Victoria PLC (VCP) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Victoria plc FY '22 Half Year Bond Investor Update Call. My name is Robyn, and I'll be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Michael Scott, Group Finance Director from Victoria Plc. Michael, please go ahead.

Good morning, everyone. It's just me today. As she said, it's Mike, the CFO. So I'll be taking you through the presentation. Hopefully, everyone has that in front of them. So very pleased to present these results to you. It's been and continues to be a fantastic year. I think that's hopefully the results, to some extent, speak for themselves in that regard. I'm on -- I'll start on, obviously, Slide 2, the highlights. Just to take a few notes. Revenue of almost GBP 490 million. Of course, there are acquisition effects within that. But importantly, and we split it out, of the 60% growth year-on-year, in that number, 30% of that is organic like-for-like constant currency growth. So genuine organic growth, which is just absolutely unprecedented. And just to sort of remind everyone that last year in the half year, yes, we had a half year that was impacted by COVID lockdowns back in April, May 2020 in the comparator. But just to remind everyone that we had such a strong performance last year coming out of those lockdown through to the half year, but the comparator was actually a strong and solid comparator. So this 30% like-for-like is very, very meaningful. And we're very proud and happy with that result, proud of and happy with. And definitively, we are confident that we are performing better than the market and better than the competition. And we've done a number of things proactively to drive that. That's -- a lot of hard work and effort has gone into delivering that. Importantly as well, that growth is profitable growth. We haven't achieved that growth by dropping our prices. We have sustained our margins. And in fact, and there's a bit of a story, as always, with us around margin because of acquisitions that's sort of muddy the picture a bit, but we -- I try and cut through that for you so you can see what is organic and what is acquisition mix. And I'll come back to that in more detail. But the headline there is that EBITDA, GBP 84.5 million, which represents 130 basis point like-for-like year-on-year increase in margin. In terms of cash flow, and again, I'll come back, consistent conversion from EBITDA to operating cash flow, obviously, as everyone knows, with our business and our strategy, that we reinvest all of our cash flow into living growth, whether that's acquisition-related or organic. But the overall operating cash flow remains very strong. And net debt, GBP 519 million, obviously following the additional EUR 250 million notes that we issued, as everyone on this call will be well aware, back in March this year. Of course, some of which, not quite all of which. We still have cash left on the balance sheet, excess cash left on the balance sheet. But a decent proportion of which we have invested into acquisitions since that time. And I'll talk through those, and that brings the net debt to GBP 519 million. And then importantly, because we've got more debt, but more bigger business, more and more revenue, more EBITDA, the leverage has remained absolutely stable at 3.3 over the last year and in line with our stated financial policy. And that leverage, by the way, is, just to be clear, pre-IFRS 16. That is notes and any bank debt or bank facilities over pre-IFRS 16 EBITDA. Just on the next Slide 3. This shows a breakdown as we -- in the same format that we always show of some of the key income statement KPIs by division. We've got a fourth division now because we acquired a business in June in the U.S. Our first acquisition in the U.S., albeit we already had existing business in the U.S. via export prior to that. And so we have carved that out into its own separate division. It's a business called CALI. It's based in San Diego in California, but it disputes across the whole of the U.S., and I'll come back to that, but just to point that out. I'm not going to dwell on the rest of the slide, I think the numbers sort of speak for themselves. But there are other slides that get into analysis in a better way. So flipping over to Slide 4. This slide is really just concentrating on revenue. It shows the 60% absolute growth in revenue by segment and then shows the like-for-like performance by segment, which obviously averages out at 30%. Obviously, not relevant for North America, given that, that is new. Clearly, incredibly strong performance in particular in the U.K. and Europe Soft Flooring division. I think as most people will know on this call for us, that is primarily a U.K. business. It also includes our Dutch artificial grass business, which following the acquisition of Edel Group earlier this year has become a more substantial part of that division, albeit it's still predominantly -- still -- a majority of which is still a U.K. business. But the grass sells -- the grass part sells all of Europe. So -- and this 48% that you can see here is organic growth. It doesn't include the impact of the acquisition of Edel, so really, really strong performance. And not to -- well, it does overshadow a bit, but not to take away from the fact that the growth in the other 2 divisions were still very, very strong. We had a unique and still -- I think the market, the demand environment in the U.K. remains and today remains, and our outlook is also very positive, very strong. But importantly, and this is the key thing I want to point out, these numbers here don't reflect the market. These numbers here reflect the performance of the group in a market that, yes, is doing well, absolutely. But -- and there are no market reports out there. But by our estimates, is growing still at a single-digit rate. So we are absolutely outperforming the market, and that comes back to the synergies and operational improvements that we've driven, which give us both margin benefit, but also importantly, competitive benefit driving the top line. And a lot of that is through just manufacturing the service proposition. And that's just really, really come delivered for us. I mean it was the same story, I'm sure, in the last call we had, but you can see here that, that story has continued to deliver for us in the U.K. We've -- the service proposition has been fantastic to drive that number. The key thing I just want to mention also in Australia is Australia has spent quite a big proportion of the period