Essentra H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 19, 2025

There are 8 speakers on the call.

Operator

Thank you. So good morning, all. Lovely to see you all today. I'm Scott Fawcett, Chief Executive of Centra, looking forward to sharing with you our 2024 results. Joined today by Roan Baker, our relatively new CFO, who will be sharing the financial highlights.

Operator

Also, in the audience, we have Steve Good, our new Chair, and the entire exec team for any difficult questions at the end of the session. So we'll have to earn their money today. So plans today, I'll give a quick highlights. Roan will pick up on financial performance. We'll cover a little bit of color into the three regions, then into the strategic update and talk a little bit about outlook before moving into Q and A at the end.

Operator

So quickly on the highlights of the year. So resilience again is a word we will use. Still clearly a challenging market last year, but very resilient performance across the business. Probably the highlight of that resilience is the gross margin with gross margin stable, expanding in all three regions a little, which is a fantastic achievement in a difficult market environment. As always, it's about controlling the controllables at such times, and we continue to focus on those market opportunities where we're seeing growth and opportunity, especially from some of the acquired businesses we've made recently.

Operator

Continue to look at efficiencies. Again, the gross margin gains very much driven by a mix of holding on to price and seeing some procurement and efficiency gains coming through to help reduce cost base. Cash flow very strong. And fundamentally, beneath the business, a great level of customer satisfaction. So MPS up three, up in all three regions, which is really encouraging, and very much driven by this very high level of employee engagement.

Operator

So 85% employee engagement is is a huge credit to the organization, the amount of passion, the care that people have in the business, and a huge thank you from me to everybody in the business for helping us navigate through what was another, another interesting year. We remain very well positioned. We'll obviously continue with all of the self help initiatives that we have in place, but remain very well positioned for when the markets do start to turn and the operating leverage opportunity that will come as a result of those volumes starting to come back in the business. And we'll talk a little bit about that later in the presentation as well. So with that, I'll hand over to Rowan to take us through the financial performance.

Speaker 1

Thanks very much, Scott. Good morning, everyone. Now before I take you through the 2024 financial performance, I thought it would be helpful to give you a few initial reflections on my first four months at Accenture. I've made it a priority to get out and about in the business. I've been across The U.

Speaker 1

S. To Mexico, China, Turkey, Italy, Germany, Poland. So it's been a busy travel time. But one thing seems really clear actually that we have a strong and experienced set of teams out there in the business at all levels actually, people who genuinely care about what it is they do. And I think that sets us up well and is a great asset for the business.

Speaker 1

It's also clear that we have a resilient business model, and you can really see that in the strength of the gross margins through the cycle. Business has also navigated well through tough market conditions. There's been some good decision making along the way, good cost control, but nothing that would inhibit the business's future ability to grow. Now if we move on then to the opportunity, this business is well positioned for success. We have a robust balance sheet, and I'll come back and talk about the balance sheet a little bit more later on.

Speaker 1

And there is flexibility and capacity within the regional footprint. And that's particularly important when you consider all of the uncertainty that there is around Trump's tariff situation, and Scott will touch on tariffs later on. We also have a significant opportunity to benefit from operating leverage as the volumes return in the business as well. So again, just looking forward, there is huge opportunity there. Now in terms of my focus areas, I will be focused on a number of areas as you can imagine, but improving performance management is one of those through enhanced finance support, really getting the finance function absolutely aligned behind the strategic initiatives in the business, maintaining the balance sheet strength using some of my more recent experience actually around cash management and working capital management, and then also disciplined capital allocation.

Speaker 1

And again, I'll come back to that later on. So moving on then to twenty twenty four performance. Our revenues stood at CHF $3.00 2,000,000, that's a 0.3% constant currency increase adjusted operating profit at CHF 40,100,000.0, again a constant currency increase, which is 2.3% Adjusted operating margin at 13.3%. And adjusted operating cash conversion was strong at 91%, and that's ahead of our target of 85%. Net debt to adjusted EBITDA stood at 1.3 times, and that again is ahead of our target of 1.5 times.

Speaker 1

Return on invested capital was down 11.1%, somewhat a function of the lower adjusted operating profit. And our adjusted earnings per share were at 8.5p. And if we take that at a three times cover for dividend, then that gives us a dividend per share for the year of 2.8p. So a look at the income statement. There's a couple of things to draw your attention to here.

Speaker 1

One that I mentioned earlier, actually, the gross margin. So you can see there the year on year expansion in the gross margins. And in fact, and Scott will touch on this a little bit more later on as well, the gross margins have grown in all of our regions across 2024. So I think that's a real positive. Just draw your attention as well to the net finance expense.

Speaker 1

So that's at 8,900,000.0 for the year, which is quite a significant increase on the prior year of 2,500,000.0, and that's primarily because we didn't have the interest income in that we had in 2023 because of the cash that we were holding prior to the return of capital to shareholders. So that's really what made the difference there. And in terms of what you can expect going forward, we would be much more in line with the 8.9% going forward in the business. Our effective tax rate, also you can see it's quite significantly improved year on year. Now that is a little bit of a one off because we had the recognition of a deferred tax asset in The UK that was previously held off balance sheet that we brought onto balance sheet, and that's what's influenced things there.

Speaker 1

And again, in future years, we'd see ourselves returning to more like the 24% to 26% previous guidance that's been given in the tax rate area. So and if we take that down to the bottom of the table, we've got an adjusted EPS. Now that EPS does also adjust for that one off in terms of the tax. So the deferred tax assets come out of that adjusted EPS, and so the EPS would have been higher if we included that tax adjustment. So that stands at 8.5p.

Speaker 1

So let's have a look at what's been happening with revenue. Now you can see on the chart there, we have a like for like revenue decline of 2.7%. And on the left hand side, you can see that breakdown by region. And we have got a mixed picture by region. So in terms of EMEA and Americas, we're down about 4% on a like for like basis year on year.

