Earnings Call: H1 2021

Feb 23, 2021

Good morning, and welcome to the MacBryde Interim Results Presentation for the 6 months ending December 2020. I'd first like to welcome Mark Strickland, our new CFO to his first results briefing. I'm delighted to have Mark on board. Made a great start and already making an impact in the business. I would like to also to express my thanks to Clive Jennings, who acted as our interim CFO for his excellent contribution during his 6 months with us. It's worth mentioning that this will be the last results review that we will do on this current regional segmental basis. From our prelims in September, we will move to reporting in our new divisional segments and you'll hear more about the shape of the group and the way we will present it going forward at the Capital Markets Day later. Next slide please, Slide 1. So by way of agenda, I will cover the headlines and a brief update on the commercial situation the business experienced in the past 6 months before Mark gives you the financial update. I will then report on some good progress in our key business initiatives and finish with an outlook statement before Q and A. Next slide please, Slide 2. Moving on to our headlines. It is very pleasing to be reporting such an improved performance in the 1st 6 months in spite of the challenging environment around us from both COVID and Brexit planning, while also delivering to schedule our Compass objectives. The first half year strong profit improvement has been a result of higher revenues and improved gross margins. We saw a strong performance in our contract manufacturing business offset by lower private label, mostly a result of the ending of 2 large contracts. We have continued to see similar category performances across our European markets as witnessed in the 1st period of lockdown with strong sales to dishwash and surface cleaners, but laundry demand weaker. These trends being a continuation of the impact on our changed personal lives as a result of COVID restrictions. We have seen slightly softer prices across a range of our raw materials early in the period, improving our gross margins, although feedstocks have started to rise to the back end of the period and have continued rising early into the New Year. We had a very positive, effective and resilient response to the COVID-nineteen challenges thrown at us during the period, whether that related to demand uncertainty, service recovery, absenteeism and employee welfare, we have seen no significant production or business disruption throughout the period. Our customer service levels have improved steadily through the 6 months recovering from their weak start to the year after our inventory levels were heavily reduced as part of the first wave panic buying. And it's great to see that as we exit the year, our service in the 90% to 95% range. We have continued apace with our key business opportunities such as our logistics savings project, the new factory in Malaysia and the closure of the Barrow factory. In financial terms, our strong 6 months saw revenues 1.7% higher, adjusted PBT was up 74% and adjusted EPS rose 92%. We are announcing later today further details on our new dividend policy, while our intention is to move to an annual dividend declaration, and therefore, there will be no interim dividend at this stage. Our debt cover ratio on an IFRS 16 basis ended the period at 2.2 times on an accounting basis and 1.1 times on the banking basis. Alongside all of this, it is fantastic that we completed all our strategy preparation, organization design and recruitment and transitioned on time on January 1 to our new divisional structures. After only 7 weeks, it is really encouraging to see the early signs of the positive impact these new teams will have on the group and the way we run the company. Of course, you can see more of this later this afternoon on Program Compass, should you be able to join us for our Capital Markets Day presentation at 1:30 p. M. Next slide, please, and actually moving on to Slide 4. Here, we have some further analysis of our first half revenue performance, and it can be demonstrated on these two charts. For clarity, the right hand chart is the total revenue change for the group by segment and therefore you can see household Europe with $2,200,000 Asia $1,500,000 and aerosols 2,500,000 contributing to our total growth of €6,200,000 The left hand chart demonstrates the category performance for the European business only and therefore only adds to the €2,200,000 that you saw on the right hand chart. We have seen a strong performance in our contracts business, up 24% in the period. As forecast, we saw 2 large supply contracts with retailers in the UK and Germany end during the period, with the remainder of our private label slightly higher overall. Both the contract losses were examples of why the change to a product based divisional approach is so important and will reduce the risk of such contract changes in the future since our technology offer in both cases was too slow to respond to the competitive threat. If you look at our category performance, we continue to see the impact of COVID-nineteen in our numbers, as I discussed earlier, with auto dishwasher showing 11% growth, cleaners 10.3% higher, whilst our laundry volumes continue to suffer as a result of people being more at home with revenues down over 12%. Within the regions, the UK had a difficult period with net contract wins and losses of more than 10%, masked by an underlying revenue growth in line with market averages on our main contract. Our North South regions had strong periods of revenue growth driven mostly by contract manufacturing with both global and regional contract supplies. And for our East region, which is primarily Germany, we saw good underlying growth net of the contract mentioned before. The Asia business continued its recent trends with 12% growth in the period, predominantly from Malaysia and Australia. And the aerosol business grew, thanks to higher revenues from our sanitizing range, which ended 15% higher as a division than the previous year. Next slide please, Slide 5. Now to a short update on some market trends and the impacts on McBride. We have seen that