Mpac Group plc (MPAC) Earnings Call Transcript & Summary

Thank you, everyone for joining us for today's webinar with Mpac to run through their half year results presentation. Just a little bit of housekeeping. This webinar is being recorded and will be available to you in due course on the Equity Development website. You can also see our analysts' research and forecast on our website. There will be a Q&A session with management at the end of the presentation. So if you do have any questions, please put them in the Q&A box at the bottom and we will endeavor to get through them all. I will now hand you over to Adam and Will to run through the presentation. Over to you, guys.

Thanks, Rachel. So good morning, everybody. I'm Adam Holland. I'm Chief Executive of the Mpac Group. And with me today, I've got William Wilkins, our CFO. We're going to run you through, I think, a great set of numbers today. We're going to give you an update on how the group is looking. Will is going to take you through the half year results in a little bit more detail. And then he'll hand it back to me to talk about strategy and where we're going and a look ahead to what you can expect in the second half of this year and beyond. So that's the plan this morning. We'll go on to the next chart, please, Rachel. Thank you. Many of you on the call today will know Mpac well, but there will be some perhaps who don't. So I'll take you through a kind of overview of what the group looks like today. If I start on the bottom left-hand side of this chart. What we do is we build the machines that our customers use to assemble and package the products that millions of people around the world depend on. Starting on the left-hand side of the cartoons, our Lambert business builds the machines that assemble products. So that might be a Gillette razor blade cartridge or a Pampers nappy or a whole variety of contact lens handling and placement devices, very complex machines. Then moving into the packaging pieces, moving from left to right, our Langen and Switchback businesses produce the machines that are our secondary packaging machines. So that's putting, let's say, for example, a wrapped Mars ice cream bar into a carton. This is the carton you might then put in the freezer. Taking those cartons and putting them into corrugated cardboard cases and trays. And then a small part of our business today is taking those corrugated cases and putting them onto pallets from distribution. Earlier this year, we also announced the acquisition of the SIGA Vision business. That's a business that we've worked with for many, many years now, and we're very pleased to have SIGA as part of the Mpac Group today. The SIGA Vision team put together cameras and vision systems for inspecting the quality and the performance of products as they go down the line and feeding that data back into the control systems to ensure quality of the products that come off the end of our customers' production line. So we welcome the SIGA team to Mpac. The business works from 4 manufacturing sites today. The Langen business operates from Wijchen in the Netherlands and Mississauga in Canada; the Switchback business operates from Cleveland in the U.S.; and the Lambert business operates from Tadcaster in the U.K. And then we have Service and Sales teams around the world, including a hub in Asia to support our customers there. About 40% of what we do today supports customers in food and beverage. That's up a little bit from previous years. Healthcare makes up about 30% of our customer base. Clean Energy is up to 14% in the first half of this year, and then the remainder of other industrial fast moving consumer goods make up the balance of our business. Our installed base is relatively large. There are about 4,000 machines in service around the world today, and our Service business supports those machines to continue operation. And the number of people in our group is growing all the time as we grow revenue. We're an hours-based business. And I'm very happy to say that we've increased the number of global engineers and designers from about 300 to nearly 350, irritatingly, 349, but wouldn't it be nice to have that 350 number on the chart for next time around. So that's where we are and that's what we do. Let's go to the next chart, please. We often talk about the way our business works as being in 5 phases. There's a consultation phase, and then moving into the design, build and installation of equipment, and then in the Service part of our business, monitoring and optimizing for customers. Consultation is a very, very small part of what we do today, often involving sort of proof of principle when we're building a first-of-a-kind machine for a customer. But it's really important, because it's a key part of the way that we engage customers at the early stage of their buying cycles and help them design perhaps not just our machines, but also the packaging and the product itself that's going to go down the line. We work very collaboratively, we can say the word, with our customers on that part of the program. And our sales teams spend a lot of time thinking about how we can support customers in that consultation phase. If we go to the next chart, we start to get to why I'm so excited to work for Mpac today and why so many of our people enjoy what we do. We work in some really attractive markets. The market that we sell into is huge. Every year, about $50 billion worth of packaging machinery is bought somewhere around the world by the kinds of customers that we sell to. And obviously, at the scale that Mpac is today, last year GBP 114 million of revenue, we have a very, very small market share, and therefore, a lot of opportunity to grow our business by winning share of that large market. The competition that we sell against are fragmented. There are many very small businesses, perhaps who are specialists in a particular kind of machine, who only sell in a particular region of the world and perhaps lack the scale that Mpac has to sell globally. There are also many businesses the same size as Mpac, and right up to businesses of sort of GBP 1 billion plus revenue to sort of GBP 3 billion, GBP 4 billion, GBP 5 billion revenue in our sector. And those larger businesses have grown to the scale that they are, of course, by buying some of the smaller businesses along the way. And we've done the same. We bought the Lambert business in the U.K. in 2019. We bought the Switchback business in the U.S. in 2020. And then a much smaller acquisition of the SIGA Vision business earlier this year. The integration of all of those businesses is complete and they are a fully formed part of the group today. How do we compete with those large BMO customers? Well, the answer is when our customers make decisions, it's an engineering-led decision. Our customers make decisions based on the technology that we're offering, and frankly, the ability of our people to solve problems that will occur during a project. These are complex installation projects by their very nature, and our people, their ability to solve those complex problems is the reason our customers choose us, and that allows us to compete against some of the largest companies in our sector. It also means we've got a great barrier to entry. So the retention of those fantastic people in the Mpac business is what gives us our cutting edge, and it creates a barrier to anybody trying to replicate what we do. And then the strap line at the bottom. The world is becoming more automated. Perhaps sounds like a throwaway