3i Group plc (III) Earnings Call Transcript & Summary

Good morning, and welcome to 3i Capital Markets seminar. I'm Simon Borrows, Chief Executive at 3i. I'm joined today by Julia Wilson, our Group Finance Director; and Silvia Santoro, our Investor Relations Director. I'm also joined by some executives from our private equity team who I will introduce shortly. The main purpose for this Capital Markets Day is to tell you about 3 private equity investments made over the last year, and the agenda for today is set out on this slide. There will be an opportunity to ask questions on each investment at the end of each session as well as for more general Q&A at the end. But before that, I intend to give you a brief update on the 3i portfolio. Our investment portfolios in private equity and infrastructure have continued to make good progress in this financial year-to-date. We have now completed our September semiannual portfolio company reviews for private equity, infrastructure and Scandlines, which have confirmed strong performance in the significant majority of our investments, including our health care investments, our retail and e-commerce investments and our value for money companies. Action's impressive performance has continued with sales, EBITDA and cash generation above budget for Q3 to date. Year-to-date sales at over EUR 4.5 billion are now over 20% ahead of last year, with strong trading continuing across all geographies. We expect LTM EBITDA to the end of P9 to be over EUR 760 million compared to EUR 579 million at September last year and EUR 506 million at September 2019. Cash generation has continued to be strong, with a current cash balance of approximately EUR 900 million. Action has now opened 150 stores in 2021, including its first 5 stores in Italy where trading has been ahead of plan. There are 3 investments we plan to cover today, which come from our digital retail, health care and consumer teams. Turning to the private equity presenters. If you remember, last year, we heard from colleagues from France, America and Italy. This year, we're bringing the changes. And today, we'll hear from Germany, America and the U.K. Peter Wirtz leads our investment in Garden house and has been with 3i since 1998, was appointed Co-Managing Director at 3i Deutschland in 2009 and Co-Head of Private Equity in 2019. Rich Relyea is the investment in ten23 , joined 3i in 2007 and was appointed Co-Managing Director of North America in 2015. And finally, Rupert Howard, who joined 3i in 2018 and is Co-Head of our U.K. private equity team. Rupert leads the investment in MPM. [Operator Instructions] I'll now hand over to Peter for the presentation on GartenHaus.