brand market share has remained higher over the past 6 months, continuing the trend that we saw in the 1st wave. Depending on category, for the most part, volumes have grown less than the total value. Hence, average prices have been higher, in part probably from fewer promotions. Retailer shares have changed in various markets from the changed shopper behavior resulting from different restriction levels. In the UK, we have seen the big four power ahead with discounters and convenience lower. In France, the hypermarkets have seen share continue to fall in favor of the supermarkets and little have also gained in France in the past year. In Germany, the one stop shopping concept has been impacting the drugstores with more general grocers faring better. Online has seen dramatic increases in penetration and any retailer without an online offer has been left behind. In the UK, online groceries rose to 15% share in the last 6 months of the year, double the level of the comparative period in 2019. This trend is also evident across most of our main markets, such as Germany and France, to similar levels. This has clearly mostly favored those retailers and especially some of the discounters, who for the most part have no online presence. In category terms, we have seen similar patterns across our different European regions with laundry weakness offset by stronger dish and disinfecting products. Our sanitizing products in aerosol saw lower sales this first half compared to the second half of last year as volume settled after initial stock up purchases from customers in the first wave. Like us, many suppliers to retailers would have been extremely busy during this period and coping with all the challenges that COVID has thrown at them. However, in some markets, the push by many retailers to price match or even force lower prices to gain share will be starting to have an impact on margins with our weaker competitors, especially in Germany and Spain. As you can see on the table on this page, if we strip out the impact of key gains and losses from our regional performance, we've demonstrated our ongoing business has performed at market growth levels or higher, especially in Germany. Next slide, please. Slide 6. As mentioned earlier, it is extremely encouraging to see the good progress that we're making in contract manufacturing with first half growth of nearly 24% in this channel, mostly coming from a laundry capsules gain and higher demand on running contracts on auto addition cleaners, where the influence of COVID-nineteen has been similar to that seen in our private label volumes. The contracts business now accounts for just over 16% of our total household sales, up from 13% last year and up from the 8% we started at about 5 years ago. As you can see from the chart, the share with multinationals continues to grow and it now accounts for 80% of our total contracts business. So with that, I'm now going to hand over to Mark and to move on to Page 7, please. So Slide 7, financial results. Good morning, ladies and gentlemen. Before I begin on the financial results, just a quick introduction to myself. I've been a CFO for over 25 years and with a varied background ranging from chemicals through own label and contract manufacturing in the food industry to logistics and consumer services. I joined McBride 7 weeks ago and I'm absolutely delighted to be joining Chris and the team at this time. From my viewpoint, the business has great foundations and as you will see this afternoon is really well placed to benefit from a great number of opportunities as the sector develops and evolves over the next few years. Anyway, enough about myself, now turning to the half year to December 2020. Slide 8 financial headlines. The first half of financial year twenty twenty one saw the group both deliver strong performance whilst at the same time continuing to show its resilience and adaptability to the many and varied challenges of the COVID-nineteen pandemic. Consequently, group revenues at $362,900,000 were up 1.7% in constant currency, reflecting continued strong demand for cleaning products due to the COVID-nineteen pandemic. This drove a significantly improved performance with adjusted operating profit of £19,000,000 up £7,400,000 on the half year to 31 December, 2019. And the resulted adjusted profits before tax of £16,900,000 was £7,200,000 or 74 percent up on 2019. Earnings per share came in at 7.1p. On the 2nd November 2020, the company announced that it would commence a share buyback program. And as of the 31st December, the group had purchased and canceled 2,100,000 ordinary shares at a cost of £1,500,000 which equates to an average acquisition price of 68.4p per share. As Chris indicated, the company is moving to a policy of annual dividends. Therefore, no interim dividend is proposed and I will return to this point later in this presentation. Cash flow generation continues to be strong despite a working capital increase of $12,800,000 to $50,500,000 As signposted at the final results presentation last year, working capital levels at June 2020 benefited from a one off upside relating to the consequences of exceptionally high demand in March 2020 and the subsequent rebuilding of inventory. The December 2020 working capital ratio has now returned to more normalized levels. And partially as a result of this net debt on an accounting basis, including IFRS 16, saw an increase of $16,100,000 to $117,600,000 Moving now on to Slide 9, revenue development. As stated earlier, revenue at constant currency was up by 1.7%. Chris bridged the revenue movements earlier and covered and I covered a number of the points on the previous slide. So I would just highlight the strong revenue growth in both Asia, which is up 12.6%, which was driven by the Australian and Malaysian markets and aerosols up 15.3% driven by sales of sanitizing products, which were launched in the second half of financial year twenty twenty. I'd also highlight the changing geographical mix of revenues within the European household business where the UK has reduced to 21.5 percent of the Household Business, the North has increased to 18.4% and the South has increased to 14.8%. Moving on to Slide 10, operating profit