Marshalls Regulatory News (MSLH)

Interim results for the half year ended 30 June 2018

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

Note:

Alternative performance measures are used consistently throughout this Interim Announcement. These relate to EBITA, EBITDA and ROCE. For further details of their purpose, definition and reconciliation to the equivalent statutory measures, see Note 3.

Highlights:

· Strong revenue growth for the half year despite severe weather impact

· Operating margins slightly ahead to 13.7% (2017: 13.6%)

· Recent trading very strong - both June and July revenues up 21%

· CPM Group Limited performed well in the period and its integration is on track and well advanced

· The Group's strong cash generation has continued

· Net debt of £48.9 million (31 December 2017: £24.3 million), reflecting the purchase of CPM for £41.4 million

· Payment of £21.3 million final and supplementary dividends on 29 June 2018

· Return on capital employed for the 12 months ended 30 June 2018 continues at circa 20% (31 December 2017 : 20.8%)

The 2020 Strategy continues to deliver long-term sustainable EBITDA growth, high ROCE and a strengthened brand:

· Capital expenditure of £28 million planned for 2018 to support growth and deliver cost savings of £5 million per annum by

2019

· Research and development expenditure increased to £2.2 million (2017: £1.7 million) coupled with new product

development and service to drive sales growth

· Focus on increasing the profitability of the Emerging UK Businesses continues

· Digital strategy gaining momentum and delivering real benefits across the business

· Continue to target selective bolt-on acquisition opportunities

· Maintained a 2 times dividend cover policy, enhanced by supplementary dividends

Commenting on these results, Martyn Coffey, Chief Executive, said:

"The Group continues to outperform the Construction Products Association's ("CPA") growth figures, despite ongoing macroeconomic uncertainty. The CPA's recent Summer Forecast predicts a decrease in UK market volumes of 0.6 per cent in 2018, followed by an increase of 2.3 per cent in 2019, while the underlying indicators in the New Build Housing, Road, Rail and Water Management markets remains supportive. Recent trading has been very strong with both June and July revenues up 21 per cent against the prior year period.

The self help programme to support organic growth is progressing well and the integration of CPM Group Limited ("CPM") is on track with post acquisition trading continuing strongly. The Board believes that Marshalls' innovative product range and strong market positions mean the Group is well placed to deliver continued future growth. The Group's focus remains the delivery of long-term sustainable growth, whilst maintaining a strong balance sheet and a flexible capital structure.

The Board remains confident of achieving its expectations for 2018."

There will be a presentation for analysts and investors today at 9.00 am with a telephone dial in facility available tel: number +44 (0)330 336 9411 - Access Code: 1478410. Marshalls' Analyst Presentation will be available for analysts and investors who are unable to attend the presentation. The presentation can be viewed on Marshalls' website at www.marshalls.co.uk.

Enquiries:

INTERIM MANAGEMENT REPORT

Group Results

Marshalls' revenue for the 6 months ended 30 June 2018 grew by 12 per cent to £244.3 million (2017: £219.1 million). This result has been achieved despite the severe weather conditions in the first 4 months, which resulted in a reduction in sales of approximately £9 million. Recent trading has been strong and the Group has continued to experience strong order intake. Revenue in both June and July is up 21 per cent against the prior year period. Encouragingly, despite wider political and economic uncertainty, the underlying indicators remain positive in Marshalls' end markets. The Group's positive cash generation has continued in the period.

Sales to the Domestic end market, which represented approximately 31 per cent of Group sales, were significantly impacted by the severe weather. Despite this, results were in line with the prior year period reflecting strong growth either side of the bad weather period. The survey of domestic installers at the end of June 2018 shows continuing strong order books of 11.3 weeks (June 2017: 11.9 weeks; February 2018 : 10.8 weeks).

Sales to the Public Sector and Commercial end market, which represented approximately 64 per cent of Group sales, increased by 19 per cent compared with the prior year period. CPM, which was acquired in October 2017, has continued to trade strongly and its integration is in line with our expectations and well advanced. The Group continues to target those parts of the market where higher levels of growth are anticipated including New Build Housing, Road, Rail and Water Management.

Sales in the International business increased by 1 per cent in the 6 months ended 30 June 2018 and represented 5 per cent of Group sales. Progress continues to be made to develop our International business and the Group continues to improve its global infrastructure, supply chains and routes to market.

Operating profit increased to £33.5 million (2017: £29.8 million) with operating margins slightly ahead at 13.7 per cent (2017 : 13.6 per cent). EBITDA improved to £41.6 million (2017: £36.7 million).

