Norcros plc (NXR) Earnings Call Transcript & Summary

Okay. All right. I think we're mostly there. So welcome to everybody. We're delighted to welcome back the Norcros team. Just a few points of admin for the viewers first. You can submit your questions as the presentation unfolds very best to address all of those later on. This presentation is being recorded. So if you miss any of it, do not worry, a video will be circulated probably early next week. The slide deck and lots and lots of other useful investor material is available on the Norcros Investor Relations site. And if anybody had missed it, there is also a recent review of their results from the equity development analysts, retaining a fair value for Norcros shares still well above the current level, even though they have performed well in recent years. So I shall now pass over to James Eyre, CFO, his last appearance on these events. So we shall thank him now on behalf of all the investors for the time that the company and himself have put on previously. And also to Thomas Willcocks, the CEO; and Thomas will commence proceedings. Over to you, Thomas.

Okay. Good morning, everybody. And on behalf of the Norcros team, James and myself really warm welcome. Good to be talking to. I'm sure lots of people we've spoken to before. It's always a pity, we can't see you, but good to have you on. Look, James and I are really pleased with the set of results. They again demonstrate the effectiveness of our strategy, really, really strong contributions from our colleagues right across our business. And before I hand over to James in a couple of slides, and the head of this being his last presentation or we said his last Norcros presentation on this platform, I really want to thank James on behalf of our team and the Board, myself personally, was a significant role that he's played over the last 12 years. And so James, thank you very much. There are really 3 key takeaways from this presentation. The first is we have again delivered a strong organic performance, especially in our core U.K. and Ireland markets -- not many businesses did not update their numbers last year or update guidance. We held guidance, and we hit our numbers. We reached significant milestones in our journey to become a capitalized cash generative bottom business and are ahead of plan in terms of the financial targets that we set at our capital markets 2 years ago. 3 of the 4 financial targets have been delivered within 2 years and also progressing extremely well in terms of our carbon targets that are measured through the SBTi. So Norcros is really well positioned to continuing share and creating value for our customers and shareholders. In a market that has remained really weak, we have again demonstrated our ability to grow and deliver through the economic cycle, both organically and also inorganically by really what we set out in our strategic plan. You can jump to the next slide, please. So when we look at these that we have in front of us, they reflect the benefits of really, really focused execution and looking at these numbers, we have grown our like-for-like revenue on an organic basis in a tough market and also our reported revenues up 16%, reflecting the Fibo acquisition. This growth has been delivered profitably with operating profit and included a record year in the U.K. and Ireland with a really strong operating margin progress there again. We've made strong progress strategically as we continue to grow a more focused portfolio. And as I've mentioned with Fibo being highlights in the year. And importantly, we've rapidly reduced our leverage back from 1.2x following the all debt and highly accretive Fibo acquisition and then the closure of Johnson Tiles in South Africa. I'm really pleased to announce that we've delivered on our medium-term ROE target of 20%. So when you look at the overall business, strong rocky, really good operating margins high cash conversion over a long period, good earnings per share growth and a nice bump up in the dividend that James might talk to. Importantly, post the year-end, we announced our intention to investigate options to sell our last remaining assets in South Africa. This really signals an inflection point for Norcros that we'll discuss through the presentation. But let's first look at our regional performance as quickly. Next slide, please. The first thing to point out is that following the acquisition of Fibo, we have renamed our U.K. and Ireland region, Europe, so where we refer to Europe like-for-likes, this exclude Fibo and is essentially what we used to report as our old UK&I region. Starting on the right-hand side, our South African like-for-like operating profit was marginally lower than the prior year, a market that remains under pressure probably with the main difference in the U.K. being that the interest rates are significantly higher. We have a really strong team in South Africa performed well, and some of the key self-help measures included the closure of Johnson tile South Africa, which has been really sensitively and accurately managed, driving a strong cash performance. I'd really like to recognize the performance of Kevin and his team in South Africa, especially with regards to the care and professionalism in which they handled and completed this really difficult closure during the year. The European like-for-like, as I said, previous U.K. and our performance was strong with operating margins up to 15.9%. Reported operating margins on the left-hand side are lower, and that's really due to the expected dilution following the acquisition of Fibo. We have demonstrated the benefits of leveraging our collective scale through the year and that is reflected in that operating margin growth. Importantly, again, these results show the benefit focusing on the brand conscious, more resilient mid-premium RMI segment. We often talk about RMI and you get different people reporting, saying RMI is poor or RMIs good. I think what you generally find is heavyside RMI is under more share than brand-led like side RMI, like Norcros. So we continue to see the market remaining fairly resilient and trading as we expect. Looking forward, it's worth drilling down a little into what is going to become the foundation of our new European focused business. And we'll look at underlying performance over the last 10 years and these numbers include the FY '26 pro forma numbers for Fibo. So if we go to the next slide. Looking at the graph on the left and the starts in FY '15, broadly coinciding with our first acquisition and fly enough that coincided with James' arrival at the business, and was a time before breakfast -- Brexit, Brexit, covered all manner of shocks in between. And what you can really see in this business is consistent through cycle profit growth. Progressive operating margin growth has been driven by the benefits of our growing collect to scale as we've grown as a business. Our focus on that more resilient brand-led mid-premium market segments, and I work on refocusing our portfolio on capital-light design-led businesses. So what you see is really strong through-cycle profit growth and also operating margin growth. And what we've done over this period is we've demonstrated a repeatable, scalable growth model, striking the right balance between organic and inorganic growth. Importantly, this model has and will continue to be applied to what is a large, attractive and fragmented end market in our targeted geographies. On the next slide, we look at what this new European group profile looks like starting with the fact that these would include the pro forma fee numbers. And essentially, what you're looking at here is the culmination of the work that we set out at the Capital Markets Day 2 years ago, looking at what is going to become the new European group profile all of the businesses in that center, donut or bathroom businesses, they are capital light, they are cash generative and essentially that talks to a transform Norcros and Norcros that is now going to become a bathroom focused group. So I'm really, really pleased with the work that the team has done here. The left one shows what the revenue would be adjusting for the full year of Feb. And on the right-hand side, it's just an important reminder that the main demand in bathrooms comes from RMI. There's a lot of noise around new build because a lot of those businesses are listed. But historically, around comes from RMI and 20% new build. This year, RMR may have been a little bit higher. When you look at the size of our business and then you go down to the bottom left-hand block, you can see the size of the opportunity in the available addressable market in the U.K., Ireland and Nordics, which is where we have our businesses. So a huge amount to go at, and we'll do that in a focused way. We have a business with a GBP 45.8 million operating profit. We have a 14% operating margin. And important to note that as we move that Vivo business up, and we know how we're going to do that, that would bring us to north of 15%, which would be the last of our financial targets set 2 years ago. And we have a rocky that's already at 20% and would grow to probably just north of 21%. So this snapshot shows the underlying strength of the base from which we will and we'll continue to develop and grow and create value really driven by a clear purpose -- our expert teams in what is and remains a decentralized structure and a balance sheet that offers a high degree of flexibility and optionality. I'll now hand over to James for the last time. Thanks, James.