Thank you very much, Simon. Good afternoon also from my side. Those of you who attend our Capital Markets Day regularly may remember that I have presented Lampenwelt at the Capital Markets Day in 2018 just after we had bought the company. Lampenwelt has developed very well over the last years, and we expect it to make more than EUR 350 million of sales this year. This compares to roughly EUR 60 million the year before we bought the business in 2017. We did a number of acquisitions over the year and have renamed the company to do Luqom to underline in this international ambition that we have for it. The reason why I'm referring back to Luqom now is that our investment thesis for GartenHaus is very similar to the one we had for Lampenwelt at the time, and I will refer to Luqom number of times in the following presentation. Next slide, please. Before I do that, I just want to spend a few words on 3i in Germany. We opened the Frankfurt office in 1984, and we were really one of the pioneers of private equity in Germany where nobody knew what private equity leverage filed a management buyout actually meant at the time. And as a result, we have a very strong reputation in Germany with a very broad and deep network that we acquired over the years. On the chart, you see a selection of our current and former investments, actually, there are quite a lot of current investments in there, 7 of them are active investments. And 3 of them have been done over the last 3 -- 12 months. So you can see that the team is very busy. It's GartenHaus, it's MAIT and ten23. And Rich, Relyea Rich is going to talk about ten23 later on. It has been led out of the U.S. with the help of the German team. And I think it's a strong testimonial of cross-border cooperation within 3i. So as you can see, we are fairly busy, and we are have a very diverse and strong team of executives in Germany, currently 15 investment professionals. Moving then to GartenHaus. GartenHaus was actually our first investment since the beginning of COVID. And if you see that the picture of Piccadilly Circus there, I think it captures the atmosphere very nicely how it felt in the first lockdown was very calm. And we, as a business, went -- after we've been through the first shock, the first priority was, of course, to see that the portfolio was in good shape that the portfolio was survived that they had enough liquidity because nobody knew what was coming. But then we relatively quickly started to change in opportunity mode and looked for opportunities that might arise. And our broad portfolio that we have helped us to differentiate between the winners and the losers in a COVID environment. And in that respect, it's not a coincidence that we have invested in GartenHaus. In particularly, our e-commerce businesses like Luqom is extremely well, and that's where we started to look for opportunities. So in the next slide, you see what GartenHaus actually does. GartenHaus is a e-com pure player for garden Homes, Garden saunas. On the left -- the picture on the left top is actually a sauna, a Garden sauna, sheds and related products. It's an 80% private label business. So we are not depending on any external brands. Outsourced manufacturing, very capital efficient. The company is based in Hamburg, with the majority of the business in Germany still. But today, we already have 10 web shops in Europe. GartenHaus is the market leader in Germany and the earnermarket line has a very attractive growth profile. I'm going to talk about this later on in the presentation. We invested EUR 70 million but expect to increase that number significantly over the lifetime of the investment by supporting a strong buy-and-build strategy for the investment. I'm proud to say that we already did the first investment, the first add-on, and we hope to be able to announce a few further ones over the next 12 months. As we have done at Luqom, we again partnered with Project A. So a reminder what Project A is. Project A is a Berlin-based operational venture capital fund. They exclusively invest in digital companies and provide the company's addition to capital with operational support by a team of 100 in-house experts, including all areas across product, growth, data and people. And for companies like Luqom, GartenHaus, which act in a highly dynamic environment, we consider it is absolutely key to be cutting edge in all those areas in order to be successful and to this route. And the partnership worked very well at Luqom, so we decided to extend it to GartenHaus House as well. So we developed a conviction early on that the company is well positioned for sustainable growth trajectory. Let me talk about the key trends that we identified and that provided us with early conviction. So first of all, accelerated digitalization through COVID, force adoption, we call it. So people were forced to buy online -- particular those older people who tended to buy stationery were forced you to try and buy online. And actually, we believe that this is a sustainable shift going forward, that these consumers will stay with us and also buy online in the future, simply because they met a good experience from the previous purchases. And then the other effect that we saw is a cocooning effect. That is a cocooning or a nesting effect. Consumer invest in their home and gardens, and we expect that also the cocooning effect is at least partially sustainable post COVID. So those were the 3 trends that we saw happening through COVID, and that gave us the conviction to do this deal. How did we get in the position to invest in this company? First of all, the sector knowledge that we acquired over the years through our investment in Lampenwelt, was instrumental both in the identifying GartenHaus as a target and in running a thorough and efficient DP process. In terms of process, it's important to say that our investment in GartenHaus was the result of the subsector deep dive where we looked at e-commerce companies that showed specific features. I'm going to speak about these features on the next slide. But we basically found that business and approached the owners. They ran a process eventually, but we were -- we clearly had a head start, and we were able to get this head start over the line in the process. So were really in a front-runner position here and eventually bought the business. We work with the same strong BLN members that we had used on Luqom. Again, I'm going to spend some time later in the presentation talking about this. But most importantly, this is a deal that's a bang-on strategy on a number of fronts. Investing in the market leader in a growing market, in a structurally growing market, partnering with management, significant buying build potential and clear internalization potential. So that is absolutely key with what we want to do. And therefore, we were very happy to be able to buy the GartenHaus. What are actually the features that we are looking for in an investment like that. There are 4 pillars, and I'm going to talk to all of them in the following slides. The first one, favorable market dynamics and shift to online; second, leading online specialist with scale advantages, resilient financial profile and cash generation and then lastly, management. Coming to the first one, favorable market dynamics. The underlying home and garden market is growing moderately with roughly 2%. However, if you look at the online market for this category, you get to double-digit growth rates on the back of increased online penetration. And if you compare the online penetration in that sector in the GartenHaus sector in this specific sector, Garden houses and Garden projects. the online penetration is still significantly below that in other sectors where you have up to 50% penetration that compares to 16% of penetration -- online penetration in the DACH region. And as a result, we expect a double-digit online growth going forward. And I think it's also important that these are stable markets. Due to the cocooning effect I alluded to earlier, the house and Garden sector tends to be relatively stable also in recession as consumers tend to cut back on more like out-of-home eating expenses or travel spendings. We have seen that in previous recession that that's the case, and that's actually a very resilient market. And the obvious question for us was, of course, on how sustainable the rapid growth in the company achieved -- that the company achieved was since COVID started. So a great, great deal of our commercial due diligence went into the question, how much is there of a one-off or a bump? The way we have assessed -- the way we assessed this effect was through discussions with consumers and customers to exactly find out their motivation, why they bought now and why they bought online. And what their intentions were for the future, how they would -- how much they would buy in the future, how much they intend to buy in the future and how they're going to buy this. And on this slide, you can see the result of this analysis. There's clearly a certain bump, but the whole online market has also been shifted to a high level from which it will continue to grow. To account for the bump element for valuation purposes, we have assumed a lower structuring EBITDA in our valuation than the EBITDA that was actually achieved. So we took a certain discount there to make sure we are not overpaying for that part. The next slide is actually one of the key slides here, and it speaks about the competitive positioning of GartenHaus. First of all, we believe that the market in which GartenHaus is active lends itself to online due to the nature of the product, the variety of the product, the choice you can offer online in comparison to stationery. And we differentiate between 3 competitors. First of all, the stationery, the off-line competition. Then secondly, the specialist online players, the peers of GartenHaus and then the Amazons of this worthy online aggregators. Let me go through them one by one. So like in many other markets, competitors markets, competitors are the large stationary formats like the DIY stores. But what you can see that they are struggling with the quite a bit of legacy that they have to transition online, leaving room for online players like GartenHaus to disrupt their business model and to grow at their cost. When you go then to the online specialist, so the peers of GartenHaus, there is absolutely key to be the market leader. And if you are the market leader, you benefit from scale effects. And these scale effects are self-enforcing in favor of the market leader. We can invest more in the assortment, we can invest more in infrastructure, in the IT and so on. And that's the effect that we can clearly see at income. And that leaves us with a third group of potential competitors, the large online generalists or aggregators like Amazon. And this is, of course, the obvious question that you always have to ask yourself if you invest in the e-commerce business. How defendable is your business against Amazon? And I'm using Amazon just as a proxy for other online aggregators. In the case of GartenHaus, we believe that their market is well protected from the threats for the following reasons. First of all, it's a category which requires customer education. So consumer require consultation, for example, whether they need a building permit or not, it's not a product that you just buy with a click. That's why we have a hotline. That's where people can call, ask their questions, and we have a hotline in the language of all the countries that we are present in. Secondly, there is no EAM, no European Article Number, which that you simply can type into a search engine and then you have an offer or many offers stores that can sell it. It's mainly an unbranded category, which makes it more difficult from consumer to orientate themselves. And therefore, they are looking for a well-curated site like we have here on GartenHaus. And lastly, this are bulky products and the logistics is very challenging or sophisticating, and that's also that Amazon hates. And therefore, that's not really a category that they are very interested in, and that leaves room for people like us or for companies like us, like GartenHaus, to focus on that niche of the market. The third feature, the resilient financial profile and the strong financial profile in many dimensions. First of all, of course, the strong growth that you can see here. 2020 was, of course, an exceptional year, but I'm pleased to say that we also expect to grow 25% in 2021. GartenHaus is profitable, which, as you all know, is not a given for fast-growing e-commerce business and cash generative as well as a result of their business model with outsourced manufacturing and logistics. And if you go one level deeper to unit economics, which is the profitability of a single orders, these numbers are also very strong. very high average order value, attractive gross margins and moderate marketing costs, particularly in comparison with other categories. So I think this is a very strong financial profile and an additional attraction. And then finally, very important for us and very important in particular for this company where we are building something management team. And with the Sebastian Arendt, we found a perfect CEO in the business. He was already there when we invested. He previously worked for at OBINext. OBI is the leading DIY chain in Germany. And Next is their digital operations. So they basically outsource their digital efforts into a separate unit called Next, and we was having that unit. So ideally positioned to take over the job at GartenHaus. He also worked at BCG, where he learned all the toolboxes that you need to run and grow a company. We further strengthened the organization with various key hires. We brought in a CFO and a CEO and many other positions on the segment tier. And like always, in our investment, we have strong alignment with the management team. They co-invest, and so the interests are absolutely on the same page. I talked about the BLN previously. Jochen Wilms. He is also our Executive Chairman for Luqom. He's a very close contact of us and someone we really trust. He comes from the building industry or building supply industry with Schuco and Grohe. But there's a lot of digital experience here, a lot of company to digitalize the sales effort and therefore, was an ideal recruit not only for Luqom, but also here for GartenHaus. Ulrich Siemssen former principle at Permira and then CFO of one of their portfolio companies. He is helping the management team, in particular, the CFO, he's sparring partner for the CFO to build up the right reporting structure that satisfied our needs as a private equity company. And then Ben Fisher. Again, we work very closely with him at Luqom, he's a General Partner Project A, former Bain & Company consultant and very knowledgeable about e-commerce in general. So what's the route to value creation over the next 3, 5 years? Firstly, to strengthen our position in the DACH region, we still see a lot of room to grow there. We want to gain market share from our competitors, motor competitors, I mentioned before. But then again -- and this is always the ambition for our companies to grow internationally. And to look into other countries, again, there is -- Luqom is a perfect example for that. We are a market leader in almost all European countries. And that should also be the ambition that we have for GartenHaus here to really expand internationally. And with the e-com business or digital company, it's not that difficult, opening a store and supporting that one in a different country is not so difficult. And then lastly, M&A. This is a hugely fragmented market, and we see huge potential to grow through acquisitions and to strengthen our market position in product categories we already serve. -- but also in adjacent product categories like, for example, fences et cetera. Following the announcement of our acquisition of Garden House we had numerous inbounds from potential targets, and the team is constantly working on add-on. And right now, they are working on one very interesting -- one that we hopefully be able to announce in summer. Sustainability, like with all of our companies is absolutely key. I think it's fair to say that the category which GartenHaus serves is as such, ESG friendly. It uses natural materials, such as wood and also contributes to the well-being of consumers. And the key is absolutely that we need to make sure that the wood we are using is coming from sustainable sources, and we are working with the FSC and PEFC to make sure that our competitor -- suppliers apply to those sustainability rules. But we're also switching to green electricity suppliers. There's still a lot to do. It's a small company, but it's very high on the agenda going forward. So what's the vision of our company. Building the leading European platform for home and Garden projects, there's quite a lot in that statement. I start with building, we didn't buy a complete company. This is something we want to -- that's our ambition. We are building. We are investing in the company. We're investing in the management team, in the infrastructure. We are adding buy and bills. So this is a project where we try over many over years, build something up just as we have done with Luqom. And it's our ambition to be leading European. I talked about this on the previous slides. That is not enough for us. That region is not a big enough for us. We want to have a European ambitions. This is also a platform, which means it's not one category. It's not only Garden houses. It's -- we have a multi-category ambition for home and garden projects. And that's the last important point I want to make here. It's a project. So we are not pet selling products. We are selling more projects, a Garden house for the owner of a garden or a family, Garden house is a project. It's not a product. And a project is much more difficult to sell. It has a higher value, but that's actually where our ambition is. It's not our ambition to be the -- to sell you the best BBQ grill or the law mower,it's bigger than that. So turning to the first year of our ownership. At 3i, we are following the program of best practices of what to do in the first year of our ownership that every new portfolio company follows. And first and foremost, ensure that we achieve actually the budget we invested on. And I'm pleased to say that we absolutely achieve that -- over achieved this in a challenging environment if you have followed the raw material developments of wood that have come down again. But also in the availability of product was a key challenge in the first year of our ownership, but with the company and the management coped with it extremely well. Then we need to make sure that we are aligned on the strategy. At GartenHaus, the key challenge is to choose the options that you want to follow. There are so many stuff that you can do that you need to make sure that you're actually choosing the right ones and the ones that create the biggest value in the long run. Upgrade of the organization, I already touched on that. We hired a CFO and CEO. And IT and finance is also one of the key stats that you do at the beginning, make sure that the IT is long term on the right track, and that we have the financial -- the best financial controls. That's always something we do right at the beginning because they are the basis of what we actually do. And then the growth initiatives. And there, I'm very proud that we have already delivered on the first one, on the first add-on, with the acquisition of Polhus. We'll see that on the next slide. Polhus is equivalent to more or less of GartenHaus in the Nordic region. They will use EUR 20 million in sales in fiscal year '21. Sweden-based, also run by the founder. Nordics is a very interesting market for us, given the space available in those regions. And the synergies mainly lie in cross-listing of assortment and basically that you take the assortment that Polhus has or GartenHaus has on their side and expanded to the other side. We made very good experiences with that when Luqom and GartenHaus -- Lampenwelt acquired a Dutch competitor, and that was hugely accretive, value accretive for the business. In terms of integration, the founders stayed on board is absolutely keen to retain that entrepreneurial spirit that they bring to the company, and we did do that by giving them broader group responsibilities to keep them interested and to keep them motivated and that works very well at the moment. And my last slide is the lens -- that the European -- the European map with now 10 countries that we are active in. But you can see, there's still a lot of gray, and our ambition is certainly to fill that gray with blue going forward. And with that, I would like to open it up for questions.

