McBride plc (10W.F) Earnings Call Transcript & Summary

Good afternoon and thank you to those of you who are joining us. There is quite a number of you. So if you just bear with us, we'll allow everyone into the meeting. Great. Okay. Well, thank you for joining us this afternoon. We're here to hear from McBride plc, who announced their results earlier this week. Today, we're going to have a brief introduction followed by a video, and then on to the main bulk of the results presentation, which was shared with analysts, as I say, earlier this week. Then, we will have an opportunity for Q&A at the end. Please feel free to submit them as we go through the presentation, and we will take as many as we can in the time that we have allocated, which is the hour. So without further ado, I will hand over to Chris Smith.

Thanks, Hannah. Good afternoon to everyone. Thank you for joining this call. So as Hannah said, I'm Chris Smith. I'm the CEO, been with the group coming up for 11 years now. And I'm joined here today by Mark Strickland, who's our CFO, who's been with the group around 5 years. I thought -- so first of all, we're going to kick off with a very rapid introduction to McBride for those of you who don't know anything about us. We have a small corporate video, which explains a bit more. And then we will, as Hannah says, rattle through the results presentation we gave yesterday. So look, this is right on the page. We are the #1, the leading supplier in our space across Europe of household cleaning products. We're all coming up for 100 years old. We are a pan-European business. We are not just a U.K. business. Our heritage is U.K. We're coming up to 1927, it was formed in Manchester. But we now have something between 3,500, 3,600 people across 18 locations and 13 countries selling over 1 billion consumer units to our customers, which are predominantly retail customers. So you'll see here on the bottom left, 84% of our business is what we call private label or white label. So this is -- and I'll come on to a bit more about what that is. And we have a small amount of volume into contract manufacturing where we manufacture for brands. You'll see on the bottom right. We are a pan-European business. Everyone thinks we're just a U.K. company. We're not -- U.K. is our third biggest market. Germany is our #1 market, nearly 1/4 of the group. In France, U.K., Italy, Spain, the main countries. And we are doing, as you'll hear in the results, just under GBP 1 billion of sales in the year to June 2025. Next slide, please, Hannah. So look, it's really important for people to understand, I think, in our business model, private label or some people call it white label is at our core. That is the roots of the business and the absolute core mission of the company. You can see our purpose statement here, everyday value cleaning products. So every home could be clean and hygienic. We are your everyday supplier of everyday products that you see in the supermarket aisle, and I'll come on to the product ranges in a moment. I just would like to point you, if you get the chance and you're on LinkedIn, join us and look us on LinkedIn. We've just been doing a series of interesting articles that paint the backdrop to what is private label, -- why -- what is fast followership mean? What does McBride offer to the market. So there's some really good posts that have been coming out in the last 3 or 4 weeks. I would point you to look at those if you get the chance, gives you a nice background around the company as well. Next slide, please, Hannah. So the products that we manufacture are summarized here. And in reality, the sort of really the main 3 thrusts for the group are laundry products, dishwashing products and surface cleaners or household cleaners, we also have some air care products from our aerosols business. And in laundry, everything you would imagine if you're stood in the aisle in Tesco from laundry powder to laundry liquid to laundry capsules, to fabric conditioner, stain removals, all those sorts of things that you would see dish, the same, tablets for automatic dishwashing machines, dishwash powders and of course, also hand dishwash, very liquid equivalents. And cleaners is everything you imagine with a spray onto a surface, table cleaning, surface cleaning, antibacterial sprays, toilet cleaners, bleach, all those sorts of products. So absolutely pretty much everything you will see in the household aisle of a retail partner. Next slide, please. We run our business across 5 divisions, product-driven. So you can see the 5 divisions here, liquids, which is anything that you pour basically out of a bottle, out of a carton, out of a pouch. We do what we call unit dosing. So those your dishwash tablets, your laundry pods and increasingly, these soft pods that you have in dishwash. Powders is what it says on the tin, it's absolutely the familiar thing that most people remember in laundry powders and dishwash powders. Then we have an aerosols business. And we have a kind of incubator [indiscernible] business in Asia doing predominantly actually personal care and household products. Next slide. The industry, as you all know, and you will see if you stand in the aisle of supermarket -- is all about ultimately innovation in the products that you're being offered as a consumer. And the real focus in innovation nowadays is all around packaging and compaction, better formulation to reduce carbon footprint. McBride is at the forefront of this in the private label space, whether it's recycled plastic, we have been the first to market, for example, with laundry liquid in what looks like an orange juice carton. You can buy that in Sainsbury's, for example. We're the first to market with a paper bag rather than a plastic bag for laundry powders. And we're the first as well to the market with a cardboard box rather than a plastic tub, for example, for laundry capsules. So the world is moving fast. The retailers are very demanding in this space, and it's a key aspect of our business, as you might imagine. And then finally, on the sort of [indiscernible], why is McBride successful and the #1 in this space. And look, we pride ourselves on being the most competitive, the most reliable and the most innovative supplier to the trade across all the markets in which we operate. We are hugely customer and market-oriented and focused. We bring significant scale. That brings fantastic distribution networks. It brings buying scale for things like raw materials and also, of course, things like innovation. We are distributed in our asset base. Transportation is expensive to move bottles of washing up liquid around. So we have a distributed asset base, pretty unique in the industry. We pride ourselves on expertise and being absolute leaders in the specialisms that are needed for these categories. And with our new strategy that's been in place now for 3 to 4 years, absolutely focused and disciplined on what we're trying to achieve in our strategic outlook. So that's a very, very rapid rattle through but McBride at a glance. Hannah, we now got a corporate video, if you would go to play that. This is available on our website, the corporate video, by the way, in the who we are section. So if you want to watch it again, you can at your leisure. But over to that. [Presentation]

