Ultimate Products Plc (ULTP) Earnings Call Transcript & Summary

For those of you already here, as you're aware, Ultimate Products announced their results earlier this week. So, today is an opportunity to go through the presentation and put forward any Q&A you might have. As a reminder, we do have a research note on our website. So please feel free to take a look at that, too. Otherwise, I think everyone is here. So I shall hand over to Andy Gossage, CEO.

Good morning, everyone, and thanks for being on the call. I'm just going to do a quick introduction. Many of you do know us. I know from previous equity development events, we're reasonably well known amongst retail. But for those who don't know who we are, we are Ultimate Products. We are a branded consumer goods business. And we are the people behind the Salter brand, which is our scales and kitchen brand, the oldest housewares brand in the U.K., over 260 years old. We're also the people behind the Beldray brand, which is a laundry and floor care brand, which is a mere 150 years old, the originator back in the early 20th century of the pop-up Pining board. We also have a suite of supporting brands, typically heritage brands. Those 2 brands make up 60% of our revenue. 20% is made up of those supporting brands.  We are a licensee for Russell Hobbs on cookware, which is about 10% of our revenue. And then we have the balance across a bit of our own label and some other brands that we sell for other people. But we have a slightly sort of counterintuitive approach. Most branded businesses use their brand equity to charge a premium for their product, in turn, generate more gross margin, some of which they recycle back into marketing. That marketing spend obviously backs up the brand and then they create a kind of virtuous circle in that way. And that's a pretty standard and tried and trusted approach.  We actually go the other way. We use our brand equity to drive volume. And we use things like automation, AI, RPA, et cetera, to create the space, and I'll pick up on this later on, to create the space to invest in the business, including in our brands. Our mission is beautiful products for every home. So we are proud to be mass market. We are proud to be advocates for the squeezed middle.  But we want our products to products our consumers can be proud of. We want them to not just fulfill their function for a great price. We want them to be beautiful.  And those of you who are familiar with the story will have heard this line before. We want them to pass the countertop test. So we want them -- if you buy a product and take your home and put it on your countertop, and your friends come around for dinner, do you leave the product on the countertop or do you put it in the cupboard? If it stays on the countertop, it's passed the countertop test, and we want all of our products to pass that test. Okay. That's a very brief introduction. There's a lot more in our annual report and a lot more on our website. From an investment proposition point of view, we do see sort of 4 elements to what we do, what we offer to investors.  First of all, we offer growth, and we have an enormous addressable market. There are 1.5 billion kitchens worldwide. And that, in the long run, gives some sense of the potential for this business to grow. Secondly, because we are a capital-light business, we outsource all of our manufacture, we also can pay a dividend as we go along as well. And we do distribute half of our profit after tax as a dividend. So a fairly unusual combination of growth and income.  The third thing we offer is resilience. And I know we're reporting some disappointing numbers today. But all businesses have tough times. And when we have tough times, we bounce back very quickly. And because we have a very agile commercial model, that means that we can refocus the business very quickly in a way that other businesses which have, say, for example, large amounts of fixed plant or maybe lots of stores would struggle with. So we've demonstrated that in the past. We demonstrated immense agility during the COVID years when operationally things got very difficult.  Then, the fourth thing we offer for investors is a really credible ESG proposition. And I would encourage you to, I know things like ESG are stuff out of favor at the moment politically, but what we offer is sensible and pragmatic and that appeals to our investors and also, as importantly, appeals commercially to our customers. So at this point, I'm just going to hand over to Chris Dent, our CFO, and I think we're going to start Hannah on Page 6.

