Essentra plc (ESNT) Earnings Call Transcript

Good morning, everybody. Nice to see you. A pretty cheerful room here in the building. So great to see everybody this morning. I'm Scott Fawcett, Chief Executive of the new Essentra, if you like. So I took over the business from the 1st of January. So plan today, we'll give you a quick overview of what's been going on, some of the highlights of the year. I'll hand over to Jack to walk through the financial performance. I'll pick up on a strategic update, talk about many of those themes that we raised in the Capital Markets Day back in November, and then talk about the outlook, how we're seeing trading and our positioning for this year. So, let's make a start. So clearly, a big year for Essentra 2022. We're now a pure-play Components business with a very clear strategy for delivering growth. We talk about 2 or 3 things that are key critical to the Components business. We're a manufacturer and distributor of low-cost building material products. [ Though ] low cost, which means, typically, service is the most important decision-making criteria for our customers. So being hassle-free, being easy to do business with, is how we position the business. And we'll talk during the presentation about the things we're doing to continue to improve customer experience and service. But our products are essential. If they don't turn up, we can stop our customers' production line, so it's really critical that we have that high level of service capability. We have a unique model, which we think is great. It differentiates us in the marketplace. We are uniquely a manufacturer and a distributor of product. So we bring together both the expertise and the flexibility with the manufacturing business, but also that broad range and the service capability from being a distribution business. And we've built this across a wide range of different product portfolios, different product categories, all in this low-cost building material space, but we have this very broad range, which is unique in the marketplace. We've talked about our strategy for delivering organic growth, so getting more customers, keeping them by being hassle-free and probably most important, cross-selling to them, getting them to buy an ever-increasing broad range of the products that we have from across that product categories. And we continue to improve the offer through digitalization, so using digital technology to improve our customer service, improve our customer experience and also think about sustainability, how do we make the offer more sustainable, how do we help our customers achieving their sustainability goals. Fundamentally, given the nature of the business, given the broad range of customers, broad range of products, the low cost but critical nature of the products, we are in a great position from a margin point of view. We generate good levels of margin, enables us to then invest in the business. So we can have a solid margin position, lots of opportunities to continue to expand margin and then invest both organically and inorganically in the future of the business. As we set out at the Capital Markets Day, our ambition is to double the size of the business and to triple the operating profit over the next 5 years. So a quick summary of 2022. As I say, a milestone year for Essentra as we simplify the business, the disposals of the Filters and Packaging divisions to become a pure-play components organization. This has left us with a strong balance sheet. We've announced the return of GBP 150 million of capital to our shareholders. Jack will give a little bit more details on that later. But even after that return, we're still in a strong position, enabling us to have room for investing in organic and inorganic growth. An example of that is the Wixroyd acquisition. I'll talk a little bit more about this later, but we completed that in December of last year. In terms of performance last year, so a good level of performance, 12% revenue growth, 12% operating profit growth, good levels of margin, pre-central cost at 18.9%, and post-central costs, and again, Jack will explain the central cost allocation, a 12.7% margin position. We continue to work on pricing, clearly, more important in this high inflation market than it has been historically. I'm pleased to say both last year and coming into this year, we believe we have pricing actions in place to offset inflation. And we continue to look at the cost base of the organization. We've talked about the business being resilient through the economic cycle. Clearly, we're in a slightly more difficult economic cycle right now, and we have been managing the cost base very carefully through the back half of last year and into the first half of this year. Underlying -- I always say the most important metrics of the future health of the organization are our customer satisfaction and our employee engagement. I'm very pleased to report that both of these made significant progress during the year, NPS plus 11 and employee engagement up 5 through the year. And we've also established a new ESG framework, and I'll talk later again about some of the progress we've made in achieving our goals in an ESG sense as well. So with that, let me hand over to Jack to take you through the numbers.

