Mpac Group plc (MPAC) Earnings Call Transcript & Summary

[Audio Gap] presentation. As a reminder, this webinar is being recorded and will be available on Equity Development's website in due course. You can also access our analyst forecast and research note on our website. There'll be a Q&A session with management at the end of the presentation, so please submit questions in the Q&A box at the bottom of your screen. Ahead of the presentation from management, we will now share a video from the Mpac team. [Presentation]

Thanks for that, guys. It's a great video. I will now hand over to Will and Adam to run through the presentation. So if you could just bear with me one second, I will pull that up and share it with the audience.

Thanks, Rachel. While that's coming up on screen, I'll just introduce myself. Good morning, everyone. My name is Adam Holland. I'm Chief Executive of the Mpac Group, and it gives me great pleasure today to present my first full year set of results for the company. As we go through the presentation, you'll see us present results in line with expectations, breaking through the GBP 100 million mark for the first time in our group's history and doubling the underlying profit before tax compared with the prior year. We've returned the group to a net cash positive position, and we made some really good progress on our strategic objectives. Will is going to take you through the financials for 2023. And I will run through progress on our group strategy and just to remind you of the ambition that we have for the group in the future. But before that, let's just take a couple of minutes to talk about what Mpac is, what we do, the markets we operate in and the customers that we serve. So Rachel, if you could take us on a couple of charts. Perfect. Thank you very much. So if we start on the bottom left-hand corner of this chart, you can see some cartoons just explaining the machines that we design, build and install, what they do in our customers' factories. They assemble the products that our customers make and sell. We create the cartons in our machines and fill those cartons with the products that our customers then sell in their -- into their industries. Our machines form the trays and the cases, the corrugated cardboard cases to put those cartons into. And we also palletize, so that is machines that will take those corrugated cardboard cases and stack them onto pallets for onward distribution. We do that in 3 product lines. Firstly, on the left-hand side, you can see the Lambert product line. It's primarily a business that works on the machines that assemble products principally for the health care sector -- or we do work in some of the other sectors across the patch and into the Langen and the Switchback product lines. Those are packaging machines that produce those carton-forming and case-packing/palletizing machines for the food and beverage, health care and other sectors as well. We operate from 4 operating sites around the world. In Mississauga in Canada and in Wijchen in the Netherlands, our Langen product line builds its machines. The Switchback machines are built in Cleveland in the U.S., and the Lambert product line is built in the U.K. in Tadcaster. And we have field service teams and sales teams around the world to support our customers. About 40% of everything we do goes into the food and beverage sector. About 40% goes into health care. And a much smaller percentage, just less than 10%, is in clean energy, in battery assembly, and that's something we'll touch on later. It's a small but important part of our group. Probably the most important number on the page is the number of global engineers and designers, 330. We're an hours-based business. Our teams undertake project work for our customers to design, build and install machines. So the work that we can do depends on the technical teams that we have, and growing that technical team year-on-year is the way we can then grow our revenues. And the other number I'll just pick out is the number of machines in service around the world. We've been around for a long time. And there are more than 4,000 machines in service in the world today that we continue to provide to field service and aftermarket support, too. Next chart, please. Now the way that we operate our business model for winning and continuing to support customers works in 5 stages. And it's very easy to go straight to the design, build and install part of the process because that's where we make the bulk of our revenue. And of course, in monitoring and optimizing, that's the Service part of our business, also very important. But actually, the consultation phase, whilst it's a very small driver of revenue for our business is a really important part of the process because our sales process is a very technical sale. We engage very early with our customers to think about the way that they are designing their factory, the way that they're designing the packaging materials and, in fact, even the design of their products themselves and the influence that's going to have on the machines that we might 1 day provide in the design and build phase. So it's a very early consultation phase, and it's very important for capturing new customers. Next chart, please. And we think that the -- we think about Mpac, first and foremost, in terms of our customers and the markets that we work in. And they are very attractive markets. They're attractive in 4 ways. Firstly, the food and beverage, health care and clean energy markets are very large. They're very resilient. We're proud to say that we've broken through the GBP 100 million revenue mark, and that's great, and we should be. But actually, if we take a step back, the markets we operate in are GBP 50 billion. So we've got a very small market share, a huge opportunity for growth, and that's a fantastic place for us to be. The second piece is that the competition that we come up against is fragmented. We compete with companies that are similar in size to Mpac today. We compete with companies that are significantly smaller that might only operate in one particular localized region of the world or have a particular specialized piece of equipment. And we compete with some companies that are very significantly larger than us, right up to the sort of $1 billion to $5 billion revenue mark. So very fragmented competition base. And of course, those much larger businesses have got to the scale that they are by buying those businesses that are smaller than Mpac along the way. M&A has been part of the Mpac story as well. We bought the Lambert business in the U.K. in 2019. We bought the Switchback business in the U.S. in 2020, and acquisition is still part of our plan for the future. The third way in which the market is attractive is that our customers make a decision, not just based on price but based on the technology that they're buying and the people that will be delivering that program for them. It's a technical decision. It's an engineering-led decision make from our customers. And that's important because without that factor, we couldn't compete with the companies of the $1 billion to $5 billion scale at the scale that we are today. But nevertheless, we go head to head with them at the scale we are today, and we compete very effectively and win. So that is a very important feature of our market. And it speaks to the last piece around barriers to entry as well. When people think about -- when I'm asked question, why do people buy from Mpac? Why buy from Mpac? The answer is the people. It's the expertise and the technical capability of our people to solve problems that our customers buy into. That is the key to our business. Mpac really is Mpac people. Next chart, please. So I've already touched on the size of the market opportunity, and it's the top right -- top left-hand quadrant to the chart in front of you, but we're an attractive investment proposition in 4 ways, and the size of the market is only 1 of them. In terms of high barriers to entry, the technical team grew significantly last year. We did nearly 400,000 technical hours of work on our customer projects last year, up from 300,000 the year before. And that is a really important growth factor because, of course, we can't bring people into our business and teach them the way that we work and the know-how that we bring to bear on those problems. Then we're not going to be able to grow. And we've proven last year by ramping up the technical team, we absolutely can do that. We can teach that process to new people. And that continues to keep the barrier to entry high to new entrants into the market. I think the other number I'd pick out here is that the percentage of our revenue that comes from services. In previous years, that number has been down in the sort of mid-teens and then the high teens. In 2022, we managed to get it to 24%. And in 2023, that number became 28%. So nearly 30% of our revenue comes from services today. 