Supreme Plc (SUP) Earnings Call Transcript & Summary

Good afternoon, and thank you to those of you who are joining us today to hear from Supreme Plc, who announced their results yesterday. If you haven't seen it already, we've got an up-to-date note on our website with forecasts, but the purpose of today is to hear from the management team. [Operator Instructions] But for now, I'm going to hand over to Sandy Chadha, CEO.

Yes. Hi. Welcome. Thank you, Hannah. Yes, I'm Sandy, CEO of Supreme, and we also have Suzanne, who is CFO. So welcome to everybody to our investor roadshow. So yes, so what is Supreme. Supreme, for those that don't know, is a fast-moving consumer goods business. We're a manufacturer. We're a brand owner, we're a distributor, and we're a licensee of fast-moving consumer goods. Most of our profit -- most of our products are the fastest-selling products in our retail stores with the highest margin. So next slide, yes. So looking at a quick snapshot, we've been going since 1935. I started in 1990. There was four of us. I was employee #4. Today, we have over 450 employees in the group in total. We service about 6,000 customers into 55,000 retail outlets. 65% to 70% of our profits come from products we manufacture ourselves. So we manufacture baking, wellness products like protein powders, meal replacements. We manufacture soft drinks, [indiscernible] and shortly be manufacturing cleaning products. We sold about 500 million products in the last year into 45 different countries. So just moving on to the next slide, Suzanne?

Yes. So we wanted to just take a quick snapshot of where the business has come since we came to market in 2021. And the results that we listed off the back of were the 2020 results. And as it says there, we were doing GBP 92 million of revenue and GBP 16 million of EBITDA at that time. So in that period of 5, 6 years, we've tripled revenue and profits also more than doubled, 2.5x the profit that we were doing back in 2020. And alongside that, we bought 9 businesses. We've taken on three new licenses. We've opened up a number of additional manufacturing sites. We've taken on a whole host of new customers and also employees. So there's been a huge transformation of the business in that time. And I think a cynic would say, "Oh, but you've acquired a lot of that growth. You've done a lot of acquisitions. So of course, your revenue has grown." While that is true, it's also important to note two things. One is that all of those acquisitions have been done from the free cash that the core business has generated. We've taken on no debt at all during that period, and we've never gone to market to fundraise at all. And that's a nod to how cash generative the core business has been consistently through its history. And secondly, yes, we have acquired lots of businesses. But typically, we acquire businesses that have been neglected or underperforming or even businesses that are in some kind of financial distress, or we're still even in administration. So we've not simply slotted successful businesses into our platform. We have had to work very hard to nurture those businesses and brands, turn them around and put them into our own platform and ensure that they are then earnings enhancing under our ownership. So that's taken a great deal of work, a great deal of resource and expertise from our people at Supreme. And then also, we've done it with our own money. So I don't think it detracts from the success of the growth just because that's acquired growth when we've done it with our own free cash.