Speaker 1

But APAC, you can see they're showing growth of 7%. Now that organic like for like decline was more than offset by the inorganic benefit of BNP TAPI, giving us a constant currency growth of 0.3. And then by the time we adjust for the FX impact, which was about 15,000,000 on the revenue line, then that brings us to the $3.00 2 for the year revenue. Operating profit. Now again, you can see the organic revenue bring the operating profit down by £3,400,000 being offset by margin efficiencies and the inorganic growth.

Speaker 1

So in terms of those margin efficiencies, that's some of which you see coming through the gross margin line that I've already talked about, we've had procurement actions and cost efficiencies there. So ultimately, delivering £1,800,000 of margin efficiencies with that inorganic BNP TAPI benefit of 2,600,000.0, CHF 4 million constant currency adjustment, and that brings us to the CHF 40,100,000.0. Now adjusting items. So there's a good news story here in that you can see that that's reduced quite significantly year on year. A couple of moving parts there.

Speaker 1

You can see the software as a service line going down from 10.8 in '23 down to 9.6, and that's really our ERP deployment as we become more efficient at that. That we would see coming down again into 2025. And the other main moving part there has been the impairment line where we had an impairment in 2023. There was no such impairment in 2024. In fact, there was a small add back for the property that was impaired in 2023.

Speaker 1

So those are the main moving parts, as I say, coming down year on year, and we'd expect that to come down further into 2025. Expectation would be that, that sits at around the sort of million mark. So cash flow. Now again, there's a strong message here. We have million, you can see in the box there, of free cash flow and again number of moving parts there that's mainly driven by the strong operating cash conversion of 91%.

Speaker 1

And in terms of those moving parts, we've got 9,900,000.0 working capital outflow, which broadly stands about in about the same place as it was at the half year. So that will be an area of focus going forward. Our net CapEx sits in line with what has been previous guidance at 4% of CapEx to sales. And then moving on outside of that first box, you can see there we've got some of the M and A activities, some of the final payments on the historic M and A activity. We've got the shareholder returns, so the dividend and the share buybacks there.

Speaker 1

And then 17,700,000.0 of adjusting items. Now that number is bigger than the the 14,000,000 that I just showed you on the P and L chart. And the reason that is larger is because we've had the payment out of some opening provisions effectively. So that's why those two don't balance off. And then we've got a couple of items grouped together there in terms of discontinued operations.

Speaker 1

Now these relate to the filters business. So we had an outflow which had already gone at the half year of twenty four point eight million. And then in the second half, we had deferred consideration, million that came in in the second half. And just a point to note, actually, we also have a further CHF 10,000,000 held on the balance sheet that should be coming into the business during 2025. So all of that together brings us to the CHF 68,200,000.0 of net debt, which is at 1.3 times net debt to adjusted EBITDA.

Speaker 1

Now I mentioned earlier the strength of the balance sheet, and there's a couple of things to talk about here. So first one is really a reminder about how we're set up. So we do have a strong long term set of debt in the business. So that was put in place a while ago, and we have $102,500,000 of U. S.

Speaker 1

Private placements. They are long dated, so we've got some maturity dates that run between 2028 to 2023 at an attractive coupon rate of 3.8%. And then pleasingly, in the year, all the hard work was done before I joined on this, but we renewed and extended our RCF, which was agreed in July 2024, extension of the $200,000,000 facility for five years based on the same terms and size and same covenants as we had in place before. We have a number of our banks here with us today, so we do appreciate your support, and thanks for joining us today. So all of that sets us up really well.

Speaker 1

And then if we look forward, we're going to be using a set of what should be fairly familiar guardrails to sort of guide us as we move forward. So we have a cash conversion of greater than 85% as our target. We have a net debt leverage of less than 1.5 times. Now at the year end, we were at 1.3 times as I've already said. And that 1.5 times, a dependence on M and A activities, we could see that tick up ever so slightly if there is a good opportunity out there, but we will the reason we're keeping it there is because we will always have a path back to that 1.5 times.

Speaker 1

So that's more of a medium term target. Our return on invested capital greater than 15%. That is absolutely key to our discipline, particularly when we look at investments and M and A activity. And then a dividend cover of three times that we'll take forward. Finally then, in terms of capital allocation, So this remains unchanged from what you would have previously seen from us, priority being the organic investment.

Speaker 1

So capital investment is required to maintain our strategic growth. We will be maintaining that at about four to five times sales sorry, four to 5% of sales, sorry. And innovation, again, really important feature in the business. Scott will talk in a moment about the sustainability aspects and the work that's going on to digitize the customer experience. Acquisitions, clearly a really important part of our model, and you've seen that with the benefit that we drove from BNP TAPI this year.

Speaker 1

It is a really important factor in our growth because it gives us the ability to drive higher organic growth through cross sell. So we will be looking at acquisition opportunities, and again, Scott will update you on that shortly. And then that brings us on to shareholder returns. So we'll be looking to keep in place the dividend cover of three times. We're committing to that three times adjusted earnings.

Speaker 1

And then we have the existing share buyback program, that the pace of which is somewhat dependent on the other capital allocation opportunities that we have in the business, particularly earnings accretive M and A. So with that, I'll hand you back to Scott for a regional and strategic update.

Operator

Thank you very much. Thank you. Okay. So let's talk a little bit about the three regions to start with. First of all, let's have a quick reminder of the regional structure and our footprint associated with the region.

Operator

So Europe is just over half of the business and again has the greatest level of margin profitability with four manufacturing sites in the European region. The Americas around one third, again with four manufacturing sites through the region. And then Asia, about 13% predominantly. The majority of that is so two thirds of that is is actually in China. I think the message here is we we have a lot of footprint optionality.

