be coming from Mainland Europe, but not -- I don't think we're one of the most directly affected companies by the Brexit. And your first question was?

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Gavin Jago, Peel Hunt LLP, Research Division - Analyst [7]

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Just around the confidence on the registered installers.

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Martyn Coffey, Marshalls plc - CEO & Executive Director [8]

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I mean, part of the problem we have with registered installers is they're doing really well. So from their point of view, business has returned. They've got a very full order book. They operating -- I mean, these are small companies, they don't, for instance, sit here talking about like year-on-year growth rates and all the rest of it, it's just, is business good? Is life good? And for them, I'd say, yes, it is at the moment. And not many of them want to actually expand because it's a different risk. A lot of them work as one team. The owner would tend to be the designer. And then you have people who do some of the harder physical work, so they don't always want to split that into 2 and 3 teams. Some do but a lot don't. So part of our job I think is can we take some of the work that they do, that they don't like doing off them, to allow them to do what they do more? Secondly, how do we get a bigger share of what they do? And if we do enough work with them. I think it's possible to have 100% of their work and we've got to work with them. And the hardest part, which we are working on, is bringing new skills to the industry. So we do work with training colleges but it's a pretty big ask for a 19-, 20-year-old coming out of a college to go and form his own business or her business. So I think that's the hardest part. But we've got to find ways of increasing that capacity. And I believe if we could get to a point by doing some of the quotations and got the order books, for instance, up to 20 or 18 weeks, you will bring more capacity into that market. Because people will then see it's possible. At the moment, they're almost creating the ceiling of 12 weeks themselves. So they never really see how much business there could be.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [9]

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Clyde Lewis of Peel Hunt. I'll stick with the pattern of 3 questions as well, if I may. Jack, you talked about sort of management at the start. Again, you're on it in terms sort of levels that you've got within the business and also on working capital, trade debtors, trade creditors sort of things as well. Running up to October, what are your thoughts sort of around that? How do you think that sort of may play -- that whole working capital part may play through the second half of the year?

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Jack Clarke, Marshalls plc - Group Finance Director & Director [10]

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I think right now, I think we're forecasting that nothing will change from our working capital perspective. Interestingly in the medium term, sort of over the next 2 years, we are planning -- we've got a much tighter grip now on the sales to production process and therefore stock. And we're looking at -- you remember 4 or 5 years ago, we took stock down from GBP 90 million to GBP 70 million? We think there's a very real opportunity to take stock down from GBP 70 million to GBP 50 million. And we're putting the planning tools in place for that now. So currently, we can carry 6 to 8 weeks worth of stock. We think we can get away with carrying 4 weeks worth of stock and still satisfy the customers, so in that sort of the medium term, we think there's another GBP 20 million to free up there. We're working hard on that.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [11]

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Martyn, you put up the new product development sort of life cycle, I think both for Domestic and commercial. I mean, the Domestic, you had 3 years on it and the commercial I think was a 5-year one, obviously slightly different. But can you sort of talk us through how I suppose product life cycles are evolving in the 2 end markets? And I suspect a lot of it is how quickly you're coming up with new stuff as it will probably eat the stuff that you developed, 3, 4, 5 years ago.

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Martyn Coffey, Marshalls plc - CEO & Executive Director [12]

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So yes, as you say, there's differences between the markets of the time, and really that's because in Domestic, we can bring a product out today and it's up to us to go to the registered and sell the benefits and it could be installed tomorrow. Commercial tends to be a bit more challenging because you've got to get approvals, you've definitely, depending whether it's in the highways authority or local authorities. So it tends to take longer in gestation, without doubt. The products, we see a really long line of what you can bring to the market and the real big challenge for us I believe we've talked about before is all of our products, you see the surface only. And effectively, it's a through product. So if you turned it over, it's basically the same product. The question is for a long time has been, has it got to be that? Because if you think of natural stone, you're operating 65 [million,] it's a lot of stone is there. If you could imagine if half or 2/3 of that didn't have to be natural stone, that you could, for instance, use concrete. Then 2 things happen. One, you can end up with a premium-looking product at a lower cost and potentially better margin from our point of view. And secondly, if you think of our quarries. We've just tripled the reserves so that is something we're working quite strongly on at the moment in terms of getting [right.] And I think gives a lots of opportunities of changing the marketplace in terms of giving really what I think most people want, which is the best product but at perhaps a more competitive price. But if for us as a manufacturer, if we are manufacturing more of those products than just buying them, then again, we'll improve the margins, utilizations and potentially the profit overall.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [13]

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The last one I had was on sort of more general cost pressures and inflation that you've seen within the business. Just wondering if you can just run us through what you're seeing? And obviously, you're mitigating a lot of this with your own productivity, changes and developments, et cetera. But what sort of, I suppose is the headline to the rate of cost inflation your seeing and where is it worst?

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Jack Clarke, Marshalls plc - Group Finance Director & Director [14]

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We've actually managed to maintain our cost level neutral over the last year. That's through renegotiating some of the really big-ticket items, the cement, the sand, the aggregates. I think there are a couple of pinch points. We have very little control over the fuel price, which is 13% of our costs, although then that we hedge on a forward basis. The only area that we've seen really significant -- sorry, on labor. We have very modest wage pressure on labor. The only area we've seen sort of big increases, and this is at right -- I think this is across the industry because we've checked with other companies, is in the area of IT and the whole digital area. That is a very expensive area and they're sort of going up at 20%, 25% a year. That's the only area that we've seen a major spike in.

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Martyn Coffey, Marshalls plc - CEO & Executive Director [15]

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Any more questions? Okay. On the people who have phoned in, is there anybody who would like to ask a question?

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Operator [16]

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(Operator Instructions)

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Martyn Coffey, Marshalls plc - CEO & Executive Director [17]

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No? Okay. Thank you very much for your time.

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Jack Clarke, Marshalls plc - Group Finance Director & Director [18]

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Thank you.

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Operator [19]

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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.