Yes. So moving on to the time lag. We said they all really. Our first acquisition since the IPO was Sci-MX and Vendek. Sci-MX has only paid GBP 1 million [indiscernible]. I think it makes triple line in profits in the year right now. But Suzanne said that we've done all this money -- all these acquisitions for money from our existing business rather than borrowing any money. Just know that's about GBP 60 million of acquisitions there in the 5 years we've been in [indiscernible]. Moving on to the divisions. So we now have actually 9 different divisions, but we have to go public -- for actually announcement purposes and making things simple, we're putting it into 3 different categories. So electrical household, which includes lighting, the batteries and now the premium products. Vaping, which includes our 88 vapes, [indiscernible] given contract that also includes our branded distribution, likes of [indiscernible] and also private labels that we make for other vape companies. And then the Wellness division, which now includes protein powders, tea and soft drinks. These are now sort of 9 divisions but streamlined into 3 different ones, and we'll probably go through them now going [indiscernible]. This just gives us a sort of depth of brands that we own and license. I mean, so 30 brands here that we have to manage. I mean most companies manage one. So to manage 30, you can imagine the complexity of the business. But yes, we do it because of our platform, which I'm going to come on to very shortly, but there's some really strong household names. And as our business has developed through time, our acquisitions are with better and bigger brands, the last one being SlimFast, which is obviously a household name across the U.K., rest of Europe and other parts of the world. Moving on, our customers. I mentioned we have 6,000 live accounts. So our team at the credit control are busy chasing 6,000 customers for money. And through those 6,000 customers, we reached to about 50,000 to 55,000 different retail outlets across the U.K. and e-commerce. I would say that we are probably got the largest range of customers than any company I know just because of the sheer different product categories we're in. And that makes one of our strengths of Supreme is the broad depth of customers that we have. Our platform, and this is probably the most clever part of Supreme is that when we acquire businesses, when we acquire brands, or when we actually add a new category organically, we don't really occur make overheads with that division. And all of a sudden, we have very good economies of scale. So giving examples, we bought SlimFast with 0 employees, not 1. We've now hired a number of employees, 4 or 5, but we actually literally integrated the whole business into Supreme. Our warehouse is one, our marketing team is one, our sales team is one. Our credit control is one. And it means that when you are competing with other companies, you're somehow at an advantage because you have a shared overhead resource across many divisions, which sometimes -- which actually most times makes you more competitive than others. Now the other side of the argument here is that we've got 450 employees looking at them, we have 330 brands and 9 divisions. If we had 450 employees in just one category, of course, it would be bigger than the category we're in. But overall, we would not make anywhere near as much money. And that's -- I guess, this is a part of Supreme that is pretty unique, and I don't know many companies that have this type of platform in the U.K. Suzanne?

So we'll go through the detailed financials later on in the deck, but just to call out some of the highlights, record year for revenue growth, 17% growth year-on-year. And as the bar chart to the left shows, it's a consistent growth story year-on-year. In fact, our cumulative annual growth rate is about 20% in revenue with 17% in EBITDA as well. So we're equally focused on profit as we are on cash, cash and revenue. And standout performers within the group have been our newly acquired SlimFast and also our vaping category, and we'll deep dive into that a little bit deeper, posting profits of over GBP 40 million, comparable with the previous year. And the other kind of call out early on is cash. We've done all of this, as I said earlier, without any assistance from the bank, and we closed the year with GBP 7.5 million cash positive, which given it's been a year of substantial expenditure on acquisitions and capital expenditure, so GBP 13 million on acquiring other brands and GBP 6 million investing in our manufacturing facilities as well as servicing our dividend, paying our corporation tax, all the usual things, we've still generated net cash in the year and closed the year with GBP 7.5 million in the bank. Operationally, it's been another extremely busy year for Supreme, as hopefully, you've come to expect. We acquired SlimFast and 1001 in that period, and we'll cover those in a bit more detail on the