Victoria PLC (VCP) Earnings Call Transcript & Summary

Hello, and welcome to the Victoria plc Preliminary Results Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Geoff Wilding, Chairman. Please go ahead with your meeting.

Good morning, everybody. Thanks for joining the call. I'll begin this meeting by handing over immediately to Mike just to start taking us through the financial numbers.

Thanks, Geoff. Good morning, everyone. So hopefully, everyone's got the presentation, which went on the website this morning. I won't read every word obviously, but I'll go through and give you the highlights. So starting on Page 4, just giving you the initial highlights. Revenue, GBP 662 million. I mean, obviously, the first thing to say is this year has been a year that's been impacted by a few things, clearly, most notably COVID, and that was really a story of 2 different parts of the year in terms of the lockdown effect on the business and then the subsequent very strong performance that we've managed to deliver outside of lockdown. And I'll come back to that in a bit. And also, as always, there is some effective acquisitions flowing through the numbers as well. So cutting through that in conjunction with COVID obviously deliver these numbers here. So the GBP 662 million is almost 7% up year-on-year in absolute terms. And of course, it was impacted in April and May last year with the initial lockdowns, in particular. But then post that time, we had very strong like-for-like growth which, across the year, [ post initial lockdown ] was 6.3% top line like-for-like organic growth. EBITDA, GBP 127.4 million, so an absolute record year for us which has been fantastic. Again, 8% up on the prior year. And of course, bearing in mind that April and May had a severe impact on the business in an adverse way last year because of the COVID lockdowns but, nevertheless, still delivering a record EBITDA from the remaining 10 months. 19.2% margin, which is up on the prior year of 19.0%. But actually, that just again disguises the fact that with COVID and cutting through all the effects of acquisitions that we've had a 340 basis point overall organic improvement in margin. And again, I'll come back to that in a bit more detail. Operating cash flow. There was a little bit of an impact, and I will come back to that in terms of working capital. But overall, we implemented very strict treasury measures this year in particular, as everyone can imagine, and we have again managed to deliver very strong conversion from operating profit into cash flow. And that's resulted in net debt reducing this year by GBP 20 million from the prior year. And again, I'll come back to that reconciliation. And leverage at the year-end was 3.1x, which is absolutely consistent with the prior year. So I'm just moving on to Slide 5. This gives a few more highlights. Again, I'll note some of this is repetitive, so I won't go into great detail. I'd rather get on the data on the later slides. But just to reiterate, we've been through the year and ended the year with a very, very strong balance sheet. And we've performed -- I believe the group has performed fantastically through this period. I won't get into the operational highlights and reasons why. That will come after this, and Philippe will walk you through that. Margin performance has also been absolutely fantastic for various operational reasons to do with historical investment and also things that we've done in current year. Again, Philippe will take you through that some more. I'll take you through a breakdown of the business in a sec and cash flow as well. So on Slide 6, this is just to show the sort of track record. So again, it's just to really show that consistent growth, both in terms of revenue and in terms of margin that we have delivered over the years. And if you look at that right-hand bar in EBITDA, you can see that there was an impact in the first half from the initial lockdowns on margin. And then the second half of the year was -- well, not really the second half of the year, really post those lockdowns, but the second half of the year, absent that initial April, May lockdown, was just a fantastic period where we delivered some very, very strong performance with 21% EBITDA margins in that half. Over the page, gives you -- so this is Slide 7. It shows some divisional numbers, as we always do, in the same formats that you've seen many times before. I think the key thing here to reiterate is when you look at these numbers, there's various things going on really around COVID. Ceramic Tiles is the division that was most impacted by acquisitions. In fact, the main impact was from a business we bought right at the end of last year, if people remember, which is a business called Ascot in Italy, which was actually bought at the end of 2020 but, therefore, flowed through and had an impact on 2021. But the key impact of that, that you'll see in a minute, is that whilst that brought some incremental revenues, really, it was all to do with manufacturing and synergies because that business, when we first bought it, had no profits and we've managed to integrate this and do a fantastic job there. And so the margin story is quite an interesting one. And I'll show you that in a second. Underlying these numbers post lockdown, across all the divisions, we have strong margin improvement. It's 470 basis points margin improvement in U.K. and Europe Soft Flooring post April, May. It's 140 basis points organic margin improvement in ceramic tiles post April, May and 690 basis points of margin improvement in Australia. And we only talk about April and May lockdowns because, frankly, through the more recent lockdowns, the business has just performed very, very strongly. I'll move on to the next few slides because these bridges are quite interesting in terms of the margin just to illustrate what I've been saying. So Slide 8 is the first of it, in UK & Europe Soft Flooring. It bridges the EBITDA margin from last year to the EBITDA margin this year. And you can see we had an impact of that initial