Operator

If we were in a perfectly normal, calm, pre pandemic world, you could argue we have too much footprint at this point in time, but we're not. We're in a very uncertain world. Therefore, the capacity opportunity we have puts us in a great position to manage market recovery, but also the flexibility in the footprint gives us a great opportunity to navigate any emerging tariff situations. However, e even at a starting point, predominantly, we're manufacturing in region for the region. Where there are intercompany, interregional flows, then we have optionality to manage those as tariff situations evolve given the current, sort of geopolitical situation.

Operator

So we're in a good place. And if you look at the risk today on unmitigated basis, it's immaterial. On a mitigated basis, it's it's virtually nothing from the the tariffs that have been announced thus far. If that continues to grow, again, we'll just look at the further options. But the starting place is strong.

Operator

The optionality is even stronger. So thinking about the performance of the three regions. So Europe, clearly, had a game of two halves in many ways. The first half, as we stood up at the half year, pretty stable, and and a little bit of encouragement. And then we saw this decline in the second half as PMIs fell, again, linked to the uncertainty in the European markets, German government, French government, challenges during the second half not not helping.

Operator

I'm pleased to say, many of you will notice coming through the start of 2025. Sentiment has started to improve. PMIs are improving. They're still below 50, but there's been a tick up at the start of the year given some greater stability and uncertainty. And again, that's pretty much translating into what we're seeing as business as well.

Operator

So that second half challenge has at least normalized heading into 2025. In terms of the highlights of the app last year, the acquisition of BNP TAPI was made at the end of twenty twenty three, and that delivered good growth. And I'll talk in a couple slides' time about the cross sell opportunity. So still a fundamentally difficult market for us, but cross sell of the the BMP TAPI products has gone very well. Access hardware continues to be a real strength for the business.

Operator

These are products that we're predominantly making in our Turkish business. That product line is very much associated with some great end markets, and therefore is a real catalyst of growth for us, and that continues to be the case. As with all regions, margins expanded through the year. I think in in in all regions, this is a case of slightly less sale price growth compared to where we've normally seen, but a holding of sale price and an offsetting reduction in cost price in what's somewhat of a a deflationary environment. So we've held on to pricing and managed to reduce cost pricing, which is a a great achievement through the business.

Operator

One of the biggest highlights of the year, clearly, is the deployment of the ERP program. Previously, we'd launched one site a year for a couple of years. We launched eight sites last year, so significant improvement. Again, never an easy program, ripping out the heart and soul of your transactional business, but they've gone well, making really good progress and delighted with with with the progress and the the the effort across both the program team and the business to have those go lives. And ultimately, all coming together with an improvement in our Net Promoter Score, again, showing good strong customer sentiment.

Operator

So, similar story in The Americas. There was definitely an improving second half, but that improvement actually did start to slow as we came through the year end. We were expecting it to be even greater, and then the uncertainty around definitely stalled The US. Again, you saw that in US PMIs at the end of last year, which dipped below 50 again. Again, as we come into 2025, those PMIs have gone north of 50 again, and, fundamentally, we're we're seeing that in our underlying business that I'll come into in a couple of moments' time.

Operator

We spoke this time last year about Chris joining the business. Chris can wave at the back. So Chris joined just around a year ago, really put a lot more focus into the commercial execution of the business. And again, we're seeing that in terms of our customer contact, customer acquisition, customer retention, activities in the market, which is helping drive the revenue line. Again, margin expansion through procurement and automation, which is fabulous, and ultimately, an improvement in Net Promoter Score similar to the one we saw in Europe.

Operator

So again, good level of customer sentiment across the business. And then finally in Asia, we did see continued sequential growth. Again, remind two thirds of our Asia business is orientated in China, that's serving both domestic China and then some export markets as well. The biggest driver of growth was the, the export of our access hardware business. So this again is the the locks, latches, and hinges business that we bought, four or five years ago, and that's selling into, again, some good growth markets across Asia and, and and into The Middle East as well.

Operator

We have done a number of insourcing projects in Asia, both insourcing products that we were buying previously and also creating some manufacturing capability in Asia, so they're more independent of the European business in this case and self manufacturing a particular line of products. So again, both of those things have helped drive margin forward. And fundamentally, again, another good improvement in our Net Promoter Score, again, across the whole region, in particular, in China driving at plus six. So good year of progress in the Asia business. So now thinking about the strategic update and where we're trying to go as a business, a quick reminder of the fundamentals of what makes this business so strong and such a great opportunity.

Operator

So we have brought together a broad range of product expertise into a single proposition. The thing that ties all of these product capabilities together is they're all fundamentally low cost products used by our manufacturing customers on their bill of materials. So that's the common thread across all of our product offer. And we have depth of expertise really fundamentally driven by our manufacturing capabilities in all five of these product areas. We then sell those products to a very broad range of customers.

Operator

Now our target customers again cover a number of interesting sectors. I'll talk a moment about the volumes, but a very broad range of customers up to a million customers potentially available to us with these five sectors as our key focus areas because we think they will have higher than average growth through the coming periods. The way we take the proposition to market, typically customers come to us for a product. They come because they're interested in a particular item to solve a challenge that they have. Once we have that initial interest and we've won that initial customer, the task then is to cross sell to them across the rest of those product capabilities.

Operator

There is a good degree of overlap of customer needs across the product, product areas, and we're uniquely placed to be able to sell more than one of these categories to our customers. And once we have customers in the house, it's around keeping them through this excellent level of customer service and increasing net promoter score that we've seen, which we term internally has been hassle free. Now when we have this breadth of customers and this breadth of products and we bring them together, what you have is a high transactional business with over half a million transactions flowing through the business, relatively low average order value, but selling these low cost and and reasonably priced inelastic products enables us to create a a high mix business that generates high high margins and generates high levels of cash conversion. So it's a very much a self fulfilling business model enabling us to generate the cash. Then linked to our capital allocation policy, how do we then grow the business?