next slide, both of which immediately earnings enhancing for Supreme, which, as you know, is one of our key M&A criteria. We spent GBP 6 million upgrading and expanding our manufacturing facilities, in particular, and we have moved into a brand-new wellness manufacturing site in the last month. And we've also opened our tea manufacturing facility at the start of this financial year. And we've also invested into our [indiscernible] drinks, which is our soft drinks manufacturing site up in the Northeast. So we are gearing the business up for growth and adding further capacity and allowing for more complexity in our manufacturing to enable long-term growth. Vaping revenues up 15%. Sandy will cover that in a little bit more detail, but real standout performance except for the year, especially given the backdrop of the disposal vape ban that we were kind of facing into this time last year. And then internationally as well, we've made some real progress internationally. We won't focus on it too much this year, but hopefully, this forms a really significant and interesting part of our presentation to you next year. We spent this year exploring territories, including and specifically Hong Kong and also the Middle East, where we've had exceptionally pleasing progress, particularly in Hong Kong, where we have now -- we now have more than 1,500 retail points signed up in Hong Kong, and we're seeing a very similar story of unfold in the Middle East. So that's very exciting for the group because we have largely been a U.K.-centric business up to this point, but this is really proving a model that our brands travel well, and they resonate with consumers, not just in the U.K. We signed two more license agreements this year, so [ Cara ] and Lamborghini, both of which we will work with from an energy and sports drinks perspective, but that's adding another string to our bow. And as Sandy said at the start, we now have a real -- a strong portfolio of brands that we -- most of which we own and all we exclusively license, almost 30 now, meaning that, that gives us real diversification in our product offering, which in the midst of a lot of vaping legislation is definitely derisking our overall opportunity and our overall proposition. So yes, an extremely busy year, but a very successful year operationally. And then if we talk specifically about the two businesses we have acquired this year, we started with 1001 back in August. And whilst that for us is a small acquisition, the business cost us GBP 1.7 million. Strategically, it's a very important acquisition for the group. And Sandy, a while ago, had identified that cleaning as a sector is a sector that is in growth and is particularly interesting at the discount level right now, and that was a category that we thought Supreme had a real place in. And so 1001 represents our kind of step into that market. We expect annually the business to turn over somewhere between GBP 4 million and GBP 5 million, and there's a lot of innovation already happening across the brand today, 1001 is a carpet care brand. We see in the future it being more of a general household cleaning brand, and there's lots of innovation to come in that area. And then secondly, SlimFast, which was a much bigger acquisition. In fact, our biggest acquisition to date. We acquired SlimFast back in October. So we've had about 5 months of revenue of that brand in these numbers here. Again, really strategically important acquisition for us. We were able to acquire Boots and Superdrug as two brand-new customers to the group, which is very helpful for us in terms of a cross-sell perspective and always good to get kind of corn U.K. retailers onto your roster. And also around 40% of their business is powders. We are a powder manufacturing -- we have a powder manufacturing facility. So we knew that there would be vertical integration and a manufacturing opportunity for Supreme, which we know helps expand gross margins and gives us more ownership of our supply chain. That's another kind of key criteria when it comes to M&A. Together, they have contributed just shy of GBP 11 million of revenue for the group and both were immediately earnings enhancing for the group. So that's very helpful. So yes, two more great additions to the portfolio. And then if we just take a snapshot of our sites, if you looked at this just 2, 3 years ago, it would be a lot smaller, and we were much more heavily concentrated in Manchester alone. I think the most important takeaway in terms of the group sites at the minute is the extent and abundance of manufacturing. We manufacture soft drinks, wellness, tea, vaping. There is a multitude of disciplines within manufacturing. And we have spent around GBP 6 million this year investing in that manufacturing, as I said earlier, setting those businesses up for further growth and giving them increased capacity and complexity to deal with new lines and innovative areas within those categories. Yes, so let's move on.

