Victoria PLC (VCP) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Victoria PLC Half Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll, which will appear on your screens now. And I would now like to hand you over to Executive Chairman, Geoff Wilding. Good afternoon, sir.

Good afternoon, and thank you very much to everybody for joining the call. I think the -- before I hand over to Brian to take you through the numbers, there's just a quick introduction I'd like to give about the macroeconomic environment. Clearly, there's very little we can do about that, and that's driving consumer demand for product, obviously not just ours, but more generally. However, the thing that gives us confidence in the future is demand always recovers and it recovers sharply. And the reason for that is when consumers are feeling less confident about the future, have less disposable income or housing transactions are lower, that doesn't mean that -- as I've said in the statement to the shareholders yesterday, that doesn't mean that the stain on the carpet goes away and the ceramic tile that's cracked in the bathroom magically repairs. And so the moment consumers start to feel confident about the future, they start investing again in their own homes. And the result of that, of course, is that the top line grows very, very quickly. So therefore, I think the focus should be on the improvement in the underlying -- in the EBITDA margin, which has gone up from H1 last year of 13% to 14.9%. The two interesting things about that is, firstly, on lower revenue, normally, there's an operational gearing effect that should see EBITDA margins go down. The fact that they have gone up and gone up by nearly 200 basis points is an indication, the amount of cost that has been taken out of the business and also the production and productivity improvements that we've achieved in the factories. What this means, of course, is that when revenue recovers at will or demand recovers, then that EBITDA margin will go up even higher and a lot more of the profit drops through to earnings -- sorry, a lot more of the revenue drops through to the bottom line. The second thing about that is the EBITDA margin hit 14.9%, while we were still undertaking the restructuring projects, which really only completed in any substantial form at the end of September. So we're expecting over the months and years ahead for that EBITDA margin to continue to grow as the full effects of the reorganization of the business goes -- becomes realized. So with that, I'll just hand over to Brian, and he can take you through the numbers.

