Victoria PLC (VCP) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Victoria PLC results investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand over to Geoff Wilding, Executive Chairman. Good afternoon to you sir.

Good afternoon. Thank you very much for joining the call. As you all would have seen from our results, the market was a lot softer in the last 12 months than it has been previously. This is largely due to inflationary pressures impacting consumer discretionary spending and pull forward demand when during the COVID lockdowns, a number of people understand we invested in the property and a lot of spending was conducted in that period and consequently, there was a -- there's been a drop in spending in more risk than the last 18 months. This will obviously normalize over time. But in the meantime, it has impacted our revenue, although I'm pleased to say that Victoria outperformed the wider market in most of the [ team ] markets. So with that, I will hand over to Brian, who -- Morgan the CFO, to take you through the new financial results for FY '24.

Thanks, Geoff and good afternoon, everyone. I will skip through to Slide 7 as for the slides that are on the website. I will quickly run through Victoria's financial highlights of the year which has proven to be challenging for the global flooring industry. And then I'll hand it over to Philippe, who will take you through more detail on each of the divisions. So slide 7 shows the results of the group for the year as we enhanced the market in March, we continue to see tough trading conditions well into the second half of the financial year. And this can be seen in volumes being lower by 12% or roughly 28 million square meters compared to the prior year. But not an impact of the volume decline as revenue at GBP 1.25 billion, that being lower than the FY '23 with all of this is being impacted. From our perspective, with different results across the divisions. The U.K. and Europe soft flooring, I'm pleased to say that the results of the integration and restructuring we've got in FY '23 can be seen with the division showing comparable year-on-year absolute gross profit off circa GBP 194 million and increased gross margin percentage despite an 11% decline in revenue. You will also see a reduction of GBP 17 million in operating expenses as a result of the reorganization, integration and other projects, delivering in improvements in absolute EBITDA to circa GBP 83 million and EBITDA margin of 370 basis points. U.K. and Europe Ceramics has been the hardest [ Cederberg ] divisions with volumes down 90% as a result of low demand in European and export markets, as well as increased competition from Indian manufacturers. The decline in volumes has led to a decline in profitability and action has been taken and continues to be taken to the group profitability in this division. Moving on to Australia. This division, while seeing a downturn in volumes and revenue continue to perform well from a margin perspective. And the North American division also showed improved EBITDA and margin after the integration of IWT in FY '23. Overall, the group delivered EBITDA of GBP 160.7 million, in line with the guidance that issued in March. Moving on to the next slide. Here you'll see the non-underlying items and I'll spend a little bit of time just going through some of the larger ones to explain. We exclude these items from our underlying performance as they tend to be irregular and therefore, they're distorted. The trends in the business or the technical accounting adjustments, which we have to put through as a result of IFRS, but is not affecting the live performance of the business. There are 2 items -- 2 cash items and the rest of noncash. So then the cash items were GBP 1 million in relation to acquisition and disposal rated costs down from GBP 4 million in the prior year. And these are costs that we pay to advisers as we're going through the process of looking at and completing acquisitions. And we also have reorganization costs, which is the cash cost. And these are from the integrations of our acquisitions and mainly relates to reorganization of Balta. We expect, over time, these costs will be cash neutral as we dispose of service