Thank you. Good morning, all. Lovely to see you all today. I'm Scott Fawcett, Chief Executive at Essentra. Looking forward to sharing with you our 2024 results. Joined today by Rowan Baker, our relatively new CFO, who will be sharing the financial highlights. 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. We'll have to earn their money today.
The plan for today, I'll give a quick highlight. Rowan 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&A at the end. Quickly on the highlights of the year. Resilience, again, is a word we'll 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, in fact, expanding in all three regions a little, which is a fantastic achievement in a difficult market environment. As always, it's about controlling the controllable at such times. 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.
Continue to look at efficiencies. Again, the gross margin gains, very much driven by a mix of holding onto price and seeing some procurement and efficiency gains coming through to help reduce cost base. Cash flow very strong. Fundamentally beneath the business, a great level of customer satisfaction.
NPS up three, up in all three regions, which is really encouraging and very much driven by this very high level of employee engagement. 85% employee engagement 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 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. We'll talk a little bit about that later in the presentation as well. With that, I'll hand over to Rowan to take us through the financial performance.
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 Essentra. I've made it a priority to get out and about in the business. I've been across the U.S. to Mexico, China, Turkey, Italy, Germany, Poland. It's been a busy travel time.
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. I think that sets us up well and is a great asset for the business. It's also clear that we have a resilient business model. 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. 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 mor e later on.
There is flexibility and capacity within the regional footprint. That is particularly important when you consider all of the uncertainty that there is around Trump's tariff situation. 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. 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 a disciplined capital allocation. Again, I'll come back to that later on.
Moving on then to 2024 performance. Our revenues stood at GBP 302 million, t hat's a 0.3% constant currency increase. Adjusted operating profit at GBP 40.1 million, again, a constant currency increase, which was 2.3%. Adjusted operating margin at 13.3%. 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 ×, and that again is, ahead of our target of 1.5 ×.
Return on invested capital was down at 11.1%, somewhat a function of the lower adjusted operating profit, a nd our adjusted earnings per share were at GBP 0.085. I f we take that at a 3× cover for dividend, then that gives us a dividend per share for the year of GBP 0.028.
A look at the income statement. There's a couple of things to draw your attention to here. One that I mentioned earlier, actually, the gross margin. You can see there the year-on-year expansion in the gross margins. 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. I think that's a real positive.
Just draw your attention as well to the net finance expense. That sat at GBP 8.9 million for the year, which is quite a significant increase on the prior year of GBP 2.5 million. That is primarily because we did not 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. That is really what made the difference there.
In terms of what you can expect going forward, we would be much more in line with the GBP 8.9 million going forward in the business. Our effective tax rate also, you can see, is quite significantly improved year-on-year. That is a little bit of a one-off because we had the recognition of a deferred tax asset in the U.K. that was previously held off balance sheet that we brought onto balance sheet. That's what's influenced things there.
Again, in future years, we'd see ourselves returning to more like the 24%-26% previous guidance that's been given in the tax rate area. 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. The deferred tax assets come out of that adjusted EPS. The EPS would have been higher if we had included that tax adjustment. That stands at GBP 0.085 .
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%. On the left-hand side, you can see that breakdown by region. We have got a mixed picture by region. In terms of EMEA and Americas, we are down about 4% on a like-for-like basis year-on-year. APAC, you can see they are showing growth of 7%.
That organic like-for-like decline was more than offset by the inorganic benefit of BMP Tappi, giving us a constant currency growth of 0.3%. By the time we adjust for the FX impact, which was about GBP 15 million on the revenue line, that brings us to the GBP 302 million for the year revenue.
Operating profit. Again, you can see the organic revenue bringing the operating profit down by GBP 3.4 million, being offset by margin efficiencies and the inorganic growth. In terms of those margin efficiencies, that is some of, some of which you see coming through the gross margin line that I have already talked about.
We've had procurement actions and cost efficiencies there. Ultimately, delivering GBP 1.8 million of margin efficiencies with that inorganic BMP Tappi benefit of GBP 2.6 million, GBP 4 million constant currency adjustment, t hat brings us to the GBP 40.1 million. Now, adjusting items. 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.
You can see the software as a service line going down from GBP 10.8 million in 2023 down to GBP 9.6 million. That's really our ERP deployment as we become more efficient at that, that we would see coming down again into 2025. 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.
