Marshalls : 2021 Half Year Report

Strong growth in first half - positive trading outlook

Marshalls plcHalf Year Report 2021

Highlights

Strong growth in first half - positive trading outlook

Marshalls plc, the specialist Landscape Products group, announces its interim results for the half year ended

30 June 2021.

Operational highlights

• Priority continues to be given to health and safety
• Strong trading and healthy order books
• • Continued focus on customer service and satisfying increased demand
  • National manufacturing network and logistics efficiency continuing to enable operational flexibility
  • Proactive supply chain management to mitigate material shortages
  • Ongoing focus on ESG leadership and priorities
  • Sustained emphasis on innovation and sustainable growth over the medium term
  • Capital investment of £30 million planned for 2021 - St Ives dual block plant build has commenced

Financial highlights

• Half year revenue of £298.1 million (2020: £210.5 million) - up 42% against 2020 and up 6% against 2019
• • Continued strong growth in Domestic - up 54% against 2020 and up 17% against 2019
  • Public Sector and Commercial sales growth up 40% against 2020 and up 1% against 2019 (3% on a like-for-like basis)
  • International sales growth of 11% against 2020 and 27% against 2019
• Profit before tax up 5% against 2019
• • Operating margin in line with 2019 at 13.8% (2019: 13.9%)
• Strong balance sheet, with a flexible capital structure and a clear capital allocation policy
• • Reported net debt of £52.4 million (2020: £98.9 million;
    2019: £97.7 million)
  • Net debt of £7.6 million on a pre-IFRS 16 basis (2020: £53.9 million; 2019: £55.6 million)
  • Operating cash flow ("OCF") to EBITDA at 93% for the twelve months ended 30 June 2021
• Interim dividend of 4.70 pence

	Half year	Half year	Half year
	ended	ended	ended	Increase %
	30 June	30 June	30 June	2021-
	2021	2020	2019	2019
Results before
operational
restructuring costs and
asset impairments1
Revenue	£298.1m	£210.5m	£280.1m	6
EBITDA	£56.4m	£18.2m	£54.9m	3
Adjusted operating	£41.0m
profit	£3.5m	£39.0m	5
Profit before tax	£38.9m	£1.6m	£37.1m	5
Basic EPS	15.30p	0.12p	15.18p	1
ROCE	18.1%	10.9%	19.3%
Net debt	£52.4m	£98.9m	£97.7m
Net debt - pre-IFRS 16	£7.6m	£53.9m	£55.6m
Adjusted operating	£41.0m
profit	£3.5m	£39.0m
Operational
restructuring costs and	-
asset impairments	£(17.6)m	-
Statutory operating	£41.0m
profit	£(14.1)m	£39.0m
Statutory results
Statutory operating	£41.0m
profit	£(14.1)m	£39.0m
Profit before tax	£38.9m	£(16.0)m	£37.1m
Basic EPS	15.30p	(7.25)p	15.18p
Interim dividend	4.70p	-	4.70p

Note:

1. Alternative performance measures are used consistently throughout this Interim Report. These relate to like-for-like, EBITA, EBITDA, return on capital employed ("ROCE"), net debt and, for the half year ended 30 June 2020, results before operational restructuring costs and asset impairments. Following the transition to IFRS 16, reference has been made to "pre-IFRS 16", "pre-IFRS 16 net debt" and "reported basis", the latter referring to amounts required under IFRS 16. For further details of their purpose, definition and reconciliation to the equivalent statutory measures, see Note 3.
2. In order to provide a more relevant performance commentary, comparison in this statement has been made to the corresponding six month period in both 2020 and 2019, the latter considered to represent a more meaningful pre-COVID-19 baseline for performance comparisons.

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Interim Management Report

The Board is confident

of making further progress and is accordingly raising its expectations for 2021 and 2022.

"The Group's long-term strategy continues to include an increasingly strong ESG agenda."

Group results

Sales in the Public Sector and Commercial end market were £189.3 million and represented 64 per cent of Group sales. This represents an increase of 40 per cent compared with the prior year and is up 1 per cent compared with the same period in 2019. The comparison with 2019 increases to 3 per cent after adjusting for the impact on sales caused by the planned reduction in Marshalls Mortars and Screed sites in the second quarter of 2020. The Group continues to focus on those market areas where future demand is expected to be greatest including New Build Housing, Road, Rail and Water Management. Infrastructure is expected to be a key element of construction growth in 2021 and 2022, driven by larger projects such as HS2 and additional focus on medium-term investment programmes. We increasingly use digital technology to communicate new concepts and designs and to facilitate the selection and specification of our ranges.

