Victoria PLC (VCP) Earnings Call Transcript & Summary

Hello and welcome to the Victoria plc Interim Results Call. [Operator Instructions] Just to remind you, this conference call will be recorded. Today, I'm pleased to present Geoff Wilding, Chairman; Philippe Hamers, Group Chief Executive; and Michael Scott, Group Financial Director. Please go ahead with your meeting.

Good morning, everybody. Thank you very much for joining the call. I'm going to just begin very quickly by running through the Q1 trading update that we provided this morning, and then I'll hand over to Mike Scott, the Financial Director, who will take you through the numbers for FY 2020. As you can see from the presentation on Page 3, we had a very sharp drop-off in revenues in March, as particularly early in the month, Italy and Spain shut down, and then later in the month, that was followed by the U.K. So unfortunately, March is normally a very strong trading month for us, and that has -- the lockdown for the month of March did have quite an impact on our FY 2020 numbers. Nonetheless, we finished broadly in line, 2020, with the analyst forecast. April, you can see, was the low period, where in every country, except for Australia, we had a complete lockdown. That was followed in May, Italy and Spain began to reopen partway through that month. By June, Spain and Italy were fully back in production. And for the last week of June, the U.K. joined them. We only reopened the factories to supply or meet demand from our retailers. So of course, with U.K. retail only opening in the last 2 weeks of June, we only opened our factories following that to meet that demand. The critical thing that I think is worth particularly noting is our cash flow and liquidity position. During Q1, despite the dramatic drop-off in revenues, the -- our operating cash flow was minus GBP 7 million, which is typical of this quarter of the year. So in other words, the low operational gearing that we have often talked about at Victoria can be -- has been substantiated by the numbers here. Our current liquidity position at 30th of June is we had net debt of GBP 385 million, and we had cash and undrawn credit facilities available to us of GBP 180 million. And I'd remind people that the debt refinancing we did in July of last year and then we finished it in January of this year, replacing the bank debt with bonds, provides us with 5-year money and with no maintenance covenants. Just quickly turning over the page, just to bring through some of the benefits that we've seen on the company's trading position during the quarter. I mentioned earlier that we have low operational gearing. I'm on Page 4 now. We've had no pressure from any of our supply chain. Most of our suppliers are local. And we have a variety of suppliers for each component that we use in the manufacturing of our product. So we have had no pricing pressure nor have we had any difficulty in accessing raw materials. We've previously talked about the experience of the operational management team, who have -- most of them have been in the industry for a very long period of time and are acutely aware of what levers to pull during economic downturns to minimize costs and ensure the group's position for recovery. Although our manufacturing sites in Australia, the U.K., Spain and Italy, a lot of our customers are spread widely across the world. And as a result, some of our customers never went into lockdown. Other customers came out of it at various periods of time, which has flattened the so-called curve for us as well in terms of impact on revenue. And then finally, we just go on to the balance sheet and liquidity position that we discussed a few minutes ago. So with that, I'll hand over to Mike Scott to take you now through FY 2020 numbers.