real estate from the estate that we acquired with Balta. We also took some costs through here for some redundancies in Turkey as we're managing the cost base as a result of continuing low demand. Pointing out here is the cash flow it can be different in terms of the timing compared to when we take the accounting charge and we would come on a specific cash flow flat numbers in covered slides time. A couple of other points to highlight here. The impairment of goodwill and the accounting standards will require us to assess goodwill on an annual basis for historical acquisitions. And to do this, we perform a discounted cash flow modeling using the current trading as the base. And given where demand has been this year and also with no imminent recovery being forecast in our models, this has resulted in an impairment which we've taken this year, mainly in relation to our expansion in Turkey ceramics business and our county business in North America. So moving on to the next slide. Cash generation, and you'll see here that operating cash flow before interest tax and exceptional items is GBP 106.4 million compared to GBP 157.8 million in FY '23. For the full year, we've seen a net flow in working capital of GBP 15.2 million, and this is made up of net flow in the first half of GBP 27.6 million when [indiscernible] was not aligned with our production and inventory levels. And in the second half, the business took action to reduce the inventory levels and for lease cash and inventory resulting in an inflow of GBP 12.4 million. We expect to see this inflow continue in FY '25. All the points on the slide are capital expenditure, where we now see this returning to normal levels, having had a significant outflow in FY '23, it was close to GBP 100 million without a lot of that in relation to the reorganization of Balta when we bought it by moving production in Belgium and into the U.K. and into Turkey. The service real estate asset disposal proceeds. This is in relation to the property that we sold in Belgium at the end of the last calendar year. And it's actual cash items, you'll see here that we had GBP 29.3 million net flow in FY '23, a net flow of GBP 33 million in FY '24. These relate to the accounting charges on the prior slide, and we expect in cash terms to pay out roughly GBP 11 million in FY '25. If we look on to the next slide, we've got a graphical representation of the movements in net debt. You've seen that net debt has decreased from GBP 658.3 million to GBP 632.9 million, and the [ delayed ] loss for that are pots and pennies with the free cash flow from before exceptionalizing GBP 28.2 million . We also had the net impact of the reorganization costs in Balta of GBP 23.2 million. And this is after net of the proceeds from the disposal of properties. The GBP 15.8 million relates to [indiscernible] payments that we made on prior year acquisitions and that number will become smaller in future years. Also, we had an inflow from the further utilization of factoring, which is not included in the definition of net debt for this purpose. And also, we've had a benefit of GBP 22 million on the view translation of our euro denominated gains. Finally, from me, moving on to the last slide and looking at the net debt structure and also the leverage. The leverage this year has increased from 3.4% to 4.4% despite our net debt, which is used for net leverage decreasing and this is purely as a result of EBITDA being lower this year than it was last year. Management is committing to reduce this leverage ahead of the next quarter of financing by generating cash from operations and sales of our assets. And this includes further disposal of real estate in the Belgium portfolio. We're expecting -- we fully compete -- all we expect to complete another in the later stages of this year. You can also see from the slide that we have GBP 73 million of cash at the end of the year, also with a low senior secured debt, part is used to buy buybacks and lower drawdown, it's as if, it is elsewhere. We have a liquidity position of over GBP 250 million across the room. All our senior debt is long tenured with the earliest repayment needed to be in August 2026. And with that, I'll hand you over to Philippe.