30% has been our target for many, many years. And actually, it's going to continue to be our target for the years to come because we believe that the most important factor that we will -- that we need to focus on for delivering long-term shareholder value is continuing to grow the installed base. And if we were to take a step back and to ramp that target up from 20%, 28%, 30% of our revenue from services to 40% or 50%, actually, all we're doing is sitting back and resting on the laurels of the past and living off the aftermarket, and that's not a long-term shareholder value proposition. So our focus is on growing the installed base. We're going to try to maintain a kind of trend line around the 30% mark for services. And in some years, it might be a little bit higher, some years a little bit lower. As long as we're in that ballpark, I think we're doing the right kinds of things. In terms of quality of earnings, the Service revenue is obviously important to us because it's a steady trickle of activities year in, year out, supporting that installed base. But the order book coverage gives us a very confident position going into 2024 as well, GBP 72.5 million order book on January 1 this year, a record order intake last year and a very clear pipeline of opportunities for us to go after high quality of earnings. And perhaps as an investor, you'd be very interested in the return on capital employed. It's not on this chart, but you can see it in some of the other key metrics in our reporting. We're a capital-light business. We don't require a significant investment in new sort of heavy machinery or new infrastructure. We don't spend a huge amount on new software development programs and take many years before bringing to the market. We're a capital-light business, and we can quite quickly turn capital investments into return. Of course, M&A plays into that as well. Next chart, please. Now when we think about what we're trying to do in the business, in 2023, 1 of the most important factors, I think, isn't the financial outcome for the group in 2023. It's the indicators of future growth. And to say that 37% of the Original Equipment orders that we won last year came from new customers to the group, I think, is a really encouraging sign. I think even more positive is that 7 of those customers are strategic accounts who have the scale, not just to place orders with Mpac in 1 year but to place sometimes many, many orders with Mpac in future years, year after year after year. And that's really important when we think about how we're trying to grow the group. We have been, and I have said many times before, a lumpy business. We win orders that might be GBP 1 million to GBP 3 million, GBP 4 million each time. And in a company turning over GBP 100 million, 2 or 3 orders 1 side of a month end or just the other side of the month end make a big difference. And how do we deal with that lumpiness? Well, it's scale. We want to grow the group by growing the number of customers that we do business with, not just doing more with the same group of customers. That is the way to deal with the lumpiness in our business. Scale smooths lumps. It's important for our new customers. Of course, they choose us because we're offering something that's attractive to them at that moment in time. It's important to our shareholders because it addresses the lumpiness in the business, but it's also important to our existing customers because they want to be able to come back to Mpac year after year and find engineers who they've worked with for many years are still employed by the group and growing and developing. And the best -- the way that we can do that is to stretch our engineers on exciting new projects and to keep them highly utilized. So it's good for our existing customers. It's good for our new customers, and it's good for our shareholders. And it's absolutely a focus for 2024 and beyond as well. Next chart, please. Just to pick out one example of those customers. When our customers invest in new facilities and new lines, often those programs are confidential to them up until the point they launch a new product into the market. And so we're going to respect the confidentiality of our customers. I'm not going to give you the name of this particular strategic account that we won in 2023. But it's a new customer to Mpac. We've never worked with them before. They've got a very wide product range, as you can see from the silhouettes along the bottom of your screen, and they operate in a significant number of geographical territories. Probably, most importantly, they're very large. This particular project is a project -- it's a new factory in Singapore. The customer selected us not just because of the capability of the machines and the people but because of our global presence to be able to install and commission and support that machine in Singapore. It combines a cartoner, a case packer, checkweighers, spoon feeders and some pretty complex conveyor systems. So it really speaks to that technical capability that we have in the team. And probably most excitingly, just after winning that first order with this new customer, we were invited to meet with their global team in their headquarters and to talk about future projects in other territories around the world. So it really shows that this growth strategy works. What we have to then do, of course, is to deliver the project, and that depends on people, and we'll talk about that on the next chart. So I talked about technical bandwidth. In previous presentations, I think we've discussed the Mpac Leadership Academy. We're just graduating the second cohort now from our Mpac Leadership Academy. We've talked about the work done in 2023 to strengthen the leadership team at the interims in September. Delivering and developing our people is key to our strategy. And I'd like to pick out a couple of examples from 2022 in other aspects as well. So if I turn to the bottom left of this chart, you can see the rate of growth in the Americas service team. We more than doubled the team -- the field service team in the Americas during 2023. And that's really important to grow the Service revenues but also to maintain that stickiness with our customers in that region and to drive growth in the Americas. I've also picked on the top right of the chart, in the U.K. in Tadcaster. I've split out the half 1 and half 2 headcount numbers. And the reason we've done that is sometimes just taking a snapshot from year to year, it doesn't really tell the whole story. If you look at where we ended June last year and where we ended December, in the 6-month period between June and December, we grew the technical team in Tadcaster 22%. And if you think about what that would be on an annualized basis, you get some sense of the pace at which we can grow teams. And the reason Tadcaster picking that out in particular is a -- it's a business that we acquired just 4 years ago. The Lambert business based in Tadcaster had a record year last year. We're really pleased with the progress that they've made, and it shows what can be done with an acquired business. Now before I turn attention to the future and some of the things we're working on in 2024, I'll hand over to Will to take you through our performance in 2023.