Good morning, everyone. I'm just on Page 6 now, and just really to start with the highlights. But obviously, I will get into a bit more detail as we progress through the slides. So just to give you highlights, we had revenue in the year of GBP 621.5 million. That's 10% up on the prior year. But obviously, some of that, as people know, is acquisition effects as prior acquisitions have come through in full, and we made a few small acquisitions -- very small acquisitions in the current -- in the year FY '20, which I'll mention in a bit. So the actual like-for-like organic growth and on a constant currency basis was 0.4%. That was adversely impacted, as Geoff mentioned at the beginning, by COVID-19 impact in March. Unfortunately, it is what it is. We saw a 12% decline -- sorry, a 9% decline overall as a group, 12% in [indiscernible], 9% overall group decline in March, which had -- went straight down to the bottom line at that point before we took our lockdown actions. In terms of EBITDA, we're reporting GBP 118.1 million. That is a post-IFRS 16 number. The pre-IFRS 16 number, i.e., consistent with prior years, is GBP 107.2 million. And there is organic margin improvement within that in the U.K. and in Europe, and I'll come back to that in a bit. And in terms of underlying PBT then, we have GBP 50.7 million, and that equates to EPS of 28.4p. Very briefly on cash flow, we generated almost GBP 100 million of operating cash flow, and that's converted to about GBP 40 million of free cash flow -- free cash flow being after tax, after interest, after replacement CapEx. We -- that led us to effectively -- and I'll comment on this on the next page, we had a flat like-for-like net debt position. We generated GBP 14 million of cash, and we invested that in various things. I'll come back to that. But our net debt at the year-end did, on the surface, go up from prior GBP 340 million to GBP 366 million. But that is entirely due to an FX swing that happened basically in March as the sterling weakened against the euro. That had a GBP 25 million adverse impact on our net debt in sterling terms. But otherwise, on a like-for-like basis, net debt was flat. And as a result of that, our leverage actually came down from the prior year by 0.2x EBITDA as our net debt, as I said, on a like-for-like basis, remained flat, but our EBITDA is obviously growing. Just quickly -- and I won't get through all the words on the next page, I'm on Page 7, I've mentioned the COVID-19 impact in March, which had an effect. The 4 acquisitions, just to mention them very briefly, and they are all quite small. We actually only announced one of these during the year, obviously because the other ones are very small, which is Ibero. We announced that. That was back in August. That's a Spanish ceramic tile business. A very high-end product business. Smaller, though, EUR 30 million turnover of which we acquired. We, before that, acquired G Tuft in the U.K. back in May last year. That is really -- that's not -- that was a defensive strategic move because G Tuft is a contract manufacturer. It doesn't have any sort of products of its own. You pay them a fee to turn yarn into carpet. And as we have acquired and consolidated in the U.K. market, we ended up being their 70% customer -- 70% of their revenue. So as a sort of defensive move, we bought that business for GBP 1.5 million. So this really is very small, but a very nice factory that came with it. Estillon is an underlay distributor in Holland. We don't do much underlay distribution historically in Europe, so that -- there's some potential there for us to -- and again, a very small acquisition, EUR 10 million of revenue, but some potential there going forward for synergies. And Ascot, the most recent one, is not really an acquisition. This is a ceramic tile business in Italy. It's actually a lease of a business, which is under a structure that exists in Italy that you can do. We have an option to buy. We have fully consolidated the numbers because it's fully our -- it is absolutely our intention to buy it. So the total consideration would be EUR 11.5 million in doing that. So not a big -- again, not a particularly big acquisition. But the great thing about that structure, because we're leasing it, is that if for some reason -- and we don't have to suspect it at all, but if for some reason we decided we didn't want to keep it, we could return the business. And as I said, that's quite a unique structure to Italy, which we've taken advantage of there. And we'll come back to the reasons for that in a bit. The -- just to point out a couple of other things. In Australia, we mentioned at the half year that we were sort of minus 5% like-for-like in the first half. But we said that it was turning a corner and we expected it to return to growth. And that's exactly what happened. We saw plus 4% year-on-year performance at the top line in constant currency in the second half. I'll come back to EBITDA margins in a bit because I've got some bridges on that to show you exactly what's happened there because there's obviously a few different components with organic and acquisition-related movements. And the bottom point is just showing you here what we spent that GBP 40 million of free cash flow on. And again, there's some bridges, so I'll come back to that in a little bit. So at this point, I'm going to hand over to Philippe to talk through some operational highlights, and then I'll come back into a bit more detail on the numbers after that.

Okay. Thank you, Mike. Just a few operational highlights. In the UK & Europe Soft Flooring, on the carpet manufacturing side. As you know, we have been focusing on some more volume in the last year and the first half of this year. So we have reversed this trend. We've developed more medium- to high-end products again, and we have been fully refocusing on the margin. Also, in carpet manufacturing, especially in the South Wales plant, we are further resizing -- rightsizing, I mean, the production resources, which we have done for the last 18 months already. So this project has been completed for the moment with about 115 fewer FTEs. As you know, we've closed the extrusion, and we have got rid of excess testing and backing people. So all of that have been in line, and the productivity gains are there. So we have also seen a gradual increase in the operational speed of the finishing lines and further quality improvement as we have confirmed before. Also important was the integration. We have mentioned it. The acquisition of G Tuft was there, that's a tufting mill in Dewsbury. So -- and for the moment, we have dedicated all synthetic carpet -- the manufacturing of all synthetic carpet to [indiscernible] plant, which is in Abingdon. And G Tuft has become a purely natural fiber tufting plant, which is -- so both of them are separate. So the carpet manufacturing has come to completion, the investments. So for the moment, it's further operational excellence, which is in place in order to drive the productivity. In the underlay manufacturing, the most important investments have been the purpose-built conveyor system to link all 5 production units to the warehouse or directly to the warehouse, so which is giving us productivity gains and is adding to efficiency and safety. So we have also brought the logistics in-house. This was outsourced. So we brought that in-house, and we got rid of an offsite storage facility. Also, there have been a lot of discussions with BU suppliers, the trim which we are buying, to have just-in-time delivery. So as you will see through the numbers in the underlay. So the working capital has been very well under control and has been reduced. Some other point, but that's more commercial then, the trading up in the accessories. So we have just upgraded the accessories and brought new products on board as well. And that's forwarded to underlay facilities which we have in the U.K. being Ezifloor and Interfloor. The key projects in the soft -- or the key project in the soft flooring is definitely the logistics operation. So we have a further improvement of the service proposition, which is now 85% within 2 days. And this comes from 68% in the last year. But the ultimate goal, as it says, the ultimate target remains the next-day delivery for over 90% of our orders. We are in line to achieve that in the course of this year. So by the end of this financial year, we should be in a position to do next-day delivery over most of the orders. So important to understand is that, in the whole logistics operation, this has been fully invested now. So we have 3 operational distribution centers in Hemel, in Kidderminster and in Hartlepool equipped with 6 cutting tables in a position to do 24,000 cuts per week. We have a vast majority. So even if we were to grow 30%, 40%, so there's no extra investment needed in logistics. So we are fully invested in logistics and prepared for growth. Then on the next slide, Page 9. So some operational highlights on UK & Europe Ceramic Tiles. First of all, in Italy, so we've been working hard in Serra to boost the output, and we've been successful on 2 out of 3 lines. So the output has been boosted by about 10%, and that was mainly at the end of the ceramic lines with the sorting and the packaging lines. There's also -- or there was a constraint, a capacity constraint in Serra, especially in the porcelain segment. So -- and Mike has alluded to that already, when we were talking about the business lease, which we have engaged with Ascot, which provided us with a 7 million square meters of extra capacity, mainly in porcelain. There's another 1.5 million meters -- square meters there for wall tiles as well. So -- but since we have cut down the SKU, so we've done a complete rationalization of the Ascot program, so this has enabled us to create more capacity for Serra. So for the moment, we are even looking for further capacity as our business in Italy is very strong. So we're looking for further bolt-on acquisitions and towards the future to address this capacity shortfall. Then in Spain, we're happy to say that the integration of Saloni has been completed. So the principle was that we wanted to make one size in one plant. So rather than making all 3 plants all different sizes, so we've allocated sizes to plants, and this has enabled us to cut down 20% of our production assets with more output. So this has been very successful. Also, we are very focused on the growing segment, which is DIY. We are creating a new brand, and we are creating new products in the DIY segment because the DIY segment seems to be picking up bigger sizes, medium to high end and not only cheap end. So we try to take advantage of that. And then the acquisition of Ibero, which was the last acquisition last year in August. The integration of that acquisition will take place in the course of this year, so we are fully working on that as well. So the integration of production and brand and marketing. Australia. Mike has mentioned it already. So we had -- last year was difficult. The first half year was difficult. We were at minus 5%. The second half, we were at plus 4%. So we are seeing tendency of the continued improvement in Australia. We're very glad with that. Also happy to report that the integration has been completed of 2 underlay plants into one. So we have closed the Melbourne plant and everything has been -- and underlay has been integrated in the Sydney plant. And this process has been completed. So the -- in the meantime, the focus in Australia when the going was very tough, all the focus was on the rightsizing of the costs, the cash conservation and the margin protection. And this is exactly what we have done in Australia. And in the meantime, whilst the going was pretty tough, so we've done a big focus on product development. We've developed in carpet tiles as well as in LVT, we've done a lot of new product development which we are currently bringing to the market. So overall, I can say we are well invested. We have become stronger in operations. We have more efficient production facilities. Of course, it's only a few highlights here. So there's more companies. But overall, the production facilities have been improved and we have a much better market positioning than in the previous year. So that's, in a nutshell, the highlights. Mike, so if I can hand back over to you.