development. Overall EBITDA was significantly up being due to the increase in sales, a favorable product mix combined with the slight softening of certain raw material and packaging input costs. That said, we expect the currently high feedstock prices to flow through to a number of our raw materials, weakening gross margins into the second half of the financial year. In terms of segmentation, obviously, household drove the increased EBITA improvement growing $5,900,000 year on year, but it is also pleasing to note the continued recovery of our aerosols business. Corporate costs reduced year on year due to less travel and training, which is COVID-nineteen related and the number of vacancies remaining unfilled. Finally, as Chris has said, it is worth noting that this is the final time that we will present the business in this way. And in this afternoon's capital markets presentations, we will take you through how we will view and report the segmentation of the business going forward. Looking at Slide 11, income statement. Continuing operations saw an improvement in gross margin to 35.7%, up 0.5 percent versus half two twenty nineteen-twenty twenty driven by mix, input costs and volumes. Distribution costs have been relatively stable when compared to last year and this in turn has led to a return on sales percentage increase to 5.2%. Whilst administrative overheads before exceptional items and amortization increased by $2,100,000 at constant currency, primarily as a result of a year on year change in incentive accrual levels, overheads as a percentage of gross profit actually fell to 85.4% from 86.8% as this measure excludes the aforementioned incentive payments. Year on year finance costs were $200,000 higher as the prior year benefited from foreign exchange currency revaluations. The effective tax rate in the first half of the year is 23% due to the release of a provision following the settlement of a tax inquiry, which is treated as a discrete item in half 1. The effective tax rate for the full year is expected to be 28%. Onto Slide 12, balance sheet and cash flow. Return on capital employed increased from 15.6 percent to 19.3 percent, mainly as a result of the increase in adjusted operating profit. Cash flow from operations before exceptional items was 14,200,000 dollars It should also be noted that the business has taken advantage of the government's deferred VAT scheme and as at half year end had £3,900,000 which will be paid across by 31st March 2022. Net debt including IFRS 16 was $117,600,000 against $101,500,000 as at June 2020. The increase being to the large cash outflow in relation to trade payables as earlier and additional lease liabilities of GBP 5,700,000 mostly in relation to our new Asian facility. On an accounting basis, our net debt to EBITDA ratio was 2.2 times versus 2.1 times at June 2020, whilst on a banking basis, in other words, the basis upon which our banking covenant is measured, the net debt to EBITDA ratio was 1.1 times, which is significantly below our banking covenant of 3 times. As of 31st December, we had €93,800,000 undrawn against our €175,000,000 RCF that is committed to June 2022. It is worth saying that the group is now engaging with our existing lenders and a number of potential new lenders to refinance this existing facility. During the year, capital expenditure increased to $13,400,000 in cash terms. Full year CapEx is expected to be circa $28,000,000 which is higher than previous years. In both cases, this increase is primarily due to expenditure upon plants and machinery in the new factory in Malaysia, which will be fully operational April, plus the purchase of assets from a German business that went into liquidation. On to Slide 13 of the financials. Exceptional items of £2,400,000 were recorded during the period of which £200,000 was incurred in respect of discontinued operations. The $2,200,000 charges in respect of continuing operations comprised of $1,700,000 relating to program Compass, £400,000 in respect to the one off legacy costs relating to the former aerosol site in Hull and £100,000 relating to closure costs for the Barrow production facility, which ceased operations in October 2020. Going forward, as I indicated earlier, the Board intend moving to a single annual total dividend to be communicated at the time of the annual results. Therefore, there is no interim dividend. Additionally, as part of the group's strategy reset and also taking into account these times of global uncertainty, the group will now be targeting an accounting basis debt to EBITDA ratio of less than 2 times. Going forward, our new distribution approach, which will more fully be communicated as part of our capital market presentation, will link dividend distribution to this debt cover measure. Moving on to pensions. As of 31st December, the group recognized deficit on its UK scheme of $29,500,000 which compares to 30th June deficit of 28,400,000 dollars The move to a cash flow driven investment strategy was completed pre COVID and has delivered on the expectation of reduced volatility in the reported deficit. Despite this, the net increase in deficit is £1,100,000 over the period as a lower discount rate meant the pension liabilities increased more than the increase in asset returns and deficit contributions paid by the group. It is also worth noting that the process for undertaking the UK pension fund triannual valuation as at 31st March 2021 kicks off shortly and we are aiming to complete the process by the 31st December 2021. Finally, for me, moving on to Slide 14, costs update. As stated, the slight softening of certain raw material and packaging prices observed in the second half of the last financial year continued into the first half of FY twenty twenty one. That said prices of certain key stocks key feedstocks have increased significantly through November December with most ending 2020 above pre lockdown levels. Coconut oil and palm kernel oil ended the half year at the highest level since late 2017 and have continued their upward trajectory into the early part of the second half of this financial year. Further price fluctuations on other direct inputs were experienced due to supply and demand imbalances, though