Thank you, Brian, and good afternoon, everybody. So when being faced with the market challenges last year, management has been focusing on the completion of the integration and the rightsizing of different projects, as we have described in previous published reports. We believe that all of these actions which have led to a reduction of about 1,200 FTEs which is about 16% of the total workforce of the Victoria Group, will deliever structural improvements in the company's operating margins due to lower CapEx, also a more competitive position due to the rightsizing projects which we've conducted, a better consumer service level given the investments, which we've conducted in our DCs in the U.K. and the U.S., a lower cost of manufacturing and working capital inversion exercises in terms of SKU and a better supply chain. This can already be clearly be demonstrated in what happened in our first reported division, which is the U.K. and Europe, soft flooring, where we have seen advanced margin expansion and a strong outperformance of the wider market. Albeit that revenue turn down the route 11%, which is much better than U.K. volume drop, which we expect last year has been above 20%. The 11% growth is against a 31% like-for-like growth in the previous year. The margin of underlying EBITDA improved from GBP 23.8 million to GBP 67 million -- from GBP 67 million to GBP 83 million, which is a fast improvement of 370 basis points. So what has happened on operational level. The problem manufacturing in Balta Belgium has been stopped and the production has been transferred to the U.K. factories in South Wales and Yorkshire, this has provided even better cost absorption due to the decreased volumes. And moreover, when extra capacity is needed, we can order these quantities externally with third party manufacturers, which we have lined up in Turkey. The Balta revenue has also been screened [indiscernible] and a lot of volume sizing has happened, whereby more profitable revenue has been reached to the benefit of the working capital. Also simultaneously and what we call our super DC and super distribution side in Worcester, which is also our headquarter. This has been brought to life last year. So our 4 Alliance U.K. distribution centers have delivered 780,000 order lines last year with a 99.2% all-time in food delivery and 98.7% within 3 days. We've also acquired first electric vehicles through which we deliver now 25% from the manufacturing plant to the distribution centers, carbon-free. I would also like to remind you the logistics operation for people who have not followed that in the previous years that our logistics operation is a unique differentiating factor for our service, which we are offering to the U.K. In [indiscernible], the operational plan has been rolled out whereby we have closed 1.2 million square feet plant and transferred the equipment to 1 of our 2 Turkish manufacturing plants for improved cost efficiency. And in the meantime, the Belgium plant has been sold which has resulted in a EUR 32 million net cash inflow in FY '24. The next division, yes, which we are reporting in the U.K. and Europe Ceramic Tiles division, following a double-digit like-for-like revenue [indiscernible] group in FY '23, the key metrics returned to the FY '22 levels and FY '24. The main reasons for the significant drop or the volume declines, which we've seen in the key markets being France, Germany, Spain and Italy, we have also decided to hold pricing levels in the face of a big demand to protect premium brands, brand equities and board tours and especially with the brands, which we're having in Spain and Italy. We've also seen, and as the third reason, the sudden and aggressive pricing competition from ceramics manufacturers in India. However, in April of this year, anti-doping and counter veiling duty, so anti subsidy petitions were filed by the industry with U.S. government seeking to impose substantial tariffs. And the same is to be expected in Europe anytime soon. Of course, this revenue drop, which is about -- which is over 20% in volume and value has had a severe impact on production variances. As you can imagine, there was a lesser cost absorption. So mitigating actions have been taken and which are still in the process of being taken, which is the full integration of all production sites in the 3 geographies, which is Spain, Italy and Turkey to optimize the efficiency, specific sizes are being allocated to specific factories to specific kilns. There's also been an investment in the new technologies such as printers and packaging lines to bring the [ Danish ] production up to European and U.S. standards going forward. We've also entered into conversations with customers to discuss value engineering to the benefit of the cost of goods sold. And then thirdly, Saloni which is our commercial brand has been completely revamped and new showrooms have been opened in Spain and elsewhere in Europe, which are more focused than on the A&D sort of architects and designers community. So very quickly on the 2 remaining reported divisions. North America, I just want to remind you that in North America, we're only distributing without manufacturing. Our larger distribution business is CALI in San Diego, California, mainly offering luxury vinyl tiles as an omnichannel distributor to the Charleston, DC followed by the 2 Balta warehouses, which we have in the Roman and Savanna and IWT warehouse, which we have in Florida. So the U.S. has always been for us as being there, proved to be a resilient market for Victoria and the volumes have been up, but revenue was down at about 3%, which is about GBP 2.5 million. So last reported division is Australia. Traditionally, very stable margin and a somewhat softer marketplace. As we can see in the very start also in the new financial year. Following the double-digit organic growth in FY '23 demand in Australia was slightly softer across all flooring divisions of 4%. And the revenue fell a bit more with about 12%, but this was mainly due to the product mix. Just a reminder, in Australia, we have 2 carbon plants in Melbourne and we have distributer in the Sydney/Melbourne, manufacturer distributor of [indiscernible] and LVT. There has been, in the meantime, no structural change in the Australian market, and we expect demand in Australia to recover due to the outwards or inwards migration and the overall growth of the interest rates, which we expect to happen later in this year. Maybe a couple of words on the outlook, Brian.

