Annual Report (ESEF) • Apr 4, 2023
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Annual Report and Accounts 2022 Transformation, resilience and innovation Annual Report and Accounts 2022 Strategic Report 1 Highlights 2 Our Purpose Roadmap 4 At a Glance 6 Investment Case 8 Chair’s Statement 10 Chief Executive’s Statement 12 Q&A with the Chief Executive 14 Our Markets 16 Summary of Group Performance 18 Segmental Review 24 Business Model 26 Our Section 172(1) Statement 28 Stakeholder Engagement 36 Strategy 40 Key Performance Indicators 42 What ESG Means to Marshalls 60 Financial Review 66 Risk Management and Principal Risks Governance 76 Board of Directors 78 Corporate Governance Statement 92 Nomination Committee Report 96 Audit Committee Report 100 Remuneration Committee Report 104 At a glance 108 Remuneration Policy 120 Annual Remuneration Report 124 Fairness, diversity and wider workforce considerations 131 Directors’ Report – Other 133 Statement of Directors’ Responsibilities 135 Independent Auditor’s Report Financial Statements 143 Consolidated Income Statement 144 Consolidated Statement of Comprehensive Income 145 Consolidated Balance Sheet 146 Consolidated Cash Flow Statement 147 Consolidated Statement of 149 Notes to the Consolidated Financial Statements 186 Company Statement of 187 Company Balance Sheet 188 Notes to the Company 194 Financial History – Consolidated Group 195 Glossary 197 Shareholder Information MarshallsGroup Follow us on Twitter @MarshallsGroup Marshalls Subscribe on YouTube MarshallsTV The Group is a leading manufacturer of products for the built environment. We are committed to quality in everything we do, including environmental and ethical best practice. We create better spaces by putting people, communities and the Front cover (bottom right) Highlights Strategic highlights • Transformational acquisition of Marley Group plc (“Marley”) completed on 29 April 2022 • offering providing increased resilience through the cycle • Traded robustly ahead of plan during the post acquisition period • Integration tracking in line with plan and management improvements • Conservative capital structure maintained - increased priority to deleveraging in capital allocation policy • Ongoing investment in leading edge technology to half of 2023 with exciting new product development opportunities • New digital trading platform “Dropship” developed which extends the range of products offered by merchants • Products resulted in decisive action taken to reduce • Good progress made on ESG priorities - carbon sequestration to be trialled in a factory environment and cement reduction plan being executed Financial highlights • • • • • • • Notes Revenue (£’m) £719.4m (up 22%) Transformational acquisition, record adjusted results and well positioned for when markets improve before tax (£’m) £90.4m (after adding back adjusting items) (up 23%) £37.2m (on a reported basis) Adjusted proforma return on capital employed (%), after adding back adjusting items 13.3% Adjusted basic EPS (p) 31.3p (before adjusting items) Reported EPS(p) 11.4p Full year dividend recommended (p) 15.6p £101.1m Adjusted EBITDA (£’m) £136.0m Stay up to date with the latest investor news at: www.marshalls.co.uk 2018 491.0 2019 541.8 2020 469.5 2021 589.3 2022 719.4 2018 65.7 2019 74.9 2020 2022 101.1 2018 80.8 2019 103.9 2020 57.6 2021 107.1 2022 136.0 2021 77.4 1 Marshalls plc | Annual Report and Accounts 2022 Strategic Report 28.4 Our Purpose Roadmap Doing the right things, for the right reasons, in the right way Our mission is to deliver sustainable growth through a brand that drives customer product solutions for the built environment Our strategic goal is to manufacturer of products for the built environment Our purpose is to create better spaces and futures environmentally and economically Read more about our strategic goal on pages 36 to 39 Read more about our purpose on page 4 Read more about our mission on page 7 Case study Training begins ahead of dual block plant opening Read more on page 18 Case study Acquisition of Marley Read more on page 34 Marshalls plc | Strategic Report 2 Case study Reducing our carbon footprint is providing innovation and growth opportunities Read more on pages 48 and 49 Case study The Marshalls Academy Read more on page 55 The Marshalls Way For the right reasons In the right way • We set clear expectations • We anticipate and embrace change • • What ESG means to Marshalls Do the right things • We consider the long-term impact of every • We are guided by strong principles • We operate in the most ethical and sustainable way • We take responsibility for every action • We have high standards • • We strive to meet the needs and expectations • We are continually developing the business and Read more about The Marshalls Way on page 95 Case study Carbon sequestration Read more on page 49 Read more about our purpose on page 4 BETTER Workplace BETTER World BETTER Product Respecting People Made to Last Climate action 3 Marshalls plc | Annual Report and Accounts 2022 Strategic Report At a Glance A leading manufacturer of products for the built environment whilst maintaining a strong balance sheet with a transformational step for the business and Marshalls is the sector market leader in ESG way on human rights matters in its supply has unlocked cost and carbon reduction Read more about our landscape projects on pages 18 and 19 Read more about our building projects on pages 20 and 21 Read more about our pages 22 and 23 Marshalls plc | Strategic Report 4 Landscape Products Comprises the Group’s Commercial and Domestic landscaping business, Landscape Protection and the International businesses. • Paving • Kerb • Edgings • Walling • Protective street furniture Landscape Products revenue 55% Building Products Comprises the Group’s Civils and Drainage, Bricks and Masonry, Mortars and Screeds, and Aggregates businesses. • Drainage and water management solutions • Concrete bricks • Masonry • Mortar • Screeds • Aggregates Building Products revenue 27% • Concrete tiles • Clay tiles • Timber battens • Roof integrated solar panels 18% What we do and offers a broad product range with specialist Where we operate We are well placed to unlock value from the expanded geographical footprint we have gained Group now has a range of options to extract value from the geographical network and an extended network review Marley acquisition In April 2022, we acquired Marley. A leader in the manufacture and for Marshalls. The deal was transformational for the Group, further diversifying Marshalls coverage of the construction market sub-sectors. Like Marshalls, Marley has a rich history and depth of expertise. The Company was founded in 1924. Marley has a similar commercial strategy to Marshalls, focusing on generating pull demand from the Read more about the Marley acquisition on pages 34 and 35 30% housing RMI 39% 39% 31% 37% 24% Concrete production facilities across the UK 22 Clay tile production facility 1 Track record of delivering shareholder value Supportive long-term market fundamentals • • Ageing housing stock underpins longer-term demand for • Strong growth in infrastructure forecast over the medium term • • Positive outlook for water management and drainage systems • discretionary improvement sector • regulatory changes 2013 2022 5 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Distinct regions across East & South West 4 90 30 20 0 PBT - £’m 0 Value £’m at 2019 constant prices 2022 2020 Marshalls plc | Strategic Report 6 Investment Case Marshalls has executed a successful strategy to become a leading manufacturer of products 2014 Capital investment – well-invested factories generate growth 2015 Continuing development of operations 2016 ESG leadership journey – carbon reduction commitments and reduced carbon footprint Sustainability embedded in the strategy for almost two decades Digital transformation improve customer experience 2017 Investment in logistics Acquisition of CPM comprehensive range of technical and innovative water management solutions 2018 Sustainable supply chain Centralised procurement to optimise buying power and co-ordinate innovation 2019 Acquisition of Edenhall of sustainable concrete brick products 2021 Dual block plant investment 2022 Establishment of three operating segments Read more on pages 18 to 23 Acquisition of Marley manufacture and supply of pitched roof systems 2013 Product range evolution The continued focus on innovation and new product development ensures the focus on manufacturing and material technology capabilities Carbon reduction plan approved by Science Based Targets initiative 2020 7 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Managing risk Risk management process remains robust with Marley now integrated Risk process • Formal process to identify, assess and analyse current and emerging risks • Robust Risk Register process which now includes Marley • Mitigating controls constantly monitored • Controls subject to internal audit • Detailed action plans developed for Attitude to risk • We adopt a conservative approach to risk management • We are prepared to accept a certain level of risk to remain competitive • We seek to mitigate exposure to all forms • We aim to ensure that all controls are operating effectively • We aim to ensure that any residual risk appetite Read more on pages 66 to 75 Focused growth strategy Brand preference for product • • relationships • Early involvement in any project Customer centricity • Aim to have the best customer experience • Provide excellent customer service • Support the Group’s brand leadership Growth in the emerging business • Expand into new growth areas • Achieve sustainable growth • market share Logistics excellence • Deliver logistics excellence • Provide outstanding customer satisfaction • Latest technology combined with low emissions Operational excellence • Well-invested manufacturing facilities • and systems • respond to market Sustainable supply • Sourcing sustainable materials, products and solutions • Sustainable and ethical supply chain • Reducing embedded carbon New product development (“NPD”) • Delivering market leading product innovation • Developing best-in-class facilities • Innovative solutions to deliver growth Digital transformation • Investing in digital and forward- thinking technology • Digital standard for the industry • Extending B2B digital trading Key risks • Macro-economic and political • Cyber security • Supply chain • Climate change • • Extreme weather • New technologies • • Competition • Project delivery • • People Strong track record • Record revenue and adjusted • Strong cumulative annual growth rates across all metrics • Consistent dividend growth Supportive UK construction market • Strong long-term outlook for Infrastructure • Shortage of housing stock and latent • Increasing requirement for water management and drainage solutions • Transformational acquisition of Marley • • • Increased network (post-Marley) with distribution sites across the UK • Unique national network ensures logistics footprint • Well-invested sites with expansion and rationalisation opportunities and sustainable supply chain • • Centralised procurement ensures optimal buying power and focus on sustainability • Majority of raw materials sourced in the UK ESG market leadership • Sustainability and carbon reduction commitments embedded in strategy • 33 per cent reduction in carbon in the last four years • products now fully recyclable Strong balance sheet and cash generation • • • Clear capital allocation policy • Priority given to organic capital investment planned for 2023) • and on reducing the carbon intensity • Dividend policy of two times dividend cover (based on adjusted earnings) over the business cycle • New deleveraging objective added this year Focused growth strategy • manufacturer of products for the built environment • Underpinned by eight strategic growth pillars • Enabled by people and talent development Read more on pages 36 to 39 Chair’s Statement in a challenging year and The acquisition of Marley is a major step in delivering our strategic goal to Summary • Revenue up 22% compared with 2021, 1% on a like-for-like basis • before tax: £37.2 million) • Actions taken to reduce capacity expected in Marshalls Landscape Products to reduce cost base by • Final dividend proposed • Clear strategy with sustainability embedded – innovation in reduction opportunities • the built environment • Continued focus on health, in December 2022 and are expected to reduce operating costs by These have been delivered because we have a strong culture and culture is all about teamwork and we have continued to support during the second half of 2022 and we have continued to do “the Results generation and we maintain good headroom against our bank facility Overview Marshalls plc | Strategic Report 8 Dividends Marshalls’ strategy The acquisition of Marley is a major step in delivering our strategic ESG strategy ESG strategy continues to generate organic growth opportunities Voice Group which includes employees elected from all parts contributed to the establishment of a number of positive initiatives Environmental Our investment in concrete technology has unlocked cost and generated carbon reduction opportunities through our investment in Tri-blend powder technology and the production of lower embodied mineralisation technology that reduces and removes carbon dioxide Our commitment for the Marshalls businesses (excluding Marley) is to Targets initiative as consistent with levels required to meet our net-zero Social We continue to take the lead in supporting and upholding human ensure that all our products and services are ethically sourced supply chain mapping via Verisk Maplecroft and this information is supplemented with knowledge gained from our extensive networks Governance We are committed to the highest standards of corporate governance and we comply with all the provisions of the UK Corporate Governance Code as outlined in our Corporate Governance Statement on pages Board changes his wealth of knowledge and experience and for his long service Our people I am privileged to serve as your Chair and continue to regard our been many achievements in 2022 that we can be proud of and the Outlook challenging and assuming a progressive improvement in our end to be challenging and are planning for an overall reduction in volumes in 2023 in-line with the Construction Products economic conditions with some improvement expected in the brick business is expected to build market share due to its low Vanda Murray OBE Chair 9 Marshalls plc | Annual Report and Accounts 2022 Strategic Report The Group delivered record sales and during 2022 The integration of Marley into the Group Summary • Record trading performance • tax: £37.2 million) • • Robust balance sheet with pre-IFRS • nearing completion • Marshalls continues to be the Introduction Marshalls has executed a successful strategy over the last eight years to become a leading manufacturer of products for the built has been transformational for the Group given its scale and performance for Marshalls in terms of both revenue and adjusted Well-publicised macro-economic and geopolitical factors have Cost increases continue to be largely recovered through price increases and our centralised procurement team is actively growth experienced by our other recent acquisitions in building materials and water management has meant that the Group now 2022 trading summary Marshalls plc | Strategic Report 10 lower levels of demand is expected to reduce operating costs by strong demand for bricks from housebuilders and the lower carbon traded ahead of our original expectations with segment operating of the Marley business has progressed in line with plan and is now well embedded and we have a clear focus on value extraction 2022 results to certain non-cash adjustments arising as a consequence of the purchase price allocation (“PPA”) exercise required to recognise the assets of Marley on acquisition at fair value and the amortisation re-assessment of the amounts that will become payable to vendors generation has continued with the aim being to repay the term loan Operational initiatives and strategy project facilitates the launch of a new range of face-mix products that have aesthetic characteristics that are like natural stone and will investment projects that will drive future organic growth and we are There continues to be a focus on innovation and new product pipeline continues to be strong and the Group is committed to sustainability agenda and we are making good progress in carbon An example of sustainable product development is the introduction of Tri-blend powder technology into our site at Ramsbottom during of embodied CO Our overall strategy continues to focus on the maintenance of a Health and safety We have continued to prioritise health and safety and we have maintained robust health and safety procedures throughout our have focused on integrating the health and safety functions of of our employees and other stakeholders to the highest possible level and have introduced our new mental health and wellbeing as possible and to provide the best support that we can using our Martyn Coffey Chief Executive The development pipeline continues to be strong and the Group is committed to providing high performance product solutions that will 11 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Marshalls plc | Strategic Report 12 Q What impact have the acquisitions made in the last few years had on the organisation? A These acquisitions have increased the scale and breadth improvement opportunities and enhancing manufacturing Q How does the acquisition of Marley align with Marshalls’ culture? A market leader in the manufacture and supply of pitched roof systems to the UK construction market and has a strong successful implementation of the integration plan over the Q What is Marshalls’ overall strategic goal and how does the acquisition and re-positioning of the operating segments help to achieve this? A acquisition of Marley accelerates this strategy by broadening complementary sales channels and strategically located sites management reporting framework and will provide greater Q How has the acquisition strengthened Marshalls’ business model and made the Group more resilient? A discretionary and more cyclically resilient sector of the UK acquisition is transformational for the Group in terms of scale towards achieving our strategic goal The acquisition of Marley accelerates our progress towards becoming the 13 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Case study Marley roof system authorities in the UK to pilot a new type of solar pitched roof Roof refurbishment is an important part of Denbighshire biggest challenges is to bring the roofs up to modern standards As well as requiring a like-for-like replacement for the old clay repairs and incorporate solar technology to help tenants cut www.marshalls.co.uk/about-us Q strategy following the acquisition of Marley and A There will be no change in the sustainability strategy following committed to our carbon reduction journey and the process to Each business segment has a programme of carbon reduction projects that will also generate significant commercial Q What is Marshalls’ approach to diversity and inclusion and health and safety following the integration of the Marley business into the Group? A is underway to ensure alignment of policies and working policies and procedures are embedded into the “day-to-day” Q Will the acquisition and increased debt alter the Group’s capital allocation policy? A generated by the combined businesses to repay the bank continue to fund organic capital investment opportunities deleveraging objective has now been included ahead of Our Markets The CPA forecast that the Construction Industry will return to growth in 2024 as UK construction market forecast to contract in 2023 but longer-term structural New build housing The new build housing sector was very resilient in 2022 and the employment market and house price growth exceeding build cost CPA total new build housing output forecast Overview product range in order to complement its strong market position in derived from each of the new build housing and commercial & 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 economies and supply chains that were recovering from the environment for major purchases and the expectation that the UK economy will contract before starting to recover in the second the output of the construction sector and therefore customer CPA total construction output forecast % growth on previous year 200,000 180,000 140,000 120,000 100,000 80,000 2017 2018 2019 2020 2021 2022 2023 2024 Years 10.0 0.0 -10.0 Private housing RMI with pre-COVID levels and demonstrates continued demand for 4.1% 0.0% 2.0% 12.9% -4.7% % growth on previous year 40,000 30,000 20,000 10,000 0 2017 2018 2019 2020 2021 2022 2023 2024 Years 20.0 10.0 0.0 -10.0 -20.0 10.1% 9.3% 4.3% -20.8% 2.4% -10.9% -1.1% Marshalls plc | Strategic Report 14 Commercial and infrastructure Commercial & infrastructure end markets (incorporating other new work and non-private housing RMI) were also supportive in 2022 with weakness in commercial and other RMI activity partially offset Longer-term structural growth drivers attractive medium and long-term growth potential driven by the that requires increased repair and maintenance and the need to Notwithstanding the undoubted challenges that we will face in House building volumes compared to government targets CPA composite commercial and infrastructure output forecast % growth on previous year 110,000 100,000 90,000 2017 2018 2019 2020 2021 2022 2023 2024 Years 10.0 0.0 -10.0 Marshalls Register installer order books UK’s housing stock is ageing next few years 1900-1918 1919-1944 1981-1990 1991-2001 2002-2011 Post 2012 18% 1,873 3,739 3,222 1,382 1,384 1,717 13% 10% 7% 3% 8% 8% 1.8% 4.8% -12.4% 9.3% 2.7% -1.1% 1.1% Moving Annual Total number of Dwelling Completions — — — 350,000 300,000 250,000 200,000 150,000 100,000 50,000 — 24 22 20 18 14 12 10 8 0 Mar 2020 Apr 2020 May 2020 Aug 2020 Sep2020 Oct 2020 Nov 2020 Dec 2020 Mar 2022 Apr 2022 May 2022 Aug 2022 Sep2022 Oct 2022 Feb 2018 13.6 Feb 2019 12.0 Feb 2020 14.7 Feb 2021 19.4 Feb 2023 14.7 Average number of Weeks Feb 2022 17.4 Survey Month 15 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Marshalls plc | Strategic Report 16 Year ended 31 December 2022 (as restated) £’m Transaction related costs 14.9 — Amortisation of acquired intangible assets 7.3 3.9 — Additional contingent consideration 3.9 — Restructuring costs 13.0 10.2 — Other — Adjusting items 53.2 which is lower than the adjusted number due to the adjusting items Good headroom is maintained against the new bank facility and its business arising from a weak market backdrop particularly in private Marley from 29 April 2022 together with a strong performance from Year ended 31 December 2022 (as restated) Change £’m % 45.3 26.8 Marley Roofing Products 34.4 — — Central costs (5.4) Adjusted operating profit 101.1 Overview of Year ended 31 December 2022 (as restated) Change £’m % Revenue 719.4 22 Net operating costs (618.3) Adjusted operating profit 101.1 Adjusting items (53.2) Statutory operating profit 47.9 (10.7) Profit before taxation 37.2 Taxation (10.7) Profit after taxation 26.5 Adjusted EPS - pence 31.3 Statutory EPS - pence 11.4 15.6 9 Net debt 236.6 190.8 Summary of Group Performance 17 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Case study demand from these customers for low carbon products that will help them to reduce the carbon impact of construction and propose a lower-carbon pavement structure for their client www.marshalls.co.uk/about-us Segmental Review Review of the year 2022 £’m % Revenue 394.1 Segment operating profit 45.3 Segment operating margin % 11.5% from Commercial and Infrastructure and approximately 30 per cent in-line with pre-COVID levels and demonstrates continued demand with a weaker performance in the second half of the year partially driven by merchants adjusting stocking levels to align with reduced Key priorities Dual block plant and new product development be unique in the UK and will support the launch of new ranges of innovative value-added products that have the aesthetic appeal of natural stone at a lower price point and is already making its way into landscape designs Our Shine customer centricity programme continues to focus the overall customer journey and an example of this is the of our inbound emails which enables service and process offset by price increases that were implemented to offset the performance and reduced manufacturing output to manage costs within our manufacturing network and trading function to ensure alignment with lower levels of customer demand and the launch of a new range of face-mix products that have aesthetic characteristics that are like natural stone and allows 2023 outlook We expect this reporting segment to experience relatively tough market conditions in 2023 due to its exposure to Private focused on developing the business and will capitalise on the new product development opportunities arising from our improve customer service and ensure that operating costs are Marshalls plc | Strategic Report 18 Digitalisation We continue to focus on executing our an end-to-end digital offering and to pioneer the digital standards for the a new digital trading platform that will allow us to offer an extended range of without requiring the merchant to stock to place orders with the merchants offers a win-win outcome where the merchant generates incremental sales due to an extended product range without incurring the costs associated with regular orders and Marshalls live or in testing with two national merchants and at an advanced stage with three other customers and will Carbon reduction where we work with partners in the work on relate to taking carbon out mean that we are in a strong position to support partners with our extensive range and our deep insight in this Industrial Coverage of construction end markets 40% 30% 30% 19 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Segmental Review continued Industrial Coverage of construction end markets 60% 10% 30% Merlin Rise – Mayfair Vintage Stock facing brick Marshalls plc | Strategic Report 20 Review of the year 2022 £’m % Revenue 193.1 Segment operating profit 26.8 Segment operating margin % 13.9% construction sites and housebuilders opening new sites at a driven by escalating energy and commodity prices and was successful in recovering these through sales price increases during 2023 outlook We expect the market backdrop for this reporting segment to be challenging in 2023 due to forecast reductions in activity in New the relatively low carbon footprint of our products compared with produce concrete bricks and therefore negligible investment is Key priorities Growth in brick volumes content of a clay brick when measured using the “gold our range of facing bricks in 2022 and increased our manufacturing capacity through the conversion of an that we are well positioned to build market share in 2023 and offset the impact from the expected weakening of UK Leverage low carbon credentials Our ESG strategy continues to generate organic growth carbon products and as part of this programme we are accelerating our development of technologies to materially reduce the carbon intensity of our products using carbon reduces and removes carbon dioxide across the concrete other industrial processes to accelerate the carbonation of This is being trialled during quarter one of 2023 in one of investing in a number of our sites to support the rollout of an innovative concrete mix design that will reduce both raw New product development The Civils and Drainage range is being extended to include a more complete technical solution with Marshalls 21 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Segmental Review continued Review of the year Marley was acquired by the Group on 29 April 2022 and the results therefore include approximately eight months the post-acquisition period were six per cent higher than 2022 £’m % Revenue 132.2 — — Segment operating profit 34.4 — — Segment operating margin % 26.0% — — RMI) with the balance of around 20 per cent from reporting segment was positive in 2022 and the Private weighting of repair and maintenance activity rather principally driven by a strong performance by our roof- an increasing proportion of total revenues being 2023 outlook We expect the market environment for this reporting segment to be more challenging in 2023 due to its growth in roof-integrated solar panels due to increased penetration in RMI projects and changes in building regulations that require new build houses to achieve Key priorities Deliver demand generation for roof Marley is unique in being able to offer a full roof strategy is centred around generating demand Conversion of these opportunities is experience and invest in being “easier to work We are applying a key focus on marketing investment and commercial messaging for changes to the building regulations for energy performance in new housing now include a contractors to become accredited for solar Marshalls plc | Strategic Report 22 Further develop a brand that the opportunity to further leverage brand equity sustainability and the extension of lower carbon Deliver operational improvements transitioned to the Group team in the second half reduced vacancy rates using the Marshalls in- rates and implemented a targeted refurbishment review of our combined logistics footprint and Industrial Coverage of construction end markets 40% 20% 40% 23 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Marshalls plc | Strategic Report 24 Manufacturing We have well-invested sites and manufacture landscape, driveway and garden products from a range of materials, principally concrete and natural stone. Related risks • Competitive activity • Threat from new technologies and business models • IT infrastructure • Legal and regulatory Business Model Creating better futures for everyone Our capital Financial Strong balance sheet and a conservative capital structure. facilities, with extended maturities, provides prudent headroom Business National coverage and sustainable of manufacturing sites Long-standing relationships with customers and suppliers and Intellectual With over 130 years’ experience, we have a reputation built core values. We focus on innovation and strong R&D and NPD Natural resources Marshalls has extensive reserves of UK natural stone. Strong supply chain relationships ensure the from India, China and Vietnam Our business Our business Customers Our customers range from Domestic homeowners to Public Sector and expectations of customers in all our Related risks • Macro-economic • Weather • Cyber security • Competitive activity • Legal and regulatory Sourcing Our main raw materials are cement, sand, aggregates and pigments – the majority of which are UK sourced. Related risks • Macro-economic • Security of raw material supply • Cyber security • Environmental • Ethical • Climate change Distribution Our operations are part of a national are less than two hours away. We have Related risks • Macro-economic • Road infrastructure • Labour availability • • Environmental • Climate change Doing things The Marshalls Way Read more on page 28 Outcomes Outcomes Stakeholder outcomes Shareholders Cumulative growth of dividends of 12.7% (pre-supplementary) over the last eight years Dividend per share 15.6p Suppliers Active membership of Supply Chain Sustainability School – leading role in upholding human rights at home and overseas in our supply chains 100% Modern slavery country risk mapping Customers We aim to provide an outstanding customer experience at every step in the customer journey Automated live customer experience dashboard in development, to improve existing metrics Positive impact, with direct investment in the community. Plastic consumption down by over 30% since 2013 Proportion of concrete and natural stone products now fully recyclable 100% on pages 66 to 75 Read more about what ESG means to Marshalls on pages 42 to 59 Read more about our segments on pages 18 to 23 engagement on pages 28 to 35 Doing things The Marshalls Way Read more on page 28 Customers S o u r c i n g M a n u f a c t u r i n g D i s t r i b u t i o n L a n d s c a p e P r o d u c t s B u i l d i n g P r o d u c t s R o o n g P r o d u c t s S u s t a i n a b i l i t y S u s t a i n a b i l i t y D i g it a l t r a n s f o r m a t i o n D i g i t a l t r a n s f o r m a ti o n I n n o v a t i o n I n n o v a ti o n 25 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Our capital Our capital Human The Group has an experienced level of engagement Technology We are accelerating the development of our digital strategy overall customer experience, and and communication Social and relationships Our business Our business Landscape Products Commercial and Domestic landscaping business, Landscape Protection and the International businesses Related risks • Macro-economic • Security of raw material supply • Cyber security • Environmental • Ethical Building Products Mortars and Screeds and Aggregates businesses Related risks • Macro-economic • Security of raw material supply • Cyber security • Environmental • Ethical Related risks • Macro-economic • Security of raw material supply • Cyber security • Environmental • Ethical Sustainability Sustainability at Marshalls is at the heart of what we do – you can see it in our products, in our commitments and in our actions. The UN Global Compact’s principles continue to guide us and The Marshalls Way of doing the right things, for the right reasons, in the right way underpins our sustainability model. Our three pillars of Respecting People, Climate Action and Made to Last demonstrate our areas of focus through becoming a Better Workplace, contributing to a Better World and giving our customers a Better Product Related risks • Security of raw material supply • • Ethical • Climate change Digital transformation Our customer focused investment in digital technology is transforming the customer experience and advancing the business model. Related risks • Macro-economic • Cyber security • IT infrastructure • Legal and regulatory Innovation We are committed to the development of innovative processes and equipment and to the delivery of innovative Related risks • Competitive • • Security of raw materials supply • Climate change Outcomes Outcomes Employees DERI strategy and employee engagement measurement Active apprenticeships in 2022 142 Government and regulatory bodies Responsible business commitments (e.g. Living Wage) 9 years of being Fair Tax • Shareholder value • • Relationship building • Organic expansion • Brand development • Effective capital structure Strategic corporate objective outcomes Incorporating Marley The acquisition of Marley was a transformational step in delivering the Group’s strategic goal of becoming the UK’s leading manufacturer of products for the built system with highly recognised and market leading brands. Read more about the Marley acquisition on pages 34 and 35 Read more about our strategy on pages 36 to 39 Doing things The Marshalls Way Read more on page 28 Marshalls plc | Strategic Report 26 Our Section 172(1) Statement S172 Relevant disclosure Reference The likely long-term impact of any decisions The Board sets the Group’s purpose, mission and strategy and ensures they and futures for everyone: socially, environmentally and economically”. The annual strategic reviews conducted by the Board (the most recent being in November 2022), and the consideration of at least one of our strategic growth pillars at each Board meeting, focus on the long-term sustainable issues we face in the short to medium term. consequences of decisions in the short, medium and long term so that not separate from, all business decisions. The Board has adopted a clear capital allocation policy, with good organic and acquisition investment opportunities that help us achieve our strategic goals. This demonstrates its commitment to the development of the business over the medium to longer term, and the acquisition of Marley Page 2 Pages 36 to 39 Pages 66 to 75 Page 64 The interests of the Company’s employees Our business is underpinned by people and talent development and is committed to diversity, equity, respect and inclusion. These are central to The Marshalls Way. Whilst we have made good progress with these during 2022, they remain areas which we are committed to continuously improve. Health, safety and wellbeing within our operations is our top priority, with this being a standing item on the agenda at every scheduled Board meeting. Our goal is continuous improvement with the achievement of annual health and our senior management team. The Board monitors culture through our engagement mechanisms, namely our Employee Voice Group which, in addition to being attended by our attended by other Board and senior management team members. engagement survey to the Board, together with details of the actions being other members of the Board and senior management team, engage with employees on a variety of subjects through our Employee Voice Group. Pages 54 to 57 Pages 58 to 59 Page 55 Page 55 Pages 54 to 55 Our Section 172(1) Statement 31 December 2022. The Board directly engages with our employees and shareholders throughout the year. This is through well-established mechanisms for The Board also receives presentations and reports from senior management as part of updates on how the business is progressing with Although there are established parameters for decisions that are reserved for the Board, the business engages openly and transparently with and experience. 27 Marshalls plc | Annual Report and Accounts 2022 Strategic Report S172 Relevant disclosure Reference The need to foster the Company’s business relationships with suppliers, customers and others Customer centricity and sustainable materials supply are both strategic growth pillars of the business. Our performance during 2022 was supported by regular engagement with on both the buy and sell side. We are committed to operating sustainably and ethically and, within our Pages 37 to 39 Pages 30 and 31 Pages 42 to 59 The impact of the Company’s operations on the communities in which it operates and the environment Our sustainability journey began more than 20 years ago and is at the heart of how we operate our business. The Board receives updates on our ESG programme from the Chief People annual programme of meetings with shareholder governance teams. including the role of the ESG Steering Committee established during 2022. engagement, the SASB Standards for Construction and the UN Sustainable Development Goals. This supports prioritisation within our ESG programme. we are integrating Marley into these. Pages 42 to 45 Pages 42 to 59 Page 46 Pages 46 and 47 The regulatory implications of any decisions experienced, well-established, specialist functional teams and with the guidance of the Group’s General Counsel and Company Secretary. from its professional advisers, as was the case with our acquisition of Marley and the associated debt and equity fundraisings, which required shareholder approval. Page 89 The importance of the Company maintaining a reputation for high standards of business conduct decisions are driven by this. Our prioritisation of the health, safety and wellbeing of our colleagues and our clear ESG commitments underpin our goal of creating better spaces, better world, better product. Our strategic growth pillars underpin our purpose, mission and strategy. Page 28 Pages 58 and 59 Pages 36 to 39 The need to act fairly The Executive Directors engage with shareholders following the publication The Chair and the Remuneration Committee Chair meet annually with the We consulted with and sought the approval of shareholders ahead of completing the acquisition of Marley. time to ensure maximum engagement opportunity. Equality of rights attaching to members’ ensures we meet the obligation Pages 30 to 35 Pages 100 to103 Pages 34 and 35 Pages 133 and 134 Pages133 and 134 Marshalls plc | Strategic Report 28 Our stakeholders: Stakeholder Engagement Generate value by sustainable growth Investment, strategic guidance and stewardship leading product innovation Customer loyalty, brand preference and A stretching, exciting, supportive and environment Diverse, talented, engaged and productive colleagues We treat suppliers fairly, building long-term relationships High-quality goods and services resulting in products our customers love and specify We act in support of the commitments doing business responsibly We see the business through the lenses of others We share expertise Government policy, regulatory recognition Shareholders Communication and dialogue build strategy from investors Customers Engaging with our customers drives solutions for the built environment Employees Our two-way dialogue helps Marshalls attract, develop and retain talented people who will help us achieve our purpose and mission Suppliers Dynamic dialogue has built a strong supportive supplier base which supports our purpose and which shares in our success Communities and We have open and honest dialogue, sharing our goals and progress in creating better futures for everyone Government and The Marshalls Way We do the right things, for the right reasons, in the right way Key What we do Our purpose To create better spaces and futures for everyone: socially, environmentally and economically 29 Marshalls plc | Annual Report and Accounts 2022 Strategic Report 2022 in focus governance structure at Board level and throughout the Group, supporting the delivery and culture of our longer-term strategy and our ability to respond to strategic challenges in the short During 2022, the business operated against the macro-economic to manage the short-term impact, whilst not losing sight of the Group’s longer-term strategic goals and acting on the opportunity Section 172(1) of the Act sits at the top of each Board agenda prioritises the health and wellbeing of our colleagues and the safety of our operations. Our sustainability and ESG commitments (pages business and our success, and we are integrating Marley into these important programmes. The Board recognises that our brand and ability to attract and retain talented people depend on our responsible operation of the business. the year ahead, the Board will continue to dynamically manage our strategy to ensure we capture the opportunities and manage the issues we are presented with. In addition, the Board will conduct its annual strategic review to ensure we balance our consideration The performance of the Group during 2022 validates the, at times, economic uncertainty, including the reduction in manufacturing capacity to ensure it is aligned with expected demand in the year ahead. its consideration of the Group’s capital structure and capital performance during the year and its future growth aspirations. The Board has continued to engage collaboratively with the senior management team, providing the challenge and support that only comes where there is transparency of information and open Marshalls plc | Strategic Report 30 Our stakeholders: How and why we engaged Stakeholder Engagement continued Marshalls’ purpose, to create better spaces and futures for everyone: socially, environmentally and economically, can only be achieved if we consider and Marshalls’ stakeholder relationships purpose and strategy can have an impact on people, both inside and outside the business. They can affect the communities, companies and other organisations we deal with or which are otherwise interested in what we do and how we do it. It is The way in which we engage with and consider the interests right things, for the right reasons, in the right way” means our relationships with them involve open and transparent two-way communication over a long period of time. This builds trust and operating in a more sustainable way, reducing our impact on the environment or supporting the business with long-term capital investment that drives our growth and shareholder value. them and an example of how we have considered their interests engagement mechanisms to ensure Marley is integrated within them. Business engagement • AGM, Annual Report, trading updates and presentations • Regular phone and video calls, face to face meetings, site visits and investor roadshows • Investor relations website • Group Sustainability Director engages regularly on ESG and sustainability • • General Meeting approving Marley acquisition in April 2022 Board engagement • The Chair and Remuneration Committee Chair held meetings with shareholders in November 2022 • PR advisers • Investor site visits and written consultations (e.g. in relation to policy) • At the Company’s AGM Links to strategic corporate objectives Shareholders Business engagement • Centralised procurement for the entire Group enabling optimal buying power and attention from suppliers • Commencement of integration of Marley expenditure into Group-wide deals • Effective, regular and honest communication with suppliers – underpinned by Code of Conduct and other core Marshalls policies • Payment of invoices made consistently in accordance with agreed payment terms • Transparent formal tenders and negotiations • • • • Implementation of a new Supplier Relationship Management system as • Strategic partnerships with NGOs, governmental institutions, ethical regulators and charities Board engagement • Board presentations on growth pillars dependent on our engagement and • Board participation in our strategic review • • Regular supply chain and business continuity internal audit reviews • Annual consideration and approval of our Modern Slavery Act statement • Reports on ethical sourcing and ETI Base Code Links to strategic corporate objectives Suppliers How we engaged Links to strategic corporate objectives Shareholder value Relationship building Organic expansion Brand development Effective capital structure 31 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Business engagement • Dedicated customer experience team and improvement plan supported • Customer journey mapping completed and regularly updated across all through the end-to-end customer journey • transaction on quotes, orders and deliveries • Development of a customer metrics dashboard to report on all customer impacting performance • Structured customer experience improvement projects process to create • Service-level agreements and quality standards in customer agreements • customer to aid ease of purchase • • Customer surveys, customer visits and a commitment to deliver • Sustainability awareness training educating customers on our commitments and products • Awards ceremonies for professional installers and design competitions for • Design and engineering support for Domestic and Commercial customers • • Training sessions for professional installers and resellers • Research sessions and focus groups to help with product development • On-site discovery to watch how our products are used to help us develop new solutions • Board engagement • Board presentations on customer centricity and brand preference • Participation in our strategic review • Customer visits and meetings with sales teams • Receiving updates on and engaging with our customer experience programme • Installer and site visits seeing practical application of our products Links to strategic corporate objectives Customers Business engagement • Employee Voice Group represents all business areas and levels • colleagues • Regular communication across channels – supporting those employees • Senior management team site visits and engagement through our Leadership Connected Group (which meets at our annual management • Development, training and apprenticeship programmes (including recognition of study completion) • • Participation in the Your Voice survey (one survey completed in Spring 2022) • With the recognition of two Trade Unions within the Group there are numerous opportunities for leaders to connect with the elected representatives and, via this, the constituents that they represent Board engagement • designated Director for employee engagement, chaired by Chief People attending regularly • Board site visits • Board attended strategy review • Annual reviews of People and Group reward strategies • Review of senior management team performance, succession planning and wider talent development initiatives • Monthly health and safety Board reviews • • Reporting to Audit Committee the trends reported through the Serious Concerns policy and our external third party partner, Safecall Links to strategic corporate objectives Employees Business engagement • Regular dialogue with Government, regulators and industry groups • Active membership of the Construction Products Association and Mineral Products Association • Effective and clear policies against bribery and the elimination of modern slavery with training for staff and business partners Board engagement • Board provides direction to the support of the UN Global Compact’s principles, and policies relating to modern slavery and anti-bribery Links to strategic corporate objectives Government and regulatory bodies Business engagement • Collaborative approach to capturing carbon by using CarbonCure technology • slavery, diversity and climate disclosures • • Social value partnerships with Rotherham College and Barnardo’s Board engagement • Board is actively engaged with the Group’s ESG and sustainability strategy, including the setting of science-based targets • Board receives regular updates on our ESG programme and commitments • Chair, with our Group Sustainability Director, engaged with shareholders • ESG measures included within Executive Director incentives Links to strategic corporate objectives Communities and the environment Marshalls plc | Strategic Report 32 Effect • over time. • It ensures our customers understand that a relentless pursuit of achieving the highest possible customer satisfaction is • Our ESG principles and responsible business practices are central to the achievement of our strategic objectives and provide the foundation for long-term sustainable growth Outcome • Whilst the acquisition of Marley has triggered a re-baselining of our carbon reduction targets in accordance with guidance from the Science Based Targets initiative and the Carbon Trust, we remain committed to achieving our goal of becoming net zero. • mineralisation technology, injecting waste CO directly into into the concrete. • performance during 2022 in spite of the macro-economic conditions. • their disappointment at times regarding availability and price rises. • the Board oversees our ESG programme. Our ESG Report sharing details of our progress with our ESG objectives. Strategy Effect • required a balanced consideration of our strategic growth pillars, the long-term sustainable growth of our business • Whilst a number of these decisions have been driven by those matters which are formally reserved for the Board, the Executive Directors, exercising their judgement, and in the spirit of transparency, engage the Board on other business critical decisions. This is consistent with The Marshalls Way and we feel this ensures we are operating with the highest standards of governance at all times. Outcome • The Board approved the payment of an interim dividend • capital requirements of the Group in line with the Group’s capital allocation policy. • The Board recommended (subject, at the time, to shareholder approval) the Group’s acquisition of Marley, which accelerates the Group’s strategy to become the UK’s leading • In November 2022, the Board approved a reduction in our we anticipate will be a challenging year ahead. Board decision making Our stakeholders: How and why we engaged Stakeholder Engagement continued 33 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Effect • During 2022, regular engagement with our customers through our customer experience programme has given us areas of importance to customers. • Ensuring all colleagues have a voice is critical to the achievement of our purpose and to the preservation • pressure on our cost base. The quality and availability of materials are critical to ensuring our products meet the high relationships with them, to secure materials that meet the high standards and ethical sourcing requirements that have become synonymous with the Marshalls brand. Diligence and have been maintained and we are integrating Marley into these processes. Outcome • record performance during the year despite the challenging environment. • of technology solutions that support better engagement how order values are calculated. • The Board continues to support our approach of establishing long-term relationships with trusted suppliers where there is a balanced consideration of quality, availability, price and sustainable supply. As part of the integration of Marley, we are leveraging our increased buying power given the commonality of materials. We have adjusted our compromising our relationships with suppliers. Security of supply of high quality, ethically sourced materials underpins the long-term sustainability of our business. • Dynamic business management Marshalls plc | Strategic Report 34 Background have enhanced its product offering as part of its strategic goal to become the UK’s leading manufacturer of products for the built environment. respected brand with around 100 years of heritage, represented product portfolio with the introduction of Marley’s pitched offering. Marley’s people and performance were central to consideration of this transformational acquisition. Board role The Board approved the acquisition of Marley in April 2022 and then gave its recommendation for approval by shareholders. including its alignment with Marshalls’ purpose, mission and recommending that shareholders approve the acquisition, the of the Marley brand. Throughout, the Board challenged and supported the senior management team’s assessment of the opportunity and the structuring of the transaction, which with the support of the Group’s professional advisers. Stakeholder considerations and impacts In assessing and executing the transaction, the Board had the acquisition would promote the success of the Group for the Customers – Consistent with Marshalls, Marley’s commercial Marley share a number of common customers, the acquisition enables the enlarged Group to offer customers a broader range of products and create deeper relationships, accelerating manufacturer of products for the built environment. Suppliers an opportunity to leverage the increased buying power of the announcement of the acquisition, to ensure continuity of supply and service. As our integration programme progresses, there will be opportunities to develop deeper relationships with Shareholders – The acquisition, which constituted a Class 1 transaction under the Listing Rules and was conditional upon debt and equity fundraisings. In recommending shareholders approve the deal, the Board presented its detailed assessment Ultimately, our shareholders supported the transaction. Board decision: Acquisition of Marley Group Stakeholder Engagement continued 35 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Lenders – We consulted with our lenders to secure the to the impact on the Group’s capital structure. Colleagues – Our people are central to our culture and the achievement of our long-term strategy. The Board, together with the senior management team, considered the impact of the deal on our existing colleagues and on those joining us from Marley. The Board recognised that the acquisition not only gives support the development and growth of both the Marshalls and Marley businesses and has already created new opportunities for colleagues in both businesses. Outcomes and decisions The Board considered the