Victoria PLC (VCP) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Victoria Plc Interim Results Investor Presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll. And I'm sure the company will be most grateful for your participation. And I'd now like to hand over to Executive Chairman, Geoff Wilding. Good afternoon.

Good afternoon, everybody. I'd just like to introduce you to Philippe Hamers, who is sitting on my left as CEO; and Brian Morgan, who is the CFO, and who's joined us in late August. So we'll begin by just a quick overview from me. I'll then hand over to Brian, who will take you through some of the financials for the half year, and then Philippe will give you some operational highlights. So as everybody will, no doubt, know by now, revenues for the half year was GBP 776 million. EBITDA was just over GBP 100 million, and the pretax profit was GBP 53 million. And effective the business needed to cope with very high inflation in the first half, and we've done that, firstly, through thoughtful price increases where we've needed to, we have increased prices to protect our cash margin. And by our cash margin, I mean the amount of profit contribution from the product. So that is how we've managed to maintain our earnings or grow our earnings to GBP 100 million for the half year. We've also done some product reengineering. We do this in cooperation with our customers, so to hit certain price points, and Philippe will talk you through that a little later. We've had a certain amount of hedging and contracted pricing into our input costs. That has helped mitigate some of the very high inflation we've seen, particularly in energy. And lastly, and again, Philippe will -- I won't steal his thunder. He will talk about the service offering that we provide to our customers, which makes them very loyal to Victoria. Going forward, and I'm looking forward in the next 12 or 18 months, we expect to see the operating margin of the business improved considerably from where it sits today. So the EBITDA margin for the half year was 13%. We are comfortable that we can see that getting back into the mid- to high teens over the next 12 to 18 months, and there's a number of factors that will contribute to it. Firstly, is the synergy gains from the various integration projects that Philippe is running for -- primarily in Balta, but we also got projects running in Italy and in Turkey. There's also some gains to be made in the -- within our businesses in the U.S. So again, I'll leave Philippe to talk you through that, but those synergy gains will add to our margins. The second area where we're expecting to see gains in our margin is a reduction in our cost of goods sold. Now this is the input costs into the business, primarily raw materials, and you can see from those 2 charts, the left-hand chart, which is -- is a proxy for the price of polypropylene fiber, which makes up nearly 50% of our cost of goods sold for the soft flooring products, which is carpet and rugs. And you can see that we were paying around GBP 1,400 per tonne earlier this year, a period at the top there covers basically from April through to June. Now the price has been steadily trending downward since then. And -- but of course, the product that we are currently selling today was manufactured using raw materials that was purchased for around GBP 1,400 a tonne. Once that product has been sold through, which it will be in the next month or 2 and the next turn of inventory comes through, the product that we are currently manufacturing has been made with raw materials costing us between GBP 800 and GBP 1,000 per tonne. And so because our cost of goods sold will come down dramatically, needless to say the operating margin will go up. Now some of that -- we will get back to our customers in terms of price reductions, but some of that, we will also keep -- and the consequence of that, as I say, is we expect our operating margins over the next 12 months or so to be back up into the high teens where they have been historically over the last few years. The chart on the right-hand side covers the cost of shipping containers, which are also important, particularly for our U.S. business, which imports a lot of product that [ it ] sells from the Far East, primarily Vietnam, but also China and Taiwan. So the cost of those shipping containers are falling dramatically and again, that will feed through into our cost of goods sold that you'll see in the next calendar year. Demand is highly variable across the different markets that we operate in. We are seeing soft demand in the U.K., but that's been made up by stronger demand in the U.S., parts of Europe and the Middle East, where we also export, and this is the value of being a highly geographically diversified company. And as a result, if we were to look across the business as a whole, we are seeing relatively solid demand for product. And again, that can be -- that's reflected in the fact that our like-for-like revenues grew in H1 by 7.7%. Although the overall growth was 59% because of acquisitions. Secondly, another point that's worth mentioning is Victoria is one of the most cost efficient manufacturers of flooring in Europe, and we've got very modern, well-invested factories. And the fact that we do have industry-leading margins gives us the capacity to absorb both cost of increases in raw materials and also declines in demand should it happen, but -- whereas some of our competitors will really struggle. And we have seen, for example, in the last few months, quite a number of our competitors in the ceramics industry have shut down their production. Now the market might be slightly softer, but because 30% of our competitors have stopped production, our market share has grown, and that's what's maintained our revenues and our operating margins in the ceramic space. The other -- on the right-hand side, we've just talked about the fact that Victoria has low operational gearing. The reason this is