Vianet Group plc (VNET) Earnings Call Transcript & Summary

Good morning, and welcome to the Vianet Group plc Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll, and I'd now like to hand you over to James Dickson, Executive Chairman and CEO. Good morning, sir.

Good morning, and thank you for joining us. With me today, I've got Mark Foster, CFO; and Sara Benton, Finance Director. We'll kick straight in. We think we've got an excellent set of results here, demonstrating that we're gathering momentum. And more importantly, there's excellent prospects that are going to fuel our growth ambitions going forward. Just to quickly recap what our business is about. We have 2 divisions. There is the Smart Machines division where SmartVend [indiscernible] product where we have provided a comprehensive vendor management system and contactless payment solutions. And the other division is Smart Zones where SmartDraught is the link product and following the recent acquisition of Beverage Metrics, we now have the sort of leading comprehensive beverage management solution for the on-premise liquor trade. We basically install hardware into pubs or vending machines or other remote assets. That allows us to capture data. That data is then processed to create dashboards, alerts, insights that allow or enable our customers to transform their business performance and we deliver compelling returns on investment for these customers. We make our money by the hardware sale or rental, but the important part is the long-term contracts with blue chip customers where we have pretty much a software-as-a-service model where we take weekly or monthly income on 3- to 5-year contracts. If we move over to the page, Mark. We've got a strong portfolio of products. The markets we operate in are significant and all the growth levers are working in our favor. If we look at the market, the vending market, the total addressable market in the U.K. is something like 300,000 vending machines, that's before we look at other verticals where we can apply our telemetry and contactless payment. The European Union, it's closer to 3 million worldwide. There are 15 million vending machines or as we term it unattended retail machines. In the -- in our current business, we've got something in the region of 54,000 devices connected and 38,000 machines. So we're just scratching the surface at this moment in time. Taking a look at the hospitality market, where the recent acquisition of Beverage Metrics give us a comprehensive solution for draught beer, liquor and [indiscernible] inventory solution. The U.S. hospitality market itself, the total addressable market is 382,000 units, outlets that are serving alcohol. And in the U.K., if we look at just the independent leased and managed pub groups is somewhere close to 50,000 as our addressable market. The structural drivers for us are really working in our favor. I think everyone knows that contactless payment is on the rise. During the year, we've added, now working with Vendekin, we've added QR payments to our solution. We've then got the whole unattended retail sector is continuing to grow, and that's only going to continue to accelerate, especially on the back of AI and its impact on unattended retail and the cost of manning services with people. The demand for data and productivity only continues to grow as the cost of labor increases. And then the other thing that's working in our favor is this continued drive towards increasingly digitized solutions. And we think that the U.K., European and indeed sort of the global switch off of 3G works in our favor, whilst it's held us back a little bit in the period just gone due to this distraction of planning upgrades to 4G. Going forward, that creates an opportunity for us [indiscernible] than we have within our existing customers. There're something close to 20,000 machines are ready to upgrade to 4G and the solutions that we've put in place help customers do that, means that it's not a big step for them to extend the penetration within their existing machine [park] to grow that. Good earnings visibility, strong recurring income and the high margins, though we really do generate good cash conversion. And as we grow the recurring revenue line, that's only going to need you to throw cash off going forward. So we tick a number of boxes, and we've also got a great team who are culturally sound and instinctively do the right thing and are highly incentivized to deliver. Yes, we're on track to deliver sustained growth for the coming years. We've got strong, healthy recurring revenue that underpins our growth and the growth is only going to refuel that and that will continue to grow. We look at Smart Zones, we're back to full billing. The data that we provide helps our customers transform their business performance. And by adding the BMI solution in the inventory, it really gives us a much larger addressable market than anything we've had historically. So that's very positive news for us. Smart Machines, 75 new contracts. That's going to continue to fuel the recurring income line, so that overall, the increase in recurring income that we saw in the past period is only going to accelerate going forward. On New verticals, we're very close to commercial traction in forecourts and [indiscernible]. So that's positive. And once again, that switch-off of 3G gives us a one-off opportunity to upgrade and extend the footprint within our existing customers. That thirst for data really is continuing to sort of drive growth for us. And we see the rise of AI is only going to improve the demand for our product because data is the life and blood of artificial intelligence. Contactless payment continues to grow. And for 2 years in a row, our solution has won the best payment solution at the Vending Industry Awards and the latest was last week, the 2023 awards. So all the components are in place to accelerate our growth. If we turn over. I'm not going to touch too much on these results because I don't want to steal Mark's thunder when it comes to the finance section, but a strong set of results. But what's really encouraging is that it's been against an inflationary backdrop, and we've had the issues to deal with in terms of COVID component, supply chain and the costs associated with that. And also during the year, we've been busy migrating our existing customers onto the SmartVend platform, which is a distraction for them and us and that migration will be complete in Q4 of the current financial year. And the other distraction has been the time taken out to plan for 3G upgrade to 4G. So that's held us back a little bit. But a real line of sight on growth and cash generation going forward. So very positive position. Moving on to Smart Machines, we just like to refresh you with a small short video of our solution. [Presentation]

