Norcros plc (NXR) Earnings Call Transcript & Summary

A warm welcome to everybody. We're just going to give you a little bit of admin to start with. First of all, this presentation is being recorded. So if you miss a bit of it, don't worry, you can watch it again. The boss will be presenting from a slide deck that is already available on the Norcros website. If you go into their very informative investor center, you will find it there. And you will also find last week's initiation research note from equity development, which has a lot of detail, forecasts and, of course, a fair value. What we are going to do is have a formal presentation and then there will be a question-and-answer segment. We have a lot of questions already input, but if you would like to submit one during the presentation, just use the appropriate button at the bottom of your Zoom stream. So I'm delighted to introduce the CEO, Thomas Willcocks; and the CFO, James Eyre, who will run you through the recent interim results and also their plans for the future. So over to you, Thomas.

Good afternoon, everybody, and it's a pleasure to have this time with you. I got James next to me, our CFO, and really happy to take you through what we feel are a really robust set of results in the current market. And the underlying theme that you'll pick up today as we go through these results is in and around the strength and positioning of our market-leading brands, really strong new product development activity and increased cohesion and work between our different brands to drive organic market share growth. So we delivered a record U.K. performance. South Africa, a little bit more difficult in and around power interruptions. Those have subsided and we expect the market to normalize and gradually grow back. Revenue of GBP 201 million for the half, underlying operating profit of GBP 21.4 million. Net debt at just around 1x EBITDA, and we've managed to hold our interim dividend. I think what's also really strong in terms of these results is really excellent cash generation, which is something that we've done consistently over the last 10 years and towards the back of the deck in the appendix. You can have a look at our track record. The really good progress in terms of the refinements and execution of our strategic priorities is paying dividends. And looking forward, full year underlying operating profit is expected to be in line with market expectations. James, I don't know if there's anything you'd like to add to that.

Not yet.

Okay. flip to the next slide. We really operate in 2 core markets and have operated in both of these markets for a very long time. We understand them very well, and we have market-leading brands in both sectors. As I've said earlier, our U.K. business delivered a record underlying operating profit of GBP 18.7 million. We believe we've outperformed the markets and we'll talk to you now in and around the reasons why that might be, outperformance from our Triton and Merlyn brands. And as I said earlier, a very, very strong new product development programs and extensive service levels have driven those share grains. On the South African side, tougher. We had significant energy challenges earlier in the year. Those impacted the start of the new build building cycle in South Africa, which run from sort of February, March to October, November. So we've missed the new build cycle for this year, but expect that to kick back off early next year on the back of improved energy supply. We have really strong brands out in South Africa. We have many Norcros out, this has got James and Thomas managing 4 businesses with full management teams there. We have no debt in South Africa and generate good profits and good cash. Next slide, please. This is a really important slide in terms of understanding Norcros and specifically our U.K. position. And you can see in the past at the top, we talked to a more resilient mid- to premium RMI segment. On the left-hand side, you have a breakdown of where the demand for bathroom and kitchen products comes from. And what you can see in the gold segment of the left hand pie is around 80% of current demand currently comes from RMI with new house build being 13%. That can move up and down. But as things stand, that would give you a good indication of where demand is coming from. In terms of the product markets that we operate in on a good better best economy middle, upper premium, the Norcros brands all sit in the 2 blue segments, which in the mid- to premium segments. I think what helps distinguish the Norcros brands is that we differentiate it from other building commodities like cement, roof trusses and we are not dependent on new build for our volume. You can click again. James.

