EPWN Epwin Group Plc

Business Review

Strong trading performance

The Group delivered a strong performance in 2023 and continued to make progress towards our strategic objectives. Revenue declined slightly compared to the prior year, as expected, by 3% to £345.4 million against a very strong comparative (2022: £355.8 million). This was due to lower market volumes, primarily in the second half of the year, and surcharge reductions as PVC input prices reduced, offset by the full year contribution of our 2022 acquisitions, which contributed £12.0 million of external revenue (2022: £3.8 million).

Underlying operating profit increased by 19% to £25.5 million (2022: £21.5 million), as underlying operating margin improved by 140 basis points to return towards pre-pandemic levels, reflecting our strong operational focus and responsible approach to materials price inflation in a competitive market.

The easing of raw material inflation, which was a significant factor in 2021 and 2022, appears to have plateaued, with prices remaining at elevated levels. Inflation continues to put pressure on overheads, particularly staff costs, driven by labour retention and living wage increases, and power prices, which continue to be elevated. As a result, the Group continues to implement pricing actions where needed to pass on heightened operating costs appropriately. Recruitment challenges have eased somewhat but remain a factor and we continue to develop our pool of talent for the future, welcoming an increased number of apprentices to the Group during the year, along with the second cohort of participants on our graduate programme.

Operational highlights

Health and safety

The safety and wellbeing of our employees is our key operational priority and we strive for continuous improvement in health and safety standards across all operations. Health and safety related KPIs are closely monitored by the main and divisional boards. Our accident frequency rate ("AFR") has increased slightly to 4.4 per 100,000 hours worked (2022: 3.8), but remains below industry benchmarks. This is again driven by increased reporting of minor accidents, as lost time accidents (resulting in one or more days unable to work) were lower than 2022 on a like-for-like basis. Employees are encouraged to report all incidents and near-misses, even when minor, as part of a proactive approach to risk management and to promote an open and blame-free culture where health and safety is continually improving. There was also an increase in the number of RIDDOR injuries to 11 (2022: 9). While this remains low for a manufacturer of our size, the occurrence of any injury is always disappointing, with all incidents thoroughly investigated and appropriate actions taken.

A Group-wide exercise to reinforce training and ensure safe process is adhered to, focussing on the most common accident types, is again being undertaken. The recording and reporting of accidents remains critical to understanding the level of risk and adherence to process in our operations and KPIs continue to be monitored closely by management.

Production

With volumes in our core markets softening compared to the prior year, particularly in the second half of the year, we maintained a sharp focus on operational efficiency. Across our key manufacturing locations, materials efficiency and scrap rates are closely monitored and improved during the year, from an already strong base, with scrap rates reducing to all-time lows across the Group due to improved operational working practices.

Recycling

Increasing the volume of PVC waste recycled through our operations and increasing the use of recycled material within our own products remain core areas of focus for the Group. During the year, we invested in expanding the capacity and margins of our recycling operation and in co-extrusion tooling, which enables us to incorporate a greater proportion of recycled material into our products. The capital investment plan committed to on the acquisition of Poly-Pure was completed and operational by the end of 2023, albeit behind schedule due to delays in the delivery of plant. The business is now in a position to deliver on the increased capacity, margin and synergies envisaged at acquisition.

Strategic progress

The Group's focus continues to be on operational efficiency, product and materials development, cross-selling and business development, identifying and completing value-enhancing acquisitions and building on the Group's inherent sustainability credentials.

Value-enhancing acquisitions

During 2022, the Group completed the acquisition of Poly-Pure, a leading UK materials re-processor and Mayfield, a supplier of decking and related products to the holiday park industry. Integration of the 2022 acquisitions has been a focus during the year and is progressing in line with management's expectations.