Operator

How do we invest in the business for further growth? Well, that's around further new product introductions, both organically and inorganically. It's about sustainability, the product offer, and we'll talk in a moment about more in that space. It's around digitalizing the customer experience. And again, I'll touch on that in a slide in a moment and driving our sales and marketing investments.

Operator

And with those investments effectively, you're generating an even greater product proposition that attracts more customers, generates more cash, and the circle goes again. So that's very much the the fundamental of of how the business model is working. So let's try and bring that product and customer opportunity to life a little bit, and I'll go into a little bit of an example here. So our target customers very much in this middle ground, and I'll make reference to those. And they are a little bit Goldilocks positioned.

Operator

They're not the high volume. They're not the really low volume. They're the piece in the middle, whereby these customers typically fit very well with our capabilities, and we can enjoy a good level of relationship and also pricing opportunity in that space. If we think about those key target markets, just to give you some examples, so digital infrastructure, obviously, data centers are a huge investment right now. Five gs network investments are significant.

Operator

A typical application here is led by Access Hardware. So we are selling an industrial hinge and lock onto a heating and ventilation application that's going to cool the data center. That's the typical type of world that we'll we'll operate in. If we think about specialist vehicles, our protection products are probably our primary starting point in those conversations. So we'll sell a protection piece of equipment that is going into protect parts of a tractor through a paint process.

Operator

So So effectively, we're selling protection items that stop paint going where the customer doesn't want it to go through a production process. So that's quite an obvious entry into specialist vehicles for us. Energy transformation, so anything to do with renewable energy. Here, a great example would be, often starting with electronics. We're selling a printed circuit board spacer into an EV charging, unit.

Operator

So that could often be the the first time we see that opportunity, and we'll start with that product. If you go into defense, again, our defense areas tend to be linked with things like armored vehicles, so we could sell an electrical grommet electronic grommet into an armored vehicle manufacturer. And then finally, machine building. Again, we're selling a lot of machine automation components. So simple components again, things like leveling feet.

Operator

So selling a leveling feet into somebody who's making a machine is quite a common starting point for us. So there can be different starting points depending on the the end market. But then beyond that, the opportunity actually is pretty consistent. If you're using a heating and ventilation piece of equipment and you bought some locks and latches, the likelihood is with inside that piece of equipment, there's some cable that needs managing. There's a printed circuit board that needs protecting.

Operator

There could be a grommet that's managing cable entry into in and out of that. So you can see how we can then sell across the rest of the range into that application. And that case is true for all of those end markets. So we start with one level of expertise, and then our task is to cross sell to the other areas of the range. So once we've won a piece of business, we're typically single source that piece of business.

Operator

We don't share that. It's a low cost item on a bill of materials. However, the number of units that our customers make is dependent on the industrial market typically. So our underlying volumes do flow somewhat with PMI. So we can win new business regardless of the market, but what happens to that business in terms of its growth or decline is typically determined by the the volumes our customers are making, and that links into into that industrial cycle.

Operator

And and in particular for us, we have this very strong correlation with PMI, in both, both Europe and The Americas. So this graph shows our underlying volumes, so nothing to do with pricing or new business, purely the same old customers buying the same products that we sold to them historically. And you can see how this was starting to improve through the first half of last year. Actually, as PMIs fell in the second half, obviously, we had our challenges and that number was starting to unwind. And as we come into twenty twenty twenty five, again, we're seeing that correlation continue and and a a a an improvement in the underlying level of business.

Operator

Now the challenge with PMI, it is a sentiment based survey. Now given the news in Germany yesterday, there's every chance German PMIs are going to continue to increase. Given the tariff situation and news in The US, there is a likelihood US PMIs are going to fall. So those things will need to be managed and are certainly not in our control. The new business aspect of this is very much in our control.

Operator

Underlying volumes will will have this market association. And if we come behind that market and what we're doing to help drive and ensure we're locking in customers, it starts with employee engagement for us. We said at the start, having engaged employees is the best way to have happy customers. So delighted with the the further improvements in employee engagement in in what's a difficult market environment. You know, we have reduced headcount across the organization now for a couple of years, so it's not, not the, the easiest place at times, but the level of commitment of the people within the organization is outstanding.

Operator

And, again, a huge thank you to to everybody who is working so hard to help us manage through this difficult difficult market environment. That high level engagement then is translating into our Net Promoter Score. So up three globally, from 40 to 43, now higher than we were in the pre pandemic times, despite the uncertainties around the world. Twenty twenty twenty was a little bit of an exception. It was the point where anybody's flying anything was going to get a very positive score because there's so much uncertainty, but we're higher than we were, 'nineteen, and 'nineteen was a previous record as well.

Operator

So absolutely delighted with that level of customer satisfaction. And it's driven by service metrics in large parts and then customer service secondly. So, again, holding on to a good level of OTIF And behind OTIF, our manufacturing lead times are at very good levels right now as well, so our responsiveness is excellent. And if you ask customers why they choose Accenture, again, reassuringly and linking with the strategy, that breadth of product offer is one of their their key reasons for coming to us. And again, we're uniquely placed there.

Operator

Nobody else has that capability to bridge across five product categories in the way that we do. Interestingly, customer service comes second and that links very much into our areas of focus and investment. So we continue to invest in the digitalization of the business and how we interact with customers. We have now commenced some new digital platforms. The old platforms are seven or eight years old now, so we have two new programs underway, which we'll deliver this year.

Operator

Lots of good progress on our CRM platform. We've launched something called customer voice, which is a real time customer feedback loop, which is excellent, and some enhancement to how we're managing customer complaints, which again has led to positivity and how customers respond to that as well. Clearly, the biggest part of our investment is in the ERP space. So eight sites last year was a was a fantastic achievement, huge amount of effort across the organization, but great achievements. And we have five further sites planned for this year.