Thank you, Scott. I'm very pleased this morning to demonstrate a very strong set of opening numbers for the new Essentra going forward. The focus of this presentation is going to be about the continuing operations, the group that's going forward, the information around the old group, the packaging, the filters disposals that's in the RNS. And of course, it will be in the annual report. But a very strong set of opening numbers. Revenue up 12%. Strong growth there, and we'll talk about that in some detail. The adjusted operating profit, again, up from GBP 56.9 million, up 12%. Operating margin, 12.7%, good, given the circumstances. Operating cash flow, 80%, so progressing to the metric that we set at the Capital Markets, which was [ 85% ]n. Scott already said that we're in a very strong cash position. We've got 2.3x surplus over our EBITDA at the moment. And our return on invested capital is 13%, which plays against our WACC of 11.8%. So moving into some of the detail. You can see that the progression on the revenue comes across both from the acquisitions that we talked about in the Capital Markets Day. So Wixroyd and Hengzhu are chipping into that. We said that's going to be an important part of our growth. It comes from organic growth. Within that organic growth, it's split 10% pricing positive and 3% volumes negative. Obviously, we're going to talk about the destocking. But again, strong growth. We're able to keep our pricing well above the cost growth we've seen and increase the margin thereby. We're driving cross-sell. This is where we take products from our existing companies, spread them across the network, either them coming through acquisitions or through our development, and therefore, add to the customer experience in terms of how many products they can take. So that's an important part of our growth, and we're continuing with that. So the revenue position is strong. In 2022, from an income statement, we've got an 18.9% operating margin at the components, sort of the operational level. That comes down to a 12.8% margin after the central costs. GBP 43 million is our pro forma adjusted operating profit. The difference between '21 and '22 is that in '21, we had GBP 4 million of central cost VAT and [ PAYE ] net credits that were released. That won't recur. So that's -- so the operating costs were actually -- the central costs were very similar to what they were in previous years. And going forward, we will have a central cost this year of GBP 23 million, which is comprised of the core GBP 18 million that we outlined in the Capital Markets Day, i.e., the GBP 13 million central cost, plus the GBP 5 million that was already in the Components division. This year, in the first half, we'll have about GBP 5 million of kind of -- as we transfer into the new group and the new structure. That won't recur. So we're very confident that our GBP 13 million central cost going forward will be the number. In terms of the detail around the adjusted operating profit, clearly, we've seen an interest charge increase this year from GBP 14.8 million to GBP 17.8 million. That is driven by the increase in interest rates on our RCF, obviously, but also it's the first full year of the USPP. And therefore, we've got a full year's charge. So that explains that. That being said, importantly, with the proceeds, we've now repaid the debt. So our interest charge going forward will be between GBP 5 million to GBP 6 million, so considerably lower, which strengthens our cash flows going forward. On the tax side, '21 was an old year with a 3.2% ETR, effective tax rate. Again, that was because of the release of some provisions in the U.S. and also the change in the anticipated change in the corporate tax rate meant that all deferred tax assets had to be revised. So you've got a normalized 21.5% this year, which is what we guided to. Obviously, with the change in the tax rates going forward, our ETR will increase to more like 24% to 25%. In terms of the adjusting items, well, we've got -- Scott is going to talk at length about the ERP and how we're developing that and how it's being successfully implemented. That has a charge of GBP 12 million. That used to be something that you would capitalize. The accounting rules changed. It's now expensed. Therefore, we show it as an adjusting item. We did have GBP 10 million relating to the ongoing business that won't recur. It was about restructuring and preparing the group for the life as an independent company. So that was the majority of the adjusting items. So you've seen a very strong revenue growth. You've seen good operating profits coming through to the bottom line with a strong margin. How does that translate in terms of cash flow? Well, you've seen the operating profit -- the stated operating profit. Then you've got your depreciation to [ add in ] some GBP 16 million. There was a right of use assets of GBP 5 million. Our working capital was progressed really well in the second half. We got it down significantly. And our OCF in the second half went from 62% in the first half to 92% in the second half. CapEx is running at 4%, which per the Capital Markets Day is what we said it would do. So that all translates into a year of an 80% operating cash flow. Clearly, we're guiding to 85%, but that progress between H1 and H2, we're actually at over GBP 19 million currently. So that