Basically, what we provide our customers is we provide them the dashboards that they need to run their business. We consider basically, a vending machine is a small supermarket, but it's remote. That's the best way to visualize it. And if you run the supermarket, you need lots of data to make sure your shelves are stacked, get your pricing right, you get the right product lines, you got the right consumer insights, and that's no different to a vending machine. We provide the dashboards that our customers need to run an effective vending machine park and ensure productivity. And if we just look at the stock service and maintenance elements, we make those much more efficient, which helps the vending operator improve their carbon footprint. It's about sending the right stock to the right machines at the right time and we help them do that. And the sort of returns that we provide are in excess of 20% of reduction in operating costs for some of our larger customers, and that's pretty compelling before you start to look at the uplift from improved sales because you've got better stock availability and you've got the white lines, and you're not losing anything from [indiscernible] being done, et cetera, et cetera. We turn over the page, Mark. Again, I'm going to leave a lot of this to Mark, but I just want to touch on the 3G to 3G switch-off. That started this year in the Basingstoke area with Vodafone. Now all the mobile network operators switched off 3G by the end of calendar 2024. Vodafone will switch off by the start of calendar 2024. And then the opportunity for us, it's less about the Smart Zones and the pub-related business because our telemetry units can get by with 2G. But if you're looking on a contactless payment solution, 2G, the delay is something like a 20-second-plus timeline to do a transaction on 2G. And that's way too long and the direction may fall off. So our customers are very keen to upgrade to 4G rather than take the risk of losing sales on the back of fall back to 2G. And that's a big opportunity for us this year. What we've put in place to help our customers is what we call Vianet Assist. And that gives some financial assistance to allow them to do a changeover. And that financial assistance also gives them the opportunity to actually apply that in their estate where they don't currently have telemetry or contactless payment. So it gives them incentive to extend the footprint. And together with the SmartVend vending management software, that really allows them to transform the productivity and the sales profile and that works in our favor, and we're going to see good growth from that in the current year. So we help reduce waste, improve margins and allow them to drive their businesses forward. We can move now to Smart Zones. [Presentation]