acquisition to be in the best interests of shareholders and Marshalls as a whole, and our shareholders approved the acquisition in April 2022. Links to strategic corporate objectives Read more about our strategy on pages 36 to 39 Impact on business model Read more about our business model on pages 24 and 25 Marshalls plc | Strategic Report 36 Strategy sustainable growth Our strategic goal is to become the UK’s leading manufacturer Eight growth pillars Brand preference for product Logistics excellence Sustainable materials supply Customer centricity Operational excellence Innovation and new product development Growth in the emerging business Digital transformation Six corporate pillars Shareholder value Sustainable Relationship building Organic expansion Brand development Effective capital structure and Enablers People Digital Governance Focus on innovation Our strategic goal To become the UK’s leading manufacturer of products for the built environment The Marshalls Way Doing the right things, for the right reasons, in the right way Respecting People Made to Last Integration of Marley Climate Action 37 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Links to strategic corporate objectives Shareholder value Relationship building Organic expansion Brand development Effective capital structure Links to ESG pillars Respecting People Made to Last Climate Action Our objectives • by building relationships with consumers, developers, builders and architects • To increase the project pipeline and conversion through our leading service and solutions offer • To develop the brand to support our • To build brand preference through What we have achieved • Strong relationships with • Internal restructuring, and our development programme has strengthened opportunities with architects and designers • Improved process mapping • Process improvements using How Marley integrates and provides more opportunity • Leveraging lead generation • Marley is the preferred • Opportunities to leverage Marshalls’ ESG credentials across the Marley brand • Wider utilisation of Marshalls’ for cement replacement Future priorities • To increase our range of innovative and sustainable products • To target greater penetration • • To develop KPIs to ensure consistent measures and to drive performance • To launch apps to help customers better visualise their landscaping projects Links to ESG pillars Links to strategic corporate objectives Customer centricity Our objectives • To grow the business by providing outstanding customer service • To improve the customer experience and the ease of doing business • To support the Group’s brand leadership • To increase the use of digital communication What we have achieved • KPI dashboard developed and driving improvement activity • Development of email automation • Customer centricity embedded in the logistics operation • Reduction in quality complaints • Launched digital survey tools to better understand our customer order experiences How Marley integrates and provides more opportunity • Opportunity to align processes reduce cost • Potential to widen the use of digitalisation • Opportunity to align and simplify price and quotation processes • Opportunity to streamline complaint handling across both businesses Future priorities • centric” culture • To improve our customer experience dashboard and streamline KPIs • To use further automation to improve order processing • To launch a fully integrated manage queues Links to ESG pillars Links to strategic corporate objectives Growth in the emerging businesses Our objectives • To ensure all businesses are set up to achieve sustainable growth • To expand into further growth areas • To deliver margin growth • To develop the product ranges and What we have achieved • Improved business processes in Civils and Drainage • greater leverage from the Marshalls brand • Building Products incorporated into the new segmental reporting structure How Marley integrates and provides more opportunity • • Sharing of best practice and process improvement opportunities Future priorities • growth plans • To develop of service offer • Links to ESG pillars Links to strategic corporate objectives Marshalls plc | Strategic Report 38 Strategy continued Logistics excellence Our objectives • To deliver logistics excellence and provide outstanding customer satisfaction • To use lower emission vehicles and new technologies across the • What we have achieved • New Group Transport Management System now live • • MPA award for safer transport and logistics How Marley integrates and provides more opportunity • Opportunity to share best practice in systems and processes • opportunity to improve utilisation across the enlarged Group Future priorities • To optimise our delivery systems and processes • To ensure we continue to attract and retain HGV drivers • To reduce transportation costs Links to ESG pillars Links to strategic corporate objectives Operational excellence Our objectives • To effectively manage our cost base and add value • products and services • To improve competitive advantage • system implementation What we have achieved • plant at St. Ives nearing completion • Continual development of • utilising Marshalls’ Enterprise • Quality improvement programme and ongoing reduction in waste How Marley integrates and provides more opportunity • • Standardisation of policies and procedures to improve health and Future priorities • To improve asset utilisation enlarged Group • attract and retain the best people • maintain quality standards Links to ESG pillars Links to strategic corporate objectives Sustainable supply Our objectives • To create a sustainable and ethical supply chain • To meet our ESG commitments • To ensure consistent availability What we have achieved • our cement-free mix design development • Alternative sourcing now embedded in the supply chain • Centralised procurement team • Embedded ethics, human rights and environmental commitments How Marley integrates and provides more opportunity • Synergy opportunities in procurement to reduce cost and consistency of supply • Opportunities for leverage on Future priorities • To establish new sources • To prioritise carbon reduction programmes and cost reduction • To reduce the reliance on cement • To strengthen reliance on UK materials sourcing Links to ESG pillars Links to strategic corporate objectives 39 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Links to strategic corporate objectives Shareholder value Relationship building Organic expansion Brand development Effective capital structure Links to ESG pillars Respecting People Made to Last Climate Action New product development Our objectives • To develop new innovative products that will deliver growth • To deliver new products that help • To focus on ESG opportunities in NPD • To develop best-in-class facilities, processes and products What we have achieved • will add additional face mix lines and advanced secondary processing • Launch of Lunar product range • New Civils and Drainage products developed for 2023 production • products launched How Marley integrates and provides more opportunity • Opportunity to align systems and • Opportunity to share resources and expertise Future priorities • To complete Landscape Products range review • To focus on opportunities that reduce embedded carbon • To investigate embedding technology/sensors into selective products Links to ESG pillars Links to strategic corporate objectives Digital transformation Our objectives • To provide an end-to-end digital offering • To pioneer the digital standard • To move to B2B digital trading wherever possible • To move ERP system to the cloud – What we have achieved • Progressed electronic trading project with chosen EDI partner • Mobile app developed for Mortars and Screeds business • major customer • • Launched data literacy programmes across all business functions How Marley integrates and provides more opportunity • Opportunity to align processes • by enhancing focus on cyber controls Future priorities • To continue to increase orders via digital channels • • To launch multi-channel communication and customer portal • focusing on cyber controls Links to ESG pillars Links to strategic corporate objectives Marshalls plc | Strategic Report 40 The Group’s KPIs monitor progress towards the achievement of its objectives. £719.4m (up 22%) 2018 491.0 2019 541.8 2020 469.5 2021 589.3 2022 719.4 Stakeholder linkage • Customers • Suppliers • Employees • Communities £90.4m (up 23%) Why is this KPI important? Delivering sustainable growth is Performance challenging during 2022. We areas where demand is expected to be greatest. Links to strategic corporate objectives Principal risks • impacts demand • Macro-economic and political • Raw material and labour shortages • Increased rate of digital change Risk mitigation • Close monitoring of trends and lead indicators • Diversity of business • Customer centricity • Digital strategy Links to remuneration Why is this KPI important? Sustainable improvement in Performance million, including the impact Links to strategic corporate objectives Principal risks • • • Security of raw material supply • Climate change Risk mitigation • Innovation and new product development • security controls • Proactive supply chain management Stakeholder linkage • Shareholders • Employees Links to remuneration adjusting items) 13.3% 2018 20.9 2019 21.4 2020 8.2 2021 20.6 2022 13.3 Why is this KPI important? ROCE is an important indicator Performance Proforma adjusted ROCE for 2022 shareholders’ funds plus net debt. The 2022 ROCE includes the pre- acquisition trading of Marley. Links to strategic corporate objectives Principal risks • Threat from new technologies and business models • Increased pace of digital change • Capital structure Risk mitigation • Digital transformation • Operational excellence • • Capital allocation policy Links to remuneration Stakeholder linkage • Shareholders • Employees £190.8m Reported basis £236.6m Stakeholder linkage • Shareholders • Employees • Customers • Suppliers Why is this KPI important? Marshalls continues to support Performance post-fund acquisition of Marley. Links to strategic corporate objectives Principal risks • • Overpaying for acquisitions • Risk mitigation • Close monitoring of trends and lead indicators • Diversity of business • Customer centricity • Digital strategy Links to remuneration 2018 63.8 2019 71.1 2022 90.4 2021 72.3 2020 23.7 Key Performance Indicators Measuring our performance Revenue (£’m) ROCE (%) Net debt (£’m) LTIPAI LTIPAI LTIPAI LTIPAI 2022 (236.6) 2021 (41.1) 2020 (75.6) 2019 (60.0) 2018 (37.4) 41 Marshalls plc | Annual Report and Accounts 2022 Strategic Report 2018 99 2019 96 2020 49 2021 80 2022 91 Adjusted operating Stakeholder linkage • Shareholders • Customers • Suppliers Why is this KPI important? and for delivering increased shareholder value. Performance proforma rolling annual basis. Links to strategic Principal risks • Supply shortages requiring increased investment in • Risk mitigation • Excellent customer service and quality • Customer relationships and brand value Links to remuneration 97% customer service index 2018 98 2019 98 2020 94 2021 98 2022 97 Customer service (excluding Marley) Stakeholder linkage • Customers • Communities • Environment Why is this KPI important? strategic priority. Customer service lies at the heart of the Marshalls brand. Performance The Group’s manufacturing operations are responding to trading patterns. The focus remains on quality, on-time delivery and order accuracy. Links to strategic Principal risks • Quality, service and reliability • Brand reputation • Risk mitigation • Customer centricity strategy • Digital strategy 3% carbon increase per tonne 2018 9.92 2019 9.21 2020 7.70 2021 6.46 2022 6.65 Climate change (excluding Marley) Stakeholder linkage • Shareholders • Employees • Customers • Suppliers • Environment • Regulators Why is this KPI important? The Group’s continued commitment to our sustainability strategy is that our annual carbon reduction targets must be achieved. Performance Whilst our relative Scope 1 and 2 emissions have increased slightly in 2022, our absolute Scope 1 and 2 emissions have decreased. Both absolute and relative emissions remain well within our science -based target pathway. Links to strategic Principal risks • change, such as wind and water • Rising energy prices and carbon taxes • Changing product requirements in the built environment Risk mitigation • • • Mitigation and adaptation strategy Links to remuneration 1.7 compared with the target incident frequency rate) (excluding Marley) Why is this KPI important? Marshalls is committed to Performance In 2022 the lost time incident frequency rate per million hours average over three years). Links to strategic Principal risks • Consistency of standards • Regulatory controls • • restrictions • Mental health and employee wellbeing Risk mitigation • Embedded culture – The Marshalls Way • Compliance procedures and policies • Employee training Links to remuneration Stakeholder linkage • Employees • Customers • Communities • Environment Links to remuneration Links to remuneration Long-term Incentive Plan Annual incentive award 91% annual basis) 2018 2.07 2019 2.29 2020 1.73 2021 2.68 2022 1.70 Links to strategic corporate objectives Shareholder value Relationship building Organic expansion Brand development Effective capital structure LTIP AI LTIPAI AI LTIPAI LTIPAI Read more about our strategy on pages 36 to 39 Marshalls plc | Strategic Report 42 What ESG Means to Marshalls Our ESG journey continues Dear stakeholder The Marshalls Way says that we do “the right things, for the right reasons, in the right way”. We believe a business should be responsible and transparent – that’s why we are a Living Wage employer and have the Fair Tax Mark accreditation. Being a responsible business is how we’ve operated for over 130 years and as we face current global challenges, it’s never been so important Following our acquisition of Marley in 2022, we put in place a programme of work to integrate our businesses. The Science Based Targets initiative (“SBTi”) dictates that such an acquisition triggers a re-baselining of our carbon footprint and therefore our reduction will work with the Carbon Trust to re-baseline for the Marshalls Group, including Marley. We will bring together the monitoring and measuring of our carbon emissions and validate our roadmap for the Group. Going through this process doesn’t mean we’re slowing down our carbon reduction activities. The historical data shown on page 48 shows the steady decrease of our carbon footprint over time and we continue to forge ahead with some really exciting projects. For more information on our plans, turn to page 49. We made some great strides in 2022. We have been recognised by the Financial Times and Statista as one of Europe’s Climate Leaders for the second consecutive year and one of our safety improvement projects won an award at this year’s MPA Health & Safety Awards. We I’m especially proud to be recognised for the approach we’ve taken to supporting employee wellbeing. As we move forward in 2023, our focus will very much be on continuing to integrate what is now the entire Marshalls Group and actively demonstrating our ESG credentials. When standing still is effectively going backwards in this fast- moving ESG space, it’s important that we communicate clearly and consistently – we take the environmental, social and governance responsibilities of our business seriously. We steer clear of greenwash. We are transparent in our dealings with our stakeholders. We stand for responsible business. Vanda Murray OBE Chair 15 March 2023 • Our acquisition of Marley has triggered a re-baselining of our carbon reduction targets. Our newly integrated • • • • • • • onwards Marshalls plc | Annual Report and Accounts 2022 Strategic Report Our sustainability strategy is underpinned by the UN Global Compact’s principles in the key areas of human rights, labour, the environment and anti-corruption. These principles, alongside the UN’s Sustainable Development Goals (“SDGs”), continue to guide us. The evolution of our three pillars – Better Workplace, Better World, Better Product – highlight our focus areas towards creating better net positive futures, whilst maintaining The Marshalls Way of “doing the right things, for the right reasons, in the right way”. found within this document (or required by Sections 414CA and 414CB of the Companies Act 2006). Reporting requirements Relevant policies Section within Annual Report Environmental Policy Statement Climate Change Policy Timber and Paper Policy Transport Policy Sustainability strategy (pages 46 to 53) Sustainability commitments relating to the environment (page 46) Social Code of Conduct Social Community Investment Policy Corporate Responsibility Policy Tax Policy Human Rights Policy Modern Slavery and Anti-Human Children’s Rights Policy Responsible business (page 42) Charitable donations (page 54) Health and safety (page 58 and 59) Stakeholder engagement (pages 28 to 35) Governance Anti-Bribery Code Tax Policy Trading Policy Schedule of matters reserved for the Board Board Committee Terms of Reference Governance and compliance (pages 78 to 91) Corporate Governance Statement (pages 78 to 91) Corporate Governance Statement (pages 78 to 91) Corporate Governance Statement (pages 78 to 91) Health and Safety Policy Serious Concerns Policy Diversity and Inclusion Policy Drug and Alcohol Policy Mental Health and Wellbeing Policy Headcount (page 58 and 59) People engagement (pages 54 to 57) Board diversity (pages 76 and 77) Gender diversity (page 55) Stakeholder engagement (pages 28 to 35) Description of risk process (page 66 and 67) Risk framework (page 67) Principal risks and uncertainties (pages 69 to 75) Our business model (pages 24 and 25) Key performance indicators (pages 40 and 41) Strategy (pages 36 to 39) Full versions of the policies referred to above form part of the Group’s Policy Framework that supports Marshalls’ Code of Conduct. marshalls.co.uk/about-us/policies. The above policies refer to Marshalls only. The integration of policies with Marley is starting in 2023. * Key policies referred to in this Annual Report. Marshalls plc | Strategic Report 44 What ESG Means to Marshalls continued in 2022 Member of the index series since 2005 wellbeing Winner of the Best Strategy for Supporting Employee Wellbeing and Grand Prix awards at the Engagement Excellence Awards 2022 B score for disclosure We continue to disclose our approach to climate change to CDP (Carbon Disclosure Project) Living As a Living Wage employer since 2014, all our people earn a real living wage We’ve held the Fair Tax Mark for seven years, demonstrating our commitment to paying our fair share of tax chain ethics Commendation for Disruption of Supply at the Data to Disrupt sourcing Our Marley clay and products are rated “excellent” by BES 6001 accreditation for responsible sourcing Marshalls plc | Annual Report and Accounts 2022 Strategic Report Sustainability School Gold member of the Supply Our Code of Conduct has been revised and the communications and training rollout will start in 2023 Made in Britain Committed to UK manufacturing since our story began in the 1890s leader Named one of Europe’s climate leaders for two consecutive years status Marshalls has been recognised as a Superbrand for 13 consecutive years MPA Award winners Winner of the Safer Transport and Logistics Award for our Crane Improvement Project at the MPA Health sequestration First UK concrete manufacturer to use CarbonCure technology to sequester carbon in concrete bricks Marshalls plc | Strategic Report 46 What ESG Means to Marshalls continued Impact on business Stakeholder interest Moderate Major Low Energy management Water management Circular economy Biodiversity impacts Natural capital Health and safety Product innovation Impact of climate change Carbon reduction Employee wellbeing Supply chain resilience Sustainable procurement Community relations Human rights and environmental due diligence Anti-corruption Diversity and equity Talent and development Regulatory environment 2 4 6 4 2 6 This is our third materiality matrix for ESG and sustainability. In to develop it. The following year, the matrix was further updated following a comprehensive review. Our 2022 materiality matrix continues to be based on the SASB Standards for Construction and the UN Sustainable Development Goals, and it’s aligned to our risk The materiality review process takes into consideration the issues that matter most to our stakeholders and have impact on our business, whilst linking back to our strategic objectives. Using a combination of desk research, analysis of industry issues and stakeholder feedback, the matrix is then analysed and reviewed. The newly formed ESG Steering Committee has conducted the 2022 review. They concluded that key material issues continue to be relevant and still broadly fall in the categories of , and . Due to increased attention on DERI (diversity, equity, respect, inclusion), the one issue that has moved is 16: Diversity and equity. We see this area as having increased stakeholder interest. Next review With the acquisition of Marley into the Marshalls Group, the ESG Steering Committee concluded that the 2023 materiality review In 2020, an ESG Committee was formed to share knowledge internally and drive our sustainability agenda. With increased focus and scrutiny on ESG, the Committee has evolved and in 2022 became the ESG Steering Committee. Reporting through the CEO to the Board, the ESG Steering made up of Executive Team and Board members, including our CEO, CFO and COO. The ESG Steering Committee’s remit is to drive our sustainability and ESG priorities by working collaboratively with teams in ESG, Finance, Operations, Legal, HR and Procurement. Governance Further to 2021’s ESG audit by KPMG, a set of action points were put in place focusing on formalising processes, looking at skill assessments and aligning ESG metrics and reporting. This formed part of the remit of the newly formed ESG Steering Committee and will be further progressed in 2023. Risk ESG risk is included in the Group Risk Register and another area of focus for the ESG Steering Committee is to look at risk and will be looking further at identifying, managing and mitigating ESG risks, reviewing ESG risk management, and internal controls. Case study Marshalls continues to make great progress on carbon reduction by meeting science-based targets. Now Marley has joined the Marshalls Group, the ESG Steering Committee has approved the decision to review our overall carbon reduction targets. In 2023, teams in Sustainability, Operations and ESG will work on the re-baselining activity and seek formal approval of targets from the Science Based Targets initiative. Link to strategic objective: Operational excellence Marshalls plc | Annual Report and Accounts 2022 Strategic Report Over the last two years, we have reviewed our impact on each of the Sustainable Development Goals (“SDGs”) that are material to Marshalls. We have also taken a more granular view and reviewed each goal’s associated targets. Our process is detailed in the diagram and sets out our activity plan. We have completed Step 1 by understanding each SDG and its associated targets, prioritising and relating to our strategic objectives and analysing our contribution at target level. Before we move on to Step 2 to measure and analyse, we will be undertaking a review to include Marley in this process. Whilst the review is taking place, we will be starting the process of collecting and analysing relevant data – linking back to our material SDGs. 1.1 Understand the SDGs and their targets 1.2 SDGs & relate to strategic objectives 1.3 Analyse contribution to targets at granular level 2.1 Set objectives 2.2 disclosures 2.3 analyse data 3.1 features of on the SDGs 3.2 3.3 Step 1 SDG targets Step 2 Measure & analyse Step 3 integrate & review Case study Goal 8.5: By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work Social value plays an important part in the built environment and construction industry. It’s a term used for the value an organisation provides to society – through helping local people into employment, supporting local businesses or working with young people on improving their employability skills. In 2022, we started a partnership with RNN Group and Rotherham College to create the Marshalls Academy. This partnership enables us to engage with brickwork students on a range of activities including curriculum planning, mock interviews and employability skills workshops, and site visits. Here we are able to provide employability skills to young people in local communities, share construction expertise in order to inform the curriculum, help young people understand the requirements of employers, and showcase Marshalls as an employer of choice. Marshalls has also started working with Barnardo’s in 2022 to support their Gap Homes project, offering bespoke supported living for young people leaving care. As part of this project, Marshalls is providing landscape design for outdoor spaces Link to strategic objective: Read our Sustainability Report: Marshalls plc | Strategic Report Case study Marshalls was a pioneer in carbon footprinting, having worked with the Carbon Trust to generate independently calculated product footprints since 2008. However, consistency and standardisation in product sustainability reporting are paramount, and it has become clear that the construction Declarations (“EPDs”) - detailed reports of a product’s sustainability performance including product carbon footprints. EPDs give our customers the defendable, comparable evidence they need, so in 2022 we engaged with OneClick LCA to generate EPDs for our products. We already have EPDs for our concrete bricks and solar PV modules, and our latest EPD for through-mix concrete block paving shows that we’re 40 per cent lower in carbon than our only published competitor’s equivalent on a cradle to grave basis. This represents a saving of over 8kg of CO 2 per m². More EPDs will follow in 2023. Link to strategic objective: Read more about our products: What ESG Means to Marshalls continued Carbon reduction Reducing our carbon emissions has long been a priority for Marshalls. We started reporting our emissions data back in 2004. Between 2008 and 2020, we reduced our carbon footprint by 50 per cent. Every year, we allocate capital for carbon reduction and energy saving projects. In 2022, this consisted of lighting upgrades, removal of diesel heating and operational control improvements. We also approved the installation of a 740kW solar array at a third manufacturing site. Though our acquisition of Marley means we are re-baselining our carbon reduction targets, Marshalls is still well on track to achieving its approved science-based targets. Scope 1 and 2 GHG emissions (tonnes CO 2 e) 54229 52577 37969 37572 36295 Current baseline for our SBTi approved targets First submission to SBTi for approval of science-based targets 50% reduction in carbon footprint since 2008 Voluntary disclosure according to TCFD recommendations Note: All data in this table excludes Marley. Note: 2004-2019 data is location based; 2020 onwards data is market based. Marshalls plc | Annual Report and Accounts 2022 Strategic Report As we continue along our carbon reduction journey, we also move forward with a range of different projects that will contribute to our carbon reduction targets. These projects are collaborative and encourage innovative thinking for the concrete industry. Case study Over its life, concrete absorbs carbon. Over the past three years, we’ve been exploring different technologies which can either increase or accelerate absorption. Ultimately, having the ability to absorb and lock away waste carbon is a really important step forward for our industry. We have committed to several projects to further investigate carbon sequestration, at small and large scale. As a result, we manufacturer to install CarbonCure Technologies’ mineralisation technology. The way this works is by injecting waste CO 2 directly into concrete as it is being mixed. The carbon immediately reacts with cement in the mix and mineralises. Once mineralised, the carbon is permanently locked into the concrete for millennia — never to be released into the atmosphere, even if the concrete is demolished. We are applying this technology at our concrete brick manufacturing site in Grove, using waste carbon from the fertiliser industry as the carbon source. It is estimated that the pilot project will permanently remove approximately 30,000kg of carbon every year. This isn’t a huge amount, but it’s the start of a journey which enables us to tackle climate change through product innovation. Case study In traditional concrete, cement accounts for about 80 per cent of the total carbon long been our goal. In recent years, we have been working on a technical development programme across our concrete block paving (“CBP”) sites in order to substitute an element of the cement with Ground Granulated Blast Furnace Slag (“GGBS”) which is a low carbon by-product of the steel industry. As a result, we have been able to replace a minimum of 40 per cent of the cement with GGBS across all of our CBP sites. In 2022, we took cement substitution technology a stage further when we introduced additional cement substitute into our mix designs, limestone powder, which has an even lower carbon embodiment than GGBS. Whilst technically it’s not been easy to achieve, this combination of GGBS and limestone powder has enabled us to replace 60 per cent of the cement at Ramsbottom, cutting the embodied CO 2 by approximately 50 per cent (versus traditional concrete containing 100 per cent cement binder). We have a clear two-year plan of investment to allow us to roll out this technology across our CBP production network. Case study Our current approved science-based target is to have 73 per cent of our suppliers, by emissions, with a science-based target of their own by 2024. We’re keen to report our carbon footprint in a more detailed way for Scope 3 supplier emissions. So we’ve put a plan in place to review supplier emissions with a view to submitting new targets to the Science Based Targets initiative. Marshalls plc | Strategic Report What ESG Means to Marshalls continued Marshalls has publicly committed to being a supporter of the TCFD. We have made TCFD-aligned disclosures according to the requirements of Listing Rule 9.8.6R in this Annual Report and in our Sustainability Report 2022. We believe we are partly compliant in our disclosure. For those pillars where we feel we are not yet fully compliant (marked with a ), we have given an explanation and the reasons behind Location Governance a. Describe the Board’s oversight of climate- related risks and opportunities b. Describe management’s role in assessing and managing climate- related risks and opportunities 2022 Progress: Approved science-based targets aligned to 1.5°C and set up of new ESG Steering Committee The Board has ultimate responsibility for climate-related risks and opportunities. Board oversight is through the ESG Steering Committee (attended by our CEO, CFO and COO). In 2022, we introduced Executive remuneration linked to carbon reduction science-based targets. 2023 will see the creation of a Climate Disclosures Working Group, involving teams from ESG, Finance, Legal and Operations, reporting to the ESG Steering Committee. The Group Risk Register, which includes climate change, is updated by the Executive Team at least every six months and the overall process is the subject of regular review by the Board. Risks are recorded with a full analysis, and risk owners are nominated who have authority and responsibility for assessing and managing the risk. The Climate Disclosures Working Group will work more closely with sites and other teams to better assess and manage these risks and opportunities. 2023 focus: Set up of Climate Disclosures Working Group, publication of our Carbon Reduction Plan and preparing to report according to the TPT framework Corporate Governance Statement (pages 78 to 91) Sustainability Report 2022 (page 14) Strategy a. Describe the climate- related risks and opportunities the organisation has medium and long term * b. Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and c. Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario 2022 Progress: Climate risk analysis for all Marshalls Group sites including Marley looked at risks and opportunities in terms of low, medium and high impact, though this requires of the focus areas of our 2023-25 plan. Our main transition risk is the inability to deliver on our mitigation strategy, which focuses on opportunities are focused on our adaptation strategy and the products we can offer to adapt to the Although we have assessed impact on our business and strategy, we intend to interrogate our through the work of the Climate Disclosures Working Group and will ensure we are fully compliant by end 2023. Our current approved science-based targets are aligned to a 1.5°C trajectory and we have a roadmap of carbon reduction projects planned to 2030 for the Marshalls business. This roadmap is subject analysis, we commissioned research that looked at four different scenarios impacting our overseas stone supply chain. Although these were not climate-related scenarios, we plan to engage in climate- related scenario analysis as part of our 2023-25 plan. 2023 focus: Re-baselining of our carbon reduction targets for the whole Marshalls Group, publication of Environmental Product Declarations and scenario analysis planning Sustainability Report 2022 (pages 16-19) As we continue to develop our process for alignment to TCFD recommendations, we have also begun to include other frameworks into our planning. The Transition Plan Taskforce (TPT) and the ISSB standards have now been incorporated into our climate disclosures plan to 2025, which includes: • reduction targets; • setting up a Climate Disclosures Working Group to bring together teams from ESG, Finance, Legal and Operations; • publication of our Carbon Reduction Plan; • taking a closer look at Scope 3 supplier emissions in terms of supplier engagement and disclosure; • • more detailed climate-related scenario analysis; and • reporting on progress. Case study Scenario analysis We have begun the process of using scenario analysis through a project which set out to build a set of contrasting, plausible future contexts through which to understand how sustainability could impact the supply and demand for natural stone. The project developed a set of four challenging, relevant and plausible scenario stories to describe four possible future worlds in 2040. The scenarios examine how the supply and demand for natural stone in hard landscaping could be impacted by factors related to sustainability and potential different responses to mitigate and adapt to climate change. Future scenario analysis will focus on resilience testing our overall strategy, using contrasting climate-related scenarios. Marshalls plc | Annual Report and Accounts 2022 Strategic Report Location Risk a. Describe the organisation’s processes for identifying and assessing climate- related risks b. Describe the organisation’s processes for managing climate- related risks c. Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management Climate change is a principal risk. We have formal ongoing processes to identify, assess and analyse risks and these form part of our Group Risk Register. Climate-related risks are explained fully in our risk section (pages 66 to 75), including our risk heatmap featuring climate change in impact for our business (see page 46). We have started analysing physical risk at all our sites, using Verisk Maplecroft data, and in 2022 added Marley sites and our Belgium site to the analysis. Looking forward, we intend to look more closely at which areas of climate change each site is more likely to face – initial analysis shows this to be water stress, heat stress and high winds. focusing on climate change-related risks which may impact on other areas of our activities. Key we are looking to investigate further through the work of the Climate Disclosures Working Group in 2023/24. assessing and managing climate-related risk Sustainability Report 2022 (page 15) Metrics and targets a. Disclose the metrics used by the organisation to assess climate- related risks and opportunities in line with its strategy and risk management process b. Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks c. Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets 2022 Progress: Decision to re-baseline and review Scopes 1, 2 and 3 science-based targets We have described our climate-related risks and opportunities according to TCFD guidelines in our Sustainability Report. As one of our risks centres on achieving our science-based targets, we use metrics to measure absolute and relative emissions (see page 52). These metrics are linked to Executive remuneration. We also use metrics relating to physical risk by analysing changes and trends, as well as analysing weather data in order to monitor impact to production and site operation. We disclose Scope 1 and 2 GHG emissions. For Scope 3, we have a science-based target however as part of our re-baselining project (to incorporate Marley into Group carbon emissions targets), we are looking to analyse Scope 3 emissions more closely by ensuring we are measuring for each material section of Scope 3. This work is due to take place in 2023. We don’t disclose externally about any related risks. Our approved science-based targets are aligned to 1.5°C (see page 42). We are committed to alignment and robustness of data. 2023 focus: ESG data alignment project and Scope 3 supplier engagement Annual Report 2022 (pages 52-53) Sustainability Report 2022 (page 14) Metrics and targets Our approach to reporting focuses on being transparent and adhering to mandatory requirements and best practice. We have approved science-based targets aligned to 1.5°C for Scope 1 and 2, along with a Scope 3 target for supplier emissions. Our base year is 2018. Our metrics and targets relate to Marshalls only. Marley has its own carbon and energy reduction targets however we will not be reporting as a Group until our carbon reduction targets have been re-baselined and approved by the Science Based Targets initiative. We have a plan in place and will update our reporting in due course. Metric Unit Absolute Scope 1 Tonnes CO 2 e Scope 1: fuel usage including diesel, petrol, gas oil, LPG, Base year emissions: 44,090 tonnes CO 2 e Absolute Scope 2 (location and Tonnes CO 2 e Scope 2: electricity usage. Base year emissions (location based): 13,782 tonnes CO 2 e Base year emissions (market based): 10,896 tonnes CO 2 e Intensity Scope 1 and 2 Kg CO 2 e/ tonne of production Relative emissions as a proportion of production. Base year emissions (location based): 10.44 kg CO 2 e/tonne Base year emissions (market based): 9.92 kg CO 2 e/tonne Energy kWh Energy performance reported as absolute and intensity (per Renewable energy kWh Self-generated energy from solar arrays at site. Read our Sustainability Report Marshalls plc | Strategic Report What ESG Means to Marshalls continued Carbon reporting 2 This chart illustrates UK and Belgium absolute CO 2 e emissions in tonnes, including transport activities, for Marshalls (excluding Marley). Marley’s absolute Scope 1 and 2 emissions for 2022 were 22,610 tonnes CO 2 e (market based). 2 e 42,147 43,559 35,072 37,540 36,232 2 This chart illustrates UK and Belgium CO 2 e intensity emissions relation to our business – for Marshalls, this is kg CO 2 e per tonne to stakeholders and allows for business growth. 6 4 2 2 9.92 9.21 8.65 7.70 7.88 6.46 7.84 6.65 The relationship between the energy used and volume of product manufactured is not linear. Whilst our relative Scope 1 and 2 emissions have increased slightly in 2022, our absolute Scope 1 and 2 emissions have decreased. This is in line with our expectations and both absolute and relative emissions remain well within the approved 1.5°C science-based target pathway for Marshalls (excluding Marley). commitment to reducing the energy and carbon impact of the our carbon reduction targets. This means that we will be integrating our carbon data, recalculating our carbon footprint and submitting our revised targets to the Science Based Targets initiative (“SBTi”) for approval. Our current goals: • reduce our relative Scope 1 and 2 emissions by 59.4 per cent by 2030 against a 2018 baseline, which is equivalent to absolute Scope 1 and 2 emissions reduction of 50.5 per cent; • 73 per cent of suppliers by emissions have science-based targets by 2024; and • start re-baselining our targets to include our Marley acquisition and submit to SBTi. Marshalls has a mandatory duty to report annual greenhouse gas (“GHG”) emissions under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. We use The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (revised edition) and the June 2018 Department for Business, Energy and Industrial Strategy (“BEIS”) published CO 2 e conversion factors to measure GHG emissions. This year, in line with mandatory requirements, we have reported according to recommendations from TCFD, which can be found Our approach to the Energy Savings Opportunity Scheme (“ESOS”) with the international standard for energy management, ISO 50001, gaining re-accreditation in 2022. In 2022, we also began the process of incorporating Marley into our ISO 50001 accreditation. We measure carbon emissions by monitoring Scopes 1 and 2. Scope 1 refers to our fuel usage, including diesel, petrol, gas oil, Scope 2 refers to our indirect emissions and for us, it’s the electricity that we’ve purchased. We continue to report our Scope 2 emissions as location based (using Government emissions factors) and market based (using supplier emissions factors). Our Scope 2 market based performance has been very low since 2020 as this was the year we switched to green electricity which comes from renewable sources. Both Marshalls and Marley carbon and energy data has been this year’s reporting as Marley is not yet included in our approved science-based targets. Progress against targets Our absolute target for 2022 was 48,150 tonnes CO 2 e and our relative target was 8.34kg CO 2 e per tonne. For 2023, our targets are 45,719 tonnes CO 2 e and 7.76kg CO 2 e per tonne of production. Marshalls plc | Annual Report and Accounts 2022 Strategic Report Marshalls continues to report global Scope 1 and 2 GHG emissions in tonnes of carbon dioxide equivalent. In accordance with the SECR framework, we are also reporting underlying energy use, which includes self-generated energy from renewables. Unless otherwise stated, the information below excludes Marley. The chart below shows underlying UK energy use for Marshalls. Belgium’s energy use for 2022 was 1.975 mkWh (2021: 1.936 mkWh). Marley’s energy use for 2022 was 135.05 mkWh. 215.836 178.682 217.868 199.016 190.578 This chart shows energy use for Marshalls in the UK in relation to product. 37.82 36.25 42.40 34.24 34.69 Note: The intensity ratio is calculated by dividing our kWh (energy) usage by our production output (tonnes). This chart shows self-generated energy from the solar arrays at our Marshalls manufacturing sites. kWh 199,453 209,551 201,635 413,449 421,975 Energy reduction We continue to engineer high emission fuels like gas oil out of the business and in 2022, we removed diesel heating at our Buxton site. Operational controls and building management systems are also areas of focus, with improvements made at our Grove site. Lighting upgrades also continue, with our Brookfoot and West Lane sites updated. We have approved the installation of a 740kW solar array at our St. Ives dual block plant and carried out feasibility studies on wind energy. Marley has joined us by having 100 per cent of its electricity coming from renewable sources, as well as adding more electric car charging points at Keele and Glasgow sites. Case study Renewables We have installed solar panels at two sites, with the third due for completion in 2023, and all our sites are powered by electricity from renewable sources. But this is not the only way we’re looking at renewable energy. In 2022, we set up a Renewables Working Group comprising colleagues from Legal, Property, Operations and Procurement. energy savings as well as reduced reliance on the grid. Link to strategic objective: Operational excellence Marshalls plc | Strategic Report Making Marshalls At Marshalls, our people are the key differentiator. We designed a People Strategy built around the modernisation of the colleague experience; building a diverse and engaged workforce that supports the performance of the business. Listening to the colleague voice is a fundamental part of how Marshalls operates and it’s been a privilege to continue to work as the Board sponsor of the democratically elected Employee Voice Group (“EVG”) in 2022. The group has been working to make sure that we “do the right things, for the right reasons, in the right way”. The Marshalls Way. Representatives of all levels have created an environment of trust where they take part in decision making, share feedback and have honest conversations with leaders. We’ve made strides in 2022 with the EVG playing a key role in a number of different projects and programmes we’re sharing in this report. I’m looking forward to continuing to work with the EVG to make Marshalls a great place to work and deliver on our purpose to create better spaces and futures for everyone. 15 March 2023 What ESG Means to Marshalls continued 14239 10143 7.6 colleagues in apprenticeship programmes (2021: 102) training courses completed (2021: 8,287) engagement score – 0.2 above industry benchmark (2021: 7.6) 3112 employees (2021: 2,700) as a Living Wage employer £33,901 charitable donations (2021: £103,500) 31% (2021: 35%) 95% of colleagues disclosing diversity data 16% women colleagues (2021: 17.8%) 2022 saw the continuation of our digital transformation programme, with the introduction of our new core people system, Marshalls Connect. We launched Marshalls Connect to modernise our HR capability and achieve greater organisational agility and resilience. Our people data and analytics now have a solid foundation and inform better decision making. In 2022, we also concluded our standardisation programme of legacy terms across the business which created greater transparency for our colleagues. To do the right thing for our people, it was important that we brought colleagues on the change journey from the start, so they understood why the transformation was happening and they had time to learn about Marshalls Connect. We showed colleagues how easy the system was to use and demonstrated how their data was safe and secure. The change management programme further reinforced our collaborative culture. We’ll be moving into the next phase of digital modernisation by consolidating and integrating other technology (learning, performance management as standout examples) into this core system. As at 16 December 2022, a total of 2,500 colleagues engaged with Marshalls Connect. That means over 98 per cent of the workforce have control of their data at the touch of a button. * This data excludes Marley. Marshalls plc | Annual Report and Accounts 2022 Strategic Report Case study The Marshalls Data Academy was launched in 2022 with the clear objective of building capability for data insight, and supporting better data-driven decisions to shape the sustainable future of Marshalls. 28 applicants have successfully been accepted to three different programmes of the Academy. and also form strong peer networks for learning and mentoring. Link to strategic objective: Our programme of understanding what drives engagement among colleagues continued throughout 2022, with a comprehensive survey carried out in May. We included a range of questions in the survey to help us measure and understand colleague engagement across key topics such as wellbeing and Company strategy. The culture of transparency and openness we’ve been building through our People Strategy has started to pay back; we’ve built trust and recent survey gave us an engagement score of 7.6 (eNPS 27), which is 0.2 above the benchmark for our industry. This data excludes Marley and our aim for 2023 is to include our Marley colleague voice as part In 2022, the EVG continued to represent colleagues across the business with Executive Team member Louise Furness and Board member for all. In 2023, Marley colleagues joined the EVG. The EVG held six meetings during 2022 and was invited to steer the business across a number of areas, including our Reward Strategy They’ve all played a key role when discussing topics and shared suggestions like the creation of a company car newsletter, corporate charity partner selection and representation on the Pensions Governance Committee. They’ve provided deep insight into the core focus areas from the employee surveys – personal growth and development and employee wellbeing – and helped the business build a tangible action plan that will make a difference to all colleagues. Personal growth and development have been highlighted, through our employee surveys, as a key area of focus. Based on colleague feedback, we now have an accelerated strategy in place to enhance this further. This will be delivered from 2023 onwards. A key core element of building capability, for now and the future, is apprenticeships and 2022 has been another successful year. We have seen 142 colleagues engaging in apprenticeship programmes (levels 3 to 7), with 37 of those colleagues successfully graduating in 2022. These graduates have excelled in their learning, not just compared to the Marshalls standard, but also when compared to their peers nationally. Our apprenticeship development programme focused on engineering, digital and technology solutions, digital marketing, leadership and management, LGV drivers, and human resources. This development strategy has helped us bring new talent into the business while growing existing talent and creating internal mobility. Our ambition for 2023 is to continue growing our own talent through increasing the number Gender split 24% Generational representation Black, mixed/multiple heritage or other minority ethnic groups) Ethnicity 2% Disability Our new HR system, Marshalls Connect, has given us an opportunity to collect up-to-date diversity data from colleagues to better understand our workforce and what we need to do to be better. Colleagues disclosing some or all of their diversity data has increased to 95 per cent in 2022. This demonstrates the progress we’ve made on our DERI (Diversity, Equity, Respect, Inclusion) journey. * The data below excludes Marley. Future key focus areas Since our DERI strategy launched in 2019, we’ve built solid foundations. We know there’s more to do and our plans for 2023 will continue to move us forward to make Marshalls a place where everyone wants to work. We’re taking the approach of delivering small changes as these will have a greater impact in changing our overall demographics. We’ll be setting change. The Board supports the creation of targets and KPIs to monitor, track and hold our leadership accountable. It’s our intention, once Marshalls plc | Strategic Report What ESG Means to Marshalls continued Established a cross functional approach involving procurement, commercial and ESG teams, to support our human rights and environmental due diligence systems and processes • Leadership and dynamic decision making at Board level Expanded our business and human rights team to increase capacity for in-house risk assessment, supplier visits and engagement for both domestic operations and our international supply chains • Increased capacity for human rights due diligence and responsiveness to issues Refreshed our Code of Conduct for Marshalls employees and suppliers, with added emphasis on whistleblowing and human rights due diligence • Reinforcing our values with employees and supply chain partners Implemented an independent Modern Slavery Risk Assessment and training programme at 32 of our Marshalls manufacturing sites in the UK • High levels of awareness of modern slavery and appropriate systems and processes Introduced a two-stage desk analysis process to understand ethical labour and environmental risks in our global supply chains. country level, and then mapped against geolocations of suppliers • Integration of human rights and environmental analysis, preparing for mandatory reporting requirements Trialled the Everyone’s Business supplier monitoring app in China, for wider rollout in 2023 • Live monitoring and real time information allowing for faster Engaged with local experts to map out our South Indian supply chain back to raw materials and to analyse current and evolving human rights risks • Further deepening local knowledge to inform ongoing strategy and engagement with the region Completed Modern Slavery Country Risk Mapping for 100% of our Marshalls Group business operations and supply chains, making this publicly available online • Transparency to enable our customers to make informed choices Continued to engage with UK Government, overseas governments, international business associations and bodies on the issues of modern slavery • Strategic working at UK and international level to bring an end to modern slavery Marshalls has been a signatory of the UN Global Compact (“UNGC”) since 2009. We take a multi-strand approach to aligning with the objectives of the UNGC framework, working in house and with external partners to better understand the human rights risks in our operations and supply chains at home and abroad. We also work with UK and overseas governments, NGOs and industry groups to promote sustainable and ethical working practices across our own and other industries. Our CEO signs our annual Modern Slavery Statement and has overall Board responsibility for human rights. Marshalls supports human rights as laid out in the Universal Declaration of Human Rights and we work diligently in all respects to support and uphold the UN Guiding Principles on Business and Human Rights. Our Human Rights and Children’s Rights policies support our work and are reviewed every year by the Board. Case study In 2022, we embarked on the most detailed mapping process of our natural stone supply chain in China to date, identifying tiers one to three, from factories to quarries. Our local China-based team, Marshalls Xiamen, provided geoco-ordinates for each premises. We then used risk analysis tools supplied by Verisk Maplecroft to map out the environmental, social and human academic reports on the region. We are using this research to inform our next steps for engaging with suppliers and workers, including the introduction of monitoring tools and the rollout Link to strategic objective: Marshalls plc | Annual Report and Accounts 2022 Strategic Report Case study Marshalls has been an active member of the International 2015 and co-chairs the ILO Child Labour Platform India Working Group, as part of a cross-sectoral initiative. This dynamic platform gives us the opportunity to join other global brands and organisations committed to eliminating child labour in supply chains. We convene to share experience, knowledge and challenges in order to gain new perspective and recommit to doing all that we can as businesses to accelerate progress and take action. This year we co-chaired the ILO Child Labour Platform India Working Group developing a cross sectoral, multilateral approach in South India. Working in concert with other engaged brands, the ILO, state governments and local communities, we will continue to pursue the decent work agenda. Link to strategic objective: Case study At the end of 2022, Marshalls was part of a successful Fund, together with UN Global Compact UK Network and Trilateral Research. The Modern Slavery Innovation Fund aims to decrease the prevalence of victims of modern slavery in the UK and overseas. The two-year project will focus upon strengthening partnerships between local businesses, UK business, investors, and local public authorities to prevent and remedy modern slavery in supply chains. Learnings will also inform UK and international policy on modern slavery and human Link to strategic objective: Case study As part of our commitment to training colleagues on modern slavery, we deliver a mix of online and onsite training. Online training is available on our Marshalls Learning Zone. In 2022, we also delivered a programme of modern slavery training awareness to colleagues at 32 of our manufacturing sites. Starting with director and manager interviews, training was followed with toolbox talks and tailored training materials. improvement will form part of our 2023 training plan which includes engaging with more colleagues at different sites and bespoke training for our procurement team. Link to strategic objective: Operational excellence Case study for Migration (“IOM”) to promote fair and ethical labour practices in the Vietnamese natural stone sector since 2019. This year we continued the collaboration with a mixed method study to understand how suppliers in the region have been impacted by the COVID-19 pandemic, and to assess obstacles and enabling factors in implementing responsible recruitment and employment practices. The project is in line with the IOM’s and is informing our future engagement with the region. Link to strategic objective: Marshalls due diligence Read our Modern Slavery Statement: Marshalls plc | Strategic Report What ESG Means to Marshalls continued Marshalls’ CEO, Martyn Coffey, is the Board Director responsible Our Health and Safety Policy is approved by the Board and reviewed aligned with the business strategy with set objectives, and clearly demonstrates the commitment of the business to take the safety and wellbeing of its people to the highest level. The Board is fully committed to the continuous development and improvement of the business’ safety processes and the importance of engaging and developing a competent workforce. The achievement of annual health and safety improvement targets is directly linked to the remuneration of the Executive Directors and senior management, as explained in the Remuneration Report on pages 100 to 130. The headline target for 2022 was to maintain lost time incidents This excludes the impact of acquisitions within a period of three years from purchase, therefore our Bricks & Masonry division is now included in our data reporting but our Marley acquisition is excluded. In 2022, it was decided by the Executive Team to start reporting our lost time incident frequency rate, instead of lost days injury frequency rate. This decision was taken because reporting lost time instead of lost days enables us to give a more rounded view of our health and safety performance over time. It also brings us in line with the most widely used measure in our industry. Case study In 2022, we reviewed processes for operating vehicle cranes further to two site incidents. A project team was set up in order to review current risk assessments and standard operating procedures (“SOPs”). The SOPs were made easier to follow and understand, with emphasis on pictorial instructions, and communicated to our Logistics colleagues. The team then started working in collaboration with our crane supplier, resulting in a new system which means that each crane has an independent key welded to the same keyring as the vehicle ignition key. This means the vehicle ignition key must be removed before and whilst the crane is in operation. This is also a fail-safe system as the crane must be stowed away correctly before the vehicle can be started and driven away. We have started of our colleagues, it also minimises risk to production. This system is not proprietary to Marshalls and we are encouraging others in our industry to adopt it for their Link to strategic objective: Logistics excellence • Reduction in lost time incident frequency rate • 62 Mental Health First Aiders (“MHFAs”) • Alignment of Marshalls and Marley health and safety function • Award wins for employee wellbeing strategy and crane safety improvement project • 26,969 training hours on health, safety and environment • • Introduction of Safety Excellence Model and management programmes to manage high risk activities • Continuing rollout of root cause analysis training and incident investigation • Internal recruitment and training of MHFAs at Marley sites • Focus on a positive safety culture by reinforcing recognition of good behaviours and continuing rollout of the Fair and Just Approach 2020 2021 2022 Lost time incident frequency rate 1.73 2.68 1.7 Fatalities 0 0 0 Note: The above data covers employees and contractors. Note: All data in this table excludes Marley. 