Brilliant. Thanks very much, Andy. So obviously, it has been a disappointing period in terms of trade for us in the first half of the year, with overall revenues being down 6%. Now, within this, there are a multitude of different factors going on. So we're trying to summarize those into the 3 main trends, which are 2 down and one up. So the first of those down in relation to the air fryers. So air fryers saw a big boom that started in October '22 and went through to about October '23. So for us, that was mainly a financial boom that we saw in FY '23, but it did clip the first quarter of FY '24. So overall, that's about a GBP 5 million headwind that we saw, and that was mainly in Q1. And that's why actually Q1, we were down 9%, but then we end up being only down 2% in Q2.  The second factor is in relation to the U.K., where the U.K., excluding air fryers, is down 7%. Now, the real big driver in relation to that is lack of spending by the U.K. consumer. If you look back to the beginning of the calendar year 2024, an awful lot of people out there were saying this was the year when the consumer was going to start spending again. We had a cost of living crisis where real wages were falling. But what the after-income tracker was starting to say at that point is that real wages were starting to rise again, and therefore, we would see consumers starting to spend. Sadly, that's not happened.  The reasons behind that are probably not fully known. So, whilst the consumers have more money in their pockets, what they've been doing is saving rather than spending, which has meant that the U.K. environment has been particularly challenging for us. On the other side of that, we have one major sort of up. So the 2 downsides we see as being transitory and temporary, whereas the up that we're seeing in the period, we see start of a long-term growth trajectory for the business. That's in relation to Europe. So at the moment, we do have a relatively substantial international European business, which does about GBP 50 million a year, but we have significantly less penetration in the EU than we do in the U.K. So U.K., we do see that there is growth there, but at a much lower degree than is available for us at the moment in the EU. Although the EU economies aren't doing particularly better than the U.K., what we're doing at the moment is significantly growing our market share. So that can be seen with the 16% growth that we've seen in the EU when we exclude that sort of air fryer effect. So, if we can move on to Slide 7. Obviously, that decrease in revenue has affected our profitability. In terms of our EBITDA, that is down during the period, so down GBP 7 million. So GBP 1.2 million of that is due to the decrease in revenue. But then the other big factor that we've seen during the period is the shipping crisis. So this started last spring when the Red Sea needed to close. That caused a spike in shipping rates, which we saw over the summer period. Now for us, that's a lagged effect in terms of when it hits our income statement.  So when you're negotiating contract rates over the summer, you bring the stuff into stock over the autumn, and that then works its way through stock. So we had that GBP 2 million extra hit to our gross margin. Obviously, shipping prices have come off since that point in time. And therefore, we've seen shipping coming off. Therefore, in the second half of the year, we'll see that sort of like gross margin benefit come through as that temporary effect of that GBP 2 million has worked its way through the business. Now, the other point I wanted to bring up on this slide is the fact that, like many businesses, we've seen pay increases. Some of them are government-mandated in relation to increases in national living wage. Obviously, with the cost of living prices, wage inflation has been higher. Now, many businesses have just seen their margin squeezed by that. But what we've done instead is we've doubled down and focused on our business productivity. And that business productivity is shown in this slide in relation to head count reduction because by having people being more efficient and effective by the productivity gains that we are making, that has allowed us to increase head count.  So from a peak head count in FY '23 of 410, we're now sort of like down at that 350 level. So that's probably everything in relation to financial to cover at the moment. So as we go through the rest of the slide, Andy is going to reiterate that growth story in Europe and probably talk more in relation to those productivity gains and how we achieve those product gains.

