Marshalls plc
Transformational acquisition, record adjusted results and well positioned for when markets improve
Marshalls plc, a leading manufacturer of products for the built environment, announces its full year results for the year ended 31 December 2022
Highlights
| £M | Year ended31 December 2022 | Year ended31 December 2021(as restated) | Change 2022 / 2021 (%) |
| Revenue | 719.4 | 589.3 | 22 |
| Adjusted results (Notes 1, 2 and 3) | |||
| Adjusted EBITDA | 136.0 | 107.1 | 27 |
| Adjusted operating profit | 101.1 | 77.4 | 31 |
| Adjusted profit before tax | 90.4 | 73.3 | 23 |
| Adjusted basic EPS – pence | 31.3 | 29.2 | 7 |
| Adjusted proforma ROCE (%) | 13.3 | 20.6 | (7.3)ppts |
| Final dividend – pence | 9.9 | 9.6 | 3 |
| Total dividend for the year – pence | 15.6 | 14.3 | 9 |
| Net debt | 236.6 | 41.1 | – |
| Net debt /(cash) – pre-IFRS 16 | 190.8 | (0.1) | – |
| Statutory results | |||
| EBITDA | 90.2 | 107.1 | (16) |
| Operating profit | 47.9 | 76.2 | (37) |
| Profit before tax | 37.2 | 69.3 | (46) |
| Basic EPS – pence | 11.4 | 27.5 | (59) |
Financial highlights
· Revenue growth of 22 per cent over 2021 which included eight months contribution from the acquisition of Marley Group plc (‘Marley’); growth of one per cent on a like-for-like basis
· Adjusted operating profit of £101.1 million, an increase of 31 per cent on 2021, reflecting the benefit of the Marley acquisition (statutory operating profit: £47.9 million; 2021: £76.2 million)
· Adjusted profit before tax of £90.4 million, an increase of 23 per cent on 2021
· Profit before tax on a statutory basis was £37.2 million (2021: £69.3 million) including the impact of adjusting items of £53.2 million
· Adjusted basic earnings per share up seven per cent at 31.3 pence per share (statutory earnings per share: 11.4 pence; 2021: 27.5 pence)
· Net debt of £191 million (on a pre-IFRS 16 basis) and leverage of 1.35 times adjusted proforma EBITDA
· Proposed final dividend of 9.9 pence per share totalling a full year dividend of 15.6 pence, an increase of nine per cent compared to 2021
Strategic highlights
· Transformational acquisition of Marley completed on 29 April 2022
o Accelerated the diversification of the Group’s product offering providing increased resilience through the cycle
o Traded robustly and ahead of plan in the post-acquisition period
o Integration tracking in line with plan and management remain confident of delivering operational improvements
· Conservative capital structure maintained and increased priority to deleveraging in capital allocation policy
· Ongoing investment in leading edge technology to enhance capabilities and efficiency – £24 million dual block plant at St Ives expected to be operational in the first half of 2023 with exciting new product development opportunities
· New digital trading platform ‘Dropship’ developed which extends the range of products offered by merchants
· Reduced volumes and profitability in Landscape Products resulted in decisive action to reduce capacity and the annual cost base by £10 million
· Good progress made on ESG priorities – carbon sequestration to be trialled in a factory environment and cement reduction plan being executed
Outlook
· The Board remains confident that the Group is well placed to deliver profitable long-term growth when market conditions improve and continues to focus on its key strategic initiatives
· In the shorter-term, whilst the macro-economic climate is expected to remain challenging and assuming a progressive improvement in our end markets during the year, the Board remains confident of delivering a result that is in-line with its expectations
Commenting on the results, Martyn Coffey, Chief Executive, said:
“Marshalls reported a record financial performance in 2022 against challenging market conditions. This performance demonstrates the benefit of the Group’s deliberate diversification strategy, illustrated by the acquisition of Marley in 2022 and other acquisitions in recent years that now form the core of our Building Products segment.