important is that our cost base fluctuates with our revenue. So if there was a period of softer demand across all our products across all our markets, if that did happen, about half of our cost base is fully variable. It's essentially raw materials, another 30% is semi variable, which we define as something that we can vary with management action within 90 days and only 6% -- sorry, 8% of our cost base is truly fixed. So just talking about our balance sheet very quickly. We have a lot of liquidity. We've got over GBP 250 million of cash and undrawn credit lines. Our debt facilities consist of long-dated fixed-rate covenant lite bonds, our interest rate at the present time that we're paying through until 2026 and [indiscernible] in 2028 and the other is 3.6%. So we have -- and that's a fixed rate. On the right-hand side, we refer to our cash flow in H2. We expect over GBP 100 million of net positive cash coming into the company in the current half year. That's going to come from a number of areas. Firstly, the normalization of the inventory levels. So last year and earlier this year, when there was quite severe disruption to supply chains, Philippe very wisely bought a substantial amount of raw materials so we were able to keep our factories operating at full capacity. And that's one of the reasons that our organic growth was so strong last year. But that didn't mean that we invested a lot of money into raw materials. Now that's normalizing. We are reducing our purchases of raw materials back to normal levels, and we will run down the prior levels of raw materials that we've been carrying for the last 15 months. The second area of inventory normalization relates to ceramic tiles where earlier this year in July and August, particularly, there were very severe concerns gas rationalization -- sorry, gas rationing and very high gas -- extreme gas prices over winter. So what again the management team did was build up levels of ceramic tiles so that we could maintain our supply to customers with a normal levels for 3 months, even if we had to completely suspend production because there was no energy through -- or gas rationing or because the prices got so high, it's uneconomic to produce. So clearly, the concerns around that have now diminished significantly, and so we will start with -- in fact, we're doing it now, we're reducing the finished goods as well. So that will generate a substantial portion of the GBP 100 million in the current half year as we go back to normal levels. Of course, there's also operating profit in H2. We confirmed yesterday that we expect to make another GBP 100 million of EBITDA in our H2. So that will contribute to cash flow and largely with some of the rationalization and integration projects that Philippe has underway on the operational side of the business. We will be left with surplus assets that are no longer required, which we can sell and that will also contribute to the cash flow. So what I'll do now is just hand you over to Brian to run through some of the details of the actual financial statements that were issued yesterday.

Thanks, Geoff. Good afternoon, everyone. Let me just put you on through the group financial slides, and then Philippe will take you through the detail on the divisions. So this has been another record period for Victoria, and we expect that to continue into the second half. As you can see from this slide, we delivered revenue of GBP 771 million. That's the underlying revenue, which is an increase of 58%. To the underlying growth, it was 7.7% for the group. The like-for-like growth is shown for the impact of acquisitions and also on a constant currency basis. The majority of divisions, again, Philippe will come back and talk about this to a double-digit growth even when compared to the same period last year, which was a record for us coming out of COVID. In terms of EBITDA, we achieved over GBP 100 million, a 19% increase from the same period last year, driven by a mixture of organic growth and the acquisitions [indiscernible]. We completed 2 acquisitions, the largest being the carve-out of the rugs and broadloom business of Balta which is based in Belgium and also has 2 factories in Turkey. We completed this in April. And then in June, we also completed the acquisition of a further small rugs manufacturers [indiscernible] Belgium. These acquisitions made us the largest soft flooring manufacturer in Europe. So if we move on to the next slide, please. This bridge shows the group underlying EBITDA margin, and we're comparing where we ended up at the end of H1 with the full year 2022. As you can see, we finished last year with an improved underlying margin of 16%. There will be 2 major impacts on our margins, which were pretty similar to last year in terms of the type of impacts. The acquisition mix effects and also the cost inflation pass-through. The acquisition mix effects can be spend as we tend to buy businesses with lower margins that are owned. And during the integration period, we expect to see a drag on the overall group margin as we complete our synergy projects. This can be seen this year with 110 basis points reduction in reported margin. The most significant impact is on our U.K. and Europe soft flooring division as we continue to integrate the Balt acquisition. This business will be fully integrated into our overall operations in the coming 24 months and will provide some significant opportunities in the U.K. and U.S. markets. The second impact, which again, we highlighted when we announced our full year results in July, it's driven by the sometimes double-digit inflation on our input costs and how we pass these on to customers. As Geoff said, we continue to see inflationary pressures in raw materials, labor and energy across all of our businesses in H1. To mitigate these management teams have implemented price increases where necessary, being laser-focused on cost and synergy initiatives, hedged or managed key input costs