1.7 lost time incident frequency rate per million hours worked (target: <2.28 average over 3 years) Marshalls plc | Annual Report and Accounts 2022 Strategic Report In 2022, we continued our focus on employee wellbeing by delivering our three-year strategy. Since colleagues helped us shape our programme and Simon Bourne, our Chief Operating strength to strength. Through our intranet, Marshalls NOW, all Marshalls colleagues have access to a dedicated area for wellbeing, providing education and support. This one-stop-shop is accessible by all colleagues at any time, on any device. Here, colleagues can support their wellbeing. Marshalls was awarded the “Best Strategy for Employee Wellbeing” Award at the Engagement Excellence Awards 2022. The judges commended our collaborative working across functions as well as consideration for the employee voice. Comments from the judges included: “Fantastic to see senior sponsorship of the strategy and that its three years demonstrates the buy-in into this” and “The wellbeing strategy is clearly built on collaboration and creativity… Marshalls should be really proud of what they’ve achieved on their wellbeing journey”. Case study Marshalls has a strong network of 62 trained Mental Health First Aiders (“MHFAs”). We continue to support our MHFAs by providing supervised sessions with clinical therapists through CiC, our employee assistance programme. We also have a programme of refresher training on mental health and wellbeing, as well as a Supporting Healthy Minds Working Group which collaborates with unions. health and managing change. We will also be integrating our processes with Marley in order to share our wellbeing resources and promoting access to our MHFA network. Link to strategic objective: Operational excellence Case study Road safety training to building sites, merchants yards and to the public. As such, we are keen to engage with local communities on road safety. primary schools in West Yorkshire and Cambridgeshire to deliver training to groups of primary schoolchildren. Covering session was interactive with a vehicle demonstration in the playground to explain and show blind spots to the children. We’re looking to do further training with schools located near our manufacturing sites in 2023. Link to strategic objective: Logistics excellence Marley integration A key focus for 2023 will be the continued integration of the Marley and Marshalls health and safety teams, by aligning common processes, management systems, policies and documentation as well as introducing a new data management system into the Group. • Winner: Safer Transport and Logistics Award for Crane Improvement Project • Finalist: Safer Transport and Logistics Award for School Awareness Project • Finalist: Supporting Healthier Minds and Employee Wellbeing Award • Finalist: Young Persons in Safety Award for Sam Wood at West Lane • Highly Commended: Safer Handling of Inbound and Outbound Materials Award for Concrete Block Board Exchange at Ramsbottom site • Highly Commended: Safer Together Award for “See it, Sort it & Go and See” Gas Walks • Highly Commended: Safer Transport and Logistics Award for SLAM (Stop, Look, Assess, Manage) 62 Mental Health First Aiders (2021: 53) Marshalls plc | Strategic Report The Group is strongly cash generative and has good facility and covenants which now includes a deleveraging objective in order to pay down the new bank loan over the medium term. Summary • 22% increase on 2021, including eight • • • • • Strong cash generation • • • • Revenue 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 On a like-for-like basis, Group revenue growth was one per cent. 2022 2021 22/21 Analysis of sales by segment £’m £’m % Marshalls Landscape Products 394.1 424.8 (7) Marshalls Building Products 193.1 164.5 17 Marley Roofing Products 132.2 — — 719.4 589.3 22 2022 2021 Analysis of sales by segment % % Marshalls Landscape Products 55 72 Marshalls Building Products 27 28 Marley Roofing Products 18 — Following the acquisition of Marley, the Group has reviewed its reporting segments and now reports under three separate segments, being Marshalls Landscape Products, Marshalls Building performance reporting and management responsibility framework. Marshalls Landscape Products (55%) Marshalls Building Products (27%) Financial Review Marshalls plc | Annual Report and Accounts 2022 Strategic Report 2022 2021 22/21 £’m £’m % Marshalls Landscape Products 45.3 62.4 (27) Marshalls Building Products 26.8 19.6 37 Marley Roofing Products 34.4 — — Central costs (4.6) (17) 2022 101.1 7 7.4 31 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 reduced commercial sales resulted in sharply lower volumes and segment is set out pages 18 to 23. totalling £53.2 million as summarised in the following table. Further details are set out in Note 4. Year ended 31 December 2022 Year ended 31 December 2021 (as restated) Group cash flow £’m £’m Transaction related costs 14.9 — Amortisation of acquired intangible assets 7.3 1.2 Fair value adjustment to inventory 3.9 — Additional contingent consideration 3.9 — Restructuring costs 13.0 2.8 Impairment of assets in Belgian subsidiary 10.2 — Other — (2.8) Adjusting items 53.2 1.2 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 (“PPA”) 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 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 and of Viridian Solar Limited in 2021. In response to lower levels of customer demand, we undertook and this resulted in a charge of £13.0 million, which comprises non-cash impairment charges. The impairment of assets in the Group’s subsidiary in Belgium arose from an impairment review carried out in response to a downturn in the business performance during 2022. The Group’s accounting policy is that adjusting items are disclosed additional information in order to enable a full understanding of the Group’s results. The policy to exclude amortisation of acquired intangible assets has required a modest restatement of Marshalls’ 2021 alternative performance measures. The disclosure of results before adjusting items represents an alternative performance measure, in order to demonstrate the Group’s capacity to deliver dividends to shareholders. Further details of the adjusting items Revenue Adjusted operating profit Margin impact Margin analysis £’m £’m % 2021 589.3 7 7.4 13.1 Marshalls Landscape Products (30.7) (17.1) (2.3) Marshalls Building Products 28.6 7.2 0.7 Marley Roofing Products 132.2 34.4 2.7 Central costs — (0.8) (0.1) 2022 719.4 101.1 14.1 The Group’s adjusted operating margin increased by one percentage compression in margins within Marshalls Landscape Products largely offset by an improved performance by Marshalls Building Adjusted EBITDA was £136.0 million (2021: £107.1 million). EBITDA on a statutory basis was £90.2 million (2021: £107.1 Change 2022 2021 22/21 £’m £’m % Adjusted EBITDA 136.0 107.1 27 Depreciation/amortisation (29.7) Adjusted operating profit 101.1 7 7.4 31 Adjusting items (1.2) Statutory operating profit 47.9 76.2 Analysis of revenue growth 2021–2022 revenue Marshalls Products Marshalls Building Products Marley Products revenue 28.6 589.3 719.4 132.2 Marshalls plc | Strategic Report 62 Financial Review continued charge of £2.8 million). On a rolling annual basis, interest after adding back the impact Including scheme administration costs, there was a normal IAS 19 notional interest charge of £0.1 million (2021: £0.4 million) in relation to the Group’s pension scheme. The IAS 19 notional interest of the Marshalls plc pension scheme, net of the expected return on scheme assets. The pension related interest cost in 2021 included a non-cash charge of £2.8 million, which was accounted for as an adjusted item. 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. The UK corporation tax rate increases to 25 per cent in 2023, and the deferred tax liability at 31 December 2022 has been calculated at 25 per cent, being the rate at which the deferred tax is expected to unwind. On a reported basis the effective tax rate was 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. The Group has paid £11.6 million (2021: £13.5 million) of corporation tax during the year. A deferred tax charge of £0.8 million pension scheme in the year has been taken to the Consolidated Statement of Comprehensive Income. For the ninth year running, Marshalls has been awarded the Fair Tax Mark, which recognises social responsibility and transparency in a company’s tax affairs. The Group’s tax approach has long been closely aligned with the Fair Tax Mark’s objectives and this is supported by the Group’s tax strategy and fully transparent tax disclosures. Taking into account not only corporation tax but also PAYE and NI paid on our employee wages, aggregate levy, VAT, fuel duty and business rates, Marshalls has funded total taxation to the UK economy of £108 million. Dividends The Group’s stated dividend policy is to maintain two times cover, through the cycle, of adjusted earnings per share. A progressive dividend policy remains a key objective. paid for 2022. This will be payable on 3 July 2023. When combined with the interim dividend of 5.7 pence, this results in a full year dividend of 15.6 pence per share. Dividend payments will continue our stated strategy and capital allocation policy. Net debt Reported net debt was £236.6 million at 31 December 2022 of IFRS 16 lease liabilities. On a pre-IFRS 16 basis, net debt was £190.8 million (2021: £0.1 million net cash). On 3 May 2022, the Group drew down the new four-year term loan of £210 million to support the funding of the acquisition of Marley. In addition to the term loan, the Group has entered into a new committed revolving credit facility of £160 million with a maturity date of four years. Good headroom is maintained against the new bank facility and its covenants, which will support investment priorities going forward, were comfortably met. Borrowing facilities The total bank borrowing facilities at 31 December 2022 amounted to £370 million, of which £120.1 million remained unutilised. The facility matures in April 2026. The bank facilities are unsecured. The Group’s committed bank facilities are charged at variable rates based on SONIA plus a margin. The Group’s bank facilities continue to be aligned with the current strategy to ensure that headroom against available facilities remains at appropriate levels and are structured to provide balanced and committed medium-term debt. At 31 December 2022, on an adjusted, pre-IFRS 16 proforma of adjusting items the relevant ratios were achieved comfortably and were as follows: • EBITA: interest charge – 16 times (covenant test requirement – to be greater than 3.0 times); and • net debt: EBITDA – 1.35 times (covenant test requirement – continued Adjusted Reported Adjusted (as restated) Reported Adjusted charge 2022 2022 2021 2021 22/21 £'m £'m £'m £'m % Operating profit 47.9 47.9 76.2 76.2 Adjusting items 53.2 — 1.2 — Adjusted operating profit 101.1 47.9 77.4 76.2 31 Net finance costs (4.1) (6.9) Adjusted profit before taxation 90.4 37. 2 73.3 69.3 25 Taxation (15.0) (14.4) Adjusted profit after taxation 73.4 26.5 58.3 54.9 Earnings per share – pence 31.3 11.4 29.2 27.5 7 Marshalls plc | Annual Report and Accounts 2022 Strategic Report Cash generation remains strong, and cash generated from operations were £106.8 million. After adding back the cash cost of adjusting items totalling £17.4 million paid, net operating cash which demonstrates the cash generative nature of the Group’s businesses. The Marley business is cash generative and is expected allocation priorities going forward, including continued investment in organic growth opportunities, new product development, dividend payments and progressive deleveraging. The ratio of net debt to EBITDA at 31 December 2022 on an adjusted pre-IFRS 16 proforma basis was 1.35 times. The ratio was 2.6 times on a reported basis. Both are comfortably within our target ranges, and well below covenant levels. The Group continues to prioritise the close control of inventory and the effective management of working capital. Debtor days remain industry leading due to continued close control of credit management procedures. The Group maintains credit insurance which provides excellent intelligence to minimise the number and value of bad debts and ultimately provides compensation if bad customers. This provides an additional short-term facility that can be utilised to facilitate the management of mid-month cycles. The Group complies with prompt payment guidelines and best practice, and with all major suppliers. 2022 2021 Group cash flow £’m £’m Net cash from operating activities 102.8 68.3 Net cash from investing activities (7.0) Net cash from financing activities (31.6) Adjusting items (2.8) Change in IFRS 16 lease liabilities and other 7.6 Movement in net debt in the year 34.5 Net debt at beginning of year (75.6) Net debt at end of year (41.1) (2021: £21.9 million). The table below summaries the Group’s cash utilisation on a pre- IFRS 16 basis both for the current and prior year and cumulatively over the last seven years. Last 7 years (pre-IFRS 16 Analysis of cash utilisation 2022 2021 basis) (pre IFRS 16 basis) £’m £’m £’m Net cash from (i) 74.4 55.5 373.1 Capital expenditure (21.9) (153.4) Proceeds from the sale 1.4 14.9 37.5 Acquisition of subsidiary undertakings (ii) — (439.1) Payments to acquire own shares/share issues 180.3 (3.6) 167.4 Dividends (17.9) (162.1) Movement in net debt 27.0 (176.6) (i) after the cash cost of adjusting items. (ii) includes the repayment of debt on acquisition of subsidiaries. The summary provides a medium-term seven-year analysis of the cash generation capacity of the Group and how cash has been invested to grow the business and also to show the cash returned the business to generate growth, improve productivity and provide industry leading manufacturing facilities. The Group has also invested £439.1 million in the targeted acquisitions of Marley, CPM and Edenhall. Dividends to shareholders over the last seven years have totalled £162.1 million, which equates to 43 per cent of net Adjusted proforma 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 operational leverage. Balance sheet conservative with over 60 per cent of the consideration funded by Group to reduce leverage. We will continue to invest in organic capital investment opportunities and new product development where these support our strategic goals. A PPA exercise has been undertaken to establish the constituent parts of the Marley balance sheet at fair value on acquisition. As part of the ongoing review of the fair value of assets and liabilities, adjustments have been made to certain balances during the period. Further details are set out at Note 25 to the Condensed Consolidated Financial Statements and is summarised below. Provisional fair values acquired £’m Tangible assets 97.6 Intangible assets 228.2 Net working capital 26.2 Net debt (259.5) Provisions (4.9) Tax (including deferred tax) (63.8) 23.8 Goodwill 24 4.1 267.9 Consideration: Cash consideration 120.3 Equity consideration 147.6 267.9 Marshalls plc | Strategic Report 64 Financial Review continued continued Balance sheet continued Net assets have increased to £661.1 million compared with £344.3 million at 31 December 2021. This is largely due to the equity issuance of £330.3 million to part fund the acquisition of Marley. Intangible assets have increased by £464.7 million, which includes Marley balance sheet at the acquisition date. This comprises principally of customer relationships of £145.4 million and the values attributable to the Marley and Viridian brands of £82.8 million. Residual goodwill of £244.1 million has been recognised. million, net working capital by £26.2 million and tax balances (mainly deferred tax) by £63.8 million. A term loan of £210 million was introduced to partially fund the acquisition. As is customary in these circumstances, we have kept this under review in the second half of the year and made some more changes to the initial assessment performed at the half year. This assessment will remain under review and subject to change during the twelve-month hindsight period which ends in April 2023. Further details of this are set out in Note 25 on page 182. 2022 2021 Group balance sheet £’m £’m Non-current assets 886.9 332.7 Current assets 322.0 263.2 Current liabilities (150.6) Non-current liabilities (101.0) Net assets 661.1 344.3 Net cash/(debt) (pre-IFRS 16) 0.1 Net debt (reported) (41.1) Net debt: EBITDA (pre-IFRS 16) 1.35 — Net debt: EBITDA (reported) 2.6 0.4 Gearing (reported) 35.8% 11.9% * Calculated on per-IFRS 16 net debt to adjusted proforma EBITDA basis. Pension scheme was a surplus of £22.4 million (2021: £25.8 million). The amount has been determined by the Scheme’s pension adviser using appropriate assumptions which are in line with current market expectations. The fair value of the scheme assets at (2021: £366.3 million). The volatility in gilt markets since the half year has had a to the scheme’s strategy of using liability driven investments also had consequences for the Marshalls’ scheme. Despite the unprecedented levels of market volatility, the scheme’s LDI asset portfolio continues to hedge protection against volatility in interest high proportion of “liquid” investments in the portfolio and this has helped the scheme respond to the recent market volatility and the short-notice collateral calls. However, during the last year the AA to 4.90 per cent. This has led to a reduction in liabilities but due to the high level of hedging in the investment strategy the scheme assets have also decreased in value. The expected rate of CPI These changes have resulted in an actuarial loss, net of deferred taxation, of £2.3 million (2021: £19.8 million actuarial gain) and this has been recorded in the Consolidated Statement of Comprehensive Income. The last formal actuarial valuation of 2021 and resulted in a surplus of approximately £24.3 million, on a technical provisions basis, which was a funding level of 107 per cent. The scheme remains in a healthy position and the Company has agreed with the Trustee that no cash contributions will be payable under the funding and recovery plan. The Group’s capital allocation policy was reviewed by the Board in the second half of the year in the context of increased balance sheet leverage following the acquisition of Marley. Whilst the Board is comfortable operating with the Group’s post- transaction leverage, in the light of the macro-environment, the policy has been revised to focus on accelerating the repayment of borrowings, one times EBITDA (December 2022: 1.35 times). Supplementary dividends have temporarily been removed from the policy. The Board is targeting net debt to reduce to around one times adjusted addition, the Group is undertaking a review of its manufacturing and property network with the potential to dispose of non-core sites, which would accelerate deleveraging whilst improving determination of its capital structure. The Group’s optimal capital structure supports the Group’s current strategic objectives, but also construction sector. The Group’s capital allocation policy is to maintain a strong balance strategy are: • to prioritise organic capital investment (£25 million investment planned for 2023), supported by an increase in new product development and research and development expenditure; • to continue the payment of dividends on the basis of a dividend cover of two times adjusted earnings; • to maintain a capital structure that recognises cyclical risk and volatility by continuing to maintain an appropriate level • targeting to reduce the net debt:EBITDA ratio to around 1.0 times • to continue to target selective bolt-on acquisition opportunities Organic growth 2 Ordinary dividends 4 Selective acquisitions Marshalls plc | Annual Report and Accounts 2022 Strategic Report Organic investment remains the priority for capital allocation and with good paybacks. Capital expenditure of £25 million is planned for 2023. This includes the dual block plant at the Group’s site in St. Ives, Cambridgeshire which is now in its commissioning will support the launch of new ranges of innovative value-added products that have the aesthetic appeal of natural stone at a lower and has received positive feedback. The Marshalls and Marley businesses employ a similar commercial strategy that focuses on generating pull demand from key was transferred to the Group team in the second half of the operational improvements focused on people, plant and process. We have reduced vacancy rates using the Marshalls in-house recruitment team, assessed plant failure rates, and implemented a targeted refurbishment programme and introduced a structured performance management system. This has resulted in increased per cent in recent months. In addition, we have integrated our procurement functions and embarked on a review of our combined logistics footprint and are evaluating how we leverage Marshalls’ ESG credentials within the business. Our ESG strategy continues to generate organic growth competitive advantage. We are continuing to focus our new product development activity on lower carbon products, and as part of this programme, we are accelerating our development of technologies to materially reduce the carbon intensity of our products using cement replacement and carbon sequestration techniques. As CarbonCure Technologies’ carbon mineralisation technology that uses waste CO carbonisation of concrete, which effectively reduces the embodied carbon. our concrete brick manufacturing sites. In addition, we are investing in several sites to support the roll out of a new concrete mix design that will reduce both raw material costs and embodied carbon. We continue to focus on executing our digital strategy, which aims to provide an end-to-end digital offering and to pioneer the digital standards for the industry. We have developed a new digital trading platform, using dropship technology, that will allow us to offer an extended range of products on our customers’ websites without requiring the merchant to stock the ranges. Customers using Marshalls’ distribution capability. The model offers a win-win outcome, where the merchant generates incremental sales due to an extended product range without incurring the costs associated via the merchant channel. We are currently live or in testing with two national merchants and at an advanced stage with three other 2022. This was delivered despite challenging market conditions which adversely impacted our Landscape Products business, and in recent years that now form the core of our building Products segment. evolving market conditions and execute self-help initiatives. Justin Lockwood 15 March 2023 Marshalls plc | Strategic Report 66 The Board plays a central role in the Group’s risk management process which covers emerging risks and incorporates scenario planning and detailed stress testing. Managing risk is a key factor outlook. In an addition to the macro-economic environment, the key risks for the Group continue to be cyber security and information technology, the security of raw materials supply and supply chain risks and climate change and other ESG related issues. All these areas are considered in more detail on pages 69 to 75. In all certain new operating procedures have been developed. Mitigating controls continue to be reviewed as appropriate. The Group’s risk function has placed particular emphasis on the following areas during the year: • economic uncertainty has been a major focus during the year. The acquisition of Marley has been an important transaction for and its underlying resilience by broadening the range of markets we sell into. The integration of Marley into the Group across all business areas has been a key priority and this is covered in more detail in the case study on page 67. Marley has now been fully integrated into Marshalls’ risk management process and procedures. There is a close correlation between the key risks • This is in progress and was commissioned at the end of 2021 in response to the BEIS White Paper. The primary goal is to in-scope processes, in order to record the key controls and associated metadata of the end-to-end process and to identify Marshalls businesses. • Cyber risk has continued to be a major focus in light of increasing external threats. Ongoing reviews, with additional resource, continue to be undertaken using both internal and external specialists. Practical support and guidance, together with additional cyber security training, are provided to facilitate KPMG completed a number of targeted internal audit projects during 2022 covering the following areas: • tendering; • project delivery; • inventory (both Marshalls and Marley); and • cyber security (both Marshalls and Marley). result of assessing the Group’s key risks. They also include audits subject to routine cyclical coverage. The priorities for the Group’s risk function in 2023 include the following areas: • the integration of Marley into the Group’s ESG development and governance framework; • the completion of a number of targeted projects will again be a major focus for KPMG. In 2023, projects will cover ESG reporting, cyber security and IT general controls will be completed; and • continuing to support the Group’s project to review the Group’s Risk management is the responsibility of the Board and is a key factor in the delivery of the Group’s strategic objectives. The Board establishes the culture of effective risk management and The Board sets the risk appetite and determines the policies and procedures that are put in place to mitigate exposure to risks. The Board plays a central role in the Group’s risk review process, which covers emerging risks and incorporates scenario planning and detailed stress testing. Process There is a formal ongoing process to identify, assess and analyse Group Risk Register. The Group Risk Register is updated by the full Executive Management team at least every six months and the overall process is the subject of regular review by the Board. Risks are recorded with a full analysis, and risk owners are nominated who have authority and responsibility Marshalls plc | Annual Report and Accounts 2022 Strategic Report • • • • • • • • • • • • • • • Auditor, regularly attends the risk review meetings. The process continues to be a robust mechanism for monitoring and controlling the Group’s principal risks, and for challenging the potential impact of new emerging risks. All risks are aligned with the Group’s strategic objectives, each risk is analysed in terms of likelihood and impact to the business and the determination of a “gross risk score” enables risk exposure to be prioritised. The Marley business has historically utilised a similar risk management process, and this has been mapped across and embedded in the Marshalls risk management process. The Group seeks to mitigate exposure to all forms of strategic, effectiveness of key mitigating controls is continually monitored, and such controls are subject to internal audit and periodic testing appropriate. The effectiveness and impact of key controls are evaluated and this is used to determine a “net risk score“ for each risk. The process is used to develop detailed action plans that are used to manage, or respond to, the risks, and these are monitored and reviewed on a regular basis by the Group’s Audit Committee. The Group has a formal framework for the ongoing assessment objective is to gain assurance that the control framework is complete and that the individual controls are operating effectively. reconciliations is undertaken on a rolling basis. Such testing includes key controls over access to, and changing permissions 1 Macro-economic and political 2 Cyber risks 3 Security of raw material supply 4 Long-term impacts of climate change 5 Human rights consideration 6 Short-term impacts of weather events 7 Threat from new technologies and business models/ increased pace of digital change 8 Corporate, legal and regulatory 9 Competitor activity 10 Project delivery of major strategic business projects and change management 11 Health and safety 12 People risk Impact Likelihood Low Case study Nature of risk Potential impact Mitigating factors Ineffective integration of Marley into the wider Group (in any of a number of functional areas and on a wider basis), due to a lack of planning, control, effort, focus, resource, leadership and execution. A potential “people”-perceived “change” risk. A lack of planning could lead to distractions and “eye off the ball” in respect of the existing Marshalls’ operations. This could lead to utilisation of unplanned resource away from the existing business. Non-delivery of strategy, goals and performance objectives. Additional costs, and non-delivery of plan. Negative perception from stakeholders and a risk of reducing shareholder value. Detailed integration plan, which has been subject to third party scrutiny during the acquisition process. Detailed delivery plans for each part of the business, Executive Management focus. Steering Committee, formal reporting and responsibility framework and structure. Active engagement with Marley personnel during this process. Monthly reporting to Marshalls’ Executive. Integration of KPIs. 2 4 6 Marshalls plc | Strategic Report continued continued The Group is prepared to accept a certain level of risk to remain competitive, but continues to adopt a conservative approach to risk management. In assessing risk appetite, the aim is to ensure that internal controls and risk mitigation measures are designed to appetite. The aim is to ensure that we continue to channel resources risk to areas where we have a net risk score that lies outside our acceptable risk appetite. The risk framework is robust and provides clarity in determining the risks faced and the level of risk that we are prepared to accept. Marshalls’ strategies are designed to either treat, After considering the principal risks on pages 69 to 75, the Directors have assessed the prospects of the Group over a longer period than the period of at least twelve months required by the “going concern“ basis of accounting. The Directors consider that the Group’s risk The Board considers annually, and on a rolling basis, a strategic plan, which is assessed with reference to the Group’s current position and prospects, the strategic objectives and the operation of the procedures and policies to manage the principal risks that might threaten the business model, future performance and target capital structure. In making this assessment, the Board considers emerging risks and longer-term risks and opportunities. The aim is to ensure that the business model is continually reviewed to ensure it is sustainable over the long term. Security, underpin the Group’s capital structure objectives. The Group’s funding strategy is to ensure that headroom remains at comfortable levels under all planning scenarios. For the purposes of the Viability Statement, the Board continues to believe that three years is an appropriate period of assessment as that there is less visibility beyond three years. The Construction Products Association’s (“CPA”) forecasts currently go out to 2024. that incorporates the income statement, balance sheet and cash impact the Group and could conceivably threaten the Group’s ability to continue operating as a going concern. The assessment concluded that the deteriorating macro-economic environment is the key risk for this purpose and, in response to this, two scenarios have been run, namely a “reasonable worst-case scenario” and test sensitivity run against the base case model. This sensitivity lower scenario from the 2022/2023 Winter forecast. This scenario results in a cumulative revenue reduction of eleven per cent during 2023 and 2024 against the base case forecast. A contribution “drop-through” rate has been applied based on the operational gearing of each business unit and an allowance has been made for reduces to £234 million by the end of 2023, and bank covenants and increased interest is mitigated by reduced tax and dividend and there remains comfortable headroom against bank facilities net debt to adjusted EBITDA covenant peaking at 1.9 in December 2023. In this scenario, we would have £27 million headroom against EBITDA and £96 million against net debt. In practice, such a downside scenario would see the Group instigate to further reduce capacity, for example reducing shifts, production lines and potentially mothballing or closing sites. The reverse stress test scenario aims to identify a deeper Against the base budget revenue reductions of 18 per cent would be required across 2023 and 2024 (all other things remaining unchanged) to increase the pre-IFRS 16 net debt: adjusted EBITDA covenant to three times at 31 December 2023. This scenario equates to around 1.7 times the reduction assumed in the CPA’s lower scenario from the 2022/2023 Winter forecast. This reverse stress test scenario reduces revenue by approximately £300 million over 2023 and 2024. Under this scenario, gearing peaks at 41 per cent at the end of 2023. There remains reasonable headroom against bank facilities, but the net debt: EBITDA bank covenant marginally breaches three times at 31 December 2023. The model assumes no further cash mitigation (e.g. reduced capital expenditure). Dividends have been reduced in line with the two times cover policy but the Board would retain the ability to further reduce or cancel dividends in order to maintain liquidity. In undertaking its review, the Board has considered the appropriateness of any key assumptions, taking into account the external environments and the Group’s strategy and risks. Based on this assessment, and taking account of the Group’s principal risks expectation that the Group will be able to continue in operation and meet its liabilities as they fall due for the next three years. The reverse stress test scenario provides an indication of the scale of downturn that could be absorbed by the Group without undertake more severe restructuring. The analysis provides the required evidence that the Directors’ assessment that the going concern assumption remains appropriate and supports a positive conclusion for the longer-term Viability Statement. Marshalls plc | Annual Report and Accounts 2022 Strategic Report Sourcing Manufacturing Distribution Customers Scenario case scenario leading to reduced consequent reduction Stress test modelling uses severe downside assumptions against the base model. These include: • Cumulative revenue reduction of eleven per cent across 2023 and 2024; • PBT falls by £70 million across 2023 and 2024; and • No further reduction in interest rates – with SONIA assumed to increase to 4.5 per cent by mid-2023 in the base model. Outcomes • Operating margin reduces to 9.5 per cent in 2023; • Reported net debt to reduce to around £234 million (which is lower than the base case rate of deleveraging); and • Bank covenants continue to be met - pre-IFRS 16 net debt to adjusted EBITDA peaks at 1.9 times in December 2023. 2. Reverse stress test scenario is a deeper The main elements of the reverse stress test model are: • Cumulative revenue reduction of 17 per cent; and • Operating margin falls to 6.7 per cent at Outcomes • Under this scenario the net debt : adjusted EBITDA bank covenant (pre-IFRS 16 basis) is marginally breached at 31 December 2023; • The model assumes that no additional cash mitigation measures (e.g. reducing capital expenditure) would be made. In practice a series of cash mitigation measures would be taken under this scenario. The Directors have undertaken a robust, systematic assessment of the Group’s emerging and principal risks. These have been considered within the timeframe of three years, which aligns with our Viability Statement on page 68. The risk process has increasingly allocated greater focus on emerging risks and risk outlook. The reporting includes more detailed assessments of proximity (how far away in time the risk will occur) and velocity (the time that elapses between an event occurring and the point at which the effects are felt). Nature of risk and potential impact The Group is dependent on the level of activity in its end markets. Accordingly, it is susceptible to economic downturn, the impact of Government policy, volatility in UK and world markets and supply chain and labour market issues. During 2022, higher interest rates and relation to energy costs) have created a cost of living crisis for large elements of the UK population. This uncertainty has impacted market sentiment and this has been exacerbated by the increasing impact of wider geo-political factors the impact of unprecedented levels of Government borrowing. Potential impact The potential longer-term impact of macro-economic uncertainty and interest rates could reduce consumer lower activity levels. This could have an results. There continues to be volatility in world markets and global economic uncertainty continues to be a risk. A continuation of high interest rates and over a more extended period. Key risk indicators • Government policy failing to contain • An escalation of the war in Ukraine and other increased global uncertainty. • Reductions in consumer order pipeline. • Further COVID-19 uncertainty and the emergence of new virus variants. Mitigating factors • The Group closely monitors trends and lead indicators, invests in market research and is an active member of the CPA. • business and end markets. The acquisition resilient. • The proactive development of the product range also continues to offer protection. • The Group undertakes scenario planning to support improved business resilience. • The Group continues to focus on those market areas where growth prospects are greatest. • Focus on innovation, new product development and the ESG driven opportunities to drive competitive advantage. Change Increase in risk The UK Government’s stated objective is to support investment support for infrastructure and housing is expected over the medium term however, the short-term outlook for construction has weakened. The economic slowdown has resulted in a loss of business and consumer delays in investment decisions. Priorities • Regular scenario planning to assess various market risks and disruptive events. • Strategic reviews focusing on business resilience and • Increase operational manufacturing network. Shareholder value Relationship building Organic expansion Brand development Effective capital structure and control framework Read more about our strategy on Read more about our business model on Marshalls plc | Strategic Report continued continued Nature of risk and potential impact Fast growing and indiscriminate risk of cyber attack. Inadequate controls and procedures over the protection of intellectual property, sensitive employee The failure to improve controls against cyber security risk quickly enough, given the rapid pace of change and the continuing threat of ransomware and denial of service attacks and new cyber threats. IT is increasingly integrated into all business processes. Potential impact loss. The Group’s industrial network is becoming more IT dependent and the and reputational risk. Key risk indicators • Emergence of new cyber • Increased examples of data loss and security breaches in the wider market. Mitigating factors • Use of IT security policies. • Regular cyber security risk audits undertaken by specialists and the use of mitigation controls and other recommended procedure updates. Annual penetration tests are undertaken on external facing systems and during 2022 cyber internal audits were undertaken by KPMG in respect of the Group’s cyber controls in relation to both Marshalls and Marley. The Group’s “cyber maturity assessment” score has continued to increase. • Restriction of sensitive data to selected senior and experienced employees who • Appropriate tools and training procedures are in place to protect sensitive data when stored and transmitted between parties (e.g. encryption of hard drives, restricted USB devices, secure data transmission mechanisms and third party security audits). • A continuous programme of awareness campaigns and training for staff. Change No change in risk Cyber risk has increased after the COVID-19 pandemic and remains witnessing more incidents, especially in the construction industry, and increasingly in relation to ransomware. The cyber control environment in Marley is not as mature as that in Marshalls and is an area of focus. Considerable focus continues to be given to promoting awareness of IT security policies. The perception is that the risk of data loss through new (or as yet unseen) security threats continues to increase. Priorities • Constant review and ongoing challenge to procedures – use of external experts. • Continue to develop cyber risk strategy. • Improve our cyber security response plans and identify and rectify any gaps. • Alignment of controls Nature of risk and potential impact Globally, the impact of the ongoing supply continues to impact material availability and has resulted in There continues to be market capacity stresses for sand, cement and other raw materials. Longer term there is a risk of “carbon taxation.” Potential impact dissatisfaction and reduce demand and margins. Key risk indicators • Temporary shortages and impacting materials and labour. • Decreases in labour availability and skills shortages. Mitigating factors • business and end markets. • The acquisition of Marley has increased procurement opportunities. • Maintaining adequate, but not excessive, stocks. • • Collaboration with all EU-based tier one and tier two suppliers to ensure any supply risks are minimised. • The digitalisation of the supply chain through the implementation of a best-in-class Supply Relationship Management System. • The Group focuses on its supplier supply agreements, the use of hedging forwarding options. • The Group utilises sales pricing and purchasing policies designed to mitigate the risks. • Consideration of alternative technologies, including the reduction of cement content. Change Reduced risk Weakening demand has led to reduced availability issues, continued. The risk of temporary shortages is mitigated by proactive supply chain management and the use of alternative suppliers. Priorities • Increase productivity and • Continue to develop supply chain strategies Marshalls plc | Annual Report and Accounts 2022 Strategic Report Nature of risk and potential impact Increasing focus on ESG and the heightened awareness of the environmental challenge, with increased operational and reporting requirements, hardening targets and greater scrutiny by investor and stakeholder groups. The acquisition of Marley may impact our publicly stated ESG commitment the science-based targets and other environmental protocols. environmental risks is included in the Sustainability section on pages 42 to 59. Potential impact Risk that investors and customers could reduce support if the Group failed to improve performance against targets or did not report appropriately. Risk of customers switching products away from those with a higher carbon footprint. Cost impact of the “Environmental Protocol,” and mitigation programmes could lead to increasingly Key risk indicators • Negative feedback from stakeholders – loss of business and investment. • Failure to meet internal targets. Mitigating factors • The Group utilises experienced, specialist staff to support the Group’s focus in • An ESG Steering Committee with Executive and Board level representation. • Specialist third parties including the Carbon Trust and Verisk Maplecroft (see further details on pages 42 to 59. • Climate risk analysis. • Agreed carbon reduction plan and a set • The Group is committed to the Science Based Targets initiative and a new Group plan is now being developed to include the impact of the Marley business. • Working groups established in all focus areas and controls being progressively embedded across the business. Change No change in risk from stakeholders, Government, customers and investors. Increased expectation of of strategic plans and transition risk. TCFD disclosure requirements. Priorities • Integration of Marley into the Group’s ESG policies • to include Marley – in conjunction with the Carbon Trust. • Ongoing assessment of climate change and risks for production, facilities, products and distribution. • Develop comprehensive strategy covering targets, products and business processes. • Review of opportunities Nature of risk and potential impact Mandatory human rights disclosure from 2022 and increased focus on modern slavery and diversity reporting. Lack of visibility of human rights within the supply chain. The continuing requirement to identify risk across the whole supply chain and the need to maintain reliable and consistent internal systems, processes and procedures. is included in the Sustainability section on pages 42 to 59. Potential impact Risk that stakeholders could reduce support if the Group failed to address issues around modern slavery and diversity appropriately. Key risk indicators • Negative feedback from stakeholders – loss of business and investment. • Inadequate data to support systems and procedures. • Increase in general level of disclosure required and administrative compliance. Mitigating factors • The Group utilises experienced, specialist staff to support the Group’s focus • Regular internal cross-functional meetings to discuss progress, issues and focus areas. • for entire procurement team. • Introduction of Safecall overseas. • Annual analysis of sourcing country risk. • Strategic partnerships with external agencies – UNGC framework. • Focus on ethical sourcing processes • Working groups established in all Change No change in risk from stakeholders, Government, customers and investors and increased operational and reporting requirements. Priorities • Develop strategic partnerships. These include the UN Global Compact (“UNGC”) together with UK and overseas governments, NGOs and industry groups. • Increase focus on the development of the Group’s comprehensive strategy. • Develop robust IT platform for data collection and analysis. Sourcing Manufacturing Distribution Customers Shareholder value Relationship building Organic expansion Brand development Effective capital structure and control framework Read more about our strategy on Read more about our business model on Marshalls plc | Strategic Report continued Nature of risk and potential impact Increasingly unpredictable weather conditions and extreme weather events. droughts across the country. The longer-term implications of climate change give rise to the transition risk of not addressing the challenges quickly enough. Potential impact Disruption to supply chain and operations that might reduce short-term activity levels. Financial risk caused by adverse impact sales and production volumes. Key risk indicators • Prolonged periods of bad weather (e.g. snow, ice make ground • Changing public perceptions of the longer-term implications of climate change. Mitigating factors • Diversity of the business. • The Group utilises centralised specialist functions to support mitigation plans and the management of relationships • Climate change risk analysis in place. • Commitment to water harvesting and recycling schemes. • The development of resilience strategies for climate change is a key element of the Group’s Climate Change Policy. • The development of the Group’s Water Management business and the continuing focus on new product development. Change No change in risk Weather conditions continue to be closely monitored but are beyond the Group’s control. awareness of climate change. Priorities • Continue to develop resilience strategies. • Development of Civils and Drainage business. Nature of risk and potential impact Reduction in demand for traditional products. Risk of new competitors and new substitute products appearing although this risk is set against a challenging 2023 outlook. Failure to react to market developments, including digital and technological advances. Potential impact The increased competition could reduce volumes and margins on traditional products. Increased costs and production capacity tied up in redundant technologies. made by the Group in this area in recent years, there remains a risk that a new third party could use emerging digital technology to enter the market and transition more quickly and effectively. Key risk indicators • Less demand for traditional products and routes to market. • Emergence of new competitors and new digital business models. • More widespread availability of technology. Mitigating factors • Good market intelligence and ongoing monitoring of competitive threats. • Flexible business strategy able to embrace new technologies. • development and new products. • Development of the Group’s e-commerce platform and digital strategy. Change Reduced risk the business, the continued development of the Marshalls brand and the focus on new products and greater continue to mitigate the risk. The pace of digital change to increase although this is balanced by a challenging outlook. Priorities • Collaboration with universities to develop new products • Increase pace of digital change and technological solutions (e.g. Dropship). • Focus on cost reduction and projects that improve continued Marshalls plc | Annual Report and Accounts 2022 Strategic Report Nature of risk and potential impact Inadvertent failure to comply with governance, legislative and regulatory business environment. The Group may be adversely affected by an unexpected reputational event, e.g. an issue in its supply chain or due to a health and safety incident. Potential impact regime across all areas of business (e.g. health and safety, competition law, the Bribery Act and GDPR) could lead A health and safety or environmental incident could lead to a disruption to production and the supply of products for customers. Such incidents could and have a negative impact on the Group’s reputation. Key risk indicators • Increased regulatory and compliance requirements. • Integration requirements for new acquisitions. • increases in the penalty regime for health and safety and environmental incidents. Mitigating factors • Centralised legal and other specialist functions, the use of specialist advisers and ongoing monitoring and mandatory compliance training programmes. • Centralisation of certain Marley functions into the central legal team. • Regular reviews of policies and procedures. • Regular compulsory data protection training implemented. • The Group has a formal Group sustainability strategy focusing on impact reduction. • The Group employs compliance procedures, policies, ISO standards and independent audit processes which seek to ensure that local, national and international regulatory and compliance procedures are fully complied with. • The Group uses professional