Thanks, Chris. Sorry, I just realized I was still on mute. So I'm going to talk first about the approach to our brands. And if I could hand out, we go to Page 9. So the history of this is up until 2013, we were kind of a general product trading business. We decided the Board at the time to really refocus on our key brands within the business. That really took us on a journey to where we are today. Over the last decade, we've tripled our revenue. We've taken EBITDA from GBP 1.5 million per year to what it is today. And it has been because of the success of our brands and, in particular, the success of Salter and Beldray. I think you can see that here, those 2 brands have gone from GBP 13 million of revenue in FY '14 to GBP 90 million of revenue in FY '24. And we very much see that being the continuing driver of this business. What we've learned, however, particularly since we appointed our Brand Director, Tracy Carroll in November '22 is, our approach to our brands was, shall I politely say, self-taught and certainly capable of improvement.  So despite the fact that it had a tremendously positive effect on the performance of the business. Really, there was a huge scope for improvements in how we approached our branding. And that's what we've been addressing since Tracey was appointed right at the very end of calendar year '22. So, we've rebranded Salter. That came first. It's our biggest and oldest brand. That's been a significant success in its execution. And we are towards the back end of the rebrand process on Beldray. And if you go to Page 10, we are at the point of the new branding going into the market. So in April, there's going to be an exclusive launch on Beldray Laundry with Tesco of the new brand. The Salter brand was more conservative, should we say, as a rebrand effective but conservative. The consumer generally knew what Salter was and what it stood for. So it was a case of making sure that the branding aligned with that.  Beldray was well known by the consumer, the high brand awareness, but perhaps the consumer was less clear as to what it stood for. So, therefore, it was maybe a blank canvas, and the rebrand is more transformational, more radical. But one that's been exceptionally well received by the retailers that we presented it to and one that has been very positively received through market research that we've done with the consumer. So this is hugely exciting. And I think over the last couple of years, we've taken our approach to branding. I feel from a situation where we were self-taught, we've done a reasonable job of it, to one where I think we are going to be best-in-class relative to our competition. So, have a look out for the Beldray brand next month if you're in your local Tesco. If we go to Page 11, we've evolved our European strategy. There was a debate internally about whether we should expand into Europe through acquiring local brands or whether we should take our British heritage brands sold from Belgium into Europe. I think that argument ebbed and flowed. We recently had a nonexec on the board, a guy called José Carlos González-Hurtado, or JC as we call them. And he came in, and he's really challenged us on a number of things. And one of the things he's challenged us on is this preconception, but also misconception, that in Continental Europe, people don't have a positive view of British brands. He said no, people do have a positive view of British brands. And we went away, and we looked at this. And if you go on to Page 12, we did some market research. The market research confirmed what JC said, which is the overall perception of British brands. I mean, this is data from Germany; France is overall positive.  That shouldn't really have come as a surprise because one of the most well-known, well-regarded, and successful kitchen electrical brands in Mainland Europe is, of course, Russell Hobbs, and it doesn't get much more British heritage than Russell Hobbs. So we are evolving to refocus our concentration on  Salter and Beldray. That will really allow us to focus our marketing efforts in a much more concerted way. It will allow us to recycle assets and content, albeit no doubt with some localization. Ultimately, in the long run, will allow us to build what I hope will be TFA-style global brands, which from a value point of view is much more meaningful. And I think, therefore, much more meaningful for our shareholders. As shown on Page 13, our first area of focus is on Mainland Europe. It's an enormous market. There's 400-odd million relatively wealthy consumers over there just on our doorstep. We're already, as Chris said earlier on, international which is largely Europe, we already have a GBP 50 million business, which is pretty sizable. 35% of revenue came from international, largely Europe in FY '24. That will probably be nearer to 40% in FY '25. But we're barely scratching the surface as this slide shows, only 11p per person of revenue at the moment over there. If we go on to Page 14, you can see we tried to pull this evolution of our approach into a graphic. In the U.K., as I mentioned before, we started a branded strategy in 2013, but we didn't recruit a brand director until 2022. So I think we were perhaps a little bit wrong putting the cart before the horse. We still had significant growth in the U.K. and that was because our commercial team and particularly our sales team did a tremendous job of getting our brands, including Salter and Beldray onto shelves. In Continental Europe, it is going to need to be a more marketing-led approach. I think the approach we did in the U.K. is unlikely to be successful over there. In fact, I'm not quite sure how we managed it over here. I think it's a huge credit to the commercial teams. It's going to need to be a bit more marketing led. So we're going to get a twin plank approach to this. Number one, we're going to market our brands, particularly Salter and Beldray via the Amazon platform. We're already well-established on that platform throughout Europe. That platform has some tremendous marketing tools, which we're already very adept at using. And it's just very simple. If we raise awareness on that platform, it's Europe's biggest GM retailer. If we raise awareness on that platform, then we raise awareness more generally for our brands. The second thing we're going to do is market our capability. We're already very well established with some market-leading retailers over in Continental Europe. We've set ourselves the objective of being their most effective supplier. We've got a plan to do that. We're probably already reasonably high up the list. We are very, very good at what we do in terms of execution. But we're going to be their most effective supplier. We are going to celebrate those successes, and we believe that this will deliver a halo effect as other European retailers become aware of our successes in those market-leading accounts. That twin plank marketing approach, we believe, will drive retailers and consumers towards us, and we have a beautiful, beautiful showroom over in Paris ready to receive those retailers. Let's move on to Page 15. Those of you who know us well will know we're always banging on about productivity. We're always talking about our graduate development scheme, our human capital, and how that feeds into the use of tools like AI and robotics. What you can see on this slide is our productivity wheel. That culture of continuous improvement that sits in the middle, that really is based on our human capital, which in turn is built on our graduate development scheme. We bring people into the business who have that culture of continuous improvement, and we foster that while they're in the business. Our people generate the ideas for automation. That automation is put into practice by our process development team. We have a dozen developers who execute big projects like the PIM, which I'm going to come on to, but also kind of week in, week out, mini and even micro projects, which deliver sort of significant time savings. Around the edge, I mean, as Chris has illustrated, that's been really crucial in terms of managing the significant cost headwinds that all U.K. corporates have experienced over the last, let's say, few years. When our annual report is released, you're going to see that our payroll costs have been level for FY '25, FY '24, and FY '23. I don't think there'll be many U.K. corporates that can say that, and that's really the output of this relentless focus on automation. But for me, that is a start of 10. Automation is a way of mitigating cost headwinds, which is absolutely brilliant, but there are bigger prizes ahead of us. First of all, growth it magnifies operational leverage because if you automate a task, then you can grow as much as you like; it doesn't matter because it's automated. But for me, it's the more commercial benefits that I believe it will and indeed is delivering. The ability to invest in branding and marketing, the ability to be the lowest price, the impact that has on colleague satisfaction because we're essentially eliminating boring low-grade administrative tasks, improve customer services and, of course, improve product quality. It's something we've been talking about for a while, but I feel that we're starting to see the tangible results of that. Chris has illustrated that in the profit bridge. But there's much more to come, particularly as we grow. Let's just go to Page 16 because it's quite difficult to explain what all of this looks like in practice, and we're probably overdue for Capital Markets Day on this. But we have recently introduced a PIM system, a PIM system stands for product information management, we are a product business. Now these PIM systems are not unique to us. We're using [indiscernible], which is a global product. But as always, it's the way we use the tools, and that's important. And I always stress to people that when we talk about this, it's not a tech play; it's a people play. We use ChatGPT for our AI. ChatGPT is available to everyone. We use Power Automate for our RPA, our robotics that's in the Microsoft suite. And PIM systems are certainly not unique to us. But the way that we will use our PIM system will be unique to us, and that comes back to the human capital and how they will use this tool. But the benefits are pretty clear. On the right-hand side, we have a set of records for one single SKU, which is a scale product. And because of the number of different retailers we supply it to across a number of different territories in our existing ERP system, that led to something like 300 records. The payment system has a concept of the golden record and, therefore, one golden record that we have to keep up to date that in turn populates our ERP system, and that's already led to significant simplification of the administration of our product offer.  That has, in turn, released our sort of talented buying teams to focus less time on nonvalue-adding administration and much more time on the qualitative task of developing our products. Okay. I'm going to pass back to Chris, who's going to talk us through the numbers.