We took decisive action to reduce our capacity and cost base in 2022 in response to a contraction of demand in our Landscape Products business, and we will continue to focus on maintaining flexibility to respond to evolving market conditions and executing self-help initiatives as required.
Our strategy is underpinned by our strong market positions, established brands and focused investment plans to drive ongoing operational improvement. Notwithstanding short-term challenges, the Board remains confident that the Group is well placed to deliver profitable long‑term growth when market conditions improve and continues to focus on its key strategic initiatives.”
There will be a video webcast for analysts and investors today at 09:00am. The presentation will be available for analysts and investors who are unable to view the webcast live and can be viewed on Marshalls’ website at www.marshalls.co.uk . Users can register to access the webcast using the following link: https://stream.brrmedia.co.uk/broadcast/63cfb902777efd4a8b514e2e
There will also be a telephone dial in facility available Tel: UK-Wide: +44 (0) 33 0551 0200 and password “Marshalls FY Results” when prompted by the operator.
Notes:
1. Alternative performance measures are used consistently throughout this Announcement. These relate to like-for-like revenue growth, EBITA, adjusted proforma EBITA, EBITDA, adjusted EBITDA, adjusted proforma pre-IFRS16 EBITDA, adjusted proforma return on capital employed (‘ROCE’), net debt, pre-IFRS16 net debt, pre-IFRS16 net debt to adjusted proforma EBITDA, adjusted operating cash flow and results after adding back adjusting items. For further details of their purpose, definition and reconciliation to the equivalent statutory measures, see Note 1.
2. The results for the year ended 31 December 2022 have been disclosed after adding back adjusting items. These are set out in Note 4.
3. Following a change to the reporting segments and the inclusion of the amortisation of acquired intangibles in adjusting items, the comparative figures have been restated to ensure consistent classification with the analysis reported for the year ended 31 December 2022 (Note 2).
Enquiries:
| Martyn Coffey | Chief Executive | Marshalls plc | +44 (0)1422 314777 |
| Justin Lockwood | Chief Financial Officer | Marshalls plc | +44 (0)1422 314777 |
| Tim RowntreeCharlie Barker | MHP Communications | +44 (0)20 3128 8540+44 (0)20 3128 8147 |
Introduction
I am pleased to report significant strategic progress in 2022, which included the transformational acquisition of Marley Group plc (‘Marley’). The contribution of Marley helped deliver a record financial performance at group level, despite significant challenges in our Landscape Products business arising from a weak market backdrop particularly in private housing RMI. Marshalls is now a more diversified business which will benefit from the greater scale and resilience that Marley and other recent acquisitions bring to the Group.
Market overview
A core element of the Group’s strategy has been to broaden its product range in order to complement its strong market position in landscaping products with a particular focus on new build housing and water management. We accelerated the execution of our strategy through the acquisition of Marley in April 2022. The deal was transformational for the Group, building on the acquisitions of concrete pipe manufacturer, CPM, in 2017 and concrete brick manufacturer, Edenhall, in 2018 and further diversified the Group’s presence in the construction products market. We estimate that around 40 per cent of the enlarged Group’s revenues are derived from each of the new build housing and commercial & infrastructure end markets. The remaining revenues of around 20 per cent are focused on private housing RMI and around two thirds of this comes from driveway and patio products that are supplied to the UK market with the balance being less discretionary products and international revenues.
The conflict in Ukraine had a significant impact on global energy and commodity prices, placing additional pressure on economies and supply chains that were recovering from the COVID-19 pandemic. These factors resulted in significant cost inflation in the UK economy, successive base rate increases by the Bank of England and falling real wages, all of which put unprecedented pressure on household budgets. The UK Government’s ‘mini-budget’ in September was received negatively by financial markets and resulted in a loss of confidence and a sharp increase in gilt rates, which fed through into material increases in the price of fixed rate mortgages. Taken together, this resulted in a reduction in consumer confidence, a weaker environment for major purchases and the expectation that the UK economy will contract before starting to recover in the second half of 2023. The economic challenges will inevitably feed into the output of the construction sector and therefore customer demand for the Group’s products in 2023. This is reflected in the CPA’s winter forecast which anticipates a contraction in activity of 4.7 per cent in 2023, with a weaker outlook for some of our key end markets. The CPA forecast that the construction industry will return to growth in 2024 as the macro-economic environment improves.