Thanks, Thomas. Good morning, everyone. We can have the next slide, please. So just on this Slide 8 and the income statement. Revenues totaled GBP 393.4 million, that's not with 6% on a like-for-like constant currency basis. On a reported basis, that was up 10.6%, largely driven by the acquisition of Fibo and continuing market share gains. In turn, the underlying operating profit was GBP 48 million, and that's 7.9% ahead of the prior year comparative. Underlying PBT was at GBP 40.9 million and was 8.2% ahead of the prior year. and exceptional items of GBP 9.9 million, mainly comprised of the noncash goodwill impairment of GBP 7.2 million. Pension scheme admin expenses at GBP 2.8 million were higher than the prior year, and that's largely due to one-off external gender equalization project costs. acquisition and disposal costs of GBP 13.1 million mainly relate to $7.8 million of noncash amortization costs on acquired intangibles and about GBP 4 million of fees associated with the Fibo acquisition. Overall, this resulted in a reported PBT of GBP 14.9 million. And next slide, please, Andy. So just on Slide 9 and some of the revenue and profit bridges. Starting with the top left, U.K. and Ireland total revenue was GBP 6.8 million higher. Fibo contributed GBP 32.7 million. And in total, as shown in the bottom left-hand chart, our overall group constant currency like-for-like revenue increased by 0.6% and that was 0.7% in Europe and 0.3% in South Africa. So just going now to the charts on the right and underlying operating profit, the top right underlying operating profit of GBP 48 million was ahead of prior year by GBP 3.5 million. There's a really strong U.K. and Ireland performance, a GBP 3.5 million increase as well as a GBP 3.3 million contribution from Fibo And note that we have separated the increase in central costs of GBP 2.8 million as we continue to make investments to help drive our strategic initiatives. And finally, looking at the bottom right chart, I guess the key number there is overall the return on sales for the group was 12.2% compared to 12.5% in the prior year. This is a marginal decrease, and it's largely driven by the initial margin dilution effect as expected from Fibo. So if we go to the next slide, please, Andy, just going to highlight a couple of key numbers on this slide. The first one being the diluted underlying earnings per share was 35.8p, and that's an increase of 7.2% on the prior year. And on the dividend, the Board is proposing a final dividend of 7.6p per share bringing the total dividend for the year to 11.3p per share, and that's a significant 0.9p per share increase on 2025. Just moving on to the next slide, please. And this is on the cash flow. Lots of numbers on this slide, so I'm just going to highlight 2 or 3 of them. The first one being the group generating an underlying operating cash flow of GBP 57.6 million in the period, and this represented an excellent cash conversion rate of 116% of underlying EBITDA. Net capital expenditure was GBP 6.8 million, and then further down, that -- yes, further down the underlying free cash flow, prefinancing dividends was GBP 42.6 million, I'm just going to call out the repayment of acquired subsidiary borrowings of GBP 39.8 million. That relates to the repayment of bonds that related to Fibo at the time of the acquisition. Next slide, please. So just on to the balance sheet. Net debt at the year-end was GBP 65.8 million, but importantly, with leverage at 1.2x. This was a reduction from the 1.6x leverage at the time of the Fibo acquisition. And I think just to stress the balance sheet remains really strong and in good shape and we continue to have significant liquidity and funding headroom to further invest in our strategic initiatives. Also to note, the group banking facility was refinanced in December '25 with the committed RCF increasing to GBP 150 million, and the maturity date was extended to December '29 with a further 1-year extension available. The pension scheme remained in surplus on an IAS 19 basis. But importantly -- more importantly, the scheme remains almost fully funded on an actuarial basis at 98% of technical provisions. Next slide, please, Andy. So most of you would have seen this slide before on our capital allocation framework. So just to outline again -- our capital allocation priorities are organic investment, ordinary dividend, complementary acquisitions and finally, supplementary distributions. And this will be done within the investment guardrails you can see on the right including maintaining leverage below 2x dividend cover of approximately 3x cash conversion in excess of 90% and a ROCE target of 20%. I which takes us to the final finance page where I provide an update on the progress towards our medium-term targets. Here, we can see significant progress across all our targets over the past 3 years. Organic growth has remained ahead of market as we continue to take market share. Group operating margin is now at 12.2%, benefiting from the closure of the tiles businesses, operating efficiencies, and as mentioned, partially offset for the time being by Feb. ROCE has again increased and is now at 20%, and cash conversion remains excellent. And over the last 3 years, averages 107% conversion rate. And finally, we are pleased to see the continued progress in our SCOPE 1 and SCOPE 2 near-term targets with a 65% reduction from our base year. So for a final time, Thomas, back to you.