Thank you, Andy. So we probably covered 17 in the bridges. So, perhaps if we move on to Slide 18.  So yes, I mentioned 3 major factors in relation to why revenue was down. However, beneath those 3 factors, there are a multitude of things going on, a huge amount of nuance within the numbers. Although the overall picture is disappointing, there are bits of positivity that I see when I dig down into the numbers in all of the different ways that we break them down. So first of all, on the geographical split. So, we know that the U.K. consumer is not spending at the moment, but we see that as a temporary factor. But where we want to achieve long-term growth in terms of international, that is where we're seeing the growth at the moment, underscoring that strategy that we have with international being up 12%.  In relation to brand, we have a branded strategy. Therefore, the fact that our brands are down by less than those other categories, again, has got some positivity. And as a guy who's fall within distance of turf, I was very pleased that Salter or Beldray brand, George Wilkinson was promoted up to the slight the premier brand in this period, reflecting that it's been doing very successfully with a Dutch retailer. There, with our premier brands, we've got the main 2, which are Salter and Beldray, but we do have a supporting of other brands, which are used specifically for channel management where we know that Salter and Beldray may not work.  Then in relation to products, again, if we exclude the effect of air fryers, our main categories are actually up with housewares, which includes cookware like pots and pans. They are up, and that is the star of the show. And we see that where we are down is in the categories that perhaps aren't the core and perhaps the focus, so down there in the third-party clearance and the others category. And then finally, by channel, we are up in relation to supermarkets. Now we do want to be selling with supermarkets, with online and with discounters. But at the moment, it appears that the supermarkets appear to be being more of the winners at the moment with especially the loyalty schemes of club card prices, et cetera, which are perhaps driving more people into supermarkets at the moment. So looking towards Slide 19, where we look at sort of the bottom end of the income statement, probably the 2 things to bring out here are the finance expense being up as we have a higher average net debt in the period and then the tax rate being slightly up, which is due to the fact we pay a higher tax rate in Europe where we've been growing than we do in the U.K. Then, moving on to Slide 20. So I just want to bring out our capital allocation policy. So our capital allocation policy is to try and maintain net bank debt to adjusted EBITDA ratio of around 1x. We have debt within the business to fund our working capital. As a wholesaler, we do have a significant working capital requirement, and we think the most suitable way to fund that is through debt.  After we invest in working capital, the policy is then to return 50% of profits via dividends and then to top that up in relation to share buybacks as much as that allows within the 1x EBITDA. Obviously, at the end of the period, we were slightly above the 1x, but that's because over the course of the year, our net debt and our working capital do move up and down significantly. So we don't look at individual balance sheet days. But what we do is look at what's happening over a longer period of time in relation to that working capital and net debt balances. So, moving on to Slide 21 and looking at the balance sheet. In the period that we've currently gone through, we have seen an increase in our net debt due to the fact that we have been investing in our working capital balances.  And the most significant one of those is in relation to our inventory. So I wanted to dive into that a little bit more because obviously, if sales are down and your inventories up, it can look very much so like a red flag to people, which is why I want to fully go through some detail about why our inventory has increased in the period, which can be seen on Slide 22. So there's been a GBP 9 million increase over the period, and that can be broken down into 2 big factors. The first one of those is in relation to goods in transit. So these are the goods that are on vessels coming from China to Europe. So, coming across the ocean. So that's up by about GBP 5 million. And that balance is up because of the closure of the Red Sea.  What that means is that vessels are now spending 15 to 20 days longer as they go around the form of Africa, which means that, that balance has increased. Obviously, the other side of the effect was the higher shipping rates. And although the shipping rates have come down, we still do have that balance sheet effect. Unfortunately, at the moment, it doesn't look like the Red Sea is going to open anytime soon. Obviously, if this sort of piece does break out, we could see that GBP 5 million return to us. But at the moment, that's not likely. However, we do have a strategy for mitigating this. It's just a longer-term strategy, and this is in relation to how we fund our inventory overall.  So the first 60 days of that is funded by our factories in China through our credit terms with them. Then after that, it's funded by import loans with the bank. So as things are spending longer on the water, our credit terms with factories run out, and we've ended up with more being funded by debt. So what we're negotiating at the moment is with our factories longer credit terms. When we first started dealing with China, like 20 years ago, we had no credit terms, and we're actually paying large deposits with the factories and then came on when it was being put on the boat in China. We've worked that up to 60 days. We're looking to build that to 90 days over time, and we're currently on an average of about 72. But that's obviously going to be a longer process rather than an instant fixed solution. The other place where we've seen a big increase is in relation to sold stock. So this is stock that we are bringing in on behalf of our large customers. So we have a PO in from them. So we know that they're going to take the stock in. That's, therefore, a lead indicator of activity in the next period. So for a big customer, we will bring in the stock for them, and they may call it off over the next sort of like a couple of months. So we really do see that GBP 4 million increase as a sign of positivity of our trading as we go through to the second half of the year, which is, for me, a positive rather than a negative. The area where there is real risk in relation to inventory is the free stock that we have brought in and then selling in the U.K. to our big tail of retail customers and through our own online channels. And that can be seen that, that's been very stable, and that will be where I would consider it to be a red flag if that was increasing significantly. But as we can see, it's been flat within the period.  So, moving on to Slide 23. We can see how that affected our net debt within the period. So the previous slide was working January to January. This is working July to January, where we can see that GBP 6 million investment in EBITDA. What we can also see there is GBP 6 million returned to shareholders. So GBP 4.2 million in relation to dividends and GBP 2 million in relation to share buybacks. So in terms of thinking about how our working capital works, I thought we should probably look at it over a period of time to see how that looks, which we can see on Slide 24.  So, in any given individual period, we can see volatility as we invest in working capital to fund growth. However, over the medium term, that does convert reliably into cash. So in individual periods here, you can see we've had periods where we've sucked in a lot of working capital and end up with a minus GBP 5 million operating cash flow. Then, in some other periods, we've ended up seeing GBP 40 million of operating cash flow. What we should look at though is that longer-term medium cash conversion there that sort of like 85%, which I would see is quite a good sort of like gauge for what I would be expecting over the medium term because as the business grows, we will have an increased level of working capital within the business. So that's a run-through on the finances.  In terms of the outlook for the second half of the year and why we have positivity there, we are seeing that growth in Europe coming through. We're seeing a normalization in relation to shipping rates, which will be supporting our operating margin in the second half of the year, which is why we have a belief at the moment that our full-year adjusted EBITDA will be in line with our current market expectations. So Andy, moving over to you for the summary.