Sales in the International business, supported by strong growth from Marshalls NV in Belgium, were up 11 per cent compared with the prior period and 27 per cent compared with 2019. International sales represented 6 per cent of Group sales in the period. The Group continues to develop its global supply chains to ensure that international operations are sustainable and aligned with market risks and opportunities.

Group revenue for the six months ended 30 June 2021 was £298.1 million (2020: £210.5 million; 2019: £280.1 million), which is 42 per cent ahead of the 2020 comparative. This represents an increase of 6 per cent compared with the same period in 2019, being the last comparative period which was unaffected by COVID-19.

Sales in the Domestic end market, which represented approximately 30 per cent of Group sales, were £89.3 million. This represents an increase of 54 per cent compared with the prior year and is up 17 per cent compared with the same period in 2019. The survey of domestic installers at the end of June 2021 revealed a healthy order book of 21.4 weeks (2020: 16.8 weeks). This compares with 17.2 weeks at the end of April 2021. Private Housing "repair, maintenance and improvement" continues to be strong and has been the quickest construction sector to recover over the last twelve months. There continues to be strong demand for DIY projects with consumers spending more time at home and choosing to invest in home and garden projects. Many households have benefited from higher disposable incomes due to lower commuting costs and lower cash outflows on other things, including holidays. The GfK consumer confidence index has been improving steadily during 2021 and has now returned to pre-COVID-19 levels. Our Domestic strategy is to develop the customer experience by digitalisation, including the use of visualisation tools, and to promote and invest in innovation. We continue to drive more sales through the Marshalls Register of approved domestic installers.

EBITDA was £56.4 million (2020: £18.2 million, before operational restructuring costs and asset impairments of £17.6 million), which represents an increase of 3 per cent compared with 2019. Operating profit increased to £41.0 million (2020: £3.5 million, before operational restructuring costs and asset impairments). The operating profit margin was 13.8 per cent in the six months to 30 June 2021, which compares with 13.9 per cent for the same period in 2019. This result was despite the additional cost of overtime, which has been required to cover COVID-19 related absenteeism, and despite the well-publicised supply chain issues, which have caused certain raw materials to be on allocation. Proactive management is mitigating the impact of material shortages.

Basic earnings per share was 15.30 pence (2020: 0.12 pence, before operational operating costs and asset impairments), which compares with 15.18 pence in the same six-month period in 2019. Group return on capital employed ("ROCE") was 18.1 per cent for the twelve months ended 30 June 2021 (2020: 10.9 per cent; 2019: 19.3 per cent).

Net financial expenses were £2.1 million (2020: £1.9 million), including

£0.9 million (2020: £0.7 million) of IFRS 16 lease interest. On a rolling

annual basis interest was covered 13.5 times (2020: 10.7 times, before operational restructuring costs and asset impairments). Interest charges on bank loans totalled £1.1 million (2020: £1.1 million) and, including scheme administration costs, there was an IAS 19 notional interest charge of £0.1 million (2020: £0.1 million) in relation to the Group's Pension Scheme. The IAS 19 notional interest includes interest on obligations under the defined benefit section of the Marshalls plc Pension Scheme, net of the expected return on Scheme assets.

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Interim Management Report continued

Group results continued

The effective tax rate was 21.3 per cent (2020: 72.7 per cent, before operational restructuring costs and asset impairments). The 2021 Budget announced that the UK corporation tax rate would increase to 25 per cent from 2023, and this rate change was substantively enacted on 24 March 2021. Consequently, the deferred tax liability at 30 June 2021 has been calculated at the rate at which the deferred tax is expected to unwind in the future, using rates enacted at the balance sheet date. This rate change has given rise to an increase in the deferred tax charge of £2.9 million for the half year and an expected increase for the full year of approximately £5.2 million. The impact of this on the tax charge has been mitigated, to some extent, by the temporary increases in capital allowances in the year arising from the announcement of a 130 per cent first year allowance for plant and machinery.

Operating performance and initiatives

The Group continues to prioritise health and safety, and we have maintained our established COVID-19 workplace protocols, notwithstanding the recent changes to Government guidelines. We continue to ensure that our procedures go beyond the recommended guidelines.