Thanks, Geoff. While there's some executive summary slides on this presentation, I will skip through to the detail. So I'll quickly run through the financial highlights and then hand over to Philippe, who will go through more detail on each of the divisions. As Geoff has said, this has been a challenging period for the industry and Victoria, but despite declines in revenue and volumes across all of the businesses -- sorry, despite declines in revenue and volumes, all of the businesses have increased or maintained their gross and EBITDA margins. On a constant currency basis, underlying revenue at GBP 643 million, is 14% behind H1 last year, and 4% ahead of H2 last year. This was driven by volume declines of 14% versus Half 1 last year and 7% versus H2. Demand in the Ceramics business has continued to be particularly hard hit and are not going to impact absolute gross profit and EBITDA. And Philippe will talk more about the market and the actions being taken by management in that division. On a constant currency basis, underlying EBITDA of GBP 95.8 million, is 0.5% behind H1 last year, but 0.7% ahead of H2 last year. And EBITDA margins were up 190 basis points year-on-year. The focus of the first half of the year has been to complete the reorganization of Balta into Victoria, and to manage the cost base of the business in line with the continuing softer demand for our products. We are particularly pleased with the EBITDA performance in the soft flooring division, which has delivered an absolute improvement in gross profit and EBITDA as well as improved margins, mainly as a result of the restructuring the group undertook in FY 2023. Moving on to the next slide. This is list of our exceptional and non-underlying items. It's probably worth spending a few minutes here just going through them. And just to remind you, these items are either irregular and, therefore, including them in the assessment of the business' performance would lead to distortion of trends or a technical adjustments, which ensure the group's financial statements are in compliance with IFRS, but do not reflect the underlying performance of the business in the period or the report of those items. There are only two of these which related to cash. The top 2, which are highlighted in orange, and that comes to GBP 8 million, which we've expanded in the year. The rest are noncash items. The cash items are the acquisition and disposal-related costs, and this is a small amount that we pay, a fees to advisers where we have been monitoring the market for potential transactions. The reorganization costs, this is in relation to the integration of acquisitions into our business. The costs this year mainly related to reorganization of Balta, and there have also been some costs in Turkey where we've rationalized the operations there in line with the continuing lower demand. On the noncash items, the acquisition-related performance plans, these are the earn-out payments that we make on businesses, which we require using that mechanism, our operation requires us to charge the income statement when the payments are earned rather than adjusting goodwill. And as these payments are regular, we believe that this should not be included in the underlying performance. Amortization of acquired intangibles, again, were required by IFRS to value such items and acquisition, and we're excluding them for underlying performance to avoid any potential [indiscernible]. An adjustment in the prior year for the underlying of the fair value uplift to acquisition opening inventory. And this is where under IFRS, we have the fair value inventory so close to the value at which we sell at the post-acquisition. This results in some of the profit, which we realized in the sale of that inventory cost completion not being recognized. And truly, this distorts trends in relation to the acquisition as margin growth in the following year to come about purely as a result of accounting adjustment. We therefore exclude the accounting adjustment from underlying performance. Depreciation of fair value uplift to acquisition property. Property, again, is required to be fair valued in acquisition. And we treat the depreciation of this fair value uplift as non-underlying since this does not represent the underlying performance of the business. And the [indiscernible] this year is as a result of the value offered to the Balta properties which we acquired last year. The next item to discuss is hyperinflation. We have seen a start to account for hyperinflation last year for our Turkish operations as a result of the Turkish economy being in hyperinflationary mode, and that's defined there were inflation over the course of 3 years, it's in excess of 100%. The accounting requires to reindex all of the income statement and balance sheet items to more up to date rates for -- to generate a notional purchasing power. The reindexation again -- excuse me, the reindexation results in a net gain to EBITDA of GBP 18.5 million this year, which we believe does not reflect the underlying performance of those businesses. You will also see that we've excluded the monetary loss of GBP 4.1 million for finance costs. The remaining items in the table related to the preferred shares that we have, and these again are noncash items. Moving on to cash generation on the next slide. We generated from operating cash flow before interest tax and exceptional items just under GBP 50 million for the period compared with just under GBP 40 million in the prior period. We've seen an outflow of work of capital driven by the poor demand in the first half, and the businesses are taking actions to release cash and inventory in the second half of the year when we expect to see an improvement in working capital. Otherwise, right in the center of slide, are interest paid, where the data which our period end fell this year meant that a portion of the bond interest was not paid until the second half of the year compared to the first half of FY '23. We expect interest payments for the full year to be in line with FY 2023. We also received a tax refund from the Spanish tax authorities, which resulted in a small relief from the income tax line. As we discussed at the year-end, capital expenditure will fall in FY '24 to more normal levels now that the restructuring of the Balta business is substantially complete. The expansionary and synergy CapEx this year predominantly relates to the movement of Balta equipment from Belgium to the lower cost manufacturing facilities in Turkey. Exceptional cash items is mainly the payments made from the provisions that we took in FY '23 for the restructuring of Balta and these costs are mainly redundancy costs. This slide is a graphical representation of the movements of net debt in the period. We ended the period with net debt of just under GBP 671 million, up from GBP 658 million, with a marginal increase coming as a result of cash outflows from restructuring of the business, partly offset by free cash flow before exceptional items and the positive FX impact of GBP 12.1 million on our euro borrowings. All of our debt is on tenured with the earliest [indiscernible] low coupon compared to current pricing bonds not due until 2026. Finally, for me, moving on to the next slide, we can see that the net debt of GBP 671 million results in leverage of 3.8x. Management is committed to reducing this leverage ahead of the next round of refinancing by generating cash from operations and sale of noncore assets. This includes the sale of [indiscernible] real estate acquired with Balta. We completed 1 such disposal this week with net proceeds of GBP 32 million. You will also see on this slide that we had over GBP 91 million of cash, which is in line with the position at the year-end. This, combined with undrawn facilities at the end of the period means we have significant liquidity of over GBP 250 million [indiscernible]. I'll now hand you over to Philippe to talk more about the divisions.