shows that we are hitting the mark on that. So again, what we said in the Capital Markets Day, we're actually achieving. Clearly, there's been a big shift in our funding position this year. We've disposed of filters and packaging. We paid down the RCF. We've now in 2023 paid down the majority of the USPP. So we started the year with debt of GBP 230 million, and we've ended the year with a net surplus of GBP 113 million, which we've used to pay down the debt, and we're going to use to fund the return of GBP 150 million that I'm going to talk about in just a moment. So Scott is absolutely right. We are so well positioned in terms of a strong balance sheet to fund our stated strategy that we outlined in the Capital Markets Day of growth, both organically and through acquisition. So we're in great shape from that perspective. Talking about the use of the disposal proceeds. Well, I've said that we paid down the RCF in 2022, and I see a couple of our bankers here this morning. Thank you for your continued support. It's really welcome. And we have taken out a new RCF that we have not drawn down on, but we have the liquidity there. The USPP, we've paid down so it's only GBP 101 million now and it's a good long-term debt to the 4% fixed coupon. So that's very cheap money in today's balance. So again, we have the balance sheet to support the growth that we desire. We've announced the sizable capital return of GBP 150 million. It will be GBP 90 million special dividend. I'll come on to the data on that in a second. And a GBP 60 million share buyback program, that is being executed now, it started today. So that's good news. And as I say, we've got the M&A firepower to support. Scott will talk about the prospects that are in the pipeline. But I'll just mention, we do have a very active pipeline, and we should -- we would like to do something this year again, which is in line with our -- again, in line with our stated strategy at the Capital Markets Day. So the specifics on the return. The special div will be paid on the 27th of April. It is ex-div. I just point that out, it went ex-div last week. That represents 29.8p per share. In addition to that, we are going to pay our final ordinary dividend. It will be GBP 0.01, bringing it to 3.3p for the year. This is going to be a 3x cover going forward. It will be progressive as earnings rise. So we are very much a growth type stock, but we will be paying an income, and it will be 3x cover. That's the firm commitment to the Board, and it's proven out with this announcement today. Our GBP 60 million share buyback, we anticipate that will take 9 to 12 months. That's what we've been guiding towards. We're entirely comfortable with that. So that's the use of the proceeds, and that's the reward. Clearly, what's driving our strategy over the next 5 to 6 years is our capital allocation policy. We have a very clear set of priorities and it is in order. Our #1 objective is organic growth. We're targeting 5% CAGR over the next 5 to 6 years. We're very comfortable that can be done. This year, we spent 4% roughly of our CapEx on the business, on organic growth. We've invested in the U.S.A., in our operational capability in Turkey, which is a major area of growth for us. In Spain, we've also put a new distribution center into Eastern Europe. I've been out there. It's world class. It's fantastic. And we also put a solar project into Thailand. On innovation, it's key that we actually drive the future here. We've set up a Centre of Excellence in Kidlington in Oxfordshire for sustainable new product development. That's going to be key to our growth going forward, and we're investing hard money into that. Digitalization, obviously, that's key to the customer experience. Scott will talk about it. But again, we've established a Center of Excellence in Istanbul, which is a real center for that sort of expertise. Acquisitions is our third priority. Scott is going to talk about it, but we've got a strong pipeline of acquisitions. We've already proven since the Capital Markets Day with Wixroyd that we will transact this and we're capable of transacting it. So there's a proof there. And the ordinary dividend is clearly in our capital allocation policy. It will be progressive and it will be at 3x. So very strong set of numbers. I want to take us back to November to our Capital Markets Day, we said that we would drive 10% growth we have. We said that we'd have our net working capital at circa 18%. It is. We said that we'd have our operating margin for the business at 18%. It's at 18.9%. Obviously, the central costs we've talked about, but Scott will show how that 18% will come even with the central costs over the next 4 to 5 years. Net debt-to-EBITDA, clearly, we're within that guidance. CapEx, I've already said, we're at 4%. Adjusted operating cash conversion well in the second half, we were at 90% plus. We are very confident in getting to that 85%. The ROIC are marginally below that at the moment, but we're driving towards it, very confident. We're very, very close. And the effective tax rate will be between that 24% to 26%. So what we said in November about delivery, this is the first score card and we're going to give score cards every presentation going forward to show that our commitment to what we said will be followed through upon. So with that, I'll pass it back to Scott.