Okay. Thanks, Adam. So I'll start with the financial highlights for the year. We reflect a very strong performance in 2023 with growth across all key financial metrics. Let's start with order intake, Adam's touched on this really. 41% growth in order intake to GBP 118.5 million. In terms of breakdown by category, Original Equipment order intake was up 50% to GBP 86.3 million, and Service order intake up 21%. Regionally, it's the Americas that remains our largest region that accounted for around GBP 60 million of that total order intake in the year. However, we saw growth across all regions, and we manage our sales teams and organize them between the Americas, EMEA and APAC, and there was growth across each of those teams. Moving on to revenue. Full year revenue, up almost 17% to GBP 114.2 million. That was after a particularly strong second half of the year, and as Adam was mentioning in a previous slide, very much driven by the increase in available technical hours to access that order book. And you will see on the bottom of the chart there, on the graphic representing revenue, steady growth since 2019. On the next slide is a bit more detail on the split of revenue by category. What does that mean in terms of order book? Well, the combination of that strong order intake and good revenue resulted in a closing order book of GBP 72.5 million. That's up 8% on the prior year, and it gives us good coverage over '24 revenue forecast. The vast majority of that order book will trade out as revenue in 2024. Turning to margins and profitability. The full year number there shows growth in gross margins to 27.7%. I think it's probably worth reflecting first half-second half split especially, 2022, our margins were impacted by supply chain disruption. And in the first half of the year, we were still trading out some of those projects impacted by supply chain disruption and the knock-on impact on operational efficiency. The second half of the year, the project profile was much cleaner. We were free of some of those operational challenges, and we saw a strong rebound in margins in the second half, and that's reflected in the graphic on the bottom of the slide as well. That growth in revenue and improvement in margin, of course, it drives significant the increase in underlying PBT. We're pleased to be able to report full year PBT up from GBP 3.5 million to GBP 7.1 million and a strong improvement in underlying EPS, up from 13.3p to 26.2p. In terms of the balance sheet and working capital and cash position. So last year, we closed the year with a net debt of GBP 4.7 million. That's been converted back to a net cash position at the end of last year of GBP 2.1 million. We were also in a net cash position at the last half year. That was driven primarily by the reduction in working capital and increased cash inflows from operating activities. You can see we ended the year with a reduction of GBP 3.7 million of working capital, down to GBP 13.2 million. We move on to the next slide, please. So here is a bridge of underlying PBT showing that transition from GBP 3.5 million to GBP 7.1 million. And the way we've tried to show this is how much is driven by revenue. And there's approximately 50-50 split there between OE and Service that's driven that GBP 4.1 million increase in revenue. And then the margin effect from the previous slide margins had improved, and about GBP 3.1 million of additional PBT has come from the improved margins. And that's mainly driven by improved OE project execution. As I mentioned, second half, particularly strong as we return to more normalized levels of margins from project execution. All it does demonstrate is Mpac can grow both revenue and margins concurrently. On the right-hand side, we show the split of revenue between the categories in which we report, Original Equipment and Service. Original Equipment revenues grew by 10%, but the real standout there is the increase in Service revenue, up an impressive 38%. Perhaps that profile won't continue in previous years, but we are confident we can maintain Service revenues, about broadly 30% of our total revenue. We reported underlying tax charge equivalent to 25% marginal rate tax, smaller cash tax payments as we have access to some deferred tax assets on our balance sheet. If we move over to the balance sheet on the next slide, please. We've run through the main position here to, just talk to what's included within noncurrent assets. The largest item in there is our accounting surplus on the U.K. pension scheme. Quite unusually, Mpac reports a significant surplus on an accounting basis, but we have a deficit on an actuarial basis. So that GBP 32 million is included within noncurrent assets. Inventories, well, we are reporting an increase in inventories. That reflects the high levels of trading, but also, we continue to carry some elevated levels of safety stock, having had the experience of supply chain disruption in 2022. We're not quite at the point where wish to release that elevated safety stock. And that's specifically associated with chip-based electronic components. However, on a listed basis, inventory turn is still 10x or above. So we're comfortable with the level of inventory. Within trade and other receivables, I'll touch on both trade and other receivables and trade and other payables because this is primarily a reflection of how we account for our projects. So we recognize revenue on our OE projects over time based on stage of completion driven by hours within the project. So within trade and other receivables, we have trade debtors and contract assets, and contract assets is mainly made up of unbilled revenue as we progress projects based on hours. And then as we hit bidding milestones, that converts to trade debtors. And then on the other side of the project balance, in trade and other payables, the largest item in there relates to deposits that we received, and it's the net value of deposits, which unwind as the project is executed over its life cycle. So they are the 2 largest items that make up our working capital balance. The increase in deposits associated with that [ food ] order profile has driven the reduction in working capital in the year. Borrowings were unchanged at GBP 8 million. We have access to a GBP 20 million committed facility through to 2025. But as I said earlier, we stay in a net cash position, both at the half year last year and the year-end. If we can move over to the next slide, please. So here we show movements of cash and some of the working capital positions. So we've touched on the cash profit, the EBITDA, GBP 10.7 million, a strong year, and then working capital increase of -- sorry, reduction but increase in cash of GBP 4.7 million. The other items within our cash flow, so we have pension contributions, the ongoing commitment to fund the deficit based on the previous schedule of contributions, GBP 2.3 million; capital additions, which include some modest new product development, capitalized expenditure as well as PPE and other fixed asset additions, GBP 2.1 million (sic) [ GBP 2.6 million ]. And then the other item there to draw out, tax, interest and reorg. So that gives the bridge between our gross cash opening position of GBP 4.2 million and closing position of GBP 11 million. So with that cash profile, the committed facility and relatively strong balance sheet, we see we've got sufficient funds to support the growth initiatives that the group has to deliver the forecast for '24 and beyond. I'll hand back over to Adam.

