Victoria PLC (VCP) Earnings Call Transcript & Summary

Good morning, everybody. Thanks for joining the call. I apologize for starting a few minutes late. So with that, I'll just hand straight over to Mike Scott, the CFO, to take you through the numbers.

Yes. Thanks, Geoff. Morning, everyone. Thanks for joining us. I'll just give you the highlights on a fairly high level and then I'll pass over to Philippe afterwards, who will run through some more of the detail in terms of operations and commercial sort of initiatives sitting behind the numbers. And obviously, we'll have Q&A at the end if people want to get into any more detail. We've achieved a record year again for a ninth consecutive year. Revenues of just over GBP 1 billion, which is breaking the GBP 1 billion mark for the first time, which is over 50% growth year-on-year. And of course, some of that did relate to acquisitions, but 20% of that growth was like-for-like organic. What do I mean by like-for-like? I mean constant currency and adjusted for the number of weeks in the year because the prior year was a 53-week year. And of that 20% organic growth -- sorry, I'm stripping out acquisitions, of course. And of that 20% organic growth, it was about half-half between price and volume, which is we are very, very pleased with given we, and we'll come on to inflation in a bit, we put up our prices to combat inflation and yet we were still able to deliver a very significant volume growth on top of that. EBITDA was GBP 163 million, again, a record year, 28% up year-on-year and EBIT followed at 35% up at GBP 108 million. I just want to give a bit of context before I move on. I mean, clearly, COVID is hopefully a thing of the past in our memories now, but certainly at the beginning of this year, our year obviously starts in April, it was not. And in the U.K. and Europe, we had COVID lockdowns lasting through to July. And in Australia, importantly for our Australian division, those lockdowns lasted right through to October. So it was still a year impacted by COVID. And then the other big thing, of course, to mention is inflation and I'll come on to a bit more detail about the analysis of the margin. But inflation for us, yes, everyone's focused at the moment on the recent energy price increases and gas price increases, but we have seen inflation through the year. In fact, for us, in a lot of our key raw materials, it started towards the end of the prior year and so we have been dealing with that for some time. And I'll come on to that in a bit. But in that context, really a fantastic set of results that we're very pleased with. We completed 5 acquisitions in the year, one in the first division, the Soft Flooring division, which was of Edel Group, which is an artificial grass business, consolidating our 2 previous acquisitions in that area. The grass business is performing extremely well and had -- did have a fantastic year and continued to perform well. We bought 2 businesses in Italy in ceramic tiles. We bought another ceramic tile business in Turkey, which has given us a low-cost manufacturing base in Turkey, selling into Europe. And we bought a U.S. business on the West Coast in California called CALI, which distributes LVT and wood products across -- nationally, across North America. And that has created a fourth division for us of being North America. So we've definitely had a busy year, both in terms of acquisitions and in terms of organic growth. Just to finish on EPS, it was up 40% adjusted fully diluted, fully diluted also for the press. With maximum possible dilution, it's up 40% -- 38% year-on-year. Final point to make on the highlights. We, having gone through that acquisitive growth as well as organic growth, we ended the year with our leverage down. Yes, some of that was due to the fact that we raised additional preferred equity with Koch in January this year, but we ended the year down at 2.7x net debt -- adjusted net debt-to-EBITDA adjusted because we [ put full ] pro forma effects of the acquisitions that we've made, which is exactly how our lending banks measure the leverage compared to 3.1% at the previous year-end. So a good, healthy and strong balance sheet with more than GBP 200 million of liquidity even after the acquisition of Balta, which we did in early April. I'm just going to go on to Slide 7. Just -- I mean, okay, Slide 7 doesn't -- it just shows you the track record there. So you can see my point that it's continuous record-breaking years for us. Slide 8 is a very important one. In terms of margin, there's been 2 key effects on our margin this year. The first one is one that we see every year as we do acquisitions every year, which is that we generally buy businesses that have a lower margin -- percentage margin than our incumbent group. And that's fine. That's not a bad thing. We pay a multiple of profits and of cash generation. So we pay a fair price, nevertheless. And of course, we look to improve those margins through synergies with our incumbent group. So -- but of course, what that does is when we buy those businesses in that first year, certainly it does drag down mathematically the overall margin as you consolidate those lower-margin businesses into the group. And in particular, this year, for example, I'll give you an example. We bought a distribution business, as I mentioned, in the U.S. in CALI. It's a $200 million turnover business making about 6% EBITDA margin. Of course, we hope to uplift that margin. But clearly, that has diluted, as perhaps some of the other acquisitions, the EBITDA margin of the group. And that, as you can see on Page 8, accounted for, at a group level, for about almost 2 percentage points of reduction in the margin -- in the reported margin. The other big effect this year, which is new this year, if you like, was due to inflation. We saw across the board, on average, about mid-teens percentage of inflation in