Thanks. So then just to take you back to -- in a little bit more detail into the numbers. And obviously, seeing how some of that stuff that Philippe discusses has manifested itself last year and will obviously continue into the current year. So Page 10 spits out the key income statement highlights by division. I don't propose going through this in great detail because the numbers are all there, and also to the following slides cover off some of the key aspects of that which we should discuss. The one thing I will discuss on this page briefly is these numbers are all shown up here sort of EBITDA and EBIT before credit loss provision. Just to explain that, and that's disclosed at the bottom there, so everyone can see that clearly. Credit loss provision under IFRS 9, this is effectively provision for bad debt from customers. As everyone knows from the history, and last year is a good example, we do not have significant bad debt experience in this business. That is due to our business model and also our very low customer concentration. So -- and last year was typical at sort of GBP 300,000. This year, we -- because of COVID-19 at year-end, our year-end is March, so right in the middle of it, we had to apply, as is required under IFRS 9, a prudent view of credit risk across our customer base. And I stress that the GBP 2.8 million is a provision. We actually haven't had any material bad debt experienced so far. And I'm happy to say, but we've provided for something in the accounts in light of COVID-19. Okay. Flipping over to Page 11. So just to talk a bit more about margin. So this is the first division. This is UK & Europe Soft Flooring. As everyone knows, this is predominantly a U.K. business. There is a little bit in Europe, but this is predominantly our U.K. business that Philippe was talking about at the beginning. And the key point here is the 1.7% organic improvement that you can see there in the first bar. And that is, of course, a result of the initiatives that we talked about in detail last year and Philippe has also just mentioned again around manufacturing and logistics. We do expect there to be -- more to come there. The 170 basis points as the benefit was started to phase in through the year. We did all the heavy lifting and the hard work last year -- sorry, the prior year, but even then, the benefits sort of come through in phases as you get the finishing line up to full speed, et cetera, et cetera. But that's -- but we're very happy that, that is coming through nicely, as we explained last year it would. There has been -- this is EBITDA margin, so there has been an IFRS 16 uplift. I, unfortunately, cannot say that that has anything other than accounting. And there has been a small dilutive impact from acquisitions. And again, if you remember, the 2 acquisitions relevant to this division in the year were the G Tuft one, which I mentioned we bought a supplier, makes no profit. And as I said, that's not why we bought it. So obviously, that had a small dilutive effect. And also Estillon, which is a 10% EBITDA margin business when we bought it. So again, a small dilutive effect. So that's just a mix effect from those acquisitions. And then, of course, the credit loss provision, as you can see on the right-hand side, which I explained a moment ago. So the key point is the organic improvement there. If you flip over to Page 12, I show the same chart, but for the ceramic tile division. Here, we had a 30 basis point organic improvement. The key thing that I wanted to illustrate here is the on the surface, it looks like the margin has come down but there has been a much more significant dilutive impact from acquisitions. And just to explain that, we bought, if you remember, Saloni, which was quite a sizable ceramic tile business in Spain in the prior year, but we bought it halfway through the year. So we still had the full year effect of that acquisition coming through. That was on acquisition at 15%, 1-5, EBITDA margin business. We also then, in the current year, we just discussed, bought Ibero, which was a 10% margin business on acquisition. And Ascot towards the end of the year, still contributed a month, which is a 5% EBITDA margin business on lease or on acquisition, if you like. So all of those had a dilutive effect. And of course, we're expecting -- and are delivering synergies coming through from those. But of course, initially, they will dilute the margin. It is what it is. Of course, the prices that we paid for these businesses reflected their profitability at the time. Okay. So that's just to make the point that the margins have been very stable in ceramics despite what it looks like on the face of the numbers. I haven't bridged Australia simply because there's no acquisitions in Australia. So you can just look straight at the numbers. The margins did come down a bit in Australia, but that's because of the challenging market conditions that we saw a lot in the previous year and through to H1, as we discussed, but then did turn around in the second half. Page 13, I won't dwell on much. It is simply to illustrate the numbers for everyone's benefit of the adoption of IFRS 16. So you can see what that did to our EBITDA, our EBIT and our PBT. It does have a negative impact to the bottom line, and that is just math. It will always be the case in the year of adoption that, that happens and in the early years because you're replacing -- for every given lease, you're replacing what was a linear cost with a sort of logarithmic cost now because your previous operating lease expense is now replaced with a linear depreciation, but a nonlinear interest cost, which is higher at the beginning and lower at the end. So of course, it has a negative impact to begin with on PBT. But of course, that's accounting the cash flows for these -- from these contracts have not changed at all. So that -- and just one more point in case anyone looks at it. You'll see here the initial liability recognized at the beginning of the last financial year, so March '19 was GBP 57 million. If you look at our year-end, it is a bigger number, but that's of course because we bought 4 businesses in the meantime, which came, of course, with some leases of their own. So just quickly on Page 14. This is a bit of a busy page. So I apologize, I will go through it very quickly. It is important for us that we explain all of the non-underlying items, of course, as all of you will be scrutinizing quite rightly. What I tried to do here was in the current -- the prior year is on the right, I've tried to split the current year down to some categories. So just to help explain what are these things relate to, I'll run through it very briefly. The first item in the first column as a result of COVID-19, we -- the Board decided to impair goodwill this year. Obviously, our forecast, especially for this year, have been adversely impacted by COVID-19, especially in Q1, as Geoff has described, in the early part of Q1. And so it was prudent for us to reassess that and to impair goodwill. And we did so by GBP 50 million. Goodwill, just to be clear, before impairment for the group was about GBP 240 million. And after impairment now, obviously, it's about GBP 190 million. Obviously, that is a noncash item. The refinance -- there are some refinance -- oh, I should just point out, there are 3 sections to this exceptional at the top. For something to be exceptional in accounting terms, it has to be a one-off. Then there's a couple of other operating items, which we've had every year. They're not -- they recur, but they are, for