[Operator Instructions] We will take our first question from Philip Middleton of Bank of America.

That was really interesting. I just wondered, looking at Luqom versus GartenHaus, I can see why I'd buy a light fitting online, getting me to buy a big piece of garden sort of building online feels to me harder because I actually want to go and see and touch it before buying it. Is that why online penetration is lower? And how do you sort of counteract that issue?

It might be the reason for it. I think mean to go and see actually GartenHaus that the one you want to buy is actually not so easy as also for the stationary businesses. So if you go to a DIY store they may have 1 or 2 Garden houses there. So you get an impression. But that's why I'm saying that the category lends itself to online because all the variety that you can get online, the various versions that I think its easier online. But I think people got more comfortable around ordering something like a Garden house online without having seeing it in the past. I think that's what we have seen in COVID. But some people still struggle with it. Actually, what we are trying to do is that we do some people who bought a Garden house that they allow or do some kind of program for other people to come and see that Garden house, come to their home and visit it. That's how we try to get around that issue that people might want to see it first before they buy something.

And we will take our next question from Luke Mason of Exane BNP Paribas.

My first question is actually on Luqom. So you spoke about acquiring that business a number of years ago, and I think it's actually more than kind of 2x this money, which is what we target more broadly. I'm just wondering what kind of the outlook on future value creation there is for Luqom and the potential for more bolt-on deals? And then roughly, is there a potential exit down the pipeline for Luqom,for example? And then just secondly, on GartenHaus. In terms of the sourcing process, can you say any more on kind of how competitive that process was? And how much of an advantage whether it for yourselves in terms of having a similar business in Luqom and the experience you had there?

Okay. The first question around Luqom, I think we see ample room for Luqom to grow, that story is not completed at all. I mean, numerous levers that I not go into further detail here. But I think there is plenty to go for. And therefore, I think we're very happy to own it and to keep it. And of course, I mean, there is -- you all know the e-commerce businesses are very much on book at the moment, and we get interest, but I think we're very pleased with it. And I think we want to have some of the growth of the future growth ourselves. In terms of process for GartenHaus, there, I think that was -- the fact that we owned Luqom very, very helpful, both internally as well as externally. I think Luqom, we build knowledge, sector knowledge, we build confidence around our ability to diligent these kind of businesses. We have the network around it. So that helped us internally to build the conviction I was speaking about. But also externally with the sellers, they knew what we were doing and the management also knew what we were doing. So that gave us a lot of credibility also that could be the choice of management that they saw what we can do and what we can do to help and to internationalize, I think that was absolutely key here.

There are no further questions queued on the phone.

We have some questions from the web. The first from a person who wishes to remain anonymous, is how much of the 2022 growth are you targeting from add-on investments? And secondly, does GartenHaus also sell its products through third-party channels?

First of all, the first one is -- so with the 25% I was alluding to, more than 25%, this pure organic growth. And with add-ons, it's pretty digital, whether we do them or not. But I mean, we can -- they can be quite sizable given that GartenHaus is not huge itself, an add-on acquisition can be very sizable for that kind of business in terms of sales. And then the second part of the question was?

Does GartenHaus also sell its products through third-party channels?

We used to, but we're doing it only through our website, also because -- third-party, if we are using Amazon as marketplace as a sales channel, yes, but not through white labeling for other businesses.

And we have a question from Greg Knox at Numis. And the question is how much consumer debt is used for buying the buildings? And do you help in organizing this finance?

No. Actually, financing doesn't play such a big role. I mean it's -- the average price is a bit north of EUR 2,000. So it's not a massive investment, and we're not getting involved in the financing yet.

We have a question from Mark Sander, who is at Primo Capital. What do you move into actual housing or micro housing?

Well, I think that -- it's a -- micro housing and GartenHaus might be probably fluent, I guess. I mean I think we have focused more on the Garden houses and micro housing it's not really a topic for us. I mean it's more those wooden garden sheds more or less.

Then we have another question from an anonymous questioner, which is how should we think about market saturation and/or resale. How long do the products last?

The products normally last 10 to 15 years, I would say. But I think the market is far from being saturated. As I said, I mean, it's growing with 2% roughly. And it's moving to online, that's why we think that there is market growth for us available. But normally, that's the parameters in which we are looking.

Then we have questions from [Bruce Hamilton] from Morgan Stanley. Can you provide any more color on possible risks from sourcing or supply chain-related cost passion?

We actually had that quite a bit. The situation relaxed quite a bit already, but we could see that 6 to 9 months ago when the timber prices went up. And then I think -- what you have to do is -- or what we did is actually try to expand our sourcing opportunities or sourcing organization. So historically, we only bought from suppliers in Estonia or mainly from suppliers as Estonia. We started to look further east, but we also started to look into suppliers for some of the components in China. But the timber prices have gone up significantly. Management did a very good deal -- job, and that's the beauty of to be an online business that you can adjust the sales prices immediately. They did a very nice job increasing the prices. And actually, as a result, we realized higher gross margins than when the prices were that -- the timber prices were actually lower. So I think you have to be very, very agile in your business or in your operations to react to these spikes in prices and to cope with those increases.

Our next question is from [indiscernible] at Kepler, which is do you have any plans to open some physical stores to supplement your offer?

Not at the moment.

The next question is from Peter DeSouza at GOG. How large is the market of potential consumers for a Garden house taking into account the amount of cash required and garden space?

Well, I mean, first of all, as I said, it's a EUR 2,000 average order value admin is not humongous. It's not huge. So -- and the market size, I don't have it on top of my mind right now exactly. But it is a substantial -- it's a significant large market. And as I said, we are not only in the market for Garden houses. There are adjacent product categories in total, the market for Garden projects was everything that you have at a bigger expenditure in the garden is definitely big enough on a European level to have growth over many years to come.

The next question is from an anonymous questioner and it is, in terms of the international opportunity, the current level of GartenHaus ownership in Southern European countries, similar to DACH or is it right to think the opportunity in these regions might be smaller than in existing geographies?