Those are the main moving parts, as I say, coming down year-on-year. We'd expect that to come down further into 2025. Expectation would be that that sits at around the sort of GBP 10 million mark. Cash flow. Now, again, there's a strong message here. We have GBP 22.5 million, you can see in the box there, of free ca sh flow.
Again, number of moving parts there. That's mainly driven by the strong operating cash conversion of 91%. In terms of those moving parts, we've got a GBP 9.9 million working capital outflow, which broadly stands about in about the same place as it was at the half year. That'll 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.
Then moving on outside of that first box, you can see there we've got some of the M&A activity, so that is some of the final payments on the historic M&A activity. We've got the shareholder returns, so the dividend and the share buybacks there. Then GBP 17.7 million of adjus ting items.
Now, that number is bigger than the GBP 14 million that I just showed you on the P&L chart. The reason that is larger is because we've had the payment out of some opening provisions effectively. That's why those two do not balance off. Then we've got a couple of items grouped together there in terms of discontinued operations. These relate to the filters business. We had an outflow, which had already gone at the half year, of GBP 24.8 million.
In the second half, we had a deferred consideration, 10 million that came in in the second half. Just a point to note, actually, we also have a further 10 million held on the balance sheet that should be coming into the business during 2025. All of that together brings us to the GBP 68.2 million of net debt, which is at 1.3 × net debt to adjusted EBITDA.
I mentioned earlier the strength of the balance sheet, and there are a couple of things to talk about here. The first one is really a reminder about how we are set up. We do have a strong, long-term set of debt in the business. That was put in place a while ago, and we have $102.5 million of U.S. private placements.
They are long dated, so we've got some maturity dates that run between 2028 - 2033 at an attractive coupon rate of 3.8%. 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 GBP 200 million 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. We do appreciate your support and thanks for joining us today. All of that sets us up really well. 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.
We have a cash conversion of greater than 85% as our target. We have a net debt leverage of less than 1.5 ×. At the year end, we were at 1.3, as I've already said. That 1.5 ×, dependent on M&A activities, we could see that tick up ever so slightly if there is a good opportunity out there. The reason we're keeping it there is because we will always have a path back to that 1.5 ×. 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&A activity. Then a dividend cover of 3× that we'll take forward.
Finally, in terms of capital allocation, this remains unchanged from what you would have previously seen from us. Priority being the organic investment. Capital investment is required to maintain our strategic growth. We will be maintaining that at about 4×-5× of sales , sorry, 4%-5% of sales, sorry.
Innovation, again, really important feature in the business. Scott will talk in a moment about the sustainability aspects and the work that is going on to digitize the customer experience. Acquisitions clearly a really important part of our model. You have seen that with the benefit that we drove from BMP Tappi this year. It is a really important factor in our growth because it gives us the ability to drive higher organic growth through cross-sell. We will be looking at acquisition opportunities. Scott will update you on that shortly.
That brings us on to shareholder returns. We will be looking to keep in place the dividend cover of 3× . We are committing to that 3× adjusted earnings. We have the existing share buyback program, the pace of which is somewhat dependent on the other capital allocation opportunities that we have in the business, particularly earnings accretive M&A. With that, I will hand you back to Scott for a regional and strategic update.
Thank you very much. Thank you. Okay. Let us talk a little bit about the three regions to start with. First of all, let us have a quick reminder of the regional structure and our footprint associated with the region.
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 are around 1/3 , again, with four manufacturing sites through the region. Then Asia, about 13%, predominantly, the majority of that is sort of 2/3 of that is actually in China.
I think the message here is we have a lot of footprint optionality. 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, even at a starting point, predominantly we're manufacturing in region for the region. The majority of our sales, even today, are made locally to serve that region. Where there are intercompany interregional flows, we have optionality to manage those as tariff situations evolve, given the current, sort of geopolitical, situation.
We are in a good place. If you look at the risk today on an unmitigated basis, it is immaterial. On a mitigated basis, it is virtually nothing from the tariffs that have been announced thus far. If that continues to grow, we will just look at the further options. The starting place is strong. The optionality is even stronger. Thinking about the performance of the three regions, 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 a little bit of encouragement. 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 helping.
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. That is pretty much translating into what we're seeing as a business as well. That second half challenge has at least normalized heading into 2025.
