Eurocell plc (ECEL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Eurocell plc Full Year Results Investor Presentation. [Operator Instructions] the company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today, and we'll publish those responses where it's appropriate to do so on the Investor Meet Company. Before we begin, I would just like to submit the following poll. And I would now like to hand you over to the executive management team from Eurocell plc. Darren and Michael, good morning.

Good morning, and welcome to Eurocell's 2023 Results Presentation. I'm Darren Waters; and CEO and sitting alongside me is Michael Scott, CFO. So our presentation this morning will cover off our 2023 results, followed by a run-through of our new strategy, and we'll be happy to take questions on both at the end of this presentation. So starting with our results. I'm pleased to report that despite a tough market and in particular, further deterioration in the second half of last year. We delivered profits in line with expectations with profit before tax at GBP 15.2 million. Sales finished the year down 4% at GBP 364.5 million with volumes down 6%. Now given our exposure to new build, which accounts for 15% of group revenues, and the market decline in RMI, I think this is a very resilient performance. If you cast your minds back to our session in September when we announced our half year results, we flagged then that due to further weakness in our end markets we were not anticipating the normal seasonal uplift in demand. And that's exactly how things played out. In fact, sales through the autumn period were worse than we had assumed when we did our reforecast. Fortunately, we were able to offset that sales shortfall, which is around GBP 5 million in the final 4 months through tight cost control and improved margins as input costs reduce, specifically recycled in feed and electricity. In terms of the things within our control, we took swift action to remove GBP 4 million of annualized overhead an exercise that was completed before the midyear. In addition, we optimize inventory levels to drive a GBP 17 million improvement in cash flow versus 2022. And our strong performance on cash resulted in us finishing the year cash positive, which paves the way towards announcing a GBP 5 million share buyback program, of which we completed around half as we speak. The review of our business strategy was completed in Q3, and I'm really delighted with the outcome. I think the team did a great job developing a very incredible plan, but more on that in part 2. So I'm now going to hand over to Michael, who will run through the financials in more detail.

Thanks, Darren. So let me start by going through the financial highlights on Page 5. Against a market that was down double digits in percentage terms, we delivered some resilience in our sales performance in 2023, with volumes 6% lower against the strong comparative period. As expected, adjusted profit before tax decreased by 47% compared to 2022. This reflects lower sales volumes and margin pressure as well as the impact of continued cost inflation, which we partially offset with selling price increases and actions to lower our cost base. Adjusted earnings per share were 11.0p and with the proposed final dividend of 3.5p per share, total dividends for the year are 5.5p. In the light of deteriorating market conditions through last year, we prioritized cash flow, and I'm pleased to report net cash from operating activities up 50% on 2022, with efficient stock management driving good working capital performance. As a result, net cash on a pre-IFRS 16 basis was GBP 0.4 million compared to net debt of GBP 14.4 million at the end of 2022. We have good headroom on our debt facility, which in line with our focus on enhancing shareholder returns, supported the introduction of a GBP 5 million share buyback program in January 2024. Turning to the full P&L on Page 6. I'll explain the drivers of our sales performance and the other components of the EBITDA in a moment. But first, on the right of this slide, I've set out the actions we've taken on cost in response to weaker markets and lower volumes. Importantly, this includes 2 major restructuring programs in Q4 2022 and Q2 '23, which together resulted in a head count reduction of approximately 9% of our workforce and annualized cost savings of GBP 9 million. The nonunderlying charge of GBP 3.5 million we recorded in 2023 includes termination costs of GBP 2.7 million for the head count reduction in Q2. The nonunderlying charge also includes implementation costs of GBP 0.8 million for strategic IT projects. These costs have been charged to the P&L rather than capitalized in accordance with the accounting rules for solutions, which are cloud-based. They've been treated as nonunderlying on the basis that their material multiyear projects, which underpin our digital strategy. And I'll think of our systems replacement later in the presentation. Moving on to the components of sales growth on Page 7. Total sales were down 4% in weak markets and against a strong 2022 comparative period with overall volumes down 6%. As you know, RMI is being impacted by weak consumer confidence reflected in homeowners pulling back on discretionary spend in response to higher cost of living and reduced housing transactions. We've also seen a steep decline in new build housing activity, reflecting successive interest rate increases and falling house prices. Profile sales were down 4% with volumes 7% lower, reflecting this reduced RMI and weaker newbuild activity partially offset by the benefit of recent market share gains. We acquired some new accounts following the closure of DuraFlex in September, and our fabricator customers are benefiting a little from the collapse of Safestyle in October. Building plastic sales were also down 4%, including volumes 