Looking further ahead, we believe that the UK construction market continues to have attractive medium and long-term growth potential driven by the structural deficit in new housebuilding, an ageing housing stock that requires increased repair and maintenance and the need to continue improving UK infrastructure. The Group’s strategy is underpinned by our strong market positions, established brands and focused investment plans to drive ongoing operational improvement.
Group results
The Group delivered record revenue and adjusted profitability in 2022, driven by the benefit of Marley’s eight-month contribution together with a strong performance by Marshalls Building Products, which was partially offset by a weaker result from Marshalls Landscape Products.
| £’m | Year ended 31 December 2022 | Year ended 31 December 2021(as restated) | Change 2022 /2021(%) |
| Revenue | 719.4 | 589.3 | 22 |
| Net operating costs | (618.3) | (511.9) | |
| Adjusted operating profit | 101.1 | 77.4 | 31 |
| Adjusting items | (53.2) | (1.2) | |
| Statutory operating profit | 47.9 | 76.2 | (37) |
| Financial expenses | (10.7) | (6.9) | |
| Profit before taxation | 37.2 | 69.3 | (46) |
| Taxation | (10.7) | (14.4) | |
| Profit after taxation | 26.5 | 54.9 | (52) |
| Adjusted EPS | 31.3 | 29.2 | 7 |
| Statutory EPS | 11.4 | 27.5 | (59) |
| Total dividend for the year – pence | 15.6 | 14.3 | 9 |
Group revenue for the year ended 31 December 2022 was £719.4 million (2021: £589.3 million) which is 22 per cent higher than 2021 including the benefit of Marley’s revenues following the acquisition. On a like-for-like basis, Group revenue increased by one per cent, with revenue growth in Marshalls Building Products and Marley being largely offset by a contraction in Marshalls Landscape Products.
Group adjusted operating profit was £101.1 million, which represents growth of 31 per cent, and this increase was driven by the benefit of Marley from 29 April 2022 together with a strong performance from Marshalls Building Products. This has been partially offset by Marshalls Landscape Products, where the impact of a softer private housing RMI market compared to the elevated levels reported in 2021 and the effect of higher prices suppressing demand, resulted in sharply lower volumes and profitability. The Group adjusted operating margin increased by one percentage point to 14.1 per cent (2021: 13.1 per cent) and reflects an improved performance by Marshalls Building Products and the benefit of Marley’s structurally higher margins, partially offset by a compression of margins in Marshalls Landscape Products. Commentary on the performance of each reporting segment is set out below.
The statutory operating profit is stated after adjusting items totalling £53.2 million as summarised in the following table, further details are set out at note 4.
| £’m | Year ended 31 December 2022 | Year ended 31 December 2021(as restated) |
| Transaction related costs | 14.9 | – |
| Amortisation of acquired intangible assets | 7.3 | 1.2 |
| Fair value adjustment to inventory | 3.9 | – |
| Additional contingent consideration | 3.9 | – |
| Restructuring costs | 13.0 | 2.8 |
| Impairment of assets in Belgian subsidiary | 10.2 | – |
| Other | – | (2.8) |
| Adjusting items | 53.2 | 1.2 |
Transaction related costs totalling £14.9 million were incurred in respect of the acquisition of Marley and principally comprised adviser fees. A purchase price allocation exercise was undertaken to recognise the assets of Marley on acquisition at fair value and this resulted in the creation of intangible assets and a non-cash adjustment to increase inventory to its fair value. The acquired intangible assets are being amortised over a period of between 15 and 25 years and therefore the associated charge will be a recurring feature of the Group’s statutory profit and loss account. Additional contingent consideration of £3.9 million has been charged as an adjusting item following a re-assessment of the amounts that will become payable to vendors arising in relation to Marley’s acquisition of Viridian Solar Limited in 2021. In response to lower levels of customer demand we undertook a restructuring exercise to right-size our capacity and cost base and this resulted in a charge of £13.0 million, which comprises £3 million of cash redundancy costs and £10 million of non-cash impairment charges. The impairment of assets in the Group’s Belgian subsidiary arose from an impairment review carried out in response to a downturn in the business’ performance during 2022.