In terms of the highlights for the last year, the acquisition of BMP Tappi was made at the end of 2023, and that delivered good growth. I'll talk in a couple of slides time about the cross-sell opportunity. Still a fundamentally difficult market for us, but cross-sell of the BMP TAPPI products has gone very well.
Access Hardware continues to be a real strength for the business. 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. That continues to be the case. As with all regions, margins expanded through the year.
I think 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 deflationary environment. We've held onto pricing and managed to reduce cost pricing, which is a great achievement through the business.
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. Significant improvement. Again, never an easy program, ripping out the heart and soul of your transactional business.
They've gone well, making really good progress and delighted with the progress and the effort across both the program team and the business to have those go lives. Ultimately, all coming together with an improvement in our Net Promoter Score, again, showing good strong customer sentiment.
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. The uncertainty around elections definitely stalled the U.S. Again, you saw that in U.S. PMIs at the end of last year, which dipped below 50 again. As we come into 2025, those PMIs have gone north of 50 again. Fundamentally we're seeing that in our underlying business that I'll come into in a couple of moments' time.
We spoke this time last year about Chris joining the business. Chris can wave at the back. Chris joined just around a year ago, really put a lot more focus into the commercial execution of the business. 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.
Margin expansion through procurement and automation, which is fabulous. Ultimately, an improvement in net promoter score, similar to the one we saw in Europe. Good level of customer sentiment across the business. Finally, in Asia, we did see continued sequential growth. Remind 2/3 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 export of our Access Hardware business. This again is 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 into the Middle East as well. 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.
They are more independent of the European business in this case and self-manufacturing a particular line of products. Both of those things have helped drive margin forward. Fundamentally, another good improvement in our Net Promoter Score, again, across the whole region, in particular in China, driving at +6 .
Good year of progress in the Asia business. 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. 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.
That's the common thread across all of our product offer. 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. Our target customers again cover a number of interesting sectors.
I'll talk in 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. There is a good degree of overlap of customer needs across the product areas, and we're uniquely placed to be able to sell more than one of these categories to our customers.
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 as being 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 500,000 transactions flowing through the business, relatively low average order value, but selling these low cost and reasonably priced, inelastic products enables us to create a high mix business that generates high margins and generates high levels of cash conversion. It is very much a self-fulfilling business model enabling us to generate the cash.
Linked to our capital allocation policy, how do we then grow the business? How do we invest in the business for further growth? That is around further new product introductions, both organically and inorganically. It is about sustainability, the product offer, and we will talk in a moment about more, more in that space. It is around digitalizing the customer experience. Again, I will touch on that in a slide in a moment and driving our sales and marketing investments.
With those investments, effectively you are generating an even greater product proposition that attracts more customers, generates more cash, and the circle goes again. That is very much the fundamental of how the business model is working. Let us try and bring that product and customer opportunity to life a little bit. I will go into a little bit of an example here.
Our target customer is very much in this middle ground, and I will make reference to those. They are a little bit Goldilocks positioned. 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.
Digital infrastructure, obviously data centers are a huge investment right now. 5G network investments are significant. A typical application here is led by Access Hardware. We are selling an industrial hinge and lock onto a heating and ventilation application that's going to cool a data center. That's the typical type of world that we'll operate in. If we think about specialist vehicles, our protection products are probably our primary starting point in those conversations.
We sell a protection piece of equipment that is going in to protect parts of a tractor through a paint process. Effectively, we are selling protection items that stop paint going where the customer does not want it to go through a production process. That is quite an obvious entry into specialist vehicles for us. Energy transformation, anything to do with renewable energy, here a great example would be, often starting with electronics. We are selling a printed circuit board spacer into an EV charging unit.
That could often be the first time we see that opportunity, and we will start with that product. If you go into defense, again, our defense areas tend to be linked with things like armored vehicles. We could sell electrical grommets, electronic grommets into an armored vehicle manufacturer.
Finally, machine building, again, we're selling a lot of machine and automation components. Simple components, again, things like leveling feet. Selling a leveling feet into somebody who's making a machine is quite a common starting point for us. There can be different starting points depending on the end market. 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 within that piece of equipment, there's some cable that needs managing. There's a printed circuit board that needs protecting. There could be a grommet that's managing a cable entry in and out of that. You can see how we can then sell across the rest of the range into that application.