We have seen strong order books and, consistent with the rest of the construction sector, have experienced the heightened operational challenge brought upon with increased demand for Marshalls products. The Group's national network of concrete manufacturing sites and quarries has continued to support a flexible operating framework, which has enabled us to manage supply and demand across the network and to control lead times as far as possible. There have been periods when cement has been on supply allocation and reduced raw material availability has required proactive management to ensure the continued supply of packaging, steel, timber and aggregates. The short supply of sea freight containers has also caused transport costs to increase significantly.

Our objective continues to be to mitigate inflation by using dynamic and alternative solutions to ensure operational continuity and cost control. However, raw material shortages across the construction sector and reduced numbers of HGV drivers within the third party haulage market are causing costs to increase which we are recovering successfully through price increases. We continue to benefit from having our own vehicle fleet, which covers a substantial proportion of deliveries, and our aim is to increase logistics efficiency and vehicle utilisation.

Marshalls' 5 year Strategy

The overall Group strategy continues to focus on the maintenance of a strong balance sheet, a flexible capital structure and a clear capital allocation policy. At the heart of the strategy are the following eight priority areas for investment and business focus. These objectives drive both long-term sustainable growth and shareholder returns.

• Brand preference for product specification
• Logistics excellence
• Sustainable materials supply
• Customer centricity
• Operational excellence
• New product development
• Digital transformation
• Growth in emerging businesses

The Group's long-term strategy focuses on organic investment to drive growth, and capital expenditure projects totalling around £30 million are planned for 2021. We have a good pipeline of projects that will drive future organic growth, including the flagship dual block plant project at our St Ives site, which has

recently commenced. This will be the first facility of this nature in the UK and the planned investment over the next three years will be around £20 million. This project will significantly increase capacity, improve efficiency, enable multiple secondary finishing and facilitate the launch of new products.

There continues to be a strong focus on innovation and new product development across all parts of the Group. Research and development expenditure of £5 million is planned for 2021. The development pipeline continues to be strong and the Group is committed to providing sustainable, high performance product solutions. These include investment in technologies to enhance the development of cement-free product solutions. We are already using up to 60 per cent cement replacement in our paving.

Organic growth will continue to be supported by targeted acquisitions. We will continue to focus on bolt-on acquisitions in our key growth areas of Water Management and New Build Housing and are developing a good pipeline of opportunities.

Marshalls' environmental, social and governance ("ESG") agenda

The Group's long-term strategy continues to include an increasingly strong ESG agenda, which is fully integrated into business operations, and our central sustainability objective is to create better futures for everyone, socially, environmentally and economically. Our ESG strategy continues to generate opportunities, which are a source of competitive advantage. The objective is that these will drive both long-term sustainable growth and shareholder returns.

Marshalls aims to give full consideration to the long-term impact of all business operations, which means that all our products and services need to be ethically sourced and sustainable. We see sustainable sourcing as an essential part of our business model. The Group continues to support the United Nations Global Compact and the UN Sustainable Development Goals and we maintain a detailed framework of comprehensive policies covering the environment, human rights, labour, anti-corruption and governance. This year is the International Year for the Elimination of Child Labour and Marshalls has renewed its pledge to support this initiative.

The Group is committed to decarbonisation and we have aligned all greenhouse gas emissions reduction targets, across all relevant scopes, to 1.5 degrees centigrade emissions scenarios. We are the first company in our sector to have emission reduction targets approved by the Science Based Targets initiative as being consistent with levels required to meet the goals of the Paris Agreement. Marshalls has committed to reduce Scope 1 and 2 greenhouse gas emissions by 40 per cent per tonne of production by 2030 from a 2018 base year. For Scope 3, we have also committed that 73 per cent of our suppliers by emissions, covering purchased goods and services and upstream transport and distribution, will have science-based targets by 2024.

We are the only manufacturer in the industry to publish our product carbon footprint. This information is verified by the Carbon Trust and by BRE, in line with the PAS 2050 requirements. This benefits ourcustomers who are able to compare the carbon footprint of our products against other products or substitute materials. We continue to use product innovation to develop and bring to market new products which are less carbon intensive to produce or made from recycled materials.

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Interim Management Report continued

Marshalls' environmental, social and governance ("ESG") agenda continued

The Group has updated all its vehicle fleet to Euro 6 European emission standards and all our plants now use 100 per cent certified renewable energy. We continue to reduce our water and timber usage and have a target of reducing plastic usage by 85 per cent by the end of 2021.

