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

Good day, ladies and gentlemen, and welcome to 3i Group plc results for the year to 31 March 2023. [Operator Instructions] I would like to remind all participants that the call is being recorded. I will now hand over to the Chief Executive of 3i Group plc, Simon Borrows, to open the presentation. Please go ahead.

Good morning. Welcome to 3i's FY '23 annual results presentation. I'm Simon Borrows, CEO of 3i Group. Also on the call with me today are: James Hatchley, our Group Finance Director; and Silvia Santoro, our Group Investor Relations Director. The slides supporting our remarks have been put on our website this morning. As you can see from this morning's numbers, we've delivered a very strong set of results for the year to 31st of March. And we've done that despite strong persisting headwinds from rising interest rates, energy costs and other inflation impacts. And we've also had to deal with the latter stages of supply chain disruption from the pandemic and the Ukraine war. Our purpose remains the delivery of attractive long-term returns to our shareholders and co-investors. We invest selectively in private equity and infrastructure assets. and take advantage of our permanent capital to run our wins, and to build the long-term compounds within our concentrated portfolio. We focus on thoughtful thematic origination. Moving to our ambitious plans. Our objective is to at least double the profits of the companies we buy. If you set actually to one side, our recent realizations are delivering closer to 3x than the 2x target, and that's despite the pandemic, the Ukraine war and the after effects too much quantity of ease. It was a real challenge to produce these returns in the year like we've just had. So our performance is testament to the careful selection of our portfolio and our particular approach to active asset management. One key is that we can and do remain disciplined, and we don't have to buy to what we see as overpriced vintages. In FY '23, we generated another excellent return on equity, of 36% after delivering 22% in FY '21 and 44% in FY '22. Private equity produced a 40% gross investment return in the year and another good year of realizations in dividend cash flow. Infrastructure produced a 6% return and GBP 107 million of cash income. Group gearing dropped to 2% at the end of March. And we increased the proposed annual dividend by 14%. We only invest in businesses that benefit from long-term growth trends. And our focused portfolio reflects those 4 themes you see here. We produced this next slide for the first time in November last year. This is [ 300 ] page as of the 31st of March 2023. You're not buying into a big alternative fund growth in action. You are buying into the underlying theme originated investments and, it's a 3i focus on active asset management and a longer-term approach. Put simply, 83% of today's portfolio is active in private growth companies focused on value infrastructure and health care. The sustainability of what we do, has always been at the heart of 3i's agenda and culture, and we continue to make good progress in the areas of environment, social and governance. Good governance and long-term stewardship have always been central to our mission, and you can see what I mean in both group and portfolio organization. Our environmental initiatives continue to move forward effectively and we have now taken a step after careful consideration to commit the group in our portfolio to science-based targets. We will submit our targets to SBTi for validation during the course of this financial year. And we continue to develop and train our people. Our diverse international team is the bedrock of everything we do, and very much reflects the values of todays 3i. Okay. Now I'll turn to our FY '23 results. I'd like to start with private equity, where we generated 40% gross in investment return, including another outstanding contribution from Action. The strong performance was well spread across the portfolio. In fact, 90% of the portfolio by value improved their earnings for the 12 months to December. Despite that overall growth, we have followed our valuation process and reduced the multiples for those assets facing either peer group compression and/or more challenging circumstances. And James will cover valuation in more detail in a minute. We maintained a very selective approach to new investments. Clearly, the challenges of the year in a weak M&A environment have made things a bit trick, but we continued our good level of bolt-on activity for the existing portfolio of companies. Despite the challenging environment, it was also another good year of realizations with healthy exit premiums and good cash income from the portfolio. The year was marked by a resilient performance from the majority of our portfolio, mainly from the discount health care and infrastructure sectors. The travel-related assets also recovered well. But our company is a digital retail and consumer discretionary -- had a much more challenging year. That was mainly due to weakening consumer demand and the inflationary pressures we've all faced. This divergence in performance around the portfolio continued throughout the year. So the valuations outcomes at 31st of March, reflects on significant value declines in our consumer digital and discretionary investments in particular. The left-hand side of the value movement slide, shows the breadth of some of the positive movements in the portfolio this year. You can see the 9 assets below action in the list, accounted for just under $0.5 billion of value growth. As usual, a good number of these businesses have grown just as strongly as Action over the year. But the right-hand side of the slide does include particularly large write-downs to lock on YDEON. And they represent a significant drag on the overall private equity result for FY '23. In general, we continue to see healthy momentum across the majority of the portfolio. However, we continue to see the balance of this year as being a challenging environment for our digital and our discretionary consumer assets. Action produced another very strong result in 2022 with sales growth of 30% as a result of 280 new store openings and 18% like-for-likes. Scale benefits and good cost control delivered 46% growth in EBITDA and excellent cash conversion of 78%. The performance was very evenly spread. All product categories in all countries performed well and