Ibstock plc (IBST) Earnings Call Transcript

Welcome to the presentation of the 2021 Interim Results for Ibstock plc. [Operator Instructions] But for now, I would like to turn the call over to Joe Hudson. Please go ahead.

Good morning, and welcome to the 2021 half year results presentation for Ibstock plc. The plan for today is that Chris will take you through the financials for the period, and I will talk you through some of the operational highlights. I'll then provide you with an update on the strategic progress we've made in the period and set out our areas of growth focus for the future. And as usual, we'll then open up for some questions. Turning first to the overview. I'm pleased to say that the group delivered a strong performance in the first half, reflecting robust demand and good operational execution. Performance benefited from actions taken during the second half of 2020 to restructure the business and the group captured in full cost savings arising from these actions. Industry supply chains became more stretched as the first half progressed, making the strong margin performance in both divisions particularly pleasing. We also made good progress against our operational strategy defined in the 3 pillars of sustain, innovate and grow, and I'll walk through the key elements later in the presentation. We have a range of growth initiatives in development, both to strengthen our core business and to diversify our revenue base. Our recently announced GBP 60 million investment in wire cut brick capacity in the West Midlands will deliver attractive returns as well as producing the U.K.'s first net-zero carbon brick factory. I'm excited about the potential in our growth pipeline. And with the strong cash flows generated from our base business, we are very confident in our ability to deliver growth above conventional market rates over the medium term. And with that, let me hand over to Chris to take us through the financials.