in question here in COVID-related lockdown. I think -- don't hold me to this, but I believe Melbourne has the unfortunate statistic of being the city with the longest lockdown in the world. But the business there and the operational team there have done a fantastic job of selling where they can in the states where they can. They've done also -- found parts of the construction industry that remained open, and we're flexible with that business to sell where they can. So to deliver like-for-like growth over these levels at a time when lockdowns were having an impact as well is just fantastic. And by the way, Australia is now largely out of lock. So we have a lot of optimism in that market as well going forward. Moving on to Slide 5. This focuses on the margin. I mean the margins, in terms of percentage -- sorry, by segment, margins in terms of the percentages are what they are in terms of the 18%, the 20.5%, the 13.3% and the 6.6%. They -- and I say that in the sense that they moved up because of organic improvements. And in this case, you'll just see the -- quite often, and you've heard this from me in the past, moved down because we buy -- generally, we buy businesses that are making a lower margin than our incumbent business. So there's a mix effect going on. So what the like-for-like margin variance that you can see there in each case represents is the organic movement in the margin. And the way we calculate that is we normalize by adding it -- looking at the businesses that we have acquired because quite often, a lot of the margin improvement also comes from -- it will manifest itself into the businesses that we acquired because we deliver synergies and then obviously, that goes into certain income statements. Some of it also manifests itself in our incumbent businesses, but some of it in the acquisition business. So what we do is we normalize that by looking at what we bought. So we back what we brought into the prior-year number, and then we look at the overall uplift. And that gives us these numbers here that you can see. So we've delivered almost 200 basis points increase organically through synergies in both the U.K., and Europe Soft Flooring division and the U.K. and Europe Ceramic Tile division through some -- sorry, for some reason, I muted there. Through some projects, which I'll talk back to. In North America, just to point out, and obviously, that's the recent acquisition, at 6.6%, we definitely expect to uplift that. It is a distribution-only business. That's the business that we bought. It's a very good business. It has very strong revenue growth. It is omni channel, has a lot of interesting opportunities to grow across these channels, and we are also looking at a lot of synergy opportunities to deliver new product categories from elsewhere in the group into that business and to distribute into the U.S. So we're very excited about that. But if people are wondering about the margin, it is because it is a pure distribution business and an auto manufacturing business. Just flipping over to Slide 6. It's not the most interesting bridge in the world, but it's bridging the margin from last -- prior-year period, equivalent period to this year. So just to again visually reinforce the point that the acquisition effect overall, across the group was 1.2% down and the organic improvement overall was 1.3% up, which is the 130 basis points at the bottom of the previous page. And further on in the presentation, there are this same bridge reproduced by segment. On to the next slide, Slide 7. This is a slide I've put in for quite a few reports now -- presentations now. There's a lot of numbers here. This is to show all of the nonunderlying items that aren't in the underlying results. Because clearly, investors want to know what lot of these things are. A lot of these things are exact -- the same items that you'll have seen in the past. I mean, things like, for example, the amortization of acquired intangibles. We see that as nonunderlying. These acquired intangibles are the things that we have to fair value on the opening balance sheets of our acquisitions such as brands, customer relationships. And then we have to amortize them. Of course, we never have to pay any cash to replace that. So we strip that out and show that separately. Just to talk through the 3 categories. Exceptional items are one-offs. Other nonunderlying operating items are, by definition, other things that are not exceptional, but sits in nonunderlying, which accounts separately, the big one, being intangibles I just mentioned, and then nonunderlying finance items. The exceptional items are generally cash items because these are the one-off costs. And you can see there, they are costs relating to acquisition activities. So legal fees, due diligence costs in relation to acquisitions that we've either made or prospected in. Obviously, if we stop making any acquisitions, that number will fall to 0. It's higher than -- well, it's a lot higher than last year, because last year, we were with COVID. We weren't making any acquisitions. But this year, as people can see, we've been fairly proactive because there's a lot of opportunity around. There are some reorg-related costs. Last year, that number was bigger because there were some COVID-related real costs last year in relation to changing some of our processes to become -- to improve the health and safety around COVID, obviously, protections. This year, that did not repeat. So there were no further COVID-related exceptional costs, but there were other costs, much smaller numbers you can see there relating to some projects, mainly in -- so we finished the closure of our Westex, one of our U.K. carpet factories was in the process -- we were in the process of closing, again, to consolidate into, in this case, our factory in Dewsbury in Yorkshire, which is completely done. And we've invested in our factory in Dewsbury in Yorkshire to grow that and consolidate the production from that factory into the second one to drive synergies. That's done. There are also some projects -- we've made a number of acquisitions in Italy. This small acquisition in Italy this year is -- was announced, and there's a lot of activity going on to integrate those acquisitions in terms of we've now got 4 factories in Italy, our factories across the different acquisitions we made over the years and bringing that together in an optimal operational way across all the different brands that we -- and products that we produce in Italy in the same way that we've done in the