comment, but it really isn't. Every day, I pick up the newspapers and read about labor shortages and the demand for talent around the world, and that affects our customers and it drives a need for more and more automation. So it really is true to say the world is becoming more and more automated. Next chart, please. So we've already talked a little bit about the growth opportunities, the sort of top left quadrant of this chart. There are 3 other really interesting reasons that our investors choose to invest in Mpac, and I'll spend a lot of time listening to our investors and making sure we are responding to the things that interest them. So our business has a very high quality of earnings. We've worked for many years to bring our Service revenues up to a target of 30% of group revenue. Last year, we got almost to 30%. And in the first half of this year, we were -- 26% of our revenue came from services. That's important, of course, because it tends to be a shorter cycle business and it's a very good sign of the stickiness of our customers and the support that we can provide to customers for the future. And obviously, it's a lead into new production lines as our customers think about expanding their facilities. So very important for us. Our order intake gives us a very good order coverage as well looking ahead to the second half. Order intake in the first half of this year almost exactly matched revenue in the first half. So the opening order book January 1, matched, within the exchange rate variations actually, the order book at the close of June. So great order average in the second half and we're looking ahead to what that means. High barrier to entry, in the bottom left-hand corner. I've talked already about the growth of our engineering and technical teams. It's very important that when we bring people into Mpac, we help them to learn how to operate as a well-integrated part of the team and to become an Mpac person. We often say that Mpac is Mpac people. So how do we bring people in and onboard them to help them become Mpac people. One really good measure is how effective they are at then being deployed on to project work and Service work, supporting customers. And I'm delighted with that number in the bottom left-hand corner. Technical hours in the first half of this year up 21% on the same time last year to 148,000 hours. It's a good measure of how we're doing to onboard those people. In the bottom right-hand corner, we talk about the capital-light nature of the business. And it really is true to say, when we think about investing in our group to grow our business, we don't require investment in new crucibles and forges and lots of heavy machinery before we can start to grow revenue. We're not a sort of heavily intensive software business where we need to spend $1 billion working on a new game or something like that before we can see any revenue from that either. Our investments tend to turn into revenue fairly quickly. We'll talk about the innovation spend and how that's working as we get further into the conversation today. But that really does mean we're capital light. And we're very happy to see the return on capital employed improve to 18% in the first half of this year. We think we can push that further in the second half, and I'm looking for a number with a 2 before too long. Working capital cycles do tend to vary as we move through our business. We're a project-based business and there are billing milestones to head to support customers. So we do see ebbs and flows of working capital. It is up in the first half of this year. And I think we said in the RNS that we released earlier this week that we expect to see that reduce as we hit those milestones in the second half of this year. Next chart, please. I'm obsessed, since I joined the Mpac team, with customers and we focused very heavily last year on broadening our customer base and winning new customers. And I explained why we wanted to do that. It's not just about growing our top line revenue, it's also that when we support our existing customers, what they look for from us is long-term continuity and the retention of engineers who really understand their business. We've produced more than 250 factories for some of the single named customers on the chart in front of you over many, many decades. We've retained those relationships. And the way to retain engineers to support those existing customers is to keep them engaged and employed and highly utilized on projects that they feel stretched and challenged on. And we can best do that by making sure we fill in the peaks and troughs of our business with new customers around the patch. So it's good for our new customers to win new customers. It's also good for our existing customers that we continue to expand our customer base. And in the first half of this year, we won 58 original equipment orders with 28 different customers. 30% of those orders came from new customers to Mpac. And I'm really pleased to say that 4 of those were new strategic accounts who have real scale, who have the kind of blue chip multinational base, not just to place an order with Mpac in the first half of this year, but we hope if we do well on those contracts, that, that will lead to further work on other projects for those customers around the world for many, many years to come. I can't give you the names of those customers, they're obviously confidential, and we treat that very seriously. On the next chart there, we've got a case study to talk about a customer project that we won in the first half of this year, and we're delighted to be working for Unilever, building a stick-pack machine for them. If you don't know what a stick-pack is, if you have those little sachets of coffee, perhaps, or sugar, and you've used one of those and torn them off and dropped them into a drink. There's a growing demand for nutraceutical products around the world. Those are sort of powdered drinks that you can add to water and create a fantastic drink -- performance-enhancing drink and Unilever are investing heavily in the opportunity that they see in that market, and we are pleased to be able to support them in that journey. The machine that we're building for Unilever is capable of 660 stick packs a minute going into cartons. And when you think about what that means, that means 11 of these little stick packs every second are being managed by an Mpac machine. We count them and put 6 into a carton, 2 cartons every second. And we are very careful to make sure that we don't put 5 in a carton. Unilever's customers would be very disappointed. And we certainly make sure that we don't put in a carton. Unilever's finance team would be very disappointed if we did that. So our ability to count and accurately get to 6 every time or 30 on the 30 count cartons at Unilever also sell and to be able to manage the flexibility of that machine is really important for Unilever. To get to the point that we've sold to Unilever, we've built a relationship with Unilever for the first time with the headquarters team in Europe; we've built a relationship with a factory team in Jefferson City, Missouri; and we've also built a relationship with the integrator that Unilever has selected to build out the rest of that factory in Jefferson City, and we're working closely with all of those parties on that program right now. It's a very exciting project and it's a sign of things to come. But perhaps before we turn to that, we should look back at the first half, and we'll take you through some of the numbers.