They might be very different. I mean I agree that from a -- I mean it has a lot to do with habits and the culture around -- so I can't exactly tell you what the GartenHaus penetration in the country like Italy is for example. But there might be other product categories that southern or in a different geography that people spend their money on. But I think it's fair to say that people love their gardens or their houses and gardens and invest in them. And we try to find out the product that is right for that geography market. So we are not limited to Garden houses. I mean that's -- again, the beauty of our model that we can choose whatever is best for a certain geography, they are not limited to certain -- to one category.

And we have a few questions from Will James at Premier Miton firstly, what portion of sales are saunas? And what are the trends you see in that area?

So sauna is a growing category. It's interesting for us, particularly because it's anti-cyclical for from throughout the year. So I mean, you sell the Garden house in spring, and then you sell the saunas in the autumn. So that is quite nice for us. And then if you think about it, that a Garden [ psalmer ] is a garden house with an opening in it. So it's not that different as a category in reality. So it's a quite good addition. And we only started that category starts to focus on that category over the last 1 or 2 years. So it's still relatively small in comparison at growing.

What customer satisfaction scores like, given the online approach, which mainly the customers may not have a chance to see or feel the finished product? Do you have a return policy?

Actually, the -- when people get their Garden house, the customer satisfaction is actually quite high. And there is not a lot of complaints around the people expected something else when they get the product. We had a little spike in negative comments that was due to delivery last year. We saw that spike and the company almost doubled in from 1 year to the other, and they were struggling with some operational challenges, but I think that has been sorted. But actually, the people are quite pleased when they have that garden house and didn't expect necessarily something else. In terms of return policy, once the thing -- the garden house has been built, we don't take it back.

And another question from [indiscernible]. How many countries could GartenHaus be rolled out to in the next 3 to 5 years?

I mean theoretically, we could roll it out throughout Europe. I mean it's 20, 25 countries, that you go -- could go into. Whether this is feasible, is a different question. At the moment, we are in 10, I would say, it's probably going to be in 5 years 20 or more.

And the follow-up question. With the garden house product range lend itself to energy efficiency in terms of adding solar panels, et cetera?

That certainly something you can think about and something also we think about adding us accessory and so on. But that's actually -- then you get to into electric, so you need to be careful what you actually do there. But I mean, it leads itself to that kind of product, yes.

It looks like that's all the questions we have on GartenHaus, and we are just intent to move on to ten23.

Rich.