lockdown period. That looks small, but don't forget that's only over a couple of months. So of course, like all businesses, when everyone stopped doing everything, that had an impact on our business. There were no acquisitions in this division in between the year. But then you can see there the very, very strong organic performance that the business was able to deliver outside of those lockdowns to drive a record margin this year of 17.5%. If you skip over to the next, Slide 9. There's again an initial impact from the carbide lockdowns in that first bar. This is that acquisition effect I'm talking about. So this is just a mix effect. We bought effectively a business in Ascot that was making virtually no profits. We also bought a smaller business during the course of this year, Keradom, in December, which is profitable in Italy as well, but smaller. But the profit margin's lower than our incumbent business. So both of those diluted the margin in terms of just adding them into the mix. But then beyond that, we were able to deliver some margin improvements again organically. That is a smaller number than in Soft Flooring and what we found -- and again, I don't want to cut across what Philippe will say as well in a minute, but what we found is that the second and third -- or second lockdown, certainly, the second national lockdown had a more [ stern ] consumer behavior in Europe than it did in the U.K. And so that was effectively why we were able to deliver much stronger margin performance in UK & Europe Soft Flooring, which is predominantly a U.K. business versus our Ceramic Tile business, which is predominantly a Continental European business. And that also frustrated a little bit some of our integration activities, which will be delivering further margin upside this year. And then just to complete the picture, as you can see in Australia, on Slide 10 -- so okay, everyone knows Australia wasn't that severely impacted by COVID as a country, I mean. But again, we've just had such a fantastic performance this year in Australia, both in terms of revenue and margins. It's been absolutely fantastic. And some of the investments that we've made over the last couple of years have really come through in all of the divisions. Just on to Slide 11. This is one that I've shown already, and I'd like to repeat. And it's a busy slide, and I apologize for that. But it just walks through the exceptional items and the nonunderlying items because, of course, understandably, there's some big numbers here and people are interested in what these things are and whether they should be worried about them or not. So I'm just going to walk through them very, very briefly. I've highlighted the ones in blue, which are cash items; and the other ones, which are noncash items. The first few columns sums up to the sort of total column after the year just ended, and then the far right column is for the prior year just as a comparison. So if I just walk through the exceptional items. We obviously make acquisitions. We made some acquisitions this year. We've prospected a lot of acquisitions this year, some of which we decided not to pursue. So there are acquisitions, disposal-related costs. These are all -- all of our exceptional items are third-party fees. We're not allocating internal costs. These are legal fees, due diligence fees in this case. Reorganization costs, there were a couple of projects integrating businesses in Italy and also small projects in the U.K., which Philippe will talk about in a minute. So there was some redundancy costs in relation to those, which is the GBP 5.5 million. The GBP 6.5 million, when we bought the businesses that we bought this year, there was a negative goodwill arising. An accounting term, which basically means that the price that we paid was less than the net assets of the business on the balance sheet. So we obviously got a very good price. And what you do with an account expense, you treat that as an income. That's an income [ in consumable ], which is exceptional, it would be fair to treat that as underlying. Then finally, this GBP 5.7 million was the final deferred consideration payment that we made on one of our historical acquisitions, Keraben, in Spain, which happened to be related to a tax ruling where we got a big tax benefit. And then part of that agreement, we need to pay some of that away back to the vendors. So that was a final payment there. So those were the exceptional items. The big nonunderlying item, everyone, was the amortization of acquired intangibles, which is that GBP 26.8 million, a bit in the middle of the page. What is that? That is when we buy a business, we have to fair value the brands and the customer relationships predominantly the business has come with, and we have to put those assets on the balance sheet. You only do that on consolidation, they're not obviously in the individual balance sheets of the businesses because they're intangible, but you do that on consolidation. And then you have to amortize them. And that comes through as a cost. These aren't things that you ever have to pay to replace like a machine. There's no cash involved. And when that amortization runs out after obviously the life of those assets, according to our amortization policy, you don't have to do anything else. You don't have to reinstate that cost. So it is very much a nonunderlying, noncash cost. And then, finally, on the finance items, just to quickly run through. We did a refinancing this year. I think as everyone is aware, we refinanced our bonds entirely in March this year. It was a huge success for us. We were very happy with it. We managed to both increase the tenure of our bonds. We now have 2 tranches maturing in 2026 and 2028 and also, at the same time, significantly reduced the coupon that we're paying. So with 50% extra financing, which we've managed to raise, we effectively have pretty much the same interest cost annually because the coupon has come down so much, which is fantastic. So we had a very strong support from the bond market, and we took