specialists covering carbon reduction, water management and biodiversity. Change No change in risk governance requirements and regulation continues to require additional management focus and robust compliance procedures within all areas Priorities • Continue to renew all compliance processes and control effectiveness. • Develop stress tests and crisis planning procedures. Nature of risk and potential impact The Group has a number of existing competitors which compete on range, price, quality and service. Potential new low cost competitors may be attracted into the market although the 2023 outlook is challenging. In addition, are now impacting all suppliers and consumers. Competitive risk increases if we fail to maintain high levels of customer service. Potential impact Increased competition could reduce volumes and margins on manufactured and traded products. Reputational damage if the Group loses competitive advantage. Key risk indicators • Threat from new low-cost competitors and new technologies. • Less demand for traditional products and the increased emergence of new digital business models and product solutions. Mitigating factors • The Group has unique selling points that differentiate the Marshalls branded offer. • The Group focuses on quality, service, reliability and ethical standards that differentiate Marshalls from • The Group has a continuing focus on new product development. • The continued development of the Group’s digital strategy and its focus for customers and all stakeholders. • Restructuring programme implemented in Q4 2022 will reduce cost base by approximately £10 million. Change Increased risk potentially changes competitive pressure in certain areas. Priorities • New product development. • Research into green technologies. • Review marketing and communications. • Continue to review all elements of customer service, including the continuing development Sourcing Manufacturing Distribution Customers Shareholder value Relationship building Organic expansion Brand development Effective capital structure and control framework Read more about our strategy on Read more about our business model on Marshalls plc | Strategic Report continued continued Nature of risk and potential impact Ineffective management of major development projects, from initial management, due to constraints that might impact the Group’s ability to absorb change. During 2022 such projects included the integration of Marley, the construction of the dual block plant at St. Ives and the successful implementation of a restructuring programme, which has included the mothballing of the Sandy manufacturing site. Potential impact The extent and complexity of projects Potential failure to realise business projects. Reputational damage, service under- delivery and staff retention risks. Key risk indicators • Delays to project delivery. • resource utilisation. Mitigating factors • Robust and standardised project • Change management framework and process in place. • Programmes are continually reviewed with strong governance and executive steering committees where appropriate. Change No change in risk Although the underlying risk continues, effective control and the ongoing development of an appropriate management framework continue to mitigate the risk. Priorities • Develop strategies • Ongoing reviews of acquisition strategy and the business model. Nature of risk and potential impact Unexpected health and safety incident, possibly caused by human error or the actions of a subcontractor. Additional risks introduced in relation to the acquisition of Marley. Ongoing risks in relation to COVID-19 and the need to maintain safe working environments. Ongoing welfare and mental health Potential impact Risk of harm to all stakeholders, including on-site employees and subcontractors. Negative impact of working from home for certain employees. prosecution. A major incident could lead to a disruption to production and a negative impact on the Group’s reputation. Key risk indicators • Integration requirements for new acquisitions. • increases in the penalty regime. Mitigating factors • Centralised specialist functions and clear policies in place. • Detailed central review of Marley health and safety risks, controls, systems • Regular communication and support for employees, including those working from • Group-wide health and safety strategy. • Ongoing monitoring, training and health and safety audits. • Introduction of a digital management system for enhanced data collection • All senior managers receive the Marshalls Health and Safety and Environmental stage 3 training. Change No change in risk Health and safety continues Continuing risks arising from COVID-19, including mental health and employee welfare. procedures leading to improved root cause analysis. Priorities • Ensure health and “day-to-day” culture. • Improve reporting structures. • Full integration of Marley into the Group’s health and safety and employee wellbeing protocols. Marshalls plc | Annual Report and Accounts 2022 Strategic Report Nature of risk and potential impact Availability of labour – with risks around core skills, demographics, capability and changing working patterns. This has become a key differentiator in the market. The “War for Talent” has increased with skill shortages in certain areas. Ongoing risks and requirements concerned with training, development and succession planning. Implications of technological change and automation. Potential impact Inability to recruit people with required skills, calibre and potential. Risk of reduced skills and inadequate training potentially leading to reduced Companies are changing their “employment position” and creating Implications for employee health and wellbeing and overall workforce morale. Potential risk to the Marshalls brand. Key risk indicators • Skill shortages and lack of diversity within • Increased stress levels within workforce leading to employee absenteeism. • Increased levels Mitigating factors • Focused human resources department with experienced staff and specialist skills. • Group People and Organisational Plan. • Strong employee and trade union relationships. • Strong communication channels and employee feedback through the “Employee Voice Group”. • Regular feedback questionnaires supported by a third party provider. • Independent “Safecall” employee helpline. • Ongoing focus on training, apprenticeships and staff development and leadership potential. Change No change in risk Increasingly competitive labour market. The emergence of challenges for employees caused by new working requirements, health and safety regulations and operational working practices. These include issues that could give rise to heightened employee wellbeing issues Priorities • Develop retention and recruitment strategies. • Effective marketing and communications. • Focus on succession planning, internal development and leadership teams. • Integration of Marley into all of the Group’s “People” strategies, policies and procedures. Sourcing Manufacturing Distribution Customers Shareholder value Relationship building Organic expansion Brand development Effective capital structure and control framework Read more about our strategy on Read more about our business model on Marshalls plc | Governance 76 Board of Directors A diverse, decisive Date of appointment 9 May 2018. Re-elected in May 2022 Experience Fellow of the Chartered Institute of Marketing with extensive experience of corporate leadership, strategy and manufacturing in both executive and non-executive roles with a wide range of UK and international businesses. Previous executive roles include Chief Executive of Blick plc from 2001 until its successful sale to Stanley Works Inc in 2004 and Managing Director of Ultraframe plc between 2004 and 2006. Alignment with strategic corporate objectives External appointments Senior Independent Non-Executive Director and Chair of the Remuneration Committee of Bunzl plc, Non- Executive Director and Chair of the Remuneration and CSR Committees of Manchester Airports Group and Non-Executive Director and Chair of Yorkshire Water. Vanda Murray OBE Chair Date of appointment 9 September 2013. Re-elected in May 2022 Experience Thermea Group BV, a leading manufacturer and distributor of domestic and industrial heating and hot water systems operating in 70 countries with a turnover of €1.8 billion, formed in 2009 from the merger of Baxi and De Dietrich Remeha. Prior to the merger, Martyn was Chief Executive of the private equity-owned Baxi Group. He also held the position Holds a BSc in Mathematics. Alignment with strategic corporate objectives External appointments Director of the Mineral Products Association. Non- Executive Director and Chair of the Remuneration Committee of Eurocell plc. Martyn Coffey Chief Executive Date of appointment 5 October 2010. Re-elected in May 2022 Experience Leadership roles in a number of different industries such as banking, retail, marketing and consumer goods, as well as in the charity and public sectors of Greater Birmingham and Solihull LEP, Chair of Cogent (the leading independent marketing agency), President of the Greater Birmingham Chambers of Commerce, CEO of Sainsbury’s Bank and a member of the operating board and Non-Executive Director Alignment with strategic corporate objectives External appointments Chair of the Royal Orthopaedic Hospital. * Tim Pile will retire as a Non-Executive Director and Board member at the Company’s 2023 AGM. Tim Pile Non-Executive Director Date of appointment 1 October 2019. Re-elected in May 2022 Designated Non-Executive Director for Experience Broad based international career in manufacturing, distribution and construction and extensive commercial strategy, marketing and communications executive experience. Formerly, Strategic Marketing and Communications Director at Morgan Sindall plc until 2013 and prior to that held senior roles at the Tarmac Group, Premier Farnell plc and ICI plc. Alignment with strategic corporate objectives External appointments Senior Independent Non-Executive Director and Non-Executive Director The Board is cohesive, well-balanced, agile and determined “to do the right things, for the right reasons, in the right way”. The Board has strong ethical values, combined with great depth of experience and skill covering leadership, strategy, manufacturing, and business change. The Board acts responsively and dynamically applying its experience, skill and knowledge whilst bringing constructive challenge to the table, ensuring the long-term sustainability of the Group. Driving the strategic plan in The Marshalls Way, whilst demonstrating its ability to be agile and alive to geo-political instability and face into short and medium term macro-economic challenges are key in maintaining the Group’s market Committee membership Audit Committee Nomination Committee Remuneration Committee Chair of the Committee Independent Director Links to strategic corporate objectives Shareholder value Relationship building Organic expansion Brand development Effective capital structure and control framework 77 Marshalls plc | Annual Report and Accounts 2022 Governance Date of appointment 26 July 2021. Re-elected in May 2022 Experience roles for seven years prior to his appointment as CFO in 2017. Justin spent four years at Associated between 2002 and 2006. Chartered accountant ten years of his career. Alignment with strategic corporate objectives External appointments None. Justin Lockwood Date of appointment 10 May 2017. Re-elected in May 2022 Experience of MJ Gleeson plc. Previous roles include Chief Executive of Galliford Try plc. Also on the board of The Jigsaw Trust, a charitable trust committed to autism awareness. Extensive senior management experience in the sector, including with leading property developer Development Securities plc (now part of Land Securities plc), Taylor Woodrow, the listed contractor/developer, and Blue Circle Industries plc. Spent seven years as a partner in the Real Estate, Hospitality and Construction Group of Alignment with strategic corporate objectives External appointments Graham Prothero Senior Independent Non-Executive Director Date of appointment 1 June 2021. Re-elected in May 2022 Experience A management consultant with expertise in retail business change, digital channel expansions and transformation. Formerly a Partner at Accenture focusing on the retail and consumer products sector. with many well-known national and international brands. Previously worked as Director of Business Transformation at Sky in addition to leadership roles at Arcadia, BHS, Mothercare and Littlewoods. Most recently served as a Non-Executive Director at Moss Bros Group PLC. Alignment with strategic corporate objectives External appointments Co-chair of the Ambassadors Group of retailTRUST, Senior Independent Non-Executive Director of Barnardo’s, Non-Executive Director for Grafton Group PLC and Director of Avis Business Consulting, a provider of transformational change strategy and execution support. Date of appointment 1 April 2022 Experience Experienced manufacturing, supply chain and operations director. Simon joined Marshalls in 2015 as Manufacturing Director and was appointed as Group Operations Director in 2017. Prior to joining the Company, Simon held senior operational and supply chain roles across various sectors. Before his appointment at Marshalls, Simon spent six years at Burtons Biscuits as Manufacturing Director and three years at Betts Group Holdings as Group Director of Manufacturing. Alignment with strategic corporate objectives External appointments Chair of MPA British Precast. Avis Darzins Non-Executive Director Simon Bourne Date of appointment 1 January 2023 Experience Group Head of Strategy at Smiths Group plc. Previous roles include Corporate Development Director of Allied Domecq plc and Strategy Director roles with Bass plc. Extensive cross-sector experience from retail, leisure retail, consumer goods and industrial manufacturing industries covering and strategy. Diana was Senior Adviser to the spent seven years on the board of Thornton’s plc as Chair of Audit Committee and Senior Independent Director. Alignment with strategic corporate objectives External appointments None Diana Houghton Non-Executive Director Date of appointment 26 May 2020 Experience years’ experience, the last eight of which have been in industry at FTSE businesses. Extensive leadership and legal experience. Responsible for transforming the legal team’s role in the business. Formerly a Bond Dickinson LLP, focused on supporting public companies. Also spent more than eight years Alignment with strategic corporate objectives External appointments None Shiv Sibal Group General Counsel Gender composition Female – 4 Male – 5 Ethnic diversity White – 8 Mixed Asian and white – 1 Length of service 0–2 years – 4 3–4 years – 1 5+ years –4 Marshalls plc | Governance 78 Our commitment to responsible creates strong alignment at Board level A transformational year, diversifying record Dear shareholder Responsible governance is critical at all times, but is put to test when operating in volatile market conditions. Geo-political instability and macro-economic uncertainty make business planning extremely challenging. Against this backdrop, the Group has emerged from a transformational but challenging year, in a strong and stable position. acquisition of Marley. Marley is a leading manufacturer and strong addition to the Group, with a highly skilled and experienced management team. Throughout the acquisition process, the Board and senior management team worked closely together in evaluating the opportunity and engaged with relevant stakeholders, at all times respecting our legal obligations and the sensitive nature of the deal. A responsive, cohesive but forthright Board led our assessment and the time, we received strong shareholder support for the transaction, but, in volatile market conditions, we recognise the importance of keeping an open dialogue with all our stakeholders. To this end, I met with shareholders towards the end of the year and, as a Board, we have this as we progress through the current year. Political and economic uncertainty characterised the second half challenges. Having completed a transformational acquisition, the Board’s attention necessarily moved to more pressing short to medium-term strategic challenges, and in particular, managing our anticipate will be a challenging year ahead, based on market indicators. This ability to respond dynamically to opportunities and threats, requires decisiveness and a determination “to do the right things for the rights reasons, the right way”. Our commitment to responsible governance and The Marshalls Way creates strong alignment at Board level and throughout the business. Our resilience, and impact of the Marley acquisition, ultimately resulted in another record year for the Group but we recognise the danger of complacency and the importance of continuous improvement. During the year, we welcomed Simon Bourne to the Board, with his transformation of our operations since joining the business. Simon and his team are now working closely with the Marley team to help As planned, Tim Pile will retire from the Board at the end of our 2023 AGM. I would like to thank Tim for his incredible contribution to the Marshalls’ Board over the last twelve years. He has challenged and supported in equal measure but always with the goal of helping Marshalls achieve its strategic ambitions in a way that balances the interests of all our stakeholders. I am delighted that Diana Houghton has joined the Board as Tim’s successor. We provide further detail on them in our Nomination Committee Report on pages 92 to 95, but these appointments mean the composition of our Board complies with the Listing Rules that require UK listed companies to disclose on a “comply or explain” basis against set diversity targets. Details of the current composition of the Board by gender, ethnic diversity and length of service are on page 77. culture and purpose, is what “good governance” means to Marshalls. This is central to our application of the UK Corporate Governance Code. Our commitment to The Marshalls Way – “to do the right things, for the right reasons, in the right way” – underpins everything we do. This Corporate Governance Statement explains how Marshalls’ governance framework supports the principles of integrity, strong ethical values and professionalism which are integral to our business. The Board recognises that we are accountable to shareholders for good corporate governance. This report, together with the Reports of the Audit, Nomination and Remuneration Committees on pages 92 to 130, seeks to demonstrate our commitment to high standards 79 Marshalls plc | Annual Report and Accounts 2022 Governance Board • Board meetings • AGM and GM • Annual strategy day • Business and stakeholder engagement • Designated NED for employee engagement • Shareholder engagement Audit Committee Read more on Nomination Committee Read more on Executive Committee • Committee meetings • AGM • Remuneration policy consultation • Monthly meetings • Weekly update calls • Annual strategy review • Monthly business reviews • Bi-monthly ESG Steering Committee meetings • Regular EVG meetings Our governance framework Remuneration Committee Read more on Programme of activities Diversity and Equity Taskforce ESG Steering Committee Read more on Business Unit Management Teams Employee Voice Group Read more on M i s s i o n S t r a t e g y P u r p o s e Culture: The Marshalls Way S t a k e h o l d e r s D n a i c D e c i s i o n M a k i n g Governance at Marshalls Our Culture is at the heart of everything we do: The Marshalls Way. Our Purpose drives our Mission, which in turn drives our Strategy. These operate as by the Board and the business. The operation of our business and the decisions we make have regard to the interests of our Stakeholders. This approach to governance enables Dynamic Decision Making but ensures we never lose sight of the elements within that drive our long-term sustainability. D n a i c D e c i s i o n M a k i n g Marshalls plc | Governance 80 • We’ve supported the business in another record year of performance, against a challenging macro-economic and geo- Ukraine crisis challenging us to ensure the business continues Group’s commitment to continuous improvement drives resilience and demonstrates its commitment to embracing change. • The acquisition of Marley represents a transformational step in the delivery of our long-term strategy. At the outset, and throughout, the Board challenged and supported the senior management team’s assessment of the opportunity and the structural aspects of the transaction. This included detailed due diligence and advisory support from a team of experienced professional advisers, culminating in overwhelming support for the deal from Group, well-positioned to achieve its strategic goal of becoming the UK’s leading manufacturer of products for the built environment. • We welcomed Simon Bourne to the Board as Chief Operating over a number of years, in driving so many of our growth pillars, including operational and logistics excellence, sustainable supply and new product innovation. Simon’s promotion is richly deserved and has been supported by a comprehensive induction plan arranged by our General Counsel and Company Secretary. • We’ve managed the succession of Tim Pile, who retires at this year’s AGM, with the appointment of Diana Houghton to the Board as a Non-Executive Director. Tim is our most experienced Board member and has, on two occasions, agreed to extend his term to support the business through the unprecedented challenges of the last three years. We thank Tim for his contribution and commitment to the business. Diana’s appointment further strengthens the Board by introducing new skills, experience and diversity, particularly in the development and execution of organisational strategy. • Following the completion of the acquisition of Marley, we held a Capital Markets Day, setting out our vision for the Group in the short to medium term and, in particular, showcasing the Marley business model and operations and the opportunity these present to the Group. • team, particularly in light of Marley joining the Group. Against challenging macro-economic and geo-political conditions, we also considered the short to medium-term resilience of the Group and the opportunities we have to maximise the particularly on our purpose, to create better spaces and futures for everyone: socially, environmentally and economically. • adopted during the pandemic, to combine in person and virtual engagement with the business and stakeholders. Making the Board accessible to all stakeholders is an important element of meeting our obligations under Section 172 of the Companies Act. • With the support of Lintstock, we completed an externally objectives we set during our last internal evaluation. The Board’s composition, stakeholder and strategic oversight and the support the Board receives, were all rated extremely highly. The Board is collegiate and supportive but provides robust challenge to the senior management team on strategy, performance and governance. (See page 79 for further details.) • We’ve built on our ESG commitments, whilst ensuring we’re complying with our reporting obligations against the TCFD recommendations. We’ve listened to our stakeholders and See page 81 for further details. The Board have focused on ensuring our commitments drive competitive advantage and brand loyalty. These will make our business sustainable in the our progress and incorporated some of these in our incentive schemes. (See page 102 for further details.) • The Board and Audit Committee have considered the impact of proposed changes to the UK Corporate Governance Code and the measures being taken to ensure the Group is able to demonstrate compliance with these ahead of their formal adoption. (See page 91 for further details.) • There has been Board representation at each of the Employee as our designated Director for employee engagement. The EVG has broad representation and continues to evolve, with new representatives from across the business elected to a two-year term earlier this year. (See page 55 for further details.) • In response to tough trading conditions and a marked softening of demand for Private Housing RMI in both the UK and International markets and destocking in the distribution channel, we approved a reduction in our manufacturing output to manage inventory levels. These actions reduced capacity and costs within our manufacturing network and trading function to ensure alignment with lower levels of demand. This is expected to reduce operating costs by around £10 million per annum from the start of 2023. • Supporting the senior management team in navigating the business through the key strategic issues and challenges we face, particularly in the short to medium term, including those driven by challenging macro-economic conditions. Ensuring • Overseeing and measuring progress against the Group’s strategic plan following the transformational acquisition of Marley, with an will be critical to the long-term sustainability of the Group and will include reviewing progress against the commitments made at our annual strategy review in November 2022. • Giving additional focus and time to understanding our stakeholders and how we engage with them, particularly customers, suppliers management, performance and long-term strategy. Maintaining our customer focus is key to maintaining our strong brand preference, which is a key differentiator for the Group. • Building a deeper understanding of the Group’s culture and to cultural integration with the Marley. • Seeking opportunities to learn from the experience of other sectors as regards our cultural, people, technology and transformation journeys. • Overseeing effective succession planning and talent retention, that are critical to ensuring the long-term success of the business. • Effectively overseeing our ESG programme, ensuring this supports our commitment to operating the business sustainably and drives commercial and competitive advantage. • Carefully monitoring the implementation and impact of the fundamental audit and corporate governance reforms proposed by the Government, which will have implications for the operation and expectations of the Board. • To continue to ensure we do everything in The Marshalls Way: “the right things, for the right reasons, in the right way”, and continued 81 Marshalls plc | Annual Report and Accounts 2022 Governance ESG priorities The Board views our approach to ESG as central to the achievement of our strategic objectives and the long-term sustainability of the business. Being a responsible business is how we’ve operated for over 130 years and, as we face current global challenges, it’s never been so important to be a transparent corporate citizen. Our ESG commitments and credentials demonstrate this clearly. • Environmental — we take our environmental impact seriously. We’re recalibrating our commitment to net zero following the acquisition of Marley but this remains our goal. • Social — we respect and value the dignity, well-being and rights of employees, their families and the wider community, as well as their safety. • Governance — strong, responsible governance supported by effective leadership helps nurture our healthy corporate culture and our processes and controls enable us to operate ethically and responsibly. For further details see our ESG report on Board • ESG metrics • ESG Board updates • Shareholder engagement • TCFD reporting • Risk register • Risks and opportunities • Sustainability Report • Science-based targets • Metrics and targets ESG oversight • The CEO is accountable for the delivery of the ESG strategy, including climate change • The Executive Team members are individually responsible for reviewing including climate risks • Attended by CEO, CFO, COO, Chief People Company Secretary • Responsible for ensuring the ESG strategy and progress is measured and reported • Advises the Board on ESG-related risks and opportunities • Responsible for implementing the Group risk management framework and Risk Register • See risk management framework and governance on pages 66 and 67 • Responsible for managing and resourcing approved activities • Advise on operational feasibility of projects • Collaborate on ESG projects • Responsible for driving progress along our plans, including science-based targets • Updates the ESG Steering Committee on progress against targets • Ensures ESG strategy considerations are Ultimate responsibility for risk management and ESG, including climate Marshalls plc | Governance As Government guidance changed, the Group removed the restrictions we put in place, which were to protect the health and safety of our colleagues and other stakeholders, our number priority at all times. Colleagues are now able to work from any of our facilities, although buildings so that we can monitor attendance levels and ensure the facilities can safely support those attending. The scale of our manufacturing and operational sites has meant that we can operate them safely without this additional process. The COVID-19 pandemic fundamentally changed ways of working continue to make use of technology, particularly for large meetings, where attendees are in many different locations. This not only saves on travel costs and reduces our carbon footprint but also makes us more agile when circumstances demand. We see this as a real important element in attracting talent, in a candidate driven market. Scheduled Board meetings during the year were all “in person”, marking a welcome return, given that this generally facilitates more engaged and inclusive discussions of business opportunities and challenges. The Board have also continued to take advantage of technology, with virtual meetings supplementing their engagement with colleagues and shareholders in particular. We remain vigilant given the emergence of new COVID-19 strains and the re-introduction of entry restrictions from certain countries. or restrictions re-introduced by the Government in response to any resurgence of the virus. Dynamic decision making remains central to the way the Board and senior management team manage the business. The Board sets the culture for effective risk management and, together with the senior management team, ensures that we’re having regard to our key stakeholders when making decisions. Improving diversity is an opportunity for the business but remains challenging in our sector, particularly in operational and site-based roles. As a Group, we actively promote diversity, equity, respect and inclusion (“DERI”) and have a zero-tolerance approach to discrimination. See page 55 for details of how we promote DERI. We apply our policies to ensure there is equality of opportunity for every role we recruit. Our commitment is supported by our Code At Board level, we have maintained our gender and ethnic diversity during 2022. In addition to myself, a female Chair, we have 44 per cent female representation on our Board overall and one Director from an ethnic minority background. On Simon Bourne’s our female representation dropped to 38 per cent, by virtue of the Board’s growth. Upon Tim Pile’s retirement at this year’s AGM, 50 per cent of the Board will be female. Although we have a diverse Board, and have improved overall gender diversity in the business, our continuous improvement mindset and application of The Marshalls Way, are driving us to improve diversity at management levels and in our operations, We acknowledge that, although we’ve seen some improvement, this will take longer than we originally anticipated, particularly given the challenges in our sector, but we are now working more closely with others in the sector to address what is a structural challenge. Making our business accessible is critical to its long-term sustainability. The Board has approved the Group-wide Diversity and Inclusion Policy and continues to support the senior management team in the execution of the Group’s longer-term DERI strategy. Our Diversity and Equity Taskforce, which has broad colleague representation from across the Group, including our General Counsel and Company Secretary, continues to “lead the charge” As required by the UK Corporate Governance Code, the Chair and the Company Secretary conducted an externally facilitated evaluation during 2022 with the support of Lintstock. Pages 88 to 90 of this report give more detail on the conclusions of the review. The evaluation covered the Board and its Committees, as well as my performance as Chair. The review also considered the Board’s performance against the objectives it set itself during its last internal evaluation in 2021. In conducting the evaluation, we used Lintstock’s evaluation tools, but these were reviewed by myself and the Company Secretary Board. The evaluation considered all critical aspects of the Board’s performance against the principles and provisions of the Code. In the opinion of the Directors, these Annual Financial Statements present a fair, balanced and understandable assessment of the Group’s position and prospects and provide the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. The respective responsibilities of the Directors and the auditor in connection with the Financial Statements are explained in the Statement of Directors’ Responsibilities and the Auditor’s Report on pages 133 and 134 and 135 to 142 respectively. Chair 15 March 2023 continued Marshalls plc | Annual Report and Accounts 2022 Governance Read more on Read more on pages 86 to 88 Read more on pages 88 to 90 Read more on page 91 Read more on page 91 This Corporate Governance Statement has been prepared in accordance with the principles of the UK Corporate Governance Code 2022. We have complied with the principles and provisions of the UK Code throughout 2022. Our Governance sections over the following pages explain how the Group has applied the principles throughout the year and up to the date of this Annual Report. • Effective, transparent communication and information drive trust and support dynamic decision making • Well-established relationship between Board and senior management team supported by regular engagement • Robust challenge and support provided and well-received by management • Clear, proportionate decision-making parameters balance Board • Diverse Board with breadth of experience, knowledge and skills • Majority of independent Directors and experienced Committee Chairs • Well-executed succession plan, with additional growth in the Board rewarding performance • Externally facilitated review highlighting Board cohesion and effectiveness, achievement of previous objectives and opportunities for development • Engagement with shareholders ensuring the Board evolves to • Clear oversight of external and internal audit functions and planning, in a transformational year • Effective oversight of internal control environment, and the programme of work supporting compliance with prospective governance changes • Detailed consideration of development in reporting under TCFD • Ensuring adequacy of the Group’s risk management framework and process and participating in risk reviews • Strengthening processes to ensure we act upon recommendations and monitor outcomes, allowing us • 4 • Overseeing the Remuneration Policy review and engagement with stakeholders, including our EVG • Early engagement with shareholders on approach to transformational nature of the year • Reviewing incentives scheme targets. Ensuring they support attraction and retention of talent, drive good behaviours and create alignment with stakeholder interests • Appropriate and proportionate consideration of performance and reward outcomes • Led by an experienced female Chair who drives strategic focus and inclusive, robust debate • Diverse, well-balanced Board with strong mix of knowledge and experience and a clear focus on long-term sustainability • 2022 focus on strategic transformation, resilience and succession • Our culture, The Marshalls Way, and purpose, “creating better spaces and futures for everyone: socially, environmentally and economically”, are at the heart of all decision making 1 Marshalls plc | Governance 84 continued Adjusting manufacturing economic conditions Embedded in Board agenda cycle Approving Half and full year results, preparation for governance reforms, standalone risk reviews Marley acquisition, annual strategy review, enlarged Group budget approval transactions Marley acquisition and associated debt and equity fundraising Appointing Simon Bourne (COO) and Diana Houghton (NED), enhancing Board diversity Acquisition related debt and equity fundraising Designated Director for employee engagement, Board evaluation, remuneration policy review The Board currently comprises an Independent Non-Executive Directors. Their biographical details are on pages 76 and 77. Our Schedule of Matters Reserved for the Board (set out below) Audit Committee Report on pages 96 to 99 provides details of the reporting, audit, risk management and internal controls. Nomination Committee Report on pages 92 to 95 reports how Board and senior management composition (including diversity), Remuneration Report on pages 100 to 130 sets out our proposed Remuneration Policy to be tabled with shareholders at this year’s AGM. It shows how our current policy has been implemented for 2022, including details of Directors’ remuneration. The Remuneration Report also provides gender pay and balance information. Ad hoc Board Committees are established for particular purposes: for example, during 2022, Board Committees were established The day-to-day management of the business and the execution of the Group’s strategy are delegated to the Executive Directors. The Group’s reporting and governance structure (see page 79) and controls below Board level are designed so that decisions are made by the most appropriate people in an effective and timely manner. In deciding what is “appropriate” for these purposes, we consider the over time. Management teams report to members of the Executive Committee, which is comprised of the senior management team, including the three Executive Directors. The Executive Directors and developments. Clear and measurable KPIs are in place to enable the Board to monitor progress. This structure, our controls and open and transparent information and communication enable the Board to make informed decisions on key issues. These include our strategy, capital structure, internal control and risk frameworks and our risk appetite whilst having regard to the interests of all Board evaluation, supported this view of how our governance model operates in practice. Marshalls plc | Annual Report and Accounts 2022 Governance Our culture and leadership, at Board and senior management team level, drive our approach to governance at Marshalls and underpinned the Group’s resilient performance during the year and the successful completion of the transformational acquisition of Marley. The Board invests time in understanding our business model and how the long-term success and viability of the business is dependent on implementing and evolving our strategy. This understanding comes from working collaboratively with the senior management team, engaging with the business and applying the Board’s skills and experience to provide the robust challenge that helps shape that strategic evolution. The Board has continued to engage regularly with shareholders and employees. Although all COVID-19 restrictions were removed by the Government during the year, the technology we used throughout the pandemic has continued to support and enhance engagement, making the Board even more responsive and agile, and providing additional visibility of our culture and how the business is managed and controlled. our purpose, how this is supported by our policies and procedures, and how we identify and manage our key risks. Transparency and openness how the business is operated and controlled on a day-to-day basis. This has enabled the Board to steer our strategy and business model towards a sustainable future, as evidenced by the transformational acquisition of Marley and the Group’s resilience in delivering record performance in an incredibly challenging macro-economic environment. The reports of our Board Committees give further detail on how our policies and processes, and the principles of the UK Corporate Governance Code, have been applied during the year in particular areas and how this relates to our culture and strategy. Dynamic decision making enabled us to take the opportunity to bring Marley into the Group and also respond to the extremely challenging market conditions later in the year by reducing our manufacturing capacity and our cost base. This ability to address not only longer-term strategic priorities but to respond to market conditions and focus on the more immediate short to medium-term issues, demonstrates the both business transformation and resilience can be prioritised together. Our well-established sustainability programme is driven by our commitment to operate the business responsibly, having regard to the interests of our stakeholders. We’re integrating Marley into our sustainability programme and, although this will take some time, such as minimising our environmental impact, respecting human rights and promoting diversity and inclusivity. the multi-million-investment in the installation of a dual block plant new plant means we can switch production between ranges quickly providing additional manufacturing agility in our network. Our strategy review in November addressed some of the strategic challenges we’re facing in the short to medium term, in responding the opportunities it presents and the impetus this gives to our longer-term strategic vision for the Group. That strategic plan remains well-balanced and considers the interests of all of our key stakeholders. Driving brand preference and customer loyalty, through innovation and responsible operation of the business, are core to all our commercial objectives. The environmental and social reports on pages 42 to 59 provide further information of our progress and commitments in operating the business responsibly. The Board receives regular updates from the Executive Directors on the agreed KPIs set out on pages 40 and 41. The Group’s CFO has receives, making it easier to establish whether the Group’s objectives are being met and to provide additional challenge and support where necessary. 2022 saw the introduction of a new HR system that underpins our ability to support and manage our people, who are the key to our the year, both planned and unplanned, that have impacted our people. We’ve continued to implement our Group people strategy our new colleagues and to understand how we can integrate Marley into our Group-wide programmes. This, inclusive approach, epitomises our commitment to The Marshalls Way, albeit we acknowledge that this will take some time. Effective communication with colleagues was critical during 2022 in market conditions. A real focus was the communication of our acquisition of Marley and ensuring we welcomed our new colleagues into the Group and the communication forums we use. This remains a work-in-progress as we look to harmonise the methods we use for communicating with our people across the business. Towards the end of the year, our focus moved to managing and communicating the impact of the capacity we felt this was managed sensitively and compassionately. Our Employee Voice Group, as an effective and representative colleague engagement forum, has continued to mature and we have recently completed elections for new EVG members as two-year terms came to an end. Making the EVG as representative as possible was a key priority, with a particular desire for more colleagues in operations to put themselves forward. During 2022, the EVG covered many topics including performance and talent management, pensions governance, learning and personal growth and our manufacturing capacity reduction project. Discussions are challenging and, on the whole, constructive with members growing of this forum, particularly given the regular attendance by our and other members of the Board and senior management team. The EVG serves as a useful gauge by which the Board can assess whether that the Group’s purpose, values and strategy remain aligned with our culture. Further details of how we engage with employees are set out on pages 28 to 35. We’re continuing our work on culture and diversity, with the implementation of diversity and inclusion strategy remaining a priority. Giving the recruitment challenges in our sector, this is a long-term project. At its core is ensuring we’re operating an inclusive business for those currently working for us, and we have this year gathered much better-quality information about representation across the business that highlights the challenge we have. Greater diversity in challenge but we’re now working with our sector peers to create a construction industry Inclusivity Pledge, as we all face the same issue. Our CEO and Talent Director are representing the Group in this initiative. We have established a calendar of DERI based events supported by internal communications campaign to drive awareness. Our Diversity and Equity Taskforce is a major step. Greater diversity and becoming representative of the communities in which we operate are important components of our long-term success. Marshalls plc | Governance 86 continued continued Good governance is supported at Marshalls by robust systems and processes and a good understanding of risk and risk appetite. The Group’s control and risk management frameworks are reviewed annually and have been critically reviewed during the year, with Marley now integrated into these processes. We review our Risk Register at least twice a year and our internal audit plan factors in the results of these reviews. The Board and the Audit Committee receive periodic reports from the internal auditor on a range of topics each year that are given careful consideration by the management are set out in the Strategic Report on pages 1 to 75. Code principles during 2022 will drive its long-term sustainable success by providing a platform to achieve its strategic goals. Read more about diversity on be excluded from participating in relevant Board meetings or voting on decisions. There is no shareholder with a holding of compromise independent judgement. Concerns about the running of the Company or proposed action would be recorded in the Board minutes. On resignation, if a Non- Executive Director did have any such concerns, the Chair would invite the Non-Executive Director to provide a written statement for circulation to the Board. The Group’s Serious Concerns Policy sets out the principles under by an independent whistleblowing telephone and online reporting service, through which concerns may be reported anonymously if preferred. The Audit Committee receives reports on matters raised under this policy and the outcome of investigations. Any concerns raised are investigated appropriately by individuals whose judgement is independent and who are not directly involved with the matters raised. Read more about sustainability, ethics and climate change on There is a clear division between Executive leadership and leadership of the Board expressed in the written Terms of Reference of the Chair and Chief Executive. continued The Chair leads the Board and is responsible for its overall effectiveness. She was independent on appointment in 2018 and brings her judgement, experience and skills to the role. Our externally facilitated Board evaluation assessed all aspects of Board performance including Board dynamics, strategic and risk oversight, composition and succession and the support the Board receives from the business and the Company Secretary. The evaluation concluded that the Board continues to operate very effectively and cohesively with an appropriate balance of robust challenge and support. The Chief Executive has responsibility for all operational matters which include the implementation of strategy and policies approved by the Board. The Senior Independent Director provides a sounding board for the Chair and also acts as an intermediary for other Directors and shareholders. The Board has determined each of the Non-Executive Directors to be independent in accordance with Section 2, Provision remain independent until he steps down, even though he has more than twelve years’ service on the Board. Further details of why we believe this to be the case are set out on page 87. At least once a year the Chair meets the Non-Executive Directors without the Executive Directors being present. The Senior Independent Director meets the other Non-Executive Directors annually without the Chair to appraise the Chair’s performance. On appointment, the expected time commitment for Board members is made clear. The Chair and other Non-Executive to discharge their duties effectively and ensure that these other commitments do not affect their contribution. The current commitments of the Chair and other Directors are shown on pages 76 and 77. boarding NED independence Senior Director CEO 87 Marshalls plc | Annual Report and Accounts 2022 Governance We continue to consider Tim Pile to be independent even though Tim originally intended to step down during 2021 but agreed to continue to support us through the pandemic and then further extended his term to 2023, when his successor, Philip Rogerson, stepped down for health reasons shortly after his appointment. knowledge and experience of the Group. Further details of these We are mindful that the UK Code directs that this length of service is likely to impair or could appear to impair his judgement, but we strongly believe this not to be the case given Tim’s track record with to the business whilst, together with the Chair and the other Non- Executive Directors, effectively holding the Executive Directors and senior management team to account on behalf of shareholders. He remains independent in thought and judgement and provides unique insight and challenge given his experience of how the business has evolved. He is a great advocate for the business but constantly challenges us across all areas of our operations with a particular focus on our brand, our customers and how we manage risk and communicate externally. Aside from his length of service, there are no other relevant factors (as set out in UK Code Provision 10) that would affect his independence. He has no associations with management or otherwise that might compromise his ability to exercise independent judgement or act in the best interests of the Group. As it committed to, the Nomination Committee planned for Tim’s succession during 2022 and Diana Houghton was appointed to the the Company’s 2023 AGM. The Chair conducted an individual performance evaluation of all the Directors, including Tim, and concluded that Tim’s contribution remained extremely valuable, particularly given There is an established format and programme for scheduled Board meetings, which were all held in person last year. This programme is supported by a forward-looking planner that focuses on Board business for the year ahead and ensures an appropriate balance between the Board’s consideration of strategy, dynamic consideration of any urgent matters. The Board remains committed to ensuring it is always available to convene if urgent matters need to be addressed as evidenced by their meeting to conditionally approve the Marley acquisition and the reduction performance respectively at each Board meeting. The Chief Executive also updates the Board, at each meeting, on wider industry, sector and competitor considerations that are relevant to ensuring that decision making has regard to all stakeholder interests. safety, which remains a top priority and is reported on and considered on a standalone basis at every scheduled Board meeting. The safe operation of our sites and our safety culture are constantly monitored to ensure they are aligned with The Marshalls Way, i.e. “we are doing the right things, for the right reasons, in the right way”. Marley’s health and safety reporting has now been integrated into the updates the Board receives and this will be Absent Board Audit Committee Remuneration Committee Nomination Committee Vanda Murray OBE (Non-Executive Chair) – Martyn Coffey – – – Justin Lockwood – – – Simon Bourne – – – Graham Prothero (Non-Executive) Tim Pile (Non-Executive) – Angela Bromfield (Non-Executive) Avis Darzins (Non-Executive) Diana Houghton (Non-Executive) – – – – * The Board held seven scheduled meetings during the year. Additional Board meetings were held to conditionally approve the acquisition of Marley and to approve a reduction in the Group’s manufacturing capacity. by invitation. The Non-Executive Directors, excluding Tim Pile, also meet the auditor in private. The Chief Executive attends Remuneration and Nomination Committee meetings by invitation. The Company Secretary attends Board and Committee meetings as Secretary. Board members also participate in the Group’s annual strategy review with the senior management team, which during 2022 was held over two days in November. In addition, the Board participates in site visits, training sessions, the Employee Voice Group and other business activities where they have relevant expertise and experience. The Board also attended the Group’s annual management conference on 2022. Marshalls plc | Governance 88 continued continued The Board participated fully in the Group’s annual strategy review which was held across two days in November 2022. This involved engagement with key members of the senior management team in considering the continuing relevance and appropriateness of the Group’s strategy, particularly in light of the acquisition of Marley and some of the short to medium-term issues the Group is facing as a result of current macro-economic conditions. In addition to the standing items on the Board’s agenda, the principal areas of focus considered by the Board in 2022 were: Strategy • Group strategy • People and culture, including succession, talent development and DERI • Acquisition of Marley and Marley strategy • “Right-sizing” manufacturing capacity • and marketing • ESG • 2023 budget • Capital structure and dividends • Operations: dual block plant investment review • IT/Digital: electronic trading, D365, cyber security and IT roadmap • Market, sector and competitor updates and outlook • Macro-economic update (HSBC) • Market (Numis and Peel Hunt) and sector (Rothschild) updates Operations • Health and safety (including Marley) • Marley integration • Supply chain, procurement and logistics • Technical innovation project updates • Adoption of new people system, engagement and morale Governance and risk • Class 1 Marley acquisition: recommendation to shareholders • Board composition: succession of Tim Pile and appointment of Simon Bourne and Diana Houghton • Approval of changes to NED remuneration • Externally facilitated Board and Committee performance evaluation • Annual shareholder governance meetings • Employee Voice Group feedback • Policy review project • Whistleblowing • Cyber security and data protection • Stakeholder engagement • AGM voting and guidance There is a transparent and formal process for appointments led by the Nomination Committee and supported by external specialist recruiters. Board succession planning is reviewed at least annually by the Nomination Committee, while succession planning at Executive level is reviewed by the Board. The Board also reviews succession planning for senior management and is able to consider and challenge, as appropriate, the Group’s recruitment policies and how they promote diversity and inclusion. During 2022, the Board received a detailed update