good reason, non-underlying items, and I'll come back to those. And then there's some non-underlying finance items at the bottom, okay? They're obviously below EBIT. So back to the second column, refinancing-related items. Obviously, these now all in the financing cost part at the bottom. We refinanced twice in the year, as everyone knows. We refinanced initially in July when we did our inaugural bond issue, which was a huge exercise. And then we tapped that bond again in January to take out the remaining part of the term loan that we had. So now we are in terms of our senior debt, apart from a revolving credit facility, we are entirely funded through bonds. So if you look at these items, the first one, the GBP 4.4 million, when you refinance you have some fees, whether they're legal fees or banks fees, et cetera, rating agency fees, when you pay those fees, you don't take them straight to your income statement under IFRS, you hold them as prepayments and you amortize that prepayment over the life of the loan. But when you then refinance -- if you then refinance earlier than you had otherwise expected, you'll have some prepayment left over, which you have to write off at that point. And so that GBP 4.4 million represents the write-off of previously paid fees in earlier periods that we are holding as prepayments on our balance sheet. Hence, it's not -- as you can see, it's not much as a cash item, it's a noncash item. The next one is the one cash item that is in this part, which is the GBP 6.5 million. When we did the refinancing in July, to be absolutely certain, we paid -- not immaterial. As you can see, [ Phase ] 2 book runners to provide an underwriting facility to make sure that if it didn't go well, that we -- there's certainty of that -- of a refinancing. Of course, in the end, fortunately, that was not required. But nevertheless, we paid for that certainty. The next item, I will try my best to explain very succinctly. Under IFRS 9, when we -- we have to look at all of our contracts and identify any embedded derivatives, financial derivatives within those contracts. As you can imagine, this is probably most common in debt -- financing rated contracts. So in the bonds, bond contracts, we have some embedded derivatives. The key one is basically the ability to repay early. So it's a 5-year bond, but technically, we can repay that at any time within the 5 years. That comes at a premium. We have to -- if you want to repay early, it's called a non-call 2, 5-year non-call 2. That means that in the first 2 years, it's very expensive to repay, but technically, it's still possible. And then in year 3, 4, 5, it's relatively cheaper. Because we have that ability, it's treated as a derivative, our ability to pay that earlier call option. There are some tests in IFRS 9 to whether you need to separately disclose -- value these and disclose these on your balance sheet or not. We ran those tests. There was a lot of scrutiny over this. We just concluded that we do have to separately value them on our balance sheet. You might look at other companies where they have bonds of certain types where they haven't. And either the terms are different such that they didn't have to or the directors made their own judgment on whether value or not. Anyway, in our case, we are valuing them separately. This call option in particular. What does that mean? Again, very briefly, if I give you a simple example, if you borrow GBP 100 million, you'll have GBP 100 million liability on your balance sheet. If you then value this call option at the point of inception of that debt, and let's say -- and of course, we value it using option -- swaption methodology. But if you evaluate it and let's say it worth GBP 5 million -- yes, it's an asset. Because it's a call option, so it's an asset. So you have to put that asset on your balance sheet at that point in time. What you do then to balance that out is you recognize -- you say, well, that GBP 5 million was embedded in the pricing of the debt. So you actually recognize a liability of GBP 105 million and an asset of GBP 5 million, which obviously balances out back to the GBP 100 million that you've actually borrowed. Obviously, at the end of the 5 years, you only have to pay back GBP 100 million. So the GBP 105 million of debt -- liability, I should say, amortizes down back to GBP 100 million by maturity. Because obviously, you don't have to repay that premium, you just repay the GBP 100 million. The asset, which is this call option, which is a 5 -at every balance sheet date, we have to fair value that, again, at that point in time based on market conditions at the time using the same methodology. Now -- so we had created this asset when we did bond refinancings in July and January. At March, our bonds -- because of COVID-19, our bonds, as with many other businesses, were trading significantly down on par. They were trading at around 77 -- from memory, EUR 77. And so it's not surprising to anyone that at that point in time, the call option wasn't worth anything. We, of course, valued that, but you still have to get to the motions. We determined it was not worth anything. So that GBP 7.3 million represents the fact that we wrote off entirely this asset that we recognized at the beginning to 0. And so that comes to income statement as a cost. It's not cash. And just to point out, of course, going forward, with market conditions in a different place and with our bond price higher, that asset may well be worth something again, in which case we'll have an income coming through in future periods related to that asset going back up in value. And of course, we'll treat that income as non-underlying as well. So that's what that is. Hopefully, that explains it. The next item is immaterial. It's just to do with the change -- a small change in terms on the small amount of unsecured debt that we have. So it's not particularly material. So that's all that -- the only cash item in there was the underwriting cost of GBP 6.5 million. Acquisitions. Very briefly, GBP 2.2 million we spent on M&A costs. We made 4 acquisitions, as we mentioned, plus general prospecting costs, not dissimilar to prior year. As you know, we are an acquisitive group in terms of our strategy. Obviously, if we're not making acquisitions, that cost will disappear to 0. But that we spent GBP 2.2 million this year. The GBP 5.8 million, when we bought Iberia -- this is the GBP 5.8 million below that. When we bought Iberia, we had negative goodwill. We paid less than the net assets that we recognized on our balance sheet on consolidation. So that's actually an income, that GBP 5.8 million, but it's not an actual income. It's a non-underlying income because it's just negative goodwill. So we took it -- we'd have to take it as an income statement as income, but we put it in the non-underlying part. Going further down, GBP 25 million amortization of acquired intangibles, that, as everyone knows -- that knows us well, we have every year, these are the brands and the customer lists that we have to value, by a business and put them more balance sheet as an intangible. And then we have to amortize them over a period of time, typically 10 to 15 years. So that cost, it was GBP 22.5 million last year, as you can see there on the right, GBP 25 million this year. It got bigger because we bought a few more businesses. It will continue until those assets run down to 0. It's an accounting point. And when they run down to 0, that cost will no longer exist. There's no cash involved in that whatsoever, as everyone knows. And then