Net financial expenses were £10.7 million (2021: £6.9 million) including £2.4 million (2021: £1.9 million) of IFRS 16 lease interest and a pension related expense of £0.1 million (2021: £3.3 million). The increase in the period reflects the additional interest cost of the bank debt used to part-fund the acquisition of Marley. The pension related interest cost in 2021 included a non-cash charge of £2.8 million, which was accounted for as an adjusting item.
Adjusted profit before tax was £90.4 million (2021: £73.3 million). Statutory profit before tax was £53.2 million lower than the adjusted result at £37.2 million (2021: £69.3 million), reflecting the impact of the adjusting items. The adjusted effective tax rate was 18.9 per cent (2021: 20.5 per cent), which is broadly in-line with the UK headline corporation tax rate. On a reported basis, the effective tax rate is 28.7 per cent due to certain transaction related costs not being eligible for a tax deduction and there being no tax relief available for the asset impairment in the Belgian subsidiary. Adjusted earnings per share was 31.3 pence (2021: 29.2 pence) which is a seven per cent increase year-on-year and represents a record for the Group. Reported earnings per share was 11.4 pence (2021: 27.5 pence), which is lower than the adjusted number due to the adjusting items and their tax effect.
Proforma adjusted return on capital employed (‘ROCE’) was 13.3 per cent (2021: 20.6 per cent), with the year-on-year reduction arising from an increase in capital employed following the Marley acquisition and the weaker performance from Marshalls Landscape Products. We expect adjusted ROCE to increase progressively in the medium term to around 15 per cent as volumes recover and we benefit from operational leverage.
Segmental performance
The Board reviewed the Group’s reporting segments following the acquisition of Marley and concluded that it was appropriate to report under three separate reporting segments, being Marshalls Landscape Products, Marshalls Building Products and Marley Roofing Products. This reflects the new internal performance reporting and management responsibility framework. Adjusted operating profit is analysed between the Group’s reporting segments as follows:
| £’m | Year ended31 December 2022 | Year ended31 December 2021(as restated) | Change 2022 /2021(%) |
| Marshalls Landscape Products | 45.3 | 62.4 | (27) |
| Marshalls Building Products | 26.8 | 19.6 | 37 |
| Marley Roofing Products | 34.4 | – | – |
| Central costs | (5.4) | (4.6) | (17) |
| Adjusted operating profit | 101.1 | 77.4 | 31 |
Marshalls Landscape Products
Marshalls Landscape Products, which comprises the Group’s Commercial and Domestic landscape business, Landscape Protection and the International businesses, delivered revenue of £394.1 million (2021: £424.8 million), which represents a contraction of seven per cent compared to 2021.
| £’m | Year ended 31December 2022 | Year ended 31December 2021(as restated) | Change 2022 /2021(%) |
| Revenue | 394.1 | 424.8 | (7) |
| Segment operating profit | 45.3 | 62.4 | (27) |
| Segment operating margin % | 11.5% | 14.7% | (3.2 ppts) |
This reporting segment derives around 40 per cent of its revenues from commercial & infrastructure and approximately 30 per cent from each of new build housing and private housing RMI. The business was adversely impacted by weakness in private housing RMI, in both the UK and Belgium, driven by the discretionary nature of our domestic products, lower consumer confidence, a reprioritisation of household expenditure and falling real wages. Installer order books at the end of February 2023 moderated to 14.7 weeks (February and June 2022: both 17.4 weeks), which is in-line with pre COVID-19 levels and demonstrates continued demand for professional installations. However, there is reduced installation capacity compared to prior years and DIY activity levels contracted markedly compared to the elevated activity levels in 2021. This resulted in a reduction in domestic volumes of around one third, with a weaker performance in the second half of the year partially driven by merchants adjusting stocking levels to align with reduced customer demand. The reduction in sales volumes was partially offset by price increases that were implemented to offset the impact of cost inflation, which in turn, also suppressed demand in all end markets.