Thank you, Simon. Thank you, Silvia. Go to Page 2. Good afternoon. My name is Richard Relyea. And as Simon noted, I'm a partner and co-head of our business in North America. And along with my team, I helped to oversee our global health care sector activities. By way of background, we've been actively investing in the U.S. market since roughly 2007. Our focus is on the health care, the business technology services and the industrial sectors principally. And since opening the office, we've been very active in the market, putting to work over $2 billion in a number of leading companies in those sectors. And I've had the opportunity to introduce in the past during these sessions several of our health care portfolio, including Q Holding, Cirtec and SaniSure. And today, we'll be introducing our most recent health care investment in biologic CDMO platform ten23 Health. Next page. So within health care, we focus our proactive efforts on a very defined set of areas, preferring to be narrow and deep rather than broad and more shallow. Importantly, we want to do this within certain of the most attractive segments of health care, which benefit from strong tailwinds and have high-value defensive business models. One of these areas is the broad biotech and pharmaceutical value chain, where we're active across the spectrum of stages in bringing life-saving and life-changing therapies to market. This includes discovery, development, including the clinical trial and approval process and commercialization and post commercial activities. Our focus in these areas is on companies that help sponsors ranging from large pharma to emerging biotechs, bring their products to market faster, more cost effectively and with greater efficacy in patient safety. Now this can involve investing in [ Indiscernible ] companies, investing in manufacturers of instrumentation or consumable products used in the process, or investing in outsourced providers of manufacturing and services relating to the drug product itself or an intermediate drug product for various media and excipients that are involved. But we would not take a principal position in the drug therapy itself within this strategy. Within this ecosystem, the Biologics segment is an area in which we spend a particular amount of time, including with our recent platform investment in SaniSure. SaniSure design to manufacture single-use fluid path products used in areas ranging across discovery to commercial production, transport and storage. And having said the business is off to a very strong start, reflecting the growth potential we described when we introduced it as well as envision both in the market and for that business in particular. As a firm, we're looking to continue to make investments in the space in complementary business models, such as the biologic CDMO sector in which ten23 operates. Now very briefly, for those less familiar with the market, biologics are drugs that are made from living cell cultures as opposed to chemicals. And this can include antibodies, protein therapies or more recent and innovative cell therapies or gene therapies. The field of biologics has created the ability to target a number of complex and chronic illnesses, including rheumatoid arthritis, certain cancers, diabetes and have resulted in many of today's largest selling drugs, including blockbusters, Humira and Rituxan. Importantly, from our vantage point, this market has only begun to realize its therapeutic and commercial potential and the pipeline of candidates that are in discovery and in various stages of clinical trials is enormous. As successful molecules make their way to commercial products, this will lead to substantial need for services to support these drugs as well as manufacturing infrastructure, relevant media materials, instrumentation and production-related consumable products, all areas in which we are or may look to be active. And our ambition overall is to support an ecosystem of complementary businesses addressing this sector as we believe it is one of the most compelling in health care and the synergies we can create among our businesses could enable them to bring tremendous value to their customers, to patients and along the way to create considerable value for us as stakeholders in the process. Next page. So to that end, ten23 Health represents a second active platform in the sector, which we've recently launched in partnership with one of the leading experts in drug product development services and related manufacturing, Dr. Hanns Christian Mahler. Together, with Dr. Mahler, we're building a biologic CDMO specializing in services, including formulation and process development, analytic method development, molecule selection support and sterile fill and finish manufacturing. The platform will grow via organic investments and acquisitions and was formally launched on September 1 with lab operations and headquarters in Basel, Switzerland. Now while starting in this manner may not be typical for a 3i deal, the reason we've taken this approach is it's a sector that we know well. Pricing for mature assets is high. And Hanns Christian is a leading expert who's done it before, and he and we know what we're trying to build, and that it will have particular strategic value if we're successful. So in many respects, we're inverting our more typical buy-and-build strategy. to begin with building it over time, that will be complemented with what we anticipate to be a series of strategic acquisitions. Next page. In addition to being one of the most scientific and process experts in the field, Dr. Mahler has built and ran leading drug product development operations twice already. First, within Roche to serve their internal development formulation needs and subsequently and most recently within Lonza, where he built one of the leading drug product contract development and manufacturing organization or CDMO organizations in the world through initially a greenfield launch of a formulation lab and subsequently through the acquisition of fill and finish manufacturing capacity, very similar to the approach we will take. We're now back in Dr. Mahler and a team of other experts in the field who joined ten23 since its formation. And importantly, one of the things that gives us tremendous confidence in Dr. Mahler is he is a -- he's a fantastic team builder. He attracts tremendous talent. He brings deep and very strong customer relationships. He's an expert in the field being a panel member at many of the leading scientific industry groups where he has tremendous recognition. And importantly, he has a very strong entrepreneurial spirit and his culture is well aligned with us, including everything from how he thinks about building a business, to managing talent to his ESG approach. On to Page 6 -- on the next page, rather. A number of attractive themes underpin this interest in the biologic CDMO space. First, as described, it's a large underlying market experiencing rapid growth within innovation. There's correspondingly a large market for outsourcing of critical services and manufacturing, and that market is growing even faster, particularly where critical expertise exists in areas like formulation development and the production of novel therapies. It's got attractive long-term supply-demand dynamics, considering the number of molecules making their way through the pipeline. And lastly, this area can help to address a number of critical topics within health care, such as rising costs and access to care globally. -- as proper formulation or reformulation can lower dosing costs, can extend drug shelf lives, make therapies widely available to patient populations and can increase patient compliance. Next page. Yes. So these trends all underpin our investment thesis in ten23 Health, which, in summary, is that we're backing an experienced global leader and his strong team to repeat the success that he's had elsewhere. It's a market that we know well, which is large, fragmented and undergoing rapid growth. Scale assets within the market, particularly with pure biologic exposure are rare and are highly valued. We can employ our proven playbook of strategically transforming a business through geographic growth. organic investment and M&A. And if we're successful in creating a high-end integrated operation, serving the leading pharma and biotech companies and innovators across the world will have the chance to create significant value for all involved parties. Next page. To provide a bit more color on the services that ten23 will offer, they can generally be captured by saying that the company will help design the process that will be used to turn active ingredients into final drugs, which will then be produced, transported across the globe, stored and eventually administer it into patients. Now these services can include the actual process development, the steps taken from substance through to finished product, formulation, analytical QC activities that help to turn drug substance into a drug that can be administered to a patient effectively and safely. Now this could involve helping a sponsor decide early on which of the molecules they're focused on can be manufactured into drugs, obviously, a critical decision. -- as not all molecules will and choosing the ones that not only have therapeutic potential but also can be produced into a drug that will work safely as intended and taking into context the delivery storage and dosing realities of our health care system is extremely important. Formulation development as a service involves, picking the mixture of drug substance, the active excipients and water for injectables that will allow the finished drug to be stable, shipped, stored, dosed safely and easily and generally used successfully. Now process development means picking the steps the equipment, the production consumables, the primary packaging, whether it's vials, syringes, et cetera, that will be used in the process of producing the final drug product. And then lastly, sterile fill and finish manufacturing is the actual process of filling the drugs into their primary packaging or dosing devices, and that occurs both in the clinical trial process as well as commercial. All of these will be within scope for ten23 and having a broad range of these allows an integrated offering, which is of tremendous value to customers. So on to the next page. So this represents the broad process of bringing a drug to market. And ten23 services are used during many steps of this process. So they're used early on, as I said, when customers rely on ten23 for advice about how to manufacture and whether the molecule is manufacturable as well as certain early aspects of formulation. It's all there -- the services are also involved throughout the clinical trial and approval process from preclinical through Phases I, II and III, and that could be for formulation or other drug product development services as well as for clinical scale manufactured product that gets used in the trials themselves. And then when commercial ten23 services such as reformulation into other dosing forms and for commercial scale production are also services offered to customers. This allows for a number of touch points with drug sponsors as well as reoccurring revenues throughout the life cycle of drug approval and commercialization. They also -- these steps also placed the business in the strategic position of working with customers up to their point of commercialization and beyond, which for large scale fill and finish CDMOs represents a very compelling lead generation opportunity and hence, a very strategic asset in ten23. Next page. Now given the high cost and time required to bring a biologic drug to market, which can be 10 years and $1 billion of capital, drug product development services can have a meaningful impact on customers' economics. Taking the right molecules for manufacturability or other early, getting the formulation right, modifying the formulation through the clinical process to optimize impact on patients and limit risks such as toxicity, can shorten lead times and avoid costly delays, saving potentially hundreds of millions of dollars either in cost or in lost time a drug is under patent. So tremendous value to customers in getting this process right and in the right formulation advice. On to the next page, you'll see that these delays are well recognized within the industry. Over 60% of survey respondents indicated that formulation choices had an impact on their process, resulting in delays. And those delays were often more than 12 months, again, having a tremendous financial impact, as well as speed of bringing critical therapies to market. So working with a partner who is a true expert in the field and can help solve problems before they arise is of tremendous importance and value. And in ten23, we've got a team that's recognized as one of the best in the world. This will open opportunities for us that we can leverage in other aspects of the business or building such as fill finish manufacturing and the ongoing revenue stream that represents. On to the next page. In addition to reduced lead time to market and reduced risk of failure in drug product development, there are a number of other important aspects of formulation, which could include longer shelf lives, could include lower manufacturing costs, facilitated transport and logistics and in many of the sponsors minds at the top of the list is true competitive advantage in the product, which means that formulation can give the drug itself an advantage. Now that could be an easier dosability, it can be in putting it into new delivery mechanisms, it could involve extending the IP. But in any case, the value of formulation services on a number of different dimensions is extremely high for sponsors and biotech. On to the next page. Given this value proposition and given the increasing complexity of both molecule and modality, as well as delivery mechanism for drugs, the spend on formulation development is expected to rise materially over time, particularly for the most complex programs that will be served by the leaders in the sector like ten23. This can become an additional strong growth driver for ten23 along with the core growth in the number of molecules in development and coming into the pipelines, given the strong continued funding environment and promising innovations. So it's got a very attractive backdrop of growth potential for us and for the business. On to the next page. Now to put the growth in the number of molecules and assets into perspective, the overall biologics market is expecting double-digit growth in the number of molecules. With the modalities of primary focus for ten23 areas like monoclonal antibodies, cell therapies, gene therapies, representing some of the fastest growth areas and those range anywhere from low teens to 20s plus CAGRs over the coming years. Now we will also serve other large markets that are slightly more mature like recombinant proteins, but offer a business like ten23 with its expertise tremendous white space. On to the next page. This chart, in addition to the overall growth in the market, gives some perspective of how many molecules are in varying stages of clinical to commercial process overall. And importantly, how many of those are in the early stages, in particular with novel modalities like cell therapies and gene therapies. These categories are strong candidates for drug product services and in particular, with high-end expertise given their complexity and the number that sit within the emerging biotechs who themselves don't tend to have the in-house expertise that someone like ten23 does. So again, not only a large and strong and well growing market, but one in which the complexion of the market when you look across the discoveries and development cycle provides a tremendous tailwind of growth for a business like ten23 in some of those extremely attractive modalities or drug therapy categories. Now to the next page. So one area in which ten23 will offer strong value, again, is complex delivery devices, that could include prefilled syringes, cartridges, auto injectors. We'll also address traditional vials, which is an area of opportunity to utilize the team's expertise, but we'll certainly be active in the more complex delivery categories as well. And in terms of the backdrop of why this is interesting, these more complex delivery devices often offer strong value propositions for the stakeholders involved. They're easier to use and more convenient for patients, and in some cases, can allow for home administration and increasing compliance on the part of patients. They tend to be more cost-effective for payers and providers. As they're easier to administer, they don't require the same level of professional staff involvement and time as an IV bag based delivery, for example. And they can often be administered, as I said at home, which frees hospital resources for other activities. Lastly, for the pharma themselves, they enable innovation in delivery that provides a competitive advantage, as I said before. And they can offer the opportunity for extended patent protection. So a new formula and/or a new delivery device can extend the patent life of a valuable drug. And the improved compliance that goes along with that can help to validate the efficacy of the drug, which is important in both uptake and payer access. On to the next page. So this table intends to help show the cost difference between a novel delivery device, which is captured in this case, under SC standing for subcutaneous versus an IV bag delivery, which is administered by a hospital professional directly into the bloodstream. Given the attention to reducing health care costs, this is a notable driver alongside patient benefits. As you see, the top half is, from an administration cost standpoint, much lower in subcutaneous delivery mechanisms than in IV-based delivery mechanisms, again, feeding the benefit of being able to offer advice and services to the complex therapies that will be a strong suit for ten23. On to the next page. Over time, in addition, we expect more therapeutic areas to benefit from subcutaneous delivery devices and some of the largest such as oncology, may be likely to benefit in the hospital setting still, while others are already or are expected to benefit from being administered in-home or other self-administered settings. On to the next page. So if we're successful, ten23 will over time build a compelling suite of drug product development services along with product manufacturing and other complementary services. We anticipate having operations in both Europe and the U.S. and possibly over time in Asia Pacific. These activities will involve M&A, in addition to organic growth, given the time frame required for pure organic growth in areas such as fill and finish manufacturing. And on to the next page. And I think importantly, one of the company's key goals and one of the aspects of ten23 of which we're most proud is Dr. Mahler's commitment and his team's commitment to ESG. He takes this as seriously as any leader with whom I've had the opportunity to work. It underpins his values and as a result, the company's culture. They don't just speak about their commitment to patients, people in the planet, these principles are central to their hiring practices, to their business processes, to their procurement vendor selection, capital investment decisions and overarching company goals. For example, the business will be carbon neutral from the outset or aim to be. And one of the first hires it made was a fair sustainability officer, which for a company of this size is an incredible indication of how seriously they plan to embed these principles into their operations from the outset. On to the next page. So far, ten23 is making strong progress against our future business goals, as just described. Lab operations are up and running. The leadership team is largely filled out and also the next tier of employees, including scientists, commercial individuals, engineers, et cetera, are on board. The reaction has been very strong to the company's launch with several programs already won and a strong pipeline being developed. Now this rapid response considering our September 1 formal go live is a real testament to the reputation and capability of Dr. Mahler and the team that has been assembled. And lastly, we're already in discussions with a number of both M&A targets and also strategic partnership candidates that would allow us to access other parts of the value chain. On to the next page. And if we're successful and can build a midsized player with high-end capabilities and clear leadership in interesting areas of biologics, we should represent an attractive and scarce asset of strategic value. As you see and as noted previously, the market is certainly rewarding players with the exposure to this sector. On the left side, you see public companies with strong biologics exposure, such as Lonza, WuXi Biologics, Catalent, Samsung Biologics and Avid Biosciences. These companies are trading, needless to say, very compelling valuations. And similarly, on the right side, you see CDMOs have always received strong values in M&A transaction, and this team has only picked up in the last years. And it's particularly the case for biologic focused CDMOs, which tend to trade at a strong premium to those focused either entirely or largely on small molecules. And as we stated ten23's focus will certainly be on being a native and almost entirely biologic focused CDMO. So going forward, ten23's priorities are: continue to build out its development services platform. And we will continue to invest strongly in the infrastructure and equipment needed to serve customers. We have a solid team in place already, and we'll be continuing to grow as the company's commercial success accelerates. We'll seek to convert the already strong commercial success we're seeing into a very compelling base of customers who can be both services customers, as well as eventually manufacturing customers. We want to execute our strategic goal of expanding via M&A the platform. And fill/finish capacity is our top priority, but we continue to look at opportunities to expand into the U.S. and to expand further the suite of complementary services that we offer. And as noted a moment ago, if we execute effectively, given the strength of the team and the brand we're building behind Dr. Mahler and his team, we should be able to create a business of very attractive strategic value with strong impact on patients and our customers. With that, I'll turn it over to Q&A.