Thanks, Jack. Okay. As I mentioned, we also talked about in November, a number of strategic themes, the ways we're improving and developing the business. Let me give you an update on some of those over the next few slides. So I touched on this already, but delighted with the progress on our core leading KPIs. So customer satisfaction, employee engagement. Customer satisfaction, up 11 points to 34. We believe anything above 30 typically is market share gain territory in a normal world. So again, we're feeling positive about that. Still room to go, still -- improvements we made from a service point of view. At this point of view, our service for the products we're manufacturing is in very good shape. Our service of products that we're sourcing still has some room for improvement. Supply chains are still not operating as smooth as they were doing pre-pandemic. And behind that, you can't have good levels of customer satisfaction if you don't have good levels of employee engagement. So delighted with the progress on employee engagement up to 83%. So well above industry norms. Again, lots of good work going from around the organization to help communicate and motivate the employee base of the business. So lots of good progress here. Part of the improvement around customer experience also links to digitalization, so how do we continually try and improve how customers interact with us. We talk about digitalization of the front end and at the back end. So from a front-end point of view, this is about our web technology, which we've now rolled out into 27 countries, the use of AI to try and help us present products and information to our customers and to our own staff in a better way. And we're now very pleased to report we have a new digital center of excellence, digital hub in Turkey. I was out there last month. We did some research around the global places where we could get good digital talent. The U.K. has been a real war for talent, especially around digital. And we identified Istanbul as an area of great talent. We have a big manufacturing site just outside Istanbul. And we've created this digital office now, as I'm delighted when I went and visited them last month. We've got 14 people there now. I have challenged us to get to 50 in a cost control fashion, clearly, but great skills in the organization, product information skills, user development skills, website product ownership skills. So the team are working on ways to help our customers find our products. And as we go forward, as the ERP rolled out, how do we interact the ERP to the website and offer more my account functionality. So really excited about the digital hub. And as I say, the ERP remains our biggest single project across the organization, rolling out Microsoft Dynamics across the business. It will underpin the future of the organization. It will give us one platform to make better decisions to improve operational efficiencies. Big opportunity to improve how we execute pricing. We do a good job on pricing. We're covering our cost inflation, but we're not doing pricing in a smart hyper-targeted way, which the new ERP will enable us to do. So we've recommenced the go lives of the ERP. We had a successful go live in France in November. That's certainly the upper end of our expectations. Anybody who's been involved in ERP system go live will know they're never pain-free, but there was about a little pain as we could ever expect in France. So that was great, huge effort from both the team running the ERP system, but also the French team really leaning into this. So we've got a proven 10 [ employee ] that's working now, and we're now in the process of rolling that out around the group. The next sites to go live are going to be Eastern Europe. So Poland and the surrounding markets will be going live at the mid-year. As Jack showed, we spent about GBP 12 million last year on the ERP platform go live. We expect to spend the same this year. And again, that's in line with the numbers we previously guided. From a footprint point of view, we continue to make progress and continue to optimize the way the organization is working. A couple of examples, one from last year and one that we're now currently working on. So Jack mentioned the new hub in Poland. We were looking to go in September to the opening of that. So really good facility, enabled us to close one of the smaller warehouses in Eastern Europe, bringing altogether improved service, better use of our working capital, also gives us some contingency with the German hub, which is our second Continental European hub. I think in the pre-pandemic world, we probably would have put all our eggs in one basket, lesson from the pandemic. Let's make sure we've got some supply chain resilience and the Polish hub is giving us that level of resilience as well. So great new facility there. And then this year, we are in the process of launching a new site in Monterrey. We have a small business in Monterrey today. Again, it's proven to be a good site for us. With a lot of research around where would we put a new larger facility into the Americas. And really, the talent was one of our key decision-making criteria. Where can we get good talent to help us run a larger scale manufacturing site in the Americas. And again, Monterrey was the winning location. Again, luckily, I had the opportunity to go in February to visit the facility. It's 10,000 square meters, very large facility. We'll be one of our larger facilities when it's fully operational, but we will have the go live of that at some point around the midyear, giving us the opportunity to help grow the Americas region, capture both our own near-shoring and our customers near-shoring of production into the Americas, which we know is a global trend. So very exciting that's coming along. Again, despite these big footprint projects, we're still