advantage of that and going back to the market to refinance and raise some new money for acquisitions. So that involved some costs. The first line, release of prepaid finance costs, is just the cost that we actually spent in the past in financing that you then have to -- you treat as a prepayment and amortized which release them. So that's a noncash cost. We did, however, have to pay some costs. And the GBP 6.3 million that's in blue is the redemption, which is the cost of redeeming your bonds early effectively. But it's definitely worth the reduction in coupon and the maturity. Then going further down, there's some costs relating to the preferred equity. Obviously, I think as everyone's aware, we raised some preferred equity with Koch Equity Development this year back in November, GBP 75 million of preferred equity. It is equity. It's an equity instrument. It sits under IFRS as a financial instrument on the balance sheet, but it's a perpetual instrument that we very much treated as equity, and our rating agencies treat it as equity. So we treat the cost associated with that with nonunderlying, but I split them out here for you. They're not cash. We don't have to pay these things in cash. There's a [ 3.4% ] cost of the actual underlying preferred equity instrument. And then there were various movements on other related items that we have to recognize like warrants and embedded derivatives, for example, embedded derivatives for our right to be able to redeem early if we want, and things like that. They move around in value. We fair value them in every balance sheet date. And at this balance sheet date, some of them reduced in value, these options. And so you get a cost, and that's that GBP 9.7 million. So again, we don't treat these as underlying costs. The acquisition-related items changes in value of earn-outs just for time value of money or for changes in forecast earnouts on historical acquisitions. The GBP 1.4 million, the last cash item, is a -- in March, we drew our RCF fully because we were worried with COVID about -- for sort of bank liquidity, we decided that it would be better even though it was cost of interest to just put the cash on the balance sheet. So we did that. We sat on GBP 75 million of cash for 6 months, and then we repaid it. And that was the cost of that, which we treat as -- it did cost us some cash but not really. Underlying feature of the business, we just [ pass some cash on the fixed line ]. And then finally, all of these final items are all other noncash items, mark-to-market adjustments on foreign exchange contracts or translational differences on denominated cash or debt. So that completes the picture there. And then -- sorry, for quite a long slide. Finally, getting into cash flow on Page 12. A very strong performance this year, especially in light of COVID. You'll see, if you look at -- so this shows all the years, as we've done in the past, 2021 on the far right. You'll see the underlying movement in working capital just before the first subtotal, GBP 18.3 million. So that is worse than it normally is. COVID did have an impact in that sense in terms of -- which we managed very, very carefully. But we did, in the end, consume some cash into working capital, and that is unwinding during the course of this year. So it's a timing difference, but COVID does have an impact on us from a working capital perspective to absorb a little bit more cash. So that brought our conversion down slightly at the operating level. And then below that line, you'll see also -- it looks like we've got a huge increase in interest paid there of GBP 30 million versus the previous year, GBP 25 million. That's not actually the case. That's just because we refinanced at the time, which means that, that GBP 30 million actually represents more than 1 year's worth of interest. The actual annual interest cost is about GBP 24 million. It's just because of the timing of the refinancing. The tax and replacement CapEx, you see was a bit lower than last year, again, due to COVID. And that brings it down to the free cash flow which, again, for those reasons above, conversion was slightly lower than last year, but not much. Just moving on to the next slide to show how that then feeds into net debt. The first bar there of the GBP 38.8 million movement, this is on Slide 13, is the total on the bottom of the previous slide. We define that as the free cash flow generated, bringing down the net debt. We then spent GBP 37 million, so pretty much all of that number on acquisition-related expenditure. That was the acquisitions in the year but also some earn-outs on previous acquisitions. We then had some refinancing costs and other items relating to the bond refinancing and the pref refinancing and pref money coming in as well. This is cash coming in, net of costs. If people remember, we did a share buyback in the year. That's wrapped up in that figure there. So the net impact of all the financing activities we did in the year was to bring the net debt down by GBP 18 million. And then we spent some money on expansionary CapEx, which links to those projects that I mentioned earlier, which Philippe will talk a bit more about. And then there's some translational differences in the last bar. So overall, net debt has come down by about GBP 20 million in the year and, as I said, leverage, very stable. And then that's basically summarized on the next slide. So you can see there, we have our debt items. The bit in the top half of the table is the actual debt items as I see them, actual bonds or bank debts or other loans and cash. So our net debt at that level is GBP 346 million. And then below that, we have to include things like our right-of-use lease liabilities for IFRS 16 accounting, and there's some of the embedded derivatives and so on. That's just to bridge back because you'll see in the accounts the number of GBP 492 million. And leverage was, as I said, a very stable 3.1x, which is well within our financial policy. That's it. Philippe, I think over to you for the operational overview. Thank you.