Thanks, Chris. Yes. So, in summary, yes, it is a challenging environment. We do think we are, in terms of our business, past the worst, but it does remain pretty volatile. The daily news flow seems to signify global volatility on a daily basis. But we're seeing in terms of the U.K., our U.K. trading in Q2 was down, but it was better than Q1. And we think H2, Q3 and Q4 will be better again. So yes, firming up there, we believe, and that seems to be confirmed by our order flow. In addition, we're seeing growing traction in Europe, particularly driven by strong demand from discounters. We very much see this as we're on the bottom rung of a very long ladder. So, there is a lot of confidence around our prospects there.  Brands have been resilient, which remains central to our strategy, and we continue to invest in them, particularly the recent rebrands of  Salter and Beldray. And finally, this continued focus on operational excellence and, of course, efficiency. Cost inflation, we feel, isn't going to abate anytime soon. In our RNS in January, we did highlight the GBP 300,000 a year of additional national insurance costs. However, the EPR, which is the new packaging tax, is due to come in from the 1st of April. We believe this will be in the range of GBP 300,000 to GBP 500,000. Rather unhelpfully, we don't actually know what the charge is going to be despite the fact that it applies from next week. The government hasn't seen fit to tell us that yet. But we believe it will be in the range of GB 300,000 to GB 500,000. So you've got sort of circa GBP 70,000, GBP 80,000 of further known cost headwinds there. We've already taken steps to address this. We believe there will be further headcount reductions as we go through this first half of calendar year '25.  We don't do redundancy exercises. It's largely through natural wastage, but it's very much driven by bottom-up productivity. So the headwinds that all U.K. corporates are seeing at the moment around costs, we continue to mitigate. That's all from us, but any questions from you, Hannah.