Thanks very much, Thomas. If you go through Slide #6, I'll just take you through some of the numbers. I'll point out some of the high-level important parts of this, and we can take any detailed questions in Q&A later. Just on Slide #6, the sum as mentioned, revenue for the half, GBP 201.6 million and an underlying operating profit of GBP 21.4 million. That was just below the record half year from the prior year. On to Slide #7, please. Andy, we'll just go into some of the detail here in the 2 regions we focus on the U.K. and South Africa. It's probably easiest to focus on the 2 bottom charts. The bottom left shows the revenue in the U.K., which, despite soft market conditions, increased by 0.8% to GBP 143.9 million, South Africa revenue decreased to GBP 57.7 million, largely due to the headwinds from the energy restrictions, which Thomas mentioned before. In the U.K., underlying operating profit was GBP 18.7 million, and that represented a record performance and a return on sales of 13%, up from the 11.4% in the half from the prior year. South African profit was at GBP 2.7 million and overall return on sales for the group was GBP 21.4 million at 10.6%. Next slide, please, Andy. So just looking here at earnings, dividends and tax. I think the 2 callout points here are, firstly, EPS at 15.6 p, marginally behind the prior year due to the interest cost from the bank debt that was used to acquire our last business, which was Grant Westfield in 2022. But despite that, the dividend per share was maintained the interim dividend at 3.4 p, and that represents and reflects our confidence in the prospects of our business going forward. Next slide, please, Andy. So this is something that Thomas alluded to before. I think that's a detailed slide with all our cash elements. At the #1 I want to focus on is just that 121% towards the middle of the slide. That's a great performance in the half, but that's representative of what we do in terms of cash management at our group. Over the last 10 years, that has historically been at 80%, 90% plus ; we're a very cash-focused business. And as you can see, we generate decent cash, and which has helped us reduce leverage in the past and we are still going forward. Next slide, please, Andy. So you can see that we've got an exceptionally strong balance sheet. Debt at GBP 46.6 million, that's coming down nicely. Leverage is just under 1x. We've got a bank facility that we've recently extended for a year to 2026, and that's GBP 130 million last year with GBP 70 million accordion. And that gives us significant liquidity and funding headroom. On the right-hand side of that chart, you'll see we've got, -- we have a legacy DB accounting scheme that's super mature, but that is in an accounting surplus and remains in an accounting surplus at GBP 15.7 million at the half year. Thomas, back to you.