Operator

Cost last year, 9.6. We're expecting it to be in the six to eight range, this year. And then above the ERP systems, we have implemented successfully last year a new, connected planning capability, which effectively is sucking all the data out of the ERPs to give us global visibility of our supply chain. That helps us plan better, helps us navigate some of the uncertainty regarding global trade, helps us identify better procurement opportunities as well. So that project's gone very well.

Operator

We're just now at the end of end of deployment and starting to to get to benefits realization. So lots of good investment to help us further improve how we deal with customers and the consistency of our processes across the business. From a product point of view, again, our objective here really is to increase the size of the entire pie as much as any particular area. The two product areas which are showing some good growth through last year are Access Hardware. We talked about the link of Access Hardware in all regions to these more attractive end markets, digital infrastructure, energy transition, and then protection products, which is very much a result of the BMP acquisition and the cross sell opportunities that have come through there, actually probably ahead of where we expected them to be at this point in time.

Operator

So that's very encouraging. But generally, our task here is to try and increase the totality of the pie overall. Sustainability clearly is an important area for us. Again, two thirds of our products are are plastic by nature. We have now got 6,500 of those products now driven from sustainable raw materials.

Operator

So that's an increase of 25% over the prior year. And we put live last year the center of excellence in Kidlington, which is there to test and trial more materials, with a little bit more focus than we've had historically. So four to six trials completed across a whole range of recycled materials. Looking at some of the more challenging, more engineered raw materials, some of the the the, the nylon type products, also exploring bioplastics as well, and proving that we can manufacture using our existing processes and tooling into some of the bio based materials as well. Beyond the product offer, our our energy and carbon reduction programs continue.

Operator

We've actually got to 49% reduction of our direct emissions since 2019. Our targets, which was agreed and approved by SBTI, was to get to 50% by 02/1930. So we're clearly going to to exceed that. And we continue to make some progress with the ESG ratings. Sustainalytics probably the one that most shareholders talk about, and again, great to see that's now come down to a a medium level of risk.

Operator

Again, it took some time for us to articulate to Sustainalytics the shape of the new Essentra and the reduction in risk associated with that. So that's good progress as well. Moving on to M and A and our opportunity for bolt on acquisitions. We remain very disciplined, continue to look for businesses predominantly who have the capability to bring new products into the offer that we can then add to those product capabilities and sell to to the broad range of customers we have. We continue to focus on a a year 315% ROIC hurdle rate, and we're paying six to nine times EBITDA is our typical ballpark.

Operator

And and most of our models, if not all of our models, will take two turns of that through synergies effectively. So that's how we we get to the returns metric. So active pipeline, actually probably more active at the start of the year than through much of last year. That's both our focus and and and, view through this year. And and also, as with most of these conversations being bilateral, it is somewhat determined by the the seller's appetite to sell.

Operator

It it normally has some sort of succession planning or retirement aspect. So long term targets can can can come to the table at a point in time, which isn't totally controllable, but good that there are a number of conversations underway right now. So again, we have a desire to make a transaction during the course of this year. Again, we remain disciplined to make sure it's the right transaction for us. Just to recap on the the last couple that we've done since becoming a stand alone business.

Operator

So first of all, Wixdroid right at the end of twenty twenty two. So again, making good progress. This is a machine and automation component business. So we've launched a broad range of products into the rest of the European business. They were very UK focused, so our our growth driver really is into the rest of the the European business at this point.

Operator

We've won a chunk of business. We've got a strong pipeline that continues to develop as well, so very pleased with that. And, similarly, from a BMP point of view, this is a general protection business, brings us some European footprint and optionality into that product line. They have a good set of manufacturing capabilities. It's a business that we knew very well.

Operator

They were our distributor for a long time. They were a vendor and customer beyond that as well. Because of the nature of these products, they are very well known products to our existing sales teams, whereas Wixroyd was a new product area. The sales teams have found it very, very easy to to pick up the BMP product capabilities, and therefore, we're actually seeing revenue ahead of Wix void and probably probably ahead of our own expectations with 400 k being delivered last year and a very strong pipeline of opportunities coming through the business right now. So again, very pleased with that despite the market being tough.

Operator

The synergy delivery is really strong on both cases. So as we step back and think about the markets and the market growth and our strategic activities and focus, it's important with Rowan joining the business that we we relook at our our midterm ambition and targets. Having done this and and Rowan having spent some time understanding all the levers and and moving parts, we are still confident that an 18% target is achievable for our operating margin in the coming years. Just talking through some of the moving pieces there and reflecting upon the 18% we talked about two years ago and what's same and and what is different in in in those assumptions. Obviously, we have the starting point of of 2024, which we've shared today.

Operator

We know and in line with expectations, there are some downward pressures on margin this year. Geographical mix being being the largest part of that. Our expectation at this point in time is that Americas and Asia will grow more quickly than Europe, and we have stronger margins in Europe, unfortunately. So that will have a a mix effect even though we expect margins to be resilient in each of the three regions. We're also looking to reintroduce an element of variable compensation this year.

Operator

There was no variable compensation in last year given the the downgrade to expectations, so there's a need to bring some of that back in. Again, we're looking to offset that with with further efficiencies through the year. But from that 2025 starting point, we then see the bridge towards, 18%. There are further efficiency opportunities coming through the investments we're making. The the the results of the the ERP program, for example.

Operator

We then have some need to reinvest in the business, both further variable compensation and an investment in areas of sales and marketing and systems investments coming into the business, and we'll manage those carefully with the efficiencies that we see as well. Then beyond that, there's clearly a pricing opportunity that remains. This year, we've seen us holding price versus a reducing cost price. In a in a normal market environment. We're seeing us able to increase pricing beyond inflation and therefore see a positive impact of pricing through margin.