Thanks, Will. So let's talk about where we're going in the future. Our long-range objective is to deliver 10% organic growth every year and 10% operating return on sales. That's where we're getting in the long run. But actually, if we come back from kind of the distant future and just talk about the next 5 years, what do we want to do with the group? We want to double the size of the group, double the revenue for the group in the next 5 years. And we want to do that in 3 ways. There are 3 levers. On the left-hand side of this chart, you can see in blue that we're going to pull. The first is driving that double-digit organic growth every year. And that's the focus for the organic growth piece. And we do that by retaining and broadening the customer base through the innovation that we talked about many, many times before, and we'll talk about a bit more today as well. The second lever is through acquisition. Today, the group offers a range of secondary packaging machines and end-of-line machines and so on. We talked a bit about the range there. But we don't offer a complete full-line turnkey service to our customers, and the intention is to continue to acquire businesses that fill out the line so we can offer a turnkey solution to customers in future. So acquisitions will continue to be part of our group strategy when we find the right opportunities. And if they're not there, we're not going to do them. It's not just about driving scale. It's a strategic activity. And when we find the right deals at the right price, we will consider those on a case-by-case basis. The third of the 3 levers is in clean energy. And we have a tremendous opportunity there to help our customers to scale up new ways of building batteries and other kinds of clean energy system. We've proven that we have a value to offer into that sector. And we have an opportunity to scale that up in the future. But we've said several times before, and I'll say it again today, we don't put speculative numbers into our financial forecast around clean energy, where our financial projections today only include the committed contracted programs that we have for our existing customers in that sector. And then anything else that we win in the future, we're going to consider an upside. But nevertheless, we have 3 levers that we can pull to double the group over the next 5 years. And how we do this? Well, on the right-hand side, you can see 3 of the boxes. We'll talk about the progress we've made on the next chart. But just to summarize, in terms of driving the return on sales, that is through operational excellence around the Original Equipment and services growth. In terms of people, clearly, we're an hours-based business. If we're going to double the revenue, we have to double the number of technical people in our business, and we're very focused on doing that. And in terms of operational excellence, projects have to be delivered on time, right the first time, and we have to load our project -- our factories efficiently across the operations that we run, and to the extent that we continue to improve on that, we will continue to see better bottom line performance. Next chart, please. I'm going to run through the 5 aspects of our group strategy, just very briefly. I'm not going to go into lots of detail on each one. But just to remind you what they are -- and we've had a stable strategy for many years now. It's part of what's driven growth. And going for growth is all about broadening our customer base, outstanding customer service, innovation, people and operational excellence. Those are the 5 pillars that make up our strategy. We've already talked about going for growth and some of the progress we've made there. And it probably deserves saying a second time, though, 41% increase in order intake last year. Clearly, the growth strategy is working. In terms of outstanding customer service, I'm delighted to get to a point where nearly 30% of our revenue comes from Service this year. How have we done that? Well, it's by focusing on the nuts and bolts of running a service business. You can see there the statistic for the on-time, in-full delivery of spare parts from the Lambert business and the step change in that business from prior year to 2023. It might not be interesting to everyone on this call, but if you're a customer, it's very interesting. The focus on delivering things that really matter to customers. And delivery of spare parts, right first time [ fixed to field service ], field service teams dispatch quickly to site, lead time to quote on those activities, all of those fundamental metrics are how you drive the nuts and bolts of the Service business. And to the extent that we've done that well in 2023, you can see the impact it has on our bottom line. In terms of innovation, today isn't the right day to announce new product launches. The day to do that is in market-facing events with our customers. But in 2023, we spent a considerable amount of time going back to a blank sheet of paper, really planning out in a lot of detail our 5-year product road map. And we now have a very clear plan for all of the new product launches that we want to make, the investments that will be required to deliver those programs over the next 5 years. And at