Okay. So Vaping. As you can see, our revenue has grown by 15% from the previous year. Now you think about the previous year when disposables were bound. So we've done actually much better in our transition from disposables to pods, way better than we thought actually, to be fair in terms of revenue. However, I must add that the margins on the pods are lower of the disposables that we discontinued last June. So I guess, overall, it's a great performance from the Vaping division. I mean if you just look back 5 years, it was GBP 29 million in 2020, and it's GBP 148 million now. So it's just incredible growth in a very short space of time. And I would say most of that's been all organic, to be fair. So yes, I'm happy with the baking division. But I think I'm going to move on to the next slide, which is probably the elephant in the room, big tax, which is coming in, in October. So just for those who don't know, there's a tax of 22p per 1 milliliter of illiquid. So a 10-milliliter liquid is GBP 2.20 plus 8p [indiscernible]. This currently our product retails for GBP 1.20, which will take the retail price up to GBP 3.80 to GBP 4. And this is going to be obviously a significant increase in price for the retailer. But at the same time, everyone is in the same boat. Now I guess this could go a few ways. And there's a few options for the consumer. The consumer option number one is pay the new tax price and carry on vaping. Option two is they give up cold turkey and they stop vaping altogether. That probably happens and last for maybe a few days and then they realize it's actually really good for them to keep on taking nicotine, and they enjoy it so much. So they start again. The third alternative is to move to cigarettes, which is actually more expensive and is a lot worse for your health. So we don't think that will happen. And if it does, it will be a disaster for the industry, but we don't believe that could be an alternative. And the last one is to move on to another brand and pay a little bit more. So I guess our percentage changes between the brands is less, but the cash difference will still be relatively similar. And I guess at the same time, we have this transition period where from October to April, we're still able to sell the product without tax. So it won't be in our numbers this year. But next year, you should see our revenue increase substantially because of the tax, but our margins obviously will decrease. Hopefully, our cash is the same or better, but the actual percentages will increase because now we have to charge tax. So just to put this in perspective, it's about GBP 120 million a year of extra tax that will be collected. Yes, so this is all very big news in terms of big things to do and big things to change in our business. So manufacturing, we need to have the right stamp the onto the box. We need to have software that integrates with HMRC. We need to be app for excise license for our factory for our distribution center. Yes, so there's a lot of things to happen in the next few months. So we are really busy with VPD, and we're in it right now. It also means opportunities where a lot of the smaller companies can't do a lot of this and a lot of them end up either closing down or we end up or somebody ends up buying them, and there's a consolidation, which actually works in our favor. We may also see a down trade from people not wanting to spend as much on a bottle liquid or trade down to a lower-priced brand. These are all things. It's hard to say where the trade is going to go. In Germany and Spain, it's not affected the business there. And we hope to see -- we're hoping to see a similar sort of outcome in the U.K. Drinks & Wellness. So the Drinks and Wellness side, most of this is actually reverse is that we've acquired a lot of brands, SlimFast, Typoo, Clearly Drinks. The core business is probably at GBP 18 million, GBP 19 million that we bought that we built organically and the rest is sort of acquired. We still see good growth in this business. We still see opportunities in this business. And we think that this is the business where we have the sort of highest valuation for Supreme in terms of valuation of the company, we think it's this area that will probably drive and help drive the valuation of the overall business. Yes. So Drinks & Wellness, happy to take questions on that you'd like to ask. The last one is on the household electrical. It's also now products. Batteries are in flat or a slight decline. It's a lighting that's in a bit more decline because once you bought a light bulb, you don't need to replace it. There's obviously been a decline since the IPO on this area, and we are actually looking at the cleaning to sort of fill some of the gap we believe that the cleaning will grow. The lighting will probably carry on declining, but we believe the batteries will be relatively stable going forward. There's a lot of consolidation. So the retailers now are not making their own private label, and we have opportunity to make that private label for them, same lighting. Also, I think the opening of the cleaning factory next year, hoping that we can win some private label and extend our 1001 and grow into more products away from just [indiscernible]. Suzanne?