these have proved not to be material overall. The ocean freight market has seen significant increases through our first half year as availability has become a growing global issue and it is something that we continue to monitor closely. The large on cost for recycled plastics versus virgin plastics also remains. Distribution costs overall have remained relatively stable compared to last year, despite the ongoing challenges arising from the COVID-nineteen pandemic. Finally, it's worth noting that we are seeing some cost inflation as a consequence of Brexit and its impact on the UK and EU supply lines, in particular costs arising from the associated administrative changes and certain packaging requirements. Thank you. And I'll now hand you back to Chris, who will cover our key actions and activities. Thank you, Mark. If we can move please on to Slide 16. In September last year, we published our 2025 product sustainability targets as part of our commitment to delivering initiatives all aimed at reducing the impact on the environment of the products that we supply. This is the 1st major commitment as part of our new ESG ambition, more of which we will talk about at the Capital Markets Day later. In September, we outlined a series of specific product sustainability targets grouped under 3 pillars of plastic reduction, responsible sourcing and increased levels of compaction and therefore lower chemical use. Whilst we will report more fully at finals time, it is pleasing to note we continue to make good progress against these targets and I pulled out some examples as a demonstration of that. Plasti bottles are the most prominent challenge for us, and our aim is that we will supply sorry, our aim was by 2025, we will supply on average more than 50% PCR content across all our bottles. The amounts of PCR per bottle, of course, varies, but we are making progress. And today, 65% of our PET bottles include some PCR content, up from 50% of the bottles this time last year. In addition, we now have 6 of our 7 liquid sites able to produce bottles with 100% PCR content following machine upgrades and modifications. Additionally, we are aiming for all our plastic packaging to be 100% fully recyclable and at over 99% today we are progressing well. Currently, 75% of our paperboard is from FSC approved suppliers and our plans to remove PVC from all packaging should be delivered during 2022. Our drive to eliminate mixed layer plastics, which are difficult to recycle, has been made easier now with all our unit dosing sites able to produce single layer plastic die packs. Internally, our technical team continues to endeavor that every new product we develop should deliver a more sustainable footprint when compared to the product that it replaces. Slide 17, please. By way of an update on some of our key initiatives, we continue to make great progress despite the distractions mentioned earlier and the general busyness of our teams. The Barrow facility, which was a laundry powder and auto dish factory, closed in the autumn of last year and its production transferred to our French powder factory and the Luxembourg dishwash factory. This whole project has been handled extremely professionally with no major challenges or disruption with any site clearance at Barrow left to complete. The benefits to our Powder business will be significant with the savings from fixed costs and overheads already visible this year and into the next year. Our capacity expansion in Malaysia, which will see us operating from a brand new facility near Kuala Lumpur, is progressing well despite challenges from movement control orders in Malaysia. The factory construction and preparation has been completed to schedule in January. However, small delays due to COVID efficiency and local government now means we'll be transferring through March and the factory will be fully operational from April. This is a significant step for the business and allows us now to progress with plans to expand our household operations in the region and grow further our personal care volumes. The new factory will allow us to produce in excess of 3 times the current quantities of our previous facility. We have 2 significant logistics projects underway, both of which will realize significant savings in the order of approximately 10% of our logistics costs. The first project is to do with warehouse operations, which will see us move from 22 to 14 locations over the next couple of years and has already now started with the 1st warehouse in France closing this month and the restructure of the supply to the German market with the consolidation to a single location in the northern German area during March this year. The second part the second project relates to our transport management and transport planning, where we will be moving to an outsourced arrangement, which will start up in quarter 4 and where we expect to see primary truck costs transport costs reduced from improved truck fill, cheaper truck lanes, less mileage and more reliable hauliers. Slide 18, please. The aerosols business has continued under its new standalone management to push ahead with significant number of product developments, especially in the sanitizer range, including such items as one stop dispensing, allowing a whole can to be dispensed from a single press of the actuator for use in things such as meeting rooms, taxis, classrooms, etcetera. We completed the installation of a new filling line acquired at the end of last year to provide more capacity for sanitizing products, and we've seen good performance this first half year with sales growth of 15%. During the period, we've installed 3 of our 4 liquid production lines that were acquired from a former competitor that liquidated during last financial year. This £4,000,000 asset deal brings significant capacity increases for our liquid production operations. The demise of the competitor was another demonstration of the challenge faced by some of our German competition, where the drive for unsustainably lower prices ultimately removes suppliers and eliminates local stable supply bases. We have continued to invest in capital through this period with our strategy in mind and we continue to see a format