finally, at the bottom there, the GBP 3.4 million in finance cost. We have some earn-out. As people know, we like to have earn-outs on our acquisitions. Under IFRS, you have to fair value these, which means you have to present value them, i.e., apply a discount in the balance sheet. And so as that discount unwinds over time, that creates a cost. That's a noncash item, but that's what that is. And then in other, very briefly, final bit, we spent GBP 3.5 million at the top there on some additional reorganization costs. Those are the ends of those projects that Philippe mentioned that we started [ using ] last year, everyone knows we had GBP 12.7 million. People were concerned with that. Was that a one-off? Those projects are all done now. We spent the last GBP 3.5 million, in particular, the last project to finish was the Australian one, as Philippe mentioned, in Q3, closing the Melbourne underlay plant. So that is all completely done. That's mainly redundancy costs. It is a cash cost, but completely finished. Going further down, GBP 5.9 million, that is an IFRS 2 charge share-based payment. But again, very briefly, we -- whenever you have an LTIP scheme, a share-based LTIP scheme, IFRS requires you to recognize a charge, which represents the fair value of that scheme to the participants. It is -- none of these schemes are payable in cash. It never will be. You just have to recognize the charge and take it to reserve. In the year, this year, we closed effectively one of those schemes to previous schemes because it wasn't in the money and wasn't incentivizing people. So we've decided to restructure it out a bit. We've closed that scheme. Absolutely no impact on the business whatsoever. There'll be no cash paid and no shares issued under that scheme, but IFRS requires you to accelerate the charge. That you previously determined that, that scheme have been worth at inception and take that entirely through your income statement at that point in time. So that's why that number looks big, but it is what it is. It is noncash. And then at the bottom there, we have some -- foreign exchange contracts to hedge our exposure on some foreign exchange raw material purchases, mainly U.S. dollars, we hedge that in a very structured way, and we don't apply hedge accounting. So the mark-to-market adjustments on those contracts just go to the income statement. That is an income. In this case, GBP 3.2 million. But it's non-underlying income. Clearly, it's just a mark-to-market adjustment on this contract, so that goes there. We have that every year. You see, last year, it was a minus GBP 0.7 million. And then finally, and I mentioned earlier, we did have some big swings in FX between euro and sterling, which resulted in some big translation movements, and that is the GBP 13 million that you can see there. So sorry that was quite long, but I thought important to talk through all of those items. And as you can see, importantly, the ones that are cash items I've highlighted to make that clear, and they're all [ important ]. The next page, just takes you through the cash flow, we added it on, so you can see the historical trend. Again, we had very good conversion -- this is Page 15. We had very good conversion obviously to operating cash from our EBITDA. We did have a minus GBP 8 million swing in working capital. But just to be clear, with the group growing as the size it is today, we're a business now that turns over GBP 60 million a month. An GBP 8 million swing in working capital is a normal month -- we have those sorts of levels of swing month on month. So that is purely timing differences. It is slightly higher than it would have been because of COVID, because of course, we didn't sell as much and reduce the stock in the final month. But that's a complete nonissue. The big material difference, I guess, is that ownership costs are higher, again, as we're growing the debt from some acquisitions. And our bonds are more expensive than our previous bank debt, but that is the cost of the certainty that we now have with no maintenance covenants and the flexibility that those bonds afford us, which we, as a Board, think is very important. And clearly, in light of the current recent events of COVID-19, I think was very -- is a very good position to be in. So that gets us down to the GBP 40 million, which is the free cash flow number that I mentioned earlier. That's how much cash we generated in the year. If you flip over to the next page, I then bridge that into the net debt. And this Slide 16 just makes point that the net debt remains flat on a like-for-like basis. So we started the year with GBP 340 million of net debt. We generated that GBP 39.2 million, which is the free cash flow from the previous slide, reduced the net debt. But we spent GBP 26.8 million on acquisition-related expenditures. That's the 4 acquisitions I mentioned earlier, plus some earn-out payments, plus some M&A fees in the year. We spent GBP 11.8 million on organic investments. That's the GBP 3.5 million of final bits of redundancy costs that I mentioned. Plus some expansionary CapEx was related to the things that Philippe discussed earlier in his section. And there's a couple of other small exceptional items, which -- and you can see there on a like-for-like basis, the net debt was flat at around about GBP 340 million. What we then had was a transactional difference that, in March, that's our euro debt bonds being converted into a higher amount of sterling. That currency position is we are naturally hedged there, just to be clear, we have a lot of euro income, and therefore, we deliberately, obviously, financed our debt in euros. Of course, when you're looking at this position, because that swing happened in March, we got the increase -- the visual increase in sterling terms on the debt side, but we did not get any EBITDA or earnings benefit from the euro earnings being translated into more sterling earnings because, of course, that would have -- that happened earlier in the year. So that's just a pure FX movement. The -- and then -- so on net debt that we reported at the year-end in the earlier slide was the GBP 365.9 million that you see there after the FX swing. The bond issue premia relates to the derivative point I mentioned earlier, plus we issued January bonds at a 5% premium. So that's that bit. The prepaid finance cost, as I mentioned earlier, you can net those off as a prepayment. And then the big item here, finally, is the IFRS 16. So we have our leases, finally, GBP 78 million at year-end, which takes the total financial liability up to GBP 448 million. And then that's just summarized on the next page, so you can see the components of the net debt there, it's the same -- it's just shows you the different parts of cash. The reason why our cash is much higher and our debt is much higher at the year-end is because we fully -- a. partly because of that FX swing because that also affected our euro cash. That went up. Great. But our debt went up as well. And partly because, as everyone knows, I think we've announced previously, we fully drew our GBP 75 million revolving credit facility in March as a precaution for COVID-19. In the end was extremely not necessary. But anyway, it was a precautionary measure at the time. So our cash is high and our debt was also higher. But of course, that's just -- that -- they just offset each other. And as I said earlier, our leverage importantly went down in the year from 3.2 down to 3 due to our growth in EBITDA. Sorry that was a bit long, but that concludes the financial section.