Great. Thank you, Hannah, for sharing that. So look, we'll now move on to the slide deck that we presented yesterday and as part of our results announcement. And look, it's really -- it was an absolute pleasure, and I'm super proud as part of the leadership team to be able to present the numbers that we did yesterday, continued proof really of our rebased much improved business. I'd like to think that another set of strong performance results as we're sharing with you today will begin to turn heads as we cement our performance at these new levels as the leading business in its sector in Europe. And as you'll hear through this presentation, the group is confident of its position and progress towards its strategic goals. This confidence is behind the reinstatement of our annual dividend, all of which will help support more investor interest in the group and the potential value opportunity. As you will hear shortly, McBride is also a much stronger all-round business. Our platform is much improved. Yes, we've turned around the financials. We've doubled our EBITDA returns from historic levels, and we've normalized our balance sheet in the past few years. But equally worthy of note is the extent to which we've improved many of what you might consider to be background features and aspects of the group's performance. And therefore, our credibility with customers, suppliers, colleagues, banking partners and other stakeholders is much improved. These core capabilities have committed McBride to continue to grow in a competitive and price-sensitive market while sustaining these high levels of profit margin. We've seen a lot of doubt in recent years that we can maintain these profit levels. So I'm delighted to say this is our fifth consecutive reporting period at these new profit levels with our outlook consistent to retain at this current level. Our heightened profitability has translated well into strong cash flows, strong cash generation. Our net debt has fallen again. It's now close to GBP 100 million, and our debt cover level is well ahead of our 1.5x target. We mentioned at our Capital Markets Day 18 months ago that we had a series of options and ideas to support further growth and expansion of the group as part of its strategic growth agenda to further its leadership in the industry. Our balance sheet is now able to permit the group to be considering these options behind what we call our Core+ and our buy-and-build ambitions. Finally, this financial position overall and our confidence for the future has permitted the Board to announce the reinstatement of annual dividends with this first dividend for over 5 years now recommended at 3p. Next slide, please. And again, thank you. At our Capital Markets Day in March 2024, we outlined our strategy direction and our midterm financial targets. It is really pleasing to be able to report good progress towards these targets as outlined on this page. In revenue terms, our growth ambition of 2% per year is a volume target. And whilst revenue growth in the last 12 months in GDP terms was up just under 1% in volume terms, our growth was at 4.3%, demonstrating continued progress with our growth task. Our profitability held at 9.3% in terms of EBITDA. Good profit growth in our powders, unit dose and aerosols businesses was offset with slightly weaker margins in our liquids business, which was off just under 1%. As I said, our cash performance was very pleasing despite increased capital expenditure, net debt fell again and debt cover is now at 1.2x, beating our target of 1.5x. Part of the net debt improvement was a result of good working capital management, which offset higher capital additions with the result that ROCE held at levels reported last year at 33% and significantly ahead of our 25% target. I will update you shortly on our transformation program, but this remains central to our strategy delivery and is now delivering net benefits and remains on track to hit the GBP 50 million cumulative net benefit over 5 years. The leadership and the Board of McBride are focused -- are laser-focused, should I say, on delivering the strategic ambitions for McBride and its stakeholders, and we remain confident we have the right team and the right direction to deliver on these targets over the midterm. Next slide. Whilst most of the headlines as the investor audience will want to hear will center around our improving financial metrics, I'm also super proud of the excellent performance across a range of our other crucial areas that point to McBride being a stronger overall business now and for the future. Service levels to customers, we call it CSL is a key hygiene factor for any supplier into retail. Our work in our transformation program on service excellence and strong focus across the business has seen the best service levels in the group for over 6 years. This positions McBride really well for any new business opportunities, margin management conversations, but also keeps our logistics and internal servicing costs to the optimum levels. Ensuring we're as efficient as possible in our manufacturing has stepped forward again this year with focused continuous improvement teams driving machine efficiency in the factories, yielding on average something like a 2% improvement in operating effectiveness. And finally, on this slide, I'm not going to go through all of these. I'm just going to talk about our sustainability ambition. We have continued to make real progress with our carbon footprint reduction ambitions, real reduction in absolute carbon levels in the last 12 months despite volume growth and actually reporting an -- what we call an intensity level reduction of minus 8%. So well on track to deliver our carbon commitments. Next page, please. A key feature of our reset business and our new strategy is to be far more informed and better aware of what is happening in the market as a whole. We have spent a significant amount of time developing our data analytics to support our understanding of how we're performing relative to the market and how the market itself is performing. We buy panel data for the 5 countries that the flags are shown on this slide, and we can track quarter-by-quarter a rolling 12-month total market position of both branded and private label products in the categories that we supply. The graph on the left shows the total market volumes over time, each bar being the next quarter on and the last data to June 2025. The dark green bars represent the branded volume and the light green bars represent the private label volume. The overall market moved up a little bit, 1% in total. But as you can see with the top line on the chart on the right, the private label growth continues to outperform the branded volume growth. Private label share has grown to 35.5%, up from around 30%, 3 to 5 years ago. And that would appear that line on the chart, which is that private label share has steadied and is holding now at these new high levels. And evidentially, if you look at other sectors like pet care, pet food, baby