Thanks, James. And if we could just click to the next slide, then please. In June 23, we highlighted 4 key strategic priorities for the group. That's the portfolio developments, our drive in terms of growing organic market share growth, a real strong focus on operational excellence and ESG as a competitive advantage, understanding what a broad umbrella that is. I'm pleased to report that we made excellent progress refining and in terms of the early execution of these strategic priorities, and we'll talk to that on the next slide. So if we look at portfolio development, Norcros has been a collection of brands over a significant while now, James, in fact, led the acquisition program that has got us to where we are, with the belief in really strong brands in the business. We generally had brands coming in and nothing going out. And we are now focused on the performance of those individual brands, specifically looking at operating margin and the return on capital employed. And if we feel that we are not able to add value to a business or a brand or grow it, then we'll look to exit it. And we have done what we said we do in the first half. We've exited our U.K. adhesives business. We did that to plan and completed it successfully. We are currently reducing the manufacturing capacity at Johnson Tiles in the U.K., and we also have a very well-developed acquisition pipeline. Our acquisition pipeline is both bond market and off markets. We are seen as a natural home for many people wanting to sell their businesses, and we have an excellent track record and set in terms of the businesses we select and our ability to grow those businesses. The second key focus area, and I think in the current market, this is really important, is organic growth. I've alluded to earlier, we've a really strong new product development program, 25% of our products or products -- 25% of the products we sell or products that have been launched in the last 3 years. Those products increasingly have strong sustainability credentials, and we have a great pipeline going forward. We have also leveraged the opportunity to cross-sell, and that is not each of the brands selling each other's brands, but rather introducing them to each other's businesses. And by way of example, our recent acquisition, Grant Westfield, we've introduced them to Screwfix, Wickes, and Topps. That's exactly what we did when we bought Merlyn on, and we doubled the size of Merlyn from 2017 until now. So a proven track record of bringing businesses on and growing them. To the earlier point, we've got market-leading brands in the more resilient RMI market segments and a number of those brands are market leaders. Triton, Grant Westfield, Merlyn are all clear at #1 players in the markets that they operate in. Big focus on operational excellence and growing cost and revenue synergies as we scaled up. On the cost side, we've done remarkably well on freight by pooling our freight. We've done well on the sales side, as discussed earlier, and we are investing further in our customer service capabilities and also simplifying our warehousing and logistics to drive further efficiencies there as well. On the ESG side, our carbon targets are currently being validated by SBTi. And I think it's really important that to note, we see this core ESG umbrella is a key part in the core part of our strategy going forward. The products that we're launching, the growth that we're starting to pick up is strongly linked to the sustainability credentials of the products that we sell. You will see the word engaged supplier status at the second bullet point there. And what that refers to is our ability to work with our partners, be it the Travis Perkins or Wickes, and become a preferred partner because of our strong ESG credentials included in those credentials is our ability to supply really critical data for their own ESG programs in the format that they want, and that makes us a much more resilient partner and much more valued as well. Importantly, we have appointed a Chief People Officer into the group. And although we run a decentralized model, we understand the importance of talent going forward in the future proofing our business and have taken early but important first steps in this regard. You can click. I think what's also important is to understand the size of the opportunity for Norcros regardless of where we are in the market cycle. We've grown by consolidating what our fragmented and very attractive kitchen and bathroom product markets. And if you look at this puzzle, it's a famous puzzle within Norcros. In the gold, you can have a look at the businesses that we currently own. And in the blue, you can have a look at the adjacent segments that would be of great interest to us. We continue to look at these really carefully. We're really sensible about making acquisitions. We spent a long time researching any businesses that we buy, and we've got a proven track record growing those businesses. Thanks, Andy. By way of new product developments, those of you that know Triton, would remember that Triton is an electric shower that you generally see a white box on the wall. Our in-house design capabilities and every one of our businesses has a specialist design team working within the business. So we're not a distributor. We don't buy other people's products. We design our own. But what we've done, and this is potentially a game-changing products, is we've launched the first behind-the-wall electric shower that looks exactly like a normal mixer. So this new ENVi shower by Triton has the mechanics of the shower sitting either in the wall, in the roof, in a cabin no longer stuck on the wall of your shower. It has excellent sustainability credentials, both in terms of being cheaper to have a shower and with a boiler shower. It is our first climate partner-certified product. So it's carbon neutral and again, has a very, very strong upside, in terms of the future home standard, and this is the kind of product that signifies where Norcros is going. Thank you, Andy. If you have a look at our key customer base, we are very specific about not just chasing revenue and you will have a look at down near the bottom or DIY retail. A very small part of our business comes from big box retailers. We have a huge focus on carefully selected trade and specification and also independent customers. This is a blue-chip customer base that is stable. And when it grows, it grows because we feel that we can find a partner that understands our brands, the hierarchy of our brands and how to position them. So very, very careful who we do business with and long-standing relationships in these channels. Walking again to the fragmented nature of the market. When you look at these bar charts, the light color signifies the market share held by the leading players in that market, including ourselves. So if you were looking at Triton and electric showers, the 2 main players are ourselves and MERLYN. We are the #1 in terms of market share and have north of 50% of the electric shower market share in the U.K. When you look across to the right and you go into enclosures and trades, again MERLYN's the #1 shower enclosure business in the U.K. and Ireland. You can see that although the market share is at 25%, there's a huge amount to go at. And that same story replicates across brassware, wall coverings and furniture accessories. We have some clear gaps in terms of baths and furniture, Baths and Sanitaryware in the U.K. We do these and supply to these segments in South Africa. So we are able to enter those markets either organically or through M&A. So there's significant opportunity to take further share in these fragmented markets. Thanks, Andy. The store is replicated in South Africa. And I think the important thing to take away from this slide is, again, the size of the markets in South Africa. If you have a look on the right-hand side, you can see the size of the 3 markets that we cover in South Africa is GBP 1.6 billion, and that really talks only to the formal market in South Africa. There's a very large informal market that is not captured. So lots of opportunity for further organic growth in South Africa, and we continue to take share from smaller and weaker competitors. Thanks Andy, We've touched on ESG, so I'm not going to spend a huge amount of time here. We've made excellent progress. Our carbon targets are being validated by SBTi. We've made our first disclosures to CDP. 4 of our businesses are really carbon neutral, and we started launching products like the ENVi that I've just taken you through, which is our first call on useful products. So we are very proud of where we are in terms of the wide and broad umbrella that is ESG, and we continue to believe that this will be a key part of driving market share growth going forward. So in summary and looking forward, a robust performance reflecting the strength and position of our market-leading brands. And I think that's really important. We're not as cyclical as a number of our peers. We are not a commodity business. We're not a distributor. We design in-house, we supply products to selected partners who know how to position our brands, and we are able to grow market share profitably. We've made really good progress on our strategic priorities by closing our adhesives business in the U.K. We have driven our new product developments to really drive organic share gains and our pipeline remains strong. As I mentioned, ESG is driving a strong competitive advantage for us, and we'll continue to do so. Our cash flow is excellent and will continue to be that way. And we have, for those of you who don't know us that well, we take a very conservative view when it comes to debt and leverage, be that when we're doing M&A or just generally running the business and that will continue. We have an excellent platform for further growth. We continue to consolidate what are large and fragmented bathroom and kitchen product markets. Our approach is all about being design-led and supply of sustainable products. And we believe that the benefit of our scale and the strength of our balance sheet are brilliant and really truly excellent new product development capabilities means we'll continue to take share from the weaker competition, both in the U.K. and South Africa. Our full-year underlying profit expectations will remain in line with market expectations. And I think that's quite important, quite different to a lot of businesses that have recently released their results.