U.K. and Spain in the past. There's a lot of activity there, mainly in Italy. But you can see, that's not a big number, and it's things like redundancy costs. And then the negative goodwill reversal, just to explain that. We bought a business last year called Hanover Flooring, which is a flooring distributor in the U.K. fitting in a nice niche gap for us in the U.K., where we -- previously, we felt underweight, and we could be a bit stronger in distribution. And there was a completion accounts adjustment on the initial purchase price. So -- and that happened after the year-end. So in the prior year, and we didn't know what it was going to be, so we can count in the prior year. We had -- it was actually a negative goodwill on this transaction, and then we had to pay these account adjustments, more distribution account adjustments -- more distribution account adjustments post year-end. So that's effectively a reversal of that negative goodwill, if you see what it mean. I talked about the big GBP 16 million. I want to just briefly talk about the GBP 4.7 million, which is there, you can see called unwind of fair value uplift to acquisition opening inventory. Apologies for that being a mouthful. What is that? Under IFRS, we have to fair value opening balance sheets on consolidation. And we've taken the view and we've looked across the accounting world and those precedents that we must also fair value inventory to selling prices. So effectively, now if you buy a business and you've got inventory, let's say, on the balance sheet that you bought valued at, say, GBP 6 million. And normally, that business would sell that inventory for GBP 10 million. Then effectively, you're now having to recognize it in your open and consolidated balance sheet at GBP 10 million, not at GBP 6 million. Of course, it bought that stock for 6, because it values it on its balance sheet at cost and it recognizes the profit when it sells it. That's normal. But in this case now, just for that opening inventory, we have to mark it up to GBP 10 million. And then, of course, when you sell it, you're making a profit, because you've already marked it up to the selling price less cost of sale. So -- and obviously, all the future stock [ we will ] then buys, once under ownership, is back at the GBP 6 million. So we don't see that uplift. We don't make any margin on that initial inventory when it's sold or even though the underlying business does. And we don't see that uplift, therefore, as reflecting the underlying performance of the business. So we put it through, but we show it separately as a nonunderlying item. And that's what that GBP 4.7 million represents. Apologies for that rather convoluted explanation. And then in finance costs, these are just -- this doesn't include the cost of the notes, for example, which is very much underlying. But in the nonunderlying side, the one material item here is in relation to the preferred equity. We have issued last year GBP 75 million of preferred equity to Koch Equity Development, I think as everyone well knows by now, that's about a year ago. And under IFRS, it's recognized as a financial instrument. There are -- notwithstanding the cost of the preferred dividends and sales which are approved and will ultimately convert into ordinary equity along with the principal. There is -- there are some embedded derivatives that we have to recognize and equity warrants also that recognize the financial instruments. And then there are fair value adjustments to those, and that's what that GBP 10.4 million represents. It's the combination of income statement impact of the fair value adjustments to all of those things. Clearly not, therefore, going to cash. I will leave it there and if anyone has any questions, please ask at the end. Just going on to cash flow on Page 8. We -- as I mentioned earlier, we -- the operating cash flow is -- the generation is constant. It's not complicated -- of course, in the end -- of course, everything is complicated. But overall, concepts are simple. We're a manufacturing business. We buy more materials. We manufacture, value add and then we have those in stock and we sell them. So what are the key consumers of cash in our business? It's working capital and its CapEx to maintain our factories and our logistic operation. The working capital, you'll see historically, is very stable. We manage it very efficiently. It doesn't consume a lot of cash into the group as we continue to grow organically, and we've been very successful at keeping that. If you look back over several years, it is a very stable number. This year, and post-COVID, it is a bit different. It was a bit different last year because of COVID and the lockdowns. But this year, the impact there of the GBP 14 million, which comes through in inventory and a little bit in package as well as we've grown the revenues clearly substantially, is an investment in stock to help mitigate some of the global, very well-known, in general, global sort of supply chain challenges. We don't see huge challenges. We are not worried at all about our -- continue to supply. But certainly, in some areas, we've taken precautions, for example, in stocking up in certain raw materials, and that's reflected there. So we have invested a bit more than normal and working capital. Below that line, below that 61.2% of the interest predominantly there on the notes, we did have to pay some taxes in this period, unlike the equivalent period last year, which was very much due to lockdowns. And the replacement CapEx, which is around about, for the new -- in large business now with the acquisitions, around about GBP 40 million a year, a little bit higher than normal because some of it was deferred from last year, again, because of COVID lockdowns. But it's about GBP 40 million a year. So GBP 18 million free cash flow. And then what I do on the next slide is I bridge that, this is Slide 9, I bridge that into the net debt. So you can see there, GBP 18 million after interest tax and everything. But then of course, we invested part of GBP 180 million in acquisitions, but that also includes the fees and costs of those acquisitions as well. So that's a big movement in net debt, as I mentioned earlier. There was some other -- there are some other items that you see in terms of exceptional cash items and explanatory CapEx relating to the projects that I mentioned in Italy in terms of integration and a little bit in the U.K. around the closure of Westex and the integration into the -- our Dewsbury factory. Finally, on