INTERIM MANAGEMENT REPORT

Group Results

Marshalls' revenue for the 6 months ended 30 June 2017 grew by 8 per cent to £219.1 million (2016: £202.4 million). The Group has continued to experience strong order intake with the underlying indicators remaining positive in Marshalls' end markets. The Group's positive cash generation has continued.

Sales to the Domestic end market continued to grow particularly strongly and increased by 17 per cent compared with the prior year period. Domestic sales now represent approximately 34 per cent of Group sales. The survey of domestic installers at the end of June 2017 revealed continuing strong order books of 11.9 weeks (June 2016: 11.7 weeks).

Sales to the Public Sector and Commercial end market, which represent approximately 60 per cent of Group sales, increased by 3 per cent compared with the prior year period. The Group continues to target those parts of the market where higher levels of growth are anticipated including New Build Housing, Water Management and Rail.

Sales in the International business increased by 25 per cent in the 6 months ended 30 June 2017 and represent 6 per cent of Group sales. Revenue increased in all our main International markets with the new sales office in Dubai having a positive impact on sales and order generation in the Middle East. Ongoing progress is being 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 £29.8 million (2016: £26.0 million) and EBITDA improved to £36.7 million (2016: £32.4 million).

Group return on capital employed ("ROCE") was 23.7 per cent for the 12 months ended 30 June 2017, which represents an increase of 380 basis points compared with the prior year. ROCE is defined as EBITA divided by shareholders' funds plus cash / net debt.

Net financial expenses were £0.7 million (2016: £0.8 million) and interest was covered 42.4 times (2016: 31.4 times).  The effective tax rate was 18.8 per cent (2016: 19.1 per cent).

Basic EPS was 12.04 pence (2016: 10.36 pence) per share. The interim dividend will be 3.40 pence (2016: 2.90 pence) per share, an increase of 17 per cent, reflecting the strong cash generation and the Group's continuing strategy of maintaining a 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. Significant cash generation has seen the Group move to a net cash position of £1.2 million at 30 June 2017. This cash position compares with net debt of £8.8 million at 30 June 2016 and is after the payment of the 2016 final and supplementary dividends of £17.4 million made to shareholders on 30 June 2016. The equivalent dividends for the prior period were paid on 8 July 2016.  The intention is to normalise this payment being made during the first half of the year going forward.  Consequently, the net cash position at 30 June 2017 represents a like-for-like improvement of £27.4 million, compared with the prior year.

2020 Strategy

Good progress continues to be made delivering the growth objectives of the 2020 Strategy and increasing the Group's ROCE. 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 2020 Strategy remains driven by a focus 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 differentiate the Marshalls brand.

Our strategy looks to maintain a strong balance sheet, a flexible capital structure and a clear capital allocation policy that both drives growth and rewards shareholders. Our acquisition focus remains centred on Minerals and the protective Street Furniture 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.  

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, with the ultimate aim of driving through sustainable cost reductions and improvements in operational efficiency.

Marshalls' digital strategy is increasing in its importance across all Group operations. The strategy combines digital trading, digital marketing and digital business and is focused on the customer experience and the key touchpoints therein.  Web and mobile applications increasingly allow the customer to model their requirements, allow digital access to the registered installer base and allow real-time visibility of stock. The Marshalls Premier Mortars "Ordering App" is a good example of how our digital strategy is driving growth through changing technology and working practices.

Operating Performance

Operating margins increased to 13.6 per cent in the 6 months ended 30 June 2017 (2016: 12.8 per cent), representing an improvement of 6.3 per cent year on year and reflecting improved operational efficiency in line with our 2020 Strategy.

Revenue increased by £15.8 million and operating profit by £3.4 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 is due to the delivery of sustainable cost reductions and operational efficiency improvements in line with our 2020 Strategy. Revenue in the Smaller UK Businesses for the 6 months ended 30 June 2017 decreased by £1.8 million compared with the prior period, primarily due to specific short-term issues in part of the Minerals business. However, despite the decrease in revenue, operating profit in the Smaller UK Businesses increased by 5 per cent. Increasing profitability in the Smaller UK Businesses is a key part of the 2020 Strategy and Street Furniture, Mineral Products and Stone Cladding 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 number of installer teams continues to grow and is now approximately 2,000. The Group remains committed to improving the product mix and to achieving a consistently high standard of quality, customer service and marketing support. The new rules regarding pension fund release continue to support growth in the Domestic end market with the total value of cash release from pensions continuing to grow. The average individual cash withdrawal from pension funds is around £9,000. The average cost of an installed driveway or patio is between £5,000 and £6,000 and this remains a popular use of pensions release funds.