Thank you. Moving on to next slide. So with the acquisition of Beverage Metrics, we now have a comprehensive drinks management solution that really does drive customer margins and profitability. We have the full dashboard and the dashboards for our customers on the portal are configurable so they can actually set them up to suite their particular business or whatever they want to look at. Purely looking at improved sales, reduced waste and that in itself will pay for the system. But then you look at all the areas where we can improve productivity, like a keg change, for instance. Why would you have to leave a 1/4 of a keg on a Saturday afternoon when you're going to go into a busy trading session when we can give them an alert and say right, put the full keg on so that you don't have to change that keg in the middle of your trading session and thereby cost you sales. So there's a whole host of different areas that we allow them to reduce the waste refraining from cutting corners that really gives them a compelling return on investment. And I think while the -- we've done a lot of work over the last 3 years to reduce the cost of our hardware and to make the -- give the solution more features and the BMI acquisition gives us substantially more features. So going forward, our customers have a lower cost solution that gives them more features and it's more relevant to their business. And if we just turn over the page now, Mark? The thing that I will pick up from here is that our lease -- our existing leased and tenanted business is very robust, and that we have a good pipeline that's going to sustain that. And then we add on the inventory solution to our existing U.K.-based solutions, and that gives us the opportunity to grow within the tenanted sector and sell inventory to the publicans within leased and tenanted, but more importantly, it allows us to go beyond leased and tenanted and have a solution that's directly relevant to independent and smaller managed operators. So that's a very positive position in that respect. The other development that's in track at the moment is we're working with Oxford partnership to work with the brand owners to pull together a lower cost flow monitoring solution that allows them to monitor individual brands going forward, and that's going to allow us to extend our footprint. And then once we've got an accounts platform and flow metering in there in a retail outlet on a number of brands, we can then upsell to get those flow meters on to other brands and then we can grow selling inventory as well. So we're in a very good position in that respect. It really -- BMI really does strengthen our relevance to the wider U.K. market. I think we sort of look a bit more of the what Beverage Metrics gives us in terms of the acquisition that we've just recently announced. We have a solution that's pretty comprehensive, covers everything from peers, wines and spirits, all liquor within an on-premise environment and it's configurable. So the dashboard gives the unit manager everything he needs in 30 seconds every morning. So that's positive. And that whole financial data, we can do it down into individual forecourt costs and do the margin analysis. For each pint, we can give the margin analysis. For each cocktail, we've got the -- we can give the margin analysis based on the predetermined product mixes. So we're in a very strong position in that respect. And the operational alerts that we can now provide in terms of [indiscernible] software, temperatures and even producing with -- we're in the process of developing quality grading so that our customers can look at their stake and actually understand based on gradings where individual outlets are, where individual distributors are in terms of clearing their own [indiscernible]. So it's a very positive position to be in. And the other thing that we're doing, we're doing a lot of partnering with people, organizations who have access to what is a significant addressable market so that we can actually work with them to have a complete beverage management ecosystem in terms of the data, everything from distributor all the way back to the kegs, going back to the distributor to make sure the keg deposit system is working in the favor of the retailer rather than in favor of the distributor. I'll just come back to the addressable market. It is substantial. In terms of the investment required, the underlined losses of Beverage Metrics were about GBP 600,000 a year and we envisage that we'll probably need another GBP 200,000 of additional investment required to commercialize, but that will be offset by an uptick in sales. So we should be going somewhere moving towards monthly breakeven by the end of the current financial year. But the reality is that's a small investment when you look at the total addressable market in the U.S. If you take in the restaurant, that's the fast casual restaurants and what not in the bars, clubs, recreation, entertainment and hotels, there's a 382,000 on-premise liquor venues with liquor licenses across those 4 segments. If we look at the restaurant sector, we're already involved with in doing work with Applebee's, Chili's and Blumen brands. And the relationships that we're developing with partners in the U.S. gives us access to every single element each of those 4 segments. And importantly, it gives us access to the smaller chains and the smaller chains make up a substantial proportion of the total market, and our solution is here towards them. So that's particularly exciting. And when you look at Applebee's, they've got something like 1,000 [indiscernible] over 1,700 sites; Chili's over 1,200; and Blumen over a 1,000 sites. So we need to see a breakthrough in those guys.