benefited from good availability of product in store at all times through the year. The strong performance I've just described has continued into 2023, with a further step-up in performance during the first quarter. Like-for-likes sales have risen to some 24% with LTM EBITDA to the end of Q3 of GBP 1.328 billion. That's 42% ahead of last year's. Once again, action supply chain has been well managed and that has meant that good availability in store across all product lines. And the strong start has continued through April, and we now have 4 months of like-for-likes of over 20%. Action has opened some 52 new stores in the year-to-date. That compares to 44 new openings at the same point last year. Cash is currently approximately EUR 400 million, and that's after paying significant dividends in December and March. In March this year, we organized a liquidity window for LP investors in Action, just under a total of EUR 500 million worth of actual interest was traded between different actual shareholders in [indiscernible]. And as part of the process, 3i acquired a small additional stake of GBP 30 million. Each March trades were based on 31st December valuation at a multiple of run rate EBITDA of 18.5x per action. And they were completed for the payments of the actual dividend at the end of March. Action also successfully syndicated new amend-and-extend agreements on its existing GBP 2.3 billion of term debt. That originally had a maturity of March 2025. That maturity was extended by 3.5 years to September 2028. The deal was extremely well received and significantly oversubscribed. That's allowed action to increase the size of the new loan to EUR 2.5 billion while maintaining attractive pricing. Action has secured a new larger GBP 500 million RCF. The new term loan, which completes this month, marks the largest single tranche euro term loan be in the European leveraged loan market since 2018. Action has now become one of the fastest-growing scale retailers in the world. And it's also through our largest and most resilient portfolio investment. Action has achieved 12 years of consistent significant growth under 3i's ownership, through all phases of economic cycle and through a global pandemic. We continue to see considerable growth potential across Mainland Europe and elsewhere. The group has opened over 2,000 stores across 11 countries under 3i's ownership, and has the potential to open multiples of that number in the future. The organic expansion for Sactional traction in very rare group of retailers where growth extends over decades, not just years. This store expansion is also self-funded. In fact, store paybacks average just 1 year and are based on very high sales densities. So, Action can continue to grow at a rapid pace, as well as making growing dividend distributions to 3i and its other shareholders. As I've emphasized before, 3i investment is permanent rather than time-limited fund capital, and that allows us to capture the significant compounding benefits from actions growth and consistent financial performance. It's no surprise that action continues to represent one of our preferred capital allocation. We're now focused on developing a select number of other portfolio companies to fulfill their potential to become longer-term compounders for the group. We have 2 early candidates in Cirtec and Royal Sanders, both of which have delivered very solid growth since our acquisition and with well set to continue on their strong trajectory. Cirtec, our medical device business has completed 9 bolt-on acquisitions since 2017, as well as building out its international footprint, into Europe and in Costa Rica. Cirtec now covers a very good span of end markets and operations. And we expect to see continued good growth over the long term. Unlike the single-use market for Central, where we're seeing some customers destocking this year, Cirtecs markets are showing a good figure in activity. Royal Sanders are leading personal care private label business -- is showing clear potential to join our long-term compounded bucket. It has completed 5 bolt-on acquisitions since our original investment, and is well set to continue to act as a consolidator in the sector across Europe. And incidentally, the Royal Sanders is supplying private label vestment range to action which is growing well. Supporting assets such as Cirtec and Royal Sanders to fulfil their long-term potential, is what we do best as we are. And that's partly to do with our people and through our processes, which support the day to day. Our B team made 4 new investments in FY '23 in a difficult transaction market. Where being disciplined and selective have been the real key. The team have also remained busy with bolt-ons, completing 11 deals over the course of the year. Most were self-funded by the investing companies with the exception of those for Luqom, Arrivia and WilsonHCG. We had another solid year of realizations with the excellent sales of Havea at a 50% uplift and a good recovery in Christ, our German jewelry business. Chris really picked up well after a very difficult pandemic. We also continued the reorganization of Q Holding. We raised GBP 332 million of proceeds from the sale of QSR, Precision Components and the Twinsburg site. That leads Q Holding an unlevered international catheter tech as an unlevered international catheter technology specialist with a strong book of business. The infrastructure team produced excellent portfolio performance in Europe, The 3iN and the other funds and very good growth in North America. But the strong investment performance wasn't reflected in 3iN share price, which actually declined over the year. This was somewhat surprising, especially when you look at how well 3iN portfolio is correlated to the various megatrends I mentioned earlier. However, we have confidence that the 3iN share price will not be divorced from its underlying NAV growth forever. Once again, we saw some excellent cash income from the team as well as continued growth in AUM. Smarte Carte in the U.S. was another travel-related asset in the portfolio, where we saw a very strong recovery performance. Domestic travel in the U.S. where Smarte Carte operates in all 50 of the top 50 U.S. airports. We recovered strongly in 2022. It also looks like international travel into the U.S. is recovering strongly this year, and that will clearly help Smarte Carte further. Now I'll hand over to James to take you through the numbers in more detail.