Group return on capital employed ("ROCE") remained strong and was 20.0 per cent for the 12 months ended 30 June 2018. This compares with 20.8 per cent for the year ended 31 December 2017 and reflects the increase in the pension scheme surplus. ROCE is defined as EBITA divided by shareholders' funds plus cash / net debt.

Net financial expenses were £1.0 million (2017: £0.7 million) and interest was covered 34.0 times (2017: 42.4 times). The effective tax rate was 19.5 per cent (2017: 18.8 per cent).

Basic EPS was 13.24 pence (2017: 12.04 pence) per share, which represented an increase of 10 per cent. The Board has declared an interim dividend of 4.00 pence (2017: 3.40 pence) per share, an increase of 18 per cent, reflecting the strong cash generation and the Group's continuing progressive dividend policy.

The Group continues to deliver strong operational cash flows through the ongoing tight control of inventory and effective management of working capital. As a consequence of the acquisition of CPM in October 2017 for £41.4 million, including £3 million of CPM debt taken on, the Group reported net debt of £48.9 million at 30 June 2018 (30 June 2017: net cash of £1.2 million). The half year end net debt is after the payment of the 2017 final and supplementary dividends of £21.3 million made to shareholders on 29 June 2018.

Group Strategy

The Group strategy continues to focus on the delivery of long-term sustainable growth. The strategy is to maintain a strong balance sheet, a flexible capital structure and a clear capital allocation policy that drives both long-term growth and shareholder returns. The Group is continuing to invest in the Marshalls brand and to prioritise organic capital expenditure projects. We continue to increase research and development and new product development, which are delivering an encouraging pipeline of new products. The focus remains on innovation and new product development, and the aim is to extend the product range and provide more integrated solutions to improve the customer experience and so strengthen and differentiate the Marshalls brand.

The Group's key priority is to deliver improvements in profit margins across all businesses and end markets through the continued focus on service, quality, design, innovation and a commitment to research and development and sustainability, together with sustainable cost reductions and improvements in operational efficiency.

Numerous cross-selling opportunities have been identified and CPM is generating a strong pipeline of new products. Our acquisition focus remains centred on the Minerals, Protective Street Furniture, Building Materials and Water Management markets. We have identified a good pipeline of potential acquisition targets but remain selective and will not compromise on the investment criteria and the hurdle rates we have in place.

Marshalls' digital strategy is increasing in momentum across all Group operations. The strategy combines digital trading, digital marketing and digital business and is focused on the customer experience. The strategy puts the interests of stakeholders and the requirements of customers as the key priority. For example, web and mobile applications enable customers to model their requirements and allow full digital access. A new Commercial web platform was launched in this period and a new Domestic platform will follow later this year. Our strategic direction is "digital by default", which seeks to define digital as a core part of the Group's culture.

Operating Performance

Operating margins increased slightly to 13.7 per cent in the 6 months ended 30 June 2018 (2017: 13.6 per cent). The increased operating margins in the core Landscape Products business, together with the positive impact from CPM, were tempered by the performances of certain of the Emerging UK Businesses and the impact of restructuring costs. CPM has delivered strong trading results since the acquisition date and its half year performance is in line with expectations. Revenue increased by £25.3 million and operating profit by £4.8 million in the Landscape Products business, which serves both the Public Sector and Commercial and Domestic end markets. The increase in operating margins within the Landscape Products business reflects the delivery of sustainable cost reductions and operational efficiency improvements as part of our 2020 Strategy programmes. The performance of our Emerging UK Businesses has been mixed during the half year period, with significant focus on restructuring certain less profitable areas. The profit is calculated after charging restructuring costs of £0.9 million which have been incurred in the period and are designed to benefit these businesses going forward. Increasing profitability in the Emerging UK Businesses remains a key part of the Group's 2020 Strategy and Street Furniture, Mineral Products and Premier Mortars remain important growth drivers for the Group.

In the Domestic end market, the Group continues to drive more sales through the Marshalls Register of approved domestic installers. The Marshalls Register is unique and comprises approximately 1,900 installer teams. The Group is committed to delivering a consistently high standard of quality, customer service and marketing support and we remain focused on enhancing the overall customer experience by extending digitisation and our commitment to innovation.

In the Public Sector and Commercial end market, Marshalls' continuing strategy is to offer sustainable integrated solutions to customers, architects and contractors. The Group's technical and sales teams remain particularly focused on those market areas where future demand is considered to be greatest, including New Build Housing, Road, Rail and Water Management. CPM is now fully part of the Landscape Products business and numerous cross-selling opportunities have been identified. CPM has a strong order book and a healthy pipeline of new products and has recently secured orders to supply a number of Smart Motorway projects.