Okay. Thank you, Adam. Yes. So it's a pleasure to be able to present a strong commercial and financial performance for the first half for Mpac. We'll start with order intake. You can see order intake almost GBP 60 million in the first half. And as we've just seen, approximately GBP 10 million of that order intake came from the 4 new strategic global accounts who placed orders with Mpac in the first half. Looking at that by sector, food and beverage sector was the largest contributor to order intake in the first half, but there was a broad spread across one of the sectors in which we operate. And regionally, it was really fairly even split between EMEA and the Americas with a good performance in EMEA in the first half. If we move on to revenue, strong growth, 14% up on the prior year. Where is that coming from? What's the driver? It's mainly original equipment revenue. And if we go back 12 months, we were already in progress in ramping up our technical resource to help deliver the increase in revenue for the second half of last year and have been successful in bringing more technical resource into the group with a high level of retention of that resource that's flowed through to the first half of this year and help to drive that increase in revenue in the first half. That combination, as Adam said, broadly the same order intake and revenue, so we closed the half year with approximately the same order book that we started the year at GBP 71.4 million. And that gives us really good coverage over not just revenue in the second half of this year, but also gives us a good coverage in the first half of next year. And for Mpac, the sweet spot really is approximately 60% of future revenue covered with the order book at any one time. That means we are able to take orders with a reasonable lead time and offer that reasonable lead time to our customers. And so we're broadly satisfied with that. At the half year, it was just 0.5% below that 60% benchmark that we set. So a good place as we go into the second half of the year. We move on to margins and profitability. You can see there, our gross profit margins increased by 4.3%. Again, to give a bit of color on what is driving that, but it probably comes down to good project execution, good project governance. So an element of that is the retention of the key technical staff, because there's in-built knowledge that can be deployed on future contracts, but also a good project execution profile and a good mix in the order book. So that increase in revenue margins dropped through to an increase in underlying PBT and an underlying operating profit of GBP 4 million, GBP 4.5 million, respectively, and the increase in EPS up to 15.2p, and Adam has already touched on it. The return on capital employed, 18.1% for the 12 months to 30th of June, and we expect that will increase in the second half to give a full year return on capital employed above 20%. Working capital, yes, that has increased at the half year. This is a product of 2 factors that drive working capital. One is the value of deposits in order book and contract liabilities on the other side by the unbilled revenue in our contract assets. So they're both driven by timing of, in the case of deposits, when orders are received and when they're converted to the down payment that come with the orders. But the main driver is really the value of unbilled revenue. So Mpac recognized revenue based on hours and stage of completion for OE projects. The key billing milestone for Mpac is typically the battery acceptance test milestone, which happens at the back end of a project. So the value of our working capital is very much driven by the shape of our order book in terms of where they are within our production process. So more projects towards the back-end just prior to FAT means we have a higher value of working capital. And that was very much the case or the half year with Mpac, and as has been said already, as projects are completed, that value element of working capital will convert to trade debtors and then to cash and gradually reduce. Move on to the next slide, please. So here, a couple of things to pull out here. I think the 2 bar graphs on the right-hand side are interesting. So OE revenue growth has been a fairly steady positive increase over the last 5 years, and we're in a good place, both with the performance in the first half and the order book going into the second half of the year to show continued progress for OE revenue. The Service face value, the growth in the first half compared to the prior first half may not look stellar. But actually, if you look at the chart, last year was a breakout year for Service. And we've been able to consolidate that increase from last year. And again, we are positive about how the second half of the year should look for our Service business. On the left-hand side, there is a waterfall showing the transition from half year. PBT last year GBP 1.9 million, up to GBP 4 million this year. And for us, we're really pleased to be able to show both revenue growth and margin growth in the first half and the quantum of which both show GBP 1.7 million and GBP 2.6 million, respectively. And then offset intent by sales, marketing and distribution costs in there. So the distribution cost increase generally reflects the growth in revenue. And then there is some pre-investment we've made in our commercial teams, which reflect the expansion of cost there, but dropping through to a very strong first half PBT performance. If we can move on the slide. So balance sheet. Probably the 2 numbers to fly out here are the 2 that drive working capital, which we already touched upon. So that's trade and other receivables, up from GBP 47.9 million to GBOP 52.6 million, and all of that increase relates to the increment in unbilled revenue. So that's the short-term impact of project stage of completion and stage of completion towards FAT or billing milestones. And then the contract liabilities reduction -- sorry, trade and other payables, which includes contract liabilities, reduction from GBP 46.9 million to GBP 44.4 million. So again, that's timing of deposits. And we saw last year more orders come in, in time for the half year to get the deposits in. Timing is slightly different in the first half of this year. You can move on the slide please, Rachel. So the cash bridge, where that leaves us? This is gross cash. So gross cash, we started the year with GBP 11 million. We closed the year with GBP 6 million. The EBITDA, we've touched upon good level of profitability and return on sales in the first half, generated GBP 5.9 million. The increase in working capital offsets that. Explained that's a product of timing, an element of which product of growth as well, but primarily it's down to project stage of completion. We have ongoing contributions we need to make to our Defined Benefit Pension Scheme, which is approximately GBP 2 million a year, but GBP 1.2 million for the half year, and then capital additions of GBP 1.4 million, around GBP 1 billion of that is related to tangible fixed assets and investment in our facility in Tadcaster. That was a one-off investment cycle, which is not expected to be recurred. The small amount relates to capitalization of new product development. And then we have lease payments, and the GBP 2 million reflects a drawdown against the RCF, taking the gross cash of GBP 6 million. We have a GBP 20 million committed facility from our bankers through to July '25. That's plenty of headroom against the facility to invest in our strategic initiatives on the group agenda. So I'll hand back to Adam.