programmes. The policies and process are commented on further in the Nomination Committee Report on pages 92 to 95. The Board recognises that organic development of future leaders is key to our people strategy and the long-term sustainability of the Group, and acknowledges that this is an area for Our Board is increasingly diverse and has a strong combination of skills, experience and knowledge with our Committees being chaired by suitably experienced colleagues with relevant expertise. Houghton (Non-Executive Director) were appointed to the Board. Tim Pile will retire from the Board at the end of the Company’s 2023 AGM. These appointments recognise and reward Simon for the operational transformation he has led and, in the case of Diana’s appointment, demonstrates the Board’s commitment to continuously assess its skills base and supplement these as part was a key area in our search criteria for the role. The Board is currently 44 per cent female, with a female Chair and one Director from an ethnic minority background. Board composition is reviewed annually, and we assess whether the current skills, experience and knowledge are aligned with the Group’s strategy and expected future leadership needs, and the Our succession plan is designed to ensure that Board members’ exceeding nine years. All Directors stand for election or re-election (as appropriate) at every Annual General Meeting, and all current Directors, except Tim Pile, will stand for re-election or election at the 2023 Annual General Meeting. The Directors’ biographical details on pages 76 and 77 show their roles, date of appointment and length During 2022, we conducted an externally facilitated Board effectiveness review led by the Chair and the Company Secretary, with the support of Lintstock. See page 90 for further details. Directors have access to the advice and services of the Company Secretary who is responsible for ensuring that Board procedures are complied with and, through the Chair, advises the Board on governance matters. The appointment or removal of the Company Secretary are matters for the whole Board. continued 89 Marshalls plc | Annual Report and Accounts 2022 Governance • We acquired Marley, taking a major step towards our strategic goal of becoming the UK’s leading manufacturer of products • Given macro-economic conditions, our annual strategic review considered short to medium-term strategic issues, building these into the Board’s agenda for 2023. • We re-assessed our manufacturing capacity, taking action medium term. • shareholders during our annual compliance meetings. ESG • We’ve restructured and also invested in our ESG team, which is • Although we’ve decided not to create a separate ESG Board Committee, the Board has oversight on ESG matters, receives regular updates and considers ESG as part of all major strategic decisions. See pages 42 to 59 for further details. • Details of the Group’s progress on our ESG journey are set out on pages 42 to 59. • We consulted with shareholders on our ESG programme as part of our annual shareholder compliance meetings. • The Board received updates on our commercial strategy, including the implementation of our Commercial Excellence framework and the restructuring of our customer teams, • We’ve begun a programme of work to digitalise trading and make us easier to deal with. • Our marketing team has been restructured and we’ve created a new Group Marketing Director role with the aim of optimising our marketing activities across the Group and driving brand preference and premium. • (Non-Executive Director) were appointed to the Board. Diana • Executive succession is actively managed by the CEO and • Recruitment and retention in a candidate led market remain extremely challenging and have highlighted the importance • Although some progress has been made, particularly in improving opportunity for development remains a key priority in the short term. The 2022 externally facilitated Board evaluation was conducted Following engagement with key stakeholders to set the context for the review, Lintstock’s evaluation tools and questionnaires part of last year’s internal evaluation. As in 2021, we carried out the review immediately after the Board’s annual strategy review in We also widened participation in the review to those members meetings by invitation to ensure their views were captured. As set out above, we made good progress against the priorities realising our overall strategical goal of become UK’s leading manufacturer of products for the built environment. Our progress review is set out below, Dynamic decision making remains critical to the effectiveness of our Board. Taking the opportunity to accelerate the achievement of our strategic goal in acquiring Marley is evidence of this. Responding to volatile market conditions later in the year and anticipated market demand for 2023, by responsibly managing our manufacturing capacity, is further evidence of the Board’s agility in addressing short to medium-term strategic challenges of diversifying our business. Board engagement and support have been critical during the last year and remain key strengths of our Board, which has strong leadership and is focused on responsibly governing to ensure Marshalls plc | Governance 90 continued continued Marshalls engaged Lintstock to facilitate a review of Board and Committee performance during 2022. Lintstock is an independent existing connections with Marshalls. key stakeholders to set the context for the review, and to tailor and Committee members, and certain members of the senior management team who regularly attend Committee meetings by invitation, then completed a tailored online survey addressing the performance of the Board, its Committees and the Chair. As well as addressing core aspects of Board and Committee performance, the exercise had a particular focus on the following areas: • Marley acquisition: the Board’s oversight of the Marley acquisition, including the business case put forward and the quality of the Board’s input during the process; • Strategy: the clarity and achievability of the Company’s strategy, the quality of the most recent Board strategy review meeting, and the key strategic issues facing the business • Culture: the key ways in which Marshalls’ corporate culture should evolve, in order to better support the execution of the Company’s strategic goals; • Stakeholder engagement: the Board’s understanding of key stakeholder groups, and how best to evolve the mechanisms through which the Board engages with stakeholders and is informed of their views. There was a particular focus on customers and how we differentiate ourselves from competitors; • Technology: the Board’s grasp of technological opportunities and threats, and the effectiveness with which developments • ESG integration: the integration of environmental, social and governance factors into the Group’s strategy and operations. Lintstock’s report was discussed at the January 2023 Board meeting. The review concluded that the Board and Committees are diverse, with great depth of knowledge, skills and relevant experience and are supported by a strong senior management team. its time, the quality of strategic discussions, and the mechanisms in place for succession planning, all of which will be considered in building the Board and Committee’s forward agenda. There was a recognition that the Board is constantly evolving and therefore address the strategic challenges the Group faces, both in the short to medium and longer term. 91 Marshalls plc | Annual Report and Accounts 2022 Governance 4 The Board has established written policies and procedures for external and internal audit functions designed to ensure that they remain independent and effective and these are regularly reviewed. Annual questionnaire-based evaluations are conducted of both our internal and external audit partners with the Board and members of the senior management team participating. The Board scrutinises supported by the advice of the auditor. The Board has a well-established procedure to identify, monitor and manage risk, and has carried out reviews of the Group’s risk management and internal control systems and the effectiveness of: controls; and the mitigation of material risks. The Strategic Report comments in detail (pages 66 to 75) on the principal risks facing the Group, in particular those that would threaten our business model, future performance, solvency or liquidity, and the controls in place to mitigate them. The Board conducts a rigorous assessment of these risks, particularly operational risks that might affect the Group’s viability in the short term and emerging risks that might impact the medium The Board’s risk and viability review incorporates stress testing, modelling where appropriate, the likely effect on the business and its prospects. Additionally, the outcomes of our risk reviews drive our internal audit planning, ensuring our resources are being directed at the most appropriate areas. The Audit Committee (on behalf of the Board) reviews the effectiveness of the Group’s risk management system and the system of internal control annually. The Risk Register and our risk disclosures in this report were reviewed by the Audit Committee The Non-Executive Directors carried out a standalone risk review in December 2022, the outcome of which has been incorporated into the Risk Register. In addition, our internal and external auditors participated in our most recent risk review meeting in November 2022. Our approach underpins our commitment to transparency to our procedures. The Audit Committee Report on pages 96 to 99 describes the Group’s internal control system, how the Board assures itself of the independence and effectiveness of internal and external audit functions and how they are managed and monitored. Addressing the requirements set out in proposed changes to the UK corporate governance regime, as they relate to our internal control environment, is the subject of a major programme of work being assurances the Board needs to provide in this regard. The Board acknowledges that such systems are designed business objectives. Read the Audit Committee Report on pages 96 to 99 The current Remuneration Policy was last approved by shareholders in 2020 and a revised Policy, which is set out in the Directors’ Remuneration Report on pages 100 to 130, will be submitted to shareholders for approval at this year’s AGM. The revised Policy addresses the relevant requirements of the UK Code and was prepared in consultation with Company shareholders with a holding carrying at least 2 per cent of the Company’s voting rights and external voting agencies. The Remuneration Committee Report describes how the current Remuneration Policy has been implemented during 2022 and the outcomes achieved. It also describes how the Remuneration Committee has carried out its responsibilities during the year. The Remuneration Committee continues to effectively discharge the duties delegated to it by the Board under the leadership of the taking a holistic view of remuneration across the Group, having consulted employees appropriately, the importance of which is recognised by the Board. Read the Remuneration Committee Report on Chair 15 March 2023 Marshalls plc | Governance Developing and growing our diverse Board Meetings Vanda Murray OBE – Chair Graham Prothero – SID Tim Pile Angela Bromfield Avis Darzins Diana Houghton — * Diana Houghton joined the Board in January 2023. I am pleased to report to shareholders on the main activities of the Committee and how it has performed its duties during 2022. I chair Nomination Committee meetings but would not do so where the Committee was dealing with my own reappointment or replacement as Chair. • In recognition of his contribution towards the development and achievement of the Group’s strategy and for his transformation of our operations since joining the business, we recommended the promotion of Simon Bourne to the Board as Chief Operating independent assessment of Simon’s suitability for this role and have subsequently supported him with his transition. Simon completed our Board induction programme with the support • As planned, and in anticipation of Tim Pile stepping down from the Board at the 2023 AGM after more than twelve years’ service, the Committee conducted a comprehensive search for Tim’s Reynolds Associates (which is an independent executive search in the listed company environment that would increase the cognitive and experiential diversity of the Board. The core search criteria included experience of transformational mergers and acquisitions, of formulating and implementing enterprise-wide Find our Terms of Reference and Nominations Policy at: The focus during 2022 has been on evolving and strengthening the Board, supporting progression and diversifying our skill base. Marshalls plc | Annual Report and Accounts 2022 Governance • Following the completion of our search and interviews appointed to the Board as a Non-Executive Director with effect appointment further strengthens the Board by introducing new skills, experience and diversity, particularly in the development and execution of organisational strategy. • We reviewed the roles, performance and succession planning, both for the Board and senior management team. In addition to the appointment of Simon Bourne and Diana Houghton to the Board, the Committee supported the promotion of Louise Managing Director of Marshalls Landscaping and Building Products Division. Louise’s promotion, and the expansion of her role to include responsibility for ESG, are recognition of her tireless work in developing and driving the implementation of our Group-wide people strategy and her commitment to the Marshalls Way, which is at the heart of our culture. Ian Dean succeeds Peter Hallitt, who retired at the end of 2022. Ian joined Marshalls in 2020, as Managing Director for what was then our Emerging Businesses division and his promotion is recognition for the change Ian is driving that will establish a foundation • We reviewed and approved the Group’s Nominations Policy and commitment to introduce even greater diversity, at both a Board and senior management team level, which is something we acknowledge we must continuously work on as diversity remains a sector-wide challenge. • In support of their re-election at the 2023 AGM, we reviewed individual Director performance identifying areas for development. We also completed an externally facilitated evaluation, which concluded the Committee was operating effectively and under strong leadership. • We have reviewed the Group’s DERI strategy, which was formally adopted this year, and the initial progress in implementing this. This remains a key area of focus for the Committee, but we recognise the challenge the Group faces given the relative lack of diversity in the sector, particularly in operational and manufacturing roles. The Committee is supporting the Group’s participation in sector-wide initiatives to improve diversity. • Continue to actively manage our Board succession plan, particularly as it relates to the Executive Directors. • Supporting the Group’s people strategy which underpins and acts as an enabler to the Group’s long-term strategy and includes the development of colleagues in our high-performing category, as well as our approach to recruitment for new, strategically from within. • Focus on succession, development and progression below Board level, particularly given the importance of developing and building the leadership capabilities of those working directly for the Executive Directors and other members of the senior management team. • Supporting the Group’s initiatives that are seeking to improve diversity, particularly in management and operational roles. Greater gender, cultural and cognitive diversity are key opportunities the Group. The Board currently comprises 44 per cent women, which will rise to 50 per cent on Tim Pile’s retirement. We have a female Chair and one Board member from a non-white ethnic minority background and comply with the revised Listing Rules that require us to publish an annual “comply or explain” statement regarding the achievement of the targets The table below summarises the key features of our Nominations Policy and how it is applied. Policy principle Supporting measures • Recruitment and succession strategic needs • Recruitment contributes to desired values and culture. • Nomination Committee conducts an annual skills review aligned strategic plans. • New Directors agree commitment to strategic direction • Appointment of Diana Houghton to the Board, as a Non-Executive Director bringing extensive listed company and strategic experience to the Board, the latter being critical to ensuring our strategy remains dynamic and relevant. • Simon’s contribution and performance, over several years, in driving so many of our growth pillars, including operational and logistics excellence, sustainable supply and new product innovation. • her creation of and contribution to our people agenda, which supports our strategic goals and underpins the long-term sustainability of the business. • Ian Dean promoted to the role of Managing Director of our Landscaping and Building Products Division. • Recruitment to achieve diversity in widest sense. • Policy sets direction and gives leadership. • Brief for search consultants for new Board and senior management appointments. • Diversity initiatives/ succession plans at Executive level reviewed and targets monitored. • Reviewed progress with the development and execution of the Group’s diversity and inclusion strategy including our approach to recruitment, development and progression. Becoming a founding signatory to a sector-wide diversity initiative. • Brief to Russell Reynolds Associates for our search for Tim Pile’s successor emphasised the importance of increasing cognitive and experiential diversity. • Introduction of our new HR system facilitated the gathering of more granular • Carefully monitoring senior management team performance and succession. Carefully assessing any internal candidates and ensuring that, in the longer term, with investment. Marshalls plc | Governance 94 Policy principle Supporting measures • There should be a clear formal Board succession plan based on objective criteria. • Annual review of terms • Annual individual evaluation. • Use of independent external search advisers. • Succession under continuous review. There were two Board changes during 2022. • Individual Director evaluations were conducted in January 2023. • We select external search advisers for Board appointments based on relevant expertise. Russell Reynolds Associates were retained the recruitment of Diana Houghton. Norman Broadbent are retained for senior management team recruitment and were appointed following a formal tender process. • Directors must time to perform effectively and familiarise themselves with the business. • Limit on other Board appointments. • Detailed induction, site visits, training and employee engagement programme. • Recruitment process addresses existing commitments and risk of • Included in letters of appointment. • New director induction process now well-established and well-received • Board training is included as part of Director induction together with site visits. • The Directors continued to engage: on risk; through attendance at Employee Voice Group and People Steering Group meetings; with our marketing team; through attendance at Lunch and Learn sessions; and by participating in our annual strategy review. Engagement has been through a combination of in- person and virtual meetings. • Compliance/ good governance. • register reviewed no less than six-monthly. • Annual re-election of Directors. • Reviews in June and December 2022. • All Directors stood for election/re-election in May 2022, except for The performance of the Committee was evaluated as part of the externally facilitated Board evaluation process in 2022, described on page 90. The Committee Terms of Reference were reviewed in December 2022. No material changes were made, and the Governance Code published in July 2018 (the “UK Code”), meetings, and there were additional ad hoc meetings and discussions between Committee members in connection Each Non-Executive Director was, on joining, provided with a detailed description of their role and responsibilities, and received a detailed business induction, which is managed by our Company Secretary. All Directors have an annual one-to-one development review meeting with the Chair to appraise performance, set personal objectives and discuss any development and training needs to enable them to continue to add value to the Board. The performance and holds additional meetings with Directors on Before any Director is proposed for re-election, or has their appointment renewed, the Committee considers the outcome of the reviews to ensure that the Director continues to be effective and demonstrates commitment to the role. The Chair provides an explanation to shareholders as to why the Director should be It is the Company’s policy that Executive Directors can only hold one external listed company non-executive directorship. Voluntary service on the governing board of a social, trade or charitable organisation is also permitted. Details of the external appointments held by the Executive Directors are included in the biographical notes on pages 76 and 77. Governance The Committee has acted throughout 2022 in accordance effectiveness was assessed in 2022, with the support of an external facilitator, Lintstock, against the UK Code as part of the Board evaluation process. The evaluation concluded that the Committee has been successful in managing Board composition and succession, with a diverse range of skills and experience in the current Board. The framework for the refreshment of skills, experience and diversity to support the needs of the business and its stakeholders in the future is transparent and well understood. Chair of the Nomination Committee 15 March 2023 continued continued Marshalls plc | Annual Report and Accounts 2022 Governance Our induction process focuses on informing, engaging and supporting new Directors when they join the business to ensure they understand the Group’s culture, business, strategy and stakeholders. We feel this knowledge, combined with their skills and experience, provides the right foundation for them to make an effective The Marshalls Way We do the right things, for the right reasons, in the right way • Summary of the Group’s history • Introduction to the Group’s Strategy • Biographies of the senior management team • Employee Engagement Survey • Sustainability Report • ESG update • Latest Board evaluation • Access to key corporate documents • Market Indicators and Drivers Report • Core compliance training • Appointment documentation support • Company Secretary support • Organograms • Key contacts • Details of key advisers • Payroll and administration support • Board one-to-ones • Executive management one-to-ones • Site visit programme • Customer visits • Introduction to our markets • Introduction to investor relations • Introduction to Remuneration Policy • Employee Voice Group attendance Engage Marshalls plc | Governance 96 Marshalls maintained a strong focus on control, risk management and governance throughout the year. The Group’s Process and Internal Financial Controls review, established in response to the BEIS White Paper, is a major project and good progress has been made during 2022. Marshalls continues to maintain Meetings Graham Prothero – Chair Angela Bromfield Avis Darzins Diana Houghton — * Diana Houghton joined the Audit Committee on Find our Terms of Reference at: This report, which is part of the Directors’ Report, explains how the Audit Committee has discharged its responsibilities during 2022 and provided focus and governance in report I also set out the Audit Committee’s objectives for 2023. • Provided a recommendation to the Board on whether the 2022 Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable. In addition, assessed the relation to ESG matters, including the reporting of the Task Force on Climate-related Financial Disclosures. • • acquisition of Marley and the adequacy of relevant disclosures in the 2022 Annual Report. Further consideration of the accounting disclosures in relation to operating segments and adjusting items. • Reviewed the new capital structure, following the additional debt introduced to part-fund the acquisition of Marley, and the headroom against bank facilities and covenants. • sensitivity analyses, including the scenario planning and assumptions used, to conclude on the Group’s going concern assessment and Viability Statement. 97 Marshalls plc | Annual Report and Accounts 2022 Governance • Reviewed and assessed the Group’s risk management process and provided assurance to the Board in relation to procedures. During 2022 this has included the alignment of risk management procedures and a review and upgrade of • During 2022, the Committee oversaw a continuing project the Group’s control environment to ensure that it continues the objectives of the BEIS White Paper. KPMG was engaged to support the process and to provide assurance to the Committee and to facilitate the monitoring of progress during the year. The aim is to produce risk and control matrices (“RACMs”) for all the Purchase-to-Pay and Inventory processes and the remainder will be developed during 2023. • Continued to monitor progress with the implementation of key projects for the Group, including the integration of Marley and the implementation of the D365 systems update, to ensure that the control environment surrounding these projects remains appropriate. • Carried out a detailed review of the outcomes of cyber security audits undertaken by KPMG LLP in order to improve cyber security controls and to ensure that IT controls remain appropriate and robust. During 2022, the work programme included a cyber security audit of Marley. • Commissioned a number of other internal audit reviews by (both Marshalls and Marley). • To focus on transparency, the clarity of reporting and the consistency of messaging across all communication and regulatory channels and over all areas of the business. • To review the delivery of the external and internal audit, to monitor progress and changes in external regulatory environment and best practice. The Committee will continue to oversee management. • To maintain our continual assessment and improvement of cyber security controls and ensure that IT controls remain appropriate and robust. This will involve further cyber security reviews. • undertaken by KPMG LLP and monitor the implementation actions from previous reviews. There are additional internal audit reviews planned for 2023, including projects covering • review that was established in response to the BEIS White Paper. This review process will be extended to the newly acquired Marley business during the project. • To review and consider the process and the matters to be considered in order to set an Audit and Assurance Policy. The Committee will consider appropriate areas once the project to review the Group’s control environment has been completed. During the year, the Audit Committee held four formal meetings and there were also meetings between the Audit Committee Chair, the The Committee meets both the external and internal auditor independently of management, ensuring it has full visibility of matters that have been the subject of particular discussions. The Committee also reports to the Board in relation to the going concern statement and the Viability Statement and whether the accounts are fair, balanced and understandable During the year, an external evaluation of the Committee’s performance was undertaken as part of the Board evaluation process. This is explained in detail in the Corporate Governance Statement on pages 78 to 91. The review found the Committee to be well-composed, effective and well-run. No areas of concern were highlighted during this review although a number of agreed actions The Chair of the Committee is a Chartered Accountant and the details are on pages 76 and 77. Deloitte LLP was appointed in May 2015 as statutory auditor, following a tender process. The Committee has adopted policies to safeguard the independence of its external auditor, Deloitte LLP. It is the policy of the Company that the external auditor should not provide non-audit services, other than those that are “de minimis“ Committee. Where the Committee perceives that the independence of the auditor could be compromised, the work will not be awarded to the external auditor. Details of amounts paid to the external auditor, and its entire network, for audit and non-audit services in 2022 are analysed in Note 3 on page 162. Other than the half-yearly review of Marshalls plc, for which a fee of £35,000 was charged (2021: £35,000), no amounts were paid for non-audit work during for non-audit services in the same period was £2,225,000 (2021: £236,000). An annual review of external audit effectiveness was undertaken the external auditor had conducted a comprehensive, appropriate and effective audit. Communication, at all levels, had been open and constructive and areas where the external auditor could work more The internal audit process is carried out by KPMG LLP, and the annual internal audit programme uses a risk-based assessment that takes into account the Risk Register and management input. KPMG attends the Group’s Risk Register review meeting on a regular basis. This risk-based assessment is reviewed and approved by the Audit Committee, and the process is overseen by the Chief external auditor and has no other connection with the Group. The Company undertook a review and updated its internal self- throughout the year. This review included the establishment of a similar procedure for the Marley business. The internal audit programme includes both regular audit checks and assignments to look at areas of critical importance. Any areas of weakness plan and a follow-up audit check to establish that actions have been completed. Instances of fraud or attempted fraud (if any) and preventative action plans are also reported to the Committee Marshalls plc | Governance 98 continued During the year, in addition to the regular internal control process, KPMG is pleased to report that, although the wider risk of cyber fraud continues security measures and systems have improved its maturity in this area. Following the review, plans are now being formulated that will Responsibility area Primary responsibilities • To review, with both management and judgements made and the quality and appropriateness of the Group’s accounting policies. • To review the assumptions and disclosures made in the Financial Statements. • To assess the clarity of disclosures and regulatory requirements. • To provide assurance to support the long-term Viability Statement and the procedures for evaluating the Group’s going concern assessment. • To review the integrity of formal announcements relating to the Group’s year and full year Financial Statements. • Monitored the integrity of the full year and half year Financial Statements and assessed critical accounting policies and practices, and compliance with accounting standards. • to the Financial Statements. The main areas of judgement were: • the acquisition accounting in relation to the acquisition of Marley; including the procedures adopted in relation to the PPA exercise; • key judgements made in relation to goodwill impairment testing; • key judgements made in assessing the carrying value of inventory • disclosure of adjusting items in the Financial Statements. • considered the assessments and conclusions made by management • Reviewed the trading updates issued during the year which provided performance and the acquisition of Marley. • Approved the Viability Statement – and reviewed the assumptions adequacy of scenario planning. • Reviewed the Group’s capital structure together with both the capital allocation and dividend policies. • Approved the going concern statement – and advised the Board that the Group is able to continue in operation and meet its liabilities as they fall due for at least the next twelve months. • Reviewed ESG disclosures, including the Group’s climate change strategy and objectives, commitment to science-based targets and Task Force • To assess and review the effectiveness of the Group’s risk management framework and procedures. • To advise the Board on current • Reviewed the operation of the Group’s Risk Committee, which comprises the Executive Directors and members of senior management. The Risk Register process is set out in more detail on pages 66 to 75, and during 2022 the Marley business has been included and fully mapped into the Group process. • Played a central role in the Group’s risk reviews during 2022. • Provided oversight into the risk process. Actions have been reported and detailed plans have been formulated to improve risk management, compliance and governance. • To review the internal control framework to ensure that the checks and balances in the processes effectively reduce risk and the likelihood of material error or fraud. • To review the effectiveness of the Group’s internal control systems, compliance controls. • Reviewed the underlying policies and procedures. • Assessed the risk of management override of controls including authorisation controls and segregation of duties. The Committee considered those areas where management applies judgement in determining the appropriate accounting and discussed this with the external auditor. The • Reviewed a detailed paper presented to the Committee covering the Group’s internal control framework and the underlying controls • Reviewed the Group’s processes for the ongoing assessment of of independent checking is undertaken focusing on key controls, reconciliations and access to, and changing permissions on, base data. • controls review – and, with KPMG providing independent assurance, reviewed the RACMs prepared in relation to the purchase-to-pay and inventory cycles. • To make recommendations to the Board on the appointment, reappointment and removal of the external auditor. • To consider the independence and objectivity of the external auditor – and to approve the external auditor’s fees. • To agree the nature and scope of the audit with Deloitte LLP. • and its key focus areas. • The Group’s current auditor, Deloitte LLP, has processes in place designed to maintain independence, including regular rotation of the audit partner. The Company has complied with the Competition and • Provided focus and challenge in relation to materiality and effectiveness appropriateness of audit evidence. • The Group’s policy on the independence, selection and rotation of legal requirements. further improve our cyber response procedures and controls. Cyber security controls around Marley’s IT environment are less mature than internal audit review. A plan of work is being put in place to address these rolling programme of cyber security awareness training is undertaken. business during 2022. continued 99 Marshalls plc | Annual Report and Accounts 2022 Governance Responsibility area Primary responsibilities • To review the effectiveness of the internal audit function and the work of KPMG, as internal auditor, and the internal audit programme. • To review the recommendations of KPMG and the responses and action plans of management. • Reported on actions and detailed plans that have been formulated to • KPMG reported on actions to support management and provide update processes. To oversee and review the effectiveness • Serious Concerns Policy and whistleblowing procedure; • Anti-Bribery Policy; and • Cyber Security Policy. • Reviewed the Committee’s Terms of Reference. • Ensured that the procedures in place in relation to each of these policies are appropriate. • Reviewed the effectiveness of procedures underlying the Serious Concerns helpline and for handling allegations from whistleblowers. and other accounting judgements relating to the Group’s Financial Statements. The Committee also provided oversight over the external and internal audit functions as well as reviewing the Group’s risk management and internal control systems and procedures. An annual review of internal audit effectiveness and of the performance of KPMG LLP as independent internal auditor The conclusion was very positive and was that the current internal managing the internal audit function. The Committee has considered, with KPMG LLP, how this process can be developed further and The proposed reforms set out how the Government plans to include a range of new proposals in relation to Directors, auditors of consultation has been extended by the UK Government, but the Audit Committee remains supportive of the objectives of the controls framework. The Committee is overseeing a project to review the adequacy, completeness and effectiveness of the Group’s control environment to ensure that it continues to be addressed. KPMG has been engaged to work with management framework, to ensure this is properly and consistently structured but also the evidence and visibility available to management and to the Committee in evaluating and reporting on the effectiveness of the control structure. The review process will be extended to the Marley business. The aim will be to ensure that the Group has a better understanding of its control risks and will be well-placed to simplify, improve and automate controls and to align effectiveness with the IT D365 implementation project. The Committee has considered whether, in its opinion, the 2022 Annual Report and Financial Statements is, taken as a whole, fair, balanced and understandable, and whether it provides the information necessary for shareholders to assess the Group’s position, performance, business model and strategy. As part of its review the Committee considered the disclosures in the Strategic Report together with the enhanced disclosures relating to the Group’s ESG objectives, sustainability and climate change risks and opportunities and targets. The Committee also considered the adequacy of the disclosures made in relation to the measures undertaken by the Group to mitigate risk. In making this assessment, the Committee has advised the Board in relation to The Committee has concluded that the disclosures, and the process and controls underlying their production, were appropriate to enable it to determine that the 2022 Annual Report and Financial Statements is fair, balanced and understandable. The Audit Committee monitors, on behalf of the Board, reported incidents under the Serious Concerns Policy (our Whistleblowing Policy), which is available to all colleagues. A third party channel on behalf of the Group for any concerns to be reported. These procedures are embedded into the Group’s Code of Conduct and are relevant to all stakeholders including suppliers, partners and colleagues. The policy and the Safecall process are displayed on operating site noticeboards and on the Company’s intranet, and set out the procedure for employees to raise legitimate concerns about any wrongdoing without fear of criticism, discrimination or reprisal. The Committee, on behalf of the Board, receives regular updates from the Company Secretary regarding any matters of material concern and an annual summary of matters raised throughout the relevant year including the nature of matters reported, the outcome of any material investigations and details of any actions arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action. The Company is committed to a zero-tolerance position with regard to bribery, made explicit through its Anti-Bribery Code and supporting guidance on hospitality and gifts. The policy and procedures are published on the Company’s website and displayed on operating site noticeboards. The Board reviews and approves any changes to the Anti-Bribery Code annually. Online training is available to all employees to reinforce the Anti-Bribery Code and procedures and is part of our core compliance training programme for relevant colleagues. There is a maintained record of gifts and hospitality with a requirement for these to be reported quarterly. The Company is currently undertaking a review of all of Marley’s I would like to thank our shareholders for their continued support during the year. I will be available at the Company’s 2023 AGM to answer any questions in relation to this report. The Audit Committee Report has been approved by the Board and signed on its behalf by: Chair of the Audit Committee 15 March 2023 Marshalls plc | Governance 100 Remuneration Committee Report Remuneration arrangements for with a focus on long-term growth. which aligns to the strategic goals www.marshalls.co.uk/about-us/corporate-governance • • • • 2023 priorities • • • • • • 2022 highlights • • • • Members and attendance Meetings Angela Bromfield – Chair Vanda Murray OBE Tim Pile Graham Prothero Avis Darzins Diana Houghton — * Diana Houghton was appointed to the Remuneration Committee on 1 January 2023. The CEO attends the Committee meetings by invitation but may not participate in discussions about his own remuneration. The Company Secretary acts as Secretary to the Committee and attends Committee meetings, along with 101 Marshalls plc | Annual Report and Accounts 2022 Governance Dear shareholder • Annual statement from me as the Committee Chair; • • • Application of the policy in 2022 and 2023 Remuneration Policy review Business performance and MIP outcomes for 2022 MIP A outcomes for 2022 MIP B awards allocated in respect of 2022 2022 MIP performance conditions 2022 MIP Performance Conditions Initial targets Actual £ £ £ Marshalls plc | Governance 102 Business performance and MIP outcomes for 2022 continued 2022 MIP performance conditions continued EPS OCF/EBITDA Executive Director changes Element of remuneration Base salary Benefits and pension MIP Element A MIP Element B Shareholding requirement Executive Director salary increases Remuneration Committee Report 103 Marshalls plc | Annual Report and Accounts 2022 Governance Chair and Non-Executive fees • • • • Group-wide considerations colleagues. • • • • Shareholders Shareholder engagement In conclusion Chair of the Remuneration Committee Our Remuneration Report has been prepared in accordance with the Companies Act 2006 and Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. It meets the requirements of the 2018 UK Corporate Governance Code (the “UK Code”) and is also prepared in accordance with the UK Listing Authority’s Listing Rules and Disclosure and Transparency Rules. Remuneration Policy (2020 AGM) Remuneration Report (2022 AGM) Marshalls plc | Governance 104 At a glance Link to Company strategy Revenue 2022 remuneration outcomes Long-term performance ——— Remuneration Committee Report 35 Martyn Coffey Justin Lockwood Simon Bourne — 171 83124 386 8 1,685 80565 266399 373 2 1,002 93657 94 70 234 555 425 63 21 405 284 49 14 62 -146 39 47 105 Marshalls plc | Annual Report and Accounts 2022 Governance Comparison to peers Shareholding requirement Impact of share price change Martyn Coffey Justin Lockwood Simon Bourne Martyn Coffey Justin Lockwood 200% 200% 126% 322% Simon Bourne 200% 147% Martyn Coffey Justin Lockwood 444 1,381 1,148 2,166 1,338 1,002 555 405 Simon Bourne 523 555 539 5,546 Marshalls plc | Governance 106 At a glance Implementation of the Policy in 2022 and the proposed Policy for 2023 for Executive Directors • • • Salary • • • • • • • • • • • • • Benefits and pension of colleagues across the Remuneration Committee Report 107 Marshalls plc | Annual Report and Accounts 2022 Governance MIP Element A the Committee. • • • • • • • be no worse than the average • • • • be no worse than the average management to agree a timeline Marshalls plc | Governance 108 MIP Element B • • • were the same as for Element A. the same as for Element A. Minimum shareholding requirement Implementation of Non-Executive Directors’ fees Chair fee Chair of a committee fee Remuneration Policy Introduction Committee process to determine new Remuneration Policy At a glance Implementation of the Policy in 2022 and the proposed Policy for 2023 for Executive Directors continued Remuneration Committee Report 109 Marshalls plc | Annual Report and Accounts 2022 Governance Factor How our new Remuneration Policy aligns Clarity • • Simplicity • • Risk • • • • • • • • • • • Predictability • • Proportionality • Alignment to culture • • Marshalls plc | Governance 110 Remuneration Policy Changes to the Policy Compliance with the Code Key remuneration element of the 2018 UK Corporate Governance Code Alignment with 2023 Remuneration Policy through the annual rolling vesting 2023 Remuneration Policy table Fixed Remuneration Salary Purpose and how it supports Operation • • • • • • • Maximum • • Change Remuneration Committee Report 111 Marshalls plc | Annual Report and Accounts 2022 Governance Pension Purpose and how it supports the strategy Operation Maximum Change Purpose and how it supports the strategy Operation Maximum Change Marshalls plc | Governance 112 Remuneration Policy 2023 Remuneration Policy table continued Variable performance-based remuneration Management Incentive Plan (“MIP”) Element A Purpose and how it supports the strategy Operation Maximum • • • Performance Conditions • • Change Remuneration Committee Report 113 Marshalls plc | Annual Report and Accounts 2022 Governance MIP Element B Purpose and how it supports the strategy Operation Maximum • • • Performance Conditions Change Minimum Shareholding Requirement Malus and Clawback Marshalls plc | Governance 114 Remuneration Policy Malus and Clawback continued • • • • • • • Element A Element B Total Remuneration Opportunity Element of package Assumptions used Fixed pay MIP Element A MIP Element B Share price appreciation Dividend equivalents Remuneration Committee Report Martyn Coffey 37% 42% 32% 24% 28% 21% 12% 2,775 27% 31% 47% 100% 2,437 1,591 746 Justin Lockwood 36% 42% 32% 22% 26% 30% 47% 100% 1,028 475 12% 1,801 1,580 Simon Bourne 37% 42% 32% 21% 26% 30% 46% 100% 905 419 12% 1,584 1,390 28% 25% 28% 25% 115 Marshalls plc | Annual Report and Accounts 2022 Governance Pay at Risk • • • Consideration of remuneration policy for other employees Recruitment Policy Remuneration element Recruitment policy and pension Maximum variable remuneration “Buyout” of incentives forfeited on cessation of employment • • • Relocation policies Martyn Coffey Justin Lockwood Simon Bourne Marshalls plc | Governance 116 Remuneration Policy Directors’ Service Contracts Date of appointment Notice by Company Notice of Director Policy on Termination Payments Recruitment element Treatment on cessation of employment General Salary, benefits and pension lieu. Incentive schemes Good leaver reasons 1 Other reason Discretion MIP Element A For the year of cessation at the normal measurement • • Remuneration Committee Report 117 Marshalls plc | Annual Report and Accounts 2022 Governance Incentive schemes Good leaver reasons 1 Other reason Discretion MIP Element A Deferred Balances in participant’s Element A Plan Account • • MIP Element B For the year of cessation Remuneration Committee • • MIP Element B Subsisting Awards • • • Other contractual obligations Marshalls plc | Governance 118 Remuneration Policy Change of Control Impact Discretion Element A of the MIP the change of control. Element A of the MIP change of control. • • circumstances of change of control. Element B of the MIP of control. • • Element B of the MIP of control • • Remuneration Committee Report 119 Marshalls plc | Annual Report and Accounts 2022 Governance Discretion Consideration of shareholder views Chair and Non-Executive Directors’ Remuneration Policy Fees Purpose and how it supports the strategy Operation arrangements. Maximum Change Marshalls plc | Governance 120 Annual Remuneration Report Salary supplement in lieu of pension Annual bonus Long-term incentives Salary Other benefits MIP Element A MIP Element B MIP Element A and B Total Total fixed Total variable 2022 £’000 2022 £’000 2022 £’000 2022 £’000 2022 £’000 2022 £’000 2022 £’000 2022 £’000 2022 £’000 621 532 36 33 93 80 70 399 94 266 88 375 1,002 1,685 750 645 252 1,040 414 166 11 5 21 8 47 124 63 83 – – 555 386 446 179 109 207 Simon 276 – 8 – 14 – 35 – 49 – 23 – 405 – 298 – 107 – 1,311 698 55 38 128 88 152 523 206 349 111 375 1,963 2,071 1,494 824 468 1,247 Note a Note b Note c Note d Setting pay in context • • Relative importance of spend on pay (percentage change) Remuneration Committee Report 14.7 69.2 Staff pay £127.4m +16.8% Distributions to shareholders £38.7m +115.7% Capital investment £28.4m +20.9% Tax £108.6m +12.5% 106.9 0.0 23.5 96.5 109.1 17.9 127.4 38.7 28.4 108.6 121 Marshalls plc | Annual Report and Accounts 2022 Governance Outcomes of incentive schemes in 2022 (audited) MIP awards 2022 Element A Element B (2020 award in respect of 2019 performance) — — — — — — — — Element B (2022 award in respect of 2021 performance) — — — — Element B (2023 award in respect of 2022 performance) Marshalls plc | Governance 122 Annual Remuneration Report Board fee Committee fees Expenses (a) Total £’000 £’000 £’000 £’000 2022 2022 2022 2022 Vanda Murray Remuneration Committee 219 5 – 2 226 Graham Prothero 55 18 – 73 Tim Pile Committees 54 – – – 54 Angela Bromfield 54 16 – 70 Avis Darzins Committees 54 – – – 54 436 39 2 477 Directors’ shareholdings and share interests • • Shares that will vest following shares contingent share interests interests in shares contingent shares shares shares shares shares shares Executive — Non-Executive — — — — — — — — — — — — — — — — — — — — — — — — — Remuneration Committee Report 123 Marshalls plc | Annual Report and Accounts 2022 Governance Annual Remuneration Report Element Reference Marshalls plc | Governance 124 Fairness, diversity and wider workforce considerations Introduction • remuneration; • • • • Process • • • • • • • • • management. • • • • • • Remuneration Committee Report 125 Marshalls plc | Annual Report and Accounts 2022 Governance • colleagues. • • • • • • Summary of incentive schemes • • in Element A other bonus or Yes Yes Yes Yes Sales bonuses Yes Widening employee share ownership Bonus Share Plan (“BSP”) Sharesave Scheme/Share Purchase Plan Living Wage employer Marshalls plc | Governance 126 Fairness, diversity and wider workforce considerations Pay comparisons CEO ratio benefits 2022 35.4:1 27.2:1 21.7:1 621 31 40 51 1,002 33 43 53 2022 Ratio of single figure total remuneration to 20.6x • • • • • CEO/average pay against TSR ——— Remuneration Committee Report 127 Marshalls plc | Annual Report and Accounts 2022 Governance Percentage change in Directors’ remuneration 2022 2022 2022 16.8% 6.3% (75.3)% 8.1% 0.0% (47.2)% n/a n/a n/a 26.3% n/a n/a 25.0% n/a n/a 5.9% n/a n/a 14.1% n/a n/a 80.0% n/a n/a 3.6% (26.4)% 27.1% CEO pay in the last ten years 2022 Year £’000 Single figure remuneration 1,002 30.2% — 100.0% Total shareholder return ——— Marshalls plc | Governance 128 Remuneration Committee Report Fairness, diversity and wider workforce considerations Gender pay gap • • Gender balance and pay Female 2022 results 2021 results 2020 results 2019 results 2018 results 129 Marshalls plc | Annual Report and Accounts 2022 Governance Bonus gender pay gap Female Percentage receiving bonus Upper quartile Upper middle quartile Lower middle quartile Lower quartile Marshalls plc | Governance 130 Remuneration Committee Report Fairness, diversity and wider workforce considerations Equity and diversity initiatives External advisers Chair of the Remuneration Committee 131 Marshalls plc | Annual Report and Accounts 2022 Governance Political donations: Risk management: Greenhouse gas emissions: Employees: Stakeholders: Corporate governance: Post-balance sheet events of importance since 31 December 2022: Research and development: Dividends Share capital and authority to purchase shares Marshalls plc | Governance 132 Share capital and authority to purchase shares continued Articles of Association Directors’ interests Listing Rule requirements Substantial shareholdings As at As at 28 February 2023 % 16.06 8.72 6.29 5.01 4.66 4.39 4.04 3.69 2.86 2.42 Shiv Sibal Group Company Secretary 133 Marshalls plc | Annual Report and Accounts 2022 Governance Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements “Reduced Disclosure Framework”. • • • • • • • • • Responsibility statement of the Directors on the Annual Report and Accounts • • • Disclosure of information to the auditor Marshalls plc | Governance 134 Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements Going concern Cautionary statement and Directors’ liability Annual General Meeting Shiv Sibal Group Company Secretary 135 Marshalls plc | Annual Report and Accounts 2022 Governance Independent Auditor’s Report to the members of Marshalls plc Report on the audit of the Financial Statements 1. Opinion • • • “Reduced Disclosure Framework” • • • • • • • “Reduced Disclosure Framework” 2. Basis for opinion 3. Summary of our audit approach Key audit matters • Materiality Scoping Marshalls plc | Governance 136 Independent Auditor’s Report to the members of Marshalls plc Report on the audit of the Financial Statements 4. Conclusions relating to going concern • • • • • the going concern basis of accounting. 5. Key audit matters the efforts of the engagement team. 5.1. Acquisition Accounting Key audit matter description “Business Combinations” How the scope • valuation of intangible assets; • • • • • • • • • • Key observations 137 Marshalls plc | Annual Report and Accounts 2022 Governance Report on the audit of the Financial Statements 6. Our application of materiality 6.1. Materiality Group Financial Statements Parent Company Financial Statements Materiality Basis for determining materiality relevant for users of the Financial Statements. Rationale for the benchmark applied Statements that is relevant to the users of the Financial Group materiality £4.3m Component materiality range £1.8m to £2.4m Audit Committee reporting threshold £0.22m Adjusted PBT £90.4m Marshalls plc | Governance 138 Independent Auditor’s Report to the members of Marshalls plc Report on the audit of the Financial Statements 6. Our application of materiality continued 6.2. Performance materiality Group Financial Statements Parent Company Financial Statements Performance materiality Basis and rationale for determining performance materiality 6.3. Error reporting threshold 7. An overview of the scope of our audit 97% 3% Revenue 100% 0% 100% 0% Net assets 139 Marshalls plc | Annual Report and Accounts 2022 Governance Report on the audit of the Financial Statements 7. An overview of the scope of our audit continued 7.2. Our consideration of the control environment IT systems • • • • • • Controls reliance 7.3. Our consideration of climate-related risks 8. Other information 9. Responsibilities of Directors Marshalls plc | Governance 140 Independent Auditor’s Report to the members of Marshalls plc Report on the audit of the Financial Statements 10. Auditor’s responsibilities for the audit of the Financial Statements 11. Extent to which the audit was considered capable of detecting irregularities, including fraud 11.1. Identifying and assessing potential risks related to irregularities • • • • • • • • • • • • 141 Marshalls plc | Annual Report and Accounts 2022 Governance Report on other legal and regulatory requirements 12. Opinions on other matters prescribed by the Companies Act 2006 • • 13. Corporate Governance Statement • • • • • • 14. Matters on which we are required to report by exception 14.1. Adequacy of explanations received and accounting records • • • 14.2. Directors’ remuneration Marshalls plc | Governance 142 Independent Auditor’s Report to the members of Marshalls plc Report on other legal and regulatory requirements 15. Other matters which we are required to address 15.1. Auditor tenure 15.2. Consistency of the Audit Report with the additional report to the Audit Committee 16. Use of our report David Johnson FCA (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor Leeds, United Kingdom Financial Statements Consolidated Income Statement for the year ended 31 December 2022 2022 2021 Notes £’000 £’000 Revenue 2 719,373 589,264 Net operating costs 3 (671,461) (513,041) Operating profit 2 47,912 76,223 Financial expenses 6 (10,716) (6,903) Financial income 6 1 2 Profit before tax 2 37,197 69,322 Income tax expense 7 (10,656) (14,424) Profit for the financial year 26,541 54,898 Profit for the year Attributable to: Equity shareholders of the Parent 26,791 54,806 Non-controlling interests (250) 92 Profit for the financial year 26,541 54,898 Earnings per share Basic 8 11.4p 27.5p Diluted 8 11.3p 27.4p Dividend Pence per share 9 15.6p 14.3p Dividends declared in the period 9 39,427 28,484 All results relate to continuing operations. 