Thanks, Joe, and good morning, everyone. Turning to cover the financial summary on Slide 5. Revenue for the period of GBP 202 million was materially above the COVID-impacted performance of 2020, in fact, broadly in line with 2019 levels of GBP 203 million. The current year period included GBP 11 million of revenue from Longley Concrete. So on a like-for-like basis, revenues were back to within 6% of 2019 levels. Adjusted EBITDA recovered strongly from a year ago with robust market demand and strong cost management, delivering total EBITDA of GBP 55 million, around 7% below the level of GBP 59 million achieved in 2019. Divisional margins recovered strongly, with clay delivering a 34% EBITDA margin, in line with 2019; and concrete delivering a margin of 18.5%, modestly below 2019 levels but in line on a like-for-like basis. This constituted a strong performance against a more challenging backdrop as the half progressed and was underpinned by excellent cost management and good commercial execution. Overall, basic adjusted EPS for the period was 7.9p, within 12% of the 9.0p we reported in 2019. Once again, the group delivered an excellent cash performance, reducing net debt by a further GBP 16 million during the period from the level of GBP 69 million at 31 December 2020. [ Learning to rebuild ], this has driven a very significant reduction in our leverage ratio, which reduced from 1.5x at year-end to 0.6x at June, at the lower end of our stated range. Given both the performance of the business and the Board's confidence in the longer-term outlook for the group, we will pay an interim dividend of 2.5p. Moving to revenue on Slide 6. I set out here the bridge from 2020 to '21 on the left-hand side but also give the 2019 split on the right-hand side. Clay revenues increased by GBP 52 million or 60% year-on-year, meaning that revenues of GBP 138 million were back to 92% of 2019 levels. Sales volumes were ahead of expectations we set out at the start of the year and reflected robust demand from both new build and RMI markets. In concrete, reported revenues increased to GBP 64 million, 22% above 2019 levels or in line on a like-for-like basis once you strip out the GBP 11 million from Longley Concrete, which was acquired in the second half of 2019. The division benefited from strong structural demand dynamics within the RMI segment with sales volumes of manufactured products just modestly below 2019 levels. As Joe will set out later, like-for-like margins in each division were back in line with 2019 levels, reflecting strong execution against the backdrop of supply chain headwinds experienced as the half roll on. The change in divisional revenue mix accounted for a reduction in overall group EBITDA margin, which was just over 27% compared to 29% in the first half of 2019. Moving to the network capacity bridge on Slide 7. Managing capacity and costs have been key to delivering performance over the last 12 months. And I would like to spend a few moments explaining how our brick network has been managed during the pandemic period and how it will evolve over the next 12 months or so as we bring further capacity on stream. In response to the sharp contraction in demand experienced in 2020, we took a number of actions last year to scale network capacity to the near-term demand view, initially being around 85% of pre-pandemic levels: firstly, we permanently closed around 5% of network capacity; secondly, we mothballed the Atlas site in the West Midlands, accounting for around a further 5%; and finally, we took steps to reduce throughput at several other factories, removing fixed costs temporarily from the group's cost base. These actions accounted for the majority of the GBP 20 million of annualized cost savings we identified. As we moved through the first half of this year, we have seen demand strengthen, and we took steps to reinstate idle capacity, meaning that by June, we had a more efficient network capable of delivering around 90% of 2019 volumes. We continue to work to commission our key enhancement projects, and this will deliver around a further 5% once they are completed by the middle of 2022. Our decision to redevelop Atlas as part of our GBP 60 million wire cut investment rather than unmothball the existing factory will mean that network