Thank you, Will. Around about 6 months ago, we set out our ambition for the next 5 years. And it is very straightforward. We intend to double the revenue of the group over that 5-year period. And to do so by pulling on 3 levers that you can see in the bottom left-hand part of this chart. So the first is 10% or better organic annual growth, and we'll talk a little bit about the work we're doing to achieve that. The second of the 2 levers is the opportunity that we see ahead in clean energy. And the third of those levers is the opportunity to acquire businesses in order to produce a fuller line offering to our customers. You heard me talk about that integrated role that is being carried out by another company for Unilever. Our intention is to get to a point in the future where, through acquisition, we can offer a full turnkey production line to a customer in the future. And actually, it is probably relevant to point out, 1 of those 4 new customer wins in the first half of this year was a cross-sell. It was traditionally a Langen customer, who we sold many, many packaging machines to over many years. And for the first time, we've sold a Lambert machine to that customer, and it's evidence that, that kind of acquisitive strategy and filling out the line really does make sense, and it leads to commercial benefits for the future. So that's where we're going. Those 3 levers. I'm not going to cover the piece on the right on this chart, because we go into a bit more detail on those topics on the next page. The next chart, please, Rachel. Thank you. So our group strategy has been remarkably stable over many years, and it's a very deliberate decision by the Board. We've got a very clear strategy and it's really making a difference. The 5 pillars are: going for growth, outstanding customer service, innovation, people, and operational excellence. We've covered quite a bit around going for growth already, so I'm going to skip straight to outstanding customer service. And in fact, in a couple of charts' time, we'll go through a case study on the Mpac Cube Connect, which I know we've probably not said enough about that in the last few months. So I'm going to take you through that in more detail. Bottom left-hand part of this chart, innovation. Through the end of last year and in March's announcement, we described the 5-year product roadmap that we've set out in 2023. That road map sets out every new product that we intend to launch over the next 5 years, when we intend to launch it, the investment required, the revenue and the markets that we intend to target with that new product and the specification and performance of the product. And of course, having set the road map out, I didn't want to say much more than that, because I don't want to announce a new product to our customers until we're ready to announce a new product. In the first half of this year, I'm delighted that we were able to launch the first 2 new products from our 5-year road map, the Horizon top-load cartoner and the OSTRO mid-range cartoner. Now the Horizon top-load cartoner, we've built lots and lots of top load cartoners over many, many years for our customers. And we've done them in a sort of bespoke way, responding to particular customer needs. And for the first time, we've taken all of that learning and put it together into a single standardized top-load cartoner. And I'm pleased to say that we have our first order in hand for that machine following the launch in the first half of this year, and we're delighted with the prospects for Horizon for the future. OSTRO, the mid-range cartoner, we've got a case study on the next chart. So I won't go through that yet. I'll save that for the next chart, and first, instead, tell you a little bit about clean energy. We were really, really pleased to celebrate with the Mpac and the Freyr and the 24M Technology teams, the first production trials of a 24M Technology cell for Freyr in Norway in the first half of this year. It was a significant milestone for the business to have achieved to automate 24M's cell process for the first time and show that we could produce off that line a good cell that performs at the levels that Freyr expected. So a really significant milestone and well done to the Mpac team and indeed the wider teams in 24M and Freyr and Siemens and our other partners around the world for supporting that program, a real success. And we're looking ahead to what that may lead to in the future. In terms of people, we've already covered the sort of growth of the team and the increase in technical hours. I think it's worth just touching on some of the other developments that we've worked on in the first half behind the scenes. Will and I have worked incredibly hard on a new leadership succession process with Tammy, who joined the business as Group HR Director. And that is allowing us to really identify the bench strength in Mpac and the pipeline of people coming through our programs for roles in the leadership team that we intend to create in the future as we grow. And I'm pleased to say that I'm remarkably encouraged by the bench strength. We've got some fantastic people in our organization. And that tool is really helping us to highlight where the talents lie and the opportunities for those people for the future. For the first time, we also rolled out Safety Cube. It's a group-wide tool that allows us to manage the risk of safety issues in our factories and improve the safety for all of the people in Mpac, whether they're working in an Mpac facility or a customer site around the world. That tool is already improving the safety performance of the business, which was good already, but you can never do too much. So we are working very hard on that. And if I move to the last part of this chart, operational excellence, and actually, I think there's a typo here. The gross margin improved by more than 2 bps, it's more like 200 bps in revenue from the food and beverage and healthcare sectors. As Will said earlier, that's the result of a significant amount of work on improving the way that we execute projects for our customers. We were delighted to announce in the first half an improvement in the Maestro lead time, that's one of our Langen cartoners. We're now quoting Maestros in the back end of the market now at 35 weeks. That's where it needs