where available and worked on product engineering with our customers to mutual benefit. To support our customers where we increased prices, we passed on the cost without adding additional margin to the cost inflation. This helped maintain absolute margin and market share, but is a negative impact of 130 basis points on the margin as reported. This leaves us with a reported margin for the first 6 months of this year with 30% and we expect this to improve in the second half as we've already seen raw material prices stabilize, synergy projects will continue to deliver, and we'll see the benefit of cost savings. Moving on to Slide 12. This slide documents our exceptional and non-underlying items, and I'll spend a little bit of time here just talking through some of the major ones. These items are either irregular and therefore, include them in the assessment of the business performance which leads to a distortion of trends or their technical adjustments, which ensure that the group's financial statements are in compliance with IFRS, but do not reflect the underlying operating performance of the business under both of those. There are 2 items here, which are cash items and totaled GBP 6.2 million and the rest are noncash. The 2 cash items are the acquisition and disposal related costs, this is fees that we paid to advisers in relation to completed and aborted acquisitions in the period, and this was predominantly the completion of Balta, the acquisition of [indiscernible] and also our recently completed acquisition of IWT, and the cost is down year-on-year as a result of volume of acquisitions this year. The other acquisition -- the other cash cost is the reorganization costs as we integrate our acquisitions into the business and the majority of this relates to Balta. It should be noted that there will be more costs in H2 related to Balta as we go through the reorganization, but we expect these costs to be cash neutral over time with the disposal of service [ related ] assets once the reorganization is compete. 1 or 2 other items to point -- sorry, go back Geoff, sorry. Thank you. 1 or 2 other items to point out here. The amortization of acquired intangibles is a large number coming through here, which relates to the amortization of the fair value of certain intangibles that we get when we acquire businesses, and we put this in here to avoid any double accounting as we also incur cost to maintain those customer relationships, our brands across our business. And finally, on the slide, we have also been required to adopt hyperinflationary accounting in our Turkish businesses under IFRS as the rate of inflation on a cumulative basis over the last 3 years has been in excess of 100%. This means that we have to reinvest the balance sheet of those businesses and also the income statement of those businesses. And this year, that resulted in GBP 1.5 million gain at EBITDA level, and a GBP 1.4 million monetary gain in finance costs. Given these businesses that we have in Turkey, one of which is a ceramics business and the other is part of Balta, the predominant amount of their revenue is in euros and U.S. dollars. We don't believe that adopting the hyperinflationary accounting reflects the [ truly in line ] performance of the business and the back those out. If we move on to cash, you'll see that as a business, we generated GBP 22.1 million of operating cash flow before interest, tax and exceptional items in the period. And the key driver on the reduction of this has been the investment that we made in working capital in the first half. There are a number of drivers up for this. One is the fact that, as Geoff mentioned, we've invested in raw materials and also finished goods to maintain the service levels to our customers. And we're now seeing supply chains return to normal levels, and also the lack of requirements to hold inventory and ceramics division as we don't see any capital gas rationing requirements in that market. And so in the second half, we will start to work that through to produce cash. The other component that's impacted inventory -- sorry, working capital is in relation to the purchases that we made in the first half, which are -- come through raw materials and finished goods. And they're now working their way through our receivables balances. Again, we'd expect to see this [ online ] in the second half as the input costs have been reducing back to historical levels and also management are taking actions overall in the inventory. On the next slide, you'll see a graphical representation of movement in net debt in the period. We ended the period with the net debt of GBP 651.5 million. So the reason for the increase on this was to do with the acquisitions that we made in the period. So the large block on this graph is GBP 154 million, and this represents the purchase of Balta and also the [Indiscernible]. The other item worth noting on this is the GBP 27.5 million, which is to do with the increase in our net debt that translation impact as a result of weaker sterling. And finally, to me on the last slide, the previous slide, we saw the net debt. We have not increased our gross debt in the period. We have got a senior secured debt or long tenured and low coupon bonds. Those are still the same as they were at the year end other than a translation impacts because they are euro denominated. Cash, the reduction in cash has been from the purchase of the top [indiscernible]. And we also picked up a small amount of finance leases the acquisition of Balta. This has left us with 3.4x leverage, which is in line with our overall group financial policy. And also on the slide that , you can see that, we have GBP 73.5 million worth of cash, and that, along with GBP 150 million worth of undrawn RCF plus other smaller facilities that we have on the group leasing a very comfortable position of having GBP 250 million worth of liquidity as we ended the period. So with that, I'll hand you over to Philippe.

