Corporate Finance » Marshalls CFO on building a capital allocation strategy

When Jack Clarke was hired to become the finance director of building materials company Marshalls four years ago he recognised that despite the group’s strong reputation, there was plenty to be gained from resetting its strategy.

For although the maker of paving stones, kerbs and street furniture such as benches and bollards has seen steady performance in recent years, there was potential for faster growth.

“Although seen as very solid manufacturer, I think it was fair to say that there was some really low hanging fruit from a financial and strategic perspective,” says Clarke, who with chief executive Martyn Coffey drew up a capital allocation policy which could communicate clearly to shareholders where the group was heading.

“You’ll find a capital allocation policy in the annual report and the communications of a large scale FTSE-100 company but there’s absolutely no reason why there shouldn’t be one here, “ asserts Clarke. “In fact it makes even more sense to be doing it in a FTSE-250 company such as Marshalls,” says Clarke.

In essence, Marshalls’ capital allocation policy articulated Marshalls’ plan to grow profit and sales through a reinvestment process in line with investors’ expectations. “Our first priority was to pay down net debt which was too high, from a position of 2.5 X ebitda cover to between zero and 1 x ebitda cover,” says Clarke.

With a platform of a significantly improved debt position, the next move was to invest free cash flow into capex projects to drive more organic growth. “You can generate returns very easily with some smart investments that will add to your margin and enhance the sales, so that’s been going on,” says Clarke.

“This year we’re going to invest £20m- which is the highest level ever for Marshalls, that’s a mixture of very big ticket capex projects- things like creating a digital platform, investing in a new saw mill, in automated vehicles rather than fork lift trucks to move products around the plants,” says Clarke.

Change agent

Clarke’s ability to inject momentum into Marshalls was underpinned by years of experience at engineer AMEC Foster Wheeler, where he was Executive Vice President and Head of Change Management. The group was acquired by oil services firm Wood Group last year.

Prior to that he served as AMEC’s power and process division and its environment and infrastructure division. Before that he held senior finance an operational roles at Halliburton and Mobil Oil, having trained with KPMG in London.

At Marshalls, bringing together a change mind set and financial acumen, has enabled Clarke to help drive a number of projects that capture the value of technology so that Marshalls can enhance its strong market positions in a number of areas.

Last year Marshalls invested £3m in a digital platform for the commercial market- making up two thirds of the group’s business- that enables customers, such as architects or installers, to locate online a product so they don’t have to waste time on journeys to retailers to see if they stock it.

“We believe the building materials is no different to the approach taken by ASOS, Lloyds Bank or a holiday company- we believe that the market will quickly move online, as anyone can access it on their phone,” he says.

Plans are afoot to launch a version for the domestic market, making up the remaining third of the group’s business, that will also require another £3m of investment. “On the domestic side the key lead to market is the installer, as massively influence purchasing decision so we try to work with them. We have developed a registered installer base in the process,” says Clarke.

Another priority is establishing patents for key products because “with anything that has a patent around it in the building materials sector, you can get significantly higher margins,” says Clarke.

An example is the patenting of mono beany- a kerb that allows water to be taken off the road more rapidly than using a traditional version, which is increasingly important when the fourth lane is being used increasingly in motorway expansion.

It’s one of a number of new product areas that made up 14% of sales last year. “We get a much higher margin in terms of profitability on new products, because nobody else is offering them,” Clark reveals. “The investors get that point, so it’s obviously a good thing to be doing.”

A further leg of the strategy is rewarding investors. “We have said that once we reach 2X cover, for every pound we earn, we will pay out 50p in dividend. That’s gone down extremely well with investors since we’ve been doing this since 2015 as the priority for investors is often about income growth,” says Clarke.

Urge to merge

Having achieved those aims, Clarke says the next priority would be to launch acquisitions selectively, partly driven by the need to diversify into areas other than hard landscaping where Marshalls dominates the UK market, and so would be limited by competition laws.

He says criteria for acquisition targets are that they be profitable, have real assets, be British-based, have a technology component to them, and be complimentary to Marshalls. After a lengthy search Marshalls spent £38m acquiring CPM, a provider of underground water management solutions, last October.

“When the call came that we were going to do this deal the investors knew it was coming and knew exactly what it would be about as it ticked all the boxes,” says Clarke. “An investor may only see you 3 or 4 times a year at best, but the fact that you’re not bringing a strange story, that you’re doing what you said you’d do, always goes down very well,” he adds.

Where Marshalls focuses its resources next is about makes the right calls in an environment with mixed degrees of opportunity depending on the sub-sector. “At the time of Brexit our stock together with most others in the building materials and construction sector bombed. We’ve recovered, but you have to pick your way through the different areas of opportunity,” says Clarke. “There are some really good winners here, and there’s some losers as well,” he adds.

“If the marketing team come and say we really need to focus on new house building, it would be a big tick. Also if they said we really need to focus on rail and road that would be a big positive because money is being spent in those areas.

“But if they said we need to make a big play on local authority spending, there wouldn’t be much of an audience for that idea because there just hasn’t been any local authority spend of note. The whole retail space would not be a good place for us to invest either because of the effects of the digital revolution,” he says.

Marshalls’ forward plans are conveyed through a viability statement published every 3 years and a strategic plan that is presented every 5. “There’s a detailed strategic review third quarter every year that is supported by an updated capital allocation paper with input by the marketing team.

“That’s then translated into financial models that are have 5 year time frames, and we then undertake stress tests on these. From that point we then have a board discussion and from there we then decide to allocate resources,” says Clarke, who studied Civil Engineering at Leeds University.

Marshalls’ most recent results reflect the positive impact the capital allocation policy has had on the group Pre-tax profits for the last full year rose from £46m to £52.1m on revenue up 8% to £430.2m, allowing ordinary and supplementary dividends to rise.

One of the critical elements Clarke has brought into this role, learning from previous experience at AMEC, is the need to put the customer at the forefront of the business model- using data insights to reveal how clients want to be serviced.

“Understanding customer behaviour and needs is how you’ll get returns,” says Clarke. “Our advocates should be the architects, specifiers and installers that use our products,” he adds.


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