Volution Group plc (FAN.L) Earnings Call Transcript & Summary

Right. My apologies, technology. So good morning, and welcome to our virtual results presentation for Volution Group for the financial year 2020. Regrettably, this presentation couldn't take place in person, but we're very pleased with the 50 participants that we have with us today. So healthy air sustainably. That's Volution. As we go to the next slide, what I'd like to talk about today, the headline to our announcement, record cash generation and a strong start to the financial year. I'm pleased today to be here with Andy O'Brien, suitably socially distanced to my right-hand side; and Lee Nurse, who's in another room, but in the same building as us. I'll take you through the introduction. I'll come back and hand over to Andy, and he'll take you through the financial review. We'd like to take you through the operational review. And also today, Lee Nurse joining us to talk about our refreshed sustainability strategy. And at the end, what we prefer is to take questions at the end of the presentation. We think, logistically, that probably makes more sense. So if we go on 2 slides now to Slide 3, I think what's really important to start with is our response to COVID-19. Clearly, the pandemic was with us throughout our second half of our financial year '20, and indeed is still with us today. But what's been absolutely essential throughout the crisis, throughout the pandemic is the priority is protecting our employees, our customers and our stakeholders. And we think we've done a really good job of protecting our employees and creating a COVID-secure environment. What happened very early on is that our products and services were deemed by government to be an essential service. I think that's a theme that's really important to understand: indoor air quality, providing ventilation equipment inside buildings. And in particular, we were proud to be associated with the Nightingale Hospital at the ExCel as well as many other similar projects around the U.K. Throughout the second half of the year when the pandemic had a material impact, particularly in the U.K., we continued to provide an uninterrupted service throughout the lockdown. That's really essential. We continued to service our customers, albeit the volumes were lower, but we serviced them exceptionally well. And an important factor here, something that we might talk about a little bit more later on, is that we did utilize the coronavirus job protection scheme. It absolutely has and did protect employment. But we came off that scheme at the end of the financial year. On the 31st of July 2020, we were no longer making any furlough claims. And indeed, our view on this is that although we're entitled to claim the bonus the government provided, which is available to us in January 2021, we do not think it's appropriate to claim under that scheme. So look, in terms of the impact, the revenue impact significantly all came in the second half of the year. Our revenue decline was 7% at the constant currency basis for the year. And in actual fact, in the first half of the year, we were growing organically. So the impact very clearly started to happen in our half 2. What I'd like to take you through more detail later on is our geographic and sector diversity, which we believe has helped us to mitigate the pandemic much more so than if we were an exclusively U.K.-focused proposition. And I'll come back to that a little bit more later on. Liquidity, cash generation, really important. I've already started with the headline, strong cash generation, record cash generation in the year. No equity raises. We think what's come through this crisis is the asset-light, flexible, agile model, and we can come back to that later on. And operational excellence. Andy and I, we're in this room October last year. A lot of you, we had the pleasure of your company, and we announced our margin expansion target through operational excellence. And I'll give more detail on that as we go through. But we spent all of the last financial year and continued to focus on operational excellence. And we're making some really good progress, and we'll talk to that in more detail in a moment. On the next slide, just before I hand over to Andy. And this -- the refreshed sustainability strategy. Volution, healthy air sustainably. Our purpose is to make provide healthy indoor air sustainably. And you can see the statement there. But I think it's really important, what we've decided is that whilst we think we articulate our proposition really well in our markets and with our customers, we think that maybe our story isn't so well understood with our investors and with other stakeholders. And certainly, what you'll notice today is a complete rebrand and refresh. And I want you to really take away today that Volution means healthy indoor air done in a sustainable way. What I'll do now, hand over to Andy. I've got a slide the screen around so that you can see him. And then Andy will take you through the financial results for our year just closed.