output will remain marginally below 2019 levels in the short term. However, medium-term capacity is expected to increase materially above the 2019 levels as the new Atlas factory is brought on-stream from early 2024. Moving to Slide 8. I would like to give you an update on the cost-saving program and provide a view on how we see cost and margins evolving over the medium term. As I said on the previous slide, the actions we took across the enterprise enabled us to remove around GBP 20 million from the fixed cost base. The majority of these savings were in the clay division, which was successful in capturing in full its share of these savings during the first half, underpinning the delivery of a 34% EBITDA margin in line with 2019. While a portion of these savings will be added back to support volume growth over time, residual savings will support margin accretion relative to 2019 levels over the medium term. Within the concrete division where savings were realized from rationalizing our operating footprint and centralizing support functions, savings were also captured in full, underpinning a like-for-like margin, which was marginally ahead of 2019 despite meaningful cost and supply chain challenges. Moving now to cover cash flow on Slide 9. The business delivered another excellent cash performance, benefiting from strong focus on both working and fixed capital management. Adjusted operating cash inflows totaled GBP 33 million compared to breakeven in 2020 and a GBP 28 million inflow in 2019. This represented a 61% cash conversion figure, up 14 percentage points on 2019. Sustaining CapEx totaled GBP 10 million in the period, in line with the guidance I gave at the start of the year. I continue to expect us to be able to absorb the final commissioning costs of our enhancement projects from within the sustaining load of GBP 20 million to GBP 22 million. I would expect the first tranche of CapEx on our major wire cut investments at Atlas and Aldridge to total a little below GBP 10 million this year. Moving now to the balance sheet. This excellent cash performance enabled us to strengthen our financial position, and you can see on the slide the extent of our further deleveraging through the first half of the year. At the end of June, net debt had reduced to GBP 53 million, a reduction of GBP 16 million from the year-end. Finished goods inventories remained flat through the first half, with sales broadly in line with production. Leverage reduced substantially to 0.6x by the end of June, down from 1.5x at the 2020 year-end. By way of reminder, under our capital allocation framework, which remains unchanged, we look to maintain leverage of between 0.5x and 1.5x net debt-to-EBITDA through the cycle. At June 2021, we had over GBP 160 million of liquidity headroom under our committed borrowing facilities. Joe will set out our areas of strategic growth focus later in the presentation, but I would reinforce the point that we have a robust balance sheet to fund this growth pipeline, which is expected to be supported by strong organic free cash flows over time. Before I hand back to Joe, as I did at the full year, I'd like briefly to cover the moving parts of our guidance for the balance of '21, and these are set out on Slide 11. We expect market demand to be sustained at similar levels to that seen in half 1, although supply chain disruption is clearly an elevated risk as we look into the second half. However, we are carrying good momentum into the second half and now expect adjusted EBITDA to be modestly ahead of previous expectations. To be clear, we said in March this year that we were comfortable with the consensus view for 2021 adjusted EBITDA of around GBP 93 million, which existed at that time. Below the EBITDA line, we expect adjusted interest for the full year to be around GBP 6 million and the effective tax rate to be around 17.5% to 18%, in line with rate at the half year. On cash, I continue to expect sustaining CapEx for the year to be around GBP 20 million to GBP 22 million, including the remaining cash spent on the capital enhancement projects and Atlas cash flows to be a little below GBP 10 million. I expect cash tax for the full year to be around 2x the GBP 4 million we paid in the first half. With that, let me pass back to Joe.