Segment operating profit reduced by £17.1 million to £45.3 million. This was driven by the combined effect of lower volumes on gross profit and a significant reduction in the operational efficiency of manufacturing network due to reduced production volumes. The impact of both these factors increased in the second half of the year due to the weaker H2 sales performance and reduced manufacturing output to manage inventory levels. We took decisive action to reduce capacity and costs within our manufacturing network and trading function to ensure alignment with lower levels of customer demand and this reduced operating costs by around £10 million per annum from the start of 2023. The cost associated with this action has been presented as an adjusting item (see note 4). The fall in volumes resulted in operating margins reducing by 3.2 ppts to 11.5 ppts for the year.
We expect this reporting segment to experience relatively tough market conditions in 2023 due to its exposure to private housing RMI and new build housing. However, we remain focused on developing the business and will capitalise on the new product development opportunities arising from our investment in the dual block plant at St Ives, invest further to improve customer service and ensure that operating costs are optimised. In the medium term, our target is to return operating margins to at least 15 per cent as customer demand recovers.
Marshalls Building Products
Marshalls Building Products comprises the Group’s Civils and Drainage, Bricks and Masonry, Mortars and Screeds and Aggregates businesses. It delivered a strong performance in 2022 and reported revenue of £193.1 million, which represents year-on-year growth of 17 per cent.
| £’m | Year ended 31December 2022 | Year ended 31December 2021(as restated) | Change 2022 /2021(%) |
| Revenue | 193.1 | 164.5 | 17 |
| Segment operating profit | 26.8 | 19.6 | 37 |
| Segment operating margin % | 13.9% | 11.9% | 2.0 ppts |
This reporting segment generates around 60 per cent of its revenues from new build housing, around 30 per cent from commercial & infrastructure, with the balance being derived from private housing RMI. All the business units in this reporting segment delivered a good performance, supported by a resilient performance by the new housebuilding sector, with particularly strong demand for Bricks and Masonry products and our Mortars and Screeds from this end market. We reported some slowing of activity in the final quarter of the year with poor weather impacting construction sites and housebuilders opening new sites at a reduced rate, which particularly impacted demand for our Civils and Drainage products.
Segment operating profit increased by £7.2 million to £26.8 million. The businesses operated in an inflationary environment in 2022 driven by escalating energy and commodity prices and was successful in recovering these through sales price increases during the year. The adjusted operating margin increased by 2.0 ppts to 13.9 per cent reflecting the operational leverage benefit of higher revenues and offsetting the rate of growth in overheads.
We expect that the market backdrop for this reporting segment to be challenging in 2023 due to forecast reductions in activity in new build housing. However, we believe that there are opportunities to increase volumes in our Bricks and Masonry business given the relatively low carbon footprint of our products compared with clay bricks and our modest share of the UK facing brick market. The Group’s block paving production assets have the flexibility to produce concrete bricks and therefore negligible investment is required to manufacture the additional volumes.
Marley Roofing Products
Marley was acquired by the Group on 29 April 2022 and consequently the results include approximately eight months of trading from the Marley business. Marley’s revenues in the post-acquisition period were six per cent higher than the corresponding period, pre-ownership, in 2021.
| £’m | Year ended 31 December 2022 | Year ended31 December 2021(as restated) | Change 2022 /2021(%) |
| Revenue | 132.2 | – | – |
| Segment operating profit | 34.4 | – | – |
| Segment operating margin % | 26.0% | – | – |
Approximately 40 per cent of Marley’s revenues are generated from each of new build housing and commercial & infrastructure (including public housing RMI) with the balance of around 20 per cent from private housing RMI. The market environment for this reporting segment was positive in 2022 and the private housing RMI segment is less discretionary than in the Group’s Landscape Products business due to a larger weighting of repair and maintenance activity rather than improvement. Revenue growth in the period was principally driven by a strong performance by our roof-integrated solar panel business, which benefitted from the trend towards energy efficient solutions in the face of energy price inflation.