Thank you, Brian, and good afternoon. So in the division -- the first division and for the largest division is the U.K. & Europe Soft Flooring division with a very solid performance, with an operating margin up 360 basis points versus the first half year of last year. So in the soft flooring, the full focus was on the Balta integration. So in the meantime, all broadloom activity in Belgium has been stopped. We were still making then about 14 million square meters, and all the production has been integrated in the Dewsbury and Yorkshire plants in the U.K. with little to no CapEx. There has been a couple of machine moves, but nothing else. So excess production capacity is sourced in Turkey when needed, and we are fully lost it out in the production plants in both of the factories, which we're having in the U.K. We've also ditched some nonprofitable business and the Balta product architecture is now redesigned towards more [indiscernible] program service programs. The relocation activity is also showing its first signs of improvement, and we are performing above target as we had in budget. And the much enhanced productivity, the lower production cost, the lower logistics cost and the improved customer service has contributed to the recovery of the Balta numbers. An important observation that I want to make at this stage is that the medium and high-end U.K. service-driven brands are all selling, the cheaper volume and [ price-driven ] brands. The second leg of the soft flooring is in the Balta rug production. So we've done quite a bit of rightsizing that as well. The Balta rug production footprint continues to be refocused towards the 2 existing Turkish plants, where we're making the rugs and where we're making the yarn. The [ Avelgem ] plant is one of the Belgium plants has been closed and have been sold in the meantime, and the production capacity has been completely dismantled and has been added in the Turkish setup. Most of the yarn production activity has also been stopped in Belgium because we used to make that -- or we have made that decision because the price of the energy was far too high, and then we've decided to move the yarn production to the Turkish plant. Balta, no employees, 700 FTEs less than in April 2022. Maybe one short word about logistics activity, which is the third leg of the soft flooring. So this is Alliance. This is our soft flooring and LVT distribution hub. So we have 4 DCs in the U.K. We have one in Hemel Hempstead and Hartlepool and Wales and in Worcester. Actually, I am in Worcester now and the warehouse in Worcester what you see behind me here is some of the 24,000 rugs which we're holding on stock. And from this distribution warehouse, we are sending about 22,000 order lines per week. And this is the service. So we've approved the service. We are at about 85% service level on next-day delivery and 95% within 3 days. Then the second largest division is the U.K. & Europe Ceramic Tiles. We've seen a much softer demand after last year's massive cost inflation due to the energy and the labor. The absolute EBITDA fell about GBP 12 million versus the half year '21, but relative EBITDA increased with 110 basis points. The revenue was down from GBP 254 million to GBP 185 million. If you look at the market, then the year-to-date market volume is down about 30% in Spain and 19% in Italy. The full focus on margin. And so we've been giving up some market share because the full focus remained on the margin. The exercises, which we conducted in that division, were focused on trying to reduce the [indiscernible] through some of the value engineering we've done and reformulating the tile in terms of clay and thickness of the tiles. There was also some continued fine-tuning in the hedging policy, which we've done. We've continued to leverage the U.S. distribution and try to take advantage of competitors -- all competitors by selling more in the U.S. DIY because we have this service outlets in the U.S., and we've continued the rightsizing operation and reduced the cost mainly in Spain and Turkey. So the current demand softness is being used to refocus the quality and size allocation across the geographical plant network to optimize the cost of manufacturing. So we have manufacturing outlets in Spain, in Italy and in Turkey and rather than looking at cylinders. So we're taking more horizontal look in our approach and try to allocate sizes through ceramics across geographies. The Italian plants have been more focused on volume through sales in the U.S. and in the European DIY, whereas the focus in Spain has always been more led towards margin protection with an impact, of course, on the demand. Across all brands, exercises have been conducted to focus on working capital through stringent product development and related SKU product architecture. And across the plants, but mainly in Turkey, so some of the older lines have been [indiscernible] as part of the restructuring process, which we have conducted. Third geography is Australia. We can be extremely short about Australia, very steady business we've had there with the same -- almost the same revenue and with continuous good solid EBITDA of 12.8%, so which has not changed versus last year. Then last but not least, as a division, we have North America, where we have operational excellence projects driven -- driving the margin expansion. So soft flooring alike, the demand in H1 and U.S. has been soft because lots of retailers were destocking at that moment. And overall footfall in shops was down as well as the consumer appetite online. The EBITDA percentage was good in the first half FY '24, was up 500 basis points from 6% to 11%, albeit it's fair to say that in October last year, we have acquired an extra distributor in Florida called IWT. And then in despite of the continued West Coast shipping disruption, CALI has succeeded in balancing the inventory levels to meet the demand and maintain the service level. CALI is the Californian distributor, which we're having, which is an online and an omnichannel distributor. Orders have been slow in half year 1, but margins have improved due to the product mix which we've conducted. We're also trying to add more products through the pipeline. In the meantime, we have 4 distribution warehouses in the East Coast, if we include the Balta warehouses, and we are realizing revenue of about $400 million in the U.S. Brian, this is the overview of the divisions. I will hand back over to you now.