diapers, ice cream, private label share when it makes such a significant step change stays at these new levels. And we expect that to continue in the coming year. In the branded space in the last 12 months, we have seen a longer period of promotional activity from the brand typically in the spring time, and we haven't seen that for a few years now. There was some impact into our volumes and the market more generally during the end of what is our quarter 3, so February, March and into a bit into April. But since then, we have seen generally private label demand return to normal levels, solid and robust. In terms of categories, quite some differences in category penetration for private label. A key focus and strategic direction for us is laundry. Laundry is typically the highest value, highest margin part of the market. It's the least penetrated for private label, typically just under 30% for laundry, where you compare that to dishwash where penetration is 44%. Overall, we grew our volumes in private label just under 2% as was evident in the market as a whole. And we did particularly well in Dishwash, where we outperformed the market heavily. And in laundry liquid, which is a key priority and focus strategic area for us, we grew that business 7% against the market that grew 2.8%. So trends in the market are still favoring private label. We believe that they will hold at this level and our growth in the future will be coming from contract wins and growing our share in the existing customer base. Next slide, please. So just very quickly on our divisions. All these -- for your information, all these divisional divisions have their own management teams. We have a series of shared resources like purchasing and transportation and central finance and IT, for example. All other functions reside and are accountable within profit and loss accounts for each of these 5 divisions. Liquids is our biggest division, over 57% of the group. And we saw a good performance from the business this year, growing top line, moving up in contract manufacturing. We onboarded a significant new contract manufacturing contract in France. We've progressed strongly with our operational excellence agenda, driving lean approaches in manufacturing. And we continue to invest in automation and reduction of headcount through robotics and end-of-line automation. That business is cost oriented, by the way. You'll see each of these divisions has a strategic focus and the liquids is typically the most competitive environment. It's the lowest barriers to entry, cost leadership essential as a strategic focus for that division. Our unit dosing business is much more about product leadership. This is a fashion thing. You'll see frequent changes to formats. These are typically high priced on shelf. And we will work hard to lead in this space by driving new innovation, new formats all the time. Two new dishwash formats introduced in the last year, and we are now bringing to market the first soft dishwash fusion product, we call it into market right now. But actually, the performance improvement for unit dosings last year when you see the profit numbers was all about its operational performance. These are very difficult products to manufacture very fiddly, quite intricate machinery. We've had a fantastic step-up in output, waste reduction levels and labor efficiency through the factories. So great to see the progress that business, our most profitable business has performed last year. Very quickly on [indiscernible]. Laundry powders and dishwash powders is a declining market. So this is a -- this -- whilst it needs to be cost leadership, it's absolutely about specialism and expertise, a lot of work for sustainability on compacted products. So the days of 10-kilo boxes of laundry powder, you're now buying 1.5 kilo bags of laundry powder to do the same number of washes. That's very good for the carbon emissions and good for transport and everything else. And we've done a great job there, even though the market has declined slightly, strong delivery and margin expansion through operational performance improvements. And I'll quickly touch on Aerosols. This business was loss-making when we started the journey of divisionalizing this business last year. It's grown 21%. It's absolutely leading in its space, and we are very positive about the outlook for our aerosols business. Next slide, please. And I'll just touch now on our transformation program. So we launched this transformation program, we ran a series of what I call excellence projects about 2 years ago. And the outcome was to obviously try to drive value and drive benefits, and we targeted GBP 50 million across the 5 years from '23 to '28, but they're all around improving the platform that McBride has got. The backbone to this project is our SAP upgrade. We have -- we are currently an SAP customer. We have SAP across our division, but it's a 26-year-old SAP, and we are now migrating to the latest generation. A sort of multiyear project. It's the backbone really of our excellence agenda, standardizing processes, absolutely harmonizing the way we work across every location. And obviously, they're driving efficiencies, much more analytics, digital interfaces, AI experiences as well. So well on track. We have our first go-live in 1st of November. We're doing it on a very limited site-by-site basis. So we're not exposing the whole business to this at one go, but our first one is coming up in November, and we're very positive and in a good place on the rollout of that project. Our commercial and service excellence programs are actually now in the phase of closing out the project work streams and ready for handing back to the business as business as usual. We have made great progress with both these initiatives and time is right now to bed in the change they brought and continue to deliver on the benefits each are already showing. Our service performance statistics show the progress. We're up to 94%. That's the best in 6 years and our improved pricing and margin management, evidence of the commercial excellence program coming through in our results. As we go forward, we will see these full year benefits roll continuously into our results going forward. The expected benefits from SAP and our productivity program coming a little later in the 5 years, but we're also driving overhead efficiencies out. We removed 60 people at the end of the last year, financial year. People were underperforming. We have a rigorous assessment of individuals now and we've upped our game as part of that platform on our HR disciplines and HR processes, and we've cut costs, and we're driving overheads out by we drive performance across all aspects of the company. So that's my rapid overall business progress update. And hopefully, you've heard about -- not just about the financials, but also the strong all-around business that Bride now is and how we are set up for continued progress towards our midterm goals. I'm going to hand over to Mark now to cover off some of the financials.