Good morning, everyone. I'll just take you through the headline numbers. As you can see, the turnover in the year increased by around GBP 900,000, just shy of 7%. Recurring revenue remained robust at 89%. Last year, it was 88%. Gross margin held well despite the impact of around GBP 450,000 of the stock premiums that we were hit by during the year. Without that stock premium impact, our margins would have been just shy of 70%. Operating profit was up GBP 742,000, 31%. Net of the stock premium impact, it would be higher than that 40% on a like-for-like basis had we not had those. Pleasingly, profit before tax is back in the blank from the big of 2021 that you can see there when we had a GBP 2.8 million loss. We're back in the blank now at GBP 452,000. The EPS has been impacted by a tax charge this year. I'll give a bit more flavor on that later, but ultimately, we made a clear ending March for some accrued R&D tax losses of GBP 922,000. The impacts of that with the deferred tax calculations gave us a tax charge of GBP 290,000 compared to last year's tax credit. So that's why the EPS is slightly down. But overall, this set of results is very, very good, particularly from the low of 2021 to where we are now. If we move on to the divisional stuff. In terms of Smart Zones. Smart Zones turnover is up GBP 332,000, round about 4%. As Jim said, all services are now back on stream. Recurring revenue, again, was robust at 95%. We did 259 new units in the year compared to 252 the year before. Gross margin was up GBP 794,000, round about 14.4% growth. Again, due to the -- everything being back on the full billing and some good cost management through that. And that all played down to the bottom line being up GBP 798,000 year-on-year, 26.7%. So very pleased with that. There was 11 new contracts. There were 6 resigns. I'm not going to go into detail today, but the metrics around recurring revenue could [indiscernible] on operating profit [indiscernible] year-on-year were also up. So Smart Zones, a good set of results. Smart Machines, turnover, as you can see, was up GBP 568,000, 10.5%, as Jim said. 75 new contracts in the period. That leads to increasing incremental recurring revenue growth year-on-year. And that works into the recurring revenue, up 80% compared to 77% in the year before. We added 11,062 new connected devices. This grew 11.6% from around 48,000 connected devices to just short of 54,000 connected devices in the year. The gross margin on the face of it was up GBP 40,000, 1.3%, but that is after the impact of the stock premiums that affected this division, GBP 450,000. Pre that, the gross margin would have been about GBP 3.56 million, 14.8%. On a like-for-like basis compared to last year because last year did have some stock premiums in as well. It would have been up GBP 260,000, about 8%. The operating profit in this division was up GBP 195,000, 10.7%. But again, stock premiums impacting that, putting that on like-for-like basis year-on-year, it would have been up GBP 400,000, 20%. Pleasingly, and very importantly, this division, the operating profit is now well ahead of prepandemic performance. So in March 2020, the operating profit in this division was GBP 1.5 million. So we're nearly GBP 0.5 million higher, 31% up from that period. Again, the metrics around recurring revenue per device and operating profit per device are all very good, heading in the right direction and off year-on-year. If we go into the cash flow. If you look at the net operating cash inflow, preworking capital line there which says GBP 4,448,000 and that's the headline cash generation that we achieved, preworking capital, but that does include the one-off accrual for the tax rebate claim we made in March of GBP 922,000, which we received in full in May. So that is now with us. So the underlying cash generation pre-working capital was GBP 3,526,000, that's up GBP 787,000 year-on-year, 28.7% growth. That represents about 114% of EBITA or 102% of EBITDA. And what it says is we're back at the healthy levels of profit to cash generation that this business has always enjoyed over the