the right moment, we'll come back out into the market and talk about those launches as they happen. I will touch on clean energy. It's obviously been an investment in terms of our capability for several years now. And I'll cover that in a case study later on in today's webinar. In terms of people, I know we've covered this a number of times, but it's so important. I'm going to just touch on it again here. I would highlight some of the senior leadership appointments we've made in 2023. We brought a new Managing Director into the U.K. business and into the U.S. business. We have a new Operations Director in the Canada team, new Supply Chain Directors for the Americas and the new Services Director of the Americas and a new Group HR Director as well. And in the last few weeks, we've appointed a new Vice President for Global Strategic Accounts who will lead that activity that we talked about, about broadening the customer base into some of those blue chips. And finally, operational excellence. It's buried away in the text there, a 3-percentage-point improvement in gross margin in the work that we do in the food and beverage and health care sectors. That is not easy to do. And it's been a sustained activity over the full 2023 to deliver that. And we've got more to do in the future as well. So lots more to do on growing that performance. I'm really, really pleased with the progress we've made on lead time. The Switchback team brought their lead time for standard products down from 37 to 22 weeks during 2023. We've got a lot of work now to do on the Langen product to match that performance of improving lead time in 2024. So some good progress right across the patch. Next chart, please. So this is that case study I promised you I'd talk through. And we always get questions about how are we performing on the Freyr Customer Qualification Plant in Norway. I was in Mo i Rana in Norway with the team last week, and I met with Freyr's chief exec, and we worked through the progress we've made on that facility and the work still ahead of us. And Freyr have been very clear in the quarterly earnings reports that they published in the New York stock market about their intentions. They say that they are on track to deliver automated production in the first half of 2024. And I can say with my own 2 eyes, I've seen that progress, and I stand shoulder to shoulder with them on that commitment. Right now, we are casting electrodes using the Mpac equipment in Mo i Rana in Norway, and we're on track to support that half 1 objective. Now Freyr's intention then is to build gigafactories in the future and to run through a process with the U.S. DOE, an Inflation Reduction Act activity, before they build their first gigafactory in the U.S. In Georgia, they've already secured the land. And probably an important milestone for us was June 2023, where we started pre-engineering work with Freyr on that activity. The pre-engineering work is about defining the specification for the equipment that we could provide into that facility in the future. So just to be clear, it's not a production order. It's the engineering work with specification. Our absolute laser focus is right now on delivering that half 1 automation objective with Freyr. In October last year, we were delighted to be able to announce a second program launch with another customer. So it's Ilika and the UK Battery Industrialisation Centre, UKBIC. We started work there on a completely different kind of technology program, still for us, a similar kind of activity. We -- our expertise is in automating a customer's process and helping them to scale up the production of an activity that they've proven elsewhere. And for Ilika, it's a solid-state battery technology that they're working on. We started work on that already. And in 2024, we'll be pleased to update you on progress as that progresses. So perhaps I'll come on to the kind of final chart of my pack, and then I'll pause for questions. If I think back about -- our next chart, please. Thank you. If I think back to how we've done in 2023, there are 3 things that I take away. Really strong growth. We've grown revenue. We've doubled profit. We've returned the group to a net positive cash. Those things are really important. The second thing is the new customers that we brought into the business. That's very important for our new customers and for our shareholders. It's important for our existing customers that we broaden our customer base. And as we grow the business, we deal with the lumpiness that has historically plagued our financial performance. You've seen the increasing proportion of our other revenue that comes from services and how important that is as well. And then finally, the third of these things is the clear ambition that we have now to double the scale of the group over the next 5 years and the steps that will take us there. We started 2024 trading in line with expectations. It's a very positive outlook for 2024, a very healthy pipeline of new prospects, and Will and I are excited about the future and the year to come. I'm going to pause there for questions. And perhaps I can ask Rachel just to pick out some of the questions that have come in over the chat function in the time that Will and I have been talking.