Thanks, Philippe. So -- there are a number of questions, which have started to appear on the screen. So -- and I'll -- we'll try and group them rather than not because there's quite a number of common themes that we're seeing. So in terms of redeeming the preference shares or buying back bonds, in other words, what are we going to do with the capital and the free cash flow that we've got coming into the business? What the answer needs to be because we cannot disclose in advanced that is actually what the company intends to do. But the Board is alive to the various opportunities we have to deploy capital and we will allocate the free cash flow in a manner that benefits the shareholders the most. And clearly, there are a number of options we can buy back shares, we can buy back bonds, we can buy back the preference shares. And the decision is to which one of those options or a combination of options that we pursue will be taken in the best interest of shareholders. And the one thing that you need to bear in mind at all times is our clear statement that we intend to reduce the leverage in the business. I have -- there's a number of questions also about the resignation of Zack Stenberg from the Board of Victoria. What I can say is there is nothing. And we can say this categorically, there is nothing more to it than exactly what was put in the statement yesterday. Zack runs a very large investment fund in New York, and the amount of time that he needs to devote to that because the fund has gotten larger. He just doesn't have time for outside Board activities. However, he is a personal friend of mine, and our families holidays together, there's been no falling out. There are -- and he remains a strong supporter of Victoria. And he continues -- I mean, we will continue to talk to him regularly as you would expect. Do you want to talk about the -- read the question on the debt figures.

Yes. As I mention earlier on, we've got liquidity of over GBP 250 million, and that's pretty much in line with the year-end. So I think there's a number of questions about the draw on the RCF. And we drew GBP 20 million during the first half, which has been repaid since the end of the half. We use that facility for different currencies if we need to pay euros we borrows it from the RCF because it's an easier thing to do. The other thing that we have -- we do have other facilities around the group, we have overdraft facilities and working capital facilities. There was no significant increase in any of the drawings in those over the period.

There's a question about when we expect the demand to recover? If I could predict that precisely, I -- it would make my life a lot easier. The key drivers for spending on flooring is there are three things that we track. Firstly is housing transactions. When somebody buys a home, one of the first things they do is replace the flooring in the house, and there's a number of reasons for that, but there's a very strong correlation between flooring sales and housing transactions, albeit with a 6- to 12-month delay. So somebody buys a house, moves in 6 to 12 months later replace the flooring. There is a very strong correlation between those two actions. So we track housing transactions. The second two factors are discretionary spending. So where the consumers have adequate surplus spendings to be able to spend on flooring, that's the second thing that we track, discretionary spending. And the third characteristic that is useful is consumer confidence. As consumers become more confident in their financial situation and the outlook for the world, then they are more inclined to invest in their own property. Clearly, interest rates are a key factor in all those three items that we look for. And I think you will have all seen in -- and literally the last few days, the change in central tone coming out of the central banks about the outlook for interest rates next year. So it's my expectation that the interest rates come down, housing transactions increase, consumer discretionary spending increases and of course, consumer confidence goes up. So I think that's -- those are the characteristics that you should be looking for as well to judge when demand will recover. There's also a question about the leverage ratio that we're aiming to achieve for the refinancing? And I think which -- in fact, I don't think I know we've stated publicly that we're aiming to deploy 2.25x, plus or minus 0.25 or 0.5. So -- sorry, to be clear, that's 2.25x EBITDA plus or minus 0.25 or 0.5.