Thank you, Chris, and good afternoon, everyone. I'm pleased to have reported an excellent set of results for the financial year ended 30th of June 2025. As you'll see, the business has further strengthened its balance sheet, increased its liquidity and through the reinstatement of the accordion has further increased its optionality for future investment and capital allocation. As a result, I continue to have huge optimism for what the business can deliver for its shareholders into the future. So looking at the 2025 financial year in a little bit more detail. Whilst group revenues were down GBP 8.3 million or 0.9% on an actual basis, on a constant currency basis, they actually rose by 0.7% or GBP 6.5 million. Contract manufacturing, especially has helped this constant currency growth. As a business, we continue to look closely at forward -- sorry, closely analyze forward-looking raw material and packaging trends, adjusting sales margins accordingly. This, combined with close operational and overhead cost control means that at GBP 66.1 million, our adjusted operating profit has been maintained at similar levels to last year. Over the last 3 years, we have progressively strengthened our balance sheet through cash generation and debt reduction. For the 2025 financial year, our free cash flow was GBP 93.9 million, and our net debt further reduced ending the year at GBP 105.2 million. This gives the business a great platform for further investments in growth. Next slide, please. This slide looks at the group and divisional performance on both an actual and a constant currency basis. If we look at the left-hand side at the actual revenue figure, there were 2 notable impacts at play. Firstly, volume growth of GBP 39.5 million or 4.3%. This arose from new contract manufacturing volumes, continued private label volume growth and a significant growth in our aerosols business. The second impact was the price and mix effect of negative GBP 33 million. This is because there were more sales of lower value products in financial year '25 versus financial year '24. It should be noted, however, that though the selling price may be lower, the profitability is often similar to other products as these are also lower cost format products. I've included the tables on the right-hand side of this slide because of the significant impact of currency during the '25 financial year. I won't go through the detail, but this clearly illustrates the point that whilst at actual currency, both revenue and operating profit reduced slightly when looked at on a constant currency basis, in fact, both revenue and operating profit grew. Next slide, please. And in the interest of time and allowing questions, I'm actually going to skip over the divisional detail and move on through the divisional slides to Slide 18. If you can look at the divisional slides in detail, they just give a little bit more about each element of our business. So what I wanted to do is spend a little time on looking at costs. As you can see, input costs were broadly flat. So looking at the left-hand chart, costs broadly flat. But as you can also see, they remain significantly higher than back in 2021. Inflation is still prevalent and some costs are still rising, albeit at slower rates than over the last few years. This is why McBride's continuing focus on margin management has been key and will remain key to the delivery of another good set of results and similar results into the future. This consistency of performance means that McBride as a group remains very well placed to sustain and grow profits into future years. In terms of overheads, as you would expect, we continue our focus on cost optimization, and I deliberately talk of cost optimization, not cost reduction, as we will continue to spend in areas where we believe the returns and benefits of any expenditure exceed the actual cost increase. As with most businesses, technology remains a key focus and indeed, McBride is embracing new technology, believing that this will be a key positive differentiator going forward. Just some examples. We will shortly be going live with Wave 1 of S/4HANA, as Chris has said. We continue to invest into and benefit from our data analytics function. Again, a real-life example of this capability is some of the market analysis information that you saw in Chris' earlier section. We're also actively developing appropriate uses for AI across the business. Lastly, it would be remiss of me not to talk about distribution costs, which actually rose to 9.2% of revenue from 8.7% of revenue. This was actually as a result of the higher volumes we put through the business at the lower selling prices. So you had higher volume whilst revenue didn't necessarily increase. Next slide, please, Hannah. So looking at pensions. Year-on-year, the IAS 19 pension deficit decreased to GBP 24.9 million from GBP 29.4 million due to the deficit reduction contributions paid by the group, a lower value of liabilities and lower-than-expected inflation. The deficit is comprised of a U.K. defined benefit deficit of GBP 23 million and the post-employment benefit obligation outside of the U.K. of GBP 1.9 million. For information, the U.K. scheme is close to new members and future accrual. Within the U.K. scheme, contributions for the financial year '25 totaled GBP 7 million being made up of GBP 5.3 million of deficit reduction contributions and a one-off payment of GBP 1.7 million to remove the pension trustees' dividend matching mechanism, which was put in place a couple of years ago. That GBP 1.7 million is already paid back as without removing it, the trustees could have claimed that they could get GBP 5.3 million, which is the cost of the dividend. So for the price of GBP 1.7 million, we've avoided a GBP 5.3 million cost. The 31st of March 2024 triennial evaluation was agreed with the trustees during the year. And as part of that agreement, McBride has agreed future pension deficit reduction contributions of GBP 5.7 million to the end of FY '28, where upon they revert back to the previous profit-related mechanism. Turning to capital expenditure. At GBP 30.4 million, capital expenditure levels were above historic norms as the business invested in both its new SAP S/4HANA system and for future operational growth. It is expected that in FY '26, that will be the sort of level of expenditure, but then thereafter, it will drop back down to around the GBP 22 million to GBP 25 million as the SAP project comes to completion. Finally, on to net debt. As indicated at the start of my presentation, the business continues to generate strong cash flows and strong cash conversion, resulting in net debt falling to GBP 105.2 million. Additionally, the business has strong core liquidity with around GBP 141 million of headroom within its core facilities and an additional unutilized GBP 75 million -- EUR 75 million accordion facility. So it is well placed as well placed as it could be for both internal and external future expansion and investment. Next slide, please, Hannah. We flagged up in January that the Board intended to reinstate annual dividends -- and I am pleased to say that the Board is recommending 3p per share dividend for the 2025 financial year just ended. Hopefully, going forward, we may become increasingly accretive as a mix proposition share comprising capital appreciation combined with an income. As I said at the beginning of my presentation, I'm hugely optimistic for the future of the business. In the Capital Markets Day in March 2024, we set the business some challenging midterm targets. And as you have seen today, we are either already delivering on many of them or have made significant progress. My personal belief is that this set of results provides a further proof point that the business is definitely on the right track. Thank you, and I'll pass back to Chris.