capability improvements in both dish and laundry now being installed to provide improved variety in product and packaging formats for our customers. Moving now please on to the last slide, Slide 20. We are keeping our full year's earnings outlook in line with our December trading statement. We continue to see quite some variability in order patterns and stock levels at customers. We see this across most categories and regions, and our teams continue to work hard to ensure we keep pace and maintain strong service levels. As anticipated, we expect to see higher feedstock prices feed through into our gross margins in the second half and our new teams are already working on the mitigation ideas and options. As COVID restrictions start to relax, we are already looking at potential medium term impact on volumes and categories. Whilst not likely to have significant impact this financial year, preparation for next year is crucial to ensure that we are ready. We remain vigilant on continuing our efforts to minimize the impact of COVID on our business activities and, of course, on our colleagues. Late in 2020, we have launched our McBride Cares program focused on supporting our colleagues' well-being and other matters affecting home and work life. And finally, our new organization and our new divisional structure is now live and the new teams completing the transition from our old ways of working. I am so encouraged by what I can see already 7 weeks after we started with evidence improvement of focus, accountability and pace. Thank you for your attention. And we'll now hand back to the operator for questions. The first question comes from Charles Hall from Peel Hunt. Charles, please go ahead. Good morning, everyone. A couple of questions, please. Chris, you mentioned the loss of 2 larger contracts was down to being too slow to respond to technology changes. Can you give a little bit more detail on those technology changes and why you were too slow and why that will be addressed with the new format? And secondly, on the shift to online, how do you see that playing out for MacBride? Charles, thank you. Yes, so the 2 contracts, they were quite both laundry contracts. 1 was a capsules contract, 1 was a powders contract. I think it's fair to say we and you'll see a bit this afternoon, our capsules is an extremely fast moving category where formats and packaging as that product develops in the market. And it's fair to say, I think, with our generous approach before, we're behind we are behind the ball in a number of cases in different markets in the formats that are now required. And I think we did not have time to react and respond to a new competitor or a competitor with an emerging new format and a new packaging concept that we were unable to match at the time. And I think and the same similar true within powders, slightly different issue, more about compaction there. But again, the lack of, if you like, focus and attention at the front end on products that are changing more rapidly, which tend to be in unit dosing, as you'll see later, has definitely led to us being a little bit behind and we have to catch up. And the new structures and the new way we're working, and you can see it already, will be far more expensive and far pacier. And we need to go back to leading that sector. And that was the reason we lost that contract. And I think we can win it back, of course. I think it's fair to say on the online, I think whilst we I think the numbers I've seen demonstrate that whilst we've seen some of that 16% of grocery moving online, only about half of that in terms of our household products has moved online. So whilst food has moved heavily online, household has moved less aggressively online, if you like. Still higher, of course, but it's not the same. I think the penetration is half that level. Certainly in the U. K, that's the statistics I've seen. And our product formats are working fine in that environment. I mean, at the moment, a lot of these companies are shelf picking. We're not needing specific formats, but it is something we're alert to. We have created products that we continue to offer online, particularly unit dosing through special brands. We offer the small product, as we've explained before. We supply that to our customer there. And we've seen some more interest from people like Amazon in formats that work well on an online premise. So I think at the moment, we're not seeing significant change other than making it as efficient as we can for our retail customers to be able to select the products either on shelf from the warehouse, but the format changes are not necessarily coming through at this stage. The next question comes from Nicola Mallard from Investec. Nicola, your line is open. Hi, good morning. A couple of questions, if I may. You've talked about feedstock prices rising and now sort of sitting above pre COVID levels. I just wondered what is there a sort of a move in place to start to look to recover some of those through price? And the other question was around Asia in terms of the new facility there. Can you give us a bit more background in terms of the capability of the products that you can manufacture over in Asia? I mean, you mentioned Personal Care, but you also said there's a big increase in capacity available. So just wondering what else you could be looking to sell in that part of the world. Thank you. Thanks, Nicola. Good morning. So I think in terms of the first question on feedstocks, I think at the moment, yes, we are doing early interventions in terms of any new prices that we might be quoting in the market, taking into consideration the direction of travel we see by the time any new tenders that we're launching at the moment would hit the market, which could be 6 to 9 months away. So we already take that, of course, into account in our pricing. At the moment, we are not moving to wholesale actions on price increases across the business. I think it's around the new structure of the business. We will be looking in a very different way at how we might target pricing or cost initiatives within products to recover that margin. But at the moment, we're not planning wholesale price increases. We will look to recover in different