Thank you, Simon, and good morning, everyone. Our financial year to the end of March has not been short of external macroeconomic, geopolitical and capital market challenges. As Simon said, despite those external headwinds, the group has again navigated these issues extremely well. Over the next few minutes, I'd like to give you some of the color behind our strong performance. I'll explain why 3i continues to be well positioned for the future. Our total return on equity was 36% for the financial year, and we closed the year with an NAV per share of GBP 17.45, as you can see here. The NAV increase was driven by the significant value growth across the portfolio of 390p and a contribution from foreign exchange of 65p. Carry deductions reduced our NAV by 39p and the surplus income over costs added 41p. The deduction of 51p from dividends explains the rest of the movement. You can see the components of the 390p per share or GBP 3.8 billion of value growth on this slide. We are really seeing what a difference the consistency of Action's outperformance can have on the group with a value movement in the year of GBP 3.7 billion. It's easy to say that the group's performance is all about action, but that's not right. The positive performance in the PE portfolio actually did what we wanted them to do. I executed against our plans and delivered over GBP 0.5 billion of value growth. Excellent performance include names such as AES, SaniSure and Royal Sanders. Luqom having enjoyed outsized pandemic growth, together accounted for the biggest parts of the PE performance decreases of GBP 310 million. We also saw a net reduction of GBP 167 million as a result of us moving 8 multiples down in the period and 3 multiples up. Our 2 quoted assets accounted for a reduction of GBP 106 million. Smarte Carte performed very well in the year off the back of the rebound in Travel and accounted for a big part of the GBP 106 million gain from assets we value on a DCF basis, as you can see in this chart. Taking the pluses and the minuses together, the portfolio grew to GBP 18.4 billion. When you consider all the volatility and challenges we've seen, -- that is a truly excellent result. Simon has already talked about Action's strong absolute performance, I'd like to cover the actual valuation. Action reported an LTM operating EBITDA to Q3 '23 of GBP 1.328 billion. That translates with the usual run rate adjustment to a run rate EBITDA of EUR 1.439 billion. We've applied a consistent post-discount multiple of 18.5x to those earnings. That gives action an enterprise value of EUR 26.6 billion, and evaluation of our 52.9% holding at the end of March. After deducting debt of GBP 11.2 billion. The implied prospective multiple for action , looking back at the enterprise value at the end of March last year and considering the actual run rate EBITDA 1 year later, is just 13x. So before looking at the Action pay Group, let's just recap on some of the KPIs we showed at the recent Capital Markets seminar. Taking the last 5 years, Action is a very strong relative performer against its peers. That's true in measures such as like-for-like growth, revenue growth and EBITDA growth. This period includes the COVID period in which Action, but not all of its peers face certain COVID-related closures. This picture of relative performance is the best backdrop against which to consider our Action valuation multiple of 18.5x. The graph on the left for the peers shows the LTM basis. The better performing peers in the set -- a bunch at the top of the graph with the group, 5 below Dollarama, Costco and Ollie's above the average, with multiples in the range -- 18.2% to 23.8%. Actions rating compares well to this group, especially when compared to its KPI outperformance. On an NTM basis, shown on the right, Actions growth trajectory puts it slightly -- multiple -- more in the middle of the pack. We don't publish an estimate for actions in NTM EBITDA, but we take comfort from the look back, which drives the 13x multiple. We also use other data points to triangulate our valuation. Our DCF doesn't meet demanding assumptions to support actions valuation. And we now have the transactions completed as part