years coming out of the pandemic period. So that's been very pleasing in the year. There was a working capital draw before the GBP 922,000 rebate, which is included in the GBP 2.411 million number there, the draw was GBP 1.489 million, mainly impacted by increasing stock levels to make sure we have stock on the shelf to manage the semiconductor global supply problem and paying the stock premiums to our suppliers. We had to make sure we had the stock on the shelves as our stock levels went up quite significantly, over 700,000. And obviously, there was a movement in creditors year-on-year that impacted that. Stock levels are now unwinding, have been unwinding since round about January, and that should continue to be throughout 2024. The cash generation post working capital of GBP 2,037,000. We use that principally to invest in technology as we continue to do so, GBP 1.7 million. That's down about GBP 275,000 year-on-year. We obviously did some property improvements. We put a new solar panel project on to the headquarter that we have in Stockton. And we had some engineered [indiscernible] that being delayed through the pandemic. So that all combined to create the investment that we did. The loan repayments while still quite high there, year-on-year, we were lower because we finished the term loan for an acquisition that we did in 2017 and that payment finished in April 2022. So cash generation, very good and the outflows then they're here to see. In terms of the balance sheet. The balance sheet remains very healthy. We've talked about [indiscernible] stock. The debt is there. It does include the GBP 900,000 tax rebate, without which the movement in debtors was only GBP 169,000. Creditors are lower. The trade creditors figure is about GBP 265,000 lower year-on-year, and we had less need for accruals and provisions at this year-end. So they will lower at the year-end. The loans themselves have reduced as we have paid down our mortgage, which completes in July '23. And as we have paid down our coronavirus business interruption loan which completes in June '26, and we finished the acquisition loan for BMI in April '22. Net debt at the balance sheet date was GBP 3.37 million post the tax refund at the end of May as that net debt is reduced to GBP 2.37 million. As you'll have seen in the announcement, we are moving banks. So I'll give you a little bit of detail around that. The civil loan that we currently have is very aggressive in terms of the repayment profile. We borrowed GBP 3.5 million in round about May 2020, and that incurs a GBP 700,000 repayment year plus interest, which is quite aggressive. And in the last 2 years, we've paid back GBP 2.655 million in loans coming out of a very tough trading period for us to COVID as you saw on the P&L. What we needed and want, it was a more flexible bank facility that reduced the outgoing repayments to loans and puts more money back into the business for the growth of the business. So the new facility we will have with HSBC, which will be signed off in the next 2 weeks or so, is a GBP 4 million committed RCF for 3 years. The interest rate for that is 2.62% above this. An GBP 840,000 mortgage, the interest rate for that is 2.42% above this. And the term loan of GBP 0.6 million for 4 years, the interest rate of which is 2.52% above this. So you can see the cost of debt versus the existing debts we have is much lower. So it's -- the marginal cost of debt is coming down. Overall, what does that do? Broadly, it means GBP 400,000 less in bank repayments per annum than where we are today for us to invest in the business as we see fit. When the actual transition happens, so as I said, we will sign the legal documents for this in the next 2 weeks, but the transition will happen on the first of August. We will draw down probably about GBP 2 million of the RCF, which leaves about GBP 2 million of headroom to use should we need it for further investment into the business. And what we this all does is it enhances the balance sheet flexibility, it removes an onerous repayment profile that we had and it supports business growth.