The initial Poly-Pure integration is well progressed. The business was impacted by increased prices for recyclate, driven by an increase in market demand, and capital investment plans to raise capacity and facilitate the production of higher margin material were impacted by long lead times on plant. However, the capital investment was completed by year end and the business is building encouraging momentum for the future. The acquisition has enabled the Group to accelerate delivery of its sustainability agenda and contribute to a circular economy by recycling post-consumer waste and developing the wider market for recycled raw materials, and we remain optimistic about its prospects.

Mayfield has expanded the geographical coverage of the Group's growing decking operations and outdoor products range and the transition of third-party production to our own facilities is progressing. As a result, Mayfield has delivered an encouraging performance against challenging conditions in the holiday park and leisure market.

Product and materials development

Broadening our product portfolio and continually improving our products to ensure they remain at the forefront of the market, continues to be a priority for the Group. We work closely with our customers so that our actions are informed by their feedback. During the year we added further products to our core PVC and aluminium ranges and enhanced the opportunities to both utilise in house, and sell externally, reprocessed materials.

Progress with consolidation and rationalisation of activities

As a diverse Group that has grown significantly through acquisition, particularly in our decking operations and distribution network, consolidation and rationalisation of our activities has been a core focus in recent years. The project, commenced in 2022, to consolidate decking production into a single site was completed on time during the first half of the year, enabling operational synergies to be realised from the second half of 2023.

The project to consolidate IT systems, as well as finance and administrative functions, across our distribution network is progressing with the system going live on a phased basis in Q4 2023 and the roll-out across our branch network anticipated to complete in H1 2024. The single system will result in improved information flow, enabling more streamlined reporting and real-time monitoring of KPIs.

Sustainability

The Group continues to focus on sustainability in all respects, ensuring that our operations and our products enable us to contribute to the UK's wider sustainability goals alongside consistently delivering a financial performance that makes us a sustainable investment and enables us to pay a sustainable dividend to our shareholders.

Environmental targets remain most relevant to the Group as an energy-intensive manufacturer of scale. Our main focus continues to be on reducing the carbon footprint of our operations, primarily through actions to reduce waste and energy usage, and we will report that energy intensity per £m of gross revenue improved again, reducing by 8% compared to 2022. We are also focussing on reducing the carbon footprint of our products, primarily through increased use of recycled raw materials, and contributing to the circular economy through the recycling of post-consumer and post-industrial waste. Our commitment to sustainability is underlined by the formalisation of sustainability metrics within the Group's new Sustainability-Linked Loan facility with our existing lenders, Barclays and HSBC and inclusion of sustainability-related KPIs in the 2023 Annual Report and Accounts.

The Group continues to develop its sustainability reporting and our 2023 Annual Report and Accounts will include an integrated Sustainability Report for the third year and reporting under TCFD requirements for the first time. We recognise that there is more work to do to better understand our Scope 3 emissions, develop meaningful targets and establish a viable pathway to net zero for the Group. As a result, during the year, the Group established a Sustainability Forum, chaired by the Group Finance Director and including employees from across the business with direct responsibility for sustainability matters. The Forum will meet quarterly, report to the Board and work towards formalising sustainability metrics and targets.

Market overview and outlook

The Group's core markets have been impacted by the unhelpful macroeconomic environment during 2023, with the CPA estimating an 11% fall in activity for private housing RMI and a 19% fall in activity for private housing new build. Epwin has outperformed the market to deliver a strong trading performance, with revenue declining by just 3% overall compared to 2022 (5% on a like-for-like basis). This is due to our inherently strong position as a manufacturer of scale and the market leader for many of our products, as well as the resilience of our business model. Our broad range of products and nationally recognised brands, wide range of materials capabilities and diverse customer base provides a number of routes to market, which has enabled the Group to successfully navigate a period of varied demand across the wider building products sector. The Group's commitment to independent distributors, who are more agile and appear to have weathered the softening market conditions better than larger distributors, remains a strength.