ways like we always do with the lag that we would normally expect. So that's the first question. The second question on Asia. So today, the business is primarily a personal care and skincare business. The products range, the normal range is, I would say, from liquid products, predominantly liquid products, sorry. So we're talking bath foams, shower gels, shampoos through to creams and gels and so forth. That we will create a huge amount more capacity in those product ranges just by extending our production filling lines into the new space that we've got. We will look to be installing shortly household production lines again for liquid products where we look to expand some fairly basic stuff at this stage, things like wash up liquid and general cleaners and laundry liquids will be the further stage. So I think we'll be transferring, and you'll hear a bit more this afternoon, transferring technology and using utilizing the European platform in innovation and technology to support the ambition there. The installation of these lines and the transfer of this technology, we do not consider to be overly technical or exceptionally difficult to do. We manage it pretty well in Europe. And the facility that we've got will provide the space and the both the mixing, filling and packing for significant expansion in household. Again, you'll hear a bit more on that this afternoon. Okay. Thank you. The next question comes from Martin Deboo from Jefferies. Martin, your line is open. Yes. Chris and Marc, hello. It's Martin Deboo, Jefferies. Similar question to Nicolas' first one, just clearly the issue into H2 is rising inputs. Just to push you a bit harder on it, what sort of commodity basket inflation across the business you expect to see in H2? Just to give us a sense of how much of a challenge it presents. And just remind me around the mitigations, do you have any sort of formula pricing arrangements in place with customers to cover commodity inflation? Or do you just have to go out and negotiate it? So, good morning, Martin. So, look, in terms of rising inputs, we don't typically quote, but we are seeing I mean, the feedstock rises have happened late in 2020 and early and are continuing at the moment in 2021. I think our predictions on are typically based on feedstocks rather than obviously any direct derivative forecasts. We're obviously relying on historic trends between feedstocks and derivatives. And it's fair to say some of that has moved around a bit through the pandemic as demand has been much more influential than pure feedstocks. But we think the impact on our index is going to be upwards of somewhere between 1% 2% by the end of the year, Not throughout the whole period, it will rise progressively through the period, potentially exiting around that level at the back end. And again, very subject to the way demand moves and I think the feedstock is a bit more predictable or a bit more visible, but it's the impact downstream on ethylene and other derivatives. And then look at the pricing mechanism point. As we've said many times before, virtually all our retail businesses is not on a pass through arrangement. That's the way the industry works. And we take the rough and the smooth and we mitigate as best we can in between cycles. The good news is though, of course, with our increasing contract percentage that you've seen in the numbers, those are typically on pass throughs. So we have price adjustment arrangements with our contract customers that mean that the burden of material changes is taken by the customer on our retail business and it's up to 15% of the group today. So a rise in contract manufacturing helps mitigate that. We will also look going forward at hedging mechanisms, see what hedging mechanisms we could do perhaps against some of the raw material feedstocks and look at some of our contract constructs that we can change going forward. Okay. Thank you for that, gentlemen. Thank you. We have another follow-up question from Charles Hall from Peel Hunt. Charles, your line is open. Thanks. Chris, you mentioned that service levels ranging 90% to 95%. And obviously, it's been a pretty difficult period with COVID restrictions in a number of facilities. Are you now finding that you're getting more consistent service levels coming out? And where do you need to get them to be confident that you're going to be retaining business going forward? Yes. Thanks, Charles. Again, you're absolutely right. It's been a huge priority for us. Of course, it's so important. And COVID has made it a challenge. I think a couple of points. I'd say, first of all, I think our recovery from the sort of May April, May June time where our stocks were decimated after the first wave of panic buying and we saw inventory drop something like 40% in that period. And with factories that are very full, it takes almost full completely already in liquid products, for example, in cleaners and so forth. It takes quite some time to rebuild the inventories and inventories are a key part of us maintaining our service position. So we steadily built those inventories back. And I would say we pretty much most sites were back fairly quickly, 3 months or so, 3 or 4 months. But we have seen a number of locations that have struggled more and we have put in additional measures and additional, if you like, interventions to really prioritize customers in the right way to make sure that we approach our customer base in the most positive and constructive way we can. I think that we've been since the end of December, we've been consistently around the 95%. We are heavily focused on maintaining that. I think the challenge a little bit is sporadic order volumes and inconsistent order volumes that just push and test us a little bit in terms of our inventory and our production prioritization. But we think we've got some really good processes going on, on the 2 factors in particular that we're struggling. Both of those are back up now where they're getting towards where they need to be and particularly one is back up in the 90s, which pulled our average down if you like. But yes, look, I think we can keep our service levels high. It's highly it's a key feature of the new divisional setup. And if you look