That case is true for all of those end markets. We start with one level of expertise and then our task is to cross-sell to the other areas of the range. Once we've won a piece of business, we're typically single source for that piece of business. 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.
Our underlying volumes do flow somewhat with PMI. 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 volumes our customers are making. That links into that industrial cycle. In particular for us, we have this very strong correlation with PMI in both Europe and the Americas.
This graph shows our underlying volume, so nothing to do with pricing or new business, purely the same old customers buying the same products that we've sold to them historically. 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. As we come into 2020, 2025, again, we're seeing that correlation continue, and an improvement in that underlying level of business. Now, the challenge with PMI is it is a sentiment-based survey. You know, 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 U.S., there is a likelihood U.S. PMIs are going to fall. 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. Underlying volumes will have this market association.
If we come behind that market and what we are doing to help drive and ensure we are 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. You know, we are delighted with the further improvements in employee engagement in what is a difficult market environment. You know, we have reduced headcount across the organization now for a couple of years.
It's not the easiest place at times, but the level of commitment of the people within the organization is outstanding. Again, a huge thank you to everybody who is working so hard to help us manage through this difficult market environment. That high level of engagement then is translating into our Net Promoter Score, up three globally from 40 - 43, now higher than we were in the pre-pandemic times, despite the uncertainties around the world.
2020 was a little bit of an exception. It was the point where anybody flying anything was going to get a very positive score because there was so much uncertainty. We are higher than we were in 2019, and 2019 was a previous record as well. Absolutely delighted with that level of customer satisfaction.
It is driven by service metrics in large parts and then customer service secondly. Again, holding onto a good level of OTIF and behind OTIF, our manufacturing lead times are at very good levels right now as well so o ur responsiveness is excellent. If you ask customers why they choose Essentra, again, reassuringly and linking with the strategy, that breadth of product offer is one of their key reasons for coming to us. We are uniquely placed there. 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. 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. We have two new programs underway, which we'll deliver this year. 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 in how customers respond to that as well.
Clearly, the biggest part of our investment is in the ERP space. Eight sites last year was a fantastic achievement, huge amount of effort across the organization, but great achievement. We have five further sites planned for this year. Cost last year GBP 9.6 million. We're expecting it to be in the GBP 6 million-GBP 8 million range this year.
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. That project's gone very well.
We're just now at the end of deployment and starting to get to benefits realization. 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've 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. That is very encouraging.
Generally, our task here is to try and increase the totality of the pie overall. Sustainability clearly is an important area for us. Again, 2/3 of our products are plastic by nature. We have now got 6,500 of those products now driven from sustainable raw materials. That is an increase of 25% over the prior year.
We put live last year the Centre of Excellence in Kidlington, which is there to test and trial more materials, with a little bit more focus than we'd had historically. 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 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 energy and carbon reduction programs continue. We've actually got to 49% reduction of our direct emissions since 2019. Our target, which was agreed and approved by SBTi, was to get to 50% by 2030. We are clearly going to exceed that. We continue to make some progress with the ESG ratings.
Sustainalytics probably being the one that most shareholders talk about. Again, great to see that's now come down to a medium level of risk. It took some time for us to articulate to Sustainalytics the shape of the new Essentra, and the reduction in risk associated with that. That's good progress as well.
Moving on to M&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 the broad range of customers we have. We continue to focus on a year three, 15% ROIC hurdle rate. We're paying 6×-9× EBITDA. It is our typical ballpark.
Most of our models, if not all of our models, will take two turns off that through synergies effectively. That is how we get to the returns metric. Active pipeline, actually probably more active at the start of the year than through much of last year. That is both our focus and view through this year.
Also, as with most of these conversations being bilateral, it is somewhat determined by the seller's appetite to sell. It normally has some sort of succession planning or retirement aspect. Long-term targets can come to the table at a point in time, which is not totally controllable. Good that there are a number of conversations underway right now. Again, we have a desire to make a transaction during the course of this year.
Again, we'll remain disciplined to make sure it's the right transaction for us. Just to recap on the last couple that we've done since becoming a standalone business. First of all, Wixroyd right at the end of 2022. Again, making good progress. This is a machine and automation component business. We've launched a broad range of products into the rest of the European business. They were very U.K.-focused . Our growth driver really is into the rest of the European business at this point.