Operator

And then there's the clear opportunity around operating leverage. We are expecting to take market share, the broadening of our product offer, the synergies we're driving through acquisitions will enable us to take share, and that will deliver operating leverage into the business. We are also assuming a return to a normal level of market growth. Now, clearly, this was my mistake two years ago. We haven't seen anything like a normal market environment, but this is assuming a a circa 2% return to an industrial production type level of growth, PMIs being, being, more normal and and occasionally above 50, for example.

Operator

I guess what's interesting here though is that gets us to a circa 18% level without acquisitions. If we add on acquisitions, there is an opportunity to go beyond that. Or if the market doesn't grow and the market is more neutral for for the coming period, acquisitions will be the the way that we'll be able to deliver the 18% margin. So there's an optionality here, but clearly recognizing the market will have an impact, and we weren't explicit around that two years ago. I don't think anybody in the room was expecting quite the market conditions that we've enjoyed will be the wrong word, but but managed through in the last couple of years.

Operator

So great that we're still confident to get there, fundamentally driven by a similar shape of circa 5% organic revenue, circa 5% acquisition revenue, and the drive towards an 18% operating margin. So fantastic to be able to restate and reaffirm this with Rowan's support as well. So thinking about the outlook, how do we see the world right now? So we're still focusing on market share and managing those areas within our control. We have this unique business model.

Operator

It is a collection of manufacturing and product expertise that we can take to our customers. The low cost nature of our products gives us that pricing management and margin opportunity. We have a lot of flexibility in the footprint to be able to manage and navigate complex global trade environments, continue to work on the cost base, but as importantly, if not more importantly, continue to look at opportunities for for growth in less cyclical markets, those markets that we think have encouraging dynamics in the coming years, whilst also seeking the M and A opportunities to continue to further add to that product capability. In terms of where we are now, we're ten, eleven weeks into the year. We have started in line with expectations.

Operator

So the slight improvements in PMIs that we've witnessed clearly has given us that, that that reasonable start to the year. We are not expecting a second half recovery. I think many organizations for the past two years have have baked in a strong h two recovery on the assumption markets have to turn at some point. At this point in time, we're we're assuming a a fairly neutral market through the rest of the year. You know, probably a softer environment in Europe is our assumption, a a a slight improving environment in The Americas is our assumption, and and continued recovery in APAC, but but no great second half improvement versus the first half run rate, which is a a change in assumptions.

Operator

And again, you know, Insanities continues to do the same thing. So baking in second half recovery didn't feel like the right thing to do at this point in time. Let's celebrate and react when it comes rather than assume it's coming. Gross margins continue to be really strong at a regional level, continue to see the opportunity of pricing versus cost to maintain margins, but the impact of us expecting growth in our two lower margin regions to be stronger than the growth in Europe to see the the downward pressure on overall group margins through that mix effect. So that's it from me and from us.

Operator

Let's move over to Q and A if we can.

Speaker 2

Thanks. Morning. It's James Beard from Deutsche Neumis. Two questions, please. Firstly, on working capital.

Speaker 2

So despite the despite volumes declining in the second half of the year, there wasn't much in the way, if anything at all, of a working capital inflow in the second half. So could you explain why that was the case and what your expectations are for working capital in 2025? And then secondly, on Turkey, back in the September trading updates, you flagged that that territory had seen, you know, incremental weakness versus your prior expectations. Can you just talk to what you said in there in the last six months?

Operator

Yes. Do you want to take booking capital and I'll take Turkey?

Speaker 1

Yes. Sure. So working capital, yes, we didn't see much movement half throughout half two. That was somewhat of a function of the stock build that went on, which I think we updated on at the half year. But clearly, we did see lower sales in the second half, so we didn't make as much of a dent in that as we were planning.

Speaker 1

So also on working capital in terms of the creditors aspect, there was a dropout of the variable comp element too. So it will be an area of focus going forward. I'll be taking a bit more of a look at that as we go through the year. But it's always a careful balance, a careful balance of investment in the inventory to drive better customer experience, etcetera. So yes, we'll be looking at that as we go through 2025.

Speaker 1

So no explicit guidance on that at this point.

Operator

So when we came September, we were witnessing a slowdown in our domestic sales in Turkey. This was linked really against second order impact, but our customers were struggling to be competitive given the strength of the lira and the, the strong pressure inflationary pressure on costs in Turkey. The Turkish business towards the end of the year did exactly what we expected in September, so that was that was reassuring. There was no change to our our expectation. We have a great management team in Turkey, and and they actually reacted and found opportunities outside of Turkey, which somewhat offset the, the the slowness in the the domestic market.

Operator

Since the start of the year, we have seen some improvement domestically. There's actually been a, well, up until this morning, there's been a small devaluation of the Turkish lira through the start of the year, which is enabling the Turkish customers, our customers who are predominantly exporting into Europe to to improve their competitiveness. Inflation is dropping, so the cost pressure is reducing. So it's normalizing a little. Again, it's certainly in line with our expectations at this point in time.

Operator

I understand there's some political unrest in Turkey this morning. First of all, we're we're about an hour's drive outside Istanbul. So from the safety of the site and our people, that that shouldn't have any implications. Let's see what it does to the to the economies, over the coming months. But the domestic Turkish business is is less than half, will be 40% of our Turkish manufacturing sales with the rest of it being exported predominantly Middle East, and such markets and then into our intercompany flows.

Operator

So we'll manage through it. It's another opportunity for us to react and demonstrate our agility as a team, but we'll see how that evolves in the coming days.

Speaker 3

Thank you. Andrew Nossey from Peel Hunt. Again, a couple of questions. Just following on from James' question there, I think historically, sort of an 18% working capital to sales was a figure quoted. Given your early assessment, is that still a reasonable foundation for when the business reaches normal state?

Speaker 1

So I'd say I mean, we were at sort of 23% at this point. As I said, it is a quite a careful balance. I'll be looking at it going forward. 18% is a good target to have in mind. How soon we'd be able to get there in light of the current economic backdrop, I'm not so sure at this point.