within this 4% to 5% of CapEx guidance. These are not going to see us breaking that CapEx ceiling that we've set out. And one of the questions we've been asked a lot since the Capital Markets Day is how do we see the margin enhancement, the margin growth of the organization. Jack talked about the central cost impact and the fact that we're then growing our way forward. So this is our bridge of how we're bridging from the current level of margin to the 18% post-central cost margin that we've declared as our midterm 5-year target. So effectively, the 100, 150 basis points coming out of benefits from the new ERP system, half of this from price optimization, half of this on pure efficiency play. So being able to run the business better, being able to run the business more smartly. There's then a smaller element coming from optimizing the footprint. The fact that we have closed the Bratislava warehouse as a result of opening up the Polish warehouse, the fact that we can use the Monterrey with a slightly lower labor cost to drive the business forward will help us do such margin expansion. Procurement is one of the areas which we're working actively on now. Rob is at the back of the room, but Rob has brought in a new procurement team as we brought what was a group procurement function and the divisional procurement function together. So we've got some new talent running up of procurement operation. And again, we're seeing some good opportunities to drive procurement opportunities and gains through the P&L in there as well. And then broadly, half of the margin optimization comes from sheer operating leverage. So just the fact that we're getting bigger, a number of the costs, the central costs that we talked about, much of our SG&A is fairly fixed. So as we grow the top line, that will flow through from a margin expansion point of view. So again, very confident in our ability to get to this 18% margin in the midterm in that 5-year time horizon. Moving on to talk about acquisition. We announced the acquisition of Wixroyd early in December, a very good business here in the U.K., initial consideration just under GBP 30 million, has a new range of products for us to effectively cross-sell to our existing customers. As with most of our acquisitions, we like to find business that have got interesting products. They fit our criteria of being typically low-cost components used by manufacturing business on their bill of materials and Wixroyd has this additional range of hardware products that are new to us. Cross-sell is the key strategic aim for most of our acquisitions, and which was clearly the case. I'm delighted to say we now have the first cross-sell activities happening in Europe of Wixroyd products. So we've done the product training. We've set up the supply chain to enable that to happen, and the first transaction took place last week. Now before everybody adjusted their model, it was GBP 100. So, room for it to grow, but a great start and pleased that we've got it over the line in the first quarter. So a nice start. I think probably the best thing about Wixroyd -- and Marcus may well be listening, there is a really strong cultural fit between the way the former owners run the business and the way that we're trying to run the business. They invested well in the business to ensure that they could deliver good customer service. They've got a good warehousing capability. They've got good manufacturing capabilities. So it is a business that was set up for success, and our job is really helping them grow. So really nice fit and very pleased with how that's going. So integration is very much on track, and we are very much seeing what we expected to see from Wixroyd, which is really reassuring. On to the broader pipeline, we used this slide back in November. So we have a very large pipeline of potential targets that we continue to review. We've built a number of relationships over the last decade with many of these targets, probably 50-plus relationships in place now. And we have a set of priority targets that we think are particularly great fit that we would [ put ] more time and more actively engaged with, from a relationship point of view. Typically, at any one point, there are a handful of conversations underway. I said this in November, and it's absolutely true right now. We have a handful of discussions which are active at this point in time. I said in November, they can be between 50% bilateral and 50% process conversations. At the moment, they're all bilateral, which is probably helpful. We typically have a greater percentage probability of being able to make a transaction with a bilateral conversation. And again, we're probably more able to control pricing expectations and the bilateral conversations. So pleased that we have active pipeline and pleased that it's biased towards bilateral discussions. Again, typically looking for businesses that will give us that product extension, the ability to cross-sell to existing customers. Whilst we are fairly geographically neutral at this point in time, given the newness of the business and the wanting for certainty, we're probably biasing our fits towards Europe and North America rather than some of the higher risk territories in Asia. So likely to do things which are closer to home in the next year or so. Increasingly looking at ESG considerations. So how would we ensure that this business fits in with our ESG goals, how will we ensure that we can see that route to decarbonizing the business over time. Obviously, having financial metrics in there, and the considerations continue to be that 8 to 10x window with us reducing that 6 to 8x post-synergy. Probably given the nature of the market and given our general sense of the market, and obviously, what's happening in the wider world, we're probably more 8 to 9x, maybe 7 to 9x in our conversations