We've won a chunk of business. We've got a strong pipeline that continues to develop as well. Very pleased with that. 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. 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 pick up the BMP product capabilities.
Therefore, we're actually seeing revenue ahead of Wixroyd and probably, probably ahead of our own expectations with GBP 400,000 being delivered last year in a very strong pipeline of opportunities coming through the business right now. Again, very pleased with that. Despite the market being tough, the synergy delivery is really strong in both cases.
As we step back and think about the market and the market growth and our strategic activities and focus, it's important with Rowan joining the business that we re-look at our midterm ambition and target. Having done this, and Rowan having spent some time understanding all the levers 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 what is different in those assumptions. Obviously, we have the starting point of 2024, which we've shared today. We know and in line with expectations, there are some downward pressures on margin this year. Geographical mix being the largest part of that.
Our expectation at this point in time is that Americas and Asia will grow more quickly than Europe. We have stronger margins in Europe, unfortunately. That will have 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. There was no variable compensation last year given the downgrade to expectations. There is a need to bring some of that back in.
Again, we're looking to offset that with further efficiencies through the year. 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 result of the ERP program, for example.
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. We will manage those carefully, with the efficiencies that we see as well. Beyond that, there is clearly a pricing opportunity that remains.
This year we have seen us holding price versus a reducing cost price. In a normal market environment, we are seeing us able to increase pricing beyond inflation and therefore see a positive impact of pricing through margin. There is the clear opportunity around operating leverage.
We are expecting to take market share. The broadening of our product offer, the synergies we are 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 have not seen anything like a normal market environment, but this is assuming a circa 2% return to an industrial production type level of growth, PMIs being more normal, and occasionally above 50%, for example. I guess what is 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. If the market does not grow and the market is more neutral for the coming period, acquisitions will be the way that we will be able to deliver the 18% margin. There is an optionality here, but clearly recognizing the market will have an impact, and we were not explicit around that two years ago.
I don't think anybody in the room was expecting quite the market conditions that we've, enjoyed would be the wrong word, but managed through in the last couple of years. 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.
Fantastic to be able to restate and reaffirm this with Rowan's support as well. Thinking about the outlook, how do we see the world right now? We're still focusing on market share and managing those areas within our control. We have this unique business model. 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 growth in less cyclical markets, those markets that we think have encouraging dynamics in the coming years, whilst also seeking the M&A opportunities to continue to further add to that product capability.
In terms of where we are now, 10-11 weeks into the year, we are started in line with expectations. I say the slight improvements in PMIs that we've witnessed clearly has given us that, that's a reasonable start to the year. We are not expecting a second- half recovery.
I think many organizations for the past two years have baked in a strong H2 recovery on the assumption markets have to turn at some point. At this point in time, we're assuming a fairly neutral market through the rest of the year. You know, probably a softer environment in Europe is our assumption, a slight improving environment in the Americas is our assumption, and continued recovery in APAC, but no great second- half improvement versus the first half run rate, which is a change in assumptions.
Again, you know, insanities continue to do the same thing. So baking in second half recovery did not 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, to be really strong at a regional level, continue to see the opportunity of pricing versus cost to, to maintain margins, but the impact of us expecting growth in our two lower margin regions to be stronger than the growth in Europe does see the, the downward pressure on overall group margins through that mix effect . That's it from me and from us. Let's move over to Q&A if we can. This way.
Thanks. Morning. It's James Beard from Deutsche Numis. Two questions, please. Firstly on working capital. So despite the, despite volumes declining in the second half of the year, there wasn't much in the way of any, if anything at all, of a working capital inflow in the second half. Could you explain why that was the case and what your expectations are for working capital in 2025?
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've seen in there in the last six months?
Yeah. Do you want to take working capital, and I'll take Turkey?
Yeah, sure. So working capital, yeah, we didn't see much movement 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. We didn't make as much of a dent in that as we were planning. Also on working capital, you know, in terms of the creditors aspect, there was a dropout of the variable comp element too.
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, you know, better customer experience, et cetera. Yeah, we'll be looking at that as we go through 2025. No explicit guidance on that at this point.
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 strong pressure, inflationary pressure on costs in Turkey. The Turkish business towards the end of the year did exactly what we expected in September. That was reassuring. There was no change to our expectation.