Thank you, Mark. I hope we've gone some way to demonstrating that we've got clear line of sight to accelerate growth and really driving the earnings going forward. I mean in terms of the -- we have very favorable markets and trends working for us. And if you look at where we are with the vending side of the business, our partnerships with Suresite and Vendekin for QR codes, the ability to reduce the transaction fees, coupled that with having really robust leading telemetry and award-winning contactless payment hardware, coupled with digital platform like coupled with our digital platform like SmartVend coupled with our -- the customer experience that we give our customers, we have a very good customer experience stores. So really building the relationships within the vending sector and in a positive position really and the fact that particularly important for us is that we were [indiscernible] service and dominate coffee. So we're in a good position in that respect. I'll probably said enough about Smart Zones and beverage management solution, but what's also important is our core platform supports entry into new verticals. Our existing platform and the technology we have allows us to move into new verticals, allows us to address remote assets beyond the vending and hospitality sector. And in the next -- during the course of the next few months, we'll see some breakthrough in forecourts as we really get some commercial traction. I think -- the one thing that's clear is that working -- our team working with the products that we have, the customers we have and the strong markets, we've established ourselves as the trusted adviser and the partner of choice. And that's something that the whole pandemic helped us to do that by actually producing data to customers and getting closer to them and being discussed on the board tables and actually becoming a valued partner. I'll turn it over to Mark. In terms of our aspirations, we've got top line growth agenda. We've got ambitious aspirations for the next 2.5 years. We are focused on doing the right things really well. We stated at the beginning that it's a challenging employment market out there. There's a scarcity of great people and the people who have left employment in the U.K. employment market. So we need -- we're going to create an attractive environment for people to work in, and that's what we're doing. And then sustainability, we should see sustainability as a commercial opportunity, both internally in terms of our own efficiency but also with our customers where we can help them reduce the carbon footprint by providing them with insights and data. If we look at what we want to achieve from our financial and revenue perspective over the next couple of years or so, about 100,000 vending connections. Well, our existing vending customers, if we get estate penetration with them, we'll deliver that by the end of full year '25. And additional things in addition to what we've already talked about that are going to help that is the integration work we've been doing. There are different ERP providers out there that have fairly clunky products. Now we're integrating with them that allows them to use our payment systems and telemetry to give them better data, and that's going to drive the increased penetration. We're also integrating with some payment providers as well so they can utilize our SmartVend. So SmartVend becomes the tool of choice out in the vending sector. The other driver for us in our U.K. vending will be the whole 3G to 4G and what we've always done to help our customers. We've sat with all our major customers and developed their plan and strategy going forward for 3G to 4G. And that is going to give us positive -- may have slowed things down in the year just gone, it's going to give us acceleration in the current year. And then if you look at the U.K. hospitality market, additional inventory and the work that we're doing with Oxford partnership with brands is going to give us growth in our core leased and tenanted business before we start to look at expansion into independence and manage. Down there, bottom right, the 1,000 -- we're certainly in for more than 1,000 USA SmartDraught estates by the end of 2025 because a 1,000 sites at anywhere from $120 to $150 per month per site generates great revenue and we have decent margins. Margins, not quite so high as the U.K. in terms of percentage terms, but in terms of cash money, they're strong. So really in a good position. And then the contracts and new verticals looking to achieve at least GBP 500,000 of gross margin. So -- and we're close to commercial announcements in additional sectors. So we're in very good shape. And I think the -- just turning over. And then we've got growing roster of awards, case studies, customer testimonials and accreditations. We're really making a strong fist of actually demonstrating to the industry that we are the trusted adviser, we'll be the partner of choice. That pretty much sums up the presentation. I'd now like to move on to questions.