Right. Look, I'll just finish off the presentation by talking very quickly about what we're seeing at the moment, what we expect the outlook to be over the remaining 9 months of this financial year. And then we'll take some questions. So we've since -- earlier in this slide of the presentation I was talking about the fact that revenue has recovered strongly since the end of the lockdowns. That has continued into July. And the outlook for August, the orders we are now taking for August and September suggests that demand will continue to remain strong. The feedback we're getting from our retailers who are our customers, is that consumers have focused their spending on -- or prioritized spending on home improvement, partly as a result of the fact that they're unable to spend the cash elsewhere on dining out or leisure travel, and partly due to the fact that they have been locked inside their house for the last 2 or 3 months, which has caused them to focus on their decor. So we're quite confident at the moment that the demand will remain consistent in the close future. The -- however, having said that, we are monitoring it very closely. The good thing about the way that our business model works is we get almost real-time visibility of consumer orders so there is -- most of our retailers here in the U.K., particularly carry very little stock. And as a result, when a consumer walks into a store and buys product, the retailer places the order on us that night. And because we have that visibility, we're able to match our production very closely to genuine end-user demand. There's also very little destocking risk in our business model because the retailers carry so little stock. We have grown quite -- a lot over the last 7 years through acquisitions. And without the outlook for our own business and the cash position in which we find ourselves, we are now very actively looking at some very interesting acquisition opportunities. There are some owners of businesses with whom we've built relationships over the last 3 or 4, 5 years who have reassessed their priorities in life, I guess would be the best way to put it, over the last -- as a result of what's happened in the last few months. And we're seeing some quite motivated sellers willing to have discussions with us about taking over their business. So we're expecting to see some quite good growth at some very attractive prices over the remainder of this financial year. So with that, we'll hand it over to questions and we'll go from there.