Yes, we have plenty. Okay. Given Europe first, can we have any color on where the H1 growth in Europe is coming from geographically? Has it been driven by the significant growth of George Wilkinson sales to the Dutch discounter?

Well, we don't talk about individual retailers. Obviously, it's commercially sensitive, and those retailers tend not to like us talking about them. So it's best avoided. But certainly, George Wilkinson, the Gap brand, is part of that. It is the discount segments where we're seeing the strong growth. Although we did see that if you go to the relevant slide, if we see it now on Page 14, we did see some growth in the supermarket segment as well. We do have a large German supermarket that's been a long-established customer of ours, a recovery in that account off the back of their stock position normalizing. So yes, but it's fairly true to say that the discount segment in Europe is the predominant driver of that growth, and we think that will be the case for the next 2 or 3 years.

Okay. How do you adjust contracts for shipping costs?

Well, with great difficulty, we're great believers in hedging things. So, as many of you will be aware, we have a conservative approach to how we hedge our interest costs, for example. We have a long-established way of hedging our currency, both on the purchasing and on the revenue side. Its shipping is very difficult to hedge.  You can enter into longer-term contracts, and we have rates through to the end of this calendar year in a range of $2,000 to $2,300 for a 40-foot. But it's a funny old gain of shipping, and contracts aren't always contracts, and if the market moves severely in one direction or the other, they tend to get ripped off, unfortunately. So we saw that particularly in '21 and '22. So it is something which is more difficult to hedge. Obviously, when we see increases in shipping rates, we've got quite a difficult decision to make. Do we seek to pass on those costs to the retailer and, therefore, on to the consumer and potentially risk volume decline? Or do we look through that rate increase if we perceive that it's temporary and perhaps take the hit in the short term to protect long-term revenues? Back in '21, '22, we did have to try and pass through, and we probably passed through a proportion of those costs because it wasn't clear that this was a short-term or more structural change in rates. We were pretty confident last year that the movement in rates was temporary and would settle down. That's proved to be the case. So, in most instances, we look to absorb that cost and therefore protect our position with those retailers and also protect the volumes on those individual SKUs. Does that make sense?

Yes. Absolutely. I think, as you say, one of the contracts, not a contract, we want to find out that. Quite a few questions here on branding and Europe. You talked about how your NED was supporting your confidence that they could strike out successfully there. So what marketing initiatives are you taking in Europe to increase awareness of your Premier-owned brands, particularly Beldray and Salter?

So it's going to be focused on our activity on the Amazon platform. So if you go to the Amazon platform, be it DE, FR, IT, or ES, you'll see Salter and Beldray have really credible brand stores already on those platforms. And we have inventory there that is selling on a day-in, day-out basis at the moment. We needed to tweak that inventory because we were underweight on electrical. Electrical for Europe, of course, is a bit more of a consideration because it has a different plug. So if cookware doesn't sell, I can always bring it back to the U.K. and deal with it here. When an electrical item doesn't, that option is not available. So that baseline is there. And Amazon has a whole suite of really effective marketing tools, which you can deploy to drive awareness both on that platform and also off-platform as well. We have a product called DSP. So we're just in the middle of testing this product at the moment. And I'd say we're very familiar with it in terms of our Amazon U.K. business. So we do have an expertise there. We're going to be using these tools to drive awareness of those brands on the Amazon platform. And because Amazon is Europe's biggest GM retailer, we strongly believe this will deliver a wider awareness of those brands off-platform as well as on-platform.