Okay. Thank you, Mike. Good morning. So very glad to report very strong results in UK & Europe Soft Flooring. As you can see, the EBITDA is up 18.7% to 17.5%. With the revenues on par, we had a very strong second half of the year with GBP 150 million. And don't forget, as Mike has mentioned, the first couple of months in the year, or the first 10 weeks, actually, the revenue was down 80%. And we still managed to make an EBITDA of 49%, up from 41.3%. Post-lockdown EBITDA was 20%, 21%, so we've been trading very strong in the last 10 months of that year and within -- into the first quarter of this year as well. So overall, 17.5%. This is a record year for U.K. and Soft Flooring. And the 3 reasons why we have had this result is, of course, we have the very strong post-lockdown demand from customers. We also have the improvement of logistics efficiency and the factory productivity, as we've explained in the past. And then, of course, the CapEx plan, which we've done in the production and logistics over the last 2 years. So some of the elements, okay, they are listed there. I won't go in too much detail. But as we mentioned in the mid-year numbers, so we've continued the bottom slicing exercise of margin-dilutive products. So when there was a strong demand, we could easily do that. We have not focused on new product development. Yes, we have new product development in the pipeline, but we haven't launched it because the current products are selling very well. The biggest project in this division was the move of Westex. Actually, the plant Westex, we moved to the Dewsbury site. Westex used to have there the die of the natural fiber, and we moved the whole plant there. So they are now at a complete different location. The site was sold. This move has been done from a production operation point of view. [ Offices ] will follow in the course of the second quarter. So we've also added new tufters to speed up the productivity. We've added beaming activity, which should reduce working capital. Normally, when we are tufting, we are tufting from racks. Now we have started tufting from beams. Basically, these are smaller batches, so we can put less stock than when we will be tufting on racks. Interesting, and this is why we've mentioned it here, it's a new development, a fantastic development in the underlay, which is a quality called RENU, which is a sustainable carpet underlay made from 98% of recycled material. And when I say recycled material we're talking about post-consumer waste. And this is selling for the moment like hotcakes, a very interesting new product development. Also, like we've seen in the carpet side with the underlay, we have decided to in-source the logistics because we were still working with third-party logistics. So we've in-sourced that because that's a key driver of the business as we have seen with the carpet side as well. Then, as you know, we have done a smaller acquisition on the continent, Estillon, on the underlay. And this has become now the European outlet for our underlay activities going forward. So very important as this is also part of the dynamics which we have seen in the business and the improved margin at logistics. And this, you will find on the right side. I'm on Page 16, by the way. This remains a key differentiator with our European counterparts. So currently, just for your information and to recap, that we have 3 warehouses in the U.K. We have one in Hemel Hempstead in the South; one in the Midland, Kidderminster; and then one in the North, Hartlepool. And we are shipping currently 24,000 pieces per week. This activity is -- currently, we're doing 50% -- 52% more orders with 33% less employees, so the productivity is up massively. We serve the whole country. 91% of U.K. Mainland served on a daily basis, and on-time deliveries are at 94%. So we've invested in more vehicles. We have 270 vehicles on the road now, which are 85% EURO 6 compliant. And they can even run on HVO, so hydrotreated vegetable oil. So the alliance -- for the moment, Alliance Logistics port has currently its own P&L. There's also some third-party logistics. Because we are so good, I think we are one of the best providers in the market to deliver soft flooring and hard flooring in the U.K. market. So this unique selling proposition, which we have on logistics, we cherish that, and we will be looking to further develop it in the future. Then I'll switch over to Page 17. So when we talk about UK Ceramic, so the revenue growth is very -- we had a very strong growth. Growth in the second half year was even GBP 150 million. The overall margin performance, as Mike has explained, is weaker. But basically, the reason why this is the pro forma effect of the acquisitions. As you know, in the previous year, we bought Ibero in August '19. We bought Ascot in March '20, which was a business which had very low