the next slide, just to reiterate, and this is Slide 10. The financial policy is key. We follow that. We will not deviate from that. The leverage at the half-year was 3.3. This is, as I mentioned, the net leverage of the notes and any bank facilities and I guess, traditional finance pieces. So this is pre-IFRS 16, over pre-IFRS 16 EBITDA was 3.3. That's what our policy is based on. And we will keep it there at that sort of maximum low 3s, as we've done in the past, as you can see there on those numbers. We still have a lot of -- we have a lot of liquidity. You can see the cash figure. We have an undrawn group RCF on top of that. We also have a further commitment of GBP 100 million of prefs that we can issue to Koch that we have not issued in addition to the GBP 75 million that we issued a year ago, and that commitment remains. So we have that available to us as well. So the liquidity is significant. The next few slides, I won't spend a long time, but just talk through some of the specific operational matters and commercial matters in some of the divisions and also show the margin bridge for each of those divisions, the same bridges I showed earlier. So just very briefly, if you look at sort of Slides 12 and 13, this relates to U.K. and Europe Soft Flooring. I mentioned the Westex plant, the location. There's also been a lot of development in terms of product, in terms of ensuring, as you can see, their ISO accreditations but also investing in our testing labs again to go to ongoing quality control and so on. And logistics, as I mentioned earlier, the service proposition is key because in software, in particular, you're not just talking about -- talking about delivering something, you're talking about huge roles of carpet that you cannot put on pallets that we retain in a distribution center on behalf of our customers and cut to order. So it is not straightforward, and it is not palletized. So you can't put anything on a pallet that way. So it's vital. It's really played into our hands in terms of driving our growth because we are a reliable supplier, as seen by all of our customers through -- and in particular, through these turbulent times. And we've really gained from that. And we continue to invest in the area, and we've committed to a new DC just off the M5 in near Worcestershire to replace our current key events warehouse, which will be operational about a year from now? So we continue to invest and ensure that we are at the forefront of that. In terms of the margin bridge, absolutely rarely. It happens, but the acquisition mix effect in this division was positive. That's because the acquisition with Edel Group, which is an artificial grass business we bought in May; and artificial grass businesses generate very good margins. But we also had organic improvement on top of that. Then the next few pages are on ceramic tiles. Again, ongoing operational excellence projects in Spain. But the big story here at the moment is we bought a couple of businesses in Italy. We now have 4 factories in Italy. We are optimizing our production footprint across these 4 factories. We've got a couple of new -- there are different parts of the production process, obviously, but we've got a couple of new lines going in. As part of that optimization in particular, a new replacement channel in Sarah, which is the original business that we bought back in 2017, is going in currently. It will be in by January. So investment going on there, as you can see within the CapEx numbers, but absolutely driving the margin improvement and we are selling our pulp production, which is fantastic because we keep adding more production and they're selling it out the demand. It's very strong for our ceramic tile products. On the margin bridge, the low -- here, we did have a negative acquisition. So these are the 2 businesses that we bought initially in April. They were effectively bought pretty much as 10% EBITDA margin businesses with about, I think, combined in total, about GBP 50 million of revenue. And so that's brought the margins down. But we are very -- we've already stated when we bought those businesses. We're confident we can pretty much double that quite quickly within the first year, and that's what we're working towards, the 3 projects that I just described. And so that is just pure mix effect of what we bought and then the organic improvement of 180 basis points alongside that. And then finally, Australia, I've mentioned -- I mean, the key thing there is it was on lockdown for a lot of the period and the team did a great job of growing -- in fact, growing that business. And it's now out of lockdown. And North America, finally, as I've said, this is -- it's new. We're really excited about some of the synergies we can deliver there in terms of channel -- revenue channel synergies. So I think that's -- the rest of the slides, there's a lot of slides in the back that are the same slides you will have seen in the past. Just talking about the group in general, there are lifts from previous presentations. There's a bit here on acquisitions. We are -- we've made these -- well, it shows just 4, but the Italian one was actually -- well, for that, actually 2 acquisitions. We've made these acquisitions so far this year. We announced the acquisition in Turkey, which is another ceramic tile -- a midsized ceramic tile producer in Turkey, a low-cost manufacturer, will fit brilliantly into the portfolio. Again, we'll optimize production across that, albeit it has its own good brands, which we obviously keep independent. So we're excited about that when that acquisition completes, which is expected to be January. So there are more opportunities, absolutely. We tread very carefully. We look for things that are -- that will be sustainable in the long run to have defendable positions in their markets. And all of that stuff that I've said every time, and we've done in the past, and we will continue to do. We are in no rush. We will only look for good things, and we will fund in ways that where our financial policy is absolutely adhered to. So I think just to round off before Q&A, I think the highlights are, I mean, incredible set of results. I mean we are very, very happy with them. To deliver 30% organic growth whilst also growing margins on a like-for-like basis, I think it's just been fantastic and to deliver 5 acquisitions and retain our leverage at the same time, I think it's also fantastic. So we're very proud of it. I hope everyone was pleased with the results. And I'll pass over for Q&A.