[Operator Instructions] There are no phone questions queued at this time.

We have one question from the web, it is from Alex [indiscernible]. And the question is Lonza is a company with CHF 53 billion and the industry is highly capital intensive. What gives you the confidence that you can compete?

Yes. It's a good question. So I think importantly, you need to distinguish between certain of the large-scale activities that are of the highest capital intensity and those that are a mix of high-end services and more efficient capital intensity. ten23 will focus very much on the high-end services relating to drug product development, formulation, as described, as well as manufacturing, but not at the scale of Lonza, as you point out. And through a combination of targeted, efficient, focused on the right areas and also hopefully, creative and value-accretive M&A, we believe we can build a base of strong fill/finish, which tends to be the more expensive side, I think, as you're pointing out, capabilities that will complement well the services that we offer that will allow us to capture the ongoing revenue streams throughout the clinical and the commercial scale while still doing this based on expertise rather than large-scale capital.

We have another question from the web and is, who are the key competitros ten23 is targeting?

There are a number of -- I think several of the companies I mentioned, which are large CDMOs offer product development services. There are a number of niche product development services businesses. I think as I mentioned, Dr. Mahler built within Lonza from the ground up a -- the leading -- or one of the leading product development services businesses for biologics in the world. And so our -- we will be competing with those offering the highest end services, which in many cases will be niche providers of reasonably modest scale. And so the actual universe of competitors within our set will be limited groups of some of the larger CDMOs and a very small set of high-end services businesses that are independent. So in a highly fragmented market, we see our competitor set as being a very small segment given the capabilities and the expertise that Dr. Mahler [indiscernible]..

We then have a question from Kim Bergoe of Numis. Can you give us an example of a potential client?

Potential client could be anyone from the large pharma companies to mid to the large biotechs and a number of emerging innovators. Both the large -- the large pharma can be Roche, Novartis, JMJ and others have a very strong recognition of the value of formulation. So while they have their own capabilities in-house, where they need expertise that is complementary to their expertise, they have a very strong understanding for the benefits of it, and therefore, can be very good partners. And then, as I said, small biotechs and even midsized and certain larger biotechs may not have the services capabilities and the expertise in-house. So our customer base will range throughout the small and innovative through to the largest and most sophisticated pharma and biotech players in the world. And those are -- that's the group with whom we're -- that spectrum is the group with whom we're currently in discussions. And that's -- that represents a very nice cross-section of Dr. Mahler's network and his team's network.

The next question is on valuation. How should we think about the valuation of the company at this stage and in the coming years? I think I'd pass that on to Julia.

Thanks, Silvia. I think it's very early days on the investment, obviously. So the easy answer today is you can expect to see [indiscernible] cost at September. And then we have to see how the business progresses over the next couple of years because there's obviously some interesting multiples on the slide that Rich put up earlier.

There are no phone questions at this time.

And there are no more questions from the webcast. So I think we can move on to MPM.