today versus where we were 6 months ago, recognizing the market is slightly tougher. The macroeconomic environment is tougher. Some of these conversations are there because private owners are recognizing it's a more difficult place and maybe wanting to look at texting at this point in time. So we've probably taken one turn off valuations in the last 6 months as a result of that. So finally, we talked about ESG from an M&A point of view. Just let me give you a quick update on how we're doing with our ESG agenda across the entire organization. This is the new framework that we showed back in November. From a planet point of view, we've reset all of our targets, effectively for the new Components business. We've actually made very good progress in terms of the percentage reductions versus the original target set for 2025, and we're therefore going to set new targets this year using the SBTi framework to set those near and midterm targets for carbon reduction. From a cultural point of view, we put a new safety program in place [ against ] -- Robert has been leading. So new safety commitment, lots of new training around the supervisory community, in particular, helping drive safety culture and safety improvement. Diversity continues to be a key theme for us. We're going to use gender diversity as our measure for diversity. It's the easiest thing for -- to measure. We think we get best data around. And we set a target for our leadership team gender diversity. And we've taken the opportunity to reset the group purpose and the group values as we brought the old components and group models together to give ourselves a new components focused cultural framework. From a community point of view, we have done good work to support our colleagues and family and friends affected by the devastating impacts in Ukraine, Turkey and Syria. We've done lots of work in the warehouses to support the aid requirements, and we've made a small donation as a business as well. We are giving everybody in the organization 1 day of community work per year. I'll make sure we publish some pictures, but Jack and I are doing some gardening next month in a social housing in Oxfordshire. So again, I'll get Jack in a compromising position that I can share at some point in the future. From a components point of view, really great progress in terms of us achieving this percentage of recycled content in our components. 2 or 3 years ago now, we joined the Circular Plastics Alliance. Their ambition was to get to 20% recycled content by 2025. We will be there this year. So again, we're going to reset our ambition for the midterm to go even further than that. And Jack mentioned the Center of Excellence we've created in Kidlington to help us do more material tests, both recycled content, but also bio-content as it becomes available as well. And then finally, bringing the whole ESG agenda together, we spent a lot of time as a team, and Emma's here and Emma leads our ESG efforts, trying to understand our Scope 3 emissions. How do we measure the scope-free impact we have as an organization. Our direct emissions are simpler. Scope 3 is a very difficult place to get to. The information that we can get from our vendors is very opaque. And we believe there's a huge opportunity for us as a business to help our customers with their Scope 3 reporting. So we're going to be setting up a framework to effectively have a carbon impact per product and therefore, by per customer, that we can report to customers so they can accurately measure the Scope 3 impact that's coming from Essentra, and again, our road map then to take that to 0 aligned with the objectives and the targets that we're setting. I think there's huge commercial opportunity in here. And we have an aggregation model. Customers are looking for simplification, emissions reporting. Scope 3 data is another area that aggregation simplification can help. And I think our business model here will be a really winning compelling proposition for our customers as we move forward. Okay. So that's the progress we've made and the steps we've taken to improve the business throughout the year and a little bit in terms of where we are and where we're going. Let me now talk about the outlook, how are we seeing the market right now and what do we think for the rest of the year. So we talked about the business being resilient and a very diversified business and our ability to manage and control margins through the economic cycle. And there are probably 3 macroeconomic events happening right now, which we're managing through, 2 of which are temporary in nature, one of which is probably going to be more ongoing. So first, those temporary issues is our China business. Asia here has a 14% of our group revenue. It was actually the same in 2021, but we would expect Asia to be growing year-on-year given it's the fastest-growing region historically. The reason it isn't has been the impact of the China lockdowns on our business. And we talked about this through last year, and that has continued into quarter 1. Now -- we are seeing post Chinese New Year now a gradual recovery. We're seeing a week-on-week improvement on sales and order trends, which is encouraging, but we think it's probably going to be half year before we're back to a level of normality. So again, relatively short term, but impacting through last year, impacting through Q1 and now gradually starting to improve. The other short-term macroeconomic factor we've seen is a distribution destocking. And again, we talked about this in our trading update, particularly focused on the U.S. back in January. I think when we showed this slide for 2021, distribution was 23% of our sales, and that's for -- went to 21% at this point in time, as we've seen distributor demand significantly reduce through the latter half of last year and again into quarter 1 this