Forterra : Financing update and proposed equity placing

THIS ANNOUNCEMENT, INCLUDING THE APPENDIX AND THE INFORMATION CONTAINED THEREIN, IS RESTRICTED AND IS NOT FOR PUBLICATION, RELEASE, DISTRIBUTION OR FORWARDING, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO AUSTRALIA, CANADA, THE REPUBLIC OF SOUTH AFRICA, JAPAN OR ANY OTHER JURISDICTION IN WHICH SUCH PUBLICATION, RELEASE OR DISTRIBUTION WOULD BE UNLAWFUL.

FURTHER, THIS ANNOUNCEMENT IS FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE AN OFFER OF SECURITIES IN ANY JURISDICTION. PLEASE SEE THE IMPORTANT NOTICES AT THE END OF THIS ANNOUNCEMENT.

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION.

For immediate release

01 July 2020

Forterra plc

Financing update and proposed equity placing

Forterra plc ('Forterra', the 'Group' or the 'Company'), a leading UK producer of manufactured masonry products, today provides an update on the impact of COVID-19 and the Group's response to date. The Company is also providing an update on its investment plans with regard to its new brick facility at Desford and its financing arrangements.

Details of equity placing

The Company has today announced its intention to conduct a non-pre-emptive placing of new ordinary shares of the Company to raise total gross proceeds of approximately £55 million. All directors of the Company intend to participate in the Placing.

The net proceeds from the Placing will enable Forterra to:

· maintain a strong balance sheet that can support the Group's continued investment programme, including the completion of a new brick manufacturing facility at Desford in Leicestershire, which is expected to generate attractive returns over the medium term and position the Group to benefit from the long-term growth in the housing market;

· benefit from an accelerated recovery in the housing market but also withstand a range of downside scenarios as a consequence of COVID-19; and

· secure a refinancing of existing bank facilities which provides (i) an extended maturity by two years to July 2024; (ii) an increase in the facility of £20 million to £170 million; and (iii) a package of covenant relaxations

Further details of the equity placing can be found in a separate announcement uploaded on the Company's website.

Update on trading

While the shape of the recovery from COVID-19 remains uncertain, there is wide recognition that the housing market will recover over the medium term. There remains a shortage of housing in the UK, with the market supported by Help to Buy, Government initiatives to release development land, low interest rates supporting mortgage availability, and favourable population growth. The Group also expects brick imports to reduce more significantly than sales of domestically manufactured bricks, as they have in prior cyclical downturns. Forterra is well positioned to take advantage of attractive market fundamentals to continue delivering shareholder value.

As previously announced, the Group has taken actions to mitigate against the impacts of COVID-19 on its business, including:

· Suspending all non-essential discretionary expenditure

· Furloughing employees (initially c.75% of the workforce, now reducing and currently at c.35%)

· The Board and the Executive Committee voluntarily taking a 20% pay cut in 2Q 2020 and forgoing 2019 bonuses

· Agreeing a package of tax deferments with HMRC

· Consulting with employees on changes to shift patterns and rationalisation of support functions

· Cancelling the FY19 dividend

The Group has additionally commenced consultation with employees at its Swadlincote facility on a restructuring programme, which, together with previously announced restructurings, is likely to result in a reduction of 225 FTEs.

Since the announcement of 3 June 2020, the Group has continued to see momentum in the business as customers have reopened their operations. For the 5 months ended 31 May revenue was 39% lower than the corresponding period in 2019, driven by a year-on-year decline of 86% in April and 62% in May. Daily despatches of brick and block products have now recovered to approximately 65% of corresponding 2019 levels in June month-to-date, with run-rates improving through the month. The Group is currently manufacturing at 14 of its 18 facilities.

Investment plans

The Group's Desford expansion project is both a major pillar in its growth plans and also a vital investment to replace an end-of-life plant. The new facility will be the largest and most efficient plant in the UK, with an annual output of c.180m extruded bricks, against the current plant capacity of c.85m. The total cost of the project is expected to be approximately £95 million, with £30 million having been spent or committed to date, with the new factory building structure now complete. The project has been delayed c.6 months due to COVID-19, with production expected to reach full run-rate in 2023. The Group believes that the new facility has the potential to deliver c.£17 million of annual EBITDA accretion once fully operational, split between efficiency and volume gains (without taking into account the deteriorating profitability associated with the end-of-life existing plant). Desford has the potential to generate EBITDA in excess of £20 million by its first full year of financial contribution in 2025. The Desford expansion project is expected to generate an attractive IRR of c.25% on the investment still to be incurred (c.15% on the total project).