of the recent LP liquidity window to add to the LP transaction back in 2019. Taking all together, we're very comfortable that the 18.5x a multiple is appropriate, as a basis for determining the fair value of our interest in Action. Okay. Let's turn to private equity valuation multiples. I'm pleased to report that since 30th of September, markets have made a partial recovery. In fact, the [ FTC ] in the S&P are up 10.7% and 11% -- and 14.6%, respectively. This leads the PE portfolio position relative to the average in the peer sets, as you can see on this slide. Just to remind you, this chart shows our PE performance valuation multiples in dark blue compared to the average of the multiples to the relevant [ PSS ] in light blue. This year has been very challenging, over which to consider valuations. But the valuation process we use at 3i remains rigorous, and the embedded independent challenge by the Board's valuation committee and by KPMG is highly valuable. Having a relatively small portfolio of assets with low churn, very much aids this process. During the first half of the year, as a result of a combination of peer group weaknesses and specific soft performance, we reduced the valuation multiples on 8 assets as shown by the red arrows, which we've added over the bars on this chart. These include Luqom and YDEON. Our valuation buffers built over recent years were eroded at the end of H1, but they haven't disappeared completely. The buffers have begun to rebuild over the second half of the year. We marked one company multiple down again in H2. First, also moved 3 company multiples up a little. In each case, they represent serial outperformance in our portfolio who are beginning to drop towards the lower end of the peer group range. All of our portfolio is marked within the range of the relevant peer group multiples. Our overall portfolio weighted average multiple, excluding Action, remains at 13x. We continue to believe that multiple is appropriate, both taking a cross-cycle view as we do, and when considering that the majority of the companies in the portfolio are on track to more than double their profit over 5 years. It is also worth remembering that valuation levels continue to be underpinned by realizations at significant premier to their book value. Our private equity portfolio generated a gross investment return of 40%. And to be clear our investment return included a GBP 622 million on foreign exchange, including GBP 129 million gain from the hedging program we put in place in October and November last year. Our private equity realizations in the year were GBP 857 million, made up of GBP 332 million from the 3 partial disposals completed by Q Holdings, GBP 471 million from the sale of Havea completed in October, and GBP 47 million from the disposal of Christ we completed in January. Our cash investment of GBP 381 million is below what we would consider a normal run rate level of investment, but that reflects the difficult market conditions the investment teams faced this year. We focused on leverage at the half year. So I thought it would be helpful to repeat this slide again with the updated position. Our private equity portfolio leverage, as you can see on the left of this slide, continues to be focused on senior-only debt and it's set at a moderate level. At the end of March, the net debt-to-earnings ratio across the portfolio ex Action reduced to 4x. That's down from 4.6x at the beginning of this financial year. Actions end of March debt ratio was 1.8x. As Simon outlined, we're delighted that Action has since signed an amend and extend transaction group's largest term loan, which extends its maturity by 3.5 years. The chart on the right shows the maturity position of the private equity portfolio as a whole at the end of March. If we were to recast this chart after the closing of the Action debt refinancing, 68% of the portfolio would have maturities beyond 2026, which we think is a very solid position to be in. Term debt across our private equity portfolio, it's now over 70% hedged against interest rate risk. That's up from 2/3 at the half year, at a weighted average maturity of more than 3 years. And the all-in debt costs this