Thanks, James. Appreciate it. So a really strong set of results. And I think this progress against the published targets is really important. We've stayed focused. Our teams have stayed focused move done what we said. I'll now give you a light update on some of the strategic initiatives that we have and continue to deliver in terms of the progress against these targets. This slide again is a slide that you all know well. And the really key takeaway here is that we continue to do what we said we were going to do when we first put the slide up on the portfolio development side. As we said, we've completed the Fibo acquisition. We've closed Johnson Tiles. We've announced post unions that we are exploring the options to sell the rest of our South African business. And we have a really attractive M&A pipeline. And as James alluded to, we have the ability to do further M&A -- on. The organic growth side, our in-play drivers, new product launches included Nature Panel, Metlex, Enlight and Heat Repeat Strong group cross-selling progress and I'll talk a little bit later and a little bit more about the complete bathroom offer. On the operational side, our group scale advantage has continued to help us significantly specifically in these uncertain times, our group freight deal and a new U.K. wide grade energy contract being part of that sort of resilience and we've also launched a group operations project that I'll talk to it a little bit later. James has covered the ESG in a bit of detail. But I think one of the important things about ESG that I'll touch on is that ESG is not only driving market share gains, but it's also improving our resilience as a business. So starting with portfolio development on the next slide. Let's get the Fibo. We're really pleased with this acquisition. The post-acquisition integration process is largely complete and as you know, we try to leave businesses alone for about a year after we bought them so that they can integrate, get the systems going and integrate it and just get back into running the businesses after a sale process. In this specific case, we brought a very strong management team that's come out of private equity. So a lot of the work we normally need to be doing around systems and reporting is already in place and again, validates the quality of this business. There is strong upside potential in this business, specifically around the operations. We have a very automated assembly or like assembly plants in Lindale Norway. It has fair capacity. So as this business grows in what is the fastest-growing bathroom segment, we're going to be dropping additional volume onto a very automated plant, and we should see a lot of the margin progression at Fibo come through this avenue. We have made some early investment in growth initiatives, especially people as we start to pivot towards growing the business in new markets. And we expect to start working on leveraging our group growth and supply chain value drivers as we start approaching a year in the second half of this year. And this is much the same thing that we've done with previous acquisitions where we have a demonstrated track record of growing these businesses faster than they were growing when they were on their own. And just as a reminder, in 2017, we bought MERLYN. We've doubled the size of MERLYN without any dilution to the operating margin -- we're on a similar journey with Grant Westfield really strong cross-selling and investment in new product development, and we fully expect that Fibo will grow faster as part of the Norcros Group and the benefits flow both ways, by the way. So I'm really pleased to report that the business is trading in line with expectations and albeit that the margins are lower than our group targets. We have a very, very well-planned business in a great market segment. Now moving on to our post year-end announcement that we are looking at options to sell our remaining South African business. The first thing to note is that following the closure of the capital intensive and cash negative Johnson South Africa business we are left with a more capital-light business in South Africa with really strong prospects and a strong track record, albeit that this now sits outside of our core product and geographic markets. I think it's important to note that any sale will take some time with an obligatory competition commission process, adding about 4 to 6 months. We don't foresee any issues here. This is really about redressing historical racial ownership imbalances in South Africa through what is called a public interest clause. And given that the current ownership is currently 100% U.K. We expect any deal in South Africa to see progress on that front. So we are just comfortable that, that would be an administrative process. And what we're really looking at here is that the successful conclusion of this process will see Norcros complete our transformation into a focused high return [indiscernible] business with significant strategic flexibility. And just addressing how we go about a process like this is we are doing this with our team. We've preannounced this rather than surprising our team in South Africa being part of Norcros since 1954 and we'll be working with that really strong team and so to make sure we find the right investors and the right home for what is a really strong team and asset. Now moving on to our organic growth drivers and projects that a real stream for us is our proven organic growth accelerators specific new product development and cross-selling that we always talk about but I think increasingly in uncertain times, and it has been uncertain times for quite some years now is that we win a lot of business because of the strength of our balance sheet and our ability to help our customers keep their promises. And I think the other thing that I will keep repeating is that we have a resilient business model that has value that we're able to chase after because of our scale and because we are increasingly selling into a more resilient mid-premium market. Highlights include our strong vitality score, which is around 23% last year, driven increasingly by higher value and higher margin ranges, often with a very strong sustainability underpin and this is driven by in-house design expertise that includes a combination of strong technical skills and also strong design skills. And to be fair, we also are happy to work on a license agreement with good partners. And the picture you see here is a very recently launched Laura Ashley panels range and really pleased to have hooked up with Laura Ashley and Clark & Clark. Secondly, our proven ability to grow businesses that we own or acquire through cross-selling. You will recall the work that we've been speaking about with Grant Westfield in tops and Screwfix and Wix. We've now added B&Q and others with some of the new accounts delivering north of GBP 1 million of additional revenue already. So a strong year at Grant Westfield from a revenue and profit growth perspective. And although at very early stage, we've started a project in vada and MERLYN together to create a full bathroom business, and I'm going to talk a little bit more about this on the next slide. So over the last sort of 18 months, we have been collaborating across Biguado and MERLYN to create and test a complete bathroom offer. And this is really in response to growing demand from our customers and end consumers to make bathrooms easier to select, purchase and install. We are not