[Operator Instructions] Our first question comes from Jason Late from Ares Management.

Congratulations, very strong results clearly. A couple of questions, if I could. The first one is, if you can talk a little bit more about, I guess, the end market demand that you're seeing. Obviously, it seems strong. I mean we see that through a lot of the building materials sector, et cetera. But can you talk about any variations in demand by geography or by product? Where it seems to be quite strong all around, but can you talk about any differences where you're seeing maybe a little bit of flattening out of demand or perhaps a surge in demand?

Do you want to ask -- is it okay for that first, Jason? Or do you want to ask a second one, and then I'll...

Be sure -- yes.

Yes. So look, yes, of course, it varies by product, it varies. And it's not even by product category even within, let's say, one product category, there are always differences in the demand profile that we see at -- across different segments of that product category. And I'll give you some examples. So right now, the strongest demand we see, and look, I can only talk to our experience and what we see in the market more broadly. I don't have a market report that tells me definitively what's happened in the last 3 months or what is going to happen in the next 3 months. The strongest demand, definitively, for us in artificial grass. There's a very, very strong demand profile there. It is seasonal in artificial grass. It's -- the strongest demand comes in the spring and summer, and that's offset in the second half of the year with stronger demand in other areas. So overall, our group seasonality is relatively far. But that -- sorry, ignoring the seasonality, I got side-handed apologies. That has seen some very, very strong demand. Our own businesses have -- incumbent business we bought in that area in 2017 have grown fantastically in the last 4 years, and that's why we invested in Edel Group in May to both get a couple of new brands in that area, but also to deliver a very high-quality manufacturing capability in that area. So I would say that's the strongest area. It is what it is. Obviously, not the biggest part of our business, but it is actually relatively big now that we bought Edel Group. In terms of the soft -- I mean, it shows in the numbers, right? Soft Flooring in the U.K. has just seen phenomenal growth. But I really want to stress, that is not reflective of the market. We are in a market that, I think, compared to perhaps to other building materials, is the cheaper end of renovation. Our products are mainly going to renovation, residential renovation. It's a cheap way to improve your home. And so the cycle does move. I'm not going to say hit that cycle, but it's steadier than most. And so what that means is we don't see huge downturns, but we also don't see huge upturns. And of course, we have seen some type of demand since COVID. We saw that last year post lockdowns. In our European markets, we haven't seen a lockdown effect this year, but we've seen continued strong demand. But -- and again, I don't have a market report, but our view is we're talking about decent single-digit growth. Now clearly, we've outperformed that. And okay, there are some price increases built into that number. But again, that's single digit. So a big chunk of that like-for-like growth is volume. And I just think we've done a really good job in outperforming the market. So sorry, to your question, yes, I think it's definitely clearly been strong in Soft Flooring. In ceramics, less so. But here is where I'd say there's a sort of also an important shift with internally. So we are really now -- we have a fantastic business in some of the higher-end brands, higher-end products. We've invested -- continue to invest in those, and they're very stable. But the business growing for us at the moment is the slightly cheaper end in the value chain in sort of the value spread, if you like, of different products. We have a big business specializing in supply to the DIY sector. That is definitely a growing segment channel for ceramic tiles in Europe. And we've invested in that. And so that's been a really good growth area for us through our Italian business. And obviously, we look to things like this Turkish potential -- well, it's signed, but hasn't competed. Turkish acquisition, again, in sort of looking at tiles, the Turkish, manufacturing is a very low-cost manufacturing base. So yes, it varies. Does that answer it, Jason?