EBITDA, between 3% and 5%. And we've improved that massively. And then in this current year, and Mike has mentioned that as well, we've done a small acquisition in Italy, which was Keradom. That was in December '20. But there's more than that. So there's -- the like-for-like average margin performance is basically impacted by 3 factors. Of course, in ceramics, you have a higher degree of operational leverage. And Ascot, as mentioned by Mike as well, give us immediate production capacity. But we had the delayed integration. It took us a few months to do the integration, so we had some duplicated cost for a period of time. And then the Q1 2021, which is actually the fourth quarter of 2020 financial results, what we call the lockdown 2, the second stage of the lockdown, European and Continental customers were more impacted than the U.K. customers. So in U.K., although there was a lockdown, we've performed on a very good level. This was, to a lesser extent, the case in the ceramics business. So very specifically then in Italy, we had the acquisition of Ascot & Dom. We acquired this for the capacity. There was a brand, local brand, Capri, and half of the production was used, therefore, and we used the other half to in-source some of the outsourced product. We've also managed to reduce the operations with 129 people. So there was a restructuring going on. We've increased on the productivity of the kilns as well and the business going forward. Very strong demand in Italy, mainly from the DIY from Germany, France and Eastern Europe. And as Mike mentioned as well, so we've topped that acquisition up, another small bolt-on acquisition, which was Santa Maria. Santa Maria is a plant which is close to Imola. It was a very interesting concept because we have the opportunity to have another couple of kilns and optimizing capacity which was exactly what we needed. So in Italy, we have continued to do the small bolt-on acquisitions, mainly buying production capacity rather than brands and to expand and to start in-sourcing because that has a positive effect on margin going forward. For the moment, in Italy, with all the investments we've done and with the plants we bought, we have a capacity of about 8 kilns spread over the 3 factories. And it is -- we keep on focusing on the low-cost production and integrated management. And then Spain, Spain suffered a little bit more because of the extended lockdowns. There was also less government support. So they were impacted a bit more than the Italian factories. And then when the business all started, the inventory takes a while -- because the program is pretty wide, it takes a while to build up the inventories again. So it took us a bit until we have reached the second half of the year, and then we were up to the level. As you have seen, we've still managed to do some like-for-like increases in the result as well on the ceramics. Also, interesting to know and to mention is the growth of the U.S. market. We do more business in the U.S. as well. Part of that is due to the increased import duties from China. So some of that business has come to Europe. The integration now -- I'm happy to say that the integration now is complete in the Spanish factories. All the factories are integrated. We managed between Ibero and Saloni to reduce the cost at about 7%. And it was -- as mentioned here, so the silica law, so we are an industry benchmark for health and safety improvements in Spain. So we speed up these investments just to be compliant with health and safety and the silica protection. So we've done all the investments needed then. Then the last part is Australia. As we have mentioned already before, extremely strong performance, 590 basis points plus. So we've expanded the turnover. The margin was very good, and it was serving between the lockdowns. They have been highly disrupted. But the management, the local management has been coping very well; has, in the meantime, used the opportunity to introduce more new product into the marketplace. We do more LVT collections now, LVT, the luxury vinyl tile. So the distribution of that is going very good, and the demand it's at a very high level. Also, end products, we see more polyester than polyprop, so there is an evolution there, so end products which are margin generating. And last thing to mention here is that we have completed now -- so as you know, we've closed an underlay factory in Melbourne, and all of that was moved to Sydney. The integration was done in Sydney of all underlay activities, and this process has 100% been completed now. So overall, most of the activities, whether that's soft flooring ceramics or our business in Australia, we've done all the integration exercises and we are working on the integration now, for the moment, at the newest companies we bought in the recent quarter. Okay. Mike, if I can hand over back to you.