portion of the book remains below 6%. Continued strong performance of action and good performance in other vintages led to a GBP 392 million increase in the carry payable in the period. So on the balance sheet, the carried interest payable has increased to GBP 1.3 billion, as you can see on this slide. This is before we reflect the crystallization of GBP 200 million of carry, which we executed in parallel with the LP trading in the Action liquidity window. The carry liability will not reflect this purchase until the cash actually closed in May. As a result of that purchase, the carry scheme related to Action will now accrue at a rate closer to 7.5% of GIR. In terms of all other private equity vintages, a sensible guide for net carry accrual as a percentage of GIR, at least once they pass their performance threshold is circa 12%. Our infrastructure team delivered a gross investment return of 6%. The GBP 23 million unrealized profit shown on this slide is made up of a gain and a loss. The gain is GBP 116 million from U.S. infrastructure and funds, principally from Smarte Carte, which is rebounding very strongly in line with the U.S. travel industry. The loss is GBP 93 million attributable to the 10% decline in the 3i share price over the year. Dividend and interest income of GBP 47 million largely reflects the dividend from 3iN, which was up 6.7% over the prior year. Scandlines generally have a solid year, and was largely free from pandemic effects. It delivered good relative growth compared to 2019 in freight and enjoyed a return to its usual peak summer leisure volumes. The year-end valuation of GBP 554 million reflects GBP 38 million of dividends paid as well as the cautious short-term outlook, and this is consistent with the approach we took at the half year. The value of the infrastructure portfolio, including Scandlines was GBP 2 billion or 11% of the portfolio value at the year-end. Private Equity delivered a strong contribution to the operating cash profit, not least from the GBP 325 million dividend from Action. Excluding the Action dividend, we still made a healthy cash operating profit of GBP 39 million, which is well ahead of our breakeven objective. In terms of costs, we set out last year that we would expect to see a full year effect of the recruitment that we did in FY '22. And this has indeed been the case. As you can see in the operating cash expense increased to GBP 133 million. Other costs also increased due to the impact of inflation. I can assure you that we remain focused on cost discipline. And I'm pleased to report that cost as a percentage of AUM were only 50 basis points, an improvement of 10 basis points compared to last year and allow more of the return to drop to the bottom line for shareholders. Moving to the balance sheet. Our portfolio value ended FY '23 at over GBP 18 billion, which is more than double the GBP 8 billion, it was just 3 years ago at the end of March 2020. Our balance sheet remains simple and transparent. It's principally made up of investments and cash on the asset side and loans and carry payable on the liability side. Gearing at the year-end remained very modest at 2%. Cash at year-end was GBP 412 million, of which 91% was held in AAA-rated money market funds. 3i group has access to a wide range of well-rated counterparties for strict limits for each one. We remain open to opportunities to optimize our debt structure. But we continue to have no appetite for structural gearing. Given the growth and the size of the group, we've tweaked our capital resource tram lines. We now have a stated aim to operate within a range of GBP 500 million net cash and GBP 1 billion of net debt, up from GBP 750 million. With the usual tolerance to operate outside of this range on a short-term basis, depending on investment and realization flows. Finally, let's turn to the dividend. This morning, we announced our intention to pay a second dividend of 29.75p, which combined with the interim dividend paid in January, will make a full year dividend payout of 53p. This remains subject to shareholder approval and would represent a growth of 14% on the prior year. Before we get into Q&A, I'll hand it back to Simon.