The Group expects Desford capital expenditure to consist of £30 million in 2020, £24 million in 2021, £23 million in 2022 and £5 million in 2023. Other capital expenditure of £5.5 million in 2020 and £12 million in 2021 to 2023 is expected.

Forterra has a strong track record of organic investment in renewal and expansion projects. The Group commissioned a £55 million investment in a new, 100m annual capacity soft mud brick factory at Measham in 2009 during the global financial crisis. The investment reflected the same strategy of expansion and renewal that guides the Group's Desford investment, reducing unit production costs by c.40% and adding c.20% of additional capacity. The £55 million investment contributed c.£13 million average annual EBITDA in the period 2015-2019.

Completing the Desford project, which is already substantially progressed, is vital to the prospects of the Group as it replaces the existing factory which is nearing end-of-life, enhances efficiencies and returns, and provides medium-term capacity expansion. With the financing arrangements announced today, Forterra is securing the future of projects like the Desford expansion which maximise long-term shareholder value.

Extended bank facilities and covenant restatement

The Group entered the COVID-19 crisis with net debt (post IFRS 16) of £57.3 million at 31 December 2019, representing 0.7 times EBITDA on a post IFRS 16 basis.

The Group has access to a £150 million revolving credit facility which is presently fully drawn and was due to expire July 2022. At 31 May 2020, the Group had net debt (post IFRS 16) of £83 million. The Group expects a slight increase in net debt in the coming months due to the timing of payments and unwinding of deferrals. As previously announced on 3 June 2020, the Group has been confirmed as eligible for the joint HM Treasury and Bank of England CCFF programme with an issuer limit of £175 million, although the Board does not have any present intention to draw upon this facility, which provides the Group with additional emergency headroom if required.

The Group has secured a refinancing of its existing bank facilities by way of amendment and restatement of the Group's existing documentation. The amended and restated facility provides (i) an extended maturity by two years to July 2024; (ii) an increase in the facility of £20 million to £170 million; and (iii) a package of covenant relaxations. A summary of certain key terms of the amended and restated facility is set out in the Appendix to this Announcement. The amended and restated facility is inter-conditional on the Placing.

Scenario analysis

Uncertainty around the scale, duration and impact of COVID-19 on the markets in which Forterra operates, namely the UK new house building, residential repair, maintenance & improvement and the commercial construction markets, mean that it is difficult at this time, to determine the impact on the performance of the Company, and the consequences for the Company's financial performance for the current financial year and beyond. As such, the Board has determined it is too early to resume financial guidance.

The Company has analysed a broad range of potential scenarios, primarily based on the rate of recovery in both the Group's Brick and Block, and Bespoke Products divisions. However, this scenario analysis does not constitute financial guidance and no assurance can be given that any particular assumptions will prove correct or modelled scenarios will result.

The impact of the lockdown on build programmes in the UK new housing market, RMI and commercial markets will lead to a meaningful reduction in revenue in FY20. Although the Construction Products Association's most recent forecast anticipates the residential construction market will recover during 2021, output in 2021 is forecast to be approximately 20% lower than in 2019.These forecasts form the basis of the Group's 'Accelerated Recovery Scenario':

- Accelerated Recovery Scenario:

o Brick and Block volumes c.35% below 2019 levels in 2020, recovering to c.20% below in 2021 (in-line with current CPA forecasts) and achieving 2019 run-rate in 2022 (with 2023 being the first full year of volumes in-line with or in excess of 2019 levels). The Group expects higher falls in Bespoke products due to the announced restructuring and a focus on higher margin products

o Pricing to track inflation at c.2% p.a.

o Restructuring costs related to announced programmes of £10 million in 2020

o Intention to resume payment of dividends at the 2021 interim results

In assessing the proposed financing actions, the Group has considered a more prudent scenario (the 'Slower Recovery Scenario'):

- Slower Recovery Scenario:

o Brick and Block volumes c.40% below 2019 levels in 2020, recovering to c.30% below in 2021 (below current CPA forecast levels) and achieving 2019 run-rate in 2023 (with 2024 being the first full year of volumes in-line with or in excess of 2019 levels). The Group expects higher falls in Bespoke products due to the announced restructuring and a focus on higher margin products

o Pricing to track inflation at c.2% p.a.