[Operator Instructions] I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation. And if I could just ask you to read out those questions and give responses where it's appropriate to do so. I'll pick up from you at the end.

Okay. We'll kick off. To start, following the acquisition of BMI, could you please give more details on the type of investments it will require? And how do you see the offering being used in the U.K.? I think I've already touched on the extended costs and carrying the existing losses with loss-making business going forward about GBP 600,000, then probably in the region of GBP 200,000 additional commercial investment. So that's about GBP 800,000 in the calendar year. But we'll expect to see that the monthly losses dropping. Can you read the question up there, Mark? And how do I see that offering being used in the U.K.? Well, the addition of inventory to our existing draft beer monitoring solution and leased and tenanted should make a useful tool for the publicans within leased and tenanted but more importantly, it gives us an offering that we can take to the independents and small and medium-sized managing operators. Next question. Where do you see the focus of the business going forward in light of the U.S.A. acquisition? The focus is very clear from where we sit. We've got a fantastic opportunity to, I guess, dominate U.K. vending and really drives growth in new verticals in the U.K. and in Europe for the machines division. And in terms of the U.S. acquisition, it really does give us an opportunity to get hospitality operations into growth in the U.K. and more importantly, make some inroads into also a substantial market in the U.S.A. What is your ambition for the company in 3 years' time? Based on our growth aspirations, we'll have a business that's generating over GBP [ 18 ] million worth of recurring income and throwing off lots of cash. So that's the focus at this moment in time, basically continue to drive that recurring income line, and that will drive share price and will drive shareholder returns, and we'll take anything else as it comes. Might we see more M&A. If we find the right opportunities, we will be prepared to make acquisitions, and that's one of the reasons why we've changed banks because in addition to having supported shareholders, we want to have a bank that's really commercial and we'll support it if we do find the right opportunities. Next question. Do you feel vulnerable given the lower rating and the clear recovery track you're on? I think the answer is no because I think that increasingly, we'll be able to demonstrate the value that we have in this business and the current share price is way too low. And I think historically, we've had a supportive roster of institutional shareholders that will want to see the value delivered and that's my thinking on it. I don't feel vulnerable. I think this is an opportunity. Can you expand on the dividend policy and how does this impact the R&D investment? Well, the reality is that we're not in pay dividends level where it's going to compromise our investment in research and development. That's the bottom line. We'll pay what we can afford to pay. But as you've seen from the presentation, we expect to be driving the recurring income line and the earnings that go alongside that, which is -- enable us to be able to increase dividends going forward after we've done all the R&D that we need to do. Next question is, [indiscernible] Americans? Do you think you are now ready to establish a collaboration with a major U.S. OpCo similar to Oxford partnership? What are the obstacles to achieve in this? Well, we're talking to a number of potential partners in the U.S.A. that gives us -- improves our access to the U.S. -- what is a substantial U.S. marketplace. And it's a case of watch this space in that respect. And the obstacles -- it's not a matter of obstacles for me -- it's not a matter of if, it's a matter of when. Next question. Congrats on the progress. Are there any negative gross margin implications from partnerships, growing importance in client wins for Smart Zones, or is it a win-win with higher revenues for buying at constant margin? Well, I expect the margins to remain high. If there's an opportunity to work with a partner and give a proportion of margin to accelerate growth of our footprint, then we'll do that. We'll take each opportunity as it comes. But today, we haven't had to eat into our margins with any of our existing partnerships that we've announced in the last sort of -- last 12, 18 months. But I would say I'd much rather have a small slice of a very large pie than a large slice of a small pie. Why was Beverage Metrics consideration based on turnover, not on profitability, strong cash generation. That's quite simple. The reality is it keeps it simple, keeps it open, keeps it transparent. And if we're generating the turnover at those levels that are anticipated or are factored into the Beverage Metrics' asset purchase agreement, then we'll be very happy people and our shareholders will be happy as well, and we'll be throwing off lots of cash. Next question. What percentage of your March 2025 revenue of GBP 25 million can you achieve organically? Well, the reality is that we can achieve 100% of that organically, and that's what is pertinent to plans. That doesn't include any further acquisitions beyond the Beverage Metrics acquisition. Next question. What is the up-to-date position around the Vendekin partnership progress? There is a limit to what I can say on this, but what I can say is that we've already completed a number of installations with one of our larger customers where it is something that this customer really wants to do and expand within the [indiscernible]. And once we probe in that, it becomes a bigger opportunity than simply the U.K. Next question. Can you confirm that you expect the cost reflected in the stock premium are expected to -- or are now declining? Well, the -- I'll hand this over to Sara, actually. I've done enough talking.

Yes, we do expect that they will decline. The prices will not go back to where they were prepandemic. But we do expect that they are settled and then we have seen some new cores coming through now with that selling figure. So next year, we would expect maybe GBP 100,000, GBP 150,000 where that would be within the actual cost of the product in the consumables and not premium at that point.

Yes. So of that GBP 450,000, we're factoring in that 150 of that will become permanent. So there's about GBP 300,000 that we, in theory, you could add back to see what real performance was. So being closer to GBP 2.3 million, GBP 2.4 million for Smart Machines had we not had that in the current year. Okay. Can you please explain what you mean by stock premiums? I'll hand this back to Sara, again.

Yes. So when we came out of pandemic, obviously globally, there was an issue with semiconductor markets and actually getting those parts into our production line. It was not across all of the businesses. It wasn't just Vianet that were affected. It went across different countries. And what that meant was that big players like your Apples and in your Samsungs,were basically taking up the market and buying all the components that other people required. And what happens then is those components go into, what we call, a gray market and with that becomes stock premium where you're paying over the odds to certain products that you need in order to make up finished goods and this happened to a lot of organizations during that time. What we'll see now is that these products are back on the market in the normal level. So therefore, the prices come down, and we buy from our normal suppliers at that point.