to be. It was longer than that over the last few years really as a result of the impact on supply chains of the semiconductor issues that affected companies around the world in 2022. We're now well through that. We're back to normalized supply chain performance, and we're delighted to have the Maestro back at 35 weeks, as are our customers. And lastly, it's a fairly innocuous point on the chart in front of you, the first stick-pack cartoner launched in North America, but I think it's a really important one. When we build those stick-pack counting machines that we talked about earlier, like the one for Unilever, forever in a day, we've built them from our facility in Wijchen in the Netherlands. And partly, it's because of the know-how required to build a cartoner that can handle a stick-pack is very significant, and the team are incredibly capable. These things might look very simple, but the behavior of a stick-pack with all of the sort of powder or the granulated content at one end of the sachet or the other end of the sachet are evenly spread through very significantly. So these things are quite complicated things to handle. And our team in the Netherlands are incredibly good at doing that. And for the first time ever, we've built a stick-pack cartoner in our Mississauga facility in Canada with the support of Wijchen team to transfer the learning. And I'm delighted to say that the factory acceptance test in our facility in Mississauga was successful with the customer in the first half of this year. It's been signed up for delivery to the customer site, and we celebrated that first build in North America with the whole team worldwide. Next chart, please. So I promised a case study on the OSTRO. And it tickled me when the team pitched to me the original concept for the OSTRO, that we were intending to launch a mid-range cartoner that was only capable of 180 cartons a minute. That's 3 a second. For us, that's mid-range. And it really is mid-range, because the Langen range goes all way up to sort of 400, 450, 500 cartons a minute at the top end of performance. So this is a machine that we've developed for a different part of the market. It's a machine that comes with Cube Connect as standard for those customers that want it. Obviously, it's a deletable option if customers choose not to, but we're not expecting many will say no. We'll talk about what Cube Connect is in a few minutes' time. I was really interested in the OSTRO for the commercial impact it has on our customers. And we have taken orders for the OSTRO already. They've come from the bakery sector, and that's particularly interesting, I think, because it's a fast-growing part of the food and beverage sector. So we see lots of opportunity ahead for the OSTRO in bakery. Two of the orders that we've won for the OSTRO came from new customers to Mpac, who we've been trying to break into frankly for years. And we now have, in the OSTRO, a product that satisfies some of the challenges that those customers face, that they can't solve with any other supplier in the world. That's why we won those 2 contracts. So it really shows the power of innovation to help us break into new customers and to support them in ways that are meaningful. It's also, for me, a very good sign that the first 2 products that we've launched from our 5-year road map are already having an impact on revenues in the second half of this year. And that, for me, is a very good sign that the rest of the innovation road map is in good shape, too. So we're going to push on with that, and I look forward to announcing more product launches in due course. Next chart, please. I've been relatively quiet about Cube Connect for the last 18 months. And it's not because we haven't been doing anything, it's because we've been working very hard in the background on a relaunch of the Cube Connect product. And it's been a soft relaunch. Cube Connect is our digital service offering to customers. And what we've done is we've rebuilt the Cube Connect system as a really modular platform to provide something that can be very quickly tailored to a customer's need. Now let's get right back to basics. When we talk to customers about what matters, most of our customers obsess with the performance of their factories around 1 or 2 particular metrics. And they do vary from customer to customer. Some of our customers are very focused on productivity and overall equipment effectiveness. Others will measure downtime. Some are measuring carbon dioxide emissions from their factories. It varies from customer to customer to customer. But to a person, they all care about improving the performance of their facilities. And the ability of Cube Connect to take data from our machines and turn it into actionable intelligence that can drive a decision by a customer that improves the performance on one of those metrics is our measure of the success of Cube Connect, and that is all that matters. It's the ability of that tool to make a difference to the customer in the way that they measure their performance. That's quite a hard thing to do. It's quite a hard thing to explain on a webinar today. And really, the truth of the pudding will be in those first trials with those target customers that we're now working with on that soft launch program. We're working with them to prove to ourselves and to them that Cube Connect really does make a difference to their businesses. And when we've done that and demonstrated it, we'll start to roll it out to more and more customers. And as I've said, the actual core platform is now standard on the OSTRO cartoner that we're providing to new equipment customers going forward. It is also available on the rest of the product range, but it's standard on the OSTRO. So we're looking forward to what that will do for customers and the impact that has on their operations. And we'll tell you more about that as the case studies develop. I think for now, though, it's probably time to summarize. And on the next chart, we have a summary of 2024 first half. I'll pause for questions in just a moment. And in fact, I'll pause for questions now. I think that's the right point. Rachel, if we've got some questions from the folks who've dialed in today, Will and I'd be very happy to take them and then perhaps we'll go through the summary at the very end.