our cost base, as I said, for us. So in things like synthetic yarn, on the carpet side, it started much earlier. So we've seen that through the year and gas as well and on the ceramic tile side. And what we've done is mitigated that where we can clearly in terms of operations. But otherwise, we've passed that on to our customers in order to preserve our bottom line and the health of our income statement. What we haven't done, because it's been so extreme this year, is added a markup, an additional markup to the passing on of that cost inflation. So to give it a simple example, if your turnover is GBP 100 and your costs are GBP 80 and your profits are therefore GBP 20, if your costs go up to GBP 100, from GBP 80 to GBP 100, we've just passed that extra GBP 20 on so our revenue has become GBP 120. But clearly, GBP 20 of profit over GBP 120 of revenue is a smaller percentage margin than GBP 20 of profit over GBP 100 of revenue. So without adding that additional markup, which we decided would be commercially not the right thing to do and not the right thing for our customers either, that effect that we protect -- successfully protected [indiscernible] we have generated more revenue to price increases than our costs in total have gone up. But it does have -- it does mean that your percentage margin goes down because you're not having that extra markup. And that, as you can see on this page, is the other 180 basis points. So those 2 things together have had a significant effect on the margin that we're reporting. Other than those 2 things, there's actually been a small uplift of about 50 basis points as we've continued to deliver some synergy projects. Flipping over to Slide 9. This takes you through the key KPIs at the divisional level. I won't dwell on this too much because Philippe is going to go more into the sort of commercial summary in each division. But as you can see, if you look across the page from left to right -- from right to left, it's been a record year in every division. We had a particularly strong year in the U.K. & Europe Soft Flooring division in terms of organic growth, but it's been strong across the board. And as I said, Philippe will come on to that a bit more in a minute. Slides 10 through 12 give the same bridge that was -- I would just focus on Slide 8, but for the 3 divisions, not for North America because that's a new division, so it's not really applicable. So you can see where, say, for example, on Slide 10 in the U.K. & Europe Soft Flooring, the acquisition mix effect, which is for the [ yield ] grass wasn't a lot because that was actually a very high profit margin business, but there was certainly a lot of inflation that we had to pass through having a big effect on margin. But otherwise, the margin performed very well with synergy projects. On Slide 11, Ceramic Tiles. We had an adverse effect from acquisition mix for the acquisitions we made in Italy in particular, which were low-margin businesses on acquisition, but we've since made many improvements through integration, and again, inflation pass-through. And then in Australia, we didn't make any -- which is on Slide 12, we didn't make any acquisitions, so no effect there. But again, inflation had an effect. The margin in Australia was slightly down by 70 basis points on an organic basis. Again, Australia was more heavily affected by COVID in this past year than the rest of the group. Coming on to Slide 13. And I won't spend too long, and apologies, there's a lot of numbers on this page. It's the same slide that I prepare every single year just to go through all of the exceptional nonunderlying items because I appreciate those are important to understand. We split them as always into 3 categories. There are exceptional items, which are, by definition, one-off, nonrepeating items. There are other nonunderlying items, which are things that we don't believe characterize the underlying performance of the group and are noncash in nature entirely. And then there are some nonunderlying finance costs as well. I'll just pick out a few of the highlights. In terms of cash items, which we highlight in blue, you can see its acquisition costs, M&A-related costs, GBP 10.7 million in the year, obviously up this year because we did make more acquisitions. Reorganization costs, GBP 5.3 million. Philippe will also speak to this, but we had some reorganization in Italy through the integration of the businesses there. We also finished off the closure of one of our -- the final piece of our rationalization in carpet manufacturing in the U.K. and the closure of one of the sites up in Yorkshire. So there were some costs there. There's an exceptional income. We had negative goodwill on 2 of the acquisitions that we made, i.e., the price that we paid for 2 of the acquisitions, which was one of the ones in Italy and the Turkish one was lower than the fair value of the balance sheet and so that immediately comes as income. But of course, we don't try and take that as underlying income. That is exceptional income, so that's that GBP 6.9 million. And then the final 2 items are smaller, but they are cash items, the GBP 2.9 million profit on disposal of fixed assets, having finished that consolidation in Yorkshire of the carpet factory that I just mentioned. We then sold a site and obviously made a profit on that. And again, we treated that profit as exceptional. The biggest thing in the next section, other nonunderlying operating items is the -- as it always is, is the amortization of the acquired intangibles. This is where, when we buy a business and we consolidate the balance sheet, under IFRS, we have to fair value everything including any intangible assets that are identified, and for us, that is brand names and that is customer relationships. We have to value those things on a cash flow modeling basis, and then we have to recognize them on the balance sheet and