Yes. Yes, that's very helpful. I mean, just curious if I can add one on the -- you sell to DIY. Some of the DIY that we're aware of have had amazing growth. But the kind of question, the sustainability of that and maybe looking over the next 12 months, it softens a bit. Are you seeing any softening in the order book from that channel?

No, not at all. Not at all. So -- and we're not -- DIY is the fastest-growing part of it. We are asked -- we are, just to stress, in every category, including ceramic tile. We service all the channels. So we like to go direct retail where we can, but we are as -- more so in the sense that we are in DIY. In fact, DIY is definitely still significantly smaller than directed to independent retail. So I don't think -- I mean, it is taking more shelf space in -- and certainly how we've has done over the last 12 months in DIY ceramic tiles, and I think that's a trend that we've -- that we benefited from.

Yes. Okay. Got it. Second one, if I could, the cost inflation outlook. Everyone talks about it. You've managed it proactively very well. No one has a glass -- a crystal ball. How are you thinking about the second half? Or if you can, even into early fiscal '23? What expectations do you have? And I guess another way to say it is, are you continuing to perhaps prebuy or keep some elevated inventory because of expected disruption?

So I think on the disruption side, we actually haven't -- we have not seen much. I mean, where we see the most disruption, as I think you probably can -- you'll imagine, is we don't -- we manufacture most of the products that we sell, but not all. And so for example, we have LVT products, vinyl tiles, or wood products that we work with -- we design and we have our own brands, but we work with manufacturing partners in the Far East. And for container reasons and so on, you can imagine that were one area where we've seen a bit of a pinch. And that pinch has manifested itself, not in terms of any decline in business, but just not being able to grow as fast as we'd like. So just to stress, that's the only area where I would say we've seen an actual constraint in supply. But we've managed that and we've made some changes and broadened our supplier agents as well to manage that. In terms of price and inflation, it doesn't affect all of our raw materials and all of our business. The key areas that have been affected so far this year are #1, synthetic yarns on the carpet side. So we make wool carpets, we make synthetic carpets. These days, synthetic carpets are more popular with consumers. And we -- and there are different types of yarn, and I don't want to bore you with the different types that even in the industry. But the key one that we use is key in our markets, in particular the U.K., is polypropylene. And that sort of spiked back in -- up back in March, then came right down again and then went up again. Not quite as high in the sort of early part of the autumn, and then it's -- and it's on its way back down again now. So it's been volatile. And we -- and that is an area we have stopped. We foresaw some of that and stocked up earlier in the year. And the way we manage that is we have redundancy in our supply chain. We have multi suppliers. We keep that as competitive as we can. We try and work with our suppliers to make sure they're taking their share of that hit. And then where we can't pass that back down to suppliers, we are passing -- we are increasing. We're passing it on to consumers and ultimately customers, I guess. Sorry, customers and ultimately, consumers. So -- and we have price list and we update those price list. And there's no rule that, that has to be once a year or in a particular time of the year. We update in order to protect our own business if we have to. Then on the other one, the only other key area really is gas to get us more recent as everyone will be well aware, that is relevant to our Ceramic Tile business, not so much our Soft Flooring business, net natural gas. And that's because the entire ceramic tile industry and the ceramics industry, for that matter, of different types, uses gas to fuel the kilns. And obviously, as everyone know, you need a kiln to fire the clay. So the whole industry has that issue. We fix our pricing with capital suppliers in the different countries. So it's not all one big gas supply. We fix our pricing with the gas companies looking out 12 months. That doesn't mean we always have 12 months at any point in time, but it certainly means we always have several months of minimum of visibility, and we benefited from that, right? Like we haven't had to suffer from the huge spike that happened in natural gas prices. When you look forward now, the prices that you can buy forward are much, much lower. So not quite back to where they were. So I think there may be some short-term impacts on that. And we will -- again, we will endeavor to pass it on through -- and maintain our margins in H2 as that feeds through and feeds through the inventory. But I certainly have no issues in terms of going beyond that, you asked about next year, financial year, I have no concerns about maintaining our margins in general. But there was such a sharp going forward, but there was such a sharp spike in gas to the extent that, that ends up not being covered by our forward buying or by price increases there may be some impact on margin, but I think it's going to be relatively immaterial.