Okay. Thanks for that, Adam and Will. Let's have a look. Yes, we've got some general questions there. So I think, to a certain extent, you may well have answered some of these. So why is Mpac's business model not capital intensive? I think you gave a little bit of an overview on that, Adam. I don't know if there's anything else you can add to that?

Yes. It's probably worth thinking about what it's like in other sectors. So I was reading on the social media this morning, on LinkedIn, that Rolls-Royce has announced a new $1 billion investment in the next generation upgrades of their Trent engine, for example. There's no world in which Mpac would have to invest $1 billion into anything that we're developing before we then start to see some revenue from that investment. Our investments tend to be relatively small and relatively short cycle. The assembly processes within our factories don't require large amounts of capital machinery to build. So our factories are not a significant expense to us. We do work on software development. But as I said, we don't need to go and spend hundreds of millions of dollars on our new software platform before we can turn that into revenue in the future. And our R&D programs are fairly focused and efficient. And of course, on every project that we work for customers, there's an element of bespoking and development there as well. So we're lucky enough to be in an industry where our customers drive the development of technology on every project that we work on. The biggest investment that we make is in our people. It's in the people that operate in the Mpac business and helping to grow the team and onboard new people and to continue the development of the people within the Mpac business. They're our greatest asset.

That's probably a good segue into the next question, which is you currently have just under 350 engineers. What would you expect that number to rise to in order to execute on your status strategy?

Yes. Certainly, over the 350 number would be nice. That rings better to me. 349 was...

349.

Yes, what a chart. Well, the short answer is, if we look around the world at companies operating in our sector, and as I said, there's a very wide spread from some companies much smaller than Mpac, companies the same size or 2x or 3x bigger, right up to companies that are well over $1 billion of revenue. If you put those out as sort of revenue per person on a chart, you find a straight line. The scatter graph is almost exactly a straight line. There is some efficiency to be gained as you grow in that I hope if we were to double the size of the business, we'd still only have one Chief Exec and one CFO. So there are some efficiencies that we can gain as we grow. But we are a people-driven business, we're an hours-driven business. And you can see that in our competitors. So as we grow the business, we were to, for example, double the revenue of the group, my expectation is that we will nearly need to double the headcount of the group to do that as well.

Okay. Another general question, are overall economic conditions important for your business? Or is there ample demand for innovation in the niches in which you operate?

It's a great question, and thank you for that piece. No business is immune to economics. And the fundamental economics that drives our markets, our headcount growth, population growth around the world, the rising life expectancy and the impact that has on health care. GDP growth per capita and urbanization definitely affect these things. And the nice thing is that those factors tend to mean that our markets are relatively robust and stable. They tend to grow at about 4% to 5% a year and have done for many years. There are cycles in a year with cost of living crisis and pressure on spend for consumers. We tend to see a different kind of factory being built, an explosion of frozen pizza lines being put together during the cost of living crisis, and we didn't sell quite so many new cognac lines. But there is still that demand. It just changes, the nature of the products that are being developed by the FMCG sector. So stable and growing markets. Really, though, I would draw attention back to the comment I made about market share. So we have a tiny market share within a large market, and our ability to grow our business depends much more on our ability to win market share and compete better than the scale of the market itself. And I think to the extent that we can do that and improve the way that we're executing projects, keep innovating and delivering for customers, support customers with outstanding levels of customer service, and that really is the minimum expectation these days. And rightly so. Those things will drive the market share growth of Mpac, and that's why we're able to say that we are targeting 10% or better growth in our business over that 5-year period, organic growth, and that's above the market growth levels. It's market share growth that we're aiming for.

Okay. And obviously, you operate in those 3 verticals, 3 high-growth verticals at the moment, but we had a question in terms of acquisitions. If you were to make further acquisitions, do you have any desire to step outside of those 3 verticals, or would acquisitions be within those 3 verticals?