2021 2022 (as restated) Notes £’000 £’000 Operating profit before adjusting items Operating profit 47,912 76,223 Adjusting items 4 53,220 1,148 Adjusted operating profit 101,132 77,371 Profit before tax and adjusting items Profit before tax 37,197 69,322 Adjusting items 4 53,220 3,961 Adjusted profit before tax 90,417 73,283 Profit after tax and adjusting items Profit for the financial year 26,541 54,898 Adjusting items (net of tax) 4 46,815 3,355 Adjusted profit after tax 73,356 58,253 Earnings per share after adding back adjusting items Basic 8 31.3p 29.2p Diluted 8 31.1p 29.0p 143 Marshalls plc | Annual Report and Accounts 2022 Consolidated Statement of Comprehensive Income for the year ended 31 December 2022 2021 2022 (as restated) Notes £’000 £’000 Profit for the financial year 26,541 54,898 Other comprehensive income/(expense) Items that will not be reclassified to the Income Statement: Remeasurements of the net defined benefit surplus 20 (3,126) 26,383 Deferred tax arising 22 781 (6,600) Impact of the change in rate of deferred tax on defined benefit plan actuarial gain — 17 Total items that will not be reclassified to the Income Statement (2,345) 19,800 Items that are or may in the future be reclassified to the Income Statement: Effective portion of changes in fair value of cash flow hedges 5,660 1,403 Fair value of cash flow hedges transferred to the Income Statement (2,847) (922) Deferred tax arising 22 (680) 36 Exchange difference on retranslation of foreign currency net investment 610 (232) Exchange movements associated with borrowings designated as a hedge against (282) 640 Foreign currency translation differences – non-controlling interests 45 (55) Total items that are or may be reclassified to the Income Statement 2,506 870 Other comprehensive income for the year, net of income tax 161 20,670 Total comprehensive income for the year 26,702 75,568 Attributable to: Equity shareholders of the Parent 26,907 75,531 Non-controlling interests 24 (205) 37 26,702 75,568 Marshalls plc | Financial Statements 144 Financial Statements Consolidated Balance Sheet at 31 December 2022 2022 2021 Notes £’000 £’000 Assets Non-current assets Property, plant and equipment 10 266,451 173,931 Right-of-use assets 11 36,997 36,445 Intangible assets 12 559,743 95,004 Employee benefits 20 22,434 25,757 Deferred taxation assets 22 1,270 1,605 886,895 332,742 Current assets Inventories 13 138,765 107,436 Trade and other receivables 14 123,281 111,909 Cash and cash equivalents 15 56,264 41,212 Assets classified as held for sale 10 — 1,860 Derivative financial instruments 19 3,661 813 321,971 263,230 Total assets 1,208,866 595,972 Liabilities Current liabilities Trade and other payables 16 152,440 138,218 Corporation tax 2,128 2,198 Lease liabilities 18 9,764 8,545 Interest-bearing loans and borrowings 17 — 1,673 Provisions 21 3,000 — 167,332 150,634 Non-current liabilities Lease liabilities 18 36,070 32,776 Interest-bearing loans and borrowings 17 247,035 39,341 Provisions 21 6,699 839 Deferred taxation liabilities 22 90,661 28,065 380,465 101,021 Total liabilities 547,797 251,655 Net assets 661,069 344,317 Equity Capital and reserves attributable to equity shareholders of the Parent Called-up share capital 23 63,242 50,013 Share premium account 23 199,927 24,482 Merger reserve 23 141,605 — Own shares (1,325) (646) Capital redemption reserve 75,394 75,394 Consolidation reserve (213,067) (213,067) Hedging reserve 2,963 830 Foreign exchange reserve 375 47 Retained earnings 391,173 406,277 Equity attributable to equity shareholders of the Parent 660,287 343,330 Non-controlling interests 24 782 987 Total equity 661,069 344,317 Approved at a Directors’ meeting on 15 March 2023. On behalf of the Board: Martyn Coffey Justin Lockwood The Notes on pages 149 to 185 form part of these Consolidated Financial Statements. 145 Marshalls plc | Annual Report and Accounts 2022 Consolidated Cash Flow Statement for the year ended 31 December 2022 2021 2022 (as restated) Notes £’000 £’000 Profit for the financial year 26,541 54,898 Income tax expense on continuing operations 7 17,061 15,030 Income tax credit on adjusting items 7 (6,405) (606) Profit before tax 37,197 69,322 Adjustments for: Depreciation of property, plant and equipment 10 21,817 16,423 Asset impairments 14,042 233 Depreciation of right-of-use assets 11 11,328 11,315 Amortisation 12 1,765 1,965 Adjusting items 39,177 1,213 Gain on sale of property, plant and equipment (1,207) (9,194) Equity settled share-based payments 1,254 2,303 Financial income and expenses (net) 6 10,715 6,901 Operating cash flow before changes in working capital 136,088 100,481 Decrease/(increase) in trade and other receivables 22,900 (16,696) Increase in inventories (13,997) (18,108) (Decrease)/increase in trade and other payables (20,737) 19,740 Adjusting items paid (17,410) (2,820) Cash generated from operations 106,844 82,597 Financial expenses paid (9,909) (3,534) Income tax paid (11,592) (13,527) Net cash flow from operating activities 85,343 65,536 Cash flows from investing activities Proceeds from sale of property, plant and equipment 1,408 14,892 Financial income received 1 2 Acquisition of subsidiary undertaking (86,193) — Acquisition of property, plant and equipment (27,840) (19,037) Acquisition of intangible assets (2,310) (2,885) Net cash flow from investing activities (114,934) (7,028) Cash flows from financing activities Net proceeds from issue of share capital 182,651 — Payments to acquire own shares (1,075) (3,567) Payment in respect of share-based payment award (1,252) — Repayment of debt on acquisition of subsidiaries (291,956) — Repayment of borrowings (97,729) (121,286) New loans 303,467 32,658 Cash payment for the principal portion of lease liabilities (11,090) (10,828) Equity dividends paid (38,669) (17,924) Net cash flow from financing activities 44,347 (120,947) Net increase/(decrease) in cash and cash equivalents 14,756 (62,439) Cash and cash equivalents at the beginning of the year 41,212 103,707 Effect of exchange rate fluctuations 296 (56) Cash and cash equivalents at the end of the year 56,264 41,212 Marshalls plc | Financial Statements 146 Financial Statements Consolidated Statement of Changes in Equity for the year ended 31 December 2022 Attributable to equity holders of the Company Share Capital Foreign Non- Share premium Merger Own redemption Consolidation Hedging exchange Retained controlling Total capital account reserve shares reserve reserve reserve reserve earnings Total interests equity £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Current year At 1 January 2022 5 0 , 0 13 24,4 82 — (6 4 6) 75 , 39 4 (21 3,067) 830 47 406, 277 34 3,330 987 3 4 4 , 317 Total comprehensive income/(expense) for the year Profit for the financial year — — — — — — — — 2 6,791 2 6,7 91 (2 50) 26,54 1 Other comprehensive income/(expense) Foreign currency translation differences — — — — — — — 328 — 328 45 373 Effective portion of changes in fair value of cash flow hedges — — — — — — 5,660 — — 5,6 60 — 5,660 Net change in fair value of cash flow hedges transferred to the Income Statement — — — — — — (2 , 8 4 7) — — (2 , 8 47) — (2 , 8 4 7) Deferred tax arising — — — — — — (6 8 0) — — (6 8 0) — (6 8 0) Defined benefit plan actuarial loss — — — — — — — — (3 ,1 2 6) (3 ,1 2 6) — (3 ,12 6) Deferred tax arising — — — — — — — — 781 781 — 781 Total other comprehensive income/(expense) — — — — — — 2 ,13 3 328 (2 , 3 4 5) 116 45 161 Total comprehensive income/(expense) for the year — — — — — — 2 ,13 3 328 24,446 26,9 07 (205) 26 ,70 2 Shares issued 13 , 2 2 9 18 0 ,1 5 1 141, 6 0 5 — — — — — — 33 4 ,98 5 — 3 34 ,9 85 Share issue costs — (4 , 70 6) — — — — — — — (4 ,7 0 6) — (4 ,7 0 6) Share-based payments — — — — — — — — 2 2 — 2 Deferred tax on share-based payments — — — — — — — — (6 0 8) (6 0 8) — (6 0 8) Corporation tax on share-based payments — — — — — — — — 12 1 12 1 — 121 Dividends to equity shareholders — — — — — — — — (38,669) (38,669) — (3 8,669) Purchase of own shares — — — (1, 07 5) — — — — — (1, 0 7 5) — (1, 0 75) Own shares issued under share scheme — — — 396 — — — — (3 9 6) — — — Total contributions by and distributions to owners 13 , 2 2 9 17 5 , 4 4 5 14 1, 6 0 5 (679) — — — — (3 9,5 50) 290,050 — 290,050 Total transactions with owners of the Company 13 , 2 2 9 17 5 , 4 4 5 141 , 6 0 5 (67 9) — — 2 ,1 3 3 328 (15 ,10 4) 3 16 ,9 5 7 (205) 316,752 At 31 December 2022 63 ,242 19 9 , 9 2 7 141, 6 0 5 (1, 3 2 5) 75, 3 94 (2 1 3,0 6 7) 2 ,9 6 3 3 75 391 , 173 6 60, 287 782 6 61, 0 6 9 147 Marshalls plc | Annual Report and Accounts 2022 Consolidated Statement of Changes in Equity continued for the year ended 31 December 2022 Attributable to equity holders of the Company Share Capital Foreign Non- Share premium Own redemption Consolidation Hedging exchange Retained controlling Total capital account shares reserve reserve reserve reserve earnings Total interests equity £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Current year At 1 January 2021 5 0 , 0 13 24,482 (8 0 6) 75 , 39 4 (2 13 , 0 67) 3 13 (3 61) 3 5 0 ,9 3 0 286, 898 950 287,848 Total comprehensive income/(expense) for the year Profit for the financial year — — — — — — — 54,8 06 54,806 92 54, 898 Other comprehensive income/(expense) Foreign currency translation differences — — — — — — 408 — 408 (5 5) 35 3 Effective portion of changes in fair value of cash flow hedges — — — — — 1, 4 0 3 — — 1, 4 0 3 — 1, 4 0 3 Net change in fair value of cash flow hedges transferred to the Income Statement — — — — — (9 2 2) — — (9 2 2) — (9 2 2) Deferred tax arising — — — — — 36 — — 36 — 36 Defined benefit plan actuarial gain — — — — — — — 26, 3 8 3 26 ,3 8 3 — 26 , 38 3 Deferred tax arising — — — — — — — (6 , 6 0 0) (6 , 6 0 0) — (6, 6 0 0) Impact of the change in rate of deferred tax on defined benefit plan actuarial gain — — — — — — — 17 17 — 17 Total other comprehensive income/ (expense) — — — — — 5 17 408 19 , 8 0 0 20 ,725 (5 5) 20 ,670 Total comprehensive income/(expense) for the year — — — — — 5 17 408 7 4,606 75 , 5 31 37 75, 568 Share-based payments — — — — — — — 2,303 2, 303 — 2,303 Deferred tax on share-based payments — — — — — — — (25 6) (2 5 6) — (25 6) Corporation tax on share-based payments — — — — — — — 345 345 — 345 Dividends to equity shareholders — — — — — — — (1 7, 9 2 4) (17, 9 2 4) — (1 7, 9 2 4) Purchase of own shares — — (3,56 7) — — — — — (3, 56 7) — (3 ,56 7) Own shares issued under share scheme — — 3,7 27 — — — — (3,7 27) — — — Total contributions by and distributions to owners — — 16 0 — — — — (19 , 2 5 9) (19 , 0 9 9) — (19 , 0 9 9) Total transactions with owners of the Company — — 16 0 — — 5 17 408 5 5, 3 47 56,4 32 37 5 6,4 69 At 31 December 2021 5 0 , 0 13 2 4,482 (6 4 6) 75 , 39 4 (2 13 , 0 6 7) 830 47 4 0 6, 277 3 4 3,330 987 3 4 4 , 3 17 Marshalls plc | Financial Statements 148 Financial Statements Notes to the Consolidated Financial Statements 1 Accounting policies Significant accounting policies Marshalls plc (the “Company”) is a public company limited by shares, incorporated in the United Kingdom under the Companies Act 2006, and is registered in England and Wales. The Consolidated Financial Statements of the Company for the year ended 31 December 2022 comprise the Company and its subsidiaries (together referred to as the “Group”). The Consolidated Financial Statements were authorised for issue by the Directors on 15 March 2023. The Company’ Landscape House, Premier Way, Lowfields Business Park, Elland HX5 9HT. The following paragraphs summarise the significant accounting policies of the Group, which have been applied in dealing with items which are considered material in relation to the Group’s Consolidated Financial Statements. The Group has applied all accounting standards and interpretations issued by the IASB and International Financial Reporting Committee relevant to its operations and which are effective in respect of these Financial Statements. Adoption of new standards in 2022 The accounting policies have been applied consistently throughout the Group for the purposes of these Consolidated Financial Statements and are also set out on the Company’s website (www.marshalls.co.uk/investor/financial-performance). Adjusting items have been disclosed separately because of their size, nature or incidence to enable a full understanding of the Group’s underlying results. There are no new or amended standards or interpretations adopted during the year that have a significant impact on the Consolidated Financial Statements. At the date of authorisation of these Consolidated Financial Statements, the Group has not applied the following new and revised IFRS Standards that have been issued but are not yet effective: • Amendments to IAS 16 “Property, plant and equipment – proceeds before intended use” • Annual improvements to IFRS Standards 2018-2020 Cycle – Amendments to IFRS1 First-time Adoption of International Financial Reporting Standards, IFRS 9 and Financial Instruments, IFRS 16 “Leases” and IAS 41 “Agriculture” • Amendments to IFRS 3 “Reference to the conceptual framework” • Amendments to IAS 37 “Onerous contracts – costs of fulfilling a contract” • Amendment to IFRS 16 “COVID-19 related rent concessions beyond 30 June 2021” • IFRS 17 “Insurance Contracts” • Amendment to IAS 1 “Classification of liabilities as current or non-current” • Amendments to IAS 1 and IFRS Practice Statement 2 – “Disclosure of accounting policies” • Amendments to IAS 12 “Deferred tax related to assets and liabilities arising from a single transaction” • Amendments to IAS 8 “Definition of accounting estimates” • Amendments to IFRS 16 “Lease liability in a sale and leaseback” • Amendment to IAS 1 “Non-current liabilities with covenants” The Directors do not expect that the adoption of the Standards listed above will have a material impact on the Consolidated Financial Statements of the Group in future periods. (a) Statement of compliance The Group Consolidated Financial Statements have been prepared and approved by the Directors in accordance with International Accounting Standards and International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board (“IASB”)”. The Parent Company has elected to prepare its Financial Statements in accordance with FRS 101 “Reduced Disclosure Framework” and these are presented on pages 186 to 193. (b) Basis of preparation The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic Report on pages 1 to 75. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also set out in the Strategic Report. In addition, Note 19 includes the Group’s policies and procedures for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk. On 3 May 2022, the Group drew down on a new four-year bank loan of £210 million to support the acquisition of Marley Group plc. In addition to the term loan, the Group has entered into a new committed revolving credit facility of £160 million with a maturity date of four years. Net debt to adjusted EBITDA was 1.35 times at 31 December 2022 on a pro forma (pre-IFRS 16) twelve-month basis. In assessing the appropriateness of adopting the going concern basis in the Consolidated Financial Statements, the Board reviewed a range of severe downside scenarios to stress test the potential impact of emerging and longer-term risks on covenant, compliance and liquidity. The stress tests reviewed do not impact the Directors’ opinion that there is sufficient headroom against both the Group’s bank facility and the associated covenants and that there are sufficient unutilised facilities held which mature after twelve months. The Group’s performance is dependent on economic and market conditions, the outlook for which is difficult to predict. However, the potential impact of wider political and economic uncertainties has been considered, including issues or delays as a consequence of continuing issues relating to the wider supply chain and the impact of cost inflation. The deteriorating macro-economic environment is the key underlying risk. The financial impact of climate change risk continues to be assessed along with market changes driven by advances in technology. Based on current expectations, the Group’s latest cash forecasts continue to meet half year and year-end bank covenants and there is adequate headroom that is not dependent on facility renewals. At 31 December 2022, on an adjusted proforma pre-IFRS 16 test basis, the relevant ratios were comfortably achieved and were as follows: • EBITA: interest charge – 16 times (covenant test requirement – to be greater than 3.0 times). • Net debt: adjusted EBITDA – 1.35 times (covenant test requirement – to be less than 3.0 times). 149 Marshalls plc | Annual Report and Accounts 2022 1 Accounting policies continued Significant accounting policies continued (b) Basis of preparation continued In performing an assessment of the Group’s going concern, the Directors have considered the Group’s capital allocation policy and priorities for capital as set out on page 64 and the possible future cash requirements arising from each of these priorities for capital. After considering these capital allocation priorities and the risks associated with other relevant uncertainties (including the impact on markets and supply chains of geographical risks such as the current crisis in Ukraine, the risk of further COVID-19 uncertainty and continuing macro-economic factors and inflation), the Directors believe that the Group is well-placed to manage its business risks successfully. The Board considers that the facilities now available to the Group are sufficient to meet significant downside liquidity scenarios over a prolonged period and that there are sufficient unutilised facilities held which mature after twelve months. Accordingly, the Directors continue to adopt the going concern basis in preparing the Consolidated Financial Statements. The Consolidated Financial Statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments and liabilities for cash settled share-based payments. The Consolidated Financial Statements are presented in Sterling, rounded to the nearest thousand. Sterling is the currency of the primary economic environment in which the Group operates. The preparation of Financial Statements in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These are set out in Note 30 on page 185. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of adopted IFRSs that have a significant effect on the Consolidated Financial Statements and estimates with a significant risk of material adjustment in the next year are discussed in Note 30. (c) Basis of consolidation (i) Subsidiaries Subsidiaries (which are set out in detail in Note 34 on pages 190 and 191) are entities controlled by the Company. Control is achieved when the Company: • has power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it considers that it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including: • the size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; • potential voting rights held by the Company, other vote holders or other parties; • rights arising from other contractual arrangements; and • any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, the results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from the date the Company gains control until the date when the Company ceases to control the subsidiary. (ii) Transactions eliminated on consolidation Intra-Group balances, and any unrealised gains and losses or income and expenses arising from intra-Group transactions, are eliminated in preparing the Consolidated Financial Statements. (iii) Non-controlling interests Non-controlling interests in subsidiaries are identified separately from the Group’s equity therein. Those interests of non-controlling shareholders that are present ownership interests, entitling their holders to a proportionate share of the acquiree’s net assets, are initially measured at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at the initial recognition plus the non- controlling interests’ proportionate share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance. Notes to the Consolidated Financial Statements continued Marshalls plc | Financial Statements 150 Financial Statements 1 Accounting policies continued Significant accounting policies continued (d) Foreign currency transactions Transactions in foreign currencies are translated to Sterling at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the Consolidated Income Statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction and are not retranslated. For the purposes of presenting Consolidated Financial Statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in a foreign exchange translation reserve (attributed to non controlling interests as appropriate). (e) Financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange and fuel pricing risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for speculative purposes. Derivative financial instruments are recognised at fair value and transaction costs are recognised in the Income Statement when incurred. The gain or loss on remeasurement to fair value is recognised immediately in the Consolidated Income Statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged (see accounting policy (f)). Classification and measurement The classification of financial assets is based both on the business model within which the asset is held and the contractual cash flow characteristics of the asset. There are three principal classification categories for financial assets that are debt instruments: (i) amortised cost; (ii) fair value through other comprehensive income (“FVTOCI”); and (iii) fair value through profit or loss (“FVTPL”). Under IFRS 9, derivatives embedded in financial assets are not bifurcated but instead the whole hybrid contract is assessed for classification. Under IFRS 9, financial assets can be designated as at FVTPL to mitigate an accounting mismatch. In respect to classification and measurement of financial liabilities, changes in the fair value of a financial liability designated as at FVTPL due to credit risk are presented in other comprehensive income unless such presentation would create or enlarge an accounting mismatch in profit or loss. Impairment Credit losses and expected credit losses are recognised in accordance with IFRS 9. The amount of expected credit losses is updated at each reporting date. The IFRS 9 impairment model has been applied to the Group’s financial assets that are debt instruments measured at amortised cost or FVTOCI. The Group has applied the simplified approach to recognise lifetime expected credit losses for its trade receivables, as required or permitted by IFRS 9. (f) Hedging The Group has elected to apply the IFRS 9 hedge accounting requirements because they align more closely with the Group’s risk management policies. An alignment of the accounting policy applied by Marley has been made following its acquisition on 29 April 2022. From this date, the Marley business has adopted IFRS 9 for hedge accounting and is now fully aligned with the Group’s accounting policy. (i) Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in the Consolidated Statement of Comprehensive Income. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset. For cash flow hedges, other than those covered by the preceding policy statement, the associated cumulative gain or loss is removed from equity and recognised in the Consolidated Income Statement in the same period or periods during which the hedged forecast transaction affects the income or expense. The ineffective part of any gain or loss is recognised immediately in the Consolidated Income Statement. When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship, but the hedged forecast transaction is still expected to occur, it no longer meets the criteria for hedge accounting. The cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised immediately in the Consolidated Income Statement and cash flow hedge accounting is discontinued prospectively. (ii) Economic hedges Where a derivative financial instrument is used to hedge economically the foreign exchange exposure of a recognised monetary asset or liability, no hedge accounting is applied and any gain or loss on the hedging instrument is recognised in the Consolidated Income Statement. 151 Marshalls plc | Annual Report and Accounts 2022 Notes to the Consolidated Financial Statements continued 1 Accounting policies continued Significant accounting policies continued (g) Property, plant and equipment (i) Owned assets Items of property, plant and equipment are stated at cost less accumulated depreciation (see (iii) below) and impairment losses (see accounting policy (m)). The cost of self-constructed assets includes the cost of materials and direct labour and an appropriate proportion of directly attributable production overheads. Certain items of property, plant and equipment that had been revalued to fair value on or prior to 1 January 2004, the date of transition to adopted IFRSs, are measured on the basis of deemed cost, being the revalued amount at the date of that revaluation. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. (ii) Subsequent costs The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied within the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in the Consolidated Income Statement as an expense as incurred. (iii) Depreciation Depreciation is charged to the Consolidated Income Statement on a straight line basis over the estimated useful lives of each part of an item of property, plant and equipment. Depreciation on quarries is based on estimated rates of extraction. This is based on a comparison between the volume of relevant material extracted in any given period and the volume of relevant material available for extraction. Depreciation on leased assets is charged over the shorter of the lease term and their useful economic life. Freehold land is not depreciated. The rates are as follows: Freehold buildings – 2.5 per cent to 5 per cent per annum Fixed plant and equipment – 3.3 per cent to 25 per cent per annum Mobile plant and vehicles – 14 per cent to 30 per cent per annum Quarries – based on rates of extraction The residual values, useful economic lives and depreciation methods are reassessed annually. Assets under construction are not depreciated until they are ready for use. Site preparation costs associated with the development of new stone reserves are capitalised. These costs would include: • costs of clearing the site (including internal and outsourced labour in relation to site workers); • professional fees (including fees relating to obtaining planning consent); • purchase, installation and assembly of any necessary extraction equipment; and • costs of testing whether the extraction process is functioning properly (net of any sales of test products). Depreciation commences when commercial extraction commences and is based on the rate of extraction. In accordance with IAS 37, provision is made for quarry restoration where a legal or constructive obligation exists, it is probable that an outflow of economic benefits will occur and the financial cost of restoration work can be reliably measured. The lives of quarries are almost always long and it is difficult to estimate the length with any precision. The majority of quarry restoration work is undertaken while extracting minerals from new areas (backfilling) and therefore work can be completed without additional cost. As a result of the particular characteristics of the Group’s quarries, the IAS 37 criteria have not been met to date based on the assets so far acquired and, therefore, provisions are typically not recognised. (h) Intangible assets (i) Goodwill All business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. For acquisitions on or after 1 January 2004, the Group measures goodwill at the acquisition date as: • the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; plus • the fair value of the existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in the Consolidated Income Statement. Costs relating to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. In respect of acquisitions where there is a contingent consideration element, an accrual is created for the estimated amount payable if it is probable that an outflow of economic benefits will be required to settle the obligation and this can be measured reliably. Marshalls plc | Financial Statements 152 Financial Statements 1 Accounting policies continued Significant accounting policies continued (h) Intangible assets continued (i) Goodwill continued On a transaction-by-transaction basis, the Group measures non-controlling interests either at their fair value or at their proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the acquisition date. In respect of acquisitions prior to 1 January 2004, goodwill is included on the basis of its deemed cost, which represents the amount recorded under the Group’s previous accounting framework. The classification and accounting treatment of business combinations that occurred prior to 1 January 2004 were not adjusted in preparing the Group’s opening IFRS balance sheet at 1 January 2004. Goodwill is subsequently stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units and is tested annually for impairment (see accounting policy (m)). In respect of equity-accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee. (ii) Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the Consolidated Income Statement as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process meets the recognition criteria for development expenditure as set out in IAS 38 “Intangible Assets”. The expenditure capitalised includes all directly attributable costs, from the date which the intangible asset meets the recognition criteria, necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Other development expenditure is recognised in the Consolidated Income Statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation (see (v) and impairment losses (see accounting policy (m)). (iii) Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (see (v) and impairment losses (see accounting policy (m)). Expenditure on internally generated goodwill and brands is recognised in the Consolidated Income Statement as an expense as incurred. (iv) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (v) Amortisation Amortisation is charged to the Consolidated Income Statement on a straight line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill is systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The rates applied are as follows: Brands – 20 to 25 years Customer and supplier relationships – 5 to 20 years Patents, trademarks and know-how – 2 to 20 years Development costs – 10 to 20 years Software – 5 to 10 years (vi) Software-as-a-service (“SaaS”) Software-as-a service (“SaaS”) arrangements are service contracts providing the Company with access to the cloud provider’s application software over the contract period. Costs incurred to configure or customise, and the ongoing fees to obtain access to the cloud provider’s application software, are recognised as operating expenses when the services are received. Some of the costs incurred relate to the development of software code that enhances or modifies existing on-premise systems and meets the definition of, and recognition criteria for, an intangible asset. (i) Trade and other receivables Trade and other receivables are stated at initial recognition, at their transaction price (as defined in IFRS 15) if the trade receivables do not contain a significant financial component in accordance with IFRS 15 (or when the entity applies the practical expedient in accordance with paragraph 63 of IFRS 15). Subsequent to initial recognition they are accounted for at amortised cost. (j) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs to completion and of selling expenses. The cost of inventories is based on the first-in, first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity, which were incurred in bringing the inventories to their present location and condition. (k) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the Consolidated Cash Flow Statement. 153 Marshalls plc | Annual Report and Accounts 2022 1 Accounting policies continued Significant accounting policies continued (l) Assets classified as held for sale Assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and expected to be completed within one year from the date of classification, and the asset is available for immediate sale in its present condition. (m) Impairment (i) Impairment review The carrying amounts of the Group’s assets, other than inventories (see accounting policy (j)), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the Consolidated Income Statement. Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash generating units and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis. A cash generating unit is the group of assets identified on acquisition that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of assets or cash generating units is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. (ii) Reversals of impairments An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (n) Share capital (i) Share capital Share capital is classified as equity if it is non-redeemable and any dividends are discretionary, or if it is redeemable but only at the Company’s option. Dividends on share capital classified as equity are recognised as distributions within equity. Non-equity share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders or if dividend payments are not discretionary. Dividends thereon are recognised in the Consolidated Income Statement as a financial expense. (ii) Dividends Dividends on non-equity shares are recognised as a liability and accounted for on an accruals basis. Equity dividends are recognised as a liability in the period in which they are declared (appropriately authorised and no longer at the discretion of the Company). (o) Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the Consolidated Income Statement over the period of the borrowings on an effective interest basis. (p) Leases IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. A right-of-use asset and a corresponding liability are recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low-value assets. The right-of-use asset is initially measured at cost and subsequently measured at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as for the impact of lease modifications, amongst others. Lease liabilities are discounted at an incremental borrowing rate calculated as the rate of interest which the Group would have been able to borrow for a similar term with a similar security of funds necessary to obtain a similar asset in a similar market. The Group’s leases principally comprise commercial vehicles and trailers, forklift trucks, motor vehicles, certain property assets and fixed plant. Short-term leases, with a duration of less than twelve months, are accounted for in accordance with the recognition exemption in IFRS 16 and hence related payments are expensed as incurred. The Group also utilises the option to apply the recognition exemption for low-value assets (with a value of less than the equivalent of $5,000), which means that related payments have been expensed as incurred. In relation to sale and leaseback transactions, sale proceeds, lease payments and any retained right-of-use asset are measured at fair value with any gain or loss arising on disposal recognised in the Income Statement. The fair value of rights that have been retained are included in the carrying amount of any right-of-use asset and recognised at the commencement of the lease. Notes to the Consolidated Financial Statements continued Marshalls plc | Financial Statements 154 Financial Statements 1 Accounting policies continued Significant accounting policies continued (q) Pension schemes (i) Defined benefit schemes The net obligation in respect of the Group’s defined benefit pension scheme is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted. The discount rate is the yield at the balance sheet date on AA credit-rated corporate bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. Net interest is calculated by applying a discount rate to the net defined benefit liability or asset. If the calculation results in a surplus, the resulting asset is measured at the present value of any economic benefits available in the form of refunds from the plan, or reductions in future contributions to the plan. The present value of these economic benefits is discounted by reference to market yields at the balance sheet date on high-quality corporate bonds. When the benefits of the scheme are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the Income Statement in the period of the scheme amendment. Actuarial gains and losses that arise in calculating the Group’s obligation in respect of a plan are recognised immediately within the Consolidated Statement of Comprehensive Income. (ii) Defined contribution schemes Obligations for contributions to defined contribution schemes are recognised as an expense in the Income Statement as incurred. (r) Share-based payment transactions The Group enters into equity settled share-based payment transactions with its employees. In particular, annual awards are made to employees under the Company’s Management Incentive Plan (“MIP”). The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. Where appropriate, the fair value of the options granted is measured using the Black-Scholes option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. Current tax relief is available as shares vest based on the value at the date of vesting. A deferred tax asset is recognised at grant date based on the number of shares expected to be issued, at the value at which they are expected to be issued, proportioned in line with the vesting period. (s) Own shares held by the Employee Benefit Trust Transactions of the Group-sponsored Employee Benefit Trust are included in the Group Financial Statements. The Trust’s purchases of shares in the Company are debited directly to equity and disclosed separately in the balance sheet as “own shares”. (t) Provisions A provision is recognised in the Consolidated Balance Sheet when the Group has a present legal or constructive obligation as a result of a past event, it can be measured reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for. (u) Trade and other payables Trade and other payables are stated at initial recognition, at their fair value and subsequently at amortised cost. (v) Revenue Revenue from the sale of goods is recognised in the Consolidated Income Statement when the performance obligations to customers have been satisfied. Revenue represents the invoiced value of sales to customers less returns, allowances, rebates and value added tax. Revenue is recorded typically on despatch of the Group’s products, when performance obligations to customers are satisfied. Products are usually delivered using the Group’s fleet of delivery vehicles on the same day. Amounts due from customers are payable by customers on standard credit terms and there is no significant financing component or variable consideration within amounts due from customers. There are no significant obligations arising in relation to returns, refunds, warranties or similar obligations. Revenue earned from any contractually distinct installation process is recognised when the Group has fulfilled all its obligations under the installation contract. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due or the possible return of goods or continuing management involvement with the goods. (w) Financial expenses Net financial expenses comprise interest on obligations under the defined benefit pension scheme, the expected return on scheme assets under the defined benefit pension scheme, interest payable on borrowings calculated using the effective interest rate method, dividends on non-equity shares, interest receivable on funds invested, dividend income, foreign exchange gains and losses and gains and losses on hedging instruments that are recognised in the Consolidated Income Statement (see accounting policy (f)). 155 Marshalls plc | Annual Report and Accounts 2022 1 Accounting policies continued Significant accounting policies continued (x) Income tax Income tax on the profit or loss for the year comprises current and deferred taxation. Income tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised directly in other comprehensive income or in equity, in which case it is recognised accordingly. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred taxation is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred taxation provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that are expected to apply when the temporary difference reverses, based on rates that have been enacted or substantively enacted at the balance sheet date. A deferred taxation asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred taxation assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. (y) Segment reporting IFRS 8 “Operating Segments” requires operating segments to be identified on the basis of discrete financial information about components of the Group that are regularly reviewed by the Group’s Chief Operating Decision Maker (“CODM”) to allocate resources to the segments and to assess their trading performance. As far as Marshalls is concerned, the CODM is regarded as being the Board. Following the acquisition of Marley, the Group has reviewed its reporting segments. The Directors have concluded that going forward the Group will report under three reporting segments, namely Marshalls Landscape Products, Marshalls Building Products and Marley Roofing Products. (z) Alternative performance measures and adjusting items The Group uses alternative performance measures (“APMs”) which are not defined or specified under IFRS. The Group believes that these APMs, which are not considered to be a substitute for IFRS measures, provide additional helpful information. APMs are consistent with how business performance is planned, reported and assessed internally by management and the Board and provide additional comparative information. The prior period alternative performance measures have been restated to reflect the amortisation of acquired intangible assets in adjusting items. Adjusting items Adjusting items are items that are unusual because of their size, nature or incidence and which the Directors consider should be disclosed separately to enable a full understanding of the Group’s results and to demonstrate the Group’s capacity to deliver dividends to shareholders. Adjusted items should not be regarded as a complete picture of the Group’s financial performance, which is presented in the total results. For the year ended 31 December 2022 adjusting items include various charges that relate to the acquisition of Marley Group plc on 29 April 2022. These include professional fees and other transaction costs relating to the acquisition, the unwinding of an inventory fair value adjustments, the amortisation of acquired intangible assets and an increase in the estimate of contingent consideration payable in respect of Viridian Solar Limited. Adjusting items also include redundancy costs and asset impairments following a restructuring exercise to reduce production capacity and the impairment of certain assets in the Group’s Belgian subsidiary. Further details have been disclosed in Note 4. For the year ended 31 December 2021, adjusting items include the disposal of the Group’s site at Ryton, significant asset impairments, the costs of closing the site at Stoke and exiting the manufacture of cast stone and the special “thank you” bonus paid to employees in recognition of their contributions during the COVID-19 pandemic. Adjusting items in 2021 also included an accounting charge relating to additional consideration for the acquisition of CPM, a non-cash finance charge resulting from the receipt of a Counsel’s legal opinion in relation to certain historic pension issues and the amortisation of acquired intangible assets. Further details have been disclosed in Note 4. Notes to the Consolidated Financial Statements continued Marshalls plc | Financial Statements 156 Financial Statements 1 Accounting policies continued Significant accounting policies continued (z) Alternative performance measures and adjusting items continued The APMs used by the Group together with an explanation of how they are calculated and why we use them is set out below. Alternative Performance Measure Definition and purpose Like-for-like revenue growth Like-for-like revenue growth is revenue growth generated by the business assuming that acquired businesses had been part of the Group for the comparative period in the previous year. This provide users with an understanding about revenue growth that is not impacted by acquisitions. Adjusted operating profit, adjusted profit before tax, adjusted profit after tax and adjusted earnings per share These performance measures are all calculated using the relevant statutory measure and are stated after adding back adjusting items. The Group’s accounting policy on adjusting items is set out on page 156. The Directors assess the performance of the Group using these measures including when considering dividend payments. EBITA and adjusted proforma EBITA EBITA is earnings before interest, taxation and amortisation and provides users with further information about the profitability of the business before financing costs, taxation and amortisation. Adjusted proforma EBITA stated after adding back adjusting items and including EBITA from 1 January to 28 April 2022 for Marley to give users information that it helpful in assessing future performance potential. EBITDA and adjusted EBITDA EBITDA is earnings before interest, taxation, depreciation and amortisation and provides users with further information about the profitability of the business before financing costs, taxation and non-cash charges. Adjusted EBITDA is EBITDA stated after adding back adjusting items. It provides users with additional information about the performance of the Group. Adjusted proforma pre-IFRS 16 EBITDA Adjusted proforma pre-IFRS 16 EBITDA is earnings before interest, taxation, depreciation, amortisation (but not right-of-use asset depreciation), and after adding back adjusting items and profit or losses on the sale of property, plant and equipment and including EBITDA from 1 January to 28 April 2022 for Marley and is used to assess compliance with covenants in the Group’s bank facility. Adjusted proforma return on capital employed Adjusted proforma return on capital employed is calculated as adjusted proforma EBITA divided by shareholders’ funds plus net debt at the period end. It is designed to give further information about the returns being generated by the Group as a proportion of capital employed. The use of adjusted proforma EBITA ensures that the return is matched to the higher value of capital employed following the Marley acquisition. Net debt Net debt comprises cash at bank and in hand, bank loans and lease liabilities. It shows the overall net indebtedness of the Group. Pre-IFRS 16 net debt Net debt comprises cash at bank and in hand and bank loans. It shows the overall net indebtedness of the Group excluding leases and is used is used in assessing compliance with covenants in the Group’s bank facility. Pre-IFRS 16 net debt to adjusted proforma EBITDA This is calculated by dividing pre-IFRS 16 net debt by adjusted proforma pre-IFRS 16 EBITDA to provide a measure of leverage. It is used in assessing compliance with the covenants in the Group’s bank facility. Adjusted operating cash flow This measure is net cash flow from operating activities stated after adding back adjusting items paid, net financial expenses paid and taxation paid. It is used to calculate the ratio of adjusted operating cash flow to adjusted EBITDA. Ratio of adjusted operating cash flow to adjusted EBITDA This measure is calculated by dividing adjusted operating cash flow by adjusted EBITDA. Adjusted operating cash flow is calculated by adding back adjusting items paid, net financial expenses paid and taxation paid. It illustrates the rate of conversion of profitability into cash flow. 157 Marshalls plc | Annual Report and Accounts 2022 1 Accounting policies continued Significant accounting policies continued (z) Alternative performance measures and adjusting items continued The following table sets out statutory operating profit, profit before tax and profit after tax and the impact of adding back adjusting items. Details of the adjusting items are set out in Note 4. 2021 2022 (as restated) £’000 £’000 Operating profit 47,912 76,223 Adjusting items (Note 4) 53,220 1,148 Adjusted operating profit 101,132 77,371 Profit before tax 37,197 69,322 Adjusting items (Note 4) 53,220 3,961 Adjusted profit before tax 90,417 73,283 Profit for the financial year 26,541 54,898 Adjusting items (net of tax) (Note 4) 46,815 3,355 Adjusted profit after tax 73,356 58,253 Earnings per share after adding back adjusting items Basic (pence) 31.3p 29.2p Diluted (pence) 31.1p 29.0p A reconciliation of IFRS reported income statement measures to income statement APMs is set out below. 2021 2022 (as restated) £’000 £’000 Operating profit 47,912 76,223 Adjusting items (Note 4) 53,220 1,148 Adjusted operating profit 101,132 77,371 Amortisation (excluding amortisation of acquired intangible assets) 1,765 1,965 Adjusted EBITA 102,897 79,336 Depreciation 33,145 27,738 Adjusted EBITDA 136,042 107,074 Marley pre-acquisition EBITDA 18,099 — Profit on sale of property, plant and equipment (1,207) (47) Right-of-use asset depreciation (11,328) (11,315) Adjusted proforma pre-IFRS 16 EBITDA 141,606 95,712 A reconciliation of operating profit to adjusted EBITDA is set out below. 2021 2022 (as restated) £’000 £’000 Operating profit 47,912 76,223 Depreciation and amortisation 42,264 30,916 Reported EBITDA 90,176 107,139 Adjusting items (excluding amortisation of acquired intangible assets) 45,866 (65) Adjusted EBITDA 136,042 107,074 A reconciliation of operating profit to adjusted proforma EBITA is set out below. 2021 2022 (as restated) £’000 £,000 Operating profit 47,912 76,233 Amortisation 9,119 3,178 EBITA 57,031 79,401 Adjusting items (excluding amortisation of acquired intangible assets) 45,866 (65) Adjusted EBITA 102,897 79,336 Marley pre-acquisition EBITA 16,357 — Adjusted proforma EBITA 119,255 79,336 Notes to the Consolidated Financial Statements continued Marshalls plc | Financial Statements 158 Financial Statements 1 Accounting policies continued Significant accounting policies continued (z) Alternative performance measures and adjusting items continued Disclosures required under IFRS are referred to as on a reported basis. Disclosures referred to on an after adding back adjusting items basis are restated and are used to provide additional information and a more detailed understanding of the Group’s results. Certain financial information on a reported basis and after adding back adjusting items is set out below. Adjusted Pre-IFRS 16 proforma 2022 Adjusted 2022 As reported 2022 Adjusted (as restated) 2021 As reported (as restated) 2021 EBITDA (£’000) 141,606 136,042 90,176 107,074 107,139 Net debt (£’000) 190,771 236,605 236,605 41,123 41,123 Net debt: EBITDA 1.35 1.7 2.6 0.4 0.4 EPS (pence) n/a 31.3 11.4 29.2 27.5 Marley Group Limited was acquired on 29 April 2022 and the following reconciliation discloses the impact of the revenue in the comparative post-acquisition period in order to provide a like-for-like comparison of revenue. 