Yes. Thanks, Sara. Next question. Can you explain why the profit margin in Smart Machines is lower than in smart zones and whether you can raise margins of Smart Machines to match those in Smart Zones. Mark?

Yes. I mean they're very distinct and different divisions and commercial metrics in each division. I think the important thing is the recurring revenue footprint that we're getting in both is high, it's growing in Smart Machines. Year-on-year, I think recurring revenue in Smart Machines was up something like GBP 600,000 in north terms. But in the machine sector, you have a bigger proportion of revenue streams that are rental. So you don't get the CapEx margin upfront, so it's spread over the life of the contract. But the commercials are very different, but it's about driving that top line recurring revenue footprint that plays itself down to the bottom line that you see and bear in mind, the Smart Machines is the business, the one that took the impact of the stock premiums. And while that would have raised the margin we see, it wouldn't quite be at the same level of Smart Zones which didn't have that, but it's just the metrics of how the commercials work in that division, which is very distinct from the other divisions.

I think I'd add to that, but from a strategic perspective, we wouldn't want the hardware margins to get in the way of growing our footprint in the trade. fact the way I see it -- there's a land and grab out there. So we can actually extend our footprint into the machine -- the vending machine part and actually secure the recurring income that's going to flow going forward. Next question. What is your foreign exchange exposure? What percentage of your revenues was denominated in pounds and what percentage of your cost base is in pounds?

Yes. Most of our revenue is -- over 90% of our revenue is in pounds. We have very little exposure from a foreign exchange basis, to be honest with you. Most of our supply chain is in pounds. So there is not a lot of exposure at all. Cost base there, I would say, 95% of our cost base is in pounds, so it's not material at all. Next question. How do you think about your capital allocation priorities? If you had an extra pound to spend, for example, how would you look to invest it, investment in the business, external growth opportunities, capital returns or a combination? Well, good question. Historically, we've continued to invest in our research and development and investing in the commercial team. And for as long as there's an opportunity to actually deliver return on investment in product solutions and people, then that's where the priority would be. But the priorities historically have been obvious. We look forward to the positioning going forward where we're throwing off so much cash. We've got -- where we've got to think really hard about what we do with our fund. Next question. Can you please discuss the challenges of customer usage of vending machines, especially in relation to connectivity, payment and ease of use for customers? I'm not entirely sure what the question is referring to, but the challenges for our customers are to ensure that vending machines have 100% uptime with 100% product availability and that they minimize the cost to serve those to -- serve those vending machines. And with that end-to-end solutions like ours, it's pretty much impossible to do that effectively. So -- if you then look at -- look at from a customer's perspective, then the reality is that you want to be able to go there, see what you want to buy and basically have a hassle-free transaction ideally using contactless. And that's where the 3G switch-off really comes into play because when the network falls back to 2G, that means it's a real hassle because the transaction time is going to go beyond 20 seconds and it's probably going to time-out, which means that you're going to have a frustrated customer and you probably lose a sale. So that sort of drives the upgrade of comms to 4G LTE which is a long-term evolution. The next -- that's all the questions. So...

Yes. James, Mark, thank you for that. I think actually managed to address every single question from the investors. And of course, the company will review all the questions submitted today and will publish those responses on the Investor Meet Company platform. But just before, redirecting investors to provide you with their feedback and is particularly important to the company. James, can I just ask you for a few closing comments?

I just like to say thank you for bearing with us for the past hour. And I hope you've seen that we have -- we made damn good progress and that we've got fantastic opportunities across Smart Machines, Smart Zones, but also in new verticals and that we're really using every tool in the box to accelerate our growth, and we're gathering real momentum. So thank you very much, indeed.

James, Mark, Sara, thanks once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order that the management income better understand your views and expectations. It's going to take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management of Vianet Group plc, we'd like to thank you for attending today's presentation, and good morning to you all.