5% lower, with RMI activity in the branches subdued, although it is encouraging to report that we're still seeing reasonable volumes of made-to-order items such as garden rooms. On to adjusted operating profit on Page 8, which was down 41% as expected. Looking at the detail and moving left to right across the chart, the volume bar of GBP 10.8 million includes the impact of volumes down 6% and the adverse effect of operational gearing. Moving to price margin at 0.7, this is a net number with several components. We continue to offset input cost inflation, particularly for labor, electricity with selling prices and our program of operational improvements also reduces costs, but increased competition for limited demand led to an increasingly difficult pricing environment and margin pressure in the branches. Continuing along the chart, as you know, we also mitigate raw material cost increases by using recycled material. However, 2023 profits were significantly impacted by feedstock prices 21% higher than 2022, leading to increased costs of GBP 1.9 million. Prices peaked in the first half, driven by reduced material availability following a contraction in the window replacement market, but we've secured additional sources of supply, which alongside reduced demand and lower virgin costs also saw feedstock prices fall back in H2, and that trend has continued into 2024. Looking beyond the chart, it is important to confirm that the economics of recycling remain attractive. The 17,500 tonnes of recycled material we consumed last year delivered an absolute gross margin benefit of GBP 2 million compared to the cost of using virgin material. Moving along the chart, labor inflation of GBP 3.2 million represents our April '23 pay award of 5%, with increased variable labor costs of GBP 1.4 million being higher share-based payment charges in 2023 compared to '22 and restructuring savings of GBP 6.5 million represent the benefit of the cost reduction programs I described earlier. In summary, profits are down in 2023, but we believe the actions we've taken position the business well to benefit from positive operational gearing when markets recover. Moving on to CapEx on Page 9. Investment of GBP 8.9 million in 2023 was mostly maintenance CapEx, although it did include GBP 1.5 million to improve staff welfare facilities in the branch network. Our guidance for 2024 is for CapEx of approximately GBP 14 million. There is GBP 3 million to drive initiatives under our new strategy, including 10 new branches, and we'll come on to the strategy shortly. There's also a further GBP 2 million for branch relocations and refurbishments and GBP 1 million for the development of our IT infrastructure. The remainder is largely maintenance CapEx. As I said earlier, implementation costs for IT solutions, which are cloud-based are charged to the P&L rather than capitalized. Our new HR information system and ERP replacement fall into this category of which GBP 0.8 million was charged to the P&L in 2023 as a nonunderlying item on the basis that there are material multiyear projects, which underpin our digital strategy. As a reminder, our existing ERP system will be unsupported by SAP after 2027. We also believe that its age profile has become a limiting factor in the development of our business. The current system was implemented in 2006 when the group had only a small branch operation and no recycling. We have, therefore, started a project to replace that, which we anticipate will be a 2- to 3-year process. And I'll cover the total cost of the project and the benefits we expected to deliver in the strategy section of the presentation. Coming back to CapEx and to sum up, the tables illustrate the significant investments we've made over the last few years to build out the infrastructure required to resolve operational constraints. As a result, we now have manufacturing, recycling and warehousing capacity in place well ahead of demand, which is supporting the delivery of improved operating efficiencies now and will facilitate our strategic initiatives and further growth in the future when markets recover. Moving on to working capital on Page 10, where the net inflow of GBP 13.4 million includes the impact of a stock reduction program, which was the main driver of our strong cash flow performance in 2023. Stock days were 84 compared to 93 at December 2022. It is worth reminding you that following significant supply chain disruption, we built manufactured stocks in 2021 and early in '22, to protect against the impact of raw material shortages. However, once we established supply chain and operational stability, we began to reduce our stock position. This was driven by improved conformance to production plans and operating efficiencies, where good performance is illustrated in the 3 charts on the right of the slide. As a result, stock levels fell by GBP 6 million in the second half of '22 and by a further GBP 13 million in 2023, which does include the benefit of lower input costs, and we're very pleased with that outcome. On the sales ledger, debtor days were 27 compared to 30 at December 22, with the absolute balance of receivables down GBP 6 million in the year, reflecting the impact of lower volumes and good cash collection. Finally, the payables reduction of $5.8 million since December '22 also reflects the impact of lower volumes. Looking ahead to 2024, we're guiding to an outflow for this year of around GBP 3 million. This reflects our ongoing work on stock optimization as well as the impact of our strategic growth initiatives, which we'll go through shortly. Turning to the full cash flow on Page 11, where we have all the components of a significant reduction in net debt. I've been through the fact it is driving the strong working capital performance. So now moving left to right across the chart. Nonunderlying costs were a cash outflow