We are committed to making our ESG data transparent so our stakeholders can trust the Marshalls brand, and we fully support the Task Force on Climate-Related Financial Disclosures ("TCFD"). Diversity, Equality, Respect and Inclusion ("DERI") is a key part of our people agenda and talent development programmes.

Balance sheet, net debt and cash flow

Net assets at 30 June 2021 were £320.1 million (2020: £275.8 million).

Reported net debt was £52.4 million at 30 June 2021 (31 December 2020: £75.6 million; 30 June 2020: £98.9 million). Net debt, on a pre-IFRS 16 basis, was £7.6 million at 30 June 2021 (31 December 2020: £26.9 million; 30 June 2020: £53.9 million). The strong cash generation in the first half of 2021 reflects the continuing focus given to capital discipline. Operating cash flow for the twelve months to 30 June 2021 represented 93 per cent of EBITDA, which illustrates the strong conversion of profit into cash. Strong cash management continues to be a high priority area.

The continuing strategy is to ensure that facility and covenant headroom remains at comfortable levels and that we have a range of competitively priced funding lines in place, with different banks, at all times and with different maturity dates. The Group has total bank facilities of £165 million, of which £140 million are committed. The committed bank facilities have a spread of medium-term maturities that now extends to 2025.

The balance sheet value of the Group's defined benefit Pension Scheme was a surplus of £9.5 million at 30 June 2021 (December 2020: £2.7 million surplus; June 2020: £10.4 million surplus). The surplus was determined by the Scheme actuary using appropriate assumptions which are in line with current market expectations. During the last six months the AA corporate bond rate has increased from 1.40 per cent to 1.90 per cent and this is the primary driver of the increased surplus. The expected rate of

CPI inflation has increased from 2.20 per cent to 2.55 per cent.

Dividend

Due to the impact of COVID-19, the Board did not declare an interim dividend in 2020. However, the payment of dividends continues to be a key priority for capital allocation and a final dividend of 4.30 pence per share for the year ended 31 December 2020 was paid to shareholders of the Company on 1 July 2021. The Group maintains a progressive dividend policy with the objective of achieving a dividend cover of two times earnings over the business cycle. The intention is to increase dividends in line with earnings.

The Group has declared an interim dividend of 4.70 pence per share, which reflects the recovery in profitability and the strong cash generation in the six months ended 30 June 2021. The dividend will be paid on 1 December 2021 to shareholders on the register at the close of business on 22 October 2021.

Principal risks and uncertainties

There are a number of potential risks and uncertainties, which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results.

The ongoing impact of the COVID-19 pandemic on the business and the return process to "business as usual" are being continually assessed. The growth in market demand and external challenges in the wider supply chain have increased the risk of raw material shortages, product availability and a shortfall in haulage capacity. We are managing these issues proactively and maintaining our focus on cyber security risk. Further details of how the Group is mitigating these risks are set out in Note 16.

A detailed explanation of the Group's risk environment and how the Group seeks to mitigate its risks can be found on pages 24 to 31 of the 2020 Annual Report.

Going concern

As stated in Note 1 of the 2021 Half Year Report, the Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than twelve months from the date of this report. Accordingly, the Directors continue to adopt the going concern basis in preparing the Half Year Report.

Appointment of Non-Executive Director

Marshalls plc today announces the appointment of Philip Rogerson as a Non-Executive Director with effect from 1 September 2021. Philip will also join the Audit, Remuneration and Nomination Committees.

Vanda Murray OBE, Chair of the Board, commented: "Philip is an experienced public company director and the Board is delighted that he will be joining Marshalls plc as a Non-Executive Director.

Philip's cross-sector and financial experience will be extremely valuable to the Board and were at the heart of our rigorous recruitment process."

Outlook

Trading continues to improve and recent order intake has been good. The Construction Products Association's recent summer forecast predicts year-on-year increases in UK market volumes of 13.7 per cent in 2021 and 6.3 per cent in 2022 and the Group expects to meet or outperform the market. Market conditions remain supportive, despite certain supply chain challenges, which are leading to inflationary pressures across the sector. The underlying indicators in our main growth markets, including New Build Housing, Road, Rail and Water Management, remain positive. As a result, we remain confident that our strategy will deliver positive long term growth and we are well positioned to cope with the temporary challenges associated with cost and material supply issues.

Encouraged by the continuing strength in demand and the positive trading environment, the Board is confident of making further progress and is accordingly raising its expectations for 2021 and 2022.

Martyn Coffey

Chief Executive

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