Thank you, Ronnie. Good morning, everybody. Just I guess to echo Ronnie's words, I'm delighted that so many of you have been able to join us this morning, albeit it is a great shame that you're joining us virtually rather than in person, but say delighted to join us nonetheless. So over the next few slides, I'll just walk through the financial highlights for the year and try to provide some additional bits of color and insight, I guess, in particular, around our margin and earnings performance and the makeup and the various moving parts of that. And indeed, as Ronnie alluded to, in the highlight that we're capturing these results with, the cash and net debt performance, which we think is a particular highlight of the year that's just finished. So on slide -- you should be on Slide 6 now, thank you. So on Slide 6, first of all, the revenue for the year, as Ronnie mentioned, 7% constant currency reduction in the year, essentially, all coming through in the second half. Later on, we'll come back to how that is made up by geography, by segment and indeed by market sector. So I won't cover that anymore at this stage. But I guess all I would remind everybody of is that despite that reduction in the year that's just finished, we can still look back on a 5-year CAGR growth of still just under 11%, or 10.7%, of the business over the last 5 years. Operating profit and margin, we'll talk through some more in the ensuing slides, both from a geographical perspective, but also from a what makes it up and what the moving pieces are. I guess, suffice to say, the 15.6% that you see on the slide there splits into 2 very distinct parts. So a first half where those of you who were with us in our half-year presentation back in March will remember, we posted a very credible 18.3% margin there with a 70% -- 70 basis points improvement in half 1. And then, of course, half 2 ensued with the impact of COVID. But as I say, we'll talk some more about that as we go through the material. And then if you look down at the 2 charts on the bottom right of the screen there, so the operating cash flow and the net debt pieces. I -- what you have there against 2020 is, of course, 2 numbers for each of those indicators. One is, if you like, on our sort of old world, IAS 17 basis, and one is on IFRS 16 basis. But if I talk about IAS 17, so like-for-like, very, very credible and -- more than credible -- an excellent GBP 23.5 million reduction in net debt in the year just completed. And as Ronnie mentioned, our record or strongest ever operating cash flow performance measured under both methodologies. If I can ask you to jump to the next slide, please. So here, just providing a bit more detail on the numbers that you saw on the previous slide. So in terms of our margin reduction, you'll see that a little bit of that -- on the third line down, you see a little bit of it came through at a gross margin level, but we were still able to sustain what we believe are very strong gross margins at just under 46% despite the activity impact that we suffered in the second half of the year. I would also just point out to people, and again, this will come through late in a subsequent slide, but we did see quite a notable movement in our effective tax rate in the year. And that is essentially a product of what we saw in terms of the dynamics in different markets and the stronger loss or reduction in the U.K. relative to our overseas markets. And of course, U.K. tax rates being lower than what we experienced outside of the U.K. has meant that there's been a mix impact that's increased our effective tax rate by 3 percentage points. And then down at the bottom of the slide there, you'll see a key number there are our closing leverage. So we were very pleased to bring the leverage down to 1.3 from 1.6 12 months ago, despite the inevitable impact to our EBITDA, but this, again, is a reflection of the very strong cash generation in the period. Next slide, please. So not much to report on this slide. This is where we ordinarily walk you between our reported and our adjusted numbers. I guess the key thing to say here, we are not reporting any exceptional operating costs in the year. In the previous year, we had GBP 1.8 million, which was predominantly in the first half of FY '19 relating to the Reading factory move. But this year, we're reporting nothing on that line. I will, in a subsequent slide, talk you through -- that's not to say there was nothing exceptional in the year, because I think almost everything about the second half of this year in COVID was indeed quite exceptional. But we will talk you through some of the key items such as furlough, which Ronnie mentioned earlier, in a later slide. So if you can please turn to the next slide. So what we're trying to do here, on the top section of the chart is, in millions of pounds, to walk you from our FY '19 profit after tax through our FY '20. And then on the bottom half, just translating those same numbers to how it plays through our earnings per share. And hopefully, these are relatively self-explanatory. But I guess -- so the first piece, volume impact offset by initiatives. So we lost about GBP 19 million of revenue at 45%, 46% margin, which equates to the GBP 8.6 million you see on the slide there. Now probably doing ourselves, had COVID not happened and had activity maintained at the levels it was before, we would indeed have expected to see a very positive impact from the operational excellence initiatives that we've been running through the business over the last 12 to 18 months. That is all sort of, if you like, blended into this number here. But hopefully, as we resume more normal levels of activity over the coming months, it will be more apparent and clear what that benefit has been to the business. Furlough income. So we -- in both the U.K. and overseas jurisdictions, total amount of furlough and equivalent receipts from various governments was GBP 3.4 million. About 80% of that was within the U.K., with a smaller amount being in Europe and Australasia. The next bar there, what I called loss of recovery. So we've looked at our U.K. factories. And I guess, to Ronnie's earlier point, we are asset-light. We are relatively fixed cost-light. But what this was just trying to quantify was the loss of, if you like, fixed cost and labor cost unrecovered as a result of the lower activity in half 2. So not a helpful number, but in the context of the activity reduction and aided by that flexible and light model, a relatively manageable number nonetheless. Restructuring costs. So I think as we posted in our preclose statement back in July, we have, over the last few months been continuing with, and in many cases, accelerating a number of streamlining initiatives, both in the U.K. and elsewhere, most of which were already planned pre-COVID, some of which were then intensified to provide as we went through the crisis. The