And just before we go to Q&A, perhaps go forward 2 more slides to 23. I just think it's worth highlighting the 10-year track record of the business. And obviously, that's arguably some difficult tough markets in the U.K. and South Africa, but you can see how the revenue has grown. The underlying operating profit performance, that's been strong. The return on capital employed consistently above 15% and the cash conversion there, absolutely excellent. You can see FY '21 as we squeeze working capital during the pandemic, and that came back again at FY '22. So we average those 2 out. And so through the cycle, we've delivered a really good set of results. And I think that's an important attribute to the Norcros story. Thanks, Andy.

Let's move on to Q&A. We've had a lot of questions submitted [Operator Instructions]. So grouping them loosely, where else could we start but South Africa? So actually one for you, James. A couple of questions on cash repatriation. Are there any currency control issues that you have to deal with? And then the second part of the question is, has there been any return of net funds from the South African unit to the U.K. parent in the last 2 or 3 years?

Good question, one we get asked often. And I think the point being is it is a well-worn to bring cash back from South Africa. You have to get local bank approval, which is a relatively straightforward thing to do. We brought cash back a month or 2 ago. And we just lead in South Africa sufficient cash to fund working capital. I think what we would say is we've never put cash into South Africa either. It makes cash. It generates cash. And just to be express, we can take cash out easily.

Okay. Thank you. And then definitely one for Thomas looking more at the macro environment. Can you give the audience a feel for how resilient the South African economy and individuals have become with respect to the problems of load shedding, which are by no means new developments in South Africa?

No. I mean we've had load shedding for as long as I can remember, and it's a planned thing in normal times, you might have 2 episodes of load shedding in a week for 2 to 3 hours. It's well communicated, and it happens when it's supposed to all of -- I mean, all of our businesses have backup energy. What unfortunately happened at the back end of quarter 4 and the beginning of quarter 1 is we had a couple of things come together that really not energy supply hard. And we went out to sort of 10 to 12 hours of load shedding a day, which is a bit of a showstopper. That's essentially been a one-off. So only time that I can recall it happening. And you can hear from my accent that I come from South Africa. What we have seen is a strong recovery in terms of the energy availability. We're seeing increased private sector supply coming on to the grid. And if you just think about South Africa, lots of wind on the East Coast and lots of sun and deserts in the middle of South Africa. So lots of solar going in. I see a pretty clear path over the next 18 to 24 months in terms of the private sector mix, in terms of energy supply and stability of energy supply. We may have a few hiccups along the way, but those hiccups wouldn't be less sale of the size that happened now 6 months ago now, they just don't impact the economic activity in South Africa. So that would be really how we would look at it. That said, we expect the recovery in South Africa to be measured because we've missed the new build cycle. That load shedding happened at the beginning. It's an annual cycle starting in February and March ending in October. So we expect new build to kick off early next year and RMI to kick off just a little bit ahead of that.

Okay. And that's a neat segue into the next question. Assuming we do gradually get a more normalized energy market in South Africa. What do you think that might mean for profit margins in the region for you?

This year, we've got up to around 7% in terms of our profit margin, James?

Yes, 7%, 8% historically in that.

We'll work our way back to the speed we get back there. I think we'll really be determined by exactly what we've been talking about, whether we right or not on the energy side. I mean South Africa is we've got 80 million people living in the young population, shortage of housing and infrastructure. And if you just go back a year or 2, we make 10 million pounds a year and have sending cash back to the U.K., we have no debt in South Africa. So around 7%. We'd like to get back to in fairly quick order and generating cash as we were and repatriating that cash. We don't intend making any significant investments in capital projects like new tile manufacturing capacity. So it's really working with what we've got in South Africa largely.

Okay. And the last one on that point, what is your medium- to longer-term plan for growing the House of Plumbing?