Thanks, Chris. So I'd like to start with a review of our key markets, and Slide 13 presents housing starts and completions as well as RMI index growth data published in the last few weeks by the Construction Products Association. As you can see, the first half of 2021 was characterized by strong demand with new housing starts ahead of 2019 levels. You will have seen our larger housebuilding customers reporting strong pricing environments, robust forward order books and sales rates, and demand for our products into this channel has been firm across the spectrum of all housebuilding customers. The most significant risk in the near term comes from constraints on the house builders of all sizes with their supply chains. You can see that the view on starts during the second half of the current year reflects a degree of caution in this regard. We do, however, expect these supply chain conditions to normalize. And with market fundamentals remaining strong, the outlook for 2022 remains very positive with both starts and completions projected to be above 2019 levels. Both our clay and concrete divisions have significant exposure to repair, maintenance and improvement markets. And the structural demand drivers, which saw a rapid recovery in RMI demand during the second half of 2020, have continued. With household balance sheets remaining very strong and with consumers continuing to prioritize spending on their homes, we see this trend continuing over the medium term. Turning now to cover the supply side. And we present here on this slide the monthly progression of total domestic brick production as a percentage of 2019, along with the market share of brick imports. We also plot industry inventories here. Domestic brick industry delivered output of just over 90% of 2019 levels in the first half. Having made the restructuring changes to our business in 2020, our active network ran at high levels of utilization, enabling good fixed cost recovery and underpinning our strong margin performance. Ordinarily, the first part of the year would see industry inventories increase with production outpacing sales during the first quarter ahead of the stronger spring and summer trading period. But you can see that with the strength of demand through this part of the year, industry inventories have remained at about 300 million bricks, representing about 2 months of forward sales. Imports have remained at about 17% to 18% of total market volumes delivered, broadly in line with the share of the market during the second half of 2020. And overall industry dynamics continue to be well balanced with overall network utilization rates continuing at high levels. I'll turn now to cover divisional performance in the period, starting with clay on Slide 15. The clay division has performed really well, capitalizing on the favorable market backdrop whilst managing supply chain conditions and supporting our customers. Revenues were back to 92% of 2019 levels, with volumes ahead of the levels we expected as we entered the year. Volume delivery was robust into all channels with both new build and RMI markets consistently strong during the period. A disciplined focus on costs, aligned with good margin and mix management, enabled the division to deliver a 34% EBITDA margin, nudging ahead of the first half of 2019. This is a great result in the challenging backdrop. As Chris said earlier, we believe that the strong well-invested asset base and market positions held by the clay business, combined with the steps we've recently taken to enhance the quality of the footprint, will enable margin accretion over the medium term. The division will benefit from the capacity provided by our enhancement projects over the next 9 months or so. And of the 3 enhancement projects mentioned, the investment in our soft mud 2 factory in Leicester is well advanced and currently in the process of being commissioned, which is delivering some exciting new products for the higher-value specification segment of the brick market. Our Ellistown -- our enhancements at Ellistown in the East Midlands and Laybrook down in the Southeast are progressing well. The timing of these projects has been impacted by our ability to get key contractors over from Continental Europe during the pandemic period, but we expect completion during the first half of 2022. Now to cover concrete. So given the significant exposure to the broader RMI market in this division, demand was strong across the product range, and sales volumes of manufactured products were back close to 2019 levels. Longley Concrete, which we acquired in the second half of 2019, has strengthened our position in the residential flooring market, and this business contributed revenues of around GBP 11 million in the first half of 2021. The Longley Concrete business sells a number of laterally sourced products as part of its offer, which typically command lower margins than the group's manufactured products. And overall, Longley delivered an EBITDA of around GBP 1 million in the first half. We're very happy with this acquisition and see more opportunities to progress margins now that commercial teams are integrated. The concrete division has a number of key inputs, notably cement, aggregates and steel in its manufacturing process. While it's possible to buy some of these key inputs forward, providing a degree of cost protection, the division experienced slightly higher levels of cost inflation than clay during the first period. Where necessary, the teams took appropriate commercial action to pass these cost increases through, and we're able to sustain like-for-like EBITDA margins at levels marginally ahead of where they were in 2019. Turning now to drill a little bit further into the concrete performance on Slide 17. In order to provide a better view on the composition of the concrete division, we've presented here a view of revenue by product category as compared with 2019. We delivered pleasing growth in infrastructure revenues as the division achieved some key contract wins in its rail markets. Our product innovation in this segment is crucial in delivering lighter, more durable, lower-carbon products to our customers. We also achieved growth in flooring revenues with the commercial synergies of the Longley acquisition starting to play through. And our sales in fencing and building category reduced modestly. Whilst demand also remained firm, sales volumes were held back by some supply chain constraints, which limited production volumes. I'd like to move now to give you an update on the strategic progress and an updated view on our growth initiatives on Slide 19. Many of you will be familiar with the 3 pillars of our operational strategy, which we refer to as sustain, innovate and grow. These pillars define how we operate consistently over time. And the impact of progress in each of these areas is enabling us to become a better, stronger and higher-quality business. As an organization, as we came out of the pandemic, we recognized that we needed to focus our efforts and engage our teams on a key number of must-win battles linked to our strategy. And I'm happy to see great progress, which is driving short- and long-term performance, and I'll highlight a few examples below from H1. Moving first to the sustain pillar. Health and safety of our people and all of our partners will always be foundational to everything we do. We are constantly reminded by this pandemic that productivity and efficiency have to be supported by a strong focus on health and safety. During the period, we launched our new health and safety management system across the organization, which allows us to share best practices and ensure that both