Okay. On the financials, so we're looking at the income statement there. As I said at the start of the call, revenue has grown 17% year-on-year. Roughly 2/3 of that has come from M&A. So the acquisitions that we made this year, so SlimFast in 1001 and also the full year impact of the acquisitions from the year before. So as a reminder, that was Clearly Drinks and Typhoo Tea. And the other 1/3 has come from the core business, organic growth, and that's largely come from vaping. As Sandy said earlier, a fairly seamless transition from disposable vapes into their rechargeable counterparts. We held on to all of our key retailers and really held their hand through that transition. You won't see any big stock write-offs in these numbers for obsolete disposable dates of ours or even many of our retailers, we managed that stock transition meticulously. And so that was an our success. And then we supplemented the revenue within vaping by adding on the distribution of incremental brands. So now not just e.l.f. and Los Merry, but also IBG, SKE and most interestingly, Hiati. We also expanded our reach into Spain as well. So that's given us some geographical expansion in that category. We did see some contraction across batteries and lighting, as Sandy has said, all fairly well sign posted. So nothing of a surprise. Perhaps people might ask, why aren't you -- if those categories are in structural decline, is that not something that you are interested to dispose of even though categories? And the answer is that they both continue to be earnings enhancing for the group overall, and they take up very minimal management bandwidth. So they are still helping to keep our customers sticky and there's still products that's in demand. So we'll continue to operate those categories for a long time yet. Our gross profit as a percentage of sales fell from 32% to 29%. As Sandy said earlier, that is largely as a result or exclusively as a result of the transition from disposable vapes to pod devices and their margins are -- the margin profile is simply lower. And the volume of branded distribution that we do that has a meaningful impact on our blended gross margin overall. Our admin expenses have increased year-on-year about GBP 5 million, but most of that is a result of the acquisitions. So when we buy a business, we take on -- we are desperate to take on the knowledge, the history, the relationships, the resources and that comes at a cost. And so we're carrying the overheads of those businesses right now. Actually, the core business increase in overheads has been very marginal year-on-year, only around GBP 700,000 of cost increases associated with inflation and more specifically the NI obligations. And it's important to note here that you'll see that revenue is up and EBITDA is flat as a result of those overheads from the acquisitions and the blended gross margin coming down. But it's more important to see that -- or more important for us to explain why the profit before tax is actually lower year-on-year you'll see that depreciation and amortization is up. It's up from GBP 8.7 million to GBP 11.3 million. Now actually, when you think about everything we've said earlier in the presentation, which is we've invested heavily in our manufacturing assets, so our fixed assets. We've also acquired brands. So intangible assets, they come -- their price tag is in depreciation and amortization. So that naturally steps up. And we've also seen a swing in adjusted items. Last year, we reported a credit of GBP 700,000. That was as a result of the bargain purchase reporting under Typhoo. And this year, it's an 800,00 loss, which is more how it's been in previous years. So it's those items, those noncash items, that have really triggered the profit before tax to fall. Our cash measure of profit, our EBITDA is comparable year-on-year. I don't think we need to go into segmental because I think between the color that Sandy has given in the deck previously and then the quick run through I gave there. I feel like we've really walked through why the various categories are up or down for electrical, so vaping up as a result of the transition. And then the revenue bridge really just illustrates everything we've just said. You can see there the first two green bars represent the incremental revenue we've had from acquisitions. And then the really big green bar is the organic growth I've just talked about in vaping, offset by some contraction in batteries and lighting. And then there's the remainder of the growth in the remainder of the core business. Now that really is our Wellness business because everything else has been [indiscernible] the bars in the chart. And the same for EBITDA. If you move over to the next bridge, and you see that the increase in EBITDA comes from the acquisitions, those earnings-enhancing acquisitions and the contraction comes again from the drop-through of the fall in revenue on electricals and then some investment into the overheads, particularly to allow us to explore the new geographical territories I talked about earlier, so Hong Kong and the Middle East and also some increased overheads associated with our new sites. A quick look at the balance sheet. The top half of the balance sheet has got bigger, fixed assets, everything we've just talked about, more manufacturing assets, more brands, more intellectual property, so more fixed assets. Our working capital is leaner year-on-year by almost GBP 10 million, and that's a result of a really careful management of our stock and inventory levels and ongoing really strict discipline we have with debtors. Our creditors are bigger this year versus last year. We highlighted last year, they were unusually low last year as a result of deposit payments to our suppliers. But then further down cash. So there is no borrowings there to speak of. We have a net cash -- positive cash of GBP 7.5 million. And then over on to cash flow to finish. We've generated GBP 32 million of operating cash from GBP 40 million EBITDA. That's an incredible level of cash conversion, I think, in any profile of business. And even at the very bottom of the cash flow positive GBP 4.3 million despite the fact that we spent GBP 13 million on acquisitions and GBP 6 million on CapEx. So that just speaks to the level of cash generation that this business is able to report year-on-year. And then just to summarize the key investment highlights. Hopefully, we draw all this out throughout the presentation, we don't need to labor these too much. But just to summarize, this business has built its platform on brands that it owns and most of which it manufactures, and that gives us -- it gives us influence and agility into our supply chain and means that our customers really have to buy the product -- our products from us. They don't have a choice that locks and our customers makes our product super sticky. And our distribution across U.K. retail is unrivaled. As Sandy said at the start, 55,000 retail points. And we have been on a real journey of diversification over the last couple of years. We were looking at vaping and seeing the legislative changes that were coming, and we knew that diversifying was a way to derisk the business. We've successfully -- tremendously successfully navigated the first element, and we are now partway through the vape tax preparation, but feeling quietly confident. So diversification was a way to -- yes, to protect ourselves against any potential downside risk, but that looks less and less likely. And then outlook, we've had a great start to the year, a positive start within Q1. Internally, we continue to bed in the acquisitions, and we are increasingly focused on gearing up the business ready for the vape products duty that begins in October. And we will keep plowing on more of the same. So we are very much open for business from an M&A perspective. Our customers are happy. We have a really open dialogue with them when it comes to tax and indeed, anything else strategic that may be on the horizon. And yes, more of the same.