Thanks, Philippe. Well, I mean that's just on the financial items. Geoff, do you want to talk through the outlook or conclude on the year?

Yes. So the year has started very strong. I appreciate we're only sort of 4 months into it or coming up to 4 months into it, but we've had a very strong start to the year. And we've been successful at passing on the increased cost of raw materials to our customers. Certainly, the demand, consumers has made that very, very easy. And one of the factors that we think is encouraging is, for many years, the data has t shown that 12 to 18 months after people buy a new home -- I don't mean brand new, I mean new-to-them home -- they replace the flooring. And there's a very strong correlation between the two. And with the number of housing transactions not only in the U.K. but also across Europe and in the United States, beginning about 6 to 9 months ago, we think that, that will sustain the demand for flooring for the next couple of years. So we feel that the short- and medium-term outlook for the business is very positive. Turning to acquisitions. We continue to pursue a number of opportunities. We've still got a substantial amount of capital available to us, partly as a result of the bond refinancing earlier this year and partly as a result of Koch's commitment and investment in Victoria. So I think it would be -- investors should expect to see some meaningful acquisitions occur in the weeks and months ahead. And with that, I'd just like to hand over for any questions.

[Operator Instructions] Our first question comes from the line of Charles Hall from Peel Hunt.

Could I just ask on the U.K.? Obviously, you had a very strong second half margin performance. Was there anything exceptional in that? Or do you expect that to continue on through this year? You obviously alluded to being able to pass on price increases. Can you comment about the extent that those have been? And I think previously, you talked about being able to mitigate any supply chain issues that are generally around in the economy. Is that still the case?

Yes. Thank you, Charles. So I'll take this one. So we have a very strong -- as we -- in the first quarter, we continue on the same level as we've been working in the second half of last year. So the demand remains very solid. And yes, we have seen some supply chain issues, especially with transport prices with container prices for some of the products we are importing. But we've been able to manage that. We've had some raw material price increases, but these prices are in the recovery mode now that we've passed on our price increases. And we are hanging on to the price increases because -- for the simple fact that we need to hang on to them because we didn't increase to the peak. So over a time period, this will flatten out. And we keep on having a few challenges in the market from supply chain point of view, but we are mitigating them. And we pass it on to the customers after we negotiated with suppliers and do what we have to do. Don't forget as well, Charles, so we are still improving on our logistics, on logistics performance. We are attracting more business. We keep on growing. If I look at the numbers of last month, how much business we attract, especially from overseas suppliers because overseas suppliers seem to be struggling a little bit with Brexit-related matters on administration to bring product across, also for the distribution of their products, so whatever we've invested in logistics has come to fruition now.

Perfect. And also a similar sort of theme in Australia. What are you seeing on pricing there? And you had a very strong second half margin, how much is that a sustainable level?

Well, in Australia, we have had to serve between the lockdowns last year, and it's not much different now because I think half of Australia is back in lockdown. There's no interstate traveling. There are some challenges in some states. Retail shops are closed and others that are still open. But if I see the numbers coming in, the demand remains very strong. I think from a raw material point of view, they are hit, to a lesser extent, by the raw material price increases. But they have been managing to pass on the increases because -- and they've done a lot of new product development where they have to incorporate the new prices of the raw materials in order to protect their margin. So strong demand in Australia and likely to go on for the foreseeable future.