risks and opportunities are visible across the whole Ibstock team. We expect to embed and extend the use of this tool over the next 12 months to support our progress towards medium-term lost-time injury frequency targets. Within the area of operational excellence, we've placed particular focus on the efficient and standardized management of our clay quarries as well as the optimization of materials management across the business. By bringing in thought leadership from other industries and combining it with the unrivaled clay and ceramics expertise we have in-house, we've identified a number of opportunities to remove cost in our quarrying activities, improve efficiency and reduce our impact on the environment. As I'll touch on later when setting out our growth ambitions, our consented clay reserves represent a key strategic asset of the Ibstock business, and the efficient management of these reserves will be even more viable as we go forward. A strong collective focus on operational excellence is particularly important in the current environment. And I believe the agile and dynamic way the teams across Ibstock have managed plant reliability in the last 6 months has been crucial to delivering the results we've achieved and supporting our customers. I'm also pleased to report that we've delivered progress in all areas of our ESG agenda, where we define our ambition to become the most sustainable manufacturer of clay and concrete products in the U.K. Just some highlights from the first 6 months of this year include the establishment of a formal ESG subcommittee of the plc board, which has already met twice; being the first company in our sector to procure 100% of power for renewable pure green sources; the announcement of the Atlas factory as the first net-zero brick factory; and significant progress in our targets for reduction in carbon, plastic, waste and cement content in concrete. We set out our sustainability road map several years ago and reported continuing performance against our 2025 targets in our recently published third annual sustainability report. However, while these targets have been effective in putting our focus in the right areas, I believe the business needs to go further and faster in delivering on this challenge. We're therefore in the process of reviewing and revising these targets now with the ESG Board's subcommittee. I look forward to updating you about these even more ambitious targets over the next 6 months or so. Moving on to innovation. I see the area of innovation as a critical priority for us as a business, keeping us at the forefront of our industry. During the first 6 months of 2021, we focused on more innovation in our core brick range and launched 3 exciting new brick types from our Leicester soft mud factory. These white and gray bricks with hand-creased textures will compete with imported products in the higher-value specification market segment. We've also seen strong growth in market demand from our facade solutions. Sales of our MechSlip mechanical slip fix and Nexus systems increased materially again through the first half, and the order books continued to grow. And our concrete business continues to deliver on its strong pipeline of innovation with next-generation cable troughing and platform copers using novel polymer technology to reduce weight and, therefore, improve handling, installation and carbon reduction for our customers. We have a target to achieve 20% of revenues from new and sustainable products by 2025. And right now we're just under 12%. Alongside our product innovation, we're focused on approaches to both marketing and sales, which leverage the latest digital tools. Made of online marketing campaign targeting architects and specifiers has ensured that customers are aware of both our leading products and solutions and the in-house design and technical expertise we can bring to our clients' build projects. And we have made good progress on our digital journey, with pilots of our new paperless outbound logistics processes progressing well during the last 6 months. Okay. Turning to cover our growth agenda, including an update on Atlas. I strongly believe that with the foundations we now have in place, Ibstock is well positioned to deliver above-market growth, and it will be a key focus for me personally in the next 12 months. As I said before, we see growth being delivered on 2 distinct tracks: firstly, in capacity, efficiency and sustainability enhancements to optimize the performance of the existing business; and secondly, on innovation and extension into new markets to diversify our revenue base. Through investment in our existing business, our broad differentiated asset base provides us with a unique optionality to make targeted organic investments to support growth over the medium term. And the recent announcement of the Atlas project, GBP 60 million in wire capacity in the Midlands is an excellent example of this optionality. We have to continue to create value from our footprint in clay. As an update, Atlas is progressing well with the project team set up, orders placed and site preparation underway. And we've also had excellent feedback from major customers about the merits of the net-zero carbon initiative. Whilst our established core clay business remains vital part of our growth ambition over the medium term, in order to deliver faster growth, we'll look to invest to diversify our revenue base in adjacent areas of the U.K. construction products markets. Within our concrete and modular business, we see a number of opportunities to deploy smaller levels of capital to capture faster paybacks at similar levels of return to the clay business. We have an attractive pipeline of acquisitions and partnerships, which I believe will enable us to accelerate growth over the medium term. And you can see on this slide the key areas of interest. We're focused on product categories across the U.K. building envelope landscaping and infrastructure markets. And we'll look to invest in areas that serve both traditional markets and those exploiting modern methods of construction. We anticipate that an increasing proportion of growth in U.K. construction will come from off-site modular construction, and we believe that different facade products and solutions are interesting areas of growth potential for us. For instance, there are currently about 20,000 planning applications for building over 11 meters in the U.K. Of these, over 18,000 are in brick or masonry, which is a 40% increase in penetration on metal cladding since 2018. We're also thinking strategically about opportunity to create value through transformational investments in sustainability. I alluded earlier to different ways to unlock value from our play reserves, and we're looking to novel ways to transform the energy footprint of our brick network. As Chris said out earlier, our strong financial position, which will be supported by ongoing cash generation, provides us with an excellent platform to accelerate progress on these growth opportunities, and we're well advanced in mapping out near and longer-term investment plans. So moving to the summary. Our strategy, sustain, innovate, grow, is delivering results. And we hope to give further updates in H2 here, including further ambitions for our ESG targets. The group delivered strong performance in H1, and we now expect the full year to be modestly ahead of previous expectations. With a strong balance sheet and cash generation, we are well positioned for growth with projects like Atlas, but also on more diversified investments that will deliver attractive returns. And with that, Chris and I will be really happy to take your questions.