Thank you, Brian. Just on the operational overview. For the record, we report on 4 divisions. We have U.K. and Europe, soft flooring. We have the U.K. and Europe ceramics division. We have then separately Australia and the fourth division is the U.S. So the focus is entirely on operations and acquisition integration. We are convinced that we can have significant synergies, which will have material earnings and cash flow growth over the next couple of years. So the 2 things, if we look at the first division, U.K. and Europe soft flooring, as we see on the slide here, the 2 projects, I would like to talk to you about is Balta, and I can see already a few questions popping up with regards to Balta and the status of the acquisition. And secondly, the logistics, I want to talk you through some of the logistic projects which we're having in the U.K. Well, first of all, if we talk about Balta, just a reminder, when we did the acquisition of Balta, about GBP 350 million of revenue, which we acquired, 2/3 of that was rugs, 1/3 was broadloom Balta EUR 100 million, 70% of that sold into the U.K., 30% on the continent. So let's focus on rugs for a moment. So we want to redesign the footprint for rugs. So we want to do less in Belgium and focus more on the Turkish operation just for the record, Balta has 3 plants in Belgium, and rugs has 2 plants in Turkey and 2 distribution centers in the U.S. So in redesigning the footprint, we want to do less in Belgium and more than Turkey. So we have decided to close 1 plant, the [indiscernible] plant. We are in the process of negotiation with the trade unions. So we should be finishing these negotiations, and we will be laying off 240 people -- sorry 260 people and 140 people will be transferring to other plants in Belgium. So the Turkish operation will be expanded. And most of the [indiscernible] manufacturing, which was now happening in Belgium will be done in Turkey as most of the components of the goods sold are cheaper in Turkey. With regards to the broadloom section, this is 1/3 of the business. So it is our intention to make it slightly smaller in Belgium and push some of the quantities, which we are making in the Belgium plant into the U.K. plant. We think about 4 million, 5 million square meters, which will be pushed into the U.K. plants. We still have a bit of capacity in U.K. plants. We have 2 manufacturing plants in the U.K. And so we are trying to bring Balta broadloom closer to the market. As an end result, we will be having -- for the U.K. market, we will be having 3 plants, 3 manufacturing plants, of which 1 in Belgium and 2 in U.K., we're having 4 distribution centers in the U.K. and we are running 7 brands. Balta, the acquisition of Balta is giving us the seventh brand. And on top of that, in terms of the Balta integration, there was also a corporate office in Balta. We're also looking to trim that down to fit the current size of Balta. Some about logistics. I've been talking briefly about logistics. I want to remind everyone that logistics is a key differentiating factor for Victoria. So we're not only a manufacturer. We are also a distributor in the U.K. market. This is important to remember and we have just commissioned a purpose-built warehouse and we're still 190,000 square feet warehouse, which is going to be net-zero carbon, and we will take access of that in February next year. We've just started to take early access to start mounting the cutting tables. So all of that is in the process of happening. The service proposition for the record remains over 90% and the service proposition of next-day delivery remains over 90%. Reminder as well, with Victoria, we're in the medium to high end of the market, by no means in the volume end of the market, so which is giving us a bit of price protection as well because of the service we are able to give to our retailers. Secondly, important division is ceramics. So we have 3 geographies where we have ceramic plants, that's Italy, Spain and Turkey. So Italy, we have 3 brands in Italy, where we've done significant investments, which have come to an end in the back end of last year. We're taking the full benefit of that in the first half of this year. As you may have seen, we've had very good results and profit in the Ceramics business. We've had a pent-up demand, especially from the DIY. DIY business has been very strong in the continent in Europe and in the U.S. On the back of some of the investments we've done in the back end of last year in Italy. So we have had extra kilns which have given us the opportunity to have more output and to make specific sizes or larger sizes, mainly because we can see the demand in larger sizes in the current market environment. In terms of Spain, the main focus in Spain has been the repositioning of the Saloni brand. Saloni brand was -- is, in fact, a commercial brand, which we're having, it's the only commercial brand we are having because most of the other brands, not only in ceramics but also in soft flooring are residential. 