It's really about a national footprint. So House of Plumbing was a regional business up in Gauteng. And we're looking firstly to get a national footprint using the existing model, which is a very heavily commercially focused model. So that business specializes in costing and supplying into large commercial products. Given that, that is a weaker segment of the economy at the moment. We have a set of restraints of growth. We were looking to address the maintenance plumbing markets. So it's really about national footprint and filling the gaps on the maintenance side as well. So a lot of opportunity in terms of growth for House of Plumbing going forward.

Okay. Right. Geographically, we're going to it north and east a little bit. So we have a question there. You have distributor arrangements with the likes of Alshaya within the Middle East. Are there any opportunities that you are seeing in Saudi Arabia given the past infrastructure developments?

Yes, I think anybody is operating in the Gulf, I think, is extremely focused on Saudi Arabia. So yes, we do -- we're fairly well represented. Got a long history in the Gulf and have increased our investments and resources in the Gulf and looking to take advantage of the growth there. We believe that the Gulf will grow, being quite a lot of changes in places like Dubai, for instance, where you can now -- when you finish working steady, so you've got a relatively rich market that is putting its roots down and I think it will deliver sustainable growth going forward.

Okay. Now we'll take you a big step Eastwards. So we've got a question on China, which is a strong area for your sourcing and your supply chain. Can you say approximately what percentage of ultimate Group revenues represent products that are sourced from China? And given that they're quite often political tensions regarding this region, what alternative plans might you have if there was a severe deterioration?

I think it's just ROCE of 50% of our revenue comes from product directly sourced from China. U.K. revenue or components that come from China to say right and where we do like assembly. In saying that, we have a long history in China. We have in excess of 30 permanent staff members in China, over 120 factories. We view them as key strategic partners and going through things like COVID, our ability to leverage those relationships really helped us outperform the market in terms of our stock levels and our service levels. The geopolitical concerns, I'll address in 2 ways. Firstly, pretty much any factor in the world making anything as a component from China in it. So you might be picking something in Italy, then there will be one widget as the car guys found out that comes from elsewhere. So nobody should get too comfortable about being completely resilient to any shocks out of China. But in saying that, we have backup and secondary plants in Europe. Specifically, we were growing quite a strong presence in Eastern Europe. The Ukraine hasn't helped it. The Ukraine is not just about brain, a lot of our wire harnesses, for instance, came from Ukraine. And we will continue to develop Eastern Europe. We, into Turkey, and we think going forward North Africa, given us close proximity, will become increasingly important. So big focus for any business, but also a reality in terms of how we deal with it.

Well said. And last question on thin, I think. Going back to South Africa. Can you describe how involved you are within the black empowerment movement stuff?

Yes. So it's a fairly complicated setup and it's legislated. The piece that we probably struggle a little bit with is there's a large ownership components in your black empowerment ratings. But in all other areas that make up their rating, we do an exceptional job, and that's in terms of things like training and development, community developments. I mean our signature community project is building with our staff, safe toilets in rural areas. And if you go into our annual financial statements, you'll be able to see examples of that. So exceptionally strong contributors to society. We're at a level that allows us to compete but doesn't get us to the front of the pack and -- and we'll remain in a position we're in at the moment, we think it's sufficient.

I think it shows a change in our ownership structure. We haven't got the full marks.

Okay. Taking those granted. Right. Swinging back to the U.K. Is Johnson Tiles losing market share at the moment? Someone asked.

No, in fact, I think, it is taking market share. And if you have a look at the positions that we're strong in, we continue to take share. We have deliberately moved away from less profitable business, and that's been part of the Norcros story over the last 2 years across a number of our businesses. So we need to do a lot of businesses, a lot of Johnson's business in the big boxes, very hard to generate a decent profit there. So our focus has been on house builders and fixers, specialty retail. And if you have a look at the product that goes in the -- some really world-beating products. So although we don't sell as much as we used to, it's a conscious effort to exit low-yielding product that made no sense being involved in really.

Okay. A couple of questions on Grant Westfield. First, the easy one. Is it fully integrated now?