amortize them over time. It just becomes -- effectively you recognize those assets instead of just recognizing goodwill in one big chunk. And then you do have to amortize them. And that cost obviously goes to income statement, it's noncash. And once these assets are fully amortized, we don't have to obviously pay any money to replace them. So we don't see that as an underlying cost. There's one just below that, that I would like to mention, GBP 5.3 million. Again, under IFRS, you have to fair value inventory on acquisition and what that means is all the inventory in the opening balance sheet you have to value effectively at the value that you're going to sell it for less selling costs. And what that means is for that inventory on the balance sheet that you start with, you're not going to make any profit. Now clearly, that doesn't reflect what the cost -- the actual cost of that inventory that the business acquired it for and doesn't reflect the actual underlying profits of that business for that period of time, of which it sells that initial inventory for the next 2, 3, 4 months. And so we take that amount, which -- and we treat it as an exceptional cost in the income statement to reflect the underlying profit of the target business as if we haven't acquired it and have to make that fair value adjustment. I'm sorry, final big one in that section, the GBP 7.1 million at the top, the acquisition-related performance plans, that is effectively earnouts and deferred consideration is called an acquisition-related performance plan because it also happen -- those ones happen to be linked to the person, the owner that we -- the person we bought the business from is staying -- and because it's linked to them, staying effectively on an employment basis, we have to treat it effectively as an exceptional employment-related costs rather than an earnout. But it is effectively earnouts under the SPA. In terms of finance costs, the key thing here, of course, and the big numbers are in terms of the preferred equity. We raised an additional GBP 150 million of preferred equity in January with Koch. We renegotiated the terms. We had a 100 basis point reduction in the preferred coupon, not just on the new GBP 150 million, but across the original GBP 75. So for us as a company, we think it was a very good deal. Actually, Koch also were very happy with it. But it certainly gave us some more firepower. Obviously, we used some of that firepower to acquire Balta after the year-end. That -- it's a complex instrument. It comes with equity warrants as everyone knows. There were no new equity warrants issued, by the way, in terms of new GBP 150 million. The actual ones are just from the original. And effectively, we have to fair value this instrument as a financial instrument under IFRS and we have to separate out certain embedded derivatives within that, and they are all separately valued. And because we, in the end, take the full effect of that in the most pessimistic way and dilute it through the diluted EPS, we then say, well, the costs that are going to income statement under IFRS we treat as nonunderlying. And just to remind everyone that those preference shares are what they are. We can redeem them, but equally we don't have to. And effectively, we never have to [ service in ] the cash if we don't want to. And ultimately, if we didn't do that after many, many years, they would convert into ordinary equity. And hence, the value for that [ in EPS ]. So I think that's where I'll stop on that page. Sorry, that was quite long. Going over to Slide 14. In terms of cash generation, a couple of things this year. Similar to last year and partly because of COVID and partly because of supply chain -- well, all because of supply chain risks globally, we took some action to increase our raw material inventory to help create a buffer for us for that. I mean, I think that's normalizing a lot now, but we certainly did that during the course of last year. And so our investment in working capital was up. And we also invested more in CapEx last year. The year before, the year to March '21, was a lower year because of COVID. We didn't spend anywhere near as much in terms of CapEx. And so we overspent, if you like, in the year just ended. So you'll see there in the table sort of in that middle section replacement CapEx, GBP 40.9 million compared to GBP 20.9 million in the previous year. And you'll also see in the movements in working capital line, GBP 26 million negative. That all went into inventory. If you look in the main [ cash flow statement of the accounts ], that's all adverse movement in inventory effect. So that's all sitting there in inventory. And we do, of course, expect that to reverse in the future. So yes, as a result of those 2 things, the conversion was a little bit lower than previous years, but we still had a healthy free cash flow -- operating cash flow conversion or pretax of 78% of EBITDA and free cash flow conversion of 24% of EBITDA at about 34% of EBIT. And then just to finish off on Slide -- from my perspective, on Slide 15. I just bridge that into the net debt for you. So we started the year with GBP 345.7 million of net debt. Those affected mostly our bonds. Everyone is aware of our corporate bonds. We generated GBP 34 million of free cash flow. We raised some GBP 142 million net effectively of preferred equity. And then we invested that money in some expansionary CapEx as part of the synergy initiative, GBP 15 million, and then, of course, acquisitions that I've mentioned. And then there are some FX and other small differences. So we ended the year at about GBP 406 million. But as I mentioned earlier and as shown on Slide 15, in terms of leverage, we finished the year at 2.7 with a very healthy balance sheet, lower than it was at the previous year end. And sorry, that was quite long and that's where I'll stop and pass it over to Philippe.