Thank you, Simon. Good afternoon. I'm delighted to join you today to talk through our investment into MPM. I'm Rupert Howard, and I co-head the U.K. PE team. I've been at 3i for 3 years now, where I focus on consumer retail and leisure, having previously spent 13 years at Rothschild. Next slide. U.K. has been at the heart of 3i since our inception, and we've been investing in the U.K. for over 70 years. Our investment team of 9 oversee a portfolio of 3 companies, which includes Audley, our tailor-made travel business, AESSEAL, our sealing solutions manufacturer and MPM, which is the subject of our discussion today. In the past, we've obviously had a number of successful realizations from the U.K. portfolio in the form of MKM, Mayborn and most recently, Aspen. Next slide. MPM is an international premium and natural pet food business, founded in 2002 and based in Manchester with operations in 50 countries worldwide and further teams on the ground in the U.S., Australia and China. It operates through 3 brands with a coherent differentiated proposition of being cat first and exceptional quality. The food is human grade, [indiscernible] all natural and clean label with manufacturing outsourced to our partners across the world. The Applaws brand is sold through the specialist channel with Encore and Reveal targeting the grocery channel. Having first identified MPM back in 2017, we acquired the business in November 2020 through the depths of COVID, investing GBP 125 million. Next slide. Over 2 years ago, we started developing our thesis around pet, and in particular, the pet food market, identifying a number of characteristics that make it an attractive area for investment, some of which are obvious and some of which are a bit more nuanced. To start with the obvious ones. It's big at over GBP 60 billion globally, it's growing almost universally in every market, it's international, the ultimate consumer of the pet is homogenous across all markets, and it's resilient. Even before COVID, it was clear that pet owners would prioritize their spend on their pets, above virtually all other discretionary consumer spend. The sector performance throughout COVID has only underpinned this. Some of the more [ nuanced ] characteristics are that pet food trends mirror human food trends. As a result, pet owners or pet parents are incredibly discerning about the ingredients that go into their pets diet. This has driven rapid growth in natural pet food with clearly identified and recognizable ingredients and away from the sludge and chemical ingredients effectively food production byproducts or waste of the past. And in common with lots of consumer markets, it's premiumizing and polarizing with growth seen at the top end of the market and by private label store brands at the expense of middle of the range undifferentiated products. This all led us to conclude that what we were looking for was a natural premium pet food business with clear international capability. Next slide. I'll briefly put a few stats around the global pet market, which I mentioned is worth nearly GBP 60 billion and of which nearly half and growing is premium. The largest market for premium pet food by some margin is the U.S. followed by EMEA, giving a total addressable market of nearly GBP 23 billion to MPM. And when we drill down further into premium wet food and specifically premium wet cat food, which is the heart of our business, the split is similar, with EMEA taking a slightly larger share of the GBP 4.4 billion core market. And as you can see on the right-hand side, growth in all of MPM's core markets is north of 4%. With just over GBP 100 million worth of sales today, there's clearly significant headroom for growth. Next slide. And as I mentioned, in addition to being scale and growing, another attraction of the market is its resilience. As you can see on the left-hand side, in the 2008 to '12 economic downturn, growth in pet food and in particular, in premium pet food, [indiscernible]. Some of the rationale for this is clear from the response we received to some of our consumer surveys with spend on pet being one of the last things that people would cut almost ahead of all other discretionary spending, including holidays, eating out entertainment and in some cases, spend on their children. Next slide, please. Some of these attractive trends have been further boosted by COVID-19. There's been a step change in pet ownership with Pets at Home referencing an estimated 8% growth in U.K. pet ownership through COVID. And given the average lifespan of a pet, this isn't a one-off blip but a step change in the number of pets and, logically, demand for pet food. This has been particularly prevalent in younger pet parents, with 1/3 of 24 to 35 year olds in the U.K. having a pet. As you'll be aware, these millennial consumers are well informed, they have a propensity to spend on premium and natural products and are very keen to build meaningful relationships with the brands that they purchase. They also happen to be the largest consumer group for MPM. Other shifts caused by COVID that have deepened the relationship that people have with pets, include more working from home, giving people who couldn't the opportunity to have a pet or those who already have a pet to spend more time with them. And in addition, the shift to more online purchases that we have seen across a number of categories continues to play out in pet food. Next slide, please. As mentioned at the start, we first identified MPM back in 2017, which allowed us to develop significant conviction behind the investment well ahead of the process. With its U.K. headquarters in international operations, MPM sat well within our mandate, and we leveraged our international capabilities to develop deep insight into MPM's core market. An upside of a predominantly virtual world was that the deal team included colleagues from the U.S., U.K., France and Germany. As articulated, the market ticked a number of boxes on a macro level, but MPM's niche positioning was particularly attractive. An asset-light outsourced business model is something we were able to understand quickly, given it was the same at both Aspen and Mayborn, and we felt well placed to assess the brands, given our investments in other strong branded businesses like Havea, BoConcept and Audley. A particularly attractive dynamic around MPM was the management team, who led the transition from founder ownership, have done one turn of PE ownership and were, therefore, both proven and hungry for the next phase of growth. As is often the case in a competitive auction, our established relationship and alignment with the management team was critical in helping us to win the deal. And as you'll be aware, sustainability is a priority thesis across 3i, and we are delighted that sustainability takes such prominence with MPM and sits at the very core of its proposition, which I'll cover in more detail later. And finally, the financial profile of the business is also hugely attractive with a relatively simple outsourced asset-light model, delivering compounding revenue growth of over 25% over the last 10 years improving profitability and high cash generation. It wasn't the most straightforward process falling right at the outset of COVID, a typical round one launched in February 2020, by which point, we had a number of management meetings that developed high internal conviction and even completed our Phase 1 commercial [ BD. ] But you may recall that the first lockdown came into force on the 16th of March 2020, which was the day just before the bid deadline, so the process was put on hold. But over COVID, we are pretty active trying to find a way to unlock the assets, convinced that it would be a winner despite COVID, but couldn't get the stars to align until September. And that meant that we were extremely well placed with a very high degree of institutional conviction when the process came back in September, and we always had our nose in front able to move quickly through our diligence to sign a deal at the start of November. Next page. I thought it would be helpful to set out 6 of the key attractions for us to the MPM opportunity and, in the process, dive a little bit deeper into the business. Next slide. So as I mentioned, over the last 10 years, MPM has delivered a revenue CAGR of over 25%. With its differentiated proposition and product resonating well with pet parents across the world, resulting in continued new listings in major specialist accounts and more recently, major grocery accounts. Excitingly, this has continued under our ownership with the business performing ahead of our investment case and winning some new accounts faster than we had anticipated. Next page. The moment of the [ fall ] is one of the most important bonding moments between a pet and their pet parent. And as pet parents treat their pets more and more like children, it's only logical that they feed them products that they would be happy to eat themselves. It's hard over a webcast to be able to convey how different the product is. But I'd like you to imagine for a moment your typical perception of wet pet food that brown [ gooey ] with the odd chunk floating in some sort of gravy or jelly and that fairly [indiscernible] small. Well, MPM's food couldn't be more different. Clearly, recognizable flaked fish or shredded chicken breast with some rice and water. And that's it. No fillers, no preservatives, no unrecognizable animal derivatives and all 100% natural. Next page. This clean label approach is hugely differentiated when you look at our competitor offerings with as many as 28 separate ingredients going into a competing chicken product. This is a visibly premium product, and it more than justifies the price position of the pet parent. Next slide. A further point of differentiation that attracted us to MPM is its cat's first proposition. It's an obvious point that cats are very different to dogs, yet the vast majority of pet food brands achieve scale in the larger dog market and then think that they can expand easily into cat. One of the main differences is that cats are very fussy eaters, whereas a dog will eat almost anything you put in front of them. In addition, a cat is a pure carnivore as they can't synthesize [indiscernible] vitamin A from other food products and, therefore, must eat meat. Palatability, in particular, texture, taste and aroma is absolutely key. Understanding all of these attributes gives MPM genuine authority in the category and expertise in the niche when talking to pet parents and retail buyers. Next slide. As we touched on earlier, understanding an asset-light outsourced model was something we were able to easily do. And this slide sets out quite how diversified the supply chain is. On the wet side, the majority of MPM suppliers focused predominantly on human food production with pet food manufacturing and attractive secondary business line for them. As a result, their facilities are all operated to high standards, such as BRC certification. MPM is of sufficient scale to be one of the larger pet food customers to these suppliers, ensuring a regular and reliable dialogue with both sides benefiting from the growth that MPM has delivered. Nevertheless, MPM is constantly evaluating new source options, and we recently started producing product in Ecuador. This ability to shift supply and scale rapidly allows MPM to be agile and dynamic as it opens new accounts and geographies. As a result, MPM has not been impacted in the same way as a number of competitors who've been struggling with supply shortages and empty shelves. Next slide, a bit of context on the shape and diversification of the business. For a start, the business is broadly split into thirds when it comes to the channel mix across specialists, online and grocery. As we've explained, the focus of the business is on wet cat, which accounts for about 80% of sales with dry cat used tactically to build the brand and support our retail partners. And finally, our lead brand Applaws accounts for about 80% of sales with Encore and Reveal adding revenue primarily in the grocery channel. Next slide. This multi-brand strategy allows the business to operate clear brand identities and avoid any channel conflict. This is particularly important in the specialist channel, where having specialist brands is important for the retailers. If you think about the consumer journey, a visit to a pet specialist is making a specific trick to purchase something for their pet, whereas a grocery buyer is likely to be purchasing pet food alongside their family shopping. Online clearly sits across both channels with the brands available across both specialists and grocery website. In all cases, the core proposition of the business remains true, premium, natural cat-first products that deliver a great margin to the retailers and a superior product to the pet. Next slide. While the end consumer is homogenous across the globe, the business benefits from a very broad geographic presence, and this portfolio insulates it from any specific single country shocks. The U.K. is the heritage of the business accounting for nearly 30% of sales, and key customers here include Pets at Home and Amazon. 35% of sales are from Europe, with key customers, including Zooplus and Fressnapf. The U.S.A. has been a rapidly growing market for MPM, having entered pet care in 2016, the U.S. is now accounting for close to 20% of the total business. Key customers here include specialists, such as PetSmart and Petco, with some exciting listings in grocery at the likes of Kroger and Target and very recently, online with chewy.com. And finally, ANZ is an important contributor, accounting for around 14% of sales with strong presence in Coles and Woolworths. Next slide. MPM's management team have been the drivers of its success to date, and we're fortunate to be partnering with a team that is capable of running a significantly larger business. In addition, we've used our extensive network to assemble a strong team of advisers to the Board, bringing a mix of FMCG, pet retail and pet food expertise across a number of markets. We feel we brought together a really heavy weight board, who all have themselves run significantly larger businesses and led successful exits and be able to help us manage the continued strong growth that the business is exhibiting. In addition, we're making some senior hires to bring into the leadership team to help the business capitalize on its existing position and deliver on our collective ambition. Next slide. I touched earlier on how important social responsibility was to our core consumer, and it's, therefore, no surprise that it takes such a prominent position in the mindset across the business. Given our primary ingredient is meat, we're very focused on ensuring that it is all sustainably sourced and traceable. In addition, 90% of our packaging is made from recyclable materials, which we believe is industry-leading levels. We're absolutely delighted that back in June, MPM received their B Corp certification, the first of hopefully many more assets in the 3i portfolio. Clearly, management's focus at the time was around the recall and ensuring that all resources were dedicated to resolving that issue. With that behind us, the team are now sharing this news and landmark certification with our customers and consumers, as you may have seen last week. An important part of the certification is the quantification and targets, which means that we very much see this as a first step and something we can improve on each year. As you would expect -- sorry, next slide. As you would expect, our first year of ownership plans are in full swing. The business is already performing ahead of our investment case, and we touched earlier on the progress we have made on the people side. We've made great progress with the team around strategy, full potential work and some of the more standard improvements in reporting and governance and around the finance function. But it hasn't all been plain sailing with a fairly eventful first year. From an operations perspective, the team have impressed us with their handling of the product recall in the U.K., which represents around 2% of our sales. The first, and we very much hope, the only case in the business' history. The source of the recall, a high level of mycotoxins has been isolated to our supplier in the U.K., who only manufacture our U.K. dry cat product. And like the other brands affected by this recall, we've been working hard to identify how this occurred, and obviously, to stop it happening again. The team were on the front for as soon as the risk was identified, ensuring that any potentially affected product was no longer on shelf, working with the FSA and our retailers and most importantly, supporting our customers and owners who were impacted. We're proud of the responsible and transparent way in which MPM dealt with the crisis and supported their affected consumers. Despite all this going on, the business has continued to trade well and continues to grow in its existing customers, as well as securing listings with new accounts. We've taken a strategic decision to be aggressive in building stock positions, despite the impact on working capital, particularly in our high-growth markets, such as the U.S., which has helped us to support our retailers and manage some of the logistical challenges that we are seeing across our peer set. Next slide, please. Finally, our investment thesis, which is built on 4 key pillars and where we intend to make significant strides over our whole period. The first is unsurprisingly to continue doing what the business does so well already, winning new accounts in new geographies and feeding more pets our wonderful products. We see huge opportunity in the U.S. where despite its phenomenal success, MPM is just scratching the surface of its potential. We're already making progress here on some initiatives, for example, listing on chewy.com in July, which means that we are trading well ahead of our investment case. To date, the success of MPM has been through a product-led strategy. And as the business grows, we're aligned on the importance of driving consumer awareness behind the brands and growing our customer base. And finally, it's no secret that online will continue to be an increasingly important channel for consumers, and we need to ensure that our products are available and appropriate wherever a consumer looks to buy them. Next slide, please. Now clearly, the pet sector has seen a huge amount of activity in the last couple of years in all geographies. We've seen appetite from other private equity firms, the large trade players and of course, the public markets. And while M&A is not a core part of our investment thesis, it is clearly something we keep an active eye on. We're really excited about the opportunity for MPM, and believe we're back to winning business and a great team and a fantastic market. I hope that was helpful and ready to take any questions that you may have.