Thanks, Philippe, Before we move to that, I'd just like to raise the point around the audit this year and last year. So you will remember that this qualification in the FY '23 always in relation to the small subsidiary. It was less than GBP 20 million of revenue, and this is due to the fact that they are in completed transited recourse concerns around the control environment and the board limited [indiscernible] scope of audit in relation to sorting that subsidiary, which is what the qualification was in relation to. We lifted that limitation after the cats we signed last year and Grant Thornton have been in there doing work since that until the end of the orders at the start of this [indiscernible] as is my team. I'm pleased to say that as Grant Thornton we're able to satisfy all the concerns that they had in relation to those early years of the business. And we now have the chain order report for both this year and last year, as we'll be seeing in the annual report published in the next couple of weeks.

Okay. A couple of words on the outlook. When analyzing the key indicators for the outlook for FY '25, we do see construction BMI back just over 50, which is suggesting the initial stage of growth. Consumer confidence also has improved from a very low end '22 and early '23 to match the current level albeit, as you can see, there's still the way to go there. Mortgage approvals in U.K. have increased substantially, and we should see the sales of floor following the same trend anytime soon. And the next slide is listing the upward synergy potential, but okay, we've gone to that when talking to the division. So just short repeat integration of Balta and broadloom and [indiscernible]. So Project in [indiscernible] completely finished [indiscernible] in the process of happening soon, but which should come to the end of the next 3 to 4 months. Integration of Graniser in ceramics, that's the investment we've done to come more up to speed and have a better kind of product for delivery in Europe and in the U.S. And then the integration of CALI flooring, which will be using the -- well, partially the Balta but in general, the Victoria distribution centers to the benefit of the supply chain. Brian?

Thank you, Philippe. And just to finish off, just talking about our cash generation and our balance sheet, we are conscious of the leverage has come up as a result of the performance this year. And we're working on a number of different things aiming to improve performance and also run self up in terms of our balance sheet on what you see on the slide is we're looking to -- exceptional costs reduced as we've completed the large reorganization Balta, we're also now returning to a more normal level of CapEx [indiscernible]. On working capital, the team has been and continues to work on reducing working capital, and we're looking to squeeze more out of that in the coming year. We've also led to add our real estate across the group where we have surplus properties, and we're looking to raise over GBP 50 million in FY '25, in relation to that. We have 1 property which is pretty advanced in the process, and we expect that, that will complete in this calendar year. And as you can see in terms of capital allocation, the focus for us will be the sort of guidance predominantly the priority will be in reducing leverage. It's also worth noting that the bonds -- first tranche of the bond is not due until August '26, but we are starting the process now to make sure that we are ready to refinance that when the market is optimal for us to do that. We talked about the last presentation around our leverage targets and one of the classes have really the higher leverage. There are a number of reasons for us to once you get to a lower average. And the right-hand side of the slide tells how we're going to go about doing that by [indiscernible] while helping out in the numerator and the denomination. So with that, I think the formal part of the presentation is completed, and we're happy to take questions.

[Operator Instructions]