restructuring costs that we took in the year with GBP 1.5 million, again, we have not adjusted those in our results. And then just the last 3 pieces. So interest cost, a slight increase in interest cost in the year. Not, of course, because of net debt performance. We've already discussed that. But as I'll take you through later in terms of how we manage liquidity through the crisis, what we did do for the last 4 to 6 months was draw down and then sit on a large amount of cash in our bank. And so therefore, we were running with higher-than-normal gross debt, but also higher than normal cash in the bank. And that resulted in a 300,000 adverse in interest cost. Tax. So clearly, our reduction in volume and resulting profit means tax itself would be lower. However, if you look at the last bar, the blue bar, the tax effect rate change. What I'm really saying there is because of the mix that I already alluded to and the shift from U.K. to non-U.K. activity, our effective tax rate did increase, and that's had an impact of 0.5p on our earnings per share, as you see on the bottom chart. Next slide, please. So when I hand back to Ronnie, he'll talk you some more through what we've seen and experienced in each of our 3 operating segments over the last year. But this chart is really just helping display the progress we were making pre-COVID, and indeed, if we focus on Europe, and to a slightly [indiscernible] Australasia, but still Australia as well, a really credible performance in half 2 despite the activity impacts. Clearly, U.K., as we've already discussed before, was, by far, the most impacted region in the second half, and that is that plus the restructuring cost, which I've just mentioned, is effectively the driver of the half 1 to half 2 movement in the U.K. Next slide, please. So cash and liquidity management during the crisis is how I entitled this slide. So as we said, we do feel that the standout highlight from the year just finished has been the cash and net debt performance of the business. Cash conversion. So we're reporting 124% on the top left there. That is a IFRS 16 measure. So on like-for-like basis, it would be 116%. So still very, very high cash conversion. As you probably recall, we set ourselves a target of 90% plus, which you see from the 5-year bar charts there. We have achieved in all bar 1 of the last 5 years. Within that, working capital reduction of GBP 6.1 million in the year, those of you who were with us last year will remember that we set ourselves an objective of bringing inventory down. We felt a year ago that we were carrying maybe GBP 2 million to GBP 3 million inventory more than we would normally have wanted. And over the course of the year, the inventory has come down by just under GBP 4 million. A little bit of that is, of course, the result of re-profiling for the new and reduced demand that we saw in the last few months of the financial year. But substantially, that GBP 3.8 million has come through from operational performance and initiatives under operational excellence. The -- before I look at the bottom left side, so then the second part of the bullet points on the right-hand side, they're just really trying to give everybody a bit of a flavor for what we did and how we manage this through the last 4 to 6 months. So as I mentioned earlier in reference to the interest cost, we did, at the start of the crisis, draw down about GBP 30 million from our revolving credit facility, which was then all fully repaid and more by the time we got to the end of the financial year as we could see the recovery playing through and no equity raise during the year. Regrettably, no dividend for FY '20, but we -- as we previously stated, we do intend to resume dividends during FY '21. We -- and credit to the management team for the agility they showed here through the year, we really did move fast and hard to look at everything, which could be described as discretionary. So substantial focus on discretionary costs. Our CapEx, which came at GBP 4.3 million for the year versus GBP 5.7 million last year. So we did focus on what was essential to the future growth rather than the nice-to-have. So we curtailed that as well. And as I referred to earlier, a real focus on inventory, very, very close management of receivables, and indeed, pleased to report that we've seen no issues of note with any of our customers over the period. And the furlough income I mentioned on the previous slide. So then just to finish on this slide, the chart on the bottom left there, just trying to pictorially show for you over the last couple of years, the evolution in our net debt in green and how that compares to the 2 darker blue lines, which effectively represent our facilities of GBP 120 million, our facilities with accordion at GBP 150 million. That's the dotted blue line. And then in terms of the leverage covenants, what does that look like over the year, which is the light blue line. So I think what that chart amply demonstrate rates is, first of all, the reduction during the year just finished, but also the substantial headroom that we have maintained throughout the period. Next slide, please. So this slide, those of you who joined us last year will remember that we shared a slide and we talked about the performance, the rental performance of all of our acquisitions and how they were looking compared to how they were at the time that we acquired them. And we've been working on how do we turn this into a target in a financial metric that we're going to monitor going forward as a business. And so what we decided is to set ourselves a target that our acquisitions, in aggregate, should return us we say more than 18% return on the investment after 3 full years. And we picked 3 years because as, again, we've talked about this before. When we buy businesses, we buy good businesses, but we then believe that we can materially improve them through access to group product range, access to group procurement capabilities and other means. So we think 3 years is a fair period of time in which to integrate a business to bring these tools to bear. So this metric here is looking at all of the businesses that we have acquired for more than 3 full financial years. And it's looking at the operating profit for 2020. So with the COVID impact inside it relative to the initial investments plus any deferred consideration that we made to acquire these businesses. And what you'll see there is, overall, as a group, we are just over 20%. The U.K. is the one piece which, at the moment, sits below our target of 18. But fundamentally, that falls down to the earlier reference that the impact that we saw within half 2 through COVID. So with that, I'm going to hand -- if we can turn the slide, please. I'm going to hand back to Ronnie, who's going to take you through, in a bit more detail, what's the operational review and the performance of each of our segments.