The Group continues to focus on innovation and new product development to drive sales growth. Research and development expenditure in the 6 months ended 30 June 2018 was £2.2 million (2017: £1.7 million). This investment includes project engineering to enhance manufacturing capabilities, concrete and other materials technology innovations and extending the new product pipeline. New product solutions for the Domestic range include Urbex Riven paving for new housing, together with additional innovative stone and vitrified paving products. In Public Sector and Commercial, CPM's Perfect Manhole System and its Redi-Rock Flood Protection System are important new product solutions now available to the Group. Revenue from new products in the core Landscape Products business has continued to grow strongly and represented 11 per cent of Group sales in the 6 months ended 30 June 2018.

Capital investment in property, plant and equipment in the 6 months ended 30 June 2018 totalled £13.5 million (2017: £7.9 million) and this compares with depreciation of £7.4 million (2017: £6.4 million). The Group's self help investment programme remains an important part of our 2020 Strategy and total capital expenditure of £28 million is planned in 2018. The aim is to deliver sustainable cost savings of £5 million per annum by 2019. This detailed plan is on track and includes various projects within natural stone, block paving and automated material handling. In addition, further to our acquisition last year, a new factory is due for completion at CPM's Somerset site in November 2018, at a cost of £5 million, which is expected to increase capacity and efficiency at the plant.

Balance Sheet and Cash Flow

Net assets at 30 June 2018 were £244.6 million (June 2017: £222.6 million).

Cash generation remains strong, although the bad weather in the first 4 months of the year has pushed out the working capital cycle in the second quarter. This knock-on impact of the bad weather is reflected in the reported net cash flows from operating activities, which were £14.0 million (2017: £19.2 million) in the 6 months ended 30 June 2018. The Group continues to focus on maintaining a strong balance sheet supported by robust capital disciplines, and strong cash management continues to be a high priority area. The Group operates tight control over business, operational and financial procedures, and continues to focus on inventory levels and the management of capital expenditure and trade receivables.

The Group's existing bank facilities provide headroom against available facilities at appropriately conservative levels. On 9 August 2018 we extended our committed facilities by 1 year to 2023 to enhance the maturity profile and also renewed short-term working capital facilities with RBS. Marshalls maintains a policy of having significant committed facilities in place with a positive spread of medium-term maturities. We have significant capacity within our banking facilities to fund organic investment and selective "bolt-on" acquisitions.

The balance sheet value of the Group's defined benefit pension scheme was a surplus of £11.5 million at 30 June 2018 (December 2017: £4.1 million surplus; June 2017: £3.6 million surplus). The surplus has been determined by the scheme actuary using assumptions that are considered to be prudent and in line with current market levels. The increased surplus is largely due to an increase, during the last 6 months, in the AA corporate bond rate from 2.50 per cent to 2.60 per cent and this is in line with market movements. The expected rate of inflation decreased to 2.10 per cent from 2.15 per cent at 31 December 2017. The balance sheet value continues to benefit from the high proportion of liability-driven investments whose performance matches the liabilities.

Dividend

The Group has a progressive dividend policy with a stated objective of achieving up to 2 times dividend cover over the business cycle. The Board has declared an interim dividend of 4.00 pence (June 2017: 3.40 pence) per share, an increase of 18 per cent, which reflects the Group's strong cash generation. This dividend will be paid on 5 December 2018 to shareholders on the register at the close of business on 19 October 2018. The ex-dividend date will be 18 October 2018. 

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 6 months of the financial year and could cause actual results to differ materially from expected and historical results. The Board does not consider that the principal risks and uncertainties have changed since the publication of the Annual Report for the year ended 31 December 2017. A detailed explanation of the risks, and how the Group seeks to mitigate these risks, can be found on pages 20 to 24 of the 2017 Annual Report, which is available at www.marshalls.co.uk/investor/annual-and-interim-reports.

Going concern

As stated in Note 1 of the 2018 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 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the Half Year Report.

Outlook

The Group continues to outperform the Construction Products Association's ("CPA") growth figures, despite ongoing macroeconomic uncertainty. The CPA's recent Summer Forecast predicts a decrease in UK market volumes of 0.6 per cent in 2018, followed by an increase of 2.3 per cent in 2019, while the underlying indicators in the New Build Housing, Road, Rail and Water Management markets remain supportive. Recent trading has been very strong with both June and July revenues up 21 per cent against the prior year period.

The self help programme to support organic growth is progressing well and the integration of CPM Group Limited is on track with post acquisition trading continuing strongly. The Board believes that Marshalls' innovative product range and strong market positions mean the Group is well placed to deliver continued future growth. The Group's focus remains the delivery of long-term sustainable growth, whilst maintaining a strong balance sheet and a flexible capital structure.