There's a question on the sales of the property. So just to clarify, we disposed a very surplus property that we have in Belgium. This property became surplus as a result of the reorganization when we closed the transaction this week, and it was EUR 32 million that we've received as a result. I think there are other properties in the Belgium portfolio that we would look to manage as well. This is all foreseen as part of the acquisition. And I think we've already stated to the market that the cost of the reorganization of Belgium will be dealt with through the rationalization of the real estate in Belgium. There's been a couple of requests for me to say what we expect the cash balance to be at the end of the year and also, we expect free cash flow. And we're not putting a forecast into the market for that. Again, I'll resay what we've said in the past, we expect our capital expenditure to return back to normal level. FY '23 was abnormal in terms of the amount of growth projects that we undertook there, and also the significant spend that we had on synergy projects with moving the -- part of the Balta operations out of Belgium and into Turkey. So we're looking at probably GBP 60 million to GBP 65 million that kind of range for CapEx this year. The interest expense will be pretty much in line with last year. You can work the tax rate -- the tax kind of cash out from the rate [indiscernible] in the P&L. And we expect to see improvement in working capital in the second half. So that's the only kind of guidance that we're giving people at the moment in relation to what we expect to see at the end of the year.

There's a couple of questions asking about a potential margin loan that I may have secured against Victoria shares. So for the avoidance of doubt, the facility that was put in place 6 years ago, it was a 2-year facility. So it's long since expired and I have not renewed it. And during the period that the facility was in place with JPMorgan, I never drew the a lot the -- a single pound, euro, whatever. I never borrowed against the shares whatsoever, which is why I allow the facility to lax after the initial [ 3-year ] period because I never used it. So to be clear, there is absolutely no borrowings secured against my shares.

Okay. That was -- is there anything that we haven't answered?

There was a question around on the volatility of our statutory number, which I will provide a more detailed explanation on the rug response rather than go through that now. There are a couple of big items, particularly around the fact that we had negative goodwill last year from Balta, which is quite a large credit, which makes the fluctuations year-on-year quite pronounced. But that is one of the reasons why we take these items out of our income statement is because it causes such fluctuations, it has actually then becomes very meaningless to explain the true underlying performance of the business.

Somebody's asked to whether or not we would consider doing a capital raise to pay down debt? The short answer is, I don't believe that's necessary certainly at anything like the current share price where we have very strong expectations of strong cash flow and improved earnings in the near term and the result of that will be that leverage will come down naturally and both in terms of leverage ratio and also the absolute number of debt. And -- sorry, the absolute total of debt. So as a result of that, I don't see any reason at this point to do a capital raise.

There are a couple of questions in relation to the FY '24 audits. So we are working with Grant Thornton through the order planning and also through some work already this year in relation to the '24 audits. We continue to work with them. And if there's anything that comes out of any work in relation to the audit, then we will clearly update the market on that. But as of the moment, there's nothing and we expect to work through the whole process with them.

Someone has asked again about the replacement Director for Zack Stenberg. So we have been in discussions for 2 or 3 months looking at potential candidates, not as a replacement, but just to address some of the governance concerns that people have because there are a large number of -- sorry, as a percentage of our Board, there are some very significant shareholders. And I know it would reassure some people that we had to increase the number of independent directors on the Board. So we are looking at it and conducting a search to find some suitable people, both industry experience and also capital market experience that they can bring to bear to help guide the company in the years ahead, and we'll expect to make some announcements on that in due course. So there is a question about have we seen an improvement or worsening of general demand over the last few months? It's an interesting question. Firstly, because different markets are exhibiting different characteristics. As you can see from what Philippe took you through with the operations earlier. The U.S., we are -- our revenues are up, our margins are up. The European market where -- which is primarily ceramic tile business, we see revenues and demand down. The U.K., we are seeing a recovery in demand. But the interesting thing, if you look at the revenue numbers or the demand for the last 18 months, so you look at H1 last year, H2 last year, H1 this year, there was a big drop off between H1 last year and H2 -- sorry, H1 last year and H1 this year, but the drop off between H2 last year and H1 this year is negligible. And what that suggests to me is the demand fell off significantly as you would expect with much higher interest rates and higher energy prices for people don't have to cope with. But demand seems to have stabilized at current levels, and there are signs of recovery in some markets. I don't want to get too excited about it too soon, as I said in the letter to the shareholders yesterday. One swallow doesn't make a summer, but there are some encouraging signs. And inevitably, as I said, unless people want to get back to walking around on mud or albeit concrete, they will -- inevitably always the demand will return, and it's just a case of when. And -- sorry.