[Operator Instructions] And our first question is from Charles Hall from Peel Hunt.

Could you -- just a couple of questions. Could you just comment on the experience through the lockdown period in terms of anything that you've learned about the businesses that you're going to take forward, either in terms of cost or channels that you sell into? What sells well? What doesn't sell well? Every company is reassessing its business in the light of the protracted period of unable to trade, and so I'd just be interested what you've seen. And secondly, can you just talk a little bit about the different consumer attitudes you're seeing as you've got a very broad-based business on the U.K. very clearly, but it'd be interesting to hear what you're seeing in Continental Europe.

Okay. I'll take that question, Philippe here. So on the lockdown, what we have seen if it was to be redone, I probably would have opened or would have [indiscernible]. Hello? Yes. So on the lockdown, I probably would have kept the factory open an extra week or 2 weeks because I think everybody shut down the factories pretty abrupt because we've seen that the demand was falling away in April very fast. So what have I learned from that is that probably we should have gone on another couple of weeks, but we have matched that because we have opened the factories a couple of weeks sooner than anyone else. So -- and if we've learned one thing that a lot of our competitors as well have been furloughing salespeople, have been furloughing staff. And we brought our people fast and quick back into the marketplace. And still now, we see that we are in the market, sales teams are in the market. And I think there's only 50 -- 40%, 50% of the salespeople which are active in the market for the moment, and we take advantage of that situation. So if there is ways to make the lockdown period smaller and shorter, and this is exactly what I would do. So we've done it on the opening side by starting early. I should have continued for the week or a couple of weeks and making that lockdown period shorter for ourselves. So with regards to the second part of your question, the consumer attitude. So what we have seen that, across the businesses, that DIY has been very strong. So during the lockdown, people have been in their homes and have seen that probably it was about time to change a few bits and pieces, not getting access to professional installers, they have been buying product and probably do-it-yourself to some extent. Because if I see how the DIY has grown and never stopped, in fact, across regions like Eastern Europe, Germany, so we've always been active in the Italian and in the Spanish business, in the ceramics and the DIY. So the consumer attitude has been a bit more driven to DIY. I can see that. Of course, in carpet, we don't do a lot of DIY business. DIY carpet is not a good product for DIY. But we have seen that the independents have opened up pretty quickly their stores. And also in the consumer behavior, we've seen that retailers, the integrated retailers, the big retailers have started to take meetings with customers prior to the shop openings, and this has helped a lot because there was this vast demand. So what we are doing currently is we're trying to make a distinguishment. So we're trying to separate the catching-up business of the new business. And I think, if I look at it, I'm trying to discount the part of the catching-up business, I think we are in a good place. I think the market is actually growing as we currently speak. So Geoff has mentioned already that June -- it's in the presentation that June was strong. We were at 102% versus last year. So July continue -- July and August continue on that same impulse. So the consumer attitude is clearly positive for the moment.

And so Philippe, you -- I mean it sounds that you feel confident that you've gained market share over the last few weeks. Do you see that as a short-term benefit? Or do you expect to retain some of that extra customer business?

We have definitely gained market share, and we will keep some of that market share. I'll give you the best example is in our underlay business. Two of our main competitors have only come to the market 3 weeks later than we have. I'm sure that we have definitely gained 15% market share. So we had already a big market share of 60% plus, I'm sure the current market share in the underlay business is about 75%. I'll probably give back half of that, but I'll keep the other half because not only my suppliers were -- my suppliers, my competitors were not supplying correctly, so we've taken advantage of that because we opened up the factory soon and we could comply with the orders we were getting. So we will definitely take advantage of that, some of that will stick in market share.