of GBP 3.2 million. CapEx payments of GBP 9.1 million include the asset additions covered earlier, plus a small reduction in our CapEx creditor of GBP 0.2 million. Then the refinancing charges of $2.3 million, plus the cost of treasury shares purchased to satisfy employee share schemes of GBP 0.7 million, which reflects the Board's decision that employee incentivization through equity should be through shares acquired rather than issued. So after dividends payment of 10.3%, this all adds up to a pre-IFRS 16 net debt reduction of GBP 14.8 million, resulting in net cash of $0.4 million at the end of 2023. IFRS 16 adds GBP 59 million to debt, which you can see in the top right table is down GBP 5.1 million compared to 2022. This reflects the net impact of branch and other lease renewals of GBP 10.5 million, less cash payments on leases of GBP 15.6 million, which are accounted for within net cash from operating activities on the left of the chart. Overall, this leaves us with good liquidity and significant headroom on our debt facility, thereby providing security, flexibility and options for the future, including, as I noted earlier, the introduction of a GBP 5 million share buyback program in January. Finally, on this slide, we extended our GBP 75 million sustainable RCF for a further year in May, and it now matures in 2027. So to sum up on Page 12, our financial results in the short term have been significantly impacted by continued weakness in market conditions. In response we've acted on costs, securing significant annualized cost savings, continued our program of operational improvements and focused on efficient working capital and cash flow management. As a result, our debt is low, and we have good headroom on our bank facility. We expect 2024 to benefit from the easing of the input cost pricing that we saw in the second half of 2023. Our operating facilities are well invested with good levels of available capacity. Overall, therefore, we believe the business is now well placed and positioned for a market recovery and to progress our new strategy, which we believe has the potential to create significant shareholder value, which Darren is now going to take you through. Finally, to the right of the slide, there's a summary of our 2024 technical financial guidance, which I hope is helpful.

Thanks, Michael. So now let's talk about our new strategy, which we started working on during the summer, and it involved a number of people across our business. And what we've got here, I think, is a highly focused plan that has genuine potential to transform Eurocell in the medium term. We summarized the new strategy in the Eurocell house that you can see here, and it starts with our new purpose, which is about creating sustainable building solutions for the trader today, the homes of tomorrow and the environment of the future. Through this new strategy, we see a clear pathway in the medium term to organically grow revenues to GBP 500 million, delivering an operating margin of 10%, which is equivalent to obviously GBP 50 million of operating profit. The strategy is built on 4 pillars: customer growth, business effectiveness, People First and ESG leadership underpinned by our 4 new values, Agile, Gritty, Proud and Decent. So let's start by talking about the customer growth initiatives. And the biggest one by far and away is our branch network, and this is already receiving a lot of focus through a number of initiatives. We are already the largest national network of specialist door and window trade counters in the U.K. with 214 branches. However, we haven't opened any branches in the last 2 years, and that's about to change as we see an opportunity to expand the network to 250 branches by owning 10 new branches every year for the next 3 years. In addition, we're also starting to relocate branches to better locations and larger formats. Now format is important because we need larger branches to support our new door and window proposition, which we're in the process of rolling out following a very successful trial, and I'll talk more about that next. Larger format stores also allow us to showcase our extended living range of garden rooms and extensions, providing homeowners with a destination outlet where they can experience the product. As part of this network expansion, we will be specifically targeting a number of white space locations in the Southeast, a region where we are currently underrepresented. To that end, we have 7 sites already identified and in-flight ready to be opened in the second half. We're also taking the opportunity to try new signage in which stores and windows will feature much more prominently alongside the Eurocell logo. So to summarize then, more branches in optimal locations and a shift towards larger format stores to support our new door and window and extended living proposition. Let's move on to doors and windows then. So when I joined the business in April last year, I was surprised to discover that doors and windows only accounted for about 10% of our branch sales. We did some benchmarking and learned that if done well, it has the potential to be a lot more than that and become the centerpiece of our branch proposition. Therefore, in the second half of the year, last year, we embarked on an initiative to transform the way that we supply and sell these products. We selected 6 trial branches spread throughout the U.K. We trained branch staff, improved quotation process, reduced lead times and sharpened our prices. Partnering with some of our major window fabricators, we commenced the trial at the beginning of November and immediately generated a significant uplift in sales, which has continued to grow week on week. If I look at the average of the sales through those 6 branches over the last 4 weeks, the increase is fivefold compared to the volumes that we were selling pretrial. So