The main challenges during the year have been in relation to consumer confidence and spending and the housing market slowdown. Increases in the Bank of England base rate to combat inflation has had a twofold effect in the market, reducing demand for new build properties and reducing the number of transactions across all property types. This, in turn, impacts the level of improvement activity in the RMI sector, as improvements often take place soon after a property is purchased. The impact of the cost of living crisis and higher mortgage rates on disposable incomes and consumer confidence, has resulted in reduced demand and lower activity in the RMI market, with non-essential improvement works again most affected.

Private housing RMI

Market expectations

Private housing RMI is now the second largest construction sector having reached historic high levels at the end of 2021 and in early 2022. The CPA forecasts a fall of 4% in 2024 before returning to modest growth in 2025, driven by a sluggish housing market, consumer confidence and spending and the impact of interest rates on household finances. Spending on non-essential, smaller discretionary improvements is likely to be the most impacted. A majority of RMI activity relates to repairs and maintenance work that cannot be postponed indefinitely, providing a level of base activity for the Group. Though there are early signs that consumer confidence is improving with growth in real wages and employment levels remaining high, in the short term, conditions are likely to remain challenging.

Response and longer-term outlook

·    Continued operational focus to protect profit margins

·    Strong market positions with high-quality, energy efficient products and a national distribution network to service the market effectively

·    Multi-brand, multi-channel market approach maximises trading opportunities

·    Diverse product range and customer base provides resilience, as demonstrated by strong 2023 performance

·    Continued investment in new product development to ensure our product offer remains attractive to customers

Private new build housing

Market expectations

The CPA expects private housing starts and completions to fall by 4% in 2024, following a challenging year for housebuilders, which saw double-digit declines in both, before returning to growth in 2025, driven by a sluggish housing market and increased mortgage rates impacting demand, as well as a challenging planning environment. Our new build-facing businesses benefitted from housebuilders' increased focus on completing existing plots during the first part of 2023, driving demand for products such as our GRP porches, dormers and chimneys. With fewer plots commenced in 2023, and as housebuilders continue to slow their build rates and report reduced order books going into 2024, we are likely to see a short-term contraction in demand. Easing mortgage rates, demand for affordable housing and anticipated cuts to interest rates provide upside potential.

Response and longer-term outlook

·    Strong position as the market leader in GRP building components providing benefits to housebuilders

·    Progress on operational efficiencies during 2022 and 2023 means businesses are well placed to respond to changing levels of demand

·    Opportunities for our new build-facing businesses to sell into other markets

·    Medium and long-term drivers remain strong as the chronic undersupply of housing continues, with targets for new homes still not being met

Public housing RMI and new build

Market expectations

Social housing RMI is increasingly considered to be a priority and there is a growing focus on decarbonisation and need for urgent improvements to the general condition of the existing public housing stock. Issues relating to the quality of housing built and maintained by social landlords, including damp and general disrepair, are becoming increasingly high profile and there remains a national shortage of suitable housing. This should result in housing associations and local authorities diverting more spending to basic repairs and maintenance, which would benefit the Group. With growth limited by financially constrained local authorities and housing associations, the CPA is forecasting modest growth of 2% in public housing RMI in 2024 and 2025.

Response and longer-term outlook

·    Encouraging start to the year for our social housing-facing businesses

·    Long-term drivers remain strong, with underinvestment in the social housing stock, much of which does not yet meet minimum EPC requirements

·    Sustainability matters of particular importance to social housing providers and local authorities, Epwin is well placed with strong environmental and sustainability credentials

Summary

In 2023, the Group demonstrated its resilience and ability to deliver against an unhelpful market backdrop. Looking ahead to 2024, short-term uncertainty remains and expectations are that markets will continue to be challenging. However, our strategic priorities remain unchanged. Our focus will continue to be on operational efficiency, completion and integration of value-enhancing acquisitions, product and materials development and cross-selling and business development, alongside continued commitment to our sustainability goals. We are confident in the medium and long-term prospects for the Group and our ability to navigate the anticipated short-term uncertainty.

Jonathan Bednall

Chief Executive Officer

10 April 2024