All right. Let me pull up some questions.

Okay. Can you update on the availability of funds should further acquisition opportunities arise?

Yes, we have GBP 40 million of facilities with HSBC. They are there waiting in the wings, ready for us if we need them. And HSBC have always been our banking partners supportive. We've just never needed to draw down on the facilities that we have on hand.

Great. The departures of Mike Holiday and Dean Lee, is this something to be concerned about as both have been mentioned on recent calls.

Nothing to be concerned about. It's a process in every line of business and employees move on. I mean they are completely different industries, one is online, one is taking. We've got already replacements in those areas. And yes, we're comfortable.

Some longer questions. Typhoo was initially positioned as an outsourced capital-light model targeting 30% gross margins. Can you explain the rationale for pivoting to in-house manufacturing and quantify the total CapEx and working capital investment associated with that transition?

I'll let Suzanne answer that, but I'd just like to say that a lot of the time to machinery to start the factory, we actually got 3 when we bought the business, is all there, but it wasn't being used. Suzzane?

Yes. No, we said a couple of times in this presentation, manufacturing is something that Supreme will always look to do. We're actually very good at it. And one of our M&A criteria when we look to buy a business is, is it a manufacturing business? Or is this something that we could manufacture in the future? So it was something that we were always open to. In fact, manufacturing means that you expand the gross margin. So yes, as Sandy said, as a capital investment, I think in total, we will spend about GBP 1 million, fitting out the entire facility, which actually considering this year will produce something like 800 million tea bags, and we will expand our gross margin 4, 5 percentage points. That is a worthy investment. So yes, we would always look to try and manufacture something if we can. And up to this point, it's going very, very well.

If we don't manufacture, we would then be buying at prices a lot higher than we are. So actually, if you think about it, brand owns normally don't manufacture, so they have their own margin, 20%, 30%. They then go to manufacturer and the manufacturer will make a margin of 20%, 30%. If you are the manufacturer, and you own the brand, then you have both margins. Of course, it's CapEx, of course, is more complexity when you make more margin. And if you are then able to fill that factory with other products to make, your overall costs come down. So it does work for us really well.

Brilliantly. But I think taking a slightly different view on it, how should investors then look at Supreme going forward in terms of perhaps assessing [ ROCE ] versus improvements in gross margin or EBITDA?

[indiscernible] question.

We're looking at return on capital employed.

What's the question?

I think -- sorry, specifically commenting on the return on capital employed now that the business is more vertically integrated with additional CapEx spend rather than focusing solely on improvements in gross profit or EBITDA.

Right. I understand the point. So we should be focused on measuring our return on capital as opposed to just gross margin. I think that's the question. Correct. And we already do. We would always look at our returns, whether it's on an acquisition or even on capital expenditure. I saw one of the comments earlier that said that the business is too heavily focused on gross margin as a percentage of sales. Now that couldn't be further from the truth. Actually, cash margin, cash profit, cash return is the fundamental measure of the business, and you can pick that up whether it's measured by a return on capital or even a baseline profit or cash in the bank. But effectively, that is the KPI that this business lives and breeds by.

Let's take a look at drinks and Wellness category. Revenue last year, GBP 48.8 million, this year, GBP 43.2 million. Which product lines moved?

Oh, good question. So we -- before we bought 1001, we had a small revenue stream within a cleaning category. We are a distributor of Procter & Gamble professional range. It was a -- it's a sub GBP 4 million revenue stream for us. And so it sat quietly within drinks and Wellness really because there was no other obvious place for it. When we acquired 1001 and we put the revenue -- the existing revenue of P&G together with 1001, it then became a substantial enough part of our business that then didn't sit in Drinks & Wellness because it isn't a drink. And it felt that the better home for it within the category is house -- within electricals. So we renamed electricals to Electricals and Households, and we moved that small bit of cleaning revenue over there, so we can -- you can see it more transparently.

Is Supreme actively advising the online consumer about late tax giving them the opportunity to book buy pretax?

Okay. So it's a good question. So I mean very limited amount of advertising you can do firstly. But we sent out lots and lots of questionnaires to customers, and we want to understand that behavior post tax. And we've got a really good understanding from over 1,000 participants on how they will possibly behave running to the tax and running after the tax. Just the tax goes up from 1st of October. We have got stock in our premises all the way up to January, February next year, maybe March, depending on how fast it all goes. And we believe that as soon as the media, the newspapers, they start shouting that tax is coming on your vape because they love talking about vaping in any negative way, they feel it's negative. So as soon as they start shouting about that in September -- end of September, I think it will be a mad rush for people to go out and buy vaping before the tax comes in, and then it will settle down. That's our view. So I think the media will do that for us. It's very hard for us to do it because there's very strong restrictions on what we can say. We can talk to our customers, that's about it.