I will give you some divisional review, the first division, the U.K. & Europe Soft Flooring division where we have record revenues and profits. Revenues were up GBP 140 million or 50% up to GBP 423 million. The EBITDA was up GBP 21 million, is now GBP 70.3 million. The underlying EBITDA margin was down, as Mike has explained, 87 basis points. This is related partially to the dilution effect of the M&A of the Edel acquisition, which we have done. And then, of course, also partially by the cost inflation positive effect, which Mike has explained earlier, yes. Very important to note that the like-for-like revenue is up 31%. So in the first product group, carpet and underlay, we can say that in the U.K., the investments are all largely done and all synergy -- all the big synergy projects are done with the exception of logistics. I will come to that in a minute. So we have relocated the Westex plant, which was in Cleckheaton. We've relocated that in the Dewsbury site. We've worked -- continued to work on the productivity. And now we have a complete -- dedicated production site for natural fibers in combination with the prior acquisition, which we've made in the past, which was G Tuft. So now we have 2 plants. We have the Dewsbury plant for natural fibers and then we have the South Wales plant for synthetic fibers. And having done, we've continued to do some smaller investments, which were a few high-speed tufters to increase the productivity. We've added beaming activity instead of [indiscernible] activity, which gives us quicker changeovers and which can reduce the working capital if need be. We've also created a new layer, as you can see, new layer of inventory where we can finish just-in-time to hit the warehouse. We just wanted to take some pressure off the warehouses for the raw stock. Very important is the next one, is the logistics -- our logistics center called Alliance. Just a reminder that this is still a core asset and -- of expansion of the Victoria Group for the people who don't remember. So for the moment, we have 4 warehouses in the U.K., we have 240 vehicles, and we have 6 cutting tables. The on-time delivery for available stock is now 94.4%. This service is unbeatable. It's second to none in the U.K. And we're one of the best in next-day delivery for the moment in the U.K. market. We've also built an additional warehouse on the Abingdon site so in South of Wales to do more roll stock. So we don't want to bring that into the distribution centers. We want to do direct shipments from there. Also in Worcester, we are building a purpose-built warehouse of 185,000 square feet complete. That's also where the new headquarters will be of Victoria. And we will vacate the old Victoria plant, which was our Midlands distribution center, yes. And we're looking what we can do with that warehouse, but probably it's going to be a centralized merchandising center and a deep storage warehouse for Balta. Then the second geography, U.K. & Europe Ceramic Tiles. Yes, sure. Also, record revenues and profits. The revenue is up to GBP 371 million or 31%. The underlying EBITDA is up to GBP 71.4 billion or 13%. The underlying EBITDA margin is down 312 basis points for the same reasons. As Mike has explained in the very beginning, we did these 3 acquisitions, which are dilutive to our margin, but we are working on synergy projects for them. Don't forget also the very high energy prices we had in half year 1, but definitely in half year 2. That's -- in ceramics, that's about 10% of the revenue, but we've been mitigating that with a lot of price increases. We've increased prices depending on product groups across the geographies, different red body of porcelain with anywhere between 15% and 30% in the last year. If I go through the regions, for example, let's start with Italy, where we have a capacity of about 21 million square meters. This is -- the capacity is all sold last year. And even in this year, the order books are still very solid. The investments we've done we've completed an investment program of EUR 10 million last year in ceramics. Most of the investment went to 2 plants, the Santa Maria plant. We've been able to speed up the certification process because when we took it over, there was a lot of certification lagging. So we've speeded that. The plant is fully specified and certified now. We've increased the productivity with 60%, the output productivity. And we're also activating the second atomizer. There was one atomizer, so we've increased the capacity of the atomizers. And we are serving 3 kilns out