[Operator Instructions] And we'll take our first question today from Yves Bromehead from Exane BNP Paribas.

If I could, I have 3. The first one is on the guidance. Assuming modest means mid-single digits, so that would essentially imply you would be happy with consensus at around GBP 100 million. But with that in mind, it's quite a sharp decline in H2 versus H1. So maybe can you just help us to reconcile the drivers and the numbers here because it's quite a different shape of margins and profitability between H2 and H1? So just trying to understand what is driving that. My second question is on working capital. If you're running flat out and demand stayed at this level, it's unlikely you'll be able to build any inventory in H2. So as we look into the free cash flow bridge here, working capital, how should we think about this? Is the H1 number equally as relevant for the full year, so expecting around the minus 10? And then last question is on the ESG side of things. With Atlas transitioning into 100% net zero and the group working towards using more renewable energy, what type of investments do you need to do in terms of the network and the piping systems? Because originally, you have a gas network that feeds from district, I presume, all the way up to your plants. But if you switch to hydrogen or electricity, what type of investments and work do you need to do to bring that on to your existing network?

Chris here. I'll take the first 2, and Joe will take the third. So in terms of guidance, you're right, in terms of where we're steering in terms of a full year number. When you think about the half 1, half 2 dynamic, I think a few reflections on it. The first one was, as we came into the year, as we talked about at the beginning of the year, we expected a result which would be modestly weighted towards the first half. And that was more a function of demand, frankly, than anything as we saw sort of stamp duty holiday and Help to Buy driving that sort of market shape. And we also anticipated, from an operating perspective, some of the bigger maintenance shutdowns being half 2 loaded as well. So that contributed to that position. Now what we've actually seen is, demand has been robust. And actually, as we look out into the second half, we continued to expect demand to be at those sorts of levels. So we feel good about where the end market is. I think the 2 things that we are overlaying on top of that really relate to supply side dynamics. The first one is around availability of inputs. So we talk about freight and labor in our factories, which we've seen, as the half 2 has started, being more of an elevated risk. But the second thing that we see is, obviously, the price of those inputs with inflation starting to come through at a pace that we didn't see in the first half. So I think when you lay those 2 things on top of where we would have expected to be, we still feel good about the second half. But I think we are overlaying a degree of caution relative to what we were able to achieve in the first half, which we think is a sensible place to be just given that the supply chain has become a much more dynamic risk over the last sort of 6 to 8 weeks or so. If I talk about working capital, which was your second question, you're right, our network is running at high levels of utilization, and we would expect to see that continuing in the second half. So I wouldn't expect to see a significant inventory build. Receivables really was the reason for the sort of outflow of working capital in the first half. June is obviously a much bigger sales month than December, so you get some natural growth in half 1 that then reverses to some extent in half 2. But against the backdrop of very good levels of utilization in a firm market, I wouldn't expect working capital to move materially in the second half, which really sort of confirms your working hypothesis there. Joe?

And on the carbon reduction, so as you know, a lot of new investments you make in any modern manufacturing processes in our industry, you get huge benefits in thermal efficiency. So we don't see that as being significantly differentiated investment. It will be part of the usual asset replenishment process that we undergo, and we'll continue to get much further down the carbon curve that way. We also work a lot on process emissions, which is optimization of materials and reductions in that way. We are working -- obviously, looking at the whole -- the strategic framework for the U.K., which looks like it's got gas and biomethane into the gas network, and if that was the case, then there wouldn't be much -- major changes in pipe working and so on. It will still flow through the same sort of network. So we don't see significant CapEx there. However, we're also looking at our own internal R&D to look at how we can see -- to look at alternative fuels. And we've done -- we're doing some investments and looking at energy from waste. That will be more expensive in terms of CapEx. But we're not talking significant amounts. We're talking about potential even for revenue generation from using waste. So I'm excited about that. We've done that in the cement industry, and we're looking at that very closely in the brick industry as well.

[Operator Instructions] We'll now take our next question from Clyde Lewis from Peel Hunt.

I've got 3 as well, if I may. One probably for Chris around the sustaining CapEx number. I think you sort of mentioned sort of GBP 20 million, GBP 21 million, which is unchanged. But you also mentioned that that's going to include the spend on the enhancement sort of programs. Should we be thinking about a lower sustaining CapEx number going forward if you're able to do the enhancement programs within that GBP 20 million to GBP 21 million? That was the first one. Second one was probably one for you, Joe. I think you gave numbers on the sort of brick use in high-rise buildings. I'm just wondering if you can give a little bit more detail around that because that was sort of interesting to hear, again, that shift in terms of sort of what's going on. And the last one I had was really on sort of pricing, whether you can give us an idea as to how much prices are higher today across the sort of, I suppose, the clay and the concrete division compared to a year ago, just to give us an idea of a bit of help on sort of modeling and understanding how much things have changed.