Thanks, Adam and Will. That was a really comprehensive presentation. Thank you for running through that. If I can just turn to questions now. How did Mpac go about in securing those new strategic key accounts?

That's a great question. And I'm going to start by talking about 3 things, I think. We wrote a list of customers that we're interested in trying to work with and develop a relationship with at the start of 2023. And we focused on asking the sales team, what is it we need to do to be really attractive for those customers to work with? And there were 3 things that we prioritized. The first was customers that we already work with today but perhaps they are of a scale where they didn't just operate as one operating company. They've got multi-divisions. And perhaps we've only operated with any supportive 1 or 2 of those divisions and never a third or a fourth division across their group. There are countless examples of that. And when you look at the blue chip multinational companies that we work with, many of their divisions operate as completely separate entities within their organization, with their own procurement teams, their own policies, their own way of doing business. Clearly, the first focus for us was to start to win business through some of those new divisions that we've never worked with before. And amongst the 7 new customers that we're delighted to work with, there are a couple of examples there of companies where, yes, we've worked with them, but we've never worked with other divisions in their group before, and getting a toe in the water is a really good step. Of course, one project with that new division isn't a new customer win. We need to win that second project and that third project and really consolidate that in 2024 and learn the ways that, that customer operates because they will be different from division to division. There'll be different priorities. So we're being measured in the way we think about what progress we want to make with that in future years and in 2024. But I'm really pleased with that first step. The second step is cross-selling. We -- there are some companies that we've sold significant volume of equipment to over the past -- over many, many decades. I've got 2 in my mind. There's a company we have sold more than 250 lines to, 250 different factories across the world. That's fantastic. But many of these lines have been from just one of our divisions in our business, one of our product lines. And to the extent that we can then broaden out and offer cross-sell from other product lines within the Mpac Group into that customer, that gives us a second way of broadening our business. And the third is completely new customers. 5 of the 7 customers that we won in 2023 were completely new to Mpac. We've never done business with them before, and we're delighted to have the opportunity to work with them on our first project. In 2024, our objective is to consolidate that and to win second and third lines with those new customers and then to add to that list as well.

I think you've probably already gone into some detail on this, but I'm going to ask just in case there's anything you wanted to add. And generally, what drives the sale? Is it technical capabilities or price?

Yes. I was asked by an investor earlier this morning, "Did you just have to drop the price to get in? Was that what you did? Was it loss leaders?" And the answer is no. It's not about -- it's not just about products. This isn't about dropping price in order to get a toe in the water. When we ask our customers, what is it you really need from us? What is it you need from us to select us rather than the competition? And often, it doesn't come down to price. [ It's not ] just because of the technical know-how and our ability to provide something that other competitors can't. And perhaps when I think about why have they not bought from this in the past, what stopped them in the past, sometimes it comes down to some very basic things. Perhaps we haven't actually looked at their terms and conditions and thought about the kind of master service agreements that they set up with their suppliers worldwide and gone through that negotiation process. It's hard work. And at the end of signing a framework agreement, you haven't got an order. You've got the opportunity then to bid for orders into that customer. We've made really good progress on getting agreed terms and conditions in place with those customers, terms that we're happy to work to. Not onerous terms, but terms that we are happy to work to and that those customers will use for many years ahead. And another example that comes up often with our sales team is lead time. There was a project just recently. One of the sales teams needed us to be able to commit to a 10-month lead time, and our standard lead time on that particular project was 12 months. And to get over the line with that customer, we found ways to bring it into a 10-month lead time and to be able to commit that to that customer. We can't do it on every project. I'd love to be able to. But from time to time, we're able to find ways to do that. And if that's important to secure a customer win and a first win with a new customer, we're going to find ways to do that. And we -- from those programs, we can then learn things that we can bring back to our existing customers as well. What is it we're able to do to get down to 10 months? And how do we make that standard? So there's huge benefits here, Rachel, that come out of that process. I'd say the summary is we've gone out and listened closely to what our customers want. And then we've done that, and that has proved successful.

And whilst we're talking about customers, do any of your customers have concerns about Mpac working with their competitors? Does that come up?

Yes, it does. Yes, we -- I've been very careful about the details of each customer project not being shared in this webinar, and we're careful in the technical, what we do. There is intellectual property that our customers have in the products that they design and sometimes also in the processes that they operate in their facilities. And many of the times, they want to remain very confidential about that. We sign nondisclosure agreements routinely as part of that, the way that we work with our customers. And we don't share that data between them. Nevertheless, I would say one of the benefits of our business, we do work with a large number of customers across the sectors that we operate in. And that means that we have expertise to bring to bear on these things. It's that irony that our customers want us to be absolutely dedicated to them, but they want us to have some experience before they start work as well. And we've been able to do that and retain customers year after year after year. Some of the blue chip customers that were on -- the logos are on the chart earlier have been our customers for many, many decades, and you don't do that by accident.