Segment operating profit in the post-acquisition period was £34.4 million, which represents an increase of one per cent compared to the corresponding period, pre-ownership, in 2021. This growth was driven by proactive management of inflationary pressures and it resulted in a segment operating margin of 26.0 per cent.
We expect the market environment for this reporting segment to be more challenging in 2023 due to its exposure to new build housing and private housing RMI. However, we expect to see continued strong growth in roof-integrated solar PV panels due to increased penetration in the RMI projects and changes in building regulations that require new build houses to achieve increased energy efficiency targets. In the medium-term, segment operating margins are expected to be in the range of 20 per cent to 25 per cent reflecting an increasing proportion of total revenues being generated from lower margin solar PV.
Strategy and ESG update
Acquisition of Marley
The acquisition of Marley was a transformational step in delivering the Group’s strategic goal of becoming the UK’s leading manufacturer of products for the built environment. It extended our product range into the pitched roofing market with an extensive range of products and solutions across the full roofing system with highly recognised and market leading brands. It enhanced the Group’s exposure to the more cyclically resilient UK roofing RMI market, which has a strong medium-term outlook, underpinned by attractive structural drivers such as the UK’s ageing housing stock with a product range principally focused on less discretionary products. The Marshalls and Marley businesses employ a similar commercial strategy that focuses on generating pull demand from key specifiers and influencers. Responsibility for Marley’s operations was transitioned to the Group team in the second half of the year and the Board remain confident of delivering significant operational improvements focused on people, plant, and process. We have reduced vacancy rates using the Marshalls in-house recruitment team, assessed plant failure rates and implemented a targeted refurbishment programme, and introduced a structured performance management system. This has resulted in increased manufacturing efficiency on concrete tile production lines of eleven per cent in recent months. In addition , we have integrated our procurement functions, embarked on a review of our combined logistics footprint and are evaluating how we leverage Marshalls’ ESG leadership within the business.
Capital allocation policy
The Group’s capital allocation policy was reviewed by the Board in the second half of the year in the context of increased balance sheet leverage following the acquisition of Marley. Whilst the Board is comfortable operating with the Group’s current post-transaction leverage, in light of the macro-environment, the policy has been revised to focus on accelerating the repayment of borrowings, prioritising this over any significant M&A activity until leverage is around one times adjusted EBITDA on a pre-IFRS16 basis (December 2022: 1.35 times). Supplementary dividends have temporarily been removed from the policy. The Board is targeting net debt to reduce to around one times adjusted EBITDA by December 2024 through organic free cashflow generation. In addition, the Group is undertaking a review of its manufacturing and property network, with the potential to dispose of non-core sites, which would accelerate deleveraging, whilst improving network efficiency.
Dual block plant
The project to construct the dual block plant at the Group’s site in St Ives, Cambridgeshire is now in the commissioning phase and producing its first blocks. We expect it to be operational in the first half of 2023. The facility will be unique in the UK and will support the launch of new ranges of innovative value-added products that have the aesthetic appeal of natural stone at a lower price point and with a significantly reduced carbon footprint. The first in the range of these products was launched to commercial specifiers in the second half of the year and has received positive feedback.
Digital
We continue to focus on executing our digital strategy which aims to provide an end-to-end digital offering and to pioneer the digital standards for the industry. We have developed a new digital trading platform using dropship technology that will allow us to offer an extended range of products on our customers’ websites without requiring the merchant to stock the ranges. Customers will be able to place orders with the merchants that will be fulfilled using Marshalls’ distribution capability. The model offers a win-win outcome, where the merchant generates incremental sales due to an extended product range, without incurring the costs associated with regular orders and Marshalls benefits by realising additional sales via the merchant channel. We are currently live or in testing with two national merchants, at an advanced stage with three other customers and will evaluate performance in the first half of 2023.