[Operator Instructions] We'll take a question from Luke Mason of Exane BNP Paribas.

Just on valuation multiples continue to rise in this space like MPM, for example, some of the [indiscernible] zooplus. So I'm just wondering if you can give a little more detail on kind of valuation multiples paid for MPM or GartenHaus or what you're seeing in general in terms of new opportunities in those types of spaces? And just a more general question on the portfolio along those lines, given kind of the valuation of [indiscernible] can you tell anything about what we should expect there? [ Can they up ] came across the portfolio for kind of multiple movements?

Luke, I mean, obviously, we're not updating September yet. So we've done our PCL process, which is the first step on our valuations program and valuation progress we're looking out in the next few weeks. I mean, clearly, we've talked about in the past that we've invested in quite a few sectors now with fairly high ratings, and we always look at those [indiscernible], but we're not going to move away from our basic process of wanting to have derisking our investment case before we make any moves on multiples.

And if I could just a real quick question on Action. I know you had [indiscernible] in the release this morning. So just wondering if you can say any more around kind of the current transaction in terms of footfall, basket sizes and how that compares to the last year, for example, and how that should translate into EBITDA margins in the coming quarters?

It's a little hard to hear the last bit. But Luke, in terms of footfall and basket sizes, I would say they substantially normalized over the summer. So we've reverted back to a business that looks more like a pre-pandemic business with very good levels of footfall and basket size is moderating as a result of that. So more frequency from shoppers and shopping in a pretty regular fashion, I would suggest. And I didn't quite catch the last bit of the question.

The last was just on EBITDA margins. And I guess we saw like in Q2 quite an uptick in margins for actions. I'm just wondering if there's any comment you can give there for the coming quarters or in the coming years?

I mean nothing specific, again, particularly given where we are in the year. But the margins that we're seeing are very much in line with our business plan. And as we've said before, as each country matures, you're going to see the store EBITDA margin improve fairly materially.

I have some questions from the webcast. The first is premiumization in pet food is not new. How do you manage to make sure you innovate and lead in this area?

I think that's a very astute observation. It's something we like that more and more of the market is moving towards premiumization. I think MPM see themselves as a genuine innovator in the category. For example, their loins and treat products, which they brought out a year or 2 ago, have been incredibly successful as a new way of bringing a premium treat product into the market. But you can be assured that it's a continued focus of the team but something that we have every confidence they are very capable of developing.

And the next question is from Kim Bergoe, Numis. What is MPM's pricing and margin strategy?

MPM's pricing is understandably a premium one. It's towards the top end, if not the top end product in most of the retailers that it operates. But as I said, if you look at the quality of the product, it's not normally something that consumers find a problem. To give you context, you would buy a can of MPM cat food for GBP 1 and a consumer would typically be spending GBP 3 on a cup of coffee. So in their total spend, it's something that they're more than willing to do.

Since we have no further questions on MPM -- but I do have another one question.

Surprise, surprise.

On Action, given a strong cash position of EUR 900 million, can you give us the latest on net debt leverage and how you're thinking about timing and size of refi?

Well, Action -- Action's gross debt is about EUR 2.9 billion. So you can do the math yourself. And you've got the LTM EBITDA figure there. So you can also see the deleveraging that's going on, and it's a little below 3x at the moment. I think what we're looking at is not a refi but a distribution of some description, and we will be looking at that part before the end of the year, given the amount of cash on the balance sheet. Okay. I think that's all the questions for today. I hope you found those 3 presentations interesting. Each one very different, but sharing a lot of similar themes in the way we approach our businesses and our investment today. So thanks for your attention, and thanks for making the time. Thank you.