Okay. Great. If I can just -- maybe just my last one, just to throw in here. The M&A that you do is obviously in different countries. Is that a specific decision to expand the geographic footprint versus perhaps buying more interesting and valuable targets within your existing countries? Or is it purely agnostic and you just -- wherever the best opportunity is, at least in terms of the numbers, you just go for that? I'm just wondering how much the geography is part of that strategy or not.

No, it's very relevant. I mean, we're not buying opportunistically in the sense that we find the cheapest thing we can, wherever it is in the world, or the lowest EBITDA multiple. No, that's not what we're doing. We, of course, want to buy at sensible prices. But importantly, we want to buy things that are going to be meaningfully added to our existing business. And one of the reasons why it took us until now within this strategy, which has been going on for many years, to buy something in the U.S. is because it's clearly not a focus when you're trying to consolidate a business predominantly in Europe. So we look at, yes, operational location because if something is on the other side of the world, it is, of course, that much harder to manage and question mark what synergies you can deliver operationally. But also, end markets. So everything we bought in Europe and look, and frankly, including the Turkish business that we've now announced, net selling across Europe. And so we look at how we can sort of balance across the channels and selling geographies. And then we also -- Turkey is good. We can work with that in terms of operational synergy with what we've already got in Spain and Italy. It would be different if it was something much further away. So it is very relevant. There's a lot of history in these industries, right? There are a lot of ceramic tile producers in Spain and Italy. So if we're growing in ceramic tiles, that's where a lot of opportunity lies. So -- whereas soft flooring, and you can imagine is more, in Northern U.K. and Northern Europe. So yes, we look at that carefully, and we scrutinize every acquisition carefully, not just based on price, but based on all of those sorts of criteria.

Okay. Yes. So the takeaway is, obviously, in your existing markets is where you're looking at targets. Now the U.S. is more of your focus now that you've got CALI, but perhaps buying something in South America should be -- I should consider as less likely because of what you've just said. I mean, that's kind of my takeaway. Is that fair?

We are interested in ceramic, more growth in ceramic tiles in Europe, and we are interested in selective growth in soft flooring, and we are interested in U.S. distribution and things that will give us synergies into that U.S. distribution.

Our next question comes from Karan Samtani from Citi.

Just one question. In terms of acquisitions, I think you've previously discussed questions about entering the commercial space. I assume that there's no change on that. You don't want to just enter the commercial market?

I guess in general, yes. So it depends -- commercial, it depends what you mean. So I think for me, there is residential and then there are different elements of nonresidential, if you like. And then there's also the -- separately, the distinction between renovation and more construction-related, which could be also in residential, right? So on -- so the vast majority of our business is focused on residential end markets, i.e., we're selling to retailers who are ultimately selling to consumers. And by definition, renovation because we're not selling to -- no, we do sell -- by the way, we do sell to households, but it's a tiny part of our business. So what are we interested in going forward? I think we're underweight in commercial. But I think that suits us for now. I think -- are we interested and do we already do business in, for example, some hotel refurbishment or some other types of commercial refurbishment? Yes. Do we want to do -- are we interested in getting into carpet tiles and office-type refurbishment? Not really. So it really depends what you mean. I think there are interesting areas of commercial that are -- that have synergies with what we're doing, that we're always going to be interested in. But, yes, by far, Karan, the things we look at are, yes, residential refurbishment related.

Right. Okay. So there's -- I'm talking more of the sort of high-end stroke, the likes of your Apples, your Amazons, the higher end of the spectrum of companies like that.

Do you mean -- in what way? You mean to refurbish offices?

Yes, exactly. The carpet tiles in these various larger corporations.

Look, we're not -- our focus is not on -- we will look at everything, yes. For starters, we have a very open mind when it comes to looking at stuff. But we very quickly narrow down what is meaningful for us, what we can manage, what we think is sustainable, where we think there is a position that can be defended, right, in the market. So -- and generally speaking, in commercial, we have less interest. But we keep an open mind as well, right? So yes, it is a fact, and it's been a factor today and it continues that, no, we're not really interested in products that go into office spaces. It's not really a focus for us.