The Board remains confident of achieving its expectations for 2018.

Martyn Coffey

Chief Executive

Condensed Consolidated Income Statement

for the half year ended 30 June 2018

All results relate to continuing operations.

Condensed Consolidated Statement of Comprehensive Income

for the half year ended 30 June 2018

Condensed Consolidated Balance Sheet

as at 30 June 2018

* The comparatives have been restated as a result of a reassessment of the fair value of assets and liabilities acquired (Note 11

Condensed Consolidated Cash Flow Statement

for the half year ended 30 June 2018

Condensed Consolidated Statement of Changes in Equity

for the half year ended 30 June 2018

Condensed Consolidated Statement of Changes in Equity (continued)

for the half year ended 30 June 2018

Condensed Consolidated Statement of Changes in Equity (continued)

for the half year ended 30 June 2018

Notes to the Condensed Consolidated Financial Statements

for the half year ended 30 June 2018

1. Basis of preparation

Marshalls plc (the "Company") is a company domiciled in the United Kingdom. The Condensed Consolidated Financial Statements of the Company for the half year ended 30 June 2018 comprise the Company and its subsidiaries (together referred to as the "Group").

The Condensed Consolidated Financial Statements have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the UK Financial Conduct Authority and the requirements of IAS 34 "Interim Financial Reporting" as adopted by the European Union ("EU").

The Condensed Consolidated Financial Statements do not constitute statutory financial statements and do not include all the information and disclosures required for full annual financial statements. The Condensed Consolidated Half Year Financial Statements were approved by the Board on 16 August 2018. The Condensed Consolidated Half Year Financial Statements are not statutory accounts as defined by Section 434 of the Companies Act 2006.

The Condensed Consolidated Financial Statements for the half year ended 30 June 2018 and the comparative period have not been audited. The Auditor has carried out a review of the Half Year Financial Information and its report is set out on page 27.

The financial information for the year ended 31 December 2017 has been extracted from the annual Financial Statements, included in the Annual Report 2017, which has been filed with the Registrar of Companies. The report of the Auditor was: (i) unqualified; (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying its report; and (iii) did not contain a statement under Section 498 (2) and (3) of the Companies Act 2006.

The annual Financial Statements of the Group are prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the EU. As required by the Disclosure Guidance and Transparency Rules of the UK Financial Conduct Authority and, other than in respect of IFRS 9 and IFRS 15 which apply from 1 January 2018, the condensed set of Financial Statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published Consolidated Financial Statements for the year ended 31 December 2017.

The Condensed Consolidated Half Year Financial Statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments and liabilities for cash settled share-based payments.

The preparation of financial statements in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In preparing these Condensed Consolidated Half Year Financial Statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the Consolidated Financial Statements of the Group for the year ended 31 December 2017.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Details of the Group's funding position are set out in Note 13 and are subject to normal covenant arrangements. The Group's on-demand overdraft facility is reviewed on an annual basis and the current arrangements were renewed and signed on 9 August 2018. Management believes that there are sufficient unutilised facilities held which mature after 12 months. The Group's performance is dependent on economic and market conditions, the outlook for which is difficult to predict. Based on current expectations, the Group's cash forecasts continue to meet half year and year end bank covenants and there is adequate headroom that is not dependent on facility renewals. After considering relevant uncertainties, the Directors believe that the Group is well placed to manage its business risks successfully. Accordingly, they continue to adopt the going concern basis in preparing the Condensed Consolidated Half Year Financial Statements.

2. Accounting policies

IFRS 9, "Financial Instruments" and IFRS 15 "Revenue from Contracts with Customers", have been applied from 1 January 2018. The application of both Standards has not had a material impact on the Group's financial reporting. The Group expects to adopt IFRS 16 "Leases", with effect from 1 January 2019. The Group is currently assessing the impact of IFRS 16, which is expected to have a significant impact on the consolidated results of the Group. It is not practicable to provide a reasonable estimate of the financial effect until the Directors complete the review.

Except as stated below, the accounting policies have been applied consistently throughout the Group for the purposes of these Condensed Consolidated Half Year Financial Statements and are also set out on the Company's website (www.marshalls.co.uk). The Condensed Consolidated Half Year Financial Statements are presented in Sterling, rounded to the nearest thousand.

The following new accounting policies have been applied from 1 January 2018.

IFRS 9, "Financial Instruments"

IFRS 9 replaces the provisions of IAS 39 that relate to recognition, classification and measurement of financial assets and financial liabilities, de-recognition of financial instruments, impairment of financial assets and hedge accounting. The adoption of IFRS 9, "Financial Instruments" from 1 January 2018 resulted in changes in accounting policies, however, no adjustments were required to the amounts recognised in the financial statements in previous periods. The new accounting policies are set out below.