Okay. That's great. Thank you, Andy. Obviously, a difficult year. But I think if we go to the next slide, what really came through for us, and this was a change that we made at the beginning of the last -- or beginning of the financial year, was to give more disclosure around our 3 operating segments. So U.K., Continental Europe and Australasia. And this is really important. We think of Volution as wanting to be one the leading ventilation companies in the space, not in the U.K. market. We're already significantly the U.K. leader by some distance, but we want to grow over time to be a more international company. And we think we're achieving that. So if you look at this slide here, it shows you, in actual fact, if we move to the next one, it probably helps really articulate that message more clearly. Our performance outside of the U.K., our revenue, if you like, by destination, by geography, is close to 60% now. What this shows in quite explicit detail is the geographic market diversification. So inside the U.K. here, we've given quite a bit of detail in terms of the specific market. So U.K. residential new build, 10% of our revenue; 15% in U.K., residential refurbishment; U.K., commercial, et cetera, et cetera, you can see on the slide here. And what we saw was that in the financial year just passed, the U.K. fared worse. And just some really important points here. If we think about COVID-19 and how different countries are dealing with this pandemic, we have market-leading positions in some of the countries that are dealing with this crisis better than other areas. Let's think about the Nordics. Let's talk about Sweden, where we're the market leader for residential ventilation, particularly in the refurbishment market. Sweden, let's see how things pan out. But at the moment, Sweden seems to be dealing with the crisis very well. Germany, another country in Europe where we have a strong position inside our Central European revenue. Australasia, New Zealand, we were talking to our team only recently. And it's great for them, but locally, no masks, things back to normal. The economy recovering really well. Geographic market diversification. It wasn't by accident. By definition, we have limited potential to grow inorganically in the U.K. over time. But indeed, the opportunities outside of the U.K. and into the future were very substantial. And I think this really comes home in the last financial year. If we go to the next slide. I'm mindful here that as we go through each of these next slides, what we have, particularly in the U.K., 17.6% revenue decline across the U.K., all came in the second half of the year. You can see across the different sectors there. Residential refurbishment, down 15%; residential new build, 20%; commercial, 22%, et cetera, et cetera. But the important takeaway from this slide is that during the first half of the financial year to the period ending January, we were doing very well with organic growth in each of those markets. And we had started to restore our margins. And indeed, what we did in the second half of the year was that we accelerated the streamlining initiatives. These are -- a lot of these initiatives were things that we planned to do in that financial year. We worked very hard on upgrading our ERP systems over the last couple of years to create that platform to give us the streamlining potential. And I'll come back later on in the presentation. I've got a nice slide where I'll show you the margin expansion and how that's delivered. But the takeaway from this slide, I think, is that we're now seeing a strong revenue recovery and margin recovery in the start to the new financial year. If we go on to the next slide into Continental Europe. Revenue decline of just 2.7%, Nordics down 9.4%. That was certainly what we saw in Norway, for example, was quite a bit of a lockdown around April, May. Sweden, as I've talked about, less significant. Central Europe, Belgium, Netherlands and Germany, particularly supported by Germany, 7.5% revenue growth during the year that included the pandemic. Our adjusted operating margin came off, and Andy has already talked to the margin and the impact on our profitability. But our growth in Germany, in particular, is -- and I look forward to inducing Lee later on to talk about regulations and so forth. But in Germany, with our inVENTer brand, we have a leading position with decentralized recovery. It's very well supported by regulations, and the outlook is very positive. And when that came through in the year, to grow 7.5% organically in a particular area of our group, in the year, we think, is particularly pleasing. And same theme here, probably going to sound a little bit like a stuck record. But strong revenue recovery in the start of the new financial year, and margins also expanding. And I want to be very explicitly clear here about margin expansion. We're not referring to margin expansion versus the prior year in its entirety. You saw what happened with the impact of half 2. We're referring to a like-for-like period in August and September of the prior year. And then finally, if we go to Australasia, 42.6% revenue growth in the year, clearly, was not delivered only organically, but we made a very nice acquisition of Ventair in March 2019, and we had small constant currency organic -- well 3.9% organic growth at constant currency was very pleasing. And that included New Zealand. And the way in which New Zealand dealt with the pandemic was to actually effectively stop everything in April, close the borders, stop everything. We had next to no revenue for one month. In spite of that, we still grew 3.9% at constant currency in the region, with almost 1 month of no revenue. But the upside is, of course, New Zealand has the pandemic absolutely under control. Adjusted operating margin came down 2.5 percentage points to 15.2%. That is partly or mainly to do with the integration of Ventair. The proposition in Australia always came with a lower margin. And back to the point that Andy said, we believe it takes us a period of time to