85% of what we're doing is residential, about 15% is in the commercial area. We're also -- we have also introduced a new showroom in Alicante and mid of December, we are thinking -- not thinking we will be opening a new showroom in Madrid for Saloni. The last geography in ceramics is Turkey. Turkey, we've done an acquisition last year, which was Graniser. Graniser was exporting 70% to Europe and to the U.S., 30% was domestic sales. We are currently running a CapEx program in Graniser, which will allow us to increase the 70% export to 90%, even up to 100% because we are less interested in the local domestic market. We are more interested in the export. And this is why in order to meet quality standards, we have had to run CAPEXs for quality purposes in terms of the inkjet printers and the packaging of the finishing lines. That's the second geography, so we can move on to the third geography, which is Australia. Australia, we've seen strong organic revenue and EBITDA growth. As you may remember, Australia came out later than -- out of the pandemic. So -- and we've seen a very good solid demand in the first half year. Another, how would I say, conclusion or effect, which we've seen in the Australian market is that we have had a lesser supply chain disruption which has -- and also less inflationary pressure from the raw material components and the energy components or all components of the cost of goods sold have been less. So we've had to perform lesser price increases in Australia than we had to do in Europe and the U.S. The popular product group, which we're having in Australia LVT. We have a distribution facility in Australia under the brand Dunlop and this is growing very fast in the Australian market. Underlay sales were on track. We are at full capacity and underlay in our Sydney plant. And so okay, it's been sold, it's optimized in terms of quantities and price. Last but not least is the American market. Currently, it has been the strategy of the Victoria Group to acquire distribution outlets in the U.S. rather than manufacturing facilities. And in the distribution, we have the revenue currently across the group in the U.S. is $400 million. This is split over CALI, which is an omnichannel distributor, which we bought last year, and then 45% of what -- of the Balta revenue in rugs, so almost $100 million is also a U.S. business. We've done a recent acquisition of a distributor in Florida in Palm City, who's working essentially in the southeast of the U.S., but having ambitions to become a national distributor in the U.S. And so if we take all this distribution capacity, this means that we currently have -- including the Balta warehouses, we have 4 warehouses on the East Coast, and we are trying to integrate as much and looking for synergies and cross-selling opportunities to sell as much product which we are making in the group. So this includes outdoor rugs, there's a good demand in -- of outdoor rugs in the U.S. market and also artificial turf. I just want to remind you that we have a large artificial turf factory in the Netherlands. And we are exporting more and more into the U.S., and we will be using these distribution facilities to support this growth. I think this is it, Geoff. I would like to hand over the presentation back to you.

Mike, that's us concluded the presentation and we're quite happy now to move to Q&A.

That's great. Thank you very much indeed for your update. [Operator Instructions] I'd like to remind you recording of this presentation along with a copy of the slides and the published Q&A will be available via investor meet company dashboard. As you can see, Geoff, you've had a number of questions submitted by investors. So thank you to everybody on today's call for your engagement. If I may, Geoff, if I could just hand back to you to read out those questions and pose them to the team and give response where it's appropriate to do so, and I'll pick up from you at the end.