The shortest answer is, within. But let me give you a slightly longer answer to help other listeners who might have other questions around acquisition. Our acquisition strategy is very, very clear. We spent quite a bit of time thinking about it and making sure that any acquisition we were to make is around a strategic direction and not just an opportunistic moment. We, today, have a very capable secondary packaging machine range. We do a little bit of end-of-line work as well. We're very pleased with the performance of the machines we offer. And in the Lambert business, we have a very capable assembly automation business. But that does not mean we can produce a full turnkey production line for our customers today. There are gaps in the technology that we offer. And our intention is to fill those gaps through acquisition. And the reason is very straightforward. Our customers have incredibly high expectations of the performance of the machines that we offer today. And the last thing we want to do is to stray into a piece of technology that we don't really understand. We would much rather acquire a business with a very capable group of people already in it and a very capable machine range and to be able to bring that into the Mpac group and offer something fantastic to customers straight away off the bat. That we think is a much lower risk for customers, much lower risk for shareholders, and a much more secure way of delivering that strategy. And why is it important? It's really because we know that there are customers who require that level of turnkey integration support. And for us to break into, we will need to be able to offer that at some point in the future. When you look to the larger competitors, as we move up in Mpac's future to a person, they are able to offer turnkey solution to their customers. So as we grow, we need to move towards that. We made a very conscious effort to strike off the list things that we don't want to acquire our way into accident. We sell to customers all over the world, and we support customers all over the world. But we only operate manufacturing businesses today in North America and Europe. We know how to do that. And our intention is not to accidentally acquire a business in the manufacturers in China or Brazil or part of the world that we don't know how to operate in today. That seems to me to be an unnecessary risk for Mpac to take. So we're focused on bits of the world we know have to operate in. And we're focused on businesses that support customers in the sectors that we're focused on today. We have an enormous opportunity in food and beverage, in healthcare, and in clean energy. We don't need to stray outside of those markets to grow our business. And the last thing I want to do is to acquire a business working for customers that we don't understand, we don't know how to do business with. I think that would be an unnecessary risk, and it's just not required for us to grow. So we're very clear on things we do want to do, we're very clear on things we don't want to do. And we're also conscious that, to some extent, we have no control over the timing. You might think you do as an acquiring business, but the reality is that it depends much more strongly on the owners of those companies on our list. And when those owners are ready to sell, we want to be ready to buy. But the day before, there's no deal going to happen. We are very conscious that we're not in control of the timing. And that's part of the reason we break it out as a separate lever on our 3 lever plan. We can control organic growth to some extent. We have got control of what we do there. We just need to be ready to support those acquisitions when the right businesses come up at the right price.

Thank you for the very comprehensive response to that. If we move on, it was good to hear a bit more about Cube Connect. With that system, can it be retrofitted to the circa 4,000 units that you currently have deployed?

Yes. I'm glad that question was asked. It was the first question I asked the technology team when they talked me through what Cube Connect is and how it works. I'd love the answer to be yes. And for some of those machines, it will be. But for the vast majority of the machines that are in service today, we can only draw the data off those machines that is being collected on those machines today. And some of those control systems take back many, many decades. You can imagine that some of the machines we support have been in service for quite a long time. To retrofit the kind of data collection systems onto those machines that didn't have them in the first place, we think the economic benefit that we can deliver for a customer in that scenario is unlikely to justify the investment. So I think for the majority of the 4,000 machines in service, we don't see it as a retrofit program. There is a caveat here. The SIGA Vision team do an absolutely fantastic job on identifying opportunities on older lines to install new vision systems that can then improve the performance of lines on brownfield sites. And our intention is not to change the way the SIGA Vision business works at all. We think it's a really exciting part of the offering that Mpac can provide. And that could be on a non-Mpac line, of course. That doesn't have to be limited to just the 4,000 machines that Mpac has provided. That could be on any line. And it gives us a reason to create a relationship with the customer even if they're not investing in new production lines and new facilities around the world today. So for me, there's a sort of a double impact of supporting our customer on a retrofit and building a relationship that might turn into something exciting for the future. So another reason why SIGA Vision business, although very small, could have a significant impact on Mpac in the future.

And still on Cube Connect, just for people's understanding, would that contribute towards service revenue? Or is that part of the bigger sale? How does it work on the financials of Cube Connect?

Service revenue.

Okay. And just on the One Mpac process, is that now complete and yielding results? And have you been able to export any business practices to other regions as a result of that?

I'm conscious, Rachel, that I'm hogging the line here. So perhaps I'll give Will a chance to answer.

I've got some financial questions for him in due course. Don't worry, Adam.

Well, that's how we get to see how he gets on with One Mpac. Will, would you like to pick that one up, and I'll fill in any gaps that I can help with.