first to offer a full bathroom our first bit of work is really going to be about getting the 2 businesses data and systems and teams even more closely aligned. So there's a common language that we're talking -- and -- but what we've done since February has really brought the 2 businesses together under the leadership of Charlie Soden, who is the Managing Director of MERLYN. So he's running those 2 teams, and we've started to integrate those teams with a number of the portfolios already integrated. But as I say, the initial focus on integration at prepare projects will take around 12 months. This project will grow our addressable market by north of GBP 1 billion in the U.K. and Ireland alone, and that's really reflecting the size of the furniture, sanitary ware and other markets. This is a medium-term project but that will drive incremental organic share and margin growth. And again, just demonstrates to that even in tough markets, we have clear pools of value that can and will tap organically and inorganically and we'll continue to leverage our collective scale to do this more efficiently, which leads to the next slide. And I'm really going to start here about doing what we say we're going to do. And we set a target last year, and you can go back to the presentation about shipping 20% of our freight using eco-fuel. And I'm really pleased to point out that in the year that passes, we, in fact, ship 37% of our inbound freight using eco fuel, which not only reduced our carbon footprint but made us more resilient in terms of the fuel appetency that we have seen more recently another crisis in the Middle East. Because we were an early adopter and embedded eco-fuel into our model, we've benefited both in terms of our predictability and shipping rates significantly and reinforcing our resilience. I'm also pleased to report that we've negotiated a scale-enabled group energy deal in the U.K. that does the same thing, 100% clean energy with long-term price stability. So this whole point about being a decentralized business, but leveraging our scale for collective benefit when it makes sense is borne out here. Looking forward and building on our initial work in the U.K. and Ireland to consolidate and simplify our warehousing footprint. We've launched a project that started this year using our internal team and external partners and this is really about investing in and simplifying our wider systems infrastructure, and we're doing this to drive improved service levels at a lower cost. We're doing this sensibly, and much like the Boston project, we'll see the incremental gains starting to come through in around 12 months from now. You're not going to see a big bang systems, right. We being big bang collapse of our existing footprint. This will be done sensibly in a considered way and in a way that has little disruption to our end markets as possible. There is value there, and we are looking 3 and 5 years ahead to make sure that we help our customers remain relevant and competitive. The underlying message is that we're not sitting back and hoping for a market recovery, and we can do this because we have a clear plan and very importantly, excellent teams running our businesses. Part of our plan has been to apply common and commercial sense and get ahead of it when it comes to modern and sustainable business practices. And if we can move to the next slide, I've shared some examples of our commitment to doing the right thing is driving value given the full deck. We'll not spend too much time here other than saying we remain extremely focused on exceeding our 2028 SPT targets and driving hard towards our 2040 targets. As I said, we've delivered our Scope 1 and 2 targets, 2 years early, again, doing what we say. And really, sustainability done properly is not about ideology, it is simply good business where we are making practical choices that strengthen our business today and ensure that we remain relevant tomorrow. Moving on to our sectional team. Our decentralized but collaborative model is different. We have passionate subject matter experts running and working in our businesses. And I'll remind you that I think the 3 of us at the center, all of the best people actually set out in the market running these businesses. but they are aligned by group-wide purpose and set of values that we call keys and who are empowered to make good decisions close to the rock phase. And it's a key reason why we win and why we have so many #1 positions with our brands. All of our businesses are great place to work certified, but we know that we still got a lot to do. But I'm really pleased that our employee proposition be someone has been recognized and awarded so a strong culture, cohesive culture that we continue to build on. And Norcros is also increasingly in a space where anyone regardless of their background can make an impact and be someone and this is probably best demonstrated by the fact that our last 5 managing director appointments have come from within the group. And to be fair so, James, and I progressed through the group. So a good business where people can impact and grow. If we could change the slide piece. So in closing, and we can change to the next slide. We have seen a strong year with current trading remaining on track with revenue over the last 2 months, up 3.1% on a like-for-like basis, again, talking to the resilience of the that sort of mid-premium market and the fact that we sell a branded products. The teams have delivered operationally. Our team has done what we said we would strategically and we are now a fundamentally very different business. our focus on becoming a capitalized design lead bathroom business, which has included taking some really tough decisions has seen no cross evolving to the high-quality business it is today. We acknowledge it's tough out there. We look forward to -- as we move forward, maintaining our current expectations. And the only thing that would change that would be a material change in underlying conditions. So we have a clear strategy and a strong and proven business model that I will finish with if we can go to the last slide, please. So Norcros is a really fantastic position now. We have a resilient, scalable model. We have benefits of scale that differentiate us in what remains fragmented end markets. Not many businesses lead with the fact that one of the great strengths in terms of growing share is our balance sheet strength. But that is a fact, and it has become particularly prudent post cover and again now. We have really strong in-house NPD. We're not a distributor. We design our own products. We have great technical and design and fashion design skills. We are able to leverage our cross-selling abilities to drive faster than usual organic growth. We have a very resilient and scale-enabled supply chain strong technology, and we continue to invest in that technology. But most importantly, we've got the best talent in the market. So really, really happy with where we are. We have a clear strategy very importantly, disciplined capital allocation. And all of these organic and also strategic drivers that we talk about are all in play, there's nothing here that we have to reinvent or come up we just keep executing into what remains a big opportunity. And I'm confident that our focus and discipline will continue to drive further value creation through the cycle. And as stated in the previous slide and our statement. So thank you very much, and we are ready for questions.