[Operator Instructions] Our next question comes from the line of Robert Chantry from Berenberg.

Just 3 questions from me. Firstly, I just wondered if you could give a bit more color on the competitive environment and the customer behavior in Europe in terms of flows of ex European tiles going into the market, et cetera. Secondly, I guess in terms of deal structure, deferred and contingent payment hasn't really been used in the last 3 deals. There's an example of the presentation deck of how you might fund the next GBP 70 million of acquisitions. Has there been a reason deferring, contingent hasn't been that used? Is it sensible to assume that there is capacity to be coming in the future? And then thirdly, clearly, the Koch transaction last year was transformational for the business. And can you just give a few examples of how that relationship with Koch has changed how you operate and approach the business? I know there's some comment in the release this morning around procurement of certain types of inputs, presumably with deal sourcing and financing, but some examples of how they've changed the way you approach the business.

Philippe, can you talk about the competitive environment in Europe and so on? And then I'll cover off the other couple of points from Robert.

Yes. Sure. Competitive environment hasn't really changed a lot. And I have to say, on the continent, the demand in hard flooring -- I'm talking hard flooring, not soft flooring because soft flooring, we are not doing any soft flooring business in the continent. So hard flooring business, the demand has been very solid, especially through -- in fact, across all channels but especially through the DIY channel, which is more directed to our Italian businesses. We get demand. So we are looking. Even with all the extra production capacity, which we bought, we are looking for extra to outsource extra capacity with -- as OEM contracts with alternative suppliers. So demand is very strong. From the independents, this is then more the Spanish business and the exports, so we see a very strong demand as well. So we're having -- we can keep our lead times. The demand is strong. And there is no extra competitors, but there's a few competitors who specialize in specific activities, like, for example, just to give you one example, in ceramics, polished is very in, top polished product, the very shiny products, marble lookalikes, are pretty much in there. So we've invested there as well to play in that game. So we cover most of the production -- not the production, the sales channels. And we have a product development, which is coping to comply with demand. So not a lot of changes, Rob.

So let me just cover off the couple of questions, one about -- the first one was about contingent considerations and earnout. The deals that we did in Italy, the companies that we bought, we were effectively buying factories capacity. And we were going to completely integrate those businesses into our own current production. And as a result, an earnout wasn't appropriate because we would not be able to identify successfully the revenues -- sorry, the earnings from the businesses that we've acquired versus the businesses that we already own because they would be completely subsumed into our existing businesses. The same has happened with the grass business that we bought in the Netherlands. That has been completely integrated into our existing businesses as well. And as a result, it was going to be impossible to identify the earnings, the contribution individually from that particular business. So an earnout wasn't appropriate. The U.S. business that we acquired, it was a largely private -- majority private equity-owned business, and an earnout wasn't an option. In fact, the reason we were able to buy that business for such an incredible price was the private equity fund that owned it. This was the remaining asset in the fund, and they were winding the fund up. They thought they already had a buyer. That buyer defaulted on completion. And they needed cash to complete the winding up of their fund. So firstly, that meant that there was no earnout available because they needed cash. But secondly, that enabled us to buy that business in an absolutely, astonishingly good price. So those are the reasons for the lack of earnouts in those. Other opportunities that we are talking to at the present time, and we are in active to conversations as you would expect with a number of opportunities, earn-outs are definitely one of the components of the deal in most of those discussions. Coming on to Koch, look, there's 3 things they've done for us. Obviously, their capital has provided us with an ability to continue to grow the business significantly over the next few months and year or so before we use it up. So the capital contribution has been very valuable, and it's very valuable to the shareholders because we haven't had to issue equity, which would obviously be dilutionary. Secondly, they have been able to provide us with advice on raw materials, particularly around polypropylene. Polypropylene prices, which -- and polypropylene is a core ingredient in the carpet fiber, in the carpets that we make. Polypropylene prices spiked earlier this year -- or the underlying propylene molecules actually, they spiked in terms of price. And we know some of our competitors were driven to hedge their prices and take actions based on those high prices whereas Koch, who are a very large producer of propylene out of their factories in the U.S., were able to tell us that it was a short-term spike and they would start heading back down again, which is exactly what's happened. So we didn't do anything stupid and hedge prices at the absolute peak. And then the last thing that they have been very helpful to Victoria is providing introductions and, frankly, giving credibility to Victoria who is a completely unknown entity in the U.S. Koch have opened doors for us. So the transaction you've seen Victoria already do in the U.S. with [ Carli ], Koch's credibility enabled us to engage with that seller. And there are other opportunities which we expect to secure in the next few weeks and months. That will be a result of, again, introductions made by Koch and the credibility that it gives Victoria as a potential buyer.