year. So the reasons behind this, somewhat obvious, but also unique in terms of the situation that we find ourselves in. We all came out of the pandemic with supply chain challenges, supply and stock shortages, and everybody was trying to grab stock for much of 2021 and the first half of 2022. We effectively got to a peak stock position in the middle of 2022 and the market started to soften and our distribution partners have been reducing their stock position since around half year last year, and that's continued through to today. We believe in our best estimate is that, that destocking will stop in quarter 2, and that distribution business will return to a more normalized level. There are a couple of indicators that help us get to that conclusion. Stocking positions now are lower than they were last January. So any stock they built through the first half of last year has clearly been taken out, and they're now back into position somewhere around quarter 4, 2021. The best and most accurate data I have is our own data as a distributor. So we talk about as a distributor and manufacturer. Our distribution business runs a stock model based upon the demand we're seeing effectively. And from the half year last year, our stock model is telling us to reduce stockholding. Lead times were reducing, you can reduce your minimum balance, reduce your safety stock, and we've taken our stock down through the back half of last year and into quarter 1. Over the last month, our stock model is saying add more stock. The demand signals are there that we need to then start to rebuild those stock volumes. So our data is showing that we've reached that point of inflection, and we believe our third-party distributors will be somewhere close to us as well. So again, we expect this distributor destocking phenomenon to come to an end in quarter 2. The final macroeconomic movement we're seeing, which is probably more ongoing, but less dramatic from an impact on us as a business, is a switch in business away from consumer markets. So when we presented this slide, which actually was a half year view, and since in November there was 3% more sales going into this automotive and consumer electronics business than there are today. And the business is getting picked up by renewable energy, telecoms, and I think a little bit into the cognac market. So the consumer markets, which again, very well reported post-pandemic booming consumer spending, which has come to a halt with the cost-of-living crisis. Again, that's impacting our supply into those markets, which are more consumer-orientated, less of an impact because we have other markets which are growing to offset that compared to the impact we're seeing in China in the distribution business. But hopefully, that gives you a feel for the macroeconomic movements we're seeing, partly geography, which we expect to normalize, or is normalizing already, partly channel, which we expect to normalize in quarter 2, and partly end markets, which we expect to be a continuing trend, but there's an equal and opposite offset in growth markets from an end market point of view. So what does this all mean from an outlook point of view, I'd say distributed destocking underway. Europe continues to perform robustly. China showing early signs of recovery. We expect to be totally recovered by half year. If you look at industrial production forecasts, again, they're expecting growth back into H2. And I think most interestingly, our new order intake is currently 8% higher than it was for the total of last year. So again, we've seen a significant pickup in order intake versus the slowdown that we're witnessing through the latter part of last year. As ever, though, in an economic cycle, we talk about the resilience of the business. We have strong margins, and we've demonstrated our ability to manage our margin position through cycles, and we're doing that right now. We continue to take pricing action to make sure we're offsetting inflation. And we are managing the cost base of the organization very carefully, managing discretionary spend very carefully. And unfortunately, we have had to take some heads out of the organization as a result of that volume slowdown, but again, showing a careful and considerate management of the P&L through the cycle. With all this together, our expectations for 2023 are unchanged. We believe we're going to have a good year. It will be a year which sees progressive growth through the year, as we talked about as the short-term factors normalize, but our expectations for the full year are unchanged, very much in line with our midterm targets, and we continue to have that strong balance sheet supporting the opportunity to invest in the business, both organically and inorganically. So to summarize, 2022 is a real milestone year for the business. The completion of the strategic review, the simplification to be a pure-play Components business. Components business had a good strong year, 12% growth -- 12% operating margin growth, good trading levels of margin as well. We've continued to invest in the business, made good progress against those targets, investing in digitalization, investing in sustainability, improving customer service, seeing those important metrics of Net Promoter Score and employee engagement come through. I'm very much confident around the delivery of this year. So our expectations remain unchanged. We do expect progressive growth through the year, but we'll continue to manage the cost base accordingly through this more difficult first quarter. And overall, our ambition hasn't changed. We're still very much here and very much on track for doubling the revenue and tripling the operating profits of the business over the next 5 years. So with that, I will close and open to any Q&A. I would invite Jack to come back and take all Andy's difficult questions.