of the Santa Maria plant now. Also in Serra. Serra was the first acquisition we've done in the Italian market. We've replaced -- there's 3 kilns in Serra. We've replaced one of the kilns, which was 24 years old and we've replaced it by a multipurpose red body and porcelain kiln. Then the biggest investment, which we've done in Italy was in the Ascot and Dom plant, where we installed a new full large-size line along with the polishing line. Polishing is very popular now. You can see it, it's the copies of marble, which you see in the bathrooms and in the kitchens. These days, most of it is porcelain and we have done an investment just like we've done in Spain, but we've also done in Italy now. And the integration of the plants, we brought all the logistics and the administration together close in the neighborhood adjacent to the Ascot plant. The second geography is Spain. So we have no new acquisitions in Spain. The capacity for the record is 24 million square meters of tiles. We have a further focus there on the integration of the 3 brands and 3 plants we bought, which is a the Keradom, Saloni and Ibero. And we've done also an investment because this is very popular now in one polishing line and we've built some replacement and regulatory CapEx. That's it for Spain. And then Turkey, the acquisition, which we've done in February '22, so very risky, of Graniser. This is considered for us and the group as a low-cost manufacturing brand and a low-cost manufacturing base for the group, but it will be continued to run as an independent company. So it's not that we will keep it, that we will integrate it as a low-cost manufacturer for the other brands. It will remain completely independent. For the moment, this plant is exporting about 70% to Europe and to the U.S. The local market is only 30%, but we are working on a big investment program to bring the capacity of export up to 90%. So we are not interested in the local Turkish market. So the plant is entirely designed to serve the export purposes. Then the third geography is Australia. We've seen strong organic revenue growth of about 11% and despite of the lockdowns. The revenue is now GBP 110 million from 99.6%. And the underlying EBITDA is slightly down 174 basis points. But don't forget that last year, we had record sales in Australia and the margin was -- last year was at 590 basis points, which is an incredible performance given the rolling lockdowns. As Mike has referred to, the last lockdown was in October last year. Just maybe detail, but LVT. So we are a distributor of LVT, which is this newer product group in the market. And this is a fast-growing product group in Australia as well. So new in the geographies is North America. And this is the final region to comment. The revenue is GBP 115 million, and the underlying EBITDA is GBP 6.4 million. We've done an acquisition in North America on the West Coast in San Diego, CALI Bamboo. And for the record, CALI Bamboo is an omnichannel distributor and works in the business-to-business and the business-to-consumer environment. So they're dealing with all types of retailers like the Lowe's and The Home Depots. They work with installers, they work with consumers. And 50% of the revenue of CALI Bamboo is LVP, so kind of LVT, which they do import. The growth of the last 12 months ending March was 22%, that was even higher, than the 17% CAGR growth of the period '16 to '21. What we're also doing there is introduction of new qualities like rugs and artificial turf. We are trying to use some of the productions we are making overseas to integrate with our North American distributor. And so we've been participating in a big fair there, Vegas Surfaces, where we've been focusing on outdoor flooring. They were branding a new product group, Your Floor Outdoor, and they've been introducing this artificial turf and the rugs during that show. Just to remind us, so you can see that the EBITDA is lower. Don't forget this is just a distributor, it's not a manufacturer, and there is very little investment. So the EBITDA and the EBIT is pretty close to one another. Important to mention that we are looking to develop the U.S. in the same way as we've done in the U.K. market. So we want to keep control of the service. That's why we are building a purpose-built warehouse as well in South Carolina instead of working with third-party logistics. So we want to be in control of the service going forward. So these are the main elements, which I wanted to flag on the regions. Do we continue here or do we want to go to Q&A? Okay.