[Operator Instructions] Our next question comes from Jonathon Smith from HPS Partners.

Could you help me with what your run rate revenues and EBITDA be, including the impact of all closed acquisitions, if you could provide that, please, Michael.

Including -- well, it's -- it depends how you look at it because when we bought some of these businesses, we -- some of the ones we buy for more operational reasons, we -- they come with brands. We continue those brands. But actually, we're happy to drop, and what's the word -- but -- to cut some lower-margin business. So sometimes we buy a business, and we've done this in Italy in particular, where we're happy to actually reduce the revenue, but we -- to improve the bottom line, right? So -- and there's an element of that. So the run rate overall is broadly -- and no surprise when you look at our half year number, it is around about GBP 1 billion in sterling equivalent. It does depend on translation, obviously, of FX.

Understood. And then in terms of H2. Can -- is there any guidance you can provide? It looks like it would be a tough comp, both in terms of revenues and EBITDA, but margins, in particular, can you give us any guidance there as to what to expect in H2?

I think we will -- I think overall -- and yes, it depends on the -- any acquisitions, of course. But if we didn't make any other acquisitions, then the no -- this mix effect will have more of -- will continue to some extent because those businesses are coming in a full year effect, yes. So there's an element of some further dilution there because they weren't bought at the very beginning of the year. But equally, we do believe that there will be some operational improvement due to further synergy improvements, because some of these projects continue, as I said, in particular, initially. Do we expect there to be some short-term impact from, for example, gas in particular? Maybe, as I mentioned already. So look, I think overall, it's hard to predict in the short term. It's the hardest actually. Longer-term, I would say we can -- we do expect there to be a bit more improvement than where we are today. The -- I would say, soft flooring is pretty much where it is. I think we can continue to grow. But I think the margins we've delivered and we actually think are sustainable, but maybe we can take a few more tens of basis points, but it's not going to be a whole percentage point. I think ceramic tiles it's very variable. The original business we bought making 30% plus EBITDA margins, and that's still -- and we've actually improved those. So they're still up there. And then we buy businesses making 5. We bring them up to 15. The ones that makes 5, you bring to 15, you're never going to get them to 30, It's just in the nature of their products or whatever. So I think there's more to do in ceramic tiles. And depending on where we are in that -- the mix of the value chain, I think it's good to assume that ceramic tiles will sustain low 20s overall. So I think we could do a bit more there. Clearly, there's a huge dilution effect of the distribution business in North America coming in. That was it, 6% pushing 7%, we can definitely improve on that to high single digits, so just to give you a feeling.

Great. And lastly, now the business is larger. How should we think of CapEx going forward? You mentioned it was elevated in H1 for some of those one-off projects. I think you said GBP 40 million per annum replacement. And how much growth? And are there any more material projects you have on the horizon?

Yes. So the GBP 40 million is the right number in terms of replacement. That is to keep everything well invested in continuing in the future. We have our CapEx program and cycle for all of that across the different divisions. Just to be clear, this is not including IFRS 16 CapEx as it were the -- on leases. In terms of projects, like it is what it is. We endeavor to split those things out accurately. I fully appreciate everyone will look at numbers and companies and go, "Well, what is maintenance and what is growth CapEx or specific project CapEx, particularly if you always have projects?" So I fully appreciate that. And everyone will be looking at our numbers asking the same question. The GBP 40 million is genuinely what I believe the number is, if we were not growing and investing in any more projects. Do we have more projects? Yes, there are some projects ongoing in Italy. It's actually a choice. We have -- potentially we could invest a fair amount, quite a few million initially to create some real organic opportunity as well. So there's a choice there. So there are things that we can do definitely going to the next year, and I would expect to see -- I'd expect to see another year of high single-digit CapEx projects to deliver more synergies. Assuming Turkey completes, there'll be a project there to make sure that we optimize the production across between Italy and Turkey as well.

This now concludes our Q&A session. I will hand back to Michael for any closing comments.

Thanks very much, everyone, and thank you for ongoing support of the group. I hope everyone's pleased with the numbers. As I said, for me, the highlights are, I think the like-for-like growth has been outstanding and especially in the context of increasing the underlying like-for-like margins, notwithstanding the acquisition mix. So it's profitable growth. And we've continued to deliver on some interesting acquisitions, I believe, where there's a lot more -- there is more opportunity with those, and there are more acquisitions potentially, but we will continue to be very cautious, and we will continue to do that in line with our financial policy, as you've seen. So thank you very much for your ongoing support.

Thank you, everyone, for joining. You may now disconnect your lines.

Thank you. Cheers.