Next question is from Robert Chantry from Berenberg.

Just 3 questions from me. I suppose, first, can you just give us an update on the global market for ceramic tiles, specifically the supply/demand balance in Europe and how it's impacting pricing? Secondly, on acquisitions, the Ascot business in Italy, not a very Italian name, but EUR 60 million of revenue, 5% margin, paying less than 4x EV/EBITDA. Can you just give us a bit more color on why the margins are at that level? Why they were willing to sell it less than 4x? And if that should be considered template of what you'd like to do around the core assets in Spain and Italy. Then I guess, question 3, clearly really useful and interesting to see the progressive recovery in the business, getting to above budget for -- a pre-COVID budget for June. The indications that's continued into July. I was wondering if you could give us some anecdotes around why you're confident and your retailers are confident that's not just a catch-up effect from lost sales, but is actually looking forward to kind of continue through into the rest of the summer and hopefully into autumn as well.

Rob, I'll answer the question on the Ascot acquisition. And then Philippe can answer your other 2 questions because -- which were more operational. The Ascot business where the -- was effectively bankrupt. The -- under the previous management, it was in a very, very bad shape. The banks have made demand on them. And as a result, they were willing to sell for very, very little. We didn't -- as Mike pointed out, we've actually leased the business under a very peculiar piece of Italian legislation, but it's neither here nor there for the purposes of this. What we gained was primarily production capacity. Our business in Italy, Serra, is seeing incredibly strong revenue growth this year or at the end of last calendar year and into the whole of this year. So the moment they were allowed to go back into business in May, the -- our Italian business went immediately to 100% capacity. It's -- that business is seeing very, very strong revenue growth due to some new customers that signed up at the end of last year and the beginning of this year. So that's the summary for Ascot. It was bought primarily to give us access to capacity -- production capacity because it takes so long to build a factory and install the equipment, whereas this gave us instant access to capacity. We picked up some revenue with it, but it wasn't very profitable revenue, although we're busy working on improving that as well. But the primary goal was to provide capacity to Serra.

Okay. Rob, maybe a couple of elements on the global ceramic market. So what we have seen is that the export outside Europe has been -- has been suffering. So whenever a brand has a lesser importance, the Keraben and Saloni brand or Ibero brand has lesser importance, so we are a bit more vulnerable. So -- but on the contrary, we have seen that DIY is growing very strongly in Europe. And there has been cross-selling opportunities. We have a network in Italy working very intensively with DIY. We've shared that with the Spanish businesses. And as a result, the Spanish businesses are further improving their business with DIY. So I think looking at that and looking at the growth and the orders we're taking within the DIY, we're going to have a strong growth. On the other side, the independents, it takes -- it has taken a bit more time for them to come back, but they are back to where they were. We've seen that in the 2 biggest markets of Canada and Spain and in France. So the domestic market and the French market is 55% of the total of the revenue of Keraben, and we've seen them come back in June and July to normal levels. So -- and that's very promising. On top of that, since you were talking global market ceramics, the U.S. market, so across all brands, we are growing very fast into the U.S. market. So we see that the U.S. market, whether that's imported directly or through Canada, so the demand is soaring. There's also very heavy duties on ceramics from China into the U.S. We're taking advantage of that situation. So overall, if I take all pluses and minuses, I think we could have some organic growth of a few percent. But the structure, the underlying business, is going to look a bit different in ceramics in the next couple of years. And then with regards to the -- why the retailers are confident and why we are so confident that the business will hang on. Again, I will try to give you an example in the underlay. So in the underlay, so when we first opened Interfloor, the factory, again after the lockdown, we've seen that the orders were building up gradually. I mean we were giving delivery terms of 2 to 3 days to the retail and on 8 or 9 days to wholesale. For the moment, the wholesale, we have to give delivery terms on -- of 8 or 9 weeks. And the retail, we tried to stick onto the 2 to 3 days for the simple reason that we want to support the activity of retail, because predominantly, in our strategy, we are very retail-focused. Yes, we take the wholesale as well as an add-on to the business. But primarily, we are very focused into retail. And the demand is so solid, and we're not getting only short-term orders, but we're getting medium- to long-term order intake, not only in the underlay but we can see that in carpet as well. So I think we got -- we will have a good run-up until Christmas. Don't forget as well that September, October, November is normally the top-selling season in carpet as well. So even if we are not continuing, at the current pace, we will still have a good and solid run during the season. So at least we are preparing. If I look on how we are feeding the supply chain, we are preparing for a good run-up. So we will -- I don't want to be surprised with a good business and unsufficient service that I can deliver to the customers. So we're fully blown, and we take advantage of our competitors who are in a different place and who try to take a view at the costs and sacrificing market share.

[Operator Instructions] And we have no more further questions at the moment. I'll hand over back to you for final remarks.

Final remarks. Okay. Thank you.

Yes. I think that's -- hopefully, that's it. Thank you very much, everyone.

Thank you. Bye.

Okay. Bye.

Bye.

This now concludes our conference call. Thank you for attending. You may now disconnect your line.