So [ I will ] then read the question from [indiscernible], there's a number of questions that I can see on different key topics. And so I'll paraphrase to make this simple, because we can answer a number of questions at the same time. So, we've got some questions around short interest in the company and the buyback of our own shares. So the -- look, I'm not privy to the investment case, clearly, of the various firms that have taken a short position in Victoria, I think they clearly have a view on the outlook of the business, which the directors disagree with for the very fact, we think the shares represent good value at current levels, and we are busy buying back our shares. We are not buying back our shares in any attempt to try and squeeze out the shorts. We're simply buying back our shares because they represent a very good use of our capital at these current share prices. And you all have also seen a number of our shareholders -- sorry, of our directors have also bought shares in the last few months. So this is the difference of viewpoint on value and the outlook for the business. And I'm sure in time, that will be resolved one way or another. We've got a question on energy prices and hedging. So we take the view on that our hedging is commercially sensitive, so we don't disclose it. However, I think it's fair to say that the fact that the company has confirmed that it is going to hit the market consensus numbers, which were up [ GBP ] 200 million of EBITDA for the full year. And we've also expressed a view as our confidence in the next financial year. I think you can take some comfort that we feel pretty comfortable with the position on our energy input costs. The Kidderminster warehouse is not one of the properties that was to be sold and that will be retained as a warehouse because of the growth of the business, but the new warehouse is actually located in Worcester, which is just off the motorway in the Midlands. And it is a very smart carbon-neutral site. These questions are sort of like in no particular order, they are random. The preferred equity, we do not expect it to be converted into common equity. So the preferred equity is an interesting instrument. The company can call it at any time in 25 million sterling blocks. So we can buy the preferred equity back at GBP 25 million at a time, there is GBP 225 million outstanding at the present time. So -- and it can be converted after 6 years at the preferred equity holder, which is Coke Industries at their auction, they can convert that into ordinary equity at the then share price. So the share price at the time. However, as we have highlighted in the statement of the shareholders yesterday and also while we were speaking with you today, it's our expectation that the company will pile up cash over the next 18 months. Acquisitions are taking a back step compared to the focus on integration of existing businesses because there are tens of millions of synergy opportunities to be realized in the existing business. So we expect to pile up cash -- and then that gives us optionality in kind of 6, 12, 18 months, whether we use that cash to pay down the debt, whether we use it to buy back the preference shares, but in any event, there is no intention to follow the preference shares to be converted into ordinary shares. So -- sorry, I just need to scroll up because the question is coming in faster than we can read them out, right. Actually, there was 1, scroll down. Yes, sorry I need to scroll down the other way. Okay. I'll -- there's a question about the backing on the broadloom carpet which continue to...

Well, there used to be a different -- indeed, there used to be a different kind of backing in the original Kidderminster plant. We never sold that backing line for the record, but the most commonly used is latex for the moment, but we are working on new types of backing, which we are currently already using on rugs, special backing, which do not hold latex and which are 100% recyclable. Then there was another question on preferred equity, but I think you've dealt with that, Geoff. So we cannot see any other questions for now.

That's great. Thank you very much indeed. And of course, if any further questions do come in, then we'll make those available to you post today's call. Geoff and to the rest of the team, I know investor feedback is particularly important to you and to the company, and I'll shortly redirect those on the call to give you their feedback. But I wondered if I may, Geoff, just come back to you just to close off with a few closing comments, and then I'll redirect investors to give their feedback.

Sure. Sort of the key message is that -- or the key 2 messages that we would like investors to take away from the conversation today is, firstly, the focus is -- of the company over the next 12 or 18 months. The focus is on operational integration and realizing the synergy. As I said a few minutes ago, there are tens of millions of synergy gains even the closure of the [indiscernible] site that Philippe was talking about earlier, that will happen next month and the saving on that alone is GBP 1 million a month in labor charges. So there are some very significant synergy projects we expect to realize over the 12 or 18 months, and that's where we think the best application of management time is. And then the second area that we want people to hear is that we expect to generate GBP 100 million of cash in H2, and we think we can continue with that rate of cash generation into the following financial year. And it is the group's or the Board's view that the company will achieve its GBP 200 million EBITDA for which I believe, see the market consensus number for the full year or thereabouts. We are confident that we will achieve GBP 200 million of EBITDA for the full year. So those are the key messages we want you to take away from this conversation today.

That's great, Geoff. Thank you very much indeed and to the team from Victoria. Can I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. This only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Victoria Plc, I would like to thank you for attending today's presentation. Good afternoon to you all.