Certainly, it's a tracking business. It's a tracking business in a growing market segment. And if you haven't heard about premium wall panels, you're going to hear about them in the next few years. We're the market leaders. We have 40% of the U.K. market and continue to grow. We -- as I said, integrating it into Norcros has had the benefits of getting it into Screwfix, Wickes and Topps in fairly quick order. We have an excellent new product development team and the integration, again, and this is the benefit of having multiple brands. They're working very, very closely with the Triton management team, helping them find the place in the business, but sure about they have been forever really. So really pleased with the acquisition, and we believe it will be one of the major growth drivers. And again, if you go into the peck, we've got the move in fine. If you go to Slide 28 for us, Andy, just to illustrate what we do and what's really happening at Grant Westfield. Is that difficult for you to do or are we testing your art. Don't worry too much if it's a bit of a hassle. But MERLYN was no different to Grant Westfield. I think as I said earlier, we brought it in and introduced it to new channels and doubled the size of the business. Slide 28. Yes. So MERLYN was the acquisition we did just prior to Grant Westfield. You can see we bought it in FY '17. And by FY '23 essentially doubled the size of the business. And that came from cross-selling, introducing them to existing group customers. And to be fair, they introduced us to some customers as well. So that ability to collaborate and work together accelerates the growth and accelerates our organic market share. So we expect Grant Westfield to be no different to the MERLYN experience.

I'm going to leave that slide up actually for a second deal. So a couple of questions. Specifically on Grant Westfield again. Are you happy with the progress you're making with the major house builders as you do have a later slide, which is only showing Grant Westfield penetrating one of the top 10?

Very early progress. But if you think of the new house build standard coming in, in 2025, where we got over 75% carbon reduction in a new house build. This is essentially a fully recyclable product. And in the manufacturing process, you also pretty much use any waste coming out of that process in biofuel. It's a very easy product to install and lends itself to future build. So we are testing, we are trialing and I expect us to make significant progress in the housebuilders going forward, James?

There's a particular reason why Grant Westfield on that slide is only one account win, that's with Barrett. That's because the opportunities with Grant Westfield have been quite considerable we've had to prioritize. So Grant Westfield has prioritized and has been introduced and is currently listed in Wickes, in Topps Tiles and in Screwfix. And we just got to be a little bit careful that they don't get stretched too thinly with these great multimillion-pound opportunities. But as Thomas said, house building, yes, we're on it, and we'll get through to get on to that very, very soon, but want to make sure that Grant Westfield prioritize it accordingly.

And I mean, outside of house build as well as to James' point, we have one big commercial hotel chain as well that we are in. You can imagine, we can turn around a bars using these panels in a day or 2 as opposed to tiles where you had to ship them all retail, regroups that ability to turn around key commercial spaces really quickly is another great thing. But to James' point, very important. We did the same with MERLYN. We do it in a measured way. We make sure we can keep our promises to our customers and deliver what we say we're going to do. We just don't shop on stuff [indiscernible].

Yes. Okay. And sticking on the U.K. house building them, we have a question, I'm sure you would never set your strategy to adapt to U.K. politics, which can be a bit unpredictable. But it does seem highly likely that we're going to get changed government in the next year. So are you comfortable given that the labor party is committing to a lot more new build, but you're in a good position should that occur?

And we've got market-leading positions in the house builders excellent relationships with our customers, both at a national level and regional level. And I think regardless of who's in power, there's a shortage of houses, and we're very, very well positioned to support and help those house builders as their stores coming through. So we see that as a strong area of revenue growth going forward.

And if you link that as well with a shortage of skills, particularly say with tile. Tiling is quite a difficult thing to do well, that lends itself to our products where it's easy fix, easy to do, a join a good fix the panel. Some of our brassware that's easy fix and some of our MERLYN enclosures, that's easy quick fix as well. Trying to help the installer is also an important attribute to a lot of our products.

Great. Now last question specifically on the U.K., where things are going well, and margins are pretty much at record levels. So what might we, from the outside, see as a new normal range for margins in the U.K. in coming years?

Yes, very pleased with that margin development in the U.K. in the first half at 13%. I think that would be -- would be buying to assume that as a new baseline for Norcros, U.K. I think that has benefited from the Grant Westfield business coming into the portfolio, which has got strong EBIT margins and the exit of the Adhesives business, which has not so strong EBIT margins. I think going forward, there's also room for improvement. And clearly, we're on that through the strategy review on what businesses we want to work on and how we can improve that further. So I hope there's more to come, but 13% is definitely the new normal.

Right, bigger perspective questions on group. You were investing in IT very sensibly. But can you give a little more detail on how you're aligning a number of IT platforms across a diverse group?