across the network, our goal is to grow sales from 1,100 window frames per week to $6,300 per week at maturity. And to put that into context, that is broadly equivalent to the number of frames being sold by Safestyle at the peak. We've seen the same increase in sales on composite doors, which are manufactured in-house at our factory in Birkenhead and we already have the capability to meet the forecasted demand without having to invest in further space or machinery. We have another 9 branches ready to go live after Easter, and we will have 54 branches operational by the end of this year with the balance to follow in 2025. And clearly, we'd like to go faster, but it will take another 12 months to put the required fabrication capacity in place to service the expected demand. Applying a degree of sensitivity, 50% of our objective, this generates incremental sales of GBP 35 million. But based on the trial results, this feels more than achievable. The drop-through on the increased sales is margin enhancing as there is very little incremental cost associated with these sales. Within the current network, there are only 6 branches that are too small to be converted to handle doors and windows, but these will be addressed through relocations. And as an example, we're currently relocating our smallest branch in Dewsbury, which is 1,000 square feet to a much new larger site just down the road. We're really excited about these opportunities and will significantly expand our share of wallet with existing customers and help us to acquire new branch of customers that we can then sell other ancillary products too. For the new branches, it will also speed up the time to reach breakeven. Typically, at the moment, it's about an 18-month time period to get to profitability, and that will show to be no more than 12 months. Right. We then turn into -- sorry, we entered into [indiscernible] our extended living range of garden rooms and extensions. Now this category has grown significantly since we entered the market 2 years ago as homeowners look to create more living space. We're aiming to be the best in the market by offering a high-quality product and a great installation experience. And if you look at some of our trust pilot reviews where we are currently averaging a 4.6 rating, you will see that we are delivering on this customer promise. We're expanding our Garden Room range to incorporate new designs and greater optionality, which will allow us to take share from other players in the market. Our Home Extensions range was launched in September and has proven to be very popular with homeowners by reducing build times and project costs through our use of modern methods of construction. In aggregate, we see this becoming a GBP 30 million revenue product category in the next 5 years as we really start to leverage our digital sales activity and improved installer network. So that's a sixfold increase in our 2023 sales, but we're already on target to double that this year. We are, therefore, initiating a campaign to expand our installer network to meet this anticipated increase in demand. Next is digital. And digital is key to delivering many of our sales objectives as we look to build awareness of our products and home improvement solutions. Based on research conducted by MaCAN, Eurocell is already the #1 trade brand with 85% prompted awareness. We aim to leverage that position by driving more relevant traffic to our website, thus improving conversion rates to drive more e-commerce sales. We will also offer the convenience of 1-hour Click and Collect through our branch network and a drop ship facility for adjacent goods that may be relevant to our customer base. Last year, we completely revamped our website to improve navigation and searchability, and we have an opportunity to mirror our leadership in trade counters by creating the strongest online building plastics proposition. For homeowners, where our brand awareness is low, we are targeting to become the place to go for garden rooms and extensions. Our digital activity through social media platforms is beginning to build some real traction with inquiries at record levels and strong conversion rates. So as a result, we've recruited more sales consultants to ensure that we continue to service inquiries efficiently. And the last point on customer growth is fabricators. Now as the #1 profile supplier, we do not believe that it would be sensible to aggressively target further share growth right now given the current market conditions as this would inevitably lead to price erosion. Instead, our priority is to partner with our existing fabricators to help them grow by giving them the opportunity to supply our branch network and leveraging our leading position in new build. For the branches, we've now partnered with 10 large fabricators who have the process capability and efficiency as well as the headroom to build their capacity as we ramp up sales. Growing our branch sales to 6,300 frames per week is the equivalent of winning 3 very large fabricators and will utilize spare capacity in our extrusion facility. That said, we will selectively look at fabricator opportunities if they present themselves. We also plan to expand our aluminum offer with the aim of providing a one-stop shop for fabricators and installers to sit alongside our PVC door and window products. Later this year, we will launch a new aluminum roof lantern that will speed up installation times and reduce callbacks for filters due to its innovative design, which includes a unique patented connection device. The feedback that we've had from early conversations with fabricators has been extremely positive. And other products will follow leveraging our design and technical expertise. So I'm now going to hand over to Michael, who's going to talk about the second pillar, which is business effectiveness.