Yes, so thanks, Adam. So yes, we've invested in One Mpac business systems, that meant common engineering systems, common ELP, common single entity network, and 365 platforms. So that's complete and it's being deployed across the group. And absolutely that helps us to leverage the individual sites we've got and the people that we've got across all sites as the revenue grows and order intake grows. So absolutely successful today. We can take an order in one site, use that previous investment to be able to execute the project at another site where there's either spare capacity or to optimize our leverage. And that is absolutely driving the increase in margin that we see in the first half of the year, because we've got a much more balanced profile. And we do look at our resource pools now as one global resource pool, especially when you think about our technical teams. And we can pick up a project in one site and deploy it anywhere.

Okay. While we've got your attention, Will, let's move on to some financials. Thank you for the explanation on the trade receivables number. Do you feel this is at a comfortable level compared with revenue?

No, it's not comfortable for us. It's a focus topic for Adam and I and the management teams every day. It's a key metric that we're looking to drive down. To be successful in reducing it, it's a combination of shorter lead times. So that really helps having a stable technical team and a fully resourced technical team. So there's some improvements that will come from that. But really, it's about hitting milestone dates on projects for the first opportunity now. Some of that's not in our control with customers. We'll want to change specification during the life of a project. And obviously, we need to accommodate that. But it's a key focus to us to reduce working capital. It's higher than it's been historically for Mpac, and we're not comfortable with the current levels, and we are working very hard to reduce it.

Then following on from that, whilst talking about working capital, is it possible to structure future contract terms, so that risk is transferred back to customers who do payments in advance.

Yes, it would be lovely, and it's absolutely where our commercial teams are pushing every time, but there's always a balance in that commercial discussion between terms, margin, lead time. And alongside that, we have some long-term agreements with customers and master agreements that we can't reopen every time there's a prospect that we bid for. So where there is a possibility, yes, we absolutely try to trade off that balance between upfront cash and margin and cost in discussions. But every contract is a commercial discussion that we have.

Great. Thank you. And finally...

Rachel, if I could just pick up on that question as well. When I joined the Mpac business, I thought very carefully about, not specifically that topic, but it's very closely related. Our business is fundamentally lumpy. We win orders that are GBP 1 million or GBP 2 million or GBP 3 million or GBP 4 million or GBP 5 million each. And we're only GBP 100 million revenue business, only. So 2 or 3 or 4 orders one side of a month end or the other side of a month end really makes a very big difference. That lumpiness is an inherent part of the kind of business that we are. And the reason I thought about it so carefully as I joined the group was that what could we do to change that? And the answer I've reached is, actually, right now it's fairly limited. And Will is absolutely right. We focus internally intently on improving that working capital position in all of the ways that we'll describe. In the end, the real way to tackle that problem and to deal with that lumpiness, the strategic change that will make that problem go away is to grow. If we double the size of the group by doubling the number of contracts that we take, that lumpiness halves. If we go again and double again, the lumpiness goes down by another factor of 2. And fundamentally, when I look at other companies in our sector, they all work with the same issues. We all face the same problems with projects that are lumpy in that scale. The strategic way to do this is to drive growth in the group. And to the extent that we can deliver faster on our 5-year plan and double the revenue of the business, that lumpiness will become easier to manage. Now that doesn't mean for a single moment that Will and I are going to finish this webinar and alleviate the pressure on the teams within Mpac to do better on the projects that we're executing today. Of course, every day, we'll look to improve. But there is a very clear strategy in place to deal with that issue in the long run.

That's great. Just a quick final question for you, Will. On the pension scheme, obviously, we got some of the numbers in the presentation. But can you give us a little bit more detail around that and how it's looking at the moment?

So we're currently working with the trustees on the valuation since June '24. We expect to conclude on that quite quickly. The last time it was 18 months because there was quite a lot to work through. This time, we expect to conclude by November, so 4- or 5-month window. That probably highlights that the scheme is into place and funding levels improved significantly since the last valuation, but I think that's consistent across the pension world because of movement in discount rates. But we are in a good place and we expect to have positive news to be able to share at the end of the year regarding that valuation, and that should provide a platform for the group to move to the next stage of discussions with the trustees.

Great. Thank you very much. So that concludes the questions. I guess you want to just go back to the summary slide, and I'll let...

Yes. Thank you, Rachel. We could update the sort of summary and outlook. And while Rachel brings that up on screen, I won't go through every point on this chart. I think you can all read through without me doing that. But I will leave you with 3 thoughts. The first is, I am really pleased with the performance of the team in the first half of this year. I think we've delivered a strong revenue growth, up 14%, improving return on capital employed and earnings per share. The second is I'm very encouraged by the good progress that we've made on our strategic initiatives. The work on the innovation program, the improvements in gross margin and lead time particularly for our customers, and also the support that we're providing to our strategic account customers around the world, those are very good signs of the direction of the company. And lastly, and probably most importantly for people who've dialed into this webinar, we are on track to deliver our full year guidance in line with expectations. Thank you ever so much for your questions today. Rachel, thank you for your time. And we're looking forward to a further update at the end of the year.

Great. Thanks, Adam. Thanks, Will. And we look forward to talking to you at the March full year results presentation. Thank you, everyone. Thanks for joining.