Great. Thank you very much, gentlemen. A comprehensive review of a very busy but successful year. Lots of questions in already, so we'll dive straight in what we've got here. So while accepting that Norcros is heavily weighted to RMI in the U.K. Are your housebuilding clients seeing any grounds for optimism yet in new build? And does the ongoing lack of activity damage their relationships with Norcros or your ability to participate in and upturn when it comes?

Look, I think the house build market is a really difficult place to be. And we're very supportive our customers there. We have leading positions in the national and regional housebuilders. And I just think if we get some half decent joined our thinking from the governments in the nicest way, that looks at a value chain like any business with at any project. There's just a huge amount of latent demand and potential growth, and we know the benefits that come with building 2 things. So we don't see a rapid recovery in household because we don't see that sort of policy coherence that we need to see -- that said, we continue to take share and Gardos recently just won 2 big house book contracts working with MERLYN. When the market turns, we will be there with our -- with the housebuilders, we will make sure, as we do now, that we leverage our balance sheet to support them in terms of stock in terms of sustainability, in terms of after sales service. So as that market grows, we will see the benefit of that. And of course, when people move houses, the people who buy the old houses need to renovate and that gives us a double flip there. So I think a bit of a journey to go, but let's hope that in the near term, we at least get some kind of coherent policy that we can all focus on. It doesn't even have to be a great plan, but just to have a plan that we all implement would be really helpful.