Thank you, Mark. So look, just to wrap up in terms of an outlook. We never close to the end of our first quarter. And at this stage, we have seen a solid start to the year. Our volumes are absolutely in line with where we expected them to be. And we are seeing a good success rate in recent tenders, signaling further growth coming through from -- in our next -- in our second half of our next -- this current new financial year. We're now seeing great progress with our customer partnerships. That's evident in our win rates and that robust pipeline looking promising. The group will continue its mission on optimizing operational delivery and efficiencies, both in our day-to-day work, but also from the work from the transformation team, the transformation program, all supporting that midterm ambition of 10% EBITDA. And finally, with a strong balance sheet and financial flexibility now, the leadership team are looking at options for investment to support the midterm step-up in the group's scale and value creation opportunity for the benefit of all current and future shareholders. So that's it on the presentation, Hannah. So we're delighted to be able to take questions.

Super. And we have a number. Right. Here we go. Cost pressures and margins. Are you able to add any detail as to how much of a threat to our operating margin are the cost-outs demanded by customers?

Look, it is always a feature of every conversation with any retailer, right, cost and price of product to retailers. It's not universal. We see very different conversations with different retailers. So please don't think every element of the market across all of Europe is identical. But we have -- part of our skill set, part of our capability is that ability to manipulate and manage product engineering to the benefit of both customers and ourselves. And unlike some other industries, like food, for example, if you could pick up a bottle of Tesco washing up liquid and a bottle of Sainsbury's and a bottle of Asda, and they all look the same, all the same site bottle and the same color. They are typically entirely chemically different. Every product is typically unique. We have that ability to flex formulations. It may affect performance. It may affect viscosity. It may have less perfume, more perfume. There are always ways to manage that. And look, it's an active part of the way we operate with our customers, and they will go through phases of want quality and they will go through phases of wanting cost. And that skill set, and Mark talked about it earlier, the focus on margin management to make sure that, yes, we can move prices and costs, but we're managing our margins and maintaining our margin. And look, there's been a lot of talk over the years about the ability of the power of the retailers into the supply side. In the crisis that we saw with the hyperinflation 3 years ago now, we recognize the -- we saw very clearly how important we are to our customers. There isn't anyone. Tesco honestly probably couldn't go anywhere else to do exactly everything we're doing. So you do have leverage. We do have arrangements with customers now for quarterly pricing reviews. It's not programmed. It's the right of both sides of a contract to ask the questions and challenge. But it protects our margins much better than before.

And is the negative GBP 33 million price and mix effect on revenue entirely the result of the cost-outs demanded requested?

Not all. No. The mix side is not. Mix is that we do -- we -- part of the mix effect is actually the impact of the big contract manufacturing arrangement that we have with one of the world's biggest branders where we now 100% manufacture their bleach in the French market. Bleaches are low-priced commodity end product, but it's a stepping stone for us into a major relationship with a big brand. And the rest, yes, it's a bit of price give here and there, but we -- as you can see in the numbers, we've held our margins despite that.