Thanks, Clyde. I'll take the first and third. Joe, deal with the second one. In terms of sustaining CapEx, yes, you're right, GBP 20 million to GBP 22 million was what we said coming into the year. We still expect that to be the case. It's got circa 3 to 4 on those enhancement projects. So that's the way to think about it. I would certainly see us over time reducing the level of sustaining CapEx. We've rationalized the network. We've closed a couple of the older factories. With Atlas being redeveloped, that will substantially reduce the sort of sustaining burden on 1/3. So I would expect to see that come down modestly over time from the amount that we've always talked about being circa GBP 20 million or so over time. So that's the position there. If I just deal with pricing, your third question, and then hand to Joe for the second one. When we came into the year, we talked about a relatively sort of benign cost environment in clay that we saw, and we said that in pricing through with our customers, we've kept unit margins whole. That has been the case that we've experienced really in the first half in clay. As you know, we are able to lock in the majority of inputs as we come into the year. We had a little bit more energy open in the back half than we did in the first half. But nonetheless, I think you can think about inflation in the first half of this year in the low single-digit percentage. When you look at concrete, as Joe said, we're laterally sourcing a lot of ingredients that go into that, and those ingredients have been subject to higher levels of cost inflation. And it's less possible to purchase things like steel forward to satisfy an entire year's need. So yes, we've seen some upward pressure. And inflation -- realized inflation in the income statement in the first half in concrete is much closer to sort of mid-single digits. As we look into the second half, I would certainly see some of those drivers on both sides of the house moving up a little bit. We are watching those very, very closely and looking at the sort of margin impact, and we'll take appropriate commercial action where we need to, to address that. So I think our conviction in the sort of pricing power of the business remains very much intact. Nothing is off the table as we think about inflation looking forwards. But that's the way to sort of think about realized cost inflation in the P&L first half.

And Clyde, a lot of people just think of the brick guys as a proxy for the housing market, which is the typical single-family homes and new builds. And that's very important, of course. But as I mentioned, there is a huge growth in recladding. There's a huge growth in build to rent. And properties for over 11 meters, commercial residential properties, I mentioned 20,000 over -- with significant values over 11 meters high. And so we're really interested in that both from a recladding, mechanical rainscreen point of view, but also in pure brick plays and facades where our products go into those end-use segments. There are also interesting growth in off-site manufacturing with traditional housebuilding going off-site. So these areas are important. There may not be short-term growth in terms of -- on the off-site side on housing building, but certainly on the mid-high-rise residential, it's a fast-growing area for us.

Our next question today comes from Gregor Kuglitsch from UBS.

A couple of questions, please. So the first one is just maybe thinking more about the price increase, the price negotiation into next year. I believe one of your competitors sort of talking pretty high numbers given what's obviously happened on the spot gas pricing and so on. So I wanted to hear your position on that matter and how hard do you think you can push pricing into next year. And then the second one is on acquisitions and sort of the M&A pipeline. I mean you're kind of flagging there may be something. At least, I think that's kind of the message. So can you just give us a sense what sort of -- I appreciate you can't comment specifically, but in terms of size, quantum, what we should be prepared for?

Yes. Gregor, I mean, typically, people have done negotiations on an annual basis in the brick industry. At the moment, times are very dynamic, and we're seeing more inflation, and that might have to change. And if that's the case, we'll not take anything off the table, as Chris said earlier on. We always want to make sure we're managing our margins and recovering our costs. And I think it's a favorable environment to do that. The market is tight. And house builders are pressing forward. They've also got pricing -- positive pricing movement in their own industry. So I think it's a positive price environment. And yes, I think we'd look to continue to move the business forward and maintain our margins. So I'm optimistic there. In terms of acquisitions, we've been really working hard to do a lot of focus on this core business internally and managing through the pandemic. And we have done some small bolt-ons, but it's a big focus for us now. We have got an interesting pipeline. Some of them are small and complementary in places like the infrastructure in concrete where we've already got a good position and some adjacencies. So I would expect to see some progress in that in the second half of this year. But again, it's -- I can't talk about specifics, but we've got an interesting pipeline. And also, we've got some good capability now to execute. One of the new MDs that we brought in has done a lot of acquisitions before in the past. So we're very much focused on that. And I would hope to see something in the next -- certainly, in the next 6 to 12 months should be positive.

Okay. Maybe a couple of follow-ups actually. So one, I saw in your statement, I think you called out additional R&D expenditure, I think, GBP 1 million to GBP 2 million. So just so we understand what that is and when that feeds through into the P&L and, I guess, the return you expect on that. And then maybe on the margin management point, can you just conceptually understand -- normally, perhaps this doesn't matter too much, but in your mind, do you look at your percentage margin? Or do you look at your kind of unit margin? I guess the point is, if we're talking about serious inflation that starts to make a difference, right, if we're seeing, I don't know, 5%, 6%, 7% inflation, you want to keep your percentage margin stable, obviously, it has a very different impact on earnings than if you're saying, "Hey, I want to keep my unit margin stable."