Yes. So I think we'll take questions in the room and then go take one online.

[indiscernible] working down there. Where are you now in terms of passing on inflation? Obviously, you had a great [indiscernible] since last year in passing it on. How much more have you got to do? And are you ahead of the game so you'd be able to [ have all of it that ] you're seeing for this year?

Yes. We've increased -- we've done most of the increases with the inflation for the moment, as I mentioned earlier. So we've done price increases, not only in Soft Flooring but also in Ceramics of 15% to 30%, depending on the geographies, depending on the product groups. And most of it is done. We're seeing no more extra inflationary pressure than the one with currencies -- we've currently had in the raw material side. We still -- it's still fluctuating on the utility side, let's say. So -- and there, we've built mechanisms. Like in ceramics, we built mechanisms where the price is adapted according to the megawatt hour of the gas price. So we are -- we have looked for links as we've done in the past for artificial -- for turf -- for yarn, I mean. We've done that for the yarn. We've done it for the ceramic tiles as well. So we're looking for an indicator and we link the price to an indicator. So if the price of the gas goes up, the price of the product goes up.

And fuel surcharge [indiscernible] put out on that.

And will it work in reverse? When eventually prices go back down again, you can pass that straight back on or can...

Yes. No, no. Where there is a mechanism, it's passed on straight. Where if it's as a surcharge, we eliminate the surcharge. So we follow the fluctuations. But I can say that we've been mitigating all of the inflationary pressure, and we've passed it on. So this is what we've done in the past and this is what we will continue to do.

And just to clear on that linkage, what proportion of your Ceramics business have linkage?

So we have the link in Spain, mainly for all our Spanish business. So we work in a bit different way. In Italy, we have partially a hedge in Italy. So -- and thanks to the hedge, we are in a position to pass on a bit more moderate price increases. It's a forward hedge. So -- and we can pass on smaller price increases and we try to mitigate the action like this because we still want to remain competitive. And if you look, of course, at the order books, if you compare Spain with Italy, in Spain, you have -- of course, when your prices increase, your demand is suffering a little bit. We see -- we have less of that effect in Italy. But don't forget, through the Italian operations, we are working more for DIY. And DIY, the demand on Continental Europe in DIY is still strong for the moment.

And can we just talk about demand that you've seen through Q1, not that it's very different in [indiscernible] region and from the product categories? Can you just give us sort of flavor of what's outperforming expectations where you might have seen some softness?

Yes. Sure. So it's important. So we have to make some difference between the geographies, between definitely the product groups and also between the end users. Like in the U.K., when we look at U.K. in the medium to high end, so we have lesser of a demand issue. So if I look at the top brands, which we're having in the U.K., like the Westex or the Abingdon, so we get -- the order books are still reasonable, but we suffer a little bit backdrop in demand. If you look at more volume end of the brands, so they suffer more. So the cheaper product, the cheaper -- the medium to low end suffers more. So if I convert that to cut lengths versus roll stock, the roll stock, so the big volumes suffering more. The cut lengths are suffering less. So there where we have this direct contact with the end consumer, with retailer, so we -- the performance seems to be better. And don't forget, with all the investments we've done in recent years, the service levels, as I have said, are second to none. So we have a fantastic service. And the retailers for the business they still have, they like to go to that security next-day delivery.

Yes, Charles. [ That's where specialize in ], in Italian business.

Can you just talk a little bit about Australia and the U.S...

Yes. So in Australia, the business -- I was in Australia 3 weeks ago. And -- okay, the business is still strong. They came out of a lockdown later. The business is performing well. I have to say that in Australia the inflation is a bit less. So they don't have the sharp edges that we see in Europe on inflation. Of course, there is inflation. Of course, there are some hiccups in the raw material, but it's less of a concern. They have passed on price increases as well, and the demand is solid. We don't see any drop-off in demand in Australia. In the U.S., it works a bit different. So the U.S., the demand, is -- has definitely dropped. But there, through the distributor, we are completely focused on the bottom line and we try to be very cash conservative. So we see the bottom -- the top line drop to some extent, but we have the continued performance on the bottom line. So we've been able to pass on the price increases because one of the inflationary pressure on the price increases for them is definitely the transport price, the container prices. And you know what has happened to the container prices, but we've all added that and passed that on with the transport surcharges to the customers, to the end customers. So in general, so I'm not too worried about the bottom line in the U.S., but the revenue could suffer a little bit because of demand.

One other point, Charles. Yes, when you look back at that like-for-like data, Soft Flooring, i.e., the U.K. business, the Soft Flooring business had an extremely, extremely strong year. And so it's no surprise in a way that, that's one of the places where, in relative terms, is a little bit more under pressure, certainly, as Philippe said, at the lower end. At the higher end, it's more robust. As Philippe said, Ceramics has been solid in Q1. Absolutely solid. And the other thing, sorry, as I mentioned, as part of the Soft Flooring business is our grass business, it's also doing very, very well. So I think the softer parts, as I said, on the volume end in carpets and the U.S.

It's important to know that we are still above pre-COVID levels. So we know with the 2 COVID years, so if I compare -- and this is the comparison we are doing into 2019. So the performance on the top line is above pre-COVID levels now. So I mean, this is helpful. Any other question?

So just on CapEx, on the 3- to 5-year view, obviously logistics [ you made good success ]. Can we expect more of the same or more focus on the U.S. distribution side of things. Just any color on that.

