Ibstock warns on profits after brick factory maintenance shutdowns

Brick and tile maker Ibstock warned on Monday that full year profits will be lower than previously guided due to a factory production logjam on top of the earlier weather problems and ongoing higher energy costs.

For the first six months of the year, the FTSE 250 company said it expects adjusted earnings before interest, tax, depreciation and amortisation to be roughly £58m, subject to final audit, which would be a 3% decline from the £59.7m produced a year ago.

Ibstock, which since April has been led by former Lafarge Holcim man Joe Hudson after the retirement of Wayne Sheppard, had warned in May that it had endured a slower than expected start to the year for its brick and concrete businesses in the UK due to the harsh winter and higher energy prices. Reported EBITDA will be nearer £66m, helped by the sale of surplus property.

While the company's UK brick factories have been producing at, or near, full production capacity for several weeks now, production in "recent months" has been "lower than expected" and because of maintenance shutdowns and extra spending on plant maintenance and refurbishment, output and cost recovery are likely to be below expectations in the second half of the year. A new brick factory in Leicestershire is unaffected and still expected to be commissioned by the end of 2018.

As a result, Hudson and his team have guided to adjusted EBITDA for the calendar year in the range of £121-125m, below the average forecast from City analysts of around £130m but still up from the adjusted EBITDA generated in 2017 of £119.6m. Reported EBITDA was guided to a range of £130-134m.

Cash generation, further boosted by gains of £9m from property sales, has remained strong and directors assured that the interim dividend and a proposed supplementary dividend will not be affected.

Hudson said demand in the UK brick market is "robust", the outlook for UK Clay business "remains encouraging", both supported housing demand.

He said a review had been made of the brick manufacturing assets "which has identified a number of measures that are required to sustain the quality and range of our production output".

"While the resulting additional maintenance shutdowns and extra spending on plant maintenance and refurbishment will have a short-term impact on our financial performance, we firmly believe that it is the right thing to do for our customers and to maximise long-term value for shareholders. We will be working closely with all customers to ensure we continue to meet their demand requirements over the second half," he said.

Ibstock shares fell 12% to 244p on Monday.

Mike van Dulken, head of research at Accendo Markets, said the maintenance shutdowns were "costly" both directly and in terms of lost output, which will only go to hamper output further and could have implications for the wider UK housebuilding sector.

"Might the housebuilders face pricing pressure from H2 into next year? Ibstock was already forecasting price rises due to energy costs. Might they need to go even higher, squeezing housebuilder margins further? Or will it have to take the hit to ensure long-term agreements?"

Amid a slowing of UK house price growth in the face of Brexit uncertainty, tighter lending conditions and an anticipated Bank of England interest rate rise this week, it was "not great news" for the sector.

Analysts at UBS summed up the statement as an implication from the new CEO "indicating that higher levels of maintenance spending will be required going forward", with around of 1/3 of this impact will be higher maintenance costs and 2/3 from lower production volumes during maintenance periods. This shortfall is expected to extend also into 2019.