We have a great management team in Turkey and they actually reacted and found opportunities outside of Turkey, which somewhat offset the slowness in the domestic market. Since the start of the year, we have seen some improvement domestically. There has actually been a, well, up until this morning, there has 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 improve their competitiveness.
Inflation is dropping, so the cost pressure is reducing. It is normalizing a little. Again, it is certainly in line with our expectations at this point in time. I understand there is some political unrest in Turkey this morning. First of all, we are about an hour's drive outside Istanbul. From the safety of the site and our people, that shouldn't have any implications. Let's see what it does to the economies over the coming months.
The domestic Turkish business is less than half, probably 40% of our Turkish manufacturing sales, with the rest of it being exported predominantly to Middl e East and such markets and then into our intercompany flows. We'll manage through it. It's another opportunity for us to react and demonstrate our agility as a team. We'll see ho w that evolves in the coming days.
Thank you, Andrew Nussey from Peel Hunt. Again, a couple of questions. Just following on from James's 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 a normal state?
I'd say, I mean, we were at sort of 23% at this point. As I said, it is 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, but I'll be looking at it through the course of half one. Yeah.
Okay. Secondly, in terms of leverage, I think you said you'd be happy for it to tick up for the right sort of M&A deal. I mean, thoughts on what level you feel comfortable with that reaching in any particular period in a year?
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 help us to that path back to the 1.5 again is gonna be important. The reason I didn't put another number in there is 'cause 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.
Got it. Scott, just, if we subscribe to the view of more onshoring in the U.S. as a consequence of presidential change, how much capacity do you have in North America right now? Equally, your sort of competitive positioning to take advantage of that, please.
Yes. I mean, capacity wise, we have two large manufacturing sites in the U.S., 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 U.S. facilities and 70% capacity in Mexico. I think a natural following question w ill be whether Mexico will be likely subject to tariffs.
However, the cost of manufacturing in Mexico remains lower than the U.S., even with a tariff situation. Probably even more importantly, labor availability in the U.S. is still a very difficult thing to manage, and labor availability in Mexico is somewhat easier. My biggest concern with a capacity splurge coming back quickly would be finding labor, and our chance of doing that in Mexico is actually stronger. 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 U.S. sites would be, would be labor would be my big question, particularly in one of the two sites, which remains quite, quite challenging still. I guess this just leads into the inflationary implications of the tariff situation of U.S. labor inflation is likely to continue to be a feature for us.
Links that from a competitive point of view, it's really quite mixed. 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.
We are clearly going to be in a better position than those. 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. You know, generally a move to U.S. manufacturing away from interregional supply. We have a greater level of market share in the U.S.. It fundamentally should be a good thing for us, but that disruption and second- order events will not be a clear path, I suspect.
Great. Thank you.
Morning, Adrian from Panmure Liberum . Do you mind if I go back to the leverage debate or the discussion? Finish the year 1.3 × 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?
No, sorry. Average 1.5. No, no, we were, we ended at 1.3. There was, there's no average 1.5. That 1.5 is our target.
Okay.
To stay below. So no, we didn't.
Okay. Apologies for that.
Yeah.
What is, okay, I'll perhaps ask it in a slightly different way. What kind of spread would you see through the year in terms of movements?
It's fairly consistent. I mean, it obviously we get, 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. Of course, when we do an acquisition and depending on the terms and exactly how that is set up, that has an impact too. This past year it has been pretty steady for the year .
I mean, I think if we think forward into being a pure play components business and the noise of the prior transactions behind us, then there is very little flow. We cash generated every month. We are then paying down debt. We are spending some CapEx that is never millions. We are a fairly boring business from that point of view.
Acquisitions will be the only thing, you know, 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, it's a little bit unexciting, which is how we like it.
Nothing wrong with that.
No, exactly.
Very good.
Hi, Ratna from Santander. 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?
Yeah, certainly the move so far, the products that we've launched to market have been based on recycled contents, 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, recycled content as a post-industrial and post-consumer, and we continue to try these things out, but generally very little, no quality impairments. Pricing has been broadly the same from a cost price point of view.
It's likely as recycling processes become more, grow scale, that the price of recycled content will fall a little. 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 virgin nylon .
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. 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. We've proven we can process them. We can prove we can process them in our normal cycle times, which is really interesting. The nature of the product that you're producing has different characteristics.