Thank you. There's been several questions received about the repurchase of the senior notes, which we were undertaking earlier this year and where we intend to continue with that. We have a stated policy, which you will have seen both in the presentation and also in the market announcement yesterday that it's our intention to reduce leverage. And clearly, one of the options available to us to do that is to continue to repurchase the senior notes. So one, we can't be explicit about what we're undertaking and what we're not undertaking of the [indiscernible] given point in time, that I just want to reiterate that it is our intention to reduce leverage. So again, there's a couple of questions around appointing for financial advisers to assist with the refinancing. Note that we haven't appointed any financial adviser at this point in time. We have -- we're still gathering our thoughts very clearly in terms of the corporate activity of the business. Call it focus in the last or recent months 15 on ensuring we get a nonqualified audit for FY'24 plus ensuring that the audit for FY '23 was revisited and also maybe given us a clean order for that year. So the focus has been there. We will continue to gather our thoughts over the weeks ahead and take a decision in due course about financial advisers. Now we approach the refi of the bonds. So also, we should on Balta and the reorganization. We've been talking about this -- the reorganization since -- for about 18 months now. And I just wanted to point it to highlight given a couple of questions that despite much softer demand with our revenue down 11% in the market down more like 20% in our soft flooring market, our EBITDA improved and our gross margin improved by some GBP 17 million despite the drop in revenue, which equates to the success of the reorganization and the cost that's been taken out of the business, mathematically, if our revenue returned to FY '23 levels, EBITDA for the Soft Flooring division would be over GBP 100 million. And I think that's a credit to the operating team at Victoria and always well for the reorganization that's currently being untaken in the Ceramics division. You'll know that again, given the soft market, the only division which had materially negative results this year was the Ceramics division, the other divisions were either neutral or positive. And so I think you can take some cut from the fact that we -- the operational team has track record in reorganizing and I think you can expect to see some better results out of the Ceramics division this coming year. Sorry, we're just taking [indiscernible] to read questions that are coming in. Philippe do you want to [indiscernible].

Yes. Well, this is in the process of happening. We don't have a final decision yet. So yes, maybe the question is, is there any more comments on the anti-dumping petition regarding the ceramic tiles found in the U.S. So this is in the process of happening. The petitions have been sent, and the U.S. government is -- will take any measure anytime soon, which will probably have a retroactive character of a few quarters. So...

Just picking it up also, we expect the that this -- the industry's expectation, including ours is that the petition will be successful in the U.S. and that Europe will follow for -- will follow the lead of the U.S.

Well, there is a question on competitive positioning in key markets in Europe, North America and U.K. So all is to do with product development and service. So we are not at the bottom end of the segment. It's good to remind everybody here that we are more in the medium to high end of the market, where service is extremely important. So enhancing our competitive position is just always be in the forefront of service, adding extra elements of service throughout the whole offer. And this is what we're basically doing mainly in our largest markets, which is the U.S. and sort of U.K. and U.S. I think that's it for questions. Is there any more?

Of course, company can review all the questions submitted today and will publish responses on the Investor Meet Company platform. But perhaps just before redirect investors to provide their feedback, which is particularly important to the company. Geoff, could I just ask you for a few closing comments.

So I think the 3 messages I'd like people to take away is firstly, and obviously, very importantly, the company received a unqualified audit for this year and the audit decision of the audit outcome last year has been reversed. So we now have 2 years of clean audits, which is what we should have, and we expect to have that going forward as well. So I think that's very important to us rest of the entire company now has a clean audit opinion. The second issue is that or the second point I would like to make to talk about briefly is there is nothing secular, or in other words, nothing structural letters changed about the sector. People will still require flooring, there's obviously some sort of an impact on consumer discretionary spending over the last 18 months, 2 years with higher interest rates and high inflation. As that mitigates or moderates over the months ahead, we do expect flooring demand to recover and the company now has much lower operating costs. It has higher risk margins and as demand recovers, we expect a very sharp recovery in both earnings and cash flow. To give you some idea, the volume of flooring sold today is down some 20% from what it was -- sorry, the volume of flooring we sold in 2023, calendar '23 was down some 20% on the volumes sold in and this is by the industry more widely. And FY -- sorry, in calendar 2019. So that is not an exceptional year. It was a perfectly ordinary year, but demand is now currently 20% below that. So that implies that just can return to normal demand levels in terms of volume would require a 25% uplift in volumes from where we sit today, and each 5% is worth about GBP 25 million of earnings to Victoria. So as the market recovers, we're expecting a very sharp improvement in both earnings and cash flow. And that ends the presentation to shareholders today.

Perfect. Can I just thank you all for updating investors today. Please could I ask investors not to close this session as are we automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This may take a few moments to complete, but I'm sure it'd be greatly valued by the company. On behalf of the management at Victoria PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.