Yes. So as I said, in the U.K. we've done, with the exception of the logistics, and we will spend about GBP 8 million there this year on new cutting tables and to furnish the place and to put the racks there. So -- but then, this is done. So there's a few smaller, like the tufting machine, it's $400,000. So I mean this is not the end of the world. There's no big CapEx to be done in U.K. All the heavy lifting is done. So -- and we still have room for growth for 20%, 30% without having to invest in the U.K. Italy, as I said, so in the next 3 to 4 years, there's nothing major that has to be done for this specific business. Of course, we're making projects. We are looking at the big development for a complete new [ ID ], it's too early to talk about that. But this would be specific project, a specific plan towards the future. But for the existing business, nothing is needed. In Turkey, there's a bit of catch-up to be done, but this is to increase the export from 70% to 90%. So -- and that will pay itself and the payback will be very short because we will have a good margin and the extra 20% of sales. And as I said, in the U.S. market, this is a distributor. And we work with -- it's going to be a leased warehouse and we will have to do a bit of CapEx to furnish that warehouse. But other than that, we are not -- there's not a lot of major CapEx ahead for the current size of the operations. And we have still room for growth in ceramics, through Graniser, through the Turkish operation. And in all of the plants, whether we talk natural fibers or synthetic fibers in the U.K., we have room for growth as well. So nothing major other than the new plants we are developing, which have to survive on their own payback then.

And I guess, the integration of both.

Yes. This is, of course, but I was talking about last financial year.

Just a point about how that business has been trading since you acquired it. Obviously, it's fairly recent, but just [indiscernible]. And as much as you can, sort of integration plans. I guess there's the announcement internally, but what you can say in terms of how you're seeing that thing.

Maybe -- let me first echo, the reason why we have bought Balta is because of the rugs business. So just a reminder for everybody that the business we acquired had a revenue of about EUR 350 million, 2/3 of that was rugs, 1/3 was broadloom. So the real business that we wanted to was the rug business and then we took a view on the broadloom business because we said, okay, 70% of their broadloom business is exports to the U.K. We know that business. We are familiar with that business. We can bring that business closer to the customers. So we'll take that as well. For the moment, what we are doing, we are trying to carve out as much as we can. So Balta, by the way, will survive as its own brand. So Balta will be the seventh plant, which we're having in the U.K. market. So on the broadloom business. So we're looking to push some of the business forward to the U.K. We still have a bit of capacity, free capacity. So we want to fill all the capacity, which we have in the U.K. and create positive variances there. So we will probably make the broadloom business in Balta slightly smaller, but we can also still in-source some of the business, which is currently outsourced by the rugs in tufting in Balta. So it would be probably on an equilibrium. On the broadloom side, since Balta is more in the medium to low end, it suffers a bit more than the Belgium brands. So you were asking me a little bit forward-looking, so this suffers a bit more. And on the rug side, 50% of the rugs is export to the U.S. And of course, the export to the U.S. is not buoyant. But okay, we didn't buy Balta just for the forecast for the next season. Balta is big operation, don't forget, it's EUR 250 million. And we are currently studying how we will go on with the future footprint of Balta. We have a Belgian operation and we have a Turkish operation. It's a big Turkish operation for the moment. It's 60% Belgium, it's 40% Turkey. So -- and we are just giving it some thought on how will we design in the future footprint. We believe the rug business is going to grow massively over the next few years because there's a lot of hard flooring being sold, whether that's LVT or ceramics. So on every hard flooring, you can put a few rugs. So we have a big belief in that business and we are continuing to monitor that closely. But we are in the -- we are designing our plants. It's a bit too early days to say that. The one bit that I can say is that Balta is a vertical integrated company. So we are extruding -- we are extruding in Turkey and we are extruding in Belgium. Extruding, I mean, we're buying the chips and we're making the plastic chips and we're making yarn from the chips. That process has become extremely expensive in Belgium. In the current market circumstances, it is -- we will probably do more of that in Turkey and less of that in Balta. The yarn is the -- and the 3 basic components of the yarn, it's the labor, it's the chips and it's the energy. And it's this energy component which is now killing it as an [ ID ]. So we are much cheaper in Turkey. And don't forget that the biggest competitors of Balta are in Turkey and in Egypt. To give you one example, in labor, you have 1 operator in Belgium, 5 in Turkey. And in Egypt, you have 1 -- or 5 Egyptians for 1 Turkish operator. So I mean, this is the competition we are facing with. And -- but Balta is known for its creativity, okay, and its product development. And this is what we are good in, and this is why we take the lead. The product development comes from the yarn and we want to keep that in-house, but not necessarily in Belgium. I hope this answers your question, Charles.