What's important, we run a decentralized model. So what you're not going to see from Norcros is some big major SAP in fruition. I think we see ERP and we do invest in our ERP is just a core piece of software. The magic comes from the apps and the stuff around that, right? So our investment is really about the customer experience, making sure it's really easy for our customers to engage or for us to engage with our customers and specifically to support our B2B customers as they manage what has become a more fragmented route to market, be it the normal customer, be it marketplace, be it B2C data is hugely important in that process. So a lot of our investments going into simplifying and making it easier for people to transact in a way that's comfortable with -- so that's really where it's at. And that will be ongoing.

Okay. And in terms of operational excellence and cost efficiency, how much more scope is there for taking cost out or sharing more the cost of services within the group? And I think you mentioned distribution as a positive example. Is there more to come?

There's but sensibly, the strength of our model is we have set to specialists running our business, great relationships backwards on the supply side and Ford. So when we're looking for opportunities here, we do that, keeping in mind that we quite often put businesses on a screeched check and add one and one together, you end up with 2. But in sales and places like that, it's often 1.5 because people they prefer selling something else. But in saying that, we move a lot of stock around. We've got numerous facilities, and we believe that there is a fair amount of value still to be had by simplifying what we do and how we move stuff around. And the answer is there's more upside.

Okay, great. And looking forward. A couple of questions about synergies within brands that are inherently quite different, but also specifically on new product development within the group. And if you have a few examples of how you're bringing the different parties together and what the end product that is and how that might contrast with what was happening within the group, say, 3 years ago.

I think what we are doing is we're working a lot closer together on NPD. I think one of the flagship projects is working together on finishes. You have seen kind of blacks, whites, rose gold, bronzes. All of those are slightly different under different lights. But by bringing our businesses together, they can be exactly the same, to be color match in a finished bathroom. So that would be one area. Another area might be in operational resilience. Our Grant Westfield business particularly strong in IT and cybersecurity. So bringing those expertise and spreading that back out to our sister companies, that's also been very beneficial as well. So we're coming together on the new product development, operational improvements. And I'm sure Thomas has got even more example

No, I have -- there's an untapped well of opportunity within the group without changing our core decentralized nature and the fact you started to see operating margins change and us growing share ahead of many competitors is really the evidence of what we're doing in those areas. But I think matching base is critical. One of our key customers is Wickes, and we work really closely with them in terms of helping them remain relevant. And we're able to do that when you walk into new Wickes store, you've got proper room sets. So you can imagine us taking a Grant Westfield panel and matching the shower enclosure, and shower wall and shower head that all work really well together. So we're positioning our customers because at the end of the day, the bet our customers do the better we do. So that's an area that we'll continue to develop Andy.

I think another -- just to add on to that as well would be in terms of that new product development, we'll just come back to the Triton example in the ENVi shower. That was a conscious decision by ourselves and the management team 18 months ago to invest. And it was a reasonable amount of money, as you might expect, but that has driven the market share gains that we're seeing now. And I don't think Thomas mentioned, but in H1 in these results, Triton grew volumes in the first 6 months of the year in what has been a tough market. And I think that speaks volumes about no pun intended that speaking to what the new product development does and your ability and our ability to take market share.

Yes. Okay. Well, I won't ask whether James' new bathroom is going to be used as a shower room going forward, but I'm sure it's well stopped with high-quality products. Right. We've got a few questions on M&A, but I'll just slip in a pension one, which I assume we'll look in your direction here, James. You've got a nice DB surplus now. So what are the chances of the liabilities perhaps in the future being sold on to an insurer or rather manager?

It's something that we are actively working on in terms of what is the optionality, what do we have to do to get the -- to get the pension in the best possible shape to get the best possible insurance pricing. That's probably at least 12, 18 months because there's quite an event involved behind the scenes on that, not least with GMP equalization, which we don't have to get the detail on, but that's a considerable amount of work. Having said that, we're also cognizant that whenever we potentially do get a quote from an insurance company, there's going to be GBP 20 million to GBP 30 million of profit margin in it for them, in which case, it may not be an appropriate use of our capital to take the pension off-balance sheet. I think the point being there is we've got options. It's in a great space, the pension scheme. It's light-years away from where it was 3 or 5 years ago. We're an accounting surplus. We've got a really collaborative trustee relationship. We work really well together to understand the strategy, back the strategy. So we were a good place and the pension doesn't disrupt us strategically at all.