Speaker 1

But I'll be looking at it through the course of half one. Yeah.

Speaker 3

Okay. And secondly, in terms of leverage, I think you said you'd be happy for it to tick up for the right sort of M and A deal. I mean, thoughts on what level you feel comfortable with that reaching in any particular period in a year?

Speaker 1

So I as I said, really, it's just a small tick up. It's just not being a slave to the 1.5, particularly mid year, you know, allowing the acquisitions to to help us to that path back to the 1.5, again, is is gonna be important. So the reason I didn't put another number in there is because I don't really see any other number than the 1.5 as being important. It's just a slight tick up, potentially mid year could happen, but only for the right opportunity with the right discipline.

Speaker 3

Got it. And Scott, just if we subscribe to the view of more on shoring in The U. S. As a consequence of presidential change, how much capacity do you have in North America right now? And equally, your sort of competitive positioning to take advantage of that?

Operator

Yes. So, I mean, capacity wise, we we have two large manufacturing sites in The US, and then we have the Mexican site that we put live a couple of years ago. We're probably running with 30% capacity in the two US facilities and 70% capacity in Mexico. And and natural following question, well, Mexico will be likely subject to tariffs. However, the cost of manufacturing in Mexico remains lower than The US even with a tariff situation.

Operator

And probably even more importantly, labor availability in The US is still a very difficult thing to manage, and and labor availability in Mexico is is somewhat somewhat easier. So the my biggest concern with the capacity splurge coming back quickly would be finding labor and our chance of doing that in Mexico is actually stronger. So we'll be able to meet the demand. We'll certainly be able to meet it competitively. Whether we can do it all through the two US sites would be labor would be my big question, particularly in one of the two sites, which remains quite challenging still.

Operator

And I guess this just leads into the inflation implications of the tariff situation, U. S. Labor inflation is likely to continue to be a feature for us. So it links out from a competitive point of view. It's really quite mixed.

Operator

I would say, on average, we're better placed. There are some pure domestic U. S. Competitors who will be in the same situation and have the opportunities. There are a number of competitors in some of the product lines who are importing reasonable volumes of their products from the East effectively, from China predominantly, and we're clearly going to be in a better position than those.

Operator

So on average, better positioned. I think the second order impacts are probably the ones that are more difficult to understand, but probably where our thoughts go to, we can certainly manage through the direct implications. Now generally, a move to US manufacturing away from interregional supply. We have a greater level of market share in The US. It fundamentally should be a good thing for us, but that disruption and second order events will not be a clear path, I suspect.

Speaker 3

Great. Thank you. Adrian Kearsey, Pam Ullibram. Do you mind if

Speaker 4

I go back to the leverage debate or the discussion? You finished the year 1.3 times leverage, average, 1.5. Can you perhaps give us sort of an indication of the spread across the year in terms of how high it went?

Speaker 1

No. Sorry. It's average 1.5. No. No.

Speaker 1

We were we ended at 1.3. There was there's no average 1.5. That 1.5 is our our target

Speaker 4

Okay.

Speaker 1

To stay below. So, no, we didn't.

Speaker 4

Okay. Apologies for that. Yeah. What what is okay. I'll perhaps ask it in a slightly different way.

Speaker 4

What kind of spread would you see through the year in terms of movements?

Speaker 1

It's fairly consistent. I mean, obviously, we get there there will be some sort of chunkier inflows and outflows that go on. I mentioned the 10 for potentially that's coming in, in 2025 from the filters business. And then, of course, when we do an acquisition and depending on the terms and exactly how that's set up, that has an impact too. But this past year, it's been pretty steady.

Operator

I mean, I think if we think forward into as being a pure play components business and the noise of the prior transactions behind us, then there's very little flow. We're cash generated every month. We're then paying down debt. We're spending some CapEx. There's never millions.

Operator

We're a fairly boring business from our point of view. So acquisitions will be the only thing. Dividend payments and acquisitions are the two big pieces of cash flow in reality. The rest of it will debt will trend down over time until we have those two events. It's a little bit unexciting, which is how we like

Speaker 4

it. Nothing wrong with that.

Operator

Yeah. No. Exactly.

Speaker 1

Very

Speaker 5

good. Hi. Ratna from Santander. So as you move away from more biodegradable material from plastic, do you see any cost or quality challenges? And how does that translate in the business?

Speaker 5

Yes.

Operator

So certainly, the move so far, the products that we've launched to market have been based on recycled content, and there's been no quality difference. Now it's polyethylene, so it's a fairly friendly material. We've got two forms of recycled content as opposed to industrial and post consumer, and we continue to try these things out. But generally, very little, with no quality impairment. And pricing has been broadly the same from a cost price point of view.

Operator

It's likely as recycling processes become more, grow scale that the price of recycled content will fall a little. So that's probably our expectation, but the starting point is a broadly neutral one. As we go into some more of the engineered plastics, the cost of recycled nylon material is actually higher than version nylon. So we've proven we can process it. We've proven we can get to the same quality outcome, but the cost base would be higher.

Operator

So that would need customer sentiment to drive and accept that versus the standard product. What's been nice in the polyethylene products, we've just switched everything over to recycled material because of no quality or price difference. Most of our customers are oblivious. We probably need to do a better job of advising what we've done because there's an upside from a doing the right thing point of view, but there's been no real change to that dynamic. The bio based materials are a level of complexity different.

Operator

We've proven we can process them. We can prove we can process them in our normal cycle times, which is really interesting. The the nature of the product that you're producing has different characteristics. Fundamentally, from the seaweed based materials we've been doing, it is less flexible. So it will work very well in some applications.

Operator

It will work less well in other applications. So again, it's about understanding if there's a clear customer demand for that, we have a way to resolve it, but that doesn't replace all of the recycled material that we're producing because the application, the nature of the product can be slightly different. But we're learning a lot. We're probably as advanced in our space as anybody, but we are. So we'll continue to learn and be ready.