Yes. Great. And if I can just maybe turn our eye to the Service business. I know you went into a little bit of detail. But the question is, what has been the key driver of the growth in that Service business? And going forward, what do you think you can grow Service revenue to as a percentage of revenue?

Yes. I mean look, we are ruthlessly honest with ourselves about what drives these things. And in 2023, we had -- at 2023, we had a bit of a tailwind from those projects that we'll describe have been stuck waiting for microchips to arrive in 2022. And of course, that supply chain issue is resolved now. We found strategies to prevent it hitting us in the future as well. But it -- we went through a spike of installation and commissioning work in 2023, which really helped. And am I concerned about that? No, because we also won a significant number of new projects in 2023, and those will also need installer commissioning in 2024. So when Will and I said we can see a route now to keep the Service business around the 28% to 30% trend line -- frankly, anything around plus or minus 5% around the 30% mark, I'd be very happy with it as a -- year in, year out, a sensible place for our Service business to be. And yes, so that's what we've done.

Great. And before I move on to questions for Will, maybe this one is for you, Adam. What's the lifespan of your products? Is there a typical product life?

Yes, it's long. This is a factory with one of our customers just a few months ago and walked down the line. And it was factory that we've been working for many, many years. And I think the first line there was a 2004 line that we had installed, and then there was a line from 2006, a line from 2008, and in every couple of years, there's an Mpac line. And of course, we've gone back and done upgrades and modifications on the lines we installed 20 years ago. So they always look like a brand-new line today, even though they're 20 years old. Our equipment lasts a long time. And to the extent that customers want to invest in capital equipment that will last for a long time, that's something we do. My observation would be that in the FMCG sectors that we operate in, in food and beverage, health care, clean energy, actually consumer trends change faster. So we do find that customers then want to change a line and repurpose a line or sometimes decommission a line when it gets to the point where they no longer want to sell that product into their market. They want to launch a new product. So the lines last longer than consumer trends do, yes.

Will, I've got a few questions for you. Where do you think margins could potentially get to?

We talked to operating margins and operating returns. We've shown in the deck today that we are targeting getting above 10% return on sales over the 5-year period. We've got quite a lot of data on how Mpac benchmarks against other businesses in our sector. We see the best return in operating terms of 12%, 13%. We are targeting above 10%. We want to be at the top rationales of our period. So that's our target.

And in terms of that ambition to double profitability, how much extra cost will that add to the business?

Well, as Adam said, we are a people business fundamentally. So you could draw a direct correlation between the revenue growth and the number of technical heads and technical resource that we need to deliver that growth. So yes, that's a fairly one-for-one profile. In terms of our opportunity to leverage our infrastructure, well, we certainly have sort of quite a significant amount of headroom to be able to deliver increased revenue against our existing infrastructure base. That will reach the threshold, but we are a capital-light business by nature. So the largest investment is people, getting facilities. Clearly, you need to power it. You need to [indiscernible] it. It needs the right locations as much as anything, but it's -- we're a people business, and that's the most important element.

Okay. And do you think there's likely to be a first half-second half weighting again in 2024? What's the typical profile?

We do see a weighting towards the second half of 2024 when we -- I think the experience in 2023 was probably more extreme. So we expect that profile to become slightly more balanced, but we still do see a weighting towards second half of the year, yes.

Okay. And do you expect a further reduction in working capital over 2024?

It is dependent upon the timing of orders and the profile of those orders. Adam said a couple of times today, we are still lumpy, and that will be addressed with scale. So as we grow and top line order intake and revenue growth transfers through, working capital should become more balanced. Yes, Adam used different -- a couple of large orders. For one end of the month compared to just after a month, it makes a big difference in terms of working capital profile. That said, yes, we still do expect an unwind. It is dependent upon shortening lead times for project execution. That's a key driver to reductions in working capital. We still, as of today, have longer lead times in our projects than we had historically, certainly before the supply chain disruption kicked in. We're working hard with our operational teams to reduce lead times, and that will be the main driver for reductions in working capital.

Will, it might be worth just saying a couple of things about ROCE as well.

Yes. Yes. We talked about Mpac as being capital light. Reflection Adam and I have had is perhaps you should be more definitive on what that means in terms of return on capital employed because that, I think, puts another lens on our performance as a group. So for 2024, stripping out pension schemes and nonoperating items, based on the underlying PBT, our ROCE, if we achieve the current guidance in the market, is about 20%. So it's probably a number which we don't highlight enough reflection from our side, but that's a really strong profile.

Great. And if I can just move on to the pension scheme. I know you usually get asked questions about this. One of the questions is, what are your plans to deal with the DB pension scheme?