Just adding to that. So if a retailer says, look, we need you to get to a certain price point for a product, we may not supply the same product as they were getting before. We say, look, if you want us to meet a price point, then we are going to reengineer that product because we reserve the right to keep our margins. So it isn't just a like-for-like product and a reduction in the price. If there is a reduction in the price point, there is probably a reduction in the cost we put into that product. Therefore, we maintain our margins.

Okay. Let's move on to cash flow and capital allocation. So you did a great job of bringing debt down. Do you foresee a decline of similar magnitude in the next period, given consensus forecasts are broadly flat? Or do you have other spending plans for the free cash flow?

So a really good question and it is the right question. I think we focused on getting our balance sheet into a really good place. I think we're in a good place. That has now really given us optionality. We've obviously decided as a first step to pay dividends. But our capital allocation process is quite rigorous. And people have talked about share buybacks, about, well, do you want a progressive dividend? Do you want to do M&A? So we have a rigorous process. We have plenty of ideas as to what we might do. But we also have shareholder value accretion in our minds. And at any point in time, we'll take decisions based on what is available to us at the time. So if we carried on and did nothing, we would reduce debt further, but I'm not convinced that reducing debt further is the best use of our cash. There may be better uses. And again, that just depends how the year progresses and how opportunities come our way or don't come our way. But it's a really good question.

Well, then as a natural segue, do you have a maintenance CapEx backlog? Or are you now able to fund growth CapEx?

So I don't think we've ever really had a maintenance CapEx backlog. I think even when we constrained cash, we kept maintaining our equipment. I think it's always interesting whether CapEx is maintenance or growth because as your machines become older and you replace them, is that, in fact, maintenance CapEx? Or when you replace them, you tend to replace them with a machine that will do things quicker or cheaper, higher volumes, and that actually gives you growth and more ability to grow volume within your businesses. Now is that maintenance CapEx? Or is that growth CapEx? I think it's a little bit of both. But I don't believe our facilities are particularly starved with CapEx. I think they are appropriately invested. We also have quite a challenging approval system to make sure that we do invest in the right things. It's not free money.

I think just to add to that, we like to have a balance in the capital. It's not all about growth for stuff beyond pure maintenance. So there's some great opportunities for efficiencies. We talked about automation, end of line, removing labor from our cost structure. Cobots and robots don't ask for pay rises, right? And they don't go -- don't do industrial action or accident. So we see plenty of options and ideas coming from within the business. There are some great sources of high-quality, good value capital outside of the usual channels, which we're exploring to drive real value quickly, and we've done a few this last year. We'll do more. There's absolutely opportunity to drive margin improvement from CapEx automation as well as obviously from growth, which we will always continue to support.

Okay. Just another quick one for you, probably, Mark. Can you tell us what estimate of WACC you're using to make decisions about what to do with free cash flow?

So I actually use a different methodology. I'm from a private equity background, so I tend to work on payback. And my initial starting point is 2-year payback on stuff. Having said that, for the right things, we will do a longer payback. And for health and safety, you've just got to do health and safety. So I don't work on a WACC. I work on return on capital. We've said it's over 25%, but I also work on how quickly can we spin that cash. So can you get a payback quickly? So you're spinning the cash and utilizing it, very sort of private equity sort of approach to it.

Okay. This individual has obviously seen the chaos that's been caused at the likes of M&S with their systems being hacked. Are you confident that won't happen to yourselves? And if so, why is that the case?

Yes. So we concentrated on the shell. So we've put a lot of money into the shell to prevent people getting into our systems. However, we're now -- we switched from a prevention of attack to eventually somebody will get through. So it's not if, it's when. And if you change your attitude to, okay, somebody eventually will get lucky and get in because we've got to be lucky every minute, every second of every day to prevent and get in. So we spend a lot of money now on the inside of the shell as to how quickly we would detect somebody on the inside and also how we would shut segments of the systems down and how quickly we could get back up. So we're as confident as we can be. Until it's tested in anger, you're never 100% sure, but we have an awful lot of top expert advice. So we do have penetration testing. We have crisis management. We have simulations. Can I guarantee? I don't think anybody can guarantee, but I think we're in a reasonable place.

Compulsory training is the other thing. And the biggest risk is social engineering, isn't it? And so making sure all our teams, all our interfaces with systems are up to date on their training and is a key part of what we've been doing as well.

Two questions on buybacks. Are you considering them? And if not, why not?

It's part of the capital allocation consideration. At the moment, if you look at our share price, you would argue it's relatively good value and you could deliver value to shareholders by buyback. If you're not careful, that just concentrates the shareholder base even more. We did one about 4 years ago, and it didn't desperately move the share price. We also have a number of other ideas as to what we could do with it. But yes, it's not out of the question. But at this moment, we are just concentrated on paying the dividend. As I say, the balance sheet strength, you're absolutely right, gives us optionality, which is a nice place to be.

Well, you raised it there, the share price question here around the frustrations that a lot of private investors feel that the current valuation put on the business. Why do you think you are so out of kilter from your peers?