Operator

We can help customers across this spectrum and do the right thing, which is very much an employee engagement drive for us as well.

Speaker 6

Toby Thorrington from Equity Development. Two from me, I think. In the notes, the revenue splits, there are some swings in there I'd be quite interested to understand, specifically in the channel down the channels, distribution is up 7% and end users down 7%. But also in the offer, I think standard products are up 6%, custom up 4% and configured product down 10%. So is that strategy?

Speaker 6

Is that regional mix? Just trying to understand what's going on there.

Operator

Yes. The distributors are normalization effects. If we look at prior year, you saw distributors destocking and that was an issue for us to manage through most of 'twenty three. So that's a normalization. If you look at our distributor sales, they're broadly in line with their customers now, but they've stopped going backwards because they're holding a stock position.

Operator

So that's not strategic. It's more of a market dynamic. And as we're on the configured versus custom, I'll have to go and check because that feels a little bit quirky. It's certainly not a strategic choice. Generally, we're standard and configured at where we place, where we excel.

Operator

The custom products. It could be things like the bio based materials playing into that if we've done some particular work for a customer. But I can't think of a strategic choice that's driven that in a different direction, to be honest. Okay.

Speaker 6

Thank you. And completely unrelated on ERP, you've given some fairly explicit guidance for this year in terms of number of site and cost. Can you just remind us sort of when the if you ever get to the end of that process?

Operator

We will get to the end. The end is in sight. So we will get to the end. It will be the first half of next year. We'll have, effectively, the Turkish business will be the last site that we we focus on.

Operator

We'll also do the the BMP acquisition, but that that's effectively scope creep, and we'll we'll manage that through the the the the internal teams. But the Turkish site will be the site that carries on into 2026. So I think as we get to the half year, we'll we'll firm up exactly our expectations of go live and and guidance. And and then from that point onwards, we effectively are creating a BAU run team for the ERP. Sam's team are putting this up right now.

Operator

So we'll have the capability within the team to to run what we have and also deploy to any further acquisitions that we make as well, one or two of the Asian markets. So it will continue in a smaller scale. It won't continue as an adjusting item from some point in the middle of next year.

Speaker 3

Okay. Thank you.

Speaker 7

We do have a few from the webcast. Firstly, are there any other geographies that you'd like to expand into?

Operator

Yeah. So when we looked at the strategy in the middle of last year, we thought three geographies were particularly interesting to us. First of all, Mexico, and whilst the Mexican economy is bouncing around a little bit currently on on the on the basis of of US trade policy, Mexico is still a great opportunity for us. We we have a big manufacturing capability there. We have a little bit of domestic business, but we're we're investing in in in that sales team.

Operator

And and Chris, Ronan, and I were both there all there at the end of last year talking about that opportunity. India is the second. Again, we have an Indian business in in Richard's world. It's relatively small but but doing very nicely, growing very well. But we we because we're not manufacturing in India and India has quite protective trade policies, we lose out at some point of volume.

Operator

So we'd like to do more in India. That's either through a small acquisition or an investment in an organic manufacturing capability. Again, it won't be huge amounts of money either way, but India is a market that we'd we'd like to do well, to do more in. We we are doing very well there. Now the team are doing very well growing the business, but we we we think there's a lot an even bigger opportunity.

Operator

And then The Middle East is the the the final area. And again, we're we're just debating exactly where in The Middle East. We have won a good level of business in Saudi over the course of the last couple of years. This is both through the the China and Turkish access hardware businesses selling into what effectively is infrastructure investments in Saudi. So we're looking at the options for market entry in Saudi to to take that, to say the opportunity even further.

Operator

So they're the three geographies that are currently active in terms of our sort of acceleration thoughts.

Speaker 7

Thank you. And just on Turkey, the Turkish lira has devalued since this, since the January trading update. If this holds, is it sufficient to catalyze a turnaround in the Turkish access hardware business? And is this an upside opportunity?

Operator

So it has devalued about 7% weaker than it was, which is helpful. We are seeing a a sort of continued gradual recovery of that Turkish domestic business. To be clear, the access hardware business in aggregate continues to grow. So whilst the second half of last year was below our expectations, we're still delivering growth, which is which is important. We expected the Turkish Lira to devalue somewhat during the course of this year.

Operator

So it's not really an upside versus our expectations, but it's very much in line with our expectations at this point in time.

Speaker 7

Thank you. Another one, please can you confirm the guidance for adjusting items in 2025?

Operator

Rowan?

Speaker 1

Yes, I can. So what I said when I was on the slide, there was circa 10,000,000 adjusting items, mainly driven by the ERP as we've covered.

Speaker 7

Great. And looks like this might be the final one. How do you perceive company valuation?

Operator

It's an opportunity. Yeah. Clearly It's a world of opportunity. It's a world of opportunity. Clearly, it's an uncertain time, and we recognize that that's having an impact on our valuation.

Operator

Hopefully, we can continue to to do the right things, drive the business in the right direction, and the value will will recognize that.

Speaker 7

Thanks, Scott. If there's nothing else in the room, I'll hand back to you for closing remarks.

Operator

Okay. So thank you all for coming along. Thank you for the questions. As I said, we recognize it's an uncertain market. I don't think anybody is foolish enough to to have a clear projection.

Operator

The business is an excellent business fundamentally, generating good levels of returns, opportunities in in every direction, selecting the right ones and executing against them is really key. We're making good progress in terms of growing into those good markets, both end markets and customer sectors. The product offer is in great shape. Acquisition opportunities are there for us to assess and understand. We're doing everything that's within our control, and we have a lot of agility in the business to respond to what happens externally.

Operator

We just can't control what happens externally, but we'll be in good shape and we'll react in the right way accordingly.

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Earnings Conference Call
Essentra H2 2024
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