Henry Carver from Peel Hunt. Just a couple for me, slightly broader ones. But with the ERP sort of system and integration stuff, how does that impact acquisitions and integration of them? Is there anything to consider? Or is it -- can you sort of run deals alongside ERP?

Yes. So there's a great opportunity in the future to be able to fully integrate acquisitions more quickly. In reality, for the last 4 years, we haven't integrated acquisitions into the old ERP because the old ERP was so clunky. It made new businesses' life more difficult than they already had. So we effectively treated them as a third-party vendor in many ways. So we actually get great value in the future from being able to put them on to the new ERP. We haven't been putting on to old ERP for the last few years because it just hasn't been worthwhile. So opportunity rather than any complication in reality.

And then just on the CapEx guidance, obviously, you're putting through Poland and Mexico at the moment. Will that 3% to 4% potentially of sales reduce in time? Or is that -- do you think likely to stay?

No, I think sustainably, we will be targeting 4%. As we said in the capital markets, that's about right to maintain our efficiency and also to drive the improvements we need. That is the guidance, 4% medium term.

Yes. So we get to 5% where we do these big footprint projects. We'll be at 4% normally. Lots of investment in sustainability, for example, retooling new machines. So that 4% level is a good level to help us continue to grow the business. 5% will be the top when we're doing bigger footprint work like Mexico.

Andrew Douglas from Jefferies. The obligatory 3 questions. Can you talk about the order intake numbers that we've got year-to-date as 8%, which is good for the future? Can you just break that down between volume and price for us just so that we are aware for our models?

Yes. Majority of it is going to be pricing, probably 7% circa, that type of level of pricing, and then a small amount of volume.

And if you think about the next 5 years in line with your targets, the manufacturing and distribution footprint, is that where we need it to be now for the long term? Or do we need something else in China or India, Far East or anything else in the U.S., toward Mexico, or are we planning now for the next 5 years?

Well, we've got continued work to optimize. There are a couple of projects which I talked to, and like I mentioned in the couple of Markets Day, one of our U.S. hubs is getting close to being full at Louisville. So we will move Louisville at some point in the next 2 to 3 years, again, well within that 4% to 5% of CapEx. The other challenge we've got -- so, I think, again, we referred to in the Capital Markets Day is we run a 3PL hub in Singapore. We probably don't want to do that for 5 years. So we're likely to move that probably to Thailand. We talk about this right now. So again, we're likely to move the Singapore hub, the Southeast Asian hub in the next 2 years, but all very much within that 5% of CapEx. So yes, a couple of shuffles but not any great uplifting.

And then the last thing is on M&A. Clearly, got a few things going on. Can we just talk about the size of potential acquisitions kind of in the pipe? And I'm assuming that a couple of ones that we talked about the Capital Markets Day drop out, if you drop in. What are you seeing in terms of the ones that you're not going forward? Is that from a DD perspective or from a price perspective? What's causing you to withdraw?

Yes, diligence normally -- either we don't believe it has the right product set for us to cross sell, and there's been -- probably the most usual reason is we just don't think we can turn it into a standard parts business that we can cross-sell to our customer set. We walked away from one of the middle last years on an ESG basis. It was a product that was going to be very challenging from an ESG perspective. So we decided that wasn't going to help at all. But I'd say that our confidence and be able to drive cross-sell is the reason we tend to walk away. Again, given the nature of the market and the fact that private equity is quieter than usual, we're not losing on price or timing, which we may have done once or twice in the last 2 or 3 years. But yes, it's our own decision to say this isn't the right fit for us. Size-wise, [ very much not ] bolt-on category. So broadly GBP 10 million to GBP 20 million, GBP 10 million to GBP 25 million of revenue, that type of size. We say to this ambition of wanting to get to circa 5% per year. That's GBP 15 million, GBP 16 million, GBP 17 million of revenue. So that type of level, 1 or 2 transactions a year of that nature would be our plan for the next couple of years.

Adrian Kearsey , Panmure Gordon. Just one for me, if that's okay. Cross-selling varies in scale across the different geographies and product lines. Could you perhaps remind us -- I know I asked a similar question at the Capital Markets Day, but could you sort of remind us of what is the high points and where is the work in progress? And perhaps what are you doing to help those areas that are slightly lagging?