ESG
Our ESG strategy continues to generate organic growth opportunities which, going forward, we believe will be a source of significant competitive advantage. We are continuing to focus our new product development activity on lower carbon products and as part of this programme we are accelerating our development of technologies to reduce the carbon intensity of our products using cement replacement and carbon sequestration techniques. As part of this initiative, the Group is the first UK company to adopt CarbonCure Technologies’ carbon mineralisation technology that uses waste CO2 from other industrial processes to accelerate the carbonation of concrete which effectively reduces the embodied carbon. This is being trialled during the first half of 2023 in one of our concrete brick manufacturing sites. In addition, we are investing in several sites to support the rollout of a new concrete mix design that will reduce both raw material costs and embodied carbon.
Our commitment for the Marshalls businesses (excluding Marley) is to reduce scope one and two greenhouse gas emissions by 59 per cent per tonne of production by 2030 from a 2018 base year. For scope three emissions, we have also targeted 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. Our emission reduction targets have been approved by the Science Based Targets initiative as consistent with levels required to meet our net-zero commitment with a 1.5°C trajectory. We were the first UK company in our sector to have approved science-based targets and have a roadmap to support our targets towards the commitment to net zero.
We remain fully committed to our carbon reduction journey and want to move forward as a Group. However, with the addition of Marley into the Group, 2030 may not be a realistic target for the enlarged business to achieve net-zero. Marley has a very different energy usage profile than Marshalls and, as a result, it will require a fundamental review of our roadmap for the Group. The Science Based Targets initiative also requires companies to recalculate their targets following a major change, such as an acquisition. The process to re-baseline and calculate our new targets will start in 2023. This will enable us to evaluate the impact that the acquisition of Marley has on the enlarged Group’s net-zero commitment. This re-baselining project will bring together the monitoring and measuring of carbon emissions and validate a new roadmap for the Group. The final stage will be to submit our new targets to the Science Based Targets initiative for formal approval.
Balance sheet, funding and cash flow
The Group balance sheet reflects the acquisition of Marley, along with the equity fundraising and additional debt financing. The financing structure of the acquisition was designed to be conservative with over 60 per cent of the consideration funded by equity, and debt facilities sized to ensure that the Group continues to operate with significant headroom. Whilst our key near term financing priority is to utilise the cash generated by the enlarged Group to reduce leverage and we have updated our capital allocation policy to be aligned to this objective. We will continue to invest in organic capital investment opportunities and new product development where these support our strategic goals.
A purchase price allocation exercise has been undertaken to establish the constituent parts of the Marley balance sheet at fair value on acquisition. This exercise has recognised £472.3 million of additional intangible assets in relation to Marley, principally customer relationships of £145.4 million and the values attributable to the Marley and Viridian brands of £82.8 million. Residual goodwill of £244.1 million has been recognised. As is customary in these circumstances, we have kept this under review in the second half of the year and made some minor changes to the initial assessment performed at the half year. The assessment will remain under review and subject to change during the twelve-month hindsight period which ends in April 2023. Further details of this are set out at Note 14.
Net assets have increased to £661.1 million compared with £344.3 million at 31 December 2021. This is largely due to the equity issuance of £330.3 million to part fund the acquisition of Marley. Intangible assets increased by £464.7 million, principally due to intangible assets acquired in respect of Marley. The acquisition has also increased tangible fixed assets by £96.2 million, net working capital by £26.2 million and tax balances (mainly deferred tax) by £63.8 million. A term loan of £210 million was introduced to partially fund the acquisition.
The balance sheet value of the Group’s defined benefit pension scheme was a surplus of 22.4 million (December 2021: 25.8 million). The amount has been determined by the Scheme’s pension adviser. The fair value of the Scheme assets at 31 December 2022 was 254.9 million (2021: 392.1 million) and the present value of the Scheme liabilities was 232.5 million (2021: 366.3 million). These changes have resulted in an actuarial loss, net of deferred taxation, of 2.3 million (December 2021: 19.8 million actuarial gain) and this has been recorded in the Consolidated Statement of Comprehensive Income.