at our divisional setup, you'll find that unit dosing and powders, aerosols in Asia have service levels always up in the 95%. It's predominantly our liquids plants, which are the ones that have been the busiest, I would say, in liquids in the last 6 to 9 months. So a key focus in the divisional position will be to keep that service level high. Those teams are accountable for it. It's their factories and their production forecasting and planning and then being embedded in their industry with their customers will keep it front and center for those teams as a key metric going forward. And look, I think it go back to the point around how do you best recover input prices, how do you best mitigate contract wins and losses is to be absolutely 1st class in service and that's a high priority for the business. I think one observation sort of coming into the business from outside is actually how we measure customer service levels. So there's 2 ways you can measure customer service levels. 1 is on original order and 1 is on agreed supply. So let's say a supermarket initial order was 100 and we agreed to supply 95 today and 5 next week. Our service level, the way we measure it would be 95. The way service level is measured elsewhere in food industries, etcetera, the service level would have been 100% because we agreed we would supply 95% and we supplied 95%. So I think also we need to look at we perhaps overly criticize ourselves on service levels when perhaps if we measured it on agreed order, our service levels would be higher than just on the planned initial order. And that's just an observation as I joining the business. Interesting. And the recent issues with Brexit and transport between the UK and Europe and also supply chain from Asia, have those had a material impact on service levels or is that being just cope to end of the payment? No, no material impact. The things that the business is dealing with and in fact sort of Brexit is becoming very much business as usual with perhaps a raised level of admin and vigilance around making sure that goods do cross the borders in a timely fashion. Yes. The Asia freight issue, I mean, it doesn't really affect our Asia. It has affected our Asia business a little bit because we obviously transport things like auto dish capsules out to Australia from Europe. We have had some increased costs relating to that. But I think it's bigger where we do buy components from China, we have seen significant rises in both freight rates, but also actually premiums on things like the triggers because there is a worldwide shortage, I believe, for not of triggers, the things that are on the spray bottle. And so getting hold of additional triggers, which has, of course, been very popular through COVID for surface cleaning has given us some increased cost, but has not affected service. Our teams have done a great job managing in that situation. Great. Thanks for that. The next question comes from Damian MacNeil from Numis. Damian, your line is open. Okay. Hey, good morning guys. Thank you very much for taking the questions. A few short ones hopefully. 200 basis points of gross margin improvement, you've indicated that it's split between mix, input costs and volumes. Is there anything is it spread evenly or is there any one of those things that's sort of the bigger driver would be the first question? No, it is and answer it is broadly spread evenly across those 3. Okay, that's great. Thanks, Mark. On the you sort of indicated that you're seeking to refinance the debt. I'm just wondering, I don't want to prejudice your discussions with the banks, but should we be expecting cost savings to rise from that or not? Or is that just really just extending out the facility the next I think it's an interesting banking environment, given the sort of COVID situation, but also I think rates have gone up in the markets generally. And also banks have been offering shorter term. So increasingly going for 3 plus 1 plus 1 and 4 plus 1. We would hope that given the business, its robust performance through this period and also the sort of defensive nature of the business and its cash flow characteristics that we will it will be a relatively straightforward, almost rollover the facility. And we are aiming to try and get a 5 year facility. What do we do is a moot point. And I would hope that we'll get quite good rates, as I say, given our credentials. Having said that, as I said, the banking world is somewhat changed over the last 18 months and certainly changed since the last refinancing 4 years ago. But I'm very positive that, yes, there'll be no issue refinancing the business. Yes. Okay. Thanks. Understood, Mark. And then just last one for me. Can you remind me what the cost savings from Barrow are expected to be? And how much we saw of that in H1? Yes. We saw a fairly limited amount, Damian. We said somewhere between $2,000,000 $3,000,000 I think when we last announced when we announced the closure. And obviously, we closed it from October onwards. So you can do the math. Yes. Okay. Thanks, Chris. I can cope with that one. Just keeping it early in the morning. The next question comes from Andy Edmond from Equity Development. Andy, your line is open. Yes, good morning, gentlemen, and well done on progress. Chris, I think I heard you say that recruitment is effectively done. And it may be that you'll cover this in a bit more detail this afternoon. But can you give us a little insight to the mood and confidence within the group and how pleased you are with the leaders that you've been able to recruit? Maybe that Mark might have to cover his ears for embarrassment here, but just an impression of how everybody is settling and how pleased you are with momentum. Yes. Good morning, Andy. Yes, nice question. Thank you. Yes, look, I'm I mean, recruitment has been difficult, as you might imagine, through the period with travel restrictions and sort of stay at home orders as it were. So but look, I've been super encouraged by the quality of candidates that I've seen. And we have landed, well, I wouldn't say all of them, but we've pretty much got all our senior team in place. And I think it's very encouraging that people wanted to join McBride. We've people are