(a) Classification and measurement

On 1 January 2018, the Group has classified its financial instruments in the appropriate IFRS 9 categories.

The derivative financial instruments designated as cash flow hedges and fair value hedges under IAS 39 at 31 December 2017 continue to qualify for hedge accounting under IFRS 9 at 1 January 2018 and are, therefore, treated as continuing hedges.

(b) Impairment of financial assets

The Group has one type of financial asset that is subject to IFRS 9's new expected credit loss model:

· trade and other receivables

Trade and other receivables do not contain a significant financing element and therefore expected credit losses are measured using the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from the initial recognition of the receivables.

While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.

There was no IFRS 9 impact on retained earnings at 1 January 2018.

IFRS 15, "Revenue from Contracts with Customers"

IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 supersedes the revenue recognition guidance within IAS 18 "Revenue" and the related interpretations. The Group adopted IFRS 15 on 1 January 2018. Comparative information has not been restated as the impact on prior periods is not material.

IFRS 15 provides a single, principles-based, five-step model to be applied to all sales contracts, based on the transfer of control of goods and services to customers, and it replaces the separate model for goods and services of IAS 18 "Revenue".

Revenue represents income derived from contracts for the provision of goods and services by the Company and its subsidiary undertakings to customers in exchange for consideration in the ordinary course of the Group's activities.

Upon approval by the parties to a contract, the contract is assessed to identify each promise to transfer either a distinct good or service, or a series of distinct goods or services, that are substantially the same and have the same pattern of transfer to the customer. Goods and services are distinct and accounted for as separate performance obligations in the contract if the customer can benefit from them either on their own or together with other resources that are readily available to the customer and they are separately identifiable in the contract.

The Group's revenues are primarily earned from the sale of goods and revenue is recognised when the performance obligation in the contracts with customers is satisfied, typically on delivery of goods to customers.

At the start of the contract the total transaction price is estimated as the amount of consideration to which the Group expect to be entitled in exchange for transferring the promised goods and services to the customer, excluding sales taxes. Any variable consideration is included based on the expected value, or most likely amount, only to the extent that it is highly probable that there will not be a reversal in the amount of revenue recognised. Total transaction price is allocated to the performance obligations identified in the contract in proportion to their relative standalone selling prices.

The Group used alternative performance measures ("APMs") which are not defined or specified under IFRS. The Group believes that their APMs, which are not considered to be a substitute for IFRS measures, provide additional helpful information. APMs are consistent with how business performance is planned, reported and assessed internally by management and the Board and provide more meaningful comparative information.

EBITA and EBITDA

EBITA represents earnings before interest, tax and the amortisation of intangibles. This is a component of the ROCE calculation. EBITDA is calculated by adding back depreciation to EBITA.

ROCE

Reported ROCE is defined as EBITA divided by shareholders funds plus net debt / (cash).

IFRS 8, "Operating Segments" requires operating segments to be identified on the basis of discrete financial information about components of the Group that are regularly reviewed by the Group's Chief Operating Decision Maker ("CODM") to allocate resources to the segments and to assess their performance. As far as Marshalls plc is concerned, the CODM is regarded as being the Executive Directors. The Directors have concluded that the detailed requirements of IFRS 8 support the reporting of the Group's Landscape Products business as a reportable segment, which includes the UK operations of the Marshalls Landscape Products hard landscaping business, servicing both the UK Domestic and the UK Public Sector and Commercial end markets. Financial information for Landscape Products is reported to the Group's CODM for the assessment of segmental performance and to facilitate resource allocation.

The Landscape Products reportable segment operates a national manufacturing plan that is structured around a series of production units throughout the UK, in conjunction with a single logistics and distribution operation. A national planning process supports sales to both of the key end markets, namely the UK Domestic and UK Public Sector and Commercial end markets, and the operating assets produce and deliver a range of broadly similar products that are sold into each of these end markets. Within the Landscape Products operating segment, the focus is on the one integrated production, logistics and distribution network supporting both end markets. Following its acquisition, the CPM business has been included within the Landscape Products operating segment.

Included in "Other" are the Group's Street Furniture, Mineral Products, Premier Mortars and International operations, which do not currently meet the IFRS 8 reporting requirements. The accounting policies of the Landscape Products operating segment are the same as the Group's accounting policies. Segment profit represents the profit earned without allocation of certain central administration costs that are not capable of allocation. Centrally administered overhead costs that relate directly to the reportable segment are included within the segment's results.