2022 2021 Increase £’000 £’000 % Reported revenue Marshalls 587,146 589,264 — Marley 132,227 124,935 6 Like-for-like revenue 719,373 714,199 1 Marley revenue is as reported for 2022 and in 2021 it represents revenue for period from 29 April to 31 December. ROCE Reported ROCE is defined as EBITA divided by shareholders’ funds plus net debt. After adding back Adjusted adjusting items proforma Adjusted As reported (as restated) As reported 2022 2022 2022 2021 2021 £’000 £’000 £’000 £’000 £’000 EBITA 119,255 102,897 57,031 79,336 79,401 Shareholders’ funds 661,069 661,069 661,069 344,317 344,317 Net (cash)/debt 236,605 236,605 236,605 41,123 41,123 Capital employed 897,674 897,674 897,674 385,440 385,440 ROCE 13.3% 11.5% 6.4% 20.6% 20.6% 159 Marshalls plc | Annual Report and Accounts 2022 1 Accounting policies continued Significant accounting policies continued (z) Alternative performance measures and adjusting items continued Net debt Net debt comprises cash at bank and in hand, bank loans and leasing liabilities. An analysis of net debt is provided in Note 26. Net debt on a pre-IFRS 16 basis has been disclosed to provide additional information and to align with the reporting required for the Group’s banking covenants. Net debt on both a reported basis and on a pre-IFRS 16 basis is set out below: 2022 £’000 2021 £’000 Net debt on a reported basis 236,605 41,123 IFRS 16 leases (45,834) (41,198) Net debt/(cash) on a pre-IRS 16 basis 190,771 (75) The ratio of adjusted operating cash flow to adjusted EBITDA The ratio of adjusted operating cash flow to adjusted EBITDA is calculated as set out below: 2022 £’000 2021 £’000 Net cash flows from operating activities 85,343 65,536 Adjusting items paid 17,410 2,820 Net financial expenses paid 9,909 3,534 Taxation paid 11,592 13,527 Adjusted operating cash flow 124,254 85,417 Adjusted EBITDA 136,042 107,074 Ratio of adjusted operating cash flow to adjusted EBITDA 91.3% 79.8% 2 Segmental analysis IFRS 8 “Operating Segments” requires operating segments to be identified on the basis of discrete financial information about components of the Group that are regularly reviewed by the Group’s Chief Operating Decision Maker (“CODM”) to allocate resources to the segments and to assess their performance. As far as Marshalls plc is concerned the CODM is regarded as being the Board. Following the acquisition of Marley, the Group has reviewed its reporting segments. The Directors have concluded that going forward the Group will report under three reporting segments, namely Landscape Products, Building Products and Roofing Products. Marshalls Landscape Products comprises the Group’s Public Sector and Commercial and Domestic landscape business, Landscape Protection and the International businesses. Marshalls Building Products comprises the Group’s Civil and Drainage, Bricks and Masonry, Mortars and Screeds and Aggregate businesses. Segment revenues and results 2022 2021 Landscape Building Roofing Landscape Building Roofing Products Products Products Total Products Products Products Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Total revenue 394,075 195,445 132,227 721,747 424,807 167,358 — 592,165 Inter-segment revenue (26) (2,348) — (2,374) (21) (2,880) — (2,901) External revenue 394,049 193,097 132,227 719,373 424,786 164,478 — 589,264 Segment operating profit 45,335 26,797 34,452 106,584 62,412 19,640 — 82,052 Unallocated central costs (5,452) (4,681) Operating profit before adjusting items 101,132 7 7,371 Adjusting items (53,220) (1,148) Operating profit 47,912 76,223 Net finance charges (Note 6) (10,715) (6,901) Profit before tax 37,197 69,322 Taxation (Note 7) (10,656) (14,424) Profit after tax 26,541 54,898 Following a change to the reporting segments, the comparative figures are being restated to ensure consistent classification with the analysis reported for the year ended December 2022. The change reflects the new internal performance reports and management responsibility framework. The Group has two customers which each contributed more than ten per cent of total revenue in the current and prior year. The accounting policies of the three operating segments are the same as the Group’s accounting policies. Segment profit represents the profit earned without allocation of certain central administration costs that are not capable of allocation. Centrally administered overhead costs that relate directly to the reportable segment are included within the segment’s results. Notes to the Consolidated Financial Statements continued Marshalls plc | Financial Statements 160 Financial Statements 2 Segmental analysis continued Segment assets 2022 2021 * £’000 £’000 Property, plant and equipment, right-of-use assets, intangible assets and inventory: Landscape Products 260,450 256,933 Building Products 148,400 155,883 Roofing Products 593,106 — Total segment property, plant and equipment, right-of-use assets, intangible assets and inventory 1,001,956 412,816 Unallocated assets 206,910 183,156 Consolidated total assets 1,208,866 595,972 Following a change to the reporting segments, the comparative figures are being restated to ensure consistent classification with the analysis reported for the year ended December 2022. The change reflects the new internal performance reports and management responsibility framework. For the purpose of monitoring segment performance and allocating resources between segments, the Group’s CODM monitors the property, plant and equipment, right-of-use assets, intangible assets and inventory. Assets used jointly by reportable segments are not allocated to individual reportable segments. Other segment information Depreciation and amortisation Property, plant and equipment, right-of-use asset and intangible asset additions 2022 2021 * 2022 2021 * £’000 £’000 £’000 £’000 Landscape Products 22,263 20,491 37,127 21,048 Building Products 8,786 9,212 4,602 6,621 Roofing Products 3,861 — 1,957 — 34,910 29,703 43,686 27,669 Included in adjusting items (Note 4) 7,354 1,213 — — 42,264 30,916 43,686 27,669 Following a change to the reporting segments, the comparative figures are being restated to ensure consistent classification with the analysis reported for the year ended December 2022. The change reflects the new internal performance reports and management responsibility framework. Depreciation and amortisation includes £7,354,000 of amortisation of intangible assets arising from the purchase price allocation exercises comprising £100,000 (2021: £100,000) in Marshalls Landscape Products, £1,113,000 (2021: £1,113,000) in Marshalls Building Products and £6,141,000 in Marley Roofing Products. The amortisation has been treated as an adjusting item (Note 4). Geographical destination of revenue 2022 2021 £’000 £’000 United Kingdom 687,903 556,110 Rest of the world 31,470 33,154 719,373 589,264 The Group’s revenue is subject to seasonal fluctuations resulting from demand from customers. In particular, demand is higher in the summer months. 161 Marshalls plc | Annual Report and Accounts 2022 3 Net operating costs 2021 2022 (as restated) £’000 £’000 Raw materials and consumables 267,254 246,478 Changes in inventories of finished goods and work in progress 6,625 (15,762) Personnel costs (Note 5) 155,521 130,903 Depreciation of property, plant and equipment 21,817 16,423 Depreciation of right-of-use assets 11,328 11,315 Amortisation of intangible assets 1,765 1,965 Own work capitalised (3,108) (2,758) Other operating costs 159,779 124,665 Redundancy and other costs 498 398 Operating costs 621,479 513,627 Other operating income (2,031) (1,687) Net gain on asset and property disposals (1,207) (47) Net operating costs before adjusting items 618,241 511,893 Adjusting items (Note 4) 53,220 1,148 Total net operating costs 671,461 513,041 2022 2021 £’000 £’000 Net operating costs include: Auditor’s remuneration (see below) 948 340 Short-term and low-value lease costs 7,010 5,671 Research and development costs 3,457 3,098 In respect of the year under review, Deloitte LLP carried out work in relation to: 2022 2021 £’000 £’000 Audit of Financial Statements of Marshalls plc 60 50 Audit of Financial Statements of subsidiaries of the Company 853 265 Half yearly review of Marshalls plc 35 25 948 340 4 Adjusting items 2021 2022 (as restated) £’000 £’000 Transaction related costs (i) 14,887 — Amortisation of acquired intangible assets (ii) 7,354 1,213 Unwind of inventory fair value adjustment (iii) 3,900 — Contingent consideration (iv) 3,928 — Redundancy and other closure costs (v) 4,173 1,175 Impairment of property, plant and equipment (vi) 8,794 1,666 Impairment of assets in the Belgian subsidiary (vii) 10,184 — Additional special COVID-19 bonus paid to all colleagues (viii) — 2,216 Additional consideration to the CPM vendors (ix) — 3,750 Net gain on sale of significant surplus site (x) — (8,872) Total adjusting items within operating costs (Note 3) 53,220 1,148 Adjusting interest expense on defined benefit pension scheme (xi)(Note 6) — 2,813 Total adjusting items before taxation 53,220 3,961 Current tax on adjusting items (Note 7) (1,599) 97 Deferred tax on adjusting items (Note 7) (4,806) (703) Total adjusting items after taxation 46,815 3,355 Notes: (i) Transaction related costs relating to the acquisition of Marley Group plc. These comprise the fees charged by professional advisers. (ii) Amortisation of acquired intangible assets is principally in respect of values recognised for the Marley brand and its customer relationships. (iii) The unwind of the inventory fair value adjustment relates to the fair value uplift of the inventory as part of the Marley acquisition that has subsequently been sold. This item has been shown as an adjusting item to align with the internal reporting and to present a margin consistent with that which would have been reported in the absence of a recent acquisition transaction. Notes to the Consolidated Financial Statements continued Marshalls plc | Financial Statements 162 Financial Statements 4 Adjusting items continued Notes continued: (iv) The additional contingent consideration relates to the reassessment of the amounts that will become payable to vendors arising in relation to Marley’s acquisition of Viridian Solar Limited in 2021. (v) 2022 redundancy and other closure costs relate a restructuring exercise to rightsize production capacity. The 2021 redundancy and other closure costs relate to the Edenhall Stoke site, following a network review, was used to manufacture cast stone and the Group decided to exit this market. (vi) The 2022 asset impairment relates to the restructuring exercise to reduce capacity and includes the mothballing of manufacturing plant at the Group’s site at Sandy and the closure of certain facilities elsewhere in the network. The 2021 write-off of property, plant and equipment relates to assets at our St. Ives site that are being dismantled to allow construction of the dual block plant. (vii) Impairment of property, plant and equipment (£1,072,000), intangible assets (£731,000), right-of-use assets (£3,445,000) and inventory (£4,936,000) in the Belgian subsidiary resulting from an impairment review carried out in response to a downturn in the business performance in 2022. These assets have been impaired to their fair value, this being higher than the value in use. This value is based upon the Directors’ assessment and consideration of the observable market information relating to such assets. (viii) The additional special bonus payable to employees as a thank you for their support during the pandemic. (ix) The additional consideration to the CPM vendors represents an accounting charge relating to the acquisition of CPM following the agreement reached with the vendors to release of funds initially set aside in escrow, following the identification of an under-funded pension scheme of a related company. This risk is now considered to be remote and £3,750,000 will be released from escrow and paid to the vendors as additional consideration. This results in a charge to the Income Statement because it falls outside the hindsight period of twelve months as set out under IAS. (x) The net gain on a significant surplus site relates to the sale of Ryton near Coventry. (xi) The interest expense on defined benefit pension scheme relates to a technical non-cash finance charge resulting from the receipt of Counsel’s opinion on certain historic benefit issues (Note 6). 5 Personnel costs 2022 2021 £’000 £’000 Personnel costs (including amounts charged in the year in relation to Directors): Wages and salaries 126,163 105,692 Social security costs 15,089 12,309 Share-based payments 1,254 2,303 Contributions to defined contribution pension scheme 13,015 10,599 Included in net operating costs (Note 3) 155,521 130,903 Personnel costs relating to the special COVID-19 bonus awarded to all colleagues (Note 4) — 2,216 Personnel costs relating to redundancy and other costs (Note 3) 498 398 Personnel costs relating to adjusting items (Note 4) 2,370 159 Total personnel costs 158,389 133,676 2022 2021 £’000 £’000 Remuneration of Directors: Salary 1,311 781 Other benefits 55 39 MIP Element A bonus 152 582 MIP Element B bonus 206 349 Amounts receivable under the MIP at the end of the first cycle 111 621 Salary supplement in lieu of pension 128 104 Non-Executive Directors’ fees and fixed allowances 477 422 2,440 2,898 The aggregate of emoluments and amounts receivable under the MIP of the highest paid Director was £1,002,000 (2021: £1,685,000), including a salary supplement in lieu of pension of £93,000 (2021: £80,000). 163 Marshalls plc | Annual Report and Accounts 2022 Notes to the Consolidated Financial Statements continued 5 Personnel costs continued There are no Directors to whom retirement benefits are accruing in respect of qualifying services. As set out in the Annual Remuneration Report on page 120, the Executive Directors receive a salary supplement in lieu of pension equal to their contractual entitlements. Further details of Directors’ remuneration, share options, long-term incentive plans and Directors’ pension entitlements are disclosed in the Remuneration Committee Report on pages 100 to 130. The average monthly number of persons employed by the Group during the year was: 2022 2021 Number Number Continuing operations 3,293 2,643 6 Financial expenses and income 2022 2021 £’000 £’000 (a) Financial expenses Net interest expense on defined benefit pension scheme 97 439 Interest expense on bank loans 8,238 1,762 Interest expense on lease liabilities 2,381 1,889 10,716 4,090 (b) Adjusting items Adjusting interest expense on defined benefit pension scheme (Note 4) — 2,813 10,716 6,903 (c) Financial income Interest receivable and similar income 1 2 Net interest expense on the defined benefit pension scheme is disclosed net of Company recharges for scheme administration (Note 20). 7 Income tax expense 2022 2021 £’000 £’000 Current tax expense Current year 11,558 11,360 Adjustments for prior years (568) (2,147) 10,990 9,213 Deferred taxation expense Origination and reversal of temporary differences: Current year 757 6,519 Adjustments for prior years (1,091) (1,308) Total tax expense 10,656 14,424 Current tax on adjusting items (Note 4) 1,599 (97) Deferred tax on adjusting items (Note 4) 4,806 703 Total tax expenses after adding back adjusting items 17,061 15,030 2022 2022 2021 2021 % £’000 % £’000 Reconciliation of effective tax rate Profit before tax 100.0 37,197 100.0 69,322 Tax using domestic corporation tax rate 19.0 7,067 19.0 13,171 Impact of capital allowances in excess of depreciation (13.9) (5,164) (3.3) (2,260) Short-term timing differences 2.5 925 (0.1) (74) Adjustment to tax charge in prior year (1.5) (568) (3.1) (2,147) Expenses not deductible for tax purposes 23.5 8,730 0.8 523 Corporation tax charge for the year 29.6 10,990 13.3 9,213 Impact of capital allowances in excess of depreciation 13.7 5,101 2.3 1,610 Short-term timing differences — 23 — (22) Pension scheme movements (0.1) (52) 0.9 659 Adjusting items (12.9) (4,806) (0.2) (152) Other items 0.4 158 (0.7) (481) Adjustment to tax charge in prior year (2.9) (1,091) (1.9) (1,308) Impact of the change in the rate of corporation tax on deferred taxation 0.9 333 7.1 4,905 Total tax charge for the year 28.7 10,656 20.8 14,424 Marshalls plc | Financial Statements 164 Financial Statements 7 Income tax expense continued The net amount of deferred taxation credited to the Consolidated Statement of Comprehensive Income in the year was £101,000 (2021: debited £6,547,000). The majority of the Group’s profits are earned in the UK with the standard rate of corporation tax being 19 per cent for the year to 31 December 2022. The UK corporation tax rate will increase to 25 per cent from 2023 and the deferred taxation liability at 31 December 2022 has been calculated at 25 per cent, which is the rate at which the deferred tax is expected to unwind in the future. Capital allowances are tax reliefs provided in law for the expenditure the Group makes on fixed assets. The rates are determined by Parliament annually, and spread the tax relief due over a number of years. This contrasts with the accounting treatment for such spending, where the expenditure on fixed assets is treated as an investment with the cost then being spread over the anticipated useful life of the asset, and/or impaired if the value of such assets is considered to have reduced materially. The different accounting treatment of fixed assets for tax and accounting purposes is one reason why the taxable income of the Group is not the same as its accounting profit. During the year ended 31 December 2022 the capital allowances due to the Group exceeded the depreciation charge for the year. Short-term timing differences arise on items such as depreciation in stock and share-based payments because the treatment of such items is different for tax and accounting purposes. These differences usually reverse in the years following those in which they arise, as is reflected in the deferred tax charge in the Financial Statements. Adjustments to tax charges arising in earlier years arise because the tax charge to be included in a set of accounts has to be estimated before those Financial Statements are finalised. Such charges therefore include some estimates that are checked and refined before the Group’s corporation tax returns for the year are submitted to HM Revenue & Customs, which may reflect a different liability as a result. Some expenses incurred may be entirely appropriate charges for inclusion in the Financial Statements but are not allowed as a deduction against taxable income when calculating the Group’s tax liability for the same accounting period. Examples of such disallowable expenditure include business entertainment costs, some legal expenses and a significant proportion of the transaction costs arising on the acquisition of Marley. The prior year adjustment in corporation tax includes the reversal of tax provisions made in prior years which are no longer required, including provisions made on acquisition of subsidiaries. As can be seen from the tax reconciliation, the process of adjustment that can give rise to current year adjustments to tax charges arising in previous periods can also give rise to revisions in prior year deferred tax estimates. This is why the current year adjustments to the current year charge for capital allowances and short-term timing differences are not exactly replicated in the deferred taxation charge for the year. The Group’s overseas operations comprise a manufacturing operation in Belgium and sales and administration offices in the USA and China. The sales of these units, in total, were under 5 per cent of the Group’s turnover in the year ended 31 December 2022. In total, the trading profits were not material and a minimal amount of tax is due to be paid overseas . 8 Earnings per share Basic earnings per share from total operations of 11.4 pence (2021: 27.5 pence) per share is calculated by dividing the profit attributable to Ordinary Shareholders for the financial year, after adjusting for non-controlling interests, of £26,791,000 (2021: £54,806,000) by the weighted average number of shares in issue during the period of 235,388,001 (2021: 199,094,964). Basic earnings per share after adding back adjusting items of 31.3 pence (2021: 29.2 pence) per share is calculated by dividing the adjusted profit attributable to Ordinary Shareholders for the financial year, after adjusting for non-controlling interests, of £73,606,000 (2021: £58,161,000) by the weighted average number of shares in issue during the period of 235,388,001 (2021: 199,094,964). Profit attributable to Ordinary Shareholders 2021 2022 (as restated) £’000 £’000 Profit before adding back adjusting items 73,356 58,253 Adjusting items (46,815) (3,355) Profit for the financial year 26,541 54,898 Profit attributable to non-controlling interests 250 (92) Profit attributable to Ordinary Shareholders 26,791 54,806 165 Marshalls plc | Annual Report and Accounts 2022 Notes to the Consolidated Financial Statements continued 8 Earnings per share continued Weighted average number of Ordinary Shares 2022 2021 Number Number Number of issued Ordinary Shares 252,968,728 200,052,157 Effect of shares issued during the period (17,299,649) — Effect of shares transferred into Employee Benefit Trust (281,078) (957,193) Weighted average number of Ordinary Shares at the end of the year 235,388,001 199,094,964 Diluted earnings per share from total operations of 11.3 pence (2021: 27.4 pence) per share is calculated by dividing the profit for the financial year, after adjusting for non-controlling interests, of £26,791,000 (2021: £54,806,000) by the weighted average number of shares in issue during the period of 235,388,001 (2021: 199,094,964) plus potentially dilutive shares of 1,213,042 (2021: 1,222,847), which totals 236,601,043 (2021: 200,317,811). Diluted earnings per share after adding back adjusting items of 31.1 pence (2021: 29.0 pence) per share is calculated by dividing the adjusted profit for the financial year, after adjusting for non-controlling interests, of £73,606,000 (2021: £58,161,000) by the weighted average number of shares in issue during the period of 235,388,001 (2021: 199,094,964) plus potentially dilutive shares of 1,213,042 (2021: 1,222,847), which totals 236,601,043 (2021: 200,317,811). Weighted average number of Ordinary Shares (diluted) 2022 2021 Number Number Weighted average number of Ordinary Shares 235,388,001 199,094,964 Potentially dilutive shares 1,213,042 1,222,847 Weighted average number of Ordinary Shares (diluted) 236,601,043 200,317,811 9 Dividends After the balance sheet date, a final dividend of 9.9 pence was proposed by the Directors. This dividend has not been provided for and there are no income tax consequences. Pence per 2022 2021 qualifying share £’000 £’000 2022 final 9.9 25,021 2022 interim 5.7 14,406 15.6 39,427 2021 final 9.6 24,263 2021 interim 4.7 9,362 14.3 33,625 The following dividends were approved by the shareholders and recognised in the Financial Statements: Pence per 2022 2021 qualifying share £’000 £’000 2022 interim 5.7 14,406 2021 final 9.6 24,263 15.3 38,669 2021 interim 4.7 9,362 2020 final 4.3 8,562 9.0 17,924 The Board recommends a 2022 final dividend of 9.9 pence per qualifying Ordinary Share (amounting to £25,021,000, to be paid on 3 July 2023 to shareholders registered at the close of business on 2 June 2023. The ex-dividend date will be 1 June 2023. Marshalls plc | Financial Statements 166 Financial Statements 10 Property, plant and equipment Land and Plant, machinery buildings Quarries and vehicles Total £’000 £’000 £’000 £’000 Cost At 1 January 2021 96,492 29,474 388,679 514,645 Exchange differences (12) — (420) (432) Additions 1,327 — 19,231 20,558 Reclassified as held for sale (1,536) — (1,566) (3,102) Reclassified to intangibles — — (837) (837) Reclassifications 2,305 (2,305) — — Disposals (7,175) (73) (17,567) (24,815) At 31 December 2021 91,401 27,096 387,520 506,017 At 1 January 2022 91,401 27,096 387,520 506,017 Exchange differences 10 — 383 393 Additions 1,305 — 27,110 28,415 Acquisition of subsidiary 66,321 — 29,869 96,190 Reclassifications (444) 444 — — Disposals (7) (1,388) (3,558) (4,953) At 31 December 2022 158,586 26,152 441,324 626,062 Depreciation and impairment losses At 1 January 2021 44,501 9,285 281,458 335,244 Depreciation charge for the year 2,660 368 13,395 16,423 Exchange differences (2) — (368) (370) Impairments 188 — 45 233 Reclassified as held for sale (413) — (829) (1,242) Reclassified to intangibles — — (219) (219) Reclassifications 28 (28) — — Disposals (3,038) (23) (14,922) (17,983) At 31 December 2021 43,924 9,602 278,560 332,086 At 1 January 2022 43,924 9,602 278,560 332,086 Depreciation charge for the year 1,929 555 19,333 21,817 Exchange differences 2 — 349 351 Impairments 422 1,403 8,041 9,866 Disposals — (1,241) (3,268) (4,509) At 31 December 2022 46,277 10,319 303,015 359,611 Net book value At 1 January 2021 51,991 20,189 107,221 179,401 At 31 December 2021 47,477 17,494 108,960 173,931 At 31 December 2022 112,309 15,833 138,309 266,451 Mineral reserves and associated land have been separately disclosed under the heading of “Quarries”. The impairment represents the assets being written down to fair value less costs to sell of £8,794,000 in relation to a restructuring exercise to reduce capacity at Sandy and certain facilities elsewhere in the network and £1,072,000 in relation to the Belgian subsidiary (Note 4). During the year ended 31 December 2022, land and buildings with a book value of £nil (2021: £1,860,000) have been reclassified as held for sale in accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”. Group cost of land and buildings and plant and machinery includes £708,000 (2021: £318,000) and £24,434,000 (2021: £8,534,000) respectively for assets in the course of construction. Capital commitments 2022 2021 £’000 £’000 Capital expenditure that has been contracted for but for which no provision has been made in the Consolidated Financial Statements 4,695 14,480 Depreciation charge The depreciation charge is recognised in the following line items in the Consolidated Income Statement: 2022 2021 £’000 £’000 Net operating costs (Note 3) 21,817 16,423 167 Marshalls plc | Annual Report and Accounts 2022 Notes to the Consolidated Financial Statements continued 11 Right-of-use assets Land and buildings Plant and equipment Total £’000 £’000 £’000 Cost At 1 January 2021 24,931 41,371 66,302 Additions 625 3,601 4,226 Disposals (2,679) (4,198) (6,877) Modifications (1,338) (118) (1,456) At 31 December 2021 21,539 40,656 62,195 At 1 January 2022 21,539 40,656 62,195 Additions 1,726 11,235 12,961 Acquisition of subsidiary 435 989 1,424 Disposals (4,019) (8,409) (12,428) Modifications 235 705 940 At 31 December 2022 19,916 45,176 65,092 Depreciation and impairment losses At 1 January 2021 4,045 17,267 21,312 Depreciation change for the year 2,212 9,103 11,315 Disposals (2,679) (4,198) (6,877) At 31 December 2021 3,578 22,172 25,750 At 1 January 2022 3,578 22,172 25,750 Depreciation change for the year 2,555 8,773 11,328 Impairments 3,208 237 3,445 Disposals (4,019) (8,409) (12,428) At 31 December 2022 5,322 22,773 28,095 Net book value At 1 January 2021 20,886 24,104 44,990 At 31 December 2021 17,961 18,484 36,445 At 31 December 2022 14,594 22,403 36,997 The impairment of £3,445,000 represents the assets being written down to fair value less cost to sell in relation to the Belgium subsidiary (Note 4). Depreciation charge The depreciation charge is recognised in the following line items in the Consolidated Income Statement: 2022 2021 £’000 £’000 Net operating costs (Note 3) 11,328 11,315 Lease commitments 2022 2021 £’000 £’000 Lease commitments that have been contracted for but have not yet commenced 22,850 1,513 Marshalls plc | Financial Statements 168 Financial Statements 12 Intangible assets Patents, trademarks Customer Supplier and Development Goodwill Brand relationships relationships know-how costs Software Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Cost At 1 January 2021 87,426 — 12,811 1,629 1,760 159 20,374 124,159 Additions — — — — — 139 2,746 2,885 Reclassified from property, plant and equipment — — — — — 342 495 837 At 31 December 2021 87,426 — 12,811 1,629 1,760 640 23,615 127, 881 At 1 January 2022 87,426 — 12,811 1,629 1,760 640 23,615 127,881 Additions — — — — — — 2,310 2,310 Recognised on acquisition of subsidiary 244,119 82,760 145,400 — — — — 472,279 At 31 December 2022 331,545 82,760 158,211 1,629 1,760 640 25,925 602,470 Amortisation and impairment losses At 1 January 2021 8,912 — 5,121 1,166 1,558 133 12,590 29,480 Amortisation for the year — — 1,060 103 42 88 1,885 3,178 Reclassified from property, plant and equipment — — — — — 144 75 219 At 31 December 2021 8,912 — 6,181 1,269 1,600 365 14,550 32,877 At 1 January 2022 8,912 — 6,181 1,269 1,600 365 14,550 32,877 Amortisation for the year — 2,381 4,820 103 42 90 1,683 9,119 Impairments — — — — — — 731 731 At 31 December 2022 8,912 2,381 11,001 1,372 1,642 455 16,964 42,727 Carrying amounts At 1 January 2021 78,514 — 7,690 463 202 26 7,784 94,679 At 31 December 2021 78,514 — 6,630 360 160 275 9,065 95,004 At 31 December 2022 322,633 80,379 147, 210 257 118 185 8,961 559,743 All goodwill has arisen from business combinations. The carrying amount of goodwill is allocated across cash generating units (“CGUs”) and these CGUs are independent sources of income streams and represent the lowest level within the Group at which the associated goodwill is monitored for management purposes. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value-in-use calculations and at both 31 December 2022 and 31 December 2021. These calculations use cash flow projections based on a combination of individual financial three-year forecasts, containing assumptions for revenue growth and operational gearing, and appropriate long-term growth rates of 2.4 per cent. The long-term growth rate assumption reflects the long-term average growth rate for the UK economy. To prepare value-in-use calculations, the cash flow forecasts are discounted back to present value using an appropriate market-based discount rate. The pre-tax discount rate used to calculate the value in use was 15.1 per cent (2021: 14.8 per cent). The Directors have reviewed the recoverable amounts of the CGUs, and considered possible impacts that might arise from a range of uncertainties, including supply chain risks and cost inflation, that could lead to a reduction in consumer confidence and a continuing slowdown in the UK economy. The financial impact of climate change risk, including the cost of the Group’s operational mitigation initiatives, continues to be assessed, along with market changes driven by advances in technology. The Group has two main CGUs, namely the landscaping and building products businesses within Marshalls and the newly acquired Marley Group has now been identified as a separate CGU. The landscaping and building products CGU’s associated cash flows are assessed as a whole when assessing impairment. This is unchanged from previous years. The Directors do not consider that any reasonable change in the assumptions would give rise to the need for further impairment in either of these CGU’s. The Marley business was acquired on 29 April 2022 and consequently the Marley CGU is the most sensitive to change. The post tax discount rate is 8.9 per cent (pre-tax 15.1 per cent). Applying a sensitivity of 10 per cent, as an increased discount rate, there is headroom of £43.7 million. The breakeven point that would indicate impairment would occur at a discount rate of 10.6 per cent. The impairment represents the assets being written down to fair value less cost to sell of £731,000 in relation to the Belgian subsidiary (Note 4). Included in software additions is £1,807,000 (2021: £1,610,000) of own work capitalised. Amortisation charge The amortisation charge is recognised in the following line items in the Consolidated Income Statement: 2022 2021 £’000 £’000 Net operating costs (Note 3) 1,765 1,965 Adjusting items (Note 4) 7,354 1,213 9,119 3,178 169 Marshalls plc | Annual Report and Accounts 2022 Notes to the Consolidated Financial Statements continued 13 Inventories 2022 2021 £’000 £’000 Raw materials and consumables 30,100 22,805 Finished goods and goods for resale 108,665 84,631 138,765 107,436 Inventories stated at a net realisable value less than cost at 31 December 2022 amounted to £6,599,000 (2021: £4,656,000). The write down of inventories made during the year amounted to £9,401,000 (2021: £1,534,000) including £4,936,000 in relation to an impairment relating to the Belgian subsidary (Note 4). There were £1,370,000 of reversals of inventory write downs made in previous years in 2022 (2021: £520,000). 14 Trade and other receivables 2022 2021 £’000 £’000 Trade receivables 103,714 84,313 Other receivables 9,794 15,989 Prepayments and accrued income 9,773 11,607 123,281 111,909 A reimbursement asset of £4,149,000 was included in other receivables in 2021. This related to monies held in escrow in relation to the acquisition of CPM in 2017 as a consequence of an under-funded pension scheme of a related company. In December 2021 the risk of a liability arising from this matter was now considered to be remote and in December 2021 agreement was reached to release £3,750,000 from escrow in order to be paid to the vendors as additional consideration for the purchase of CPM. An amount was recorded in other payables for the charge of £3,750,000 which was booked in the Income Statement for the year ended 31 December 2021 to reflect this additional consideration payable to the CPM vendors (Note 4 the amounts were settled in full during 2022). Ageing of trade receivables 2022 2021 £’000 £’000 Neither impaired nor past due 57,128 46,142 Not impaired but overdue by less than 30 days 40,989 32,927 Not impaired but overdue by between 30 and 60 days 1,641 2,700 Not impaired but overdue by more than 60 days 5,246 3,276 105,004 85,045 There were no net receivables due after more than one year (2021: £nil). All amounts disclosed above are considered recoverable and are disclosed gross of a provision for expected credit losses of £1,290,000 (2021: £732,000). This provision has been determined using a lifetime expected credit loss calculation. Assumptions made regarding the recoverability of balances have been determined with reference to past default experiences in line with our policies and understanding. Balances are only written off if deemed irrecoverable after all credit control procedures have been exhausted. 15 Cash and cash equivalents 2022 2021 £’000 £’000 Bank balances 56,262 41,207 Cash in hand 2 5 Cash and cash equivalents in the Consolidated Cash Flow Statement 56,264 41,212 16 Trade and other payables 2022 2021 £’000 £’000 Current liabilities Trade payables 82,561 67,261 Taxation and social security 16,165 13,718 Other payables 21,259 31,278 Accruals 32,455 25,961 152,440 138,218 All trade payables are due in six months or less. Marshalls plc | Financial Statements 170 17 Interest bearing loans and borrowings 2022 2021 £’000 £’000 Analysed as: Current liabilities — 1,673 Non-current liabilities 247,035 39,341 247,035 41,014 Bank loans The bank loans are subject to by intra-Group guarantees by certain subsidiary undertakings. 18 Lease liabilities 2022 2021 £’000 £’000 Analysed as: Amounts due for settlement within twelve months (shown under current liabilities) 9,764 8,545 Amounts due for settlement after twelve months 36,070 32,776 45,834 41,321 2022 2021 Minimum Minimum lease lease payments Interest Principal payments Interest Principal £’000 £’000 £’000 £’000 £’000 £’000 Less than 1 year 11,046 1,282 9,764 9,828 1,283 8,545 1 to 2 years 8,176 1,126 7,050 7,316 1,110 6,206 2 to 5 years 14,576 2,384 12,192 13,149 2,434 10,715 In more than 5 years 22,230 5,402 16,828 21,915 6,060 15,855 56,028 10,194 45,834 52,208 10,887 41,321 As at 31 December 2022, the total minimum lease payments (above) comprised property of £30,686,000 (2021: £33,272,000) and plant, machinery and vehicles of £25,342,000 (2021: £18,936,000). Certain leased properties have been sublet by the Group. Sublease payments of £200,176 (2021: £285,254) are expected to be received during the following financial year. An amount of £206,541 (2021: £295,548) was recognised as income in the Consolidated Income Statement within net operating costs in respect of subleases. The Group does not face a significant liquidity risk with regard to its lease liabilities. For the year ended 31 December 2022, the interest expense on lease liabilities amounted to £2,381,000 (2021: £1,889,000). Lease liabilities are calculated at the present value of the lease payments that are not paid at the commencement date. For the year ended 31 December 2022, the average effective borrowing rate was 3.4 per cent. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. The vast majority of lease obligations are denominated in Sterling. For the year ended 31 December 2022, the total cash outflow in relation to leases amounts to £13,471,000 (2021: £12,717,000). The total cash outflow in relation to short-term and low-value leases was £7,010,000 (2021: £5,671,000). 171 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Notes to the Consolidated Financial Statements continued 19 Financial instruments The Group holds and uses financial instruments to finance its operations and to manage its interest rate, liquidity and currency risks. The Group primarily finances its operations using share capital, retained profits and borrowings. The Group’s bank loans are non-equity funding instruments, further details of which are set out on page 175. As directed by the Board, the Group does not engage in speculative activities using derivative financial instruments. Group cash reserves are held centrally to take advantage of the most rewarding short-term investment opportunities. Forward foreign currency contracts are used in the management of currency risk. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, foreign currency risk and pricing risk. The Board reviews and agrees the policies for managing each of these risks and they have remained unchanged since 2021. Capital management The Group defines the capital that it manages as its total equity and net debt balances. The Group manages its capital structure in light of current economic conditions and its strategic objectives to ensure that it is able to continue as a going concern whilst maximising the return to stakeholders through the optimisation of debt and equity balances. The Group manages its medium-term bank debt to ensure continuity of funding and the policy is to arrange funding ahead of requirements and to maintain sufficient undrawn committed facilities. A key objective is to ensure compliance with the covenants set out in the Group’s bank facility agreements. From time to time the Group purchases its own shares on the market; the timing of these purchases depends on market prices. Primarily the shares are intended to be used for issuing shares under the Group’s incentive schemes. Buy and sell decisions are made on a specific transaction basis by the Board. There has been no change in the objectives, policies or processes with regard to capital management during the years ended 31 December 2022 and 31 December 2021. Financial risks The Group has exposure to a number of financial risks through the conduct of its operations. Risk management is governed by the Group’s operational policies, guidelines and authorisation procedures, which are outlined in the Strategic Report on pages 1 to 75. The key financial risks resulting from financial instruments are liquidity risk, interest rate risk, credit risk, foreign currency risk and pricing risk. In managing interest rate and currency risks the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates would have an impact on consolidated earnings. For instance, a weakening of Pound Sterling on the foreign currency market would increase the cost of certain raw materials, whereas a strengthening would have the opposite effect. (a) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Board is responsible for ensuring that the Group has sufficient liquidity to meet its financial liabilities as they fall due and does so by monitoring cash flow forecasts and budgets. Cash resources are largely and normally generated through operations and short-term flexibility is achieved by bank facilities. Bank debt is raised centrally and the Group aims to maintain a balance between flexibility and continuity of funding by having a range of maturities on its borrowings. Details of the Group borrowing facility are provided on page 175. (b) Interest rate risk The Group’s policy is to review regularly the terms of its available short-term borrowing facilities and to assess individually and manage each long-term borrowing commitment accordingly. The Group borrows principally at floating rates of interest and, where appropriate, uses interest rate swaps and interest rate caps to generate the desired interest rate profile, thereby managing the Group’s exposure to interest rate fluctuations. Approximately 70 per cent of core debt is covered by interest rate swaps and caps of varying maturities up until 2026, which reflects the maturity date of the related loans and medium-term requirements, in accordance with Group policy. The Group classifies its interest rate swaps as cash flow hedges and states them at fair value. The fair value of interest rate swaps is £3,547,000 asset (2021: £nil) and is adjusted against the hedging reserve on an ongoing basis. The period that the swaps cover is matched against the debt maturity in order to fix the impact on the Income Statement. During the year £3,259,000 (2021: £nil) has been recognised in Other Comprehensive Income for the year with £288,000 (2021: £nil) being reclassified from equity to the Income Statement. The interest rate swaps have been fully effective in the period. Sensitivity analysis A change of 100 basis points in interest rates at the balance sheet date would have decreased equity and profit by the amounts shown below. The sensitivity analysis has been undertaken before the effect of tax. The sensitivity analysis of the Group’s exposure to interest rate risk has been determined based on the change taking place at the beginning of the financial year and held constant throughout the reporting period. This analysis assumes that all other variables, in particular foreign currency rates, remain constant and considers the effect of financial instruments with variable interest rates, financial instruments at fair value through profit or loss or available for sale with fixed interest rates and the fixed rate element of interest rate swaps. The analysis was performed on the same basis for 2021. 2022 2021 £’000 £’000 Increase of 100 basis points (1,134) (372) Decrease of 100 basis points 1,134 372 Marshalls plc | Financial Statements 172 19 Financial instruments continued Financial risks continued (c) Credit risk Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount and, where appropriate, credit insurance cover is obtained. This provides excellent intelligence to minimise the number and value of bad debts and ultimately provides compensation if bad debts are incurred. An ageing of trade receivables is shown in Note 14 on page 170. Investments are allowed only in liquid securities and only with counterparties that have a credit rating equal to or better than the Group. Transactions involving derivative financial instruments are with counterparties with which the Group has a signed netting agreement as well as sound credit ratings. Given their high credit ratings, management does not expect any counterparty to fail to meet its obligations. At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet. (d) Foreign currency risk The Group is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than Sterling. The currencies giving rise to this risk are primarily Euros and US Dollars. The Group’s policy is to cover all significant foreign currency commitments in respect of trade receivables and trade payables by using forward foreign currency contracts. All the forward exchange contracts have maturities of less than one year after the balance sheet date. Where necessary, the forward exchange contracts are rolled over at maturity. The Group classifies its forward exchange contracts as cash flow hedges and states them at fair value. The fair value of forward exchange contracts is a £195,000 liability (2021: £159,000 asset) and is adjusted against the hedging reserve on an ongoing basis. During the year £354,000 (2021: £131,000) has been recognised in other comprehensive income for the year with £nil (2021: £nil) being reclassified from equity to the Income Statement. At 31 December 2021 all outstanding forward exchange contracts had a maturity date within twelve months. The foreign currency profile of monetary items was: 2022 2021 Sterling Euro US Dollar AED Total Sterling Euro US Dollar AED Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Cash and cash equivalents 51,167 2,799 2,257 41 56,264 38,534 808 1,834 36 41,212 Trade receivables 103,032 992 (190) (120) 103,714 82,712 1,529 192 (120) 84,313 Secured bank loans (240,130) (6,905) — — (247,035) (34,500) (6,514) — — (41,014) Lease liabilities (40,275) (5,559) — — (45,834) (35,598) (5,723) — — (41,321) Trade payables (74,613) (6,728) (1,220) — (82,561) (61,634) (5,114) (513) — (67,261) Derivative financial instruments 3,820 (73) (86) — 3,661 654 158 1 — 813 Balance sheet exposure (196,999) (15,474) 761 (79)(211,791) (9,832) (14,856) 1,514 (84) (23,258) A 10 per cent strengthening and weakening of the following currencies against the Pound Sterling at 31 December 2022 would have increased/(decreased) equity and profit or loss by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date. This analysis assumes that all other variables, in particular other exchange rates and interest rates, remain constant. The analysis was performed on the same basis for 2021: 2022 2021 £’000 £’000 10% strengthening of £ against € 1,375 1,321 10% weakening of £ against € (1,125) (1,080) 10% strengthening of £ against $ (68) (135) 10% weakening of £ against $ 55 110 10% strengthening of £ against AED 7 7 10% weakening of £ against AED (6) (6) (e) Pricing risks Where appropriate the Group uses hedging instruments to mitigate the risks of significant forward price rises of fuel in relation to expected consumption. The current hedges held are in place until 28 February 2023. The Group classifies its fuel hedges as cash flow hedges and states them at fair value. The fair value of the fuel hedges is a £273,000 asset (2021: £654,000 asset) and is adjusted against the hedging reserve on an ongoing basis. The period that the fuel hedges cover is matched against future expected purchases in order to fix the impact on the Income Statement. During the year £2,755,000 (2021: £1,272,000) has been recognised in other comprehensive income, with £3,136,000 (2021: £922,000) being reclassified from equity to the Income Statement. The fuel hedges have been fully effective in the period. When combining interest rate swaps, fuel hedges and forward contracts, this gives a total of £5,660,000 credit (2021: £1,403,000 credit) recognised in other comprehensive income for the year with £2,847,000 debit (2021: £922,000 debit) being reclassified from equity to the Income Statement. 173 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Notes to the Consolidated Financial Statements continued 19 Financial instruments continued Financial risks continued (f) Other risks Further information about the Group’s strategic and financial risks is contained in the Strategic Report on pages 66 to 75. Effective interest rates and maturity of liabilities At 31 December 2022 there were £45,834,000 (2021: £41,321,000) of Group borrowings on a fixed rate. The interest rate profile of the financial liabilities is set out below. The tables also disclose cash and cash equivalents in order to reconcile to net debt (Note 26). Fixed or Effective 6 months 6 – 12 1 – 2 2 – 5 More than variable interest rate Total or less months years years 5 years rate % £’000 £’000 £’000 £’000 £’000 £’000 31 December 2022 Cash and cash equivalents (Note 15) Variable 3.8 (56,264) (56,264) — — — — Interest bearing loans and borrowings (Note 17) Variable 3.8 247,035 — — — 247,035 — Lease liabilities (Note 18) Fixed 3.4 45,834 5,771 3,993 7,050 12,192 16,828 236,605 (50,493) 3,993 7,050 259,227 16,828 Fixed or Effective 6 months 6 – 12 1 – 2 2 – 5 More than variable interest rate Total or less months years years 5 years rate % £’000 £’000 £’000 £’000 £’000 £’000 31 December 2021 Cash and cash equivalents (Note 15) Variable 1.8 (41,212) (41,212) — — — — Interest bearing loans and borrowings (Note 17) Variable 1.8 41,014 — 1,673 39,341 — — Lease liabilities (Note 18) Fixed 3.4 41,321 5,396 3,149 6,206 10,715 15,855 41,123 (35,816) 4,822 45,547 10,715 15,855 At 31 December the undiscounted outstanding contractual payments (including interest) of financial liabilities were as follows: Fixed or Carrying 6 months 6 – 12 1 – 2 2 – 5 More than variable value Total or less months years years 5 years rate £’000 £’000 £’000 £’000 £’000 £’000 £’000 31 December 2022 Interest bearing loans and borrowings Variable 247,035 288,377 6,222 6,188 12,409 263,558 — Trade and other payables Variable 136,525 136,525 136,525 — — — — Lease liabilities Fixed 45,834 56,028 6,476 4,570 8,176 14,576 22,230 Derivative financial assets Fixed (3,661) (3,661) 33 (241) — (3,453) — 425,733 477,269 149,256 10,517 20,585 274,681 22,230 Fixed or Carrying 6 months 6 – 12 1 – 2 2 – 5 More than variable value Total or less months years years 5 years rate £’000 £’000 £’000 £’000 £’000 £’000 £’000 31 December 2021 Interest bearing loans and borrowings Variable 41,014 41,700 237 1,907 39,556 — — Trade and other payables Variable 118,888 118,888 118,888 — — — — Lease liabilities Fixed 41,321 52,208 6,175 3,653 7, 316 13,149 21,915 Derivative financial assets Fixed (813) (813) (547) (266) — — — 200,410 211,983 124,753 5,294 46,872 13,149 21,915 Marshalls plc | Financial Statements 174 19 Financial instruments continued Borrowing facilities The total bank borrowing facility at 31 December 2022 amounted to £370 million (2021: £155.0 million), of which £120.1 million (2021: £114.0 million) remained unutilised. The undrawn facility available at 31 December 2022, in respect of which all conditions precedent had been met, was as follows: 2022 2021 £’000 £’000 Committed: Expiring in more than 5 years — — Expiring in more than 2 years but not more than 5 years 120,095 80,659 Expiring in 1 year or less — 18,327 Uncommitted: Expiring in 1 year or less — 15,000 120,095 113,986 On 3 May 2022, the Group drew down a new four-year bank loan of £210 million to support the funding of the acquisition of Marley. In addition, to support ongoing working capital requirements, the Group has entered into a new committed revolving credit facility of £160 million with a maturity date of four years. The Group’s committed bank facilities are charged at variable rates based on SONIA plus a margin. The Group’s bank facility continues to be aligned with the current strategy to ensure that headroom against the available facility remains at appropriate levels and are structured to provide committed medium-term debt. Marshalls is party to a reverse factoring finance arrangement between a third party UK bank and one of the Group’s key customers. The principal relationship is between the customer and its partner bank. The agreement enables Marshalls to benefit from additional credit against approved invoices and, in practice, this provides a facility of up to £15 million which the Group utilises periodically in order to help manage its short-term, mid-month funding requirements. The credit risk is retained by the customer and Marshalls pays a finance charge upon utilisation. Fair values of financial assets and financial liabilities A comparison by category of the book values and fair values of the financial assets and liabilities of the Group at 31 December 2022 is shown below: 2022 2021 Book amount Fair value Book amount Fair value £’000 £’000 £’000 £’000 Trade and other receivables 113,538 113,538 95,032 95,032 Cash and cash equivalents 56,264 56,264 41,212 41,212 Bank loans (247,035) (259,180) (41,014) (40,023) Trade payables, other payables and provisions (136,525) (136,525) (118,888) (118,888) Interest rate swaps, forward contracts and fuel hedges 3,661 3,661 813 813 Contingent consideration (8,860) (8,860) (1,563) (1,563) Financial instrument assets and liabilities – net (218,957) (24,408) Non-financial instrument assets and liabilities – net 880,026 368,725 661,069 344,317 175 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Notes to the Consolidated Financial Statements continued 19 Financial instruments continued Borrowing facilities continued Estimation of fair values The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table. Other than contingent consideration, which uses a level 3 basis, all use level 2 valuation techniques. (a) Derivatives Derivative contracts are either marked to market using listed market prices or by discounting the contractual forward price at the relevant rate and deducting the current spot rate. For interest rate swaps, broker quotes are used. (b) Interest-bearing loans and borrowings Fair value is calculated based on the expected future principal and interest cash flows discounted at the market rate of interest at the balance sheet date. (c) Trade and other receivables/payables For receivables/payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. All other receivables/payables are discounted to determine the fair value. (d) Contingent consideration The basis of calculating contingent consideration is set out in Note 21 on page 180. (e) Fair value hierarchy The table below analyses financial instruments, measured at fair value, into a fair value hierarchy based on the valuation techniques used to determine fair value. • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000 31 December 2022 Derivative financial assets/(liabilities) — 3,661 — 3,661 Contingent consideration — — (8,860) (8,860) — 3,661 (8,860) (5,199) 31 December 2021 Derivative financial assets/(liabilities) — 813 — 813 Contingent consideration — — (1,563) (1,563) — 813 (1,563) (750) 20 Employee benefits The Company sponsors a funded defined benefit pension scheme in the UK (the “Scheme”). The Scheme is administered within a trust which is legally separate from the Company. The Trustee Board is appointed by both the Company and the Scheme’s membership and acts in the interest of the Scheme and all relevant stakeholders, including the members and the Company. The Trustee is also responsible for the investment of the Scheme’s assets. The defined benefit section of the Scheme provides pension and lump sums to members on retirement and to dependants on death. The defined benefit section closed to future accrual of benefits on 30 June 2006 with the active members becoming entitled to a deferred pension. Members no longer pay contributions to the defined benefit section. Company contributions to the defined benefit section after this date are used to fund any deficit in the Scheme and the expenses associated with administering the Scheme, as determined by regular actuarial valuations. The Trustee is required to use prudent assumptions to value the liabilities and costs of the Scheme whereas the accounting assumptions must be best estimates. The defined benefit section of the Scheme poses a number of risks to the Company, for example longevity risk, investment risk, interest rate risk, inflation risk and salary risk. The Trustee is aware of these risks and uses various techniques to control them. The Trustee has a number of internal control policies, including a Risk Register, which are in place to manage and monitor the various risks it faces. The Trustee’s investment strategy incorporates the use of liability-driven investments (“LDIs”) to minimise sensitivity of the actuarial funding position to movements in interest rates and inflation rates. The volatility in gilt markets during 2022 has had a significant impact on pension schemes. Due to the Scheme’s LDI strategy to provide an effective hedge against both inflation and interest rates the additional market volatility and the increase in gilt rates during the year had consequences for the Marshalls Pension Scheme. The Scheme utilises a “cash driven investment strategy” which has ensured there have been sufficient “liquid” investments in the Scheme to enable the Trustee Board to respond effectively to the market volatility and the short- notice collateral calls. The defined benefit section of the Scheme is subject to regular actuarial valuations, which are usually carried out every three years. The next actuarial valuation is being carried out with an effective date of 5 April 2024. These actuarial valuations are carried out in accordance with the requirements of the Pensions Act 2004 and so include deliberate margins for prudence. This contrasts with these accounting disclosures which are determined using best estimate assumptions. Marshalls plc | Financial Statements 176 20 Employee benefits continued A formal actuarial valuation was carried out as at 5 April 2021. The results of that valuation have been projected to 31 December 2022 by a qualified independent actuary. The figures in the following disclosure were measured using the projected unit method. The amounts recognised in the Consolidated Balance Sheet were as follows: 2022 2021 2020 £’000 £’000 £’000 Present value of Scheme liabilities (232,469) (366,359) (399,938) Fair value of Scheme assets 254,903 392,116 402,664 Net amount recognised at the year end (before any adjustments for deferred tax) 22,434 25,757 2,726 The current and past service costs, settlements and curtailments, together with the net interest expense for the year, are included in the employee benefits expense in the Consolidated Statement of Comprehensive Income. Remeasurements of the net defined benefit surplus are included in other comprehensive income. 