Okay. For you, Chris. Roughly what is the budget for the replacement of your ERP system? And will this cost be capitalized or expensed?

So we are currently finalizing all the plans around that. So, there is nothing set in stone at the moment. And with any ERP system, it's quite a long plan as well. So it's not something for FY '26. It's probably something for FY '27 that, that will start being introduced. It's likely to be in the order of GBP 1 million to GBP 2 million. My personal view on capitalization is that it will be capitalized, but obviously, that's a discussion that I need to make sure we fully on board with the auditors in relation to that once I know exactly what the figures are going to be.

Okay. And Andy, a follow-up for you. Is Amazon marketing enough to raise brand awareness? Are you considering other approaches?

Well, I think it is very powerful. We've seen the effect of that through our use in the U.K. We do use a number of the tools already across the Amazon EU platforms. There is a more powerful tool called DSP, which is used as off-platform marketing as well as on-platform marketing. So that's what we're testing at the moment. So, we have used these tools before; in fact, we use them every day, and they are pretty powerful at driving traffic and awareness. I think in the medium term, they won't be sufficient on their own as we will need to go through some gears in terms of local marketing. So the move-ons will be things like sourcing local influencers, for example. We have a well-established bank of U.K. influencers, which is very effective for us in the U.K. I think over time, we will need to develop a host of German and French influencers, say. We do already, by the way, in terms of trade marketing, do the significant amounts. We attend Ambiente and IFA. We have a significant presence there. They're 2 of Europe's 2 biggest trade shows. And I think in terms of corporate -- there's marketing to consumer and there's marketing to the trade. I mentioned before about being the most effective supplier to our existing retailer base over there and being willing to shout about that and being able to be willing to celebrate our successes. You'll see for those of you who follow our LinkedIn, and if you don't, I'd encourage you to do so. I think you might see a bit of activity around that as well.

A couple of questions on China here in terms of your diversification away from it. Is it still the plan? What's the time line? What are your opportunities, which territories?

So it does remain, I would say, our biggest business risk, the territorial reliance on China manufacturing. I mean, within China, we're very well diversified. We have about 200 manufacturers and not a lot of concentration risk there. When we IPO-ed, we had other risks up there in that top right-hand corner, like licensing, customer concentration, and channel concentration. We've addressed all of those, but we do have this remaining risk around territorial reliance on China. And I think we've got to be realistic. I think there's unlikely to be significant moves in the short term. I mean, we do source, by the way, from lots of different territories. We've been in India for the best part of 20 years, for example. We've been sourcing from Eastern Europe for probably the last 15 years. But the Chinese do consumer goods incredibly well, and other territories are struggling to match that capability. Now, I think what will happen is that there will be a move by U.S. brands and U.S. retailers looking to move more production away from China. Obviously, there's a little bit of a trade war going on between those 2 countries at the moment. So we are seeing American brands and American retailers, we're seeing manufacturers responding to that by setting up production particularly, for example, in Southeast Asia. It's going to be a painful transition for them because it always is in these situations. Setting up local supply chains does take a little time.  We're going to be watching it very closely. And if we see if it proves to be successful, then we'll run on to the pitch. So we're going to watch closely from the sidelines. And if, for example, there's some success, say, with setting up good supply chains for electrical products in Vietnam, for example, I'm not saying that's what will happen, but if it was to happen, then we will respond to that. But we'd rather be frank; the Americans made our mistakes for us, and we benefited later. So we do see it as a huge risk. And that's a huge issue that's been overstated. We do see it as our most significant big business risk. But I've got to manage expectations to be realistic about this. We're going to be predominantly China-sourced for some time.

For you, Chris, we had a quick capital allocation chat before we went live, didn't we? Given the increase in net debt, do you think it is wise to continue with the share buyback program when you consider the falling share price and the increased finance costs, all of which make the shares being purchased more expensive?