Look, it is immensely frustrating. I mean we recognize that for all involved. I think the message we get -- the story we get is, look, concerns about 2022 happening again and concerns around -- which -- I know we should say the word unprecedented, no one likes that word. But I mean, we've never ever seen anything like that in my 11 years and in any of the history of the company before. It was all an outcome really of the consequence of supply chain post-COVID being chaotic and the ability to get chemicals and prices going up crazily. But the other fear is that sort of -- it's just going to go back to being a 3.5% to 4% business like it was for the 10 years probably running up to the COVID time. So we're super confident this business is not a 3% to 4% business. This is a 7% to 8% and an 8% to 10% business in EBITDA terms. We fundamentally believe the restructuring we've done, the way we've driven the organization design, our focus in the right markets. We have -- in the 5 years up to COVID, this business declined its volumes every single year. In the 5 years since we've grown them every single year. That's a testament to the way we now approach the customer, the way we operate with the customer. So we're firmly of the view that higher level sustainability levels of profits are there. The message is you've got to keep doing it to prove it. And so look, this is our second full year. It's 2.5 years because the year before that was -- we were coming out of the challenge in the second half was at these sorts of levels. We have got huge amounts of headroom. And in the last crisis, we entered that crisis, which is unprecedented. I mean we had [indiscernible] GBP 260 million, GBP 270 million of inflation on input costs in a 9-month period on a business that was making GBP 30 million of EBITDA. You can imagine how difficult that is to sort out, but we did. We've come through it. We've completely changed the relationships we have with our customers. And look, we can never predict whether there's going to be another macro crisis like that. But this business is an entirely different shaped business and a more resilient business. And we have got -- as Mark showed in the headroom, you can take a shock. We might take a shock for a quarter, but we have arrangements with customers that allow us to go back and challenge on price if that's clearly evident. And we spent a lot of time on raw material prediction indices. We're using data analytics. We're using all sorts of statistical processes to try to predict the forward views on ethylene, on natural products like natural alcohol and these sorts of things because that's super -- that's a major part of our proposition to customers is given that insight early. So I think the business is positioned well. It feels like we need to do more of it to prove to investors that this isn't a 3% to 4% business again. And we're sitting here with our targets. We've shown them today, second year in a run. We're looking -- the year forward is looking very similar, too. We hope to be better. And look, we're a staple product. Everybody needs toilet cleaner. They need to be able to wash the clothes. They need to clean the dishes. In consumer choice where they spend their money, we are a staple. And we're the biggest in Europe at doing it. and that sets us in a good position for the future. So look, we're just going to do more, and that valuation will come in time.

Can I just add 2 things to that. I think in general, the small cap market is relatively unloved in the U.K. I think there's probably something Chris and myself can do more of. We've tended to be concentrated on to institutional investors, and this is our first attempt to reach out to the retail investors, and we need to engage, I think, more with the likes of yourselves. We've probably not got our message across into the retail community as well as we could do. This is our first step. And hopefully, we can engage more with investors like ourselves.

And just one last point. Although we call fast-moving consumer goods this space, it is actually slow moving consumer goods. I have to tell you this. Nothing changes dramatically overnight other than that crazy raw material situation, which has never happened before. The business doesn't line up around from this to that over time. It's really steady. We can predict it pretty well going forward. So it isn't -- although it's FMCG and everyone gets a bit panicky and jazz hands about the space, it is pretty steady. We are a great customer for our raw material suppliers. We're boringly tedious of buying the same amount of hypochlorite or PVC or whatever we might be buying from our suppliers. So it is a steady, solid business. It doesn't -- it's not going to change overnight.

Okay. That was a really good explanation. Let's take a positive note. We've got a couple of questions here on growth. Given impressive service levels, where are the new opportunities and sort of aligned to that, are you making any progress on discounters because you were a little bit sort of underweighted, should we say?