Fundamentally, from the seaweed-based materials we've been doing, it's less flexible. It will work very well in some applications and work less well in other applications. Again, it's about understanding if there's a clear customer demand for that so we have a way to resolve it. 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.
We're learning a lot. We're probably as advanced in our space as anybody, but we are. We will continue to learn and be ready. We can help customers across this spectrum and do the right thing, which is very much an employee engagement drive for us as well.
Morning, 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, distributions up 7% and end users down 7%. Also in the offer, I think standard products are up 6%, custom up 4%, and configured product down 10%. Is that strategy, is that regional mix? Just trying to understand what is going on there.
Yeah, the distributors are a normalization effect. If we look at prior year, you saw distributors destocking and that was an issue for us to manage through most of 2023. That is a normalization. If you look at our distributor sales, they are broadly in line with end customers now, but they have stopped going backwards because they are holding a stock position. That is not strategic. It is more of a market dynamic.
On the configured versus custom, I will have to go and check because that feels a little bit quirky. It is certainly not a strategic choice. We generally are standard and configured where we play, it is where we excel. 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. I can't think of a strategic choice that's driven that in a different direction, to be honest.
Okay. Thank you. C ompletely unrelated on ERP, you've given some fairly explicit guidance for this year in terms of number of site and costs. Can you just remind us sort of when, when the, if you ever get to the end of that process?
We will get to the end. The end is in sight. 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 focus on. We'll also do the BMP acquisition, but that's effectively scope creep and we'll manage that through the internal teams. The Turkish site will be the site that carries on into 2026. I think as we get to the half year, we'll firm up exactly our expectations of go live and guidance.
From that point onwards, we effectively are creating a BAU run team for the ERP. Sam's team are putting this up right now. We'll have the capability within the team to run what we have and also deploy to any further acquisitions that we make as well, and one or two of the Asian markets. It will continue in a smaller scale. It won't continue as an adjusting item from some point in the middle of next year.
Okay. Thank you.
We do have a few from the webcast. Firstly, are there any other geographies that you'd like to expand into?
Yeah. 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. Whilst the Mexican economy is bouncing around a little bit currently on the basis of U.S. trade policy, Mexico is still a great opportunity for us. We have the big manufacturing capability there. We have a little bit of domestic business, but we're investing in that sales team. Chris, Rowan, and I were all there at the end of last year talking about that opportunity.
India is the second. Again, we have an Indian business, in Richard's World. It's relatively small, but doing very nicely, growing very well. We, because we're not manufacturing in India and India has quite protective trade policies, we lose out at some point to volume. 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. India's a market that we'd like to do more in. We are doing very well there. The team are doing very well, growing the business. We think there's a look, an even bigger opportunity. The Middle East is the final area.
A gain, 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 China and Turkish access hardware businesses selling into what effectively is infrastructure investment in Saudi. We are looking at the options for market entry in Saudi to take that opportunity even further. They are the three geographies that are currently active in terms of our sort of acceleration thoughts.
Thank you. Just on Turkey, the Turkish lira has devalued since the January trading update. If this holds, is it sufficient to catalyze a turnaround in the Turkish access hardware business a nd is this an upside opportunity?
It has devalued about 7%, weaker than it was, which is helpful. We are seeing a sort of continual gradual recovery of that Turkish domestic business. To be clear, the access hardware business in aggregate continues to grow. Whilst the second half of last year was below our expectations, we're still delivering growth, which is important. We expected the Turkish lira to devalue somewhat during the course of this year. It's not really an upside versus our expectations, but it's very much in line with our expectations at this point in time.
Thank you. Another one, please. Can you confirm the guidance for adjusting items in 2025?
Rowan.
Yes, I can. What I said when I was on the slide there was a circa GBP 10 million adjusting items. Mainly driven by the ERP as we've covered.
Great. It looks like this might be the final one. How do you perceive company valuation?
It's an opportunity. Yeah. Yeah. Clearly.
I t'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. Hopefully, we can continue to do the right things, drive the business in the right direction, and the value will recognize that.
Thanks, Scott. If there's nothing else in the room, I'll hand back to you for closing remarks.
Okay. 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 have a clear projection. The business is an excellent business fundamentally, generating good levels of returns, opportunities 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. We just can't control what happens externally, but we will be in good shape and we'll react in the right way accordingly.
Thank you.
Thank you all.