2022 2021 £’000 £’000 Net interest expense before adjusting items 197 539 Adjusting interest expense (Note 4) — 2,813 Net interest expense recognised in the Consolidated Income Statement 197 3,352 Remeasurements of the net liability: Return on Scheme assets (excluding amount included in interest expense) 130,067 3,786 Gain arising from changes in financial assumptions (134,472) (20,383) Gain arising from changes in demographic assumptions (886) (6,317) Experience loss/(gain) 8,417 (3,469) Debit/(credit) recorded in other comprehensive income 3,126 (26,383) Total defined benefit debit/(credit) 3,323 (23,031) The principal actuarial assumptions used were: 2022 2021 £’000 £’000 Liability discount rate 4.90% 1.90% Inflation assumption – RPI 3.15% 3.30% Inflation assumption – CPI 2.60% 2.70% Rate of increase in salaries n/a n/a Revaluation of deferred pensions 2.60% 2.70% Increases for pensions in payment: CPI pension increases (maximum 5% p.a.) 2.55% 2.70% CPI pension increases (maximum 5% p.a., minimum 3% p.a.) 3.60% 3.35% CPI pension increases (maximum 3% p.a.) 1.95% 2.35% Proportion of employees opting for early retirement 0% 0% Proportion of employees commuting pension for cash 80% 80% Mortality assumption – before retirement Same as post- retirement Same as post- retirement Mortality assumption – after retirement (males) S2PXA tables S2PXA tables Loading 110% 110% Projection basis Year of birth CMI_2021 Year of birth CMI_2020 1.0% 1.0% Mortality assumption – after retirement (females) S2PXA tables S2PXA tables Loading 110% 110% Projection basis Year of birth CMI_2021 Year of birth CMI_2020 1.0% 1.0% Future expected lifetime of current pensioner at age 65: Male aged 65 at year end 85.3 85.4 Female aged 65 at year end 87.5 87.5 Future expected lifetime of future pensioner at age 65: Male aged 45 at year end 86.3 86.3 Female aged 45 at year end 88.7 88.7 177 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Notes to the Consolidated Financial Statements continued 20 Employee benefits continued Changes in the present value of assets over the year 2022 2021 £’000 £’000 Fair value of assets at the start of the year 392,116 402,664 Interest income 7,313 5,551 Return on assets (excluding amount included in net interest expense) (130,067) (3,786) Benefits paid (13,780) (11,740) Administration expenses (679) (573) Fair value of assets at the end of the year 254,903 392,116 Actual return on assets over the year (122,754) 1,765 Changes in the present value of liabilities over the year 2022 2021 £’000 £’000 Liabilities at the start of the year 366,359 399,938 Past service cost — 2,813 Interest cost 6,831 5,517 Remeasurement (gains)/losses: Actuarial gains arising from changes in financial assumptions (134,472) (20,383) Actuarial gains arising from changes in demographic assumptions (886) (6,317) Experience loss/(gain) 8,417 (3,469) Benefits paid (13,780) (11,740) Liabilities at the end of the year 232,469 366,359 The split of the Scheme’s liabilities by category of membership is as follows: 2022 2021 £’000 £’000 Deferred pensioners 96,072 204,739 Pensioners in payment 136,397 161,620 232,469 366,359 Average duration of the Scheme’s liabilities at the end of the year (in years) 14 18 The major categories of Scheme assets are as follows: 2022 2021 £’000 £’000 Return-seeking assets UK equities 936 1,864 Overseas equities 22,462 41,492 Other equity type investments 31,066 34,119 Total return-seeking assets 54,464 77,475 Other Insured pensioners 419 591 Cash 3,118 6,117 Property 32,848 36,941 Liability-driven investments and bonds 164,054 270,992 Total matching assets 200,439 314,641 Total market value of assets 254,903 392,116 The return-seeking assets and LDI assets have quoted prices in active markets. The valuation of the insured pensions has been taken as the value of the corresponding liabilities assessed using the assumptions set out above. The Scheme has no investments in the Company or in property occupied by the Company. The Company expects to pay no contributions to the defined benefit section of the Scheme during the year ended 31 December 2023. Marshalls plc | Financial Statements 178 20 Employee benefits continued Sensitivity of the liability value to changes in the principal assumptions If the discount rate were 0.5 per cent higher/(lower), the defined benefit section Scheme liabilities would decrease by approximately £14.3 million (increase by £14.3 million) if all the other assumptions remained unchanged. If the inflation assumption were 0.5 per cent higher/(lower), the Scheme liabilities would increase by £6.1 million (decrease by £6.1 million). In this calculation all assumptions related to the inflation assumption have been appropriately adjusted, that is salary, the deferred pension and pension in payment increases. The other assumptions remain unchanged. If life expectancies were to increase/(decrease) by one year, the Scheme liabilities would increase by £8.0 million (decrease by £8.0 million) if all the other assumptions remained unchanged. Management Incentive Plan (“MIP”) Share-based payment awards have been made during the year in accordance with the rules of the MIP. Full details of the performance criteria and the basis of operation of the MIP are set out in the Remuneration Committee Report on pages 100 to 130. Equity settled awards are settled by physical delivery of shares. The following equity settled awards have been granted: Number of instruments £’000 Plan year Vesting date Equity settled awards granted to Directors of Marshalls plc 87,000 715 2019 March 2023 Equity settled awards granted to other employees 86,224 708 2019 March 2023 Equity settled awards granted to Directors of Marshalls plc — — 2020 March 2024 Equity settled awards granted to other employees — — 2020 March 2024 Equity settled awards granted to Directors of Marshalls plc 104,187 726 2021 March 2025 Equity settled awards granted to other employees 184,712 1,288 2021 March 2025 Equity settled awards granted to Directors of Marshalls plc 317,782 885 2022 March 2026 Equity settled awards granted to other employees 359,324 1,001 2022 March 2026 1,139,229 5,323 Analysis of closing balance (deferred into shares): 2022 2021 £’000 Shares £’000 Shares Equity settled awards granted to Directors of Marshalls plc 2,326 508,969 2,939 463,027 Equity settled awards granted to other employees 2,997 630,260 3,467 534,892 5,323 1,139,229 6,406 997,919 2022 2021 Value Number of Value Number of £’000 options £’000 options Outstanding at 1 January 6,406 997,919 7,261 1,228,437 Granted 1,933 694,397 3,474 498,256 Change in value of notional shares (530) — — — Lapsed (297) (42,585) (252) (43,204) Element released (2,189) (510,502) (4,077) (685,570) Outstanding at 31 December 5,323 1,139,229 6,406 997,919 The total expenses recognised for the period arising from share-based payments were as follows: 2022 2021 £’000 £’000 Awards granted and total expense recognised as employee costs 2,038 2,545 Further details in relation to the Directors are set out in the Remuneration Committee Report on pages 100 to 130. Included in the total expense of £2,038,000 (2021: £2,545,000) is an amount of £1,297,000 (2021: £1,490,000) settled as interim cash payments under the terms of the Scheme and which has been included within wages and salaries in Note 5. Employee Bonus Share Plan A Bonus Share Plan was approved by shareholders in May 2015 under which a number of senior management employees were granted performance related bonuses with an element of this bonus being in the form of shares. The bonus performance criteria are the same as those applicable to the MIP awards. The bonus shares take the form of nil-cost options to acquire shares at the end of a three-year vesting period from the date of grant, and vesting is conditional on continued employment at the end of the vesting period. Awards are made to participants following publication of the Group’s year-end results. In addition, certain discretionary Share Awards have been granted to certain employees in the form of nil-cost options to acquire Ordinary Shares in Marshalls plc at the end of a three-year period. The total awards outstanding at 31 December 2022 were over 279,431 shares (31 December 2021: 358,217). The total expenses recognised for the year arising from share-based payments were £270,000 (2021: £1,117,000). Employee profit sharing scheme At 31 December 2022 the scheme held 42,287 (2021: 42,287) Ordinary Shares in the Company. 179 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Notes to the Consolidated Financial Statements continued 21 Provisions Contingent consideration Legal and regulatory provisions Total £’000 £’000 £’000 At 1 January 2021 — 3,149 3,149 Movement in provisions made in the period — (2,310) (2,310) At 31 December 2021 — 839 839 At 1 January 2022 — 839 839 On acquisition of subsidiary undertakings 4,932 — 4,932 Increase in the provision in the period (Note 4) 3,928 — 3,928 At 31 December 2022 8,860 839 9,699 2022 2021 £’000 £’000 Analysed as: Current liabilities 3,000 — Non-current liabilities 6,699 839 9,699 839 As part of the acquisition of Marley, there is an obligation to pay the vendors of Viridian Solar Limited deferred consideration which is contingent on the achievement of certain performance targets in the period post-acquisition. These performance periods are annually up to and including 31 December 2024 and will be settled in cash on their payment date on achieving the relevant targets. The range of additional consideration is estimated to be between £nil and £12 million. The Group has included £8,860,000 million as a contingent consideration which represents £4,932,000 for the fair value at acquisition date and a further charge in the post-acquisition period of £3,928,000, which has been included in adjusting items (Note 4).. Contingent consideration has been calculated based on the Group’s expectation of what it will pay in relation to the post-acquisition performance of the acquired entities. Other provisions comprise the estimated cost of settlement of certain legal and regulatory matters relating to the CPM business acquired on 19 October 2017 and the Edenhall business acquired on 11 December 2018, and reflect the Directors’ estimate of the likely outflow from settlement of these matters. 22 Deferred taxation Recognised deferred taxation assets and liabilities Assets Liabilities 2022 2021 2022 2021 £’000 £’000 £’000 £’000 Property, plant and equipment — — (24,606) (17,089) Intangible assets — — (57,542) (1,547) Inventories 505 — — (477) Employee benefits — — (5,606) (6,439) Equity settled share-based payments 432 1,249 — — Other items 333 356 (2,907) (2,513) Tax assets/(liabilities) 1,270 1,605 (90,661) (28,065) The deferred taxation liability at 31 December 2022 has been calculated at 25 per cent based on the rate at which the deferred tax is expected to unwind in the future using rates enacted at the balance sheet date. The deferred taxation liability of £5,606,000 (2021: £6,439,000) in relation to employee benefits is in respect of the net surplus for the defined benefit obligations of £22,434,000 (2021: £25,757,000) (Note 20) calculated at 25 per cent (2021: 25 per cent). Deferred tax assets on capital losses and overseas trading losses have not been recognised due to uncertainty around the future use of the losses. Deferred taxation liabilities represent sums that might become payable as tax in future years as a result of transactions that have occurred in the current year. The explanation as to why such liabilities may arise is included in the notes to the tax reconciliation (Note 7). The deferred tax liabilities disclosed in the year ended 31 December 2022 include the deferred tax relating to the Group’s pension scheme assets. Deferred tax assets on capital losses and overseas trading losses have not been recognised due to uncertainty around the future use of the losses. Marshalls plc | Financial Statements 180 22 Deferred taxation continued Movement in temporary differences Year ended 31 December 2022 Recognised Recognised On in other in statement acquisition of 1 January Recognised comprehensive of changes subsidiary 31 December 2022 in income income in equity undertaking 2022 £’000 £’000 £’000 £’000 £’000 £’000 Property, plant and equipment (17,089) (2,069) — — (5,448) (24,606) Intangible assets (1,547) 1,664 — — (56,918) (56,801) Inventories (477) 779 — — (538) (236) Employee benefits (6,439) 52 781 — — (5,606) Equity settled share-based payments 1,249 (209) — (608) — 432 Other items (2,157) 117 (677) — 143 (2,574) (26,460) 334 104 (608) (62,761) (89,391) Year ended 31 December 2021 Recognised Recognised in other in statement 1 January Recognised comprehensive of changes 31 December 2021 in income income in equity 2021 £’000 £’000 £’000 £’000 £’000 Property, plant and equipment (12,506) (4,583) — — (17,089) Intangible assets (1,594) 47 — — (1,547) Inventories (499) 22 — — (477) Employee benefits (519) 663 (6,583) — (6,439) Equity settled share-based payments 2,241 (736) — (256) 1,249 Other items (1,569) (624) 36 — (2,157) (14,446) (5,211) (6,547) (256) (26,460) The deferred tax balances on short-term timing differences are expected to reverse within one to three years. Based on the current investment programme of the Group and assuming that current rates of capital allowances on fixed asset expenditure continue into the future, there is little prospect of any significant part of the deferred taxation liability of the Company becoming payable over the next three years. It is not realistic to make any projection after a three-year period. 23 Called-up share capital The authorised, issued and full paid up Ordinary Share Capital was as follows: Authorised Issued and paid up Value Value Ordinary Shares ( 25 pence nominal) Number £’000 Number £’000 At 31 December 2021 300,000,000 75,000 200,052,157 50,013 Shares issued in the year — — 52,916,571 13,229 At 31 December 2022 300,000,000 75,000 252,968,728 63,242 During the year 52,916,571 new Ordinary Shares with a nominal value of £0.25 per share were issued and fully paid in connection with the Group’s acquisition of Marley on 29 April 2022. Share premium account and merger reserve Share premium account Merger reserve 2022 2021 2022 2021 £’000 £’000 £’000 £’000 At 1 January 24,482 24,482 — — Shares issued in relation to the placing and open offer 180,151 — — — Consideration shares issued — — 141,605 — Costs associated with the share issue (4,706) — — — At 31 December 199,927 24,482 141,605 — During the year ended 31 December 2022, 28,824,114 new Ordinary Shares were issued at £6.50 per share in relation to a placing and a placing and open offer. An amount of £180,151,000 has been credited to the share premium account in relation to the issue of these shares. A further 24,092,457 new ordinary shares were issued at £6.80 per share as consideration for the acquisition of Marley Group Limited. An amount of £141,605,000 has been credited to a merger reserve in relation to the issue of these shares and reflects the fair value of the shares at the date of the acquisition. Own shares reserve Transactions of the Group-sponsored Employee Benefit Trust are included in the Group Financial Statements. The Trust’s purchases of shares in the Company are debited directly to equity and disclosed separately in the balance sheet as “own shares”. Further details are included on page 131. Capital redemption reserve The capital redemption reserve records the nominal value of shares repurchased by the Compan y . 181 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Notes to the Consolidated Financial Statements continued 23 Called-up share capital continued Consolidation reserve On 8 July 2004 Marshalls plc was introduced as the new holding company of the Group by way of a court-approved Scheme of Arrangement under Section 425 of the Companies Act 1985. The restructuring was accounted for as a capital reorganisation and accounting principles were applied as if the Company had always been the holding company of the Group. The difference between the aggregate nominal value of the new shares issued by the Company and the called-up share capital, capital redemption reserve and share premium account of Marshalls Group plc (the previous holding company) was transferred to a consolidation reserve. Hedging reserve This represents the gains and losses arising on derivatives used for cash flow hedging, principally from the Group’s interest rate swaps, energy price contracts and forward exchange contracts. Dividends After the balance sheet date, the following dividends were proposed by the Directors. The dividends have not been provided for and there were no income tax consequences. 2022 2021 £’000 £’000 9.9 pence final dividend (2021: 9.6 pence) per Ordinary Share 25,021 19,12 2 24 Non-controlling interests 2022 2021 £’000 £’000 At 1 January 987 950 Share of (loss)/profit for the year (250) 92 Foreign currency transaction differences 45 (55) At 31 December 782 987 25 Acquisition of subsidiary On 29 April 2022 Marshalls Group Limited acquired 100 per cent of the issued share capital of Marley Group plc, a leader in the manufacture and supply of pitched roofing systems to the UK construction market. Marley Group plc operates within the UK and is registered in England and Wales. The fair values acquired are disclosed as provisional given that the acquisition was made on 29 April 2022. The amounts in respect of the identifiable assets acquired and liabilities assumed are set out in the table below: Provisional fair values acquired £’000 Land and buildings 66,321 Plant, machinery and vehicles 29,869 Right-of-use assets 1,424 Brand 82,760 Customer relationships 145,400 Inventories 27,423 Trade and other receivables 33,284 Cash and cash equivalents 34,087 Trade and other payables (34,556) Provisions (4,932) Borrowings (291,956) Lease liabilities (1,588) Corporation tax (987) Deferred tax (62,761) Total identifiable net assets 23,788 Goodwill 244,119 267,907 Total consideration satisfied by: Cash consideration 120,280 Equity consideration 147,627 Total cost of investment 267,907 Total cash movements in connection with the acquisition Cash consideration 120,280 Cash and cash equivalents acquired (34,087) Borrowings acquired 291,956 Lease liabilities acquired 1,588 Total cash outflow (net) in connection with the acquisition 379,73 7 Marshalls plc | Financial Statements 182 25 Acquisition of subsidiary continued The headline enterprise value agreed for the transaction was £535 million on a cash-free and debt-free basis. Due to the timing between the agreed consideration scheme price as at 6 April 2022 of £6.80 and the share price at the close of completion on 29 April 2022 of £6.18, the enterprise value of the transaction at fair value was £525.7 million. The consideration for the acquisition was funded by a combination of new debt financing and £187 million from a Firm Placing and Placing Open Offer. In addition 24,092,457 new Ordinary Shares were issued to the seller at a price of £6.80 per share, equating to a value of £163,827,000 million. The fair value of the equity consideration is £147,627,000, which reflects a reduction of £16,200,000 being the impact of the reduced share price of £6.18 at the date of completion on 29 April 2022. As part of the ongoing review of the fair value of assets and liabilities acquired, adjustments have been made to the initial assessment that was disclosed in the Half Year Statement at 30 June 2022. These had the effect of reducing fair value of the net assets acquired under the acquisition by £13,795,000 which has given rise to an increase in goodwill of the same amount. The provisional value of goodwill reported in respect of Marley as at 31 December 2022 is £244,119,000. Goodwill, trade and other payables, trade and other receivables and corporation tax balances have been restated accordingly in the 31 December 2022 balance sheet. In assessing the fair value of land and buildings, brands and customer relationships, the Group has engaged the support of third party specialists, including PwC and Avison Young. Due to their contractual dates, fair value receivables (shown above) approximate to the gross contractual amounts receivable. The amount of gross contractual receivables not expected to be received is minimal. The goodwill arising from the acquisition represents the opportunity to grow by utilising the capabilities and technical experience of the acquired workforce and developing synergistic opportunities. The goodwill arising from the acquisition is not expected to be deductible for income tax purposes. Transaction costs incurred on the acquisition totalled £14,887,000 and further details are set out in Note 4, adjusting items. Marley contributed revenue of £132,227,000 and operating adjusted profit of £34,452,000 to the Group’s results for the period between the date of acquisition and the balance sheet date. 26 Analysis of net debt 1 January On acquisition Other 31 December 2021 Cash flow New leases of Marley changes (i) 2022 £’000 £’000 £’000 £’000 £’000 £’000 Cash at bank and in hand 41,212 (19,331) — 34,087 296 56,264 Debt due within 1 year (1,673) 1,673 — — — — Debt due after 1 year (39,341) 84,545 — (291,956) (283) (247,035) Lease liabilities (41,321) 11,090 (14,015) (1,588) — (45,834) (41,123) 77,977 (14,015) (259,457) 13 (236,605) (i) Other changes include foreign currency movements on cash and loan balances. Movement in the net debt is shown net of bank arrangement fees. Reconciliation of net cash flow to movement in net debt 2022 2021 £’000 £’000 Net decrease in cash equivalents (19,331) (62,439) Cash outflow from decrease in bank borrowings 86,218 88,628 On acquisition of subsidiary undertakings (259,457) — Cash outflow from lease repayments 11,090 10,828 New leases entered into (14,015) (3,158) Effect of exchange rate fluctuations 13 584 Movement in net debt in the year (195,482) 34,443 Net debt at 1 January (41,123) (75,566) Net debt at 31 December (236,605) (41,123) 183 Marshalls plc | Annual Report and Accounts 2022 Financial Statements 27 Changes in liabilities arising from financing activities The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s Consolidated Cash Flow Statement as cash flows from financing activities. Non-cash changes 1 January Financing Acquisition of Other 31 December 2022 cash flows * Subsidiary (Note 25) changes ** 2022 £’000 £’000 £’000 £’000 £’000 Interest bearing loans and borrowings (Note 17) (41,014) 86,218 (291,956) (283) (247,035) Lease liabilities (Note 18) (41,321) 11,090 (1,588) (14,015) (45,834) Total liabilities from financing activities (82,335) 97,308 (293,544) (14,298) (292,869) Non-cash changes 1 January Financing Acquisition of Other 31 December 2021 cash flows * Subsidiary (Note 25) changes ** 2021 £’000 £’000 £’000 £’000 £’000 Interest bearing loans and borrowings (Note 17) (130,282) 88,628 — 640 (41,014) Lease liabilities (Note 18) (48,991) 10,828 — (3,158) (41,321) Total liabilities from financing activities (179,273) 99,456 — (2,518) (82,335) The cash flows from bank loans, overdrafts and other borrowings make up the net amount of proceeds from borrowings and repayments of borrowings in the Consolidated Cash Flow Statement. * New leases and foreign currency movements. 28 Contingent liabilities National Westminster Bank plc has issued, on behalf of Marshalls plc, the following irrevocable letters of credit relating to the Group’s cap on self-insurance for employer’s liability and vehicle insurance: Beneficiary Amount Period Purpose M S Amlin Limited £675,000 23 Dec 2011 to 30 Oct 2023 Employer’s liability HDI Global SE — UK £500,000 8 Dec 2020 to 30 Oct 2023 Employer’s liability AIOI Nissay Dowa Insurance UK Limited £575,000 8 Dec 2020 to 30 Oct 2023 Vehicle insurance Aviva Insurance Limited £350,000 19 Mar 2014 to 30 Oct 2023 Vehicle insurance M S Amlin Limited £750,000 30 Oct 2016 to 30 Oct 2023 Vehicle insurance Marshalls plc has provided a statutory Parent Company guarantee to those subsidiaries listed below in order that they are exempt from the requirements of the Companies Act 2006 relating to the audit of individual accounts by virtue of S479A of the Act. Registered number Marley Group Limited 13596495 Monty Bidco Limited 12144582 Monty Midco 1 Limited 12144469 Monty Midco 2 Limited 12144529 Monty Topco Limited 12144396 Marshalls Building Products Limited 00113882 Marshalls Properties Limited 04349470 Marshalls EBT Limited 05472428 CPM Group Limited 01005164 PD Edenhall Limited 03635485 Edenhall Holdings Limited 10367730 PD Edenhall Holdings Limited 08911209 29 Related parties Identity of related parties The Group has a related party relationship with its Directors. Transactions with key management personnel Other than the Directors, there are no senior managers in the Group who are relevant for establishing that Marshalls plc has the appropriate expertise and experience for the management of its business. The Directors of the Company and their immediate relatives control 0.2182 per cent (2021: 0.3072 per cent) of the voting shares of the Company. In addition to their salaries and pension allowances, the Group also provides non-cash benefits to Directors. Further details in relation to Directors are disclosed in the Remuneration Committee Report on pages 100 to 130. Notes to the Consolidated Financial Statements continued Marshalls plc | Financial Statements 184 30 Accounting estimates and judgements Management discussed with the Audit Committee the development, selection and disclosure of the Group’s critical accounting policies and estimates and the application of these policies and estimates. The accounting policies are set out in Note 1 on pages 149 to 160. As stated in the accounting policies, revenue is disclosed net of rebates. Whilst the Directors do not regard the determination of accruals for rebates as a key area of estimation uncertainty, the estimation of appropriate accruals for rebates requires commercial assessment. Note 13 contains details of the Group’s inventory. Whilst not considered by the Directors to be a key source of estimation uncertainty, the carrying value of the Group’s finished goods inventory has been reviewed using commercial judgement with regard to the assessment of the appropriate level of provisioning against inventory obsolescence and for net realisable value. The Directors consider the following to be key sources of estimation uncertainty: • Note 20 contains information about the principal actuarial assumptions used in the determination of defined benefit pension obligations. These key assumptions include discount rates and inflation rates which have been determined following advice received from an independent qualified actuary. Sensitivity analysis is disclosed in Note 20 on page 179. • Note 12 contains information about the principal assumptions that have been applied in assessing the carrying value of goodwill for impairment and acquired intangible assets. The assessments use cash flow projections based on financial forecast. To prepare value-in-use calculations key assumptions are made in relation to cash flow forecasts that are discounted back to present value using an appropriate market-based discount rate. The assumption around the discount rate is determined following advice from third party financial advisers. Sensitivity analysis is disclosed in Note 12 on page 169. • Note 4 contains information relating to the assumptions in relation to the impairment of the net assets of the Belgian subsidiary. The Directors have made an assessment of the market for such assets in arriving at the fair value applied. The Directors have concluded that critical accounting judgements, apart from those involving estimations, have been made in relation to the following issue during the preparation of the Financial Statements: • Adjusting items have been disclosed separately as alternative performance measures due to their size, nature and incidence to provide a better understanding of the Group’s results. The determination of whether items merit treatment as an adjusting item is a matter of judgement. Note 4 contains details of adjusting items. • Note 1 contains information about the assumptions and adjustments made relating to the identification of operating segments for the Group as defined in IFRS 8 “Operating segments”. • Note 25 contains information relating to the acquisition of Marley Group plc. Judgements have been applied in determining the fair value of land and buildings, brands, customer relationships and the related deferred tax. • Note 12 contains information relating to the judgements made in relation to goodwill impairment testing. These include judgements made in relation to the cash flow forecasts and the use of an appropriate market-based discount rate. 185 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Company Statement of Changes in Equity for the year ended 31 December 2022 Share Capital Share premium Merger Own redemption Equity Retained Total capital account reserve shares reserve reserve earnings equity £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Current year 50,013 24,482 — (646) 75,394 14,560 167,702 331,505 Total comprehensive income for the year Profit for the financial year — — — — — — 137,785 137,785 Total comprehensive income for the year — — — — — — 137,785 137,785 Transactions with owners, recorded directly in equity Contributions by and distributions to owners Shares issued 13,229 180,151 141,605 — — — — 334,985 Share issue costs — (4,706) — — — — — (4,706) Share-based payments — — — — — 725 529 1,254 Deferred tax on share-based payments — — — — — (219) — (219) Dividends to equity shareholders — — — — — — (38,669) (38,669) Purchase of own shares — — — (1,075) — — — (1,075) Own shares issued under share schemes — — — 396 — — (396) — Total contributions by and distributions to owners 13,229 175,445 141,605 (679) — 506 (38,536) 291,570 Total transactions with owners of the Company 13,229 175,445 141,605 (679) — 506 99,249 429,355 At 31 December 2022 63,242 199,927 141,605 (1,325) 75,394 15,066 266,951 760,860 Share Capital Share premium Own redemption Equity Retained Total capital account shares reserve reserve earnings equity £’000 £’000 £’000 £’000 £’000 £’000 £’000 Current year 50,013 24,482 (806) 75,394 13,010 195,034 35 7,127 Total comprehensive expense for the year Loss for the financial year — — — — — (6,362) (6,362) Total comprehensive expense for the year — — — — — (6,362) (6,362) Transactions with owners, recorded directly in equity Contributions by and distributions to owners Share-based payments — — — — 1,622 681 2,303 Deferred tax on share-based payments — — — — (72) — (72) Dividends to equity shareholders — — — — — (17,924) (17,9 24) Purchase of own shares — — (3,567) — — — (3,567) Own shares issued under share schemes — — 3,727 — — (3,727) — Total contributions by and distributions to owners — — 160 — 1,550 (20,970) (19,260) Total transactions with owners of the Company — — 160 — 1,550 (27, 332) (25,622) At 31 December 2021 50,013 24,482 (646) 75,394 14,560 167,702 331,505 Marshalls plc | Financial Statements 186 2022 2021 Notes £’000 £’000 Non-current assets Investments 34 353,699 352,974 Deferred taxation assets 35 156 673 Loans to Group undertakings 36 407,497 — 761,352 353,647 Current assets Debtors 37 — 964 Net current assets — 964 Total assets 761,352 354,611 Current liabilities Creditors 38 (492) (23,106) Net current liabilities (492) (23,106) Net assets 760,860 331,505 Capital and reserves Called-up share capital 39 63,242 50,013 Share premium account 39 199,927 24,482 Merger reserve 39 141,605 — Own shares (1,325) (646) Capital redemption reserve 75,394 75,394 Equity reserve 15,066 14,560 Profit and loss account 266,951 167,702 Equity shareholders’ funds 760,860 331,505 Approved at a Directors’ meeting on 15 March 2023. On behalf of the Board: Martyn Coffey Justin Lockwood The Notes on pages 188 to 193 form part of these Company Financial Statements. Company Balance Sheet at 31 December 2022 187 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Notes to the Company Financial Statements 31 Accounting policies The following paragraphs summarise the main accounting policies of the Company, which have been applied consistently in dealing with items which are considered material in relation to the Company’s Financial Statements. (a) Authorisation of Financial Statements and Statement of Compliance with FRS 101 The Parent Company Financial Statements of Marshalls plc for the year ended 31 December 2022 were authorised for issue by the Board England and Wales. The Company’s Ordinary Shares are publicly traded on the London Stock Exchange and the Company is not under the control of any single shareholder. These Financial Statements were prepared in accordance with the historical cost basis of accounting and Financial Reporting Standard 101 “Reduced Disclosure Framework” (b) Basis of preparation The accounting policies which follow set out those policies which apply in preparing the Financial Statements for the year ended In these Financial Statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures: • the requirements of paragraphs 45(b) and 46 – 52 of IFRS 2 “Share-based Payments”; • the requirements of IFRS 7 “Financial Instruments: Disclosures”; • the requirements of paragraphs 91 – 99 of IFRS 13 “Fair Value Measurement”; • the requirement in paragraph 38 of IAS 1 “Presentation of Financial Statements” to present comparative information in respect of paragraph 79(a)(iv) of IAS 1; • the requirements of paragraphs 10(d), 10(f), 16, 39(c), 40A, 40B, 40C, 40D, 111 and 134 – 136 of IAS 1 “Presentation of Financial Statements”; • the requirements of IAS 7 “Statement of Cash Flows”; • the requirements of paragraphs 30 and 31 of IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”; • the requirements of paragraph 17 of IAS 24 “Related Party Disclosures”; • the requirements in IAS 24 “Related Party Disclosures” to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member; and • the requirements of paragraphs 134(d) – 134(f) and 135(c) – 135(e) of IAS 36 “Impairment of Assets”. The Company also intends to take advantage of these exemptions in the Financial Statements to be issued in the following year. Objections may be served in the Company by shareholders holding in aggregate 5 per cent or more of the total allocated shares in the Company. Where required, additional disclosures are given in the Consolidated Financial Statements. (c) Investments Fixed asset investments in subsidiaries and associates are shown at cost less provision for impairment. The Directors consider annually whether a provision against the value of investments on an individual basis is required. (d) Share capital (i) Share capital (ii) Dividends Dividends on non-equity shares are recognised as a liability and accounted for on an accruals basis. Equity dividends are recognised (e) Pension schemes in Note 20 on pages 176 to 179. Marshalls plc | Financial Statements 188 31 Accounting policies continued (f) Share-based payment transactions The Company enters into equity settled share-based payment transactions with its employees. In particular, annual awards are made These schemes allow employees to acquire shares in Marshalls plc. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. Where appropriate, the fair value of the options granted is measured using the Black-Scholes option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. Current tax relief is available as shares vest based on the value at the date of vesting. A deferred tax asset is recognised at grant date based on the number of shares expected to be issued, at the value at which they are expected to be issued, proportioned in line with the vesting period. (h) Trade and other payables Trade and other payables are stated at nominal amount (discounted if material). (i) Income tax except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred taxation is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts are not provided for: the initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable reverse in the foreseeable future. The amount of deferred taxation provided is based on the expected manner of realisation or settlement realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. 32 Operating costs The audit fee for the Company was £60,000 (2021: £50,000). This is in respect of the audit of the Financial Statements. Fees paid to the Company’s auditor for services other than the statutory audit of the Company are not disclosed in the Notes to the Company Financial Statements since the consolidated accounts of the Group are required to disclose non-audit fees on a consolidated basis. Details of Directors’ remuneration, share options, long-term incentive plans and Directors’ pension entitlements are disclosed on pages 100 The average monthly number of employees of Marshalls plc (including Executive Directors) in the year ended 31 December 2022 was 203 (2021: 183). The personnel costs for the majority of these employees are borne by Marshalls Group Limited. The personnel costs charged 33 Ordinary dividends: equity shares 2022 2021 Pence per share £’000 Pence per share £’000 2022 interim: paid 1 December 2022 5.7 24,263 4.7 9,362 9.6 14,406 4.3 8,562 15.3 38,669 9.0 17,924 After the balance sheet date the following dividends were proposed by the Directors. The dividends have not been provided and there were no income tax consequences. 2022 2021 £’000 £’000 2022 final: 9.9 pence (2021: 9.6 pence) per Ordinary Share 25,021 19,122 189 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Notes to the Company Financial Statements continued 34 Investments £’000 352,974 Additions 725 At 31 December 2022 353,699 Investments comprise shares in the subsidiary undertaking, Marshalls Group Limited. The Directors have considered the carrying value of The increase in the year of £725,000 represents adjustments to the number of shares expected to vest in respect of share-based payment awards granted to employees of Marshalls Group Limited. Pursuant to Sections 409 and 410(2) of the Companies Act 2006, the subsidiary undertakings of Marshalls plc at 31 December 2022 are set out below. Subsidiaries Principal activities Class of share % ownership Acraman (418) Limited Non-trading Ordinary/ preference 100 Alton Glasshouses Limited Non-trading Ordinary 100 Bollards Direct Limited Non-trading Ordinary 100 Capability Brown Garden Centres Limited Non-trading Ordinary 100 Capability Brown Landscaping Limited Non-trading Ordinary 100 Classical Flagstones Limited Non-trading Ordinary 100 Non-trading Ordinary 100 Dalestone Concrete Products Limited Non-trading Ordinary 100 Edenhall Limited Non-trading Ordinary 100 Edenhall Building Products Limited Non-trading Ordinary 100 Edenhall Concrete Limited Non-trading Ordinary 100 Edenhall Concrete Products Limited Non-trading Ordinary 100 Non-trading Ordinary/ preference 100 Edenhall Technologies Limited Non-trading Ordinary 100 Locharbriggs Sandstone Limited Non-trading Ordinary 100 Lloyds Quarries Limited Non-trading Ordinary 100 Marley Limited Manufacturer of roofing products and solutions Ordinary 100 Non-trading Ordinary 100 Marshalls Building Materials Limited Non-trading Ordinary 100 Property management Ordinary 100 Marshalls Concrete Products Limited Non-trading Ordinary 100 Marshalls Directors Limited Non-trading Ordinary 100 Marshalls Dormant No. 30 Limited Non-trading Ordinary 100 Marshalls Dormant No. 31 Limited Non-trading Ordinary 100 Non-trading Ordinary 100 Marshalls Estates Limited Non-trading Ordinary 100 Intermediate holding company Ordinary 100 Marshalls Landscape Products Limited Non-trading Ordinary 100 Marshalls Landscape Products (North America) Inc. Landscape Products supplier Ordinary 100 Marshalls Mono Limited Landscape Products manufacturer and supplier and quarry owner supplying a wide variety of paving, street furniture and natural stone products Ordinary 100 Marshalls Natural Stone Limited Non-trading Ordinary 100 Marshalls NV Landscape Products manufacturer and supplier Ordinary 66.7 Marshalls Profit Sharing Scheme Limited Non-trading Ordinary 100 Property management Ordinary 100 Marshalls Register Limited Non-trading Ordinary 100 Marshalls Stone Products Limited Non-trading Ordinary 100 Marshalls Street Furniture Limited Non-trading Ordinary 100 Non-trading Ordinary 100 Non-trading Ordinary 100 Non-trading Ordinary 100 Non-trading Ordinary 100 Ollerton Limited Non-trading Ordinary 100 Non-trading Ordinary 100 Paver Systems (Carluke) Limited Non-trading Ordinary 100 Paver Systems Limited Non-trading Ordinary 100 PD Edenhall Holdings Limited Intermediate holding company Ordinary 100 Marshalls plc | Financial Statements 190 Subsidiaries Principal activities Class of share % ownership Non-trading Ordinary 100 Non-trading Ordinary 100 Premier Mortars Limited Non-trading Ordinary 100 Quarryfill Limited Non-trading Ordinary 100 Rhino Protec Limited Non-trading Ordinary 100 Robinson Associates Stone Consultants Limited Non-trading Ordinary 100 Robinsons Greenhouses Limited Non-trading Ordinary 100 Rockrite Limited Non-trading Ordinary 100 S Marshall & Sons Limited Non-trading Ordinary 100 Scenic Blue Limited Non-trading Ordinary 100 Scenic Blue Landscape Franchise Limited Non-trading Ordinary 100 Non-trading Ordinary 100 Stancliffe Stone Company Limited Non-trading Ordinary 100 Non-trading Ordinary 100 Stone Shippers Limited Non-trading Ordinary 100 Stonemarket (Concrete) Limited Non-trading Ordinary 100 Stonemarket Limited Non-trading Ordinary 100 The Great British Bollard Company Limited Non-trading Ordinary 100 The Stancliffe Group Limited Non-trading Ordinary 100 The Yorkshire Brick Co. Limited Non-trading Ordinary 100 Town & Country Paving Limited Non-trading Ordinary 100 Urban Engineering Limited Non-trading Ordinary 100 Viridian Solar Limited Manufacturer of roof interpreted solar products Ordinary 100 Viridian Solar BV Manufacturer of roof interpreted solar products Ordinary 100 Woodhouse Group Limited Non-trading Ordinary 100 Non-trading Ordinary 100 Xiamen Marshalls Import Export Company Limited Sourcing and distribution of natural stone products Ordinary 100 Viridian Solar B.V. is registered in the Netherlands, Xiamen Marshalls Import Export Company Limited is registered in China and Marshalls Landscape Products (North America) Inc. is registered in the USA. Paver Systems Limited, Paver Systems (Carluke) Limited and Paver Systems Limited and Paver Systems (Carluke) Limited Roadmeetings, Carluke, Lanarkshire ML8 4QG Locharbriggs Sandstone Limited Locharbriggs, Dumfries, Dumfriesshire DG1 1QS Marshalls Landscape Products (North America) Inc. 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801, USA Marshalls NV Nieuwstraat 4, 2840 Rumst, Belgium Viridian Solar BV Van Bylandtachterstraat 24, unit 6 5046 MB Tilburg, The Netherlands Xiamen Marshalls Import Export Company Limited 12 A4, Xiangyu Building, No. 22, 4th Xiangxing Road, Xiangyu Free Trade Zone, Xiamen, China 34 Investments continued 191 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Notes to the Company Financial Statements continued 35 Deferred taxation Recognised deferred taxation assets and liabilities Assets Liabilities 2022 2021 2022 2021 £’000 £’000 £’000 £’000 Equity settled share-based payments 156 673 — — Movement in temporary differences Recognised in statement Recognised of changes in 31 December 2022 in income equity 2022 £’000 £’000 £’000 £’000 Equity settled share-based payments 673 (298) (219) 156 Recognised in statement Recognised of changes 31 December 2021 in income equity 2021 £’000 £’000 £’000 £’000 Equity settled share-based payments 1,058 (313) (72) 673 36 Loans to Group undertakings 2022 2021 £’000 £’000 Amounts owed from subsidiary undertakings 407,497 — An on-demand facility is in place between Marshalls plc and Marshalls Group Limited. The loan is unsecured and, together with accrued interest and any other amounts accrued, is repayable in full on demand. Interest is accrued on a daily basis on the outstanding balance at a rate equivalent to SONIA plus 1.65 per cent. The loan, however, is expected to be recovered after more than one year and has been reported as a non-current asset. 37 Debtors 2022 2021 £’000 £’000 Corporation tax — 964 38 Creditors 2022 2021 £’000 £’000 Corporation tax 492 — Amounts owed to subsidiary undertakings — 23,106 492 23,106 No creditors were due after more than one year. 39 Capital and reserves Called-up share capital The authorised, issued and full paid up Ordinary Share Capital was as follows: Authorised Issued and paid up Value Value Ordinary Shares (25 pence nominal) Number £’000 Number £’000 At 31 December 2021 300,000,000 75,000 200,052,157 50,013 Shares issued in the year — — 52,916,571 13,229 At 31 December 2022 300,000,000 75,000 252,968,728 63,242 52,916,571 new Ordinary Shares with a nominal value of £0.25 per share were issued during the year fully paid in connection with the Group’s Share premium account and merger reserve Share premium account Merger reserve 2022 2021 2022 2021 £’000 £’000 £’000 £’000 24,482 24,482 — — Shares issued in relation to the placing and open offer 180,151 — — — Consideration shares issued — — 141,605 — Costs associated with the share issue (4,706) — — — At 31 December 199,927 24,482 141,605 — Marshalls plc | Financial Statements 192 39 Capital and reserves continued Share premium account and merger reserve continued During the year ended 31 December 2022, 28,824,114 new Ordinary Shares were issued at £6.50 per share. An amount of £180,151,000 has been credited to the share premium account in relation to the issue of these shares. A further 24,092,457 new Ordinary Shares were issued at £6.80 per share as consideration for the acquisition of Marley Group Limited. An amount of £141,605,000 has been credited to a merger Own shares reserve Capital redemption reserve The capital redemption reserve records the nominal value of shares repurchased by the Company. Distributable reserves The Company’s distributable reserves amount to £266 million (2021: £168 million) at the end of the period. Equity reserve The equity reserve represents the number of shares expected to vest in respect of share-based payment awards granted to employees 40 Capital and leasing commitments The Company had no capital or leasing commitments at 31 December 2022 or 31 December 2021. 41 Bank facilities The Group’s banking arrangements are in respect of Marshalls plc, Marshalls Group Limited and Marshalls Mono Limited with each company being nominated borrowers. The operational banking activities of the Group are undertaken by Marshalls Group Limited and the Group’s bank debt is largely included in Marshalls Group Limited’s balance sheet. 42 Contingent liabilities National Westminster Bank plc has issued, on behalf of Marshalls plc, the following irrevocable letters of credit relating to the Group’s cap Beneficiary Amount Period Purpose M S Amlin Limited £675,000 23 Dec 2011 to 30 Oct 2023 Employer’s liability £500,000 8 Dec 2020 to 30 Oct 2023 Employer’s liability £575,000 8 Dec 2020 to 30 Oct 2023 Vehicle insurance Aviva Insurance Limited £350,000 19 Mar 2014 to 30 Oct 2023 Vehicle insurance M S Amlin Limited £750,000 30 Oct 2016 to 30 Oct 2023 Vehicle insurance 43 Pension scheme Full details of the Scheme are provided in Note 20. The Company is unable to identify its share of the Scheme assets and liabilities on 44 Accounting estimates and judgements The preparation of the Financial Statements requires management to make judgements, estimates and assumptions. Although these judgements and estimates are based on management’s best knowledge, actual results ultimately may differ from these estimates. There are no critical accounting judgements or key sources of estimation uncertainty. 45 Related parties Related party relationships exist with other members of the Group. All operating costs are borne by Marshalls Group Limited and are 193 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Financial History – Consolidated Group Year ended 31 December 2018 31 December 2019 31 December 2020 31 December 2021 Year ended 31 December 2022 £’000 £’000 £’000 £’000 £’000 Consolidated Income Statement Revenue 490,988 541,832 469,454 589,264 719,373 Net operating costs (after adding back adjusting items) (425,331) (466,938) (441,059) (511,893) (618,241) Operating profit (after adding back adjusting items) 65,657 74,894 28,395 77,371 101,132 (823) (1,213) (19,022) (1,148) (53,220) Operating profit 64,834 73,681 9,373 76,223 47,912 Financial income and expenses (net) (1,899) (3,828) (4,720) (6,901) (10,715) Profit before tax (after adding back adjusting items) 63,758 71,066 23,675 73,283 90,417 Profit before tax 62,935 69,853 4,653 69,322 37,197 Income tax expense (11,307) (11,942) (2,095) (14,424) (10,656) Profit for the financial year 51,628 57,911 2,558 54,898 26,541 Profit for the year attributable to: Equity shareholders of the Parent 51,958 58,240 2,370 54,806 26,791 Non-controlling interests (330) (329) 188 92 (250) 51,628 57,911 2,558 54,898 26,541 66,593 76,104 12,092 79,401 57,031 66,593 76,104 29,901 79,336 102,897 80,792 103,875 45,298 107,139 90,176 80,792 103,875 57,618 107,074 136,042 Basic earnings per share (pence) 26.3 29.4 1.2 27.5 11.4 Basic earnings per share (after adding back 26.7 30.0 9.2 29.2 31.3 Dividends per share (pence) – IFRS 14.8 16.7 — 9.0 15.3 Dividends per share (pence) – traditional 12.0 4.7 4.3 14.3 15.6 Dividends per share (pence) – supplementary 4.0 — — — — Year-end share price (pence) 464.8 860.0 748.5 699.5 273.2 Tax rate (%) 18.0 17.1 45.0 20.8 28.7 2021 2022 £’000 £’000 £’000 £’000 £’000 Consolidated Balance Sheet Non-current assets 302,785 350,035 324,416 332,742 886,895 Current assets 210,776 212,534 290,013 263,230 321,971 Total assets 513,561 562,569 614,429 595,972 1,208,866 Current liabilities (141,190) (162,349) (157,158) (150,634) (167,332) Non-current liabilities (105,656) (104,454) (169,423) (101,021) (380,465) Net assets 266,715 295,766 287,848 344,317 661,069 Net borrowings (37,433) (59,976) (75,566) (41,121) (236,605) Gearing ratio 14.0% 20.3% 26.3% 11.9% 35.8% “Leases” Marshalls plc | Financial Statements 194 ABI Barbour ABI – a provider of construction intelligence data BEIS Business, Energy & Industry Strategy BES 6001 BRE accreditation for responsible sourcing BRE Independent organisation offering expertise in the built environment sector CCO Corporate Criminal Offence – legislation which can hold companies accountable for tax fraud CDP Carbon Disclosure Project Circular economy Production model recycling and reusing as much as possible CO 2 , CO 2 e and greenhouse gas emissions Carbon dioxide emissions. Carbon dioxide (CO 2 ) is the primary greenhouse gas emitted through human activities. While CO 2 emissions come from a variety of natural sources, human related emissions are responsible for the increase that has occurred in the atmosphere since the Industrial Revolution. 2 different greenhouse gases in a common unit. For any quantity and type of greenhouse gas, CO 2 2 which would have the equivalent global warming impact. Carbon sequestration Carbon sequestration is the long-term removal, capture or sequestration of CO 2 from the atmosphere to slow or reverse atmospheric CO 2 pollution and to mitigate or reverse climate change. Carbon dioxide is captured from the atmosphere through biological, chemical and physical processes. Concrete building products naturally absorb CO 2 . Calculations show that concrete absorbs roughly 30 per cent of the amount of CO 2 that cement production emits over its life. CPA Construction Products Association D365 Microsoft cloud ERP software system DERI Diversity, equity, respect and inclusion eNPS Employee Net Promoter Score – how likely employees are EPDs Environmental Product Declarations ERP system Enterprise Resource Planning software system ESOS Energy Savings Opportunity Scheme ETI Ethical Trading Initiative EVG Employee Voice Group managed forests FTSE4Good An index of companies scoring highly in corporate social responsibility measures GDPR General Data Protection Regulation GfK Company providing data and analytics on consumer goods GHG Greenhouse gases ILO International Labour Organization ISO International Organisation for Standardisation LDI asset portfolio Liability Driven Investment asset portfolio – investment needed Marshalls NOW MHFAs Mental Health First Aiders MIP Management Incentive Plan Mitigation vs adaptation The difference between climate change mitigation strategies and climate change adaptation is that mitigation is aimed at tackling the causes and minimising the possible impacts of climate change. Adaptation looks at how to reduce the negative effects it has and how to take advantage of any opportunities that arise. Net zero A net zero company will set and pursue a 1.5°C aligned science- based target for its full value chain emissions. Any remaining hard- greenhouse gas removal. NGO Non-Governmental Organisation NHBC National House Building Council PAS 2050 standard on product carbon footprinting that has been used as the basis for the development of other standards internationally. From creation to disposal; throughout the lifecycle. The term is used in a number of business contexts, but most typically in a company’s responsibility for dealing with hazardous waste and product performance. Glossary 195 Marshalls plc | Annual Report and Accounts 2022 Financial Statements Product carbon footprints A lifecycle product carbon footprint measures the total greenhouse gas emissions generated by a product, from extraction of raw materials, to end of life. It is measured in carbon dioxide equivalent (CO 2 e). Product carbon footprints should be associated with a scope or boundary, the most common being: Cradle to gate: This measures the total greenhouse gas emissions from the extraction of raw materials through to product manufacture up to the factory gate. Cradle to grave: This measures the total greenhouse gas emissions from the extraction of raw materials through to the product’s manufacture, distribution, use and eventual disposal. QR technologies Quick Response technology, a type of barcode RIDDOR Reporting of Injuries, Diseases and Dangerous Occurrences Regulations Risk Register A document used to table risks and responses to those risks RM&I Repair, Maintenance & Improvement SASB Sustainability Accounting Standards Board Science-based targets Science-based targets are a set of goals developed by a business to provide it with a clear route to reduce greenhouse gas emissions. is developed in line with the scale of reductions that are required Science Based Targets initiative (“SBTi”) best practice in emissions reductions and net zero targets in line with climate science. It provides technical assistance and expert resources to companies which set science-based targets in line with the latest climate science. The SBTi is a partnership between CDP, the United Nations Global Compact, the World Resources The SBTi is considered the gold standard in carbon reduction commitment setting. Scope 1, 2 and 3 emissions Scope 1 – all direct emissions Emissions derived from the activities of an organisation or under their control. This includes fuel combustion on site, from owned Scope 2 – indirect emissions Emissions derived from electricity purchased and used by the organisation. Emissions will be created during the production of the energy and eventually used by the organisation. This includes electricity from energy suppliers to power computers, heating and cooling. Scope 3 – all other indirect emissions Emissions derived from activities of the organisation, but occur from sources that they do not own or control. This is usually the largest covering emissions associated with business travel, procurement, waste and water. Examples include plane travel, shipping of goods and waste disposal. SDGs Sustainable Development Goals SECR Streamlined Energy and Carbon Reporting SIP Share Investment Plan SLAM Stop, Look, Assess, Manage SuDS Sustainable Drainage Systems TCFD Task Force on Climate-related Financial Disclosures The Group ULEZ Ultra Low Emission Zone UNGC United Nations Global Compact Verisk Maplecroft A company providing risk analytics WDI Workforce Disclosure Initiative WEPs Women’s Empowerment Principles Glossary continued Marshalls plc | Financial Statements 196 Shareholder Information Shareholder analysis at 31 December 2022 Number of Number of Size of shareholding shareholders % Ordinary Shares % 2.75 97 Financial calendar print technology, which minimises the impact of printing on the environment, Advisers Stockbrokers Numis Securities Limited Peel Hunt Auditor Legal advisers Slaughter and May Pinsent Masons LLP Financial adviser N M Rothschild & Sons Limited Bankers Registrars The Pavilions Landscape House Premier Way Marshalls plc | Annual Report and Accounts 2022 197 Financial Statements Marshalls plc, Landscape House, Elland HX5 9HT Annual Report and Accounts 2022
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