Yes. Sure. That's quite broad question for me, but I just wanted to touch upon. You've always made strong foundations for the year ahead. But I want to know more about your competition. So you're obviously very well positioned. Hedging protected your margins. Where does that leave your competition? I can imagine, again, the capacity withdrawal, there'd be lots of businesses that collapse. So where do you see your [ position ] and does that support your growth outlook?

Yes. Well, if you're talking about hedging, you're talking more about gas prices. And this is what we are currently seeing. At current gas prices, if you don't have any kind of hedging, albeit it long term, short term, it's extremely difficult. So some people follow the fluctuations in the market. And for the moment, every now and then, you see some of the factories close down for a period of 4 to 6 weeks because it doesn't make sense to make ceramic tiles when the price of the gas is 165 to 200 megawatt per hour. So -- but we can -- we are trying to mitigate that partially through some of the hedging, partially to bring it on or to push it forward to the customer and through price increases. And that is what we have done. Of course, there's a limit to the price increase you can make to the market before the demand starts to fold. And I think we have a very good view on where that limit is. But as I said -- so we're in a position to hang on to that, not only because of the hedging but also because of the customer base, which we're having. The customer base, the DIY, which is still strong and solid and is ready to pay up just to get the deliveries because they still have a good demand. And the independent retailers, specialized retailer in ceramic, there, we can see some more demand drop. And this is what we feel then more in the Spanish, frankly. But there's definitely a limit to how much price increase you can do and to where the gas cost can be. But of course, if you have long-term coverage, you can deal with that and you can play it to your advantage there.

And do you know what your competitors are doing? Your close competitors, do you have any indication of sort of how they're handling this?

Well, they're handling it the same way. So they try to link. I think it has become a general industry standard that prices are linked to indicators. So everybody is doing pricing surcharges. So the whole level, it's not that I'm having a better competitive position than somebody else. The whole market is going up because, don't forget, every hedging comes to an end. So you're forced to keep on increasing your prices as well because, otherwise, you're in front of a wall when the hedging stops. So -- and nobody has hedged for massive amounts. So everybody is taking a view and the whole competitive landscape is building. And where we take maybe most advantage of that is in Italy because of the segment, because we have an extremely lean operation there. And if I look, and this is just judging from the order books, which we're having, which are full for the next 3 to 4 months.

I mean it's important to remember, it's a huge market. It's still very fragmented. I don't want to say bifurcated, but there are large and small players and definitely small players are going to suffer. I think we benefit from our scale as do other larger competitors. There is a huge range of certification of how people run their operations as well in terms of how efficiently they get [indiscernible] in their kilns. We like to think obviously that we're very good at that. There are other people who are good at that, but there are some people who will [ less in ] that. So it really comes down to your scale, how efficient you are with your operations, how efficient you are with your -- how well invested in your factory, how efficient you are with your purchasing, whether you're hedged. And yes, absolutely, there will be winners and losers through that.

And also the size of integration, which we're having. We have our own atomizers throughout the group where we do the atomized clay. And of course, if you're a manufacturer and you don't have your atomizer, then you have to buy atomized clay in the market. There's somebody else, your third-party manufacturer, is taking advantage of that and taking an extra margin on top of an already very high gas price to make the atomized clay. So they're taking advantage of that. And since we have this integration, so yes, we buy the gas, but we don't have to pay up on our margin. And that's where the difference is, in the profitability. If you look, our profitability is still 20%. And the biggest drop we have had in the profitability is because of the margin effect of the acquisition and the cost-positive effect of the acquisition. So we're still performing well.

Obviously well positioned now.

The key -- I mean, Victoria is -- has got the advantage of scale, which we've highlighted in the statement this morning. And then second, so we got the advantage of scale, which gives us more flexibility to diversify geographies we sell into. But I think one of the greatest advantages we have is our operating margins are amongst the best in the industry. And all that means is that the industry does come under pressure, we'll still be making money when probably 70%, 80% of our competitors are losing money. And that puts us in a very good position for growth.

Absolutely.

Is there any...

Perfect. So yes, if anyone online has any questions they'd like to ask, just send and we'll be happy to pass on for you. Shall I pass on to you for closing statements?

Look, we're well out of time and beyond. So thanks very much, everybody, for listening and joining the call. And I look forward to updating you with you in due course. Thank you.

Thanks very much, everyone.

Thank you.