And we have one more question from the line of Richard Hickinbotham from Singer Capital Markets.

You've answered most of my principal questions, but just a couple of supplementaries, if I may. I just wondered how far to run is the sort of bottom slicing of low-margin soft flooring products. And the other question I had was just really about the focus of future expansionary CapEx, what sort of quantum, what sort of opportunities are there for you and what sort of return criteria you're putting against that investment.

Okay. So how far do we run the bottom slicing. Well, for manufacturing purposes, there's a minimum quantity, which you will always need. So we try to look for the right equilibrium in our factories. So if we need for a factory like the Abingdon factory, if we need 12 million square meters, we will try to optimize that. And we will cut accordingly products away, which are margin dilutive, just to fill the factory at 100% because that's where we make the most money. The cost price is not what it is if you're only running at 80% of the capacity. So we're looking for that fine balance. So that's as far as we take the margin dilution. Then on future CapEx, so I think on the soft flooring, we are -- with regard to production with the new production outlet, which we're having in Dewsbury for our natural fibers and then we have Abingdon for the synthetic fiber, so we still add some tufters and bits and pieces of it. This is never big. And I think it was mentioned somewhere in the presentation, I think we can make another 15% to 20% growth without having to heavily invest in CapEx. As I said earlier as well, most important for me as a key differentiating factor is logistics. So we will keep on investing there. So don't be surprised if, sooner or later, you will see some more investment on the logistics side of that because this is just so helpful for us. The margin on a cutting is so much more than the margin on a roll. So the more we can cut, the better it is. So you can see some potential more investment in cutting operations. Having said that, the next 15% to 20% growth, which we can have, we can easily handle through the existing warehouses. And in the future, if we will go beyond that number, then you may see some more investments. Nothing major on the soft plant. If we talk about hard flooring. Hard flooring, we are, in all of our factories, whether that's in Italy and in Spain, at full capacity. So you may see some production build, some extra production capacity if we want to expand. And we can do that. We still have a couple of possibilities to go on this expansion. As you know, hard flooring is a bit more capital intensive than soft flooring. But okay, it provides a better margin as well, so it can carry that. But I would say nothing spectacular to do. The numbers, the growth numbers, we foresee for the next year or a couple of years. So you should not expect anything spectacular on the production side. The problem is with new investments, it takes a while before they are there. So sometimes, it's better to follow a strategy, like we do in Italy, to do some bolt-on acquisitions, as Geoff has explained, just by production capacity. So the advantage is we can immediately in-source some of the products. Don't forget, not only in Italy but also in Spain, we are outsourcing a lot of work. So if we are buying a production plant, we have immediately upside by doing -- by integrating the product, by in-sourcing the outsourced. Is that an answer to your question, Richard?

And Richard, just on your question on return on investment, we have a minimum hurdle of 20% internally. But actually, more generally, we look for a 2- to 3-year payback as a general -- which is obviously higher than 20% but just to give you the broad idea of how we do look at that internally.

And as there are no further questions, I'll hand it back for any closing remarks.

Now look, I think -- sorry, I started speaking while I was still on mute. Look, I think both the RNS is fairly full and the presentation is fairly full. Obviously, if you have any further questions, you're more than welcome to contact any one of the 3 of us. But fundamentally, I think Victoria is in a very good place, and we can expect to continue to grow the business and increase the free cash flow per share over the next 12 months significantly from where it is today. And so with that, thank you very much for attending. And we look forward to seeing you next time.

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

Thanks, everyone.