Thanks, Darren. Our objective here is to make Eurocell a lean and efficient business. And therefore, we are upgrading our business systems to increase efficiencies and improve the customer experience. As I said earlier, we are in the process of replacing our ERP systems. The first stage of this process is to implement a trade counter system in the branch network. Having selected Intact IQ as our new system, we have now started the build and plan to transition to it in the first half of 2025. This will transform the way we interact and transact with our customers in the branches, including simplified processes and the use of electronic point-of-sale functionality. The second stage is to select and implement in the ERP systems to support all other functions of the business, including manufacturing, recycling, warehousing, distribution and finance. Here, the objective is to improve efficiency by the automation and the integration of key business processes. For ERP, we expect to select the system later in 2024 with the transition to be completed around mid-'26. Overall, as previously reported, we expect total costs of the system replacement to be GBP 8 million to GBP 10 million over a 3-year period. We will manage risk on this project very carefully with Board oversight and a highly experienced IT director already in place. We're also embedding a continuous improvement philosophy into the business, which is already highlighting significant opportunities for efficiencies, particularly in our manufacturing and recycling operations. Our initiative to sell more doors and windows through the branches will lead to our spare capacity that we already have in our extrusion and composite door businesses, thereby helping to make us more efficient. We will also continue to target better use of our operational footprint and drive process innovation, where technologies such as digital printing have the potential to reduce cost and improve our environmental performance. Now back to Darren to cover People First.

Thanks, Michael. So People First. I mean this is all about the culture within the business. And to me, it's really another key initiative to unlocking value in Eurocell by developing a really strong cohesive culture across the business. We've got some great people in our business who really love their job, but we want them to love Eurocell too. Now in health and safety, we've made some significant strides over the past 12 months, halving our accident rate in 2023, but we still have a long way to go. In my mind, safety and business performance go hand in hand, and we are committed to driving towards a world-class safety culture. In January, we appointed a new people director to raise employee engagement, enhance our employee value proposition and improve the way we recruit, develop and retain talent. In February, we cascaded our new strategy to all of our 2,000 employees through a series of webinars hosted by Excom team members, and we received some great feedback and my sense is that like us, many of our employees are now really starting to believe in the potential of this business. Getting our employees aligned behind our strategic goals and embedding our new purpose and values will be a key enabler in shaping the future of Eurocell. In April, we will appoint our first-ever internal communications manager to improve the way that we cascade information across the business. And I realize that much of this is standard practice in progressive businesses, but many of these initiatives are new to Eurocell, which is why we're getting on with it because it will drive discretionary efforts and improve the outcome across all of our strategic initiatives. I'm now going to hand over to Michael who'll give out the last pillar, which is ESG.

So with ESG, we want to earn a reputation for being a truly responsible company. As you know, Eurocell is already a leader in PVC recycling preventing 3 million waste windows being sent to landfill every year. We've now increased the proportion of recycled material used in our manufacturing up to 32%, which drives significant cost and carbon savings compared to the use of virgin materials, and we've set a new target to reach 40% by 2030. But that's just one aspect of ESG. And looking ahead, we aim to excel in all areas. We covered the S with our People First strategy, so I'm going to focus on the E and the G. We're now working with a specialist ESG consultancy to support the development of our ESG strategy and improve our data collection and disclosures. The results of our work so far include a materiality assessment where we surveyed a selection of employees, suppliers, customers, banks and shareholders to determine the most important sustainability topics for the business. We also completed a baseline carbon footprint, including Scope 1, 2 and 3 emissions identifying key decarbonization levers. We've used the outputs from this work to define ESG objectives and targets and develop a sustainability strategy, supported by appropriate governance and internal controls monitored through our Board-led social values and ESG Committee. Looking forward, a key focus for our work in 2024 will be to determine a path to reach net 0 by our target date of 2045. This will include filing science-based targets with SBTI and developing and publishing a net 0 transition plan. Albeit our path here will be heavily dependent on reduced emissions in our raw material supply chain. Finally, we will also continue to deliver on the other initiatives we have to drive carbon reduction, including further investment in on-site electricity generation through the installation of solar panels at our largest operating facilities. Finally, page 24 summarizes our financial ambition with this new strategy. We believe we've identified a clear pathway to good organic growth and improved margins. And our ambition is to become a GBP 500 million revenue business generating a 10% operating margin over a 5-year period. In terms of sales, as you've heard, the biggest growth drivers will be expanding the branch network up to around 250 sites, along with the windows and doors initiative, plus the extended living range. All underpinned by increased returns-driven investment in digital to raise awareness of our products and home improvement solutions and thereby acquire new customers. In terms of operating profit, the customer growth initiatives generally exploit our existing infrastructure and are relatively light in terms of CapEx and therefore, they have the potential to generate good operating margins. Investment is required for the strategic systems replacement project. But alongside our business effectiveness and continuous improvement initiatives, we think there is good potential to deliver major improvements in our customers' experience and the efficiency of our operations. With our well-invested facilities and available operating capacity, positive operational gearing should kick in as we grow and I note here that our operating margin target of 10% is broadly equivalent to Eurocell's immediate post-IPO margin, adjusted for mix changes and some natural dilution from raw material prices. Overall, therefore, we believe that this is an ambitious vision. But when we aggregate the growth opportunities and apply a degree of sensitivity, we think it is an achievable target with the potential to create significant shareholder value. So that's the end of our presentation. So Jake, if you want to turn the cameras back on, and we'll work through the Q&A that's come up here.