So it will certainly mean that it might be moderated. And that's what we're doing at the moment because, yes, if we continue to be above 1x over the course of the cycle, then there is no spare cash because ultimately, the cash, first of all, is going for our working capital and net debt. But we do manage that over the cycle. So you've already seen the sort of like between Q1 and Q2, it's sort of like gone down in terms of share buyback. But what I don't want to do in relation to it is a hard accelerator hard rate. What you're trying to do is soften it over the course of a cycle. But what we've not continued to do is do the GBP 1 million a quarter that we started off with the share buybacks. So that's what you hopefully want to do and not have a hard break accelerator when things change in individual balance sheets.

As we look at the own label moves in the U.K., what makes you so sure it's cyclical rather than structural?

Well, for the simple reason that consumers want the brand when it comes to general merchandise. We know this because the consumers tell us this through our market research. So, for example, consumers are very open-minded to own label when it comes to food because, say, for example, Tesco is a grocer and there's a huge credibility with the likes of Tesco Finance, for example. However, consumers are more skeptical when it comes to general merchandise about their own label. I mean, what we look to offer to the retailer and the consumer is the best of all worlds. So we look to hit price points which are on or just above own label pricing anyway, but give the retailer a brand that they can sell to their consumer. What we have to demonstrate, and we almost always do, is that it delivers higher profit density to the retailer. It's got to deliver like-for-like growth.  So we persuade the retailer of them to test our brands, maybe give up some of that own label space. And then when we demonstrate like-for-like growth in sales, I'd say we nearly always do, then we build out from there. I think the other reason why own label is difficult is that you'll all have seen how consumer generally is under a lot of pressure, consumer businesses, and that includes retailers, escalating costs and food aside and some sign even that's moderating. So they're not exactly booming demand at the moment. So it's a bit of a pin. And retailers are having to cut overheads. They have to reduce buying teams. They're cutting back on investments in their Far East offices. They don't want the overheads. And what we offer to the retailer, we believe, is a variable cost. If it's a per unit cost rather than the fixed overhead that's needed to fulfill, to do a proper job of an own source own label offer.

Okay. I'm conscious of time, but can you just answer this one in terms of the house brokers suggesting that sales to European discounters have a lower gross margin? Is that correct?

I was going to say no. There is a range of gross margins that we achieve with different customers. What we tend to look at is the net margin that you're earning on any sort of by individual customers. So at the higher end is online, where when you're selling to meetings down the road, you end up with a higher gross margin, but there is a higher cost to serve. Conversely, with some of the discounters, which are very, very simple to serve, they have a lower-than-average gross margin but a much lower cost to serve, meaning that your operating margin is the same. So yes, when you see a change in mix, sometimes you will see a change in your gross margin at that line, but you're still managing the business to what operating margin you're going to make at the end of it. And obviously, for the shareholders, it's the operating margin, which is the key, not the sort of like the gross margin.

And despite efforts on productivity, revenue per employee is similar to 5, 6 years ago. How do you expect this to evolve going forward?

Well, our key metric, I mean, it is an important metric, revenue per head. We tend to measure gross margin per head as a more important metric. I mean, if you think about 5 years ago, if you think about what's happened over the past 5 to 10 years, the business has gotten rid of customer concentration risk. So if you go back to when we IPO-ed, something like 45% of our revenue came from 2 customers. Now, obviously, not great from a quality of earnings point of view, but it's lovely and great operationally. You're setting up your business for we have a much more diversified business now, including, for example, a sizable online business where we're serving micro transactions on a daily basis. So I think the fact that the revenue per head level is actually given that change in mix is actually a bit of an achievement. Gross margin per head has improved significantly, although it has fallen back, obviously, in response to the poorer results in H1. But we do see that we do think that will bounce back. I think revenue…

The gross margin is obviously very heavily affected by the shipping, which is definitely a one-off effect. So that's what really driven it down. So we will see an increase in that in the second half of the year as that has flowed through the business.

Gross margin per head has gone from sort of GBP 80,000 per head a few years ago to, I think, about GBP 100,000 per head now. It was as high as GBP 115,000. I think over the next few years, it will recover and will be nearer to GBP 130,000 to GBP 150,000 a head. So, I think it's a fair question, very much a fair question, but I think it relies on a change in mix, should represent a significant headwind to productivity that we've wholly mitigated. And if you think if you look at it on that gross margin, we've not just mitigated it, we've moved beyond it as well.

Okay. Well, I think that we will do for today. So, I just want to thank those of you who are still on the call. We know we've gone over the hour mark. So, thanks for sticking with us. And to you, too, gentlemen, for taking the time to present to us this morning. We'll look forward to perhaps some tailwinds going forward.

Great. Thanks, everyone. Thanks so much for your time.

Goodbye.