So we're really pleased with where we are with the pension scheme and the funding level. Perhaps I just need to go back to the last valuation, June '21. We reported a deficit of GBP 28 million at the time, 93%, 94% funded. Funding levels have improved significantly since then. And we kick off the next valuation in June 2024. Clearly, we have to wait to conclude on that valuation before we can share any -- the outcome of it. But we have been working well with the trustee, and we're pleased where the schemes [ adopt to ]. Specifics on funding levels and the new schedule of contributions will follow, yes, 9, 12 months after we kick off that valuation cycle. But the plan is -- don't change. We're working closely with the trustees to decouple the fund from the company at the first opportunity. And as a Board, we're very pleased with how that is progressing.

Great. I'm just conscious of time, so I'm just going to ask a couple more questions. Maybe one more for you, Will. For technical teams, what's the current ratio of pay technical hours versus bench time? And what's the medium-term target?

Okay. Well, I'll probably refer to our internal targets here. So -- and it's different for different types of technical teams. So our project engineers, we target internally to hit above 80% utilization for the technical teams. On the shop floor is above 90%. There are very specific measures that our teams work towards to ensure we get the highest possible utilization of really valuable technical resource. Those targets are long-term targets. We achieved those targets currently. We're pushing our teams to deliver high levels of utilization all the time. We have 4 sites. You do get pockets of opportunity, we call it that, over the course of the year. It's where Adam and I really focus on making sure we've got -- and even the load balance as possible across our operational sites to maximize and leverage the resource that we have.

Great. We've got a few questions. So I'm going to bond them all together. It's probably a bigger question and one for you, Adam. And it's around the company's view going forward around acquisitions, and this maybe plays into the dividend question as well. So we've had a question about when do you plan to pay a dividend, but we've also got the questions about what your ambitions -- or what is your ambition to do a transformational acquisition? And if so, how do you envisage being able to finance that transaction? So I guess we're talking about paying a dividend or acquiring a company or maybe both. So you can have that.

And I know there's -- it's a very sensible question to ask. I'm very happy to answer it. We consider a dividend very seriously at the Board meeting every time this question comes out and in between as well. The Board and I are very clear that we see the best way of creating long-term shareholder value, the best way of deploying cash right now is not through a dividend. And we've got other ways of creating shareholder value that we think will deliver a better return for our shareholders. So we're focused on those. And of course, that includes acquisitions, which you've raised as well. When we think about the acquisitions that we're looking at, they are -- we are very, very clear about the kinds of acquisitions that we want to go and make. They're strategic acquisitions to fill out the line that we offer to our customers and to fill the gaps in the technologies that we offer today. They're not about getting into the market sectors that we don't operate in. We're in the food and beverage, health care, clean energy sectors. We know those sectors well, and there's tremendous opportunity for growth without straying into things we don't know about. They're not about getting into geographies of the world that we don't operate in today. We operate from North America and Europe. We sell all over the world. We have service teams all over the world, but those are the territories that we operate in, in our facilities. We now have to run there as well. So it's not about geography. It's not about market sector. It is about the technology. And for that reason, we've got a very clear list of the kinds of companies that we're after and we're looking for. And we have to be patient. I have to be patient. We can only talk to those companies that come to market. We can build relationships with those that might, 1 day, come to market. But it's up to the sellers to get to a point where they're interested to -- interested in selling. And at that point, we're clear that we'll be competing with other buyers. We're not going to go and buy the silly price. We have to do the right deal at the right time with the right company. And I hope that some of those will change the company significantly. Some of the companies we're talking with could be a significant -- could be transformational for Mpac, but some of them are much smaller as well and everything in between. We're very clear on the list, and we're patient, waiting for the right ones to come to market at the right time. And when they do, we will be ready.

And I guess in terms of financing, again, it depends on when that occurs and what you're looking to buy.

Yes. It depends on scale. At the smaller end of the scale, obviously, financing options are very straightforward. At the larger end of the scale, we have to take a more considered view. Probably the way to answer the question is I'm not looking to build a war chest to go out and then invest in scale for scale's sake without shareholders having a view each time we take a deal. Where we come to a deal that requires shareholder involvement, we will come and talk about those specific deals. And because we haven't got a specific to talk about today, it's quite hard to answer the question that you've asked or others that perhaps fell into that category. But we're working hard on it. And when we have the right deal to talk about, we'll come to talk.

Great. Well, given the time, and I know you've got another call to get on to, I think that's a good place to end the presentation. But as I said before, it's been really comprehensive. Thank you very much for your time. If you -- if the guys that have joined the call have got any further questions, by all means, field them to Equity Development. And we'd be happy to answer those. So thank you to everyone for attending. We'll shortly send an e-mail out asking for some feedback on the presentation and really appreciate any comments that you've got to make. And we hope to see you all again in 6 months' time for the interim presentation. Thank you, guys. Thanks, everyone, for joining.

Thanks, Rachel.

Thanks, Rachel.