Darren and Michael, thank you very much indeed for your presentation this morning, and I will just bring back up your cameras there. [Operator Instructions] I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Michael and Darren, as you can see there in the Q&A tab, we have received a number of questions throughout your presentation this morning, and thank you to all of those on the call for taking the time to submit their questions. But Darren, Michael, if I may, at this point, I hand back to you just to read out those questions and give your responses where its appropriate to do so. And then I'll pick up from you at the end.

Thanks. I think the first one we got here is from Marcus with the plan to open new branches and expand the product offerings. How do you anticipate balancing the investment required against the potential returns to shareholders? So let me just pick that up initially and then Michael, you can add any additional comments. But I think the cost of opening a new branch or indeed a relocation in terms of fit out a relatively CapEx light. I mean we're talking about between GBP 150,000 and GBP 200,000 aside from, obviously, the lease commitment. The beauty of what we're doing with the door and window project is that we are not only increasing the amount of revenue that we can put through a branch, but we're also shortening the time that it takes for a branch to reach profitability, particularly for the brand new branch in a new location. So I think from that point of view, what you end up seeing is a completely different investment picture. Michael, I don't know if you want to add to that?

Yes. And you'll see, I've just flipped back to Slide 24 where the table top right of that slide sets out the investment required. And you can see that the we have underlying CapEx for the base business of around about GBP 10 million per annum, which is largely maintenance CapEx and refurbishment. The next line down shows you the capital cost of the strategic initiatives, and it is relatively light touch. That includes 10 new branches per annum at an average CapEx cost of between $150,000 and $200,000 per branch. So outside of that, there's actually very little incremental CapEx, the GBP 5 million in 2025 is the big rollout of the Windows and Doors initiative, and that is the racking that we need in the branches to support that initiative. So overall, what you see here is relatively light CapEx and therefore, the initiatives we have, have the ability to generate significant returns, generally speaking, a mid-teen operating margin, which is -- if we look at the waterfall chart, we're looking to move margin from 5% up to 10%. And there are sort of 3 aspects to that. One is that the new initiatives have mid-teen margins. The second is operational gearing. You see our profits halved in 2023. A big piece of that is that we have a heavily fixed cost base, and therefore, we're an operationally geared business. Now that obviously has been difficult for us in 2023. But as and when markets recover, you'll see a significant operational gearing effect going the other way, which we will benefit from. And then the final aspect of this is raw material pricing, whereby if I look at, again, 2023, raw materials have been priced, it's been difficult for us. But towards the end of from September onwards, we saw an easing in input costs and we're now in a much more balanced position for 2024. If you look at the profit estimates in the marketplace for us for 2024, PBT goes from GBP 20 million in '23 up to -- sorry, GBP 15 million in '23 up to GBP 20 million in 2024. A big piece of that is a normalized -- normalization of raw material costs, which is an important first leg on this jump from 5% to 10%. And I would point you back here to '21 and '22 when operating margins were north of 8%. So it's a long answer to say that we do believe that the sales bridge is very reasonable. We gave you the components of that, the margin on the new initiatives is accretive and in line with our overall target and the capital investment is relatively light.

Thanks, Michael. One here on the ERP system, so from David, regarding the ERP system replacement and continuous improvement initiatives, what time line and budget considerations have been factored into these projects? And how do you expect these assets to impact operational efficiency and customer experience? So i'll let you take that one.