Okay. So there's a question on working capital. The slowdown in demand in the first half, we saw an increase in our inventory. There are -- as Philippe said, there are actions in place for us to release the inventory that we have on the balance sheet and realize cash. So that is in all of our objectives for the second half of this year to do that and to make sure that the inventory that we have is now more in line with what we're seeing in the current demand in the market.

There's a question about why we think the share price has fallen. I could be facetious and say because there was more sellers than buyers. But the -- look, there's been two events that I think haven't been helpful. Firstly, the delay in the accounts and the order qualification has clearly not been helpful a lot. Neither of those things have anything -- have any underlying impact on the actual business, but it certainly impacts investor confidence. And we have done everything that we possibly can to ensure that it never happens again. As you'll appreciate, the Board and -- own over 50% of the company. And we are very, very focused on ensuring that the share price recovers. But having said that, I think that was the first factor was the -- and then secondly, there has been -- the macro environment is challenging out there. And I think interest rates have stayed higher for longer than most people anticipated. And I think that's damaged investor confidence that's not particularly a Victoria think, there's more anything to do with home improvements or discretionary consumer spending. There's a question around why do we not give EBITDA guidance? Well, an actual fact, the market consensus numbers for the year is GBP 187 million. This is -- and when I refer to market consensus guidance, that is the average of the forecast by the 3 analysts that cover Victoria. The company itself doesn't make a habit of putting out specific numbers in the market, but there is a regulatory obligation that if we think that number is materially too high or too low, we need to perform the market. The fact that we haven't seen anything about it means that we are comfortable with the number, plus or minus a reasonable margin. So as I said, I'd just repeat the average number. The average consensus forecast is GBP 187 million EBITDA for the FY '24.

Okay. So I think the rest of the questions up here are around specifics, which happy to respond, things like the movements in leases, which I'm happy to respond to but in writing rather than take up time on this call. So I think, Jake, I think we're done with questions.

Perfect. Brian, Geoff Philippe, thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And of course, we'll be able to give you back all of the questions that were submitted today just for you to review and add any additional responses, of course, where it's appropriate to do so. But Geoff, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, that would be great.

Yes. Again, I'll just come back to the fact that the company cannot clearly control the macroeconomic environment, although we're clearly closer to an improvement every day that goes by. So I think the focus needs to be on the fact that the company has materially increased operating margins in H1, and we expect to see further increases because as Philippe have described earlier, some of these restructuring projects were still underway during H1. So the full effect wasn't seen, so we can expect to see further improvements in margin going forward. And then the second comment is that circa 40% of our revenue is gross profit. So as revenue recovers, and I think the analysts have got us at that GBP 187 million of operating profit that they're forecasting for this year, the average revenue number is GBP 1.3 billion per quarter, give or take. And every extra GBP 100 million of revenue, GBP 40 million rough figure drops to the bottom line, assuming it's a 40% drop through on GDP. And the impact of that GBP 100 million sounds like a big number, but in actual fact, it's only an 8% improvement on where -- currently a little bit less than 8% improvement on where we are. And last year, people -- I remember, we turned over GBP 1.5 billion. So the improvement could be very significant when the demand returns and most definitely will as the macro environment improves. Philippe hasn't suddenly forgotten how to make or sell carpet, it is just difficult macro conditions at the present time, causing pressure on the top line. So that will bring the call to an end.

Perfect, Geoff, and thank you once again for updating investors this afternoon. Could I please investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can really better understand your views and expectations. This will 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, we would like to thank you for attending today's presentation, and good afternoon to you all.