Just to add on house builders increasingly looking at their resilience of their supply chain. I mean they know they're in a tough spot. I think our balance sheet wins is market share, as Thomas just mentioned, if a housebuilder has a supplier that goes bang then it's going to be very, very difficult for them. And with the bathroom being one of the last components of the house that gets fitted, I think for us to have a strong balance sheet with inventory on hand with great service -- that is a really important criteria for housebuilders.

Thomas, you mentioned that panels are now your largest source of revenues. Can you say a little bit more about who the leading competitors in your European markets are?

Yes. It's quite an interesting piece because this is -- this product category has grown up in Scotland and Northern Europe, mainly Norway. And it grew out of fairly humble sort of product in social housing and has started to move more upmarket and Grant Westfield Fibo being strong proponents of that. We have no real major international directly international competitors. So most of our competitors in the U.K. and Europe, are smaller and probably less well capitalized and businesses, and that's why we are probably able to move quicker and have moved quicker to take this product more premium. We also have a stronger balance sheet in terms of being able to support our customers and see this as a category that will continue to grow. Would it attract new competitors? Likely yes. But it's not only about the product, it's about how you move this product around. It's big. And one of the benefits for us is we have over many years through MERLYN perfected, moving big, heavy and fragile stuff around, especially in terms of last mile. And again, we have been able to apply some of that expertise here. So confident that we can continue growing confident that we can continue staying ahead in terms of our model, which is a design and service model. So yes, I hope that answered it for you.

Yes, it does indeed. A couple of questions on MERLYN and VADO and the complete offering. First one, I suppose a typical question for most businesses, probably not one for Norcros, but has there been any internal tension or loss of staff as you've started to build a management structure around the project?

Yes. I think this was something we've been thinking about for some time. And again, we spent a lot of time in preparation when we did eventually decide to formalize what we've been doing informed anyway. And I personally went out and spoke to both those businesses. We spoke about the reason for doing it. We spoke about the markets were demos and there was an opportunity for growth for the businesses and people in those businesses. Of course, it brings uncertainty changes are never easy. We haven't seen accelerated levels of churn as a result of this and my belief is that hopefully, most of the team can really see this going. But we stay very, very close. We've put additional people or sourcing talent management resource around this project to help people with clear way through. And I hope we're hoping and believe that most of the people want to stay on board and be part of what is a really exciting project.

Yes. And in terms of -- you mentioned that this project was, to a large extent, client led. We have a question, are there some of your clients that your offering of a complete bathroom might be seen as stepping on their toes.

No, because we're obviously selling to other businesses. And -- so we're essentially a B2B business and where we used to just sell a share and closer to, let's say, an independent retailer. We're now selling them a complete bathroom that they can then sell on to the end consumer. So it's more about that. And really interesting and encouraging thing here is we did the trials with Cameo and then Safari, those trials have got us into weeks in terms of making their whole bathroom experience and what they can offer their end consumers a lot stronger. And that's given us the confidence to now put the foot on the accelerator here.

A couple of questions about South Africa. You announced it before the results, but you will have been seeing a lot of your institutional shareholders in recent days. How is the plan going down with your larger shareholders?