Thank you, James. I'd like to just close with a few final remarks. At 3i, we're excited about the shape of the group and a potential in our portfolio. We have great teams with plenty of experience and disciplined processes to underpin our performance. We have a long-term mindset. That's the result of investing permanent capital, and we see significant growth stretching out in front of us, especially from the compounders in our current portfolio. Action is clearly the leading light in this regard. And we are really beginning to see Action's compounding starting to manifest across 3i Group's returns, with strong income as well as asset growth contributions. Action started 2023 very strongly with a significant step-up to true like-for-like performance. That performance is driven by Pekoll as Action becomes a key destination for customers buying essentials as well as looking for a surprise. The magnitude of the step-up in trading in the first part of this year is stronger than we expected. And it's important to note that there are some very challenging like-for-like comparisons ahead and in the last 4 months of the calendar year in particular. So we don't necessarily expect the current very high level of like-for-likes to be sustained throughout the entire year. But the 3i story is not just about Action. As you've seen, we've delivered strong compound returns from all 3 of the group's segments since the restructuring of 2012. And we expect to see those strong contributions continue in the years ahead, and in particular, we expect to see other companies graduate from the PE portfolio into our long-term hold bucket. I'd like to close our formal remarks with a comment on active asset management in 3i, which is something we also focused on as part of our restructuring in 2012. As investors in private equity and infrastructure companies, we pursue a highly involved all of asset management. Our approach is only practical with the concentrated nature of the current 3i portfolio. We start at the outset of our acquisition process with an investment case, which we also in conjunction with company management. The simple goal of the investment case is just to grow the business to a -- be established profits over a 5- to 6-year time scale. Managers of each business are closely aligned to the plan outcome and to 3i, through that participation in equity and equity-like plans as co-owners of the business. These long-term equity plans 5 plus years are much more meaningful than short-term annual variable pay. In successful investments, this 3i approach will deliver significant capital sums to the management team. The management team is supported in the execution of the investment case, by a Board primarily made up of experience through our executives or others hired by 3i. We bring particular sector or special skills in the situation. The Board in 3i investor team have regular monthly involvement with the company and are assisted by others, other members of the local investment team. Our teams are regularly involved at different levels throughout the organization of the investee company. Active and involved governance is one of the key ingredients of our success. 3i also provides specialist, legal, corporate finance, banking, ESG and digital expertise to assist investee management teams to share in best practice. That support particularly relates to specific projects in funding and M&A as well as their ESG and digital agendas. The 3i Investment Committee and the senior partners in the private equity and infrastructure investment teams review in detail, progress against the investment case of each investment every March and September. It is in these reviews that investment community challenges the investment teams, on the progress their businesses are making against their specific investment case. On those occasions, the investment committee may agree to changes which could either prolong 3i's ownership by marking the asset as having potential for our long-term portfolio or even shorten the life of the plan to capitalize on current opportunities in the M&A market. A more highly intensive approach to asset management is only possible because we are a conviction investor with our top 20 assets making up 94% of our portfolio value. Our approach to asset management has the key to our strong investment performance since 2012, with our focus on good governance with real influence, a long-term perspective and permanent capital. We have a real competitive advantage against other forms of stewardship, be they more hands-off private or shorter-term focused public ownership models. Our business is not complex, but it does rely on consistency and discipline, and it helps to keep it as simple as possible. These are the attributes of the heart of our strategy and they give us confidence in the future. Despite the external challenges, we will continue to face in the months and years ahead. Thank you, and we'll now open up things for questions.