The volatility in gilt markets since the half year has had a significant impact on defined benefit pension schemes. Due to the scheme’s strategy of using liability driven investments (“LDI”) to provide an effective hedge against both inflation and interest rates, this volatility and the significant spike in gilt rates also had consequences for the Marshalls’ scheme. Despite the unprecedented levels of market volatility, the scheme’s LDI asset portfolio continues to hedge protection against volatility in interest rates and inflation. The scheme’s strategy is to include a relatively high proportion of “liquid” investments in the portfolio and this has helped the scheme respond to the recent market volatility and the short-notice collateral calls. However, during the last year the AA corporate bond rate has increased significantly from 1.90 per cent to 4.90 per cent. This has led to a reduction in liabilities but due to the high level of hedging in the investment strategy the scheme assets have also decreased in value. The Scheme’s actuarial valuation as at 5 April 2021 was a surplus of £24.3 million, on a technical provisions basis, and the Company has agreed with the Trustee that no cash contributions will be payable under the funding and recovery plan.
The Group had net debt at 31 December 2022 of 236.6 million (December 2021: 41.1 million), including £45.8 million (December 2021: £41.3 million) of IFRS 16 lease liabilities. Net debt on a pre-IFRS16 basis was £190.8 million compared to net cash of £0.1 million at December 2021. On 3 May 2022, the Group drew down the new four-year term loan of 210 million to support the funding of the acquisition of Marley. In addition to the term loan, the Group has entered into a new committed revolving credit facility of 160 million with a maturity date of four years. Net debt to EBITDA was 1.35 times at 31 December 2022 on an adjusted pre-IFRS 16 proforma basis. Good headroom is maintained against the new bank facility and its covenants, which will support investment priorities going forward, and were comfortably met as at 31 December 2022.
Adjusted operating cash flow (before interest and taxation) for 2022 represented 91 per cent of adjusted EBITDA (2021: 80 per cent) which demonstrates the cash generative nature of the Group’s businesses. Strong conversion of EBITDA into operating cash flow is expected to support the Group’s capital allocation priorities going forward including continued investment in organic growth opportunities, new product development, dividend payments and progressive deleveraging.
Dividend
The Group maintains a dividend policy of distributions covered twice by adjusted earnings through the cycle . The Board has proposed a final dividend of 9.9 pence per share, which taken together with the interim dividend of 5.7 pence per share, would result in a pay-out in respect of 2022 of 15.6 pence. This is in-line with the Group policy and would represent a year-on-year increase of nine per cent. The dividend will be paid on 3 July 2023 to shareholders on the register at the close of business on 2 June 2023. The shares will be marked ex-dividend on 1 June 2023.
Outlook
The Board remains confident that the Group is well placed to deliver profitable long-term growth when market conditions improve and continues to focus on its key strategic initiatives. In the shorter-term, whilst the macro-economic climate is expected to remain challenging and assuming a progressive improvement in our end markets during the year, the Board remains confident of delivering a result that is in-line with its expectations.
The Board are mindful that the macro-economic climate continues to be challenging and are planning for an overall reduction in volumes in 2023 in-line with the Construction Products Association’s Winter forecast. The first half of the year is expected to be more challenging due to stronger comparators and difficult economic conditions with some improvement expected in the second half driven by a strong labour market, declining inflation and energy prices, and the stabilisation of mortgage rates.
Against this backdrop, trading in the seasonally low volume months of January and February, was subdued due to weak end market demand and poor weather conditions. Revenue growth was 18 per cent, including the benefit of Marley, but on a like-for-like basis revenue contracted by 10 per cent. The weakest performances were in the domestic side of Marshalls Landscape Products, which is trading against the strongest comparators from 2022.
Order intake has improved in recent weeks, and we will continue to monitor performance, respond flexibly to evolving market conditions and execute self-help initiatives as required. We also expect a strong performance from our integrated solar business, supported by changes in building regulations, and our concrete brick business is expected to build market share due to its low carbon product range.
Martyn Coffey
Chief Executive