I don't think it's a surprise. The Capital Markets Day laid out our plot and when we talk about being a bathroom business, our South African business, it's a really good business for many years, and I know the team and the quality of the team and the brands we've got there. But the 3 businesses there, you've got a -- you've got a tile adhesive business, a very good one. You've got the second largest tile and bathroom retailer, and we've got a small plumbing merchanting business. And as much as we'd love to stay old with that team and that business we want to become a focused mid-premium bathroom business. So I think anyone who's been following us for some time would have seen the clear progression. And I think the fact that we managed to close the tile manufacturing business gets this business into a position where it is more attractive. And hopefully, I know we will find the right home for it.

Just to add to that. Andy, I think the direct feedback from investors is they recognize that this is a really strong asset with a really experienced management team. It's profitable. It makes cash and recognizing that this is actually a rare attractive asset in the South Africa market and very much the flavor of -- get a project value for its -- and if you don't, then we won't consider selling it.

Okay. Very sensible stance. And another, I suppose, a logical question since the plans have been announced -- has there been any impacts in internally or more in terms of revenues for the South African business or business as usual with the -- being the Norcros way, the aspiration that all your stakeholders will see the business potentially end up in a more suitable place?

Look, it's always a difficult announcement you have made. Again, we went out, as I said, and spoke the top 200 people face-to-face. But I think importantly, it is a stand-alone business. It's run itself for many years. Kevin, who runs that business has -- is Bidvest for those of you who know them. So he's been through a rollup at Bidvest. And I think the confidence that he and his senior management team bring to the rest of the team is really important. So we haven't seen anything, no. We continue to run the business like we're going to own it forever. So we're also not sort of throttling the business anyway. So I think we're in a good place. And as I said, we're not doing it to them, we're doing it with them. This is about working together to get to the right place.

Good. And moving nearly forward to look at the residual focus on Europe. We have a question there's clear opportunity to grow market share in Europe as a whole, which are the countries that you need to have critical mass in that you do not at the moment? How far has Fibo got you on that journey? And will you target acquisitions on a regional by country basis to expand your reach?

Yes. So again, common sense for us is closer the better really. And also, which markets are we able to find that value brands have value sustainability underpin and service and maybe are a bit more fragmented. So we still have opportunities in the U.K. and Ireland, both organically and inorganically obviously, Nordics is someway that we've looked at for a long time from -- in fact, from the time James led our M&A team. What Fibo has given us as a management team that does business in the U.K. and up in Northern Europe. And the key takeaways is each of those businesses in each of those countries is different. But this is not about copy paste. I think as we grow into maybe taking some of our other brands back across that way, what we'd be looking at is working with our team at Fibo and our M&A team to find businesses, maybe it's a case of showing a kind of a really good show in closure of business that's for sale and that would benefit from our growth drivers. So that would probably be the likely model. And then, of course, we're going to be supporting Fibo and Grant Westfield in terms of the overall market expansion across Europe and the rest of the world, which they're already doing. They, in fact, export to places like New Zealand, the states and others already. So we're going to drive the panel piece but use our knowledge of those individual countries to drive the rest of the model.

That's very sensible. Maybe one for you, James. You showed the pro forma margin -- EBIT margins for the European business, what might be an aspirational level to move EBIT margins to over the medium term in Europe?

Yes. Thanks, Andy. And maybe I'll start and then maybe Thomas you can jump in. I think as we mentioned in the presentation, we think there's a good pathway to improve in the Fibo margin overall. So getting through in the 15% in the short, medium term is definitely doable. And then in the kind of more medium term, we think high teens as an EBIT margin is possible. We've got the levers to be able to do that. I think much beyond that, you start to stretch the envelope a little too far. So I think at this stage, we'd see a pathway to 15 and then progression through to high teens.

I think it's sensible. When we set that initial target of 15%, as I say, we had South Africa in the low teens and that implied Europe being in the high teens. And when you have a look at what's left after South Africa, and you've got a big chunky and really business like Fibo sitting between 10% and 11% with a clear path and then the other pools of value that we've spoken about today, we really are confident in terms of be able to see to progress those margins, as James has explained.

Good. You've provided very neat segue, Thomas. Thank you there. You're very helpful slide on progress versus capital market targets showed you or you're well ahead of the curve. So there's a couple of questions linking them together and things will change if there is a disposal of the South African business. I think the first one, positioning the group in the mid-premium segment has clearly worked very well in recent years of consumer caution. Is there any possible shift up or down from that position?