In the Public Sector and Commercial end market, Marshalls' continuing strategy is to enhance its market leading position as a landscape products specialist. The Group's experienced technical and sales teams continue to promote a full range of integrated products and sustainable solutions to customers, architects and contractors. Commercial market confidence indicators have continued to improve over the last 12 months and the ABI's hard landscape lead indicator shows demand increasing over the next year. This indicator consolidates planning information for all the sub-sectors requiring hard landscaping. On average, there is a 12-month lag between contracts being awarded and the landscape products being required, so this provides 12-month advance information on likely future demand. The ABI continues to highlight Transport, Residential and Landscaping as the leading growth areas, which is firmly in line with the key focus areas of the Group's 2020 Strategy.

As a key part of the 2020 Strategy, 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 2017 was £1.7 million (2016: £1.6 million). Investment in research and development includes project engineering to enhance manufacturing capabilities, concrete and other materials technology innovations and extending the new product pipeline. Keypave and Urbex are 2 examples of recent successful new product solutions for the New Build Housing sector. Revenue from new products in the core Landscape Products business continues to strengthen and represented 14 per cent of Group sales in the 6 months ended 30 June 2017.

The Group's previously announced self help capital investment programme is an important part of our 2020 Strategy and will incur additional capital expenditure of £15 million over the next 3 years. The 2017 financial year is the first year of this enhanced investment, which is expected to deliver sustainable cost savings of £5 million per annum by 2019.  The detailed plan is on track and progressing well. The programme includes various projects within natural stone, block paving and automated material handling. Capital investment in property, plant and equipment in the 6 months ended 30 June 2017 totalled £7.9 million (2016: £5.8 million) and this compares with depreciation of £6.4 million (2016: £5.9 million).

Balance Sheet and Cash Flow

Net assets at 30 June 2017 were £222.6 million (June 2016: £204.9 million).

In the 6 months ended 30 June 2017 net cash flows from operating activities were £19.2 million (2016: £9.3 million). This strong cash generation delivered a net cash position of £18.6 million at 30 June 2017, before the dividend payments referred to above, and a reported post dividend net cash balance of £1.2 million (June 2016: £8.8 million net debt). The Group continues to focus on maintaining a strong balance sheet supported by robust capital disciplines. 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 ensure headroom against available facilities remains at appropriately conservative levels. Our committed facilities are currently in the process of being extended by 1 year to 2022 to enhance the maturity profile and, on 1 August 2017, the Group also renewed its 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 also secured additional facilities with our banking partners which would be available to fund "bolt-on" acquisitions.

The balance sheet value of the Group's defined benefit pension scheme was a surplus of £3.6 million at 30 June 2017 (December 2016: £4.3 million surplus; June 2016: £7.9 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.  During the last 6 months, the AA corporate bond rate reduced from 2.65 per cent to 2.55 per cent, in line with market movements. The expected rate of inflation reduced to 2.15 per cent from 2.20 per cent at 31 December 2016. The balance sheet value continues to benefit from the high proportion of liability-driven investments whose performance matches the liabilities.

The Group has established a new defined contribution pension scheme within a Master Trust operated by Aviva / Friends Life. The new Marshalls Retirement and Savings Plan was launched on 1 April 2017 and the transition process is now complete. This will provide a much improved pension proposition for the majority of Group employees.

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 3.40 pence (June 2016: 2.90 pence) per share, an increase of 17 per cent, which reflects the Group's strong cash generation.  This dividend will be paid on 6 December 2017 to shareholders on the register at the close of business on 20 October 2017.  The ex-dividend date will be 19 October 2017.

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 2016. 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 2016 Annual Report which is available at www.marshalls.co.uk/investor/annual-and-interim-reports.

Going concern

As stated in Note 1 of the 2017 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 Construction Products Association's ("CPA") recent Summer Forecast predicts growth in UK market volumes of 1.9 per cent in 2017, which represents a slight improvement on their Spring Forecast. The Group continues to outperform the CPA growth figures and the underlying short to medium term market indicators remain supportive.  The CPA's 2018 forecast has recently been reduced, which reflects the continuing wider economic uncertainty.

The Group continues to invest in product innovation and service delivery initiatives and is well placed to drive through further sustainable improvements in operational efficiency gains. The Board believes that Marshalls' innovative product range and strong market positions will continue to support growth and operational profit improvements during the delivery of the 2020 Strategy and will drive future shareholder returns. The Group's focus remains the delivery of the growth initiatives set out in the 2020 Strategy, whilst maintaining a strong balance sheet and a flexible capital structure.

The Board remains confident of achieving its expectations for 2017.

Martyn Coffey

Chief Executive