[Operator Instructions] We will take our first question from Bruce Hamilton of Morgan Stanley.

I've got 2 or 3. On the Action like-for-likes at 24%. I'm just checking, I don't think there's any sort of prior year adjustments we need to think about. So that sounds like a relatively clean number. And I hear what you're saying about -- that the comps becoming harder as we move into the latter part of calendar '23, but I assume you would expect that, that comes down to the sort of high single-digit level, i.e., over the next 12 months. Your like-for-likes probably well above that, well into the double digits, just to check I'm not missing anything. Secondly, linked to that, I guess, the operating leverage set out at action -- that's sort of 14-ish% seems relatively undemanding. So I just wanted to get a sense of whether is -- if there was any chance that've been changed or certainly the degree of conservatism you feel is built in? And then final point, just given the appetite for the debt extension at Action. How are you thinking about potential sort of releveraging timing for that business?

Okay. Thanks, Bruce. I'll deal with these questions around Action. So, Yes, it is a -- serve as a capital market day. It is a pretty clean comparison is, so that's point number one. I think on the like-for-likes, we do have some very strong trading in the second half of last year to jump against. And that is particularly strong from September through year-end. So we would expect the year in accordance with what we guided about our plan to end up with like-for-likes in the high single digits given the high inflation environment we're -- still seeing across the high streets. But when we offered that plan, we didn't expect to start the first 4 months of the year with like-for-likes over 20%. But the weight of trading is in that second half of the year, and we need to bear that in mind. In terms of operating leverage, again, it's a bit of the same thing. The scale benefits come through from trading at any period of the year at -- that 24% type of like-for-likes are more powerful than we were expecting perhaps this year. So again, we can't predict how it will be in the second half of the year, but certainly in the first half of the year. That is delivering scale benefits that we have on plan for or put upward pressure on the EBITDA margin. In terms of the debt extension, we decided to, again, keep things simple and be cautious. So focus on simply an amend and extend transaction as the first step of action moving back into the debt markets. As I described, that was a very successful exercise. We haven't intended on upsizing the terms and, b, given the weight of demand for action paper from investors. We decided to do that in a small way. In due course, we will consider whether we do a more straightforward refinancing for Action, the company is deleveraging very rapidly, even while it's paying out significant dividends. So that's a topic on the agenda for due course, but we're not actively working on our ticket at the moment. It's been a busy period with the trading with the amended extend and pulling half the LPs for this.

The next question is from Luke Mason of BNP Paribas.

Three questions. Firstly, on deployment, I heard your messaging around the difficult outlook. I'm just wondering what you're seeing and expecting for the rest of the year in terms of deployment. Have you seen valuation multiples come off for the types of companies that you may be looking at? And secondly, just similarly on realizations, I had some good realizations in FY '23. Just wondering if you have anything in the pipeline or how we just think about kind of cash realizations for the next year? And then thirdly, just on Action, just a cheeky question. I wonder if you can give any details on kind of gross margin progression in H1 -- in Q1, sorry, just given some of the challenges with cost inflation, et cetera?

Okay. Again, why don't I take those ? I mean, on deployments, if I look at with today, I think it's pretty patchy. We're not seeing -- significant increase in transactions that some bankers and others talking about. We are locked on in certain sectors to some interesting situations, but we're not convinced that the vendors have walked away from last year prices or the prices before, we'll have to wait and see. And there is still quite a lot of capital looking for a home, even if there isn't the debt appetite in the -- where it's been there in the past. So we do expect to continue with a reasonable level of transactions, but we're going to be vigilant around pricing as we normally are. And we think it will be fertile brand for bolt-ons that side of the activity level is pretty strong. In terms of realizations, I think this is going to be more second half loaded for us given the likely level of confidence in the first part of the year. But I would still expect another year of GBP 1 billion plus of cash inflows in the form of dividends and realizations this year given the plans that we have. In terms of the actual gross margin, it's pretty much where we expected to spend where we've signaled, which is we're managing various cost inflation across the piece internally, but we are seeing some cost of goods sold reductions, particularly out of the Far East, which is helping with all of that. So -- so we're feeling pretty comfortable about where that's at the moment.

[Operator Instructions] The next question is from Chris Brown of JPMorgan.

Simon. James. Just a quick couple of questions. Just on the amended extent. Can you talk a little bit about the terms of that or what might have changed just in terms of thinking about maybe covenants or the spread or anything like that? And also what hedging arrangements you might have made?

The hedging, the -- final point, Chris, the hedging arrangements haven't really changed. We had extensive hedging arrangements in place covering action steps, which go out in a good way. So those very much are unchanged in terms of the interest costs that we're paying. The margin on the loan itself has not changed very much. We were at the tight end of things given the interest in the paper. And I think in terms of the amending, then we've cleaned things up. So it's very much a cup of lies set of loans with a good degree of flexibility for Action.