It's a good question and one we get asked quite a lot. We've been going around some London seeing some of the bigger shareholders because we have some businesses talking about trading up and down and a whole lot of different things like that. And of course, there's never a single kind of customer. So we can acquire it always apply our people trading up and down to a mono customer. What we find is in the mid-premium segment, especially on the light side, the branded product side is a lot of those customers don't have mortgages anymore. If they've got a brand in their bathroom, they're not going to have a whole brand adviser and replace the tap with an OEM product that doesn't match it. So we haven't seen any down trading to talk about, and we're extremely focused on being profitable business. So we think that, that -- and especially the gray pound, it's a growing part of the market. So we see it remaining resilient going forward.

Good. And the related question, I presume from a shareholder who says thank you for a better final dividend than expected. Can you remind me what the key considerations to the Board in setting a dividend are around earnings cover, balance sheet, net debt leverage, et cetera, et cetera, and whether that might change after a successful South African disposal?

James?

Yes, sure. So I guess the key parameters that we set out in our capital allocation policy, our earning a dividend cover of approximately 3x. And I guess, overall, keeping leverage below 2x. So they are the key factors in what the Board discusses in setting the dividend. And probably, we don't see a material change in that going forward. James and I always say, we've got a clear strategy, we've got clear targets to go in. So while balancing giving some back to shareholders, we would like to apply the cash that we generate to growing the business.

Again, you've anticipated the next question. In terms of capital allocation, returns to shareholders may be on the agenda deleveraging was another question. And there's also one whether given the much improved health of the pension scheme, you might look for a buyout of that at some stage in the future.

I'm going to let James handle that he's been part of the team that's worked so hard to get us in the position we're in. So jump in, James.

Yes. So firstly, if we consummate a South African disposal, proceeds would then obviously reduce leverage, and we have a very active well-developed M&A pipeline with some really good strategically compelling opportunities. So that would be that would be first prize. In terms of potential pension scheme buyout, I think the pension scheme is just in a really good place. It's light years away from where it was 5, 10 years ago. The deficit recovery contributions they finish in June next year. I think it depends on what the cost of a buyout would be, whether we would consider it to be an appropriate use of capital. I think -- so we'll decide at the time. But if a buyout cost was say the GBP 15 million I don't think that would be a particularly good use of capital because the -- because we're not putting any more cash into the scheme anymore. If it was significantly lower than that, yes, we would consider it as a board.

Great. Just time for a couple of final questions. Firstly, there's a lot going on. Are you comfortable there is enough management bandwidth to run the South African sale process and at the same time, appraise, execute, integrate Fibo as well as looking at future acquisitions?

Yes. So what we do is that we have got a small center. As you know, James is stepping down at the end of June, but we got them until March next year. He will be fronting up on the South African piece and he's working with a very strong team in SA. So that is hugely helpful. James, also around as we continue to progress the pension and really help out on any other thing that we might need a bit of flexibility on. In terms of the other projects we run, what we do is we try and not bring on too much fixed cost at the center and when we do need to partner and bring in additional resource, we do that on a flexible basis. And we do flex it up and down, and we will show with more clarity. We started to give an idea of what the central costs look like. We're going to split those out going forward. So our shareholders can see when we are flexing up a little to deliver the kind of transformation that we have over the last number of years and then also when we can flex down in quiet period. So we're comfortable we have. We're mindful. We talk about it a lot at board level. But at this stage, we're comfortable, yes.

Yes. And the last one, also neatly set up. We have a fine question. How is the recruitment process for a new CFO going, Thomas?

Well, we just kicked that off and the bar has been set high. So the bar is that it's got to be James or James plus. And just in terms of how we run our business, we fully expect to have our CFO present are not working from a beach house somewhere and dialing in our team. So we're a little old fashion like that. So we want somebody based up in the northwest with the right skills, the right future-facing skills, we have a very strong team behind James, Andy Hamer stepping in on an interim basis. He's been with us, he was Group Financial Controller. He's been the U.K. and Ireland and as well a list in terms of what we need to do here. So he and his team with James still available means that we will find the right candidate, somebody who understands our business model is aligned to what we're trying to do and excited by what we're trying to do. We won't be rushed into making the wrong ones.

Great. Well, thank you very much to our readers and viewers for all the relevant questions. You will get a feedback form immediately this webinar closes, if you could spend just a minute looking at the questions on that. the company would be very grateful for your feedback. Thanks to the presentation team. Of Course, James [Foreign Language]. I hope, but thank you for all your contributions and wish you the best in your future employment. Thomas. Thank you, firstly for involving yourself again, and good luck with continuing to beat your targets.

We're working hard at it. Thank you very much, and thank you for your time, everybody.

Thanks, everybody. Bye-bye.