o Restructuring costs of £15 million in 2020, with further restructuring likely to be necessary in 2021 and beyond

o Intention to resume payment of dividends in 2022

In terms of financial effects of the scenarios and the proposed equity issuance (all leverage ratios shown on post IFRS 16 basis):

- Accelerated Recovery Scenario:

o December 2020 Net debt / EBITDA (LTM): c.2.1x (vs. c.4.4x without an equity raise)

o December 2021 Net debt / EBITDA (LTM): c.1.3x (vs. c.2.4x without an equity raise)

- Slower Recovery Scenario :

o December 2020 Net debt / EBITDA (LTM): c.3.8x (vs. c.7.2x without an equity raise)

o December 2021 Net debt / EBITDA (LTM): c.2.3x (vs. c.3.8x without an equity raise)

Under both scenarios, the modelling suggests a c45% EBITDA drop through of the decline in revenue in 2021.

The Placing secures Forterra's current capital expenditure projects, including the new factory under construction at Desford, while also facilitating the agreement to the extension of the RCF and amendment of covenants by the Group's lending banks. If the Placing were not to proceed, in the Accelerated Recovery Scenario, the Company would breach its bi-annual covenants in December 2020 and June 2021, with further breaches out to June 2022 under the Slower Recovery Scenario. There can be no guarantee that covenant variations would be forthcoming, especially for the prolonged period of a slower recovery. Even if they could be obtained, they may come with restrictions on the management of the business, such as the limiting of capital expenditure. The Group would additionally not secure the RCF extension as currently planned, leading to a need to refinance debt facilities in H1 2021 at the latest.

Despite the immediate challenges presented by COVID-19, the Directors are confident in the long-term market dynamics for Forterra and in its positioning to drive long-term value. Today's announcement is an important step in securing that position for the future benefit of the Company's shareholders.

Enquiries:

Forterra Stephen Harrison, Chief Executive Officer Ben Guyatt, Chief Financial Officer	[phone]
FTI Consulting Richard Mountain / Nick Hasell		[phone]

IMPORTANT NOTICES

THIS ANNOUNCEMENT IS FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE OR FORM ANY PART OF AN OFFER TO SELL OR ISSUE, OR A SOLICITATION OF AN OFFER TO BUY, SUBSCRIBE FOR OR OTHERWISE ACQUIRE, ANY SECURITIES IN THE UNITED STATES, AUSTRALIA, CANADA, THE REPUBLIC OF SOUTH AFRICA, JAPAN OR ANY OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ANY FAILURE TO COMPLY WITH THESE RESTRICTIONS MAY CONSTITUTE A VIOLATION OF THE SECURITIES LAWS OF SUCH JURISDICTIONS. NO PUBLIC OFFERING OF THE NEW ORDINARY SHARES TO BE ISSUED PURSUANT TO THE PLACING IS BEING MADE IN ANY JURISDICTION.

This Announcement is not for public release, publication, distribution or forwarding, in whole or in part, directly or indirectly, in or into Australia, Canada, the Republic of South Africa, Japan or any other jurisdiction in which such release, publication, distribution or forwarding would be unlawful.

The securities referred to herein have not been and will not be registered under the US Securities Act of 1933, as amended (the 'Securities Act'), or under the securities laws of any state or other jurisdiction of the United States, and may not be offered or sold, directly or indirectly, in or into the United States except pursuant to an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States.

Appendix

Key terms of the Company's amended and restated facility agreement

Term	Summary
Facility amount	£170,000,000
Syndicate members	HSBC UK Bank plc, National Westminster Bank plc, Santander UK plc and The Governor and Company of the Bank of Ireland
Agent	The Royal Bank of Scotland plc
Security	Share charge over shares in the Company's subsidiaries, Forterra Building products Limited and Forterra Holdings Limited
Term	4 years from the Effective Date (being the date on which all conditions precedent are satisfied, which is anticipated to be on or around admission of the new ordinary shares issued pursuant to the Placing) plus an option to extend by 1 year
Financial covenants	Market standard for an agreement of this nature, including minimum liquidity (tested for a limited period only), interest cover and leverage
Additional covenant	Company is free to declare dividends if the most recent leverage ratio (Net Debt to EBITDA) was equal to or less than three and is projected to remain so immediately after the dividend is paid