You got to assess it at the time. And as you say, anybody who's going to buy an asset is looking for a return on it, so it could well be best left to run its stores under your own management. So we share to see with that. Right. Lastly, if you -- on M&A. And perhaps you could give a little idea of what the upper scale limit might be for your capacity to buy an attractive asset? And what are the Board's sensible leverage limit controls around that?

Let me try and pick up on the structure. And I guess in terms of size of transaction, you've seen we had the largest transaction in Grant Westfield, which was GBP 80 million last year. We've certainly looked at things bigger than that, and we certainly look at things smaller than that. I think from a structure point of view, it depends on what that kind of financial structure looks like. I think we're very cognizant where the share price is at the moment, raising equity. We have to be very careful about that. But if the deal is strategically compelling and we can structure something sensibly that's earnings accretive, we'll take that to shareholders. Having said that, with leverage, just to be clear, we have a very conservative approach to leverage. We take leverage up to 1.5x, 1.75x at most. We've seen us do that historically, and then the cash generation means that, that leverage comes down. So I think we've got an active pipeline. We're looking at lots of really interesting exciting businesses, some of which may be a bolt-on and old debt, some of which may be a little bit more significant, but it's got to make sense, and it's got to work from a financial returns point of view.

Quite right, too. And in terms of that sort of pipeline, which has been around for a while in terms of opportunity, can you just add a little more color about how the pipeline itself is changing? Are there competitors taking businesses away from that? Are new businesses coming on to your horizon? Is there much flux in the market at the time?

I think all the time, that pipeline, there will be some of that that's been there several years from businesses that we've known and followed and really get to understand the owners who just aren't ready to sell yet. There'll be businesses on there that are in an auction process with private equity sniffing around, et cetera. And there be other businesses that are totally off market that will only, will be looking at because the owners don't want everybody going through their numbers, and that's commercially sensitive data. So all the time, deals will come in and all the time, deals will come off. But I think what I would say is as a business as Norcros, we know the market better than anybody else. Over the years, I've been here, which is 10. We've seen hundreds of IMS. We know the business. We know the people and would have seen as a really good home for our acquisitions. So we've got a really solid reputation. We're not going to do 2 deals a year and go crazy. Our deals are sensible, lots of due diligence, and we bring things in that makes sense.

Okay. And then in terms of targets, we have a question. Would geography be a major driver? Or is that just one component of what you would regard as an ideal strategic fit?

I think overall, the majority of our targets are in the U.K. But equally, we see near Coast Europe has potential. There's some attractive markets there like Scandinavia. Historically, well, we've operated in the Middle East. So we've looked at the businesses there. And as far field as Brazil, which has the largest electric shower market in the world. I don't think we're going to buy anything in Brazil anytime soon, but it just gives you a flavor of the international element of what we're looking at, and we want to make sure we understand the global market for our products.

Okay. And obviously, not everybody is faring as well as you are at the moment. We've had the administration of Victoria Plug recently in the U.K. So we have a question, would you also look at assets and businesses being sold at distressed valuations? Or is it again the ultimate arbiter of acquisition going to be strategic fit?

Yes. We don't major on turnarounds. We may pick up brands or specific parts of distressed businesses or businesses that have closed, but we like to take on strong existing management teams and businesses with really good market positions and really strong growth prospects. Our offer selling has 15 people in it. So we don't have the bandwidth to be turning businesses around, and we think there's easier ways of finding good businesses at the right value and using them to grow themselves just by supporting them financially and as we showed, introducing into our sales channels. So our focus would be there.

Well, that's great to anybody whose question hasn't made it through, do let us know and we'll move forward on to the management. But thank you very much to the audience. Some very, very interesting diverse questions. A reminder for those who joined a little late, that this slide deck that Tom and James have been using is available on the Norcros website, as is our initiation as very detailed piece written by Toby Thorrington last week, which had a 233x fair value, which you're a little bit nearer to now, not less than last week. So we hope that, that journey continues. Thank you on behalf of all of the audience, to Thomas and James for a very enlightening presentation. And a last request to everybody who's watching, we will send you some feedback forms, and we'd be very grateful if you could fill that in as with the management at Norcros be. So thank you again, gentlemen, for an excellent presentation.

Thanks, and Thanks for your time, guys. Have a good day. Bye-bye.