Marshalls : 2022 Full Year Results

Embargoed until 7.00am on Wednesday 15 March 2023

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

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

1. Accelerated the diversification of the Group's product offering providing increased resilience through

the cycle

1. Traded robustly and ahead of plan in the post-acquisition period

• 1. 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).

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.

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.

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:

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.

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 inline 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.