Can you talk through the working capital impact on the vape duty? When does Supreme start paying it? And what's the lag on receiving the duty by the retailer?

We'll start paying it probably February, March next year when we start selling tax products and the lag is about 15 days we anticipate, between when we have to pay it and when our customers will pay us. We have applied for an excise warehouse status, which means we suspend the payment of any taxes until the point that we sell the product rather than naturally when it occur naturally, which is the legislation says you should pay it when you manufacture or import it, but we will apply to suspend it.

About GBP 10 million -- it's about GBP 10 million of working capital next...

Yes, correct, yes.

You mentioned that 88Vape doesn't really have competition within the discount segment because of how competitive you price the products are. Given how competitive the vaping market is overall, why do you think more competitors haven't tried to replicate the model, especially given its profitability and scalability?

So well, the answer is tens of companies have tried. So there's two things. Obviously, it's low price. That isn't the only driver. If you ask me, a bigger driver is the brand loyalty because we were the first company to introduce a low-priced product. We inherited millions, probably 1.5 million vapers. Those vapers are mostly loyal to 88. So even when product comes on half the price of 88 in the same retailers, they don't go for it, which tells me I'm more confident post tax. But let's see how it goes. But that's the answer. It's not just price. It's price loyalty. If you use a flavor and a type of -- when you make this product and it gives you a type of sensation, taste and feeling, you will stick with it. And if the prices even cheaper, sometimes we will stay with what you know.

Can you explain the phrase doubling of your factory's tea output in FY '27?

The factory now has the capacity to double its output. So last year, it manufactured just shy of 400 million tea bags. And next year, it now has the ability, the capacity. I'm not promising that it will or it will need to, but it can make nearer to 800 million tea bags. And that's as a result of the investment that we've made in the facility over the course of the year.

Congratulations to you both and some questions. Net profit dropped this year because of depreciation from the recent factory purchases. Is this lower profit the new normal? Or will operating cash flow conversion stay strong?

So those increased depreciation rates are here to stay at least for a couple of years whilst we unwind the CapEx that we have been spending. Ideally, EBITDA will increase, so that will offset some of the increases in depreciation and amortization. But I would assume as someone is trying to model it that the rates that we've seen this year will be higher again next year because of the full year of the SlimFast intellectual property amortization and the full year depreciation of assets we've acquired this year. Thereafter, we'll return back to spending more like a baseline of GBP 2 million of CapEx a year as opposed to the GBP 6 million that was really quite unusually high for Supreme this year. But yes, I'd assume that those rates are going to stick around.

Okay. Given the range of products that you do have, how do you ensure that the management team isn't spread too thin? How are the teams below you structured?

Yes. So I say we have a head of each division and they have their own people team. A lot of the people within Supreme have grown away up from the grassroots. So they've been here from early days. And we look at the divisions and we look where somebody or a division is struggling with resource, we'll then throw and work to actually solving that we solve the issues of any resources are shot, make sure we try and solve that with a middle layer of management.

Okay. Suzanne, are you suggesting that the reduction in PBT should be viewed in the context of increased depreciation and amortization arising from acquired businesses?

Right.

Okay. Does this imply that the depreciation charge associated with the acquired tangibles is not expected to be broadly representative of the ongoing maintenance CapEx required to sustain the assets?

No. What we've spent this year, we do not have to sustain to maintain the assets. We have spent an unusually high amount this year. I think I said earlier, our baseline CapEx going forward. So before we bought the businesses we bought in the last couple of years, Supreme typically spent about GBP 1 million on CapEx. It did that year after year. CapEx expenditure has been -- we've always been fairly light despite the fact we are a manufacturing business. We bought Clearly Drinks 2 years ago or FY '25. They are highly automated facility and their baseline CapEx spend there alone is about GBP 1 million to maintain that machinery. So then our baseline group CapEx became GBP 2 million. That remains our baseline level. We might spend a little bit more this year, depending on what we need to do in terms of adaptations in our vaping facility as a result of to accommodate some of the changes you need to for tax. However, I'd say GBP 2 million is we would expect to continue to spend GBP 2 million going forward, nothing like what we spent this year.