excited about the Compass strategy, both internally and from our what we've said so far up through September externally. So I think we've had plenty of interesting people coming to the company. I think in these times, as Mark mentioned, it's a stable products business that's highly defensive in that sense and good cash generator and in good financial shape. So it's not being difficult to attract quality candidates. I think internally, I've been thrilled by the engagement. We worked really hard at the whole transition. Writing a strategy is one thing, but actually transitioning an organization. And as you'll hear a bit later, something like 40% of our sort of white collar colleagues have all have changed jobs in this new structure. We've done that, gone live on January 1. And really, despite the fact we're managing it very closely, really very little noise, people really positive and excited about the new engagement, I guess, with something they feel they can touch and reach because they belong to a division. They belong to something they can influence directly. So far, very positive. I'm really pleased that the momentum in the business is very positive. Look, I think there are markets that are tough at the moment. There are parts of the business that are it's not going to be straightforward. This is a tough industry. But I think the new way of looking at it, the new way of operating and the new teams that we've got, it feels a very different business already even after the 7 weeks. For me as CEO particularly and my previous CFO life, it feels a very different business to manage with a much broader, flatter less flat structure, if you like, a little more senior management, general management in the middle level to drive the key business activities. And we start to see that already, and I think it's very encouraging. Well, good to hear. You might find that a little bit harder to get people to sell you shares at attractive prices from now on, but looking forward to this afternoon. Thanks for that. Thanks, Andy. Thanks, Andy. The next question comes from Sarah Welford from Edison. Sarah, your line is open. Good morning. It's Sarah Welford at Edison. Just one question on the contract losses. And I guess perhaps maybe you're going to go through this this afternoon, but where do you think you are in terms of the desirability of the contracts? I mean, obviously, you've exited some unprofitable or less profitable businesses in the past. How do you see your current portfolio of contracts? Are you broadly happy with them? Or do you think there is still some management to be done there? Well, good morning, Sarah. I don't think we wanted to lose those 2 contracts. They weren't ones we exited deliberately. These are ones that I mean, they came to we completed the term on them, if you like, and then they came up for tender. Look, I think we've got a variety of really highly quality contracts and we've got ones where we clearly need to improve our game. And it is all around our focus and specialism coming back into this business that there are whilst a lot of the innovation in our sector is fairly light, particularly in the liquids ranges and say some of the powders products and things like unit dosing, which is as you'll hear later such a high growth sector, we do need to be stronger and better and faster at upping our game on our product format and our packaging format. And I think this is a reflection just on 6 years in the business, I guess, that besides things like service and responsiveness to customers, the innovation pace needs to be different for different parts of the business. And we maybe have had a more single approach, more generous approach to what priorities we give to different projects and how we use our resources. And this new structure will create that focus and will create that direction in order for us to choose more wisely, resource allocate better and allocate capital better. And that's just a reflection on those two individual things. But I would say, I would hope in all our businesses going forward, we will see people nudging up and improving the margin returns that we get from our contracts and the reliable and our service and innovation performance will mean our reliability should see fewer and fewer tenders going forward. So I don't think we're not sitting here with banks of awful contracts. It's much more about how we approach them with our customers and provide something new and exciting when it's time. Okay. Thank you. We have a follow-up question from Nicola Mallord from Investec. Nicola, your line is open. Hi. Thank you. Actually, it's following on from Sarah's sort of remark there. I mean, just on those contracts, I wondered whether you could give us a feel for the scale in terms of what the growth would have been, the 3.6% or the 1.7% at the top line if you haven't have lost those? And also, where are we in the cycle of losing them? Will we see that as a drag in the second half? Or should we be anticipating, obviously, that it's largely progressed from here on in? And then this might be one that you do want to push into this afternoon. But on the costs, you've talked about having a much leaner operation in the smaller central cost line. Of the €160,000,000 or so that we see in the admin line, what do we think is still sort of shared cost at in the center? And then what have you been able to push out into the division? So on the first one, Nicolas, I think broadly roughly speaking, it's around about £10,000,000 of annualized sales between those two contracts, some of which impacted in H1. And there'll be some of it rolling into H2 as annualizes, of course. We've got that included in our forecast, of course. We knew about it even before we started the year. So I'll answer that one. And Mark, do you want to answer on the call? Yes. In terms of cost, we're going into a bit more detail this afternoon. But under the new structure, over 85% of cost is directly attributable to the divisions, I. E, under their own control. So commercial costs, technical costs, supply chain costs, etcetera, move out of central functions and into the division. So yes, a lot of that will move into divisional responsibility. Okay. Perfect. Thank you.