Yes. Well, I love your question. Thank you. Look, we're very positive on the growth agenda. You've seen in the market data that the tailwind the industry has had for the last few years probably has steadied. There are pockets of difference within the overall market. But in general, the tailwind that we've had and the whole industry is probably steadied. It's holding at these new levels. So our growth in private label with the retailers is going to come from market share gains. I said earlier in my speech that we have made great progress in recent tenders. We've done very well with one of the -- our #1 customer is one of the worldwide brand. So discounters that you're probably thinking of begins with an A and letters along. That is our biggest customer. It's still no more than -- it's about 11% of the group. It's multi-country. It's not one single contract. And we just won loads more business at them as well. And they're a big partner customer for us. So we will gain share. That's the plan within our existing customer base. We didn't lose customers. You tend to lose SKUs or categories or ranges. We've never been kicked out really of any customer, but things move around a bit within the industry. So we're doing well, I think, in the retail, but we will just gain share. We have targeted areas like we talked strongly about laundry. We want to be #1 in the top -- we're #1 in the 5 countries of the big 5 countries in Europe, we're #1 in 3 of them, probably 4 actually just start to prove out at the moment, but we have gap in a fifth. So we've got opportunity to grow there. And then the other side is contract manufacturing. So we have a target of 25% of our revenues get to contract manufacturing. Why? 3 reasons really. One, it's load balancing. So it means we have a regular -- they're very reliable volumes in strategic long-term contract deals. It's a platform of volume through your factories, which cover overheads. Secondly, they are priced quarterly rigorously by the -- so it's absolute pass-through, and we will change the prices every month -- every quarter, sorry. But thirdly, relationships with the brands are important. We learn a lot from them. We help co-invest. We -- sorry, co-develop sometimes with branders. And they bring standards and insights that are helpful to our business model as well. So look, we think there's more opportunity. Reckitt recently have sold part of their household business. We think some of that may be available for contract manufacturing in the future. We would like to think we could participate in that. And we're now seeing increasingly a number of brands for peripheral operations where they don't have scale, for example, looking for outsourced partners, and we think we can grow strongly and get that ratio up in our total portfolio. So we're still very positive about growth. And as someone said, I think in the question, the platform that I talked about earlier around high-quality products, really strong service levels, good innovation, responsible development around sustainability, factories that you can walk around and be super proud of, safe environment. The platform is in good shape and customers like that.

Great. The GBP 45 million of transformation benefits, how are they going to be distributed between each accounting period? And which KPI should we be looking at to see this effect?

Yes. So it's GBP 50 million over -- the GBP 50 million cumulative over the 5 years. I think we'll see another GBP 5 million in the current financial year. So the benefit overall would be GBP 10 million, probably GBP 5 million the following year, which would make it GBP 15 million and then GBP 20 million in the final year. So it gradually ramps up. But if you add those all up, that gets you to your GBP 50 million. And it will come through a number of things. I mean how do you prove that you've got an extra penny on a bottle of bleach. We use a number of KPIs for commercial excellence and the benefit we get from that. So some you can directly measure such as overhead cost or OEE. Others such as commercial excellence, how do you measure the benefit from that it's derived from a number of KPIs. But it will come through things like margin, it will come through operating costs and it will come through overhead.

And what about the cost of the SAP implementation, both capital and operating? And what are the expected benefits?

So yes, that's a really good question. Again, the benefits are in part of the transformation and part of the transformation benefits. The overall project will be around GBP 27 million to GBP 30 million over -- it's over 4, 5 years. In terms of the benefits, the benefits should max out around GBP 15 million a year.

Great. Will you allow me one more question? I have passed, but we've got a few more. You mentioned record output from factories, but obviously, we're seeing increasing costs in the U.K. from employment and obviously expensive in the EU as well. How do you allocate new business to factory? Is it purely a geographical consideration?

Yes. So typically, if you look at the product ranges that we -- the divisions are product-based, liquid products typically don't travel very well. I mean they do travel, but they're expensive. They're typically lower value per unit and the freight costs are quite high as a percentage of the total cost structure. So which is why our liquids factor is typically distributed around Europe to be more proximate to the end markets. So in those cases, for liquids choice, it's obvious which factory it's going to go to. It will be the one in the local area. When it comes to unit dose and powders, we make those centrally. They do travel well. The price points are higher. And it will depend -- our Danish plant for dishwash tablets is eco-certified. So if the Eco ranges, they will typically go there. And so often, it's driven by the sort of format of the product and what the capability of each site is. But we do load balance between the unit dose and powder sites, less so within the liquids. There's a bit of it. I won't -- I mean, for example, the German market is served by both our Polish plant in liquids, but also our Belgium plant. So there is a bit of load balancing and optimizing for cost and transport between those. But typically, it's pretty straightforward when we put the product.

Great. And what are the branded companies doing in terms of promotion? Where are we in that cycle?

Yes. So if you look at the data, the price point, we look at data at a macro level across countries and by categories, pretty much across the board, the gap, I mentioned in my -- in that original speech, it typically branded products are twice the price of a private label. That gap has widened over the last 2 to 3 years. It's not necessarily narrowing at all at the moment. There are some exceptions, but broadly speaking, it's not narrowing. So the price gap is as big as ever. And what we're seeing with the brands, I would say, more than ever is we're seeing probably more on advertising. This is our perception, more promotional activity through advertising, through store placement, gondola ends, you're going to see Club card type promotions. And you'll see as well sort of fixture promotion where they'll decorate shelves and have gripping banners and arrows pointing at it. A little bit less on the pricing than we thought. So I think they're experimenting. It's not -- again, it's a very big generalization, please. So it may be completely wrong on any particular case. But that would be the general feeling. I think the price points are not coming down on average. We see the gap held. So therefore, by definition, it's not price investment that we're seeing in promotion and advertising.

Well, listen, thank you. I know you've got to get off to our next meeting. So thank you very much for your time today to our audience for joining us. Apologies if we didn't get through to your question. I will try and send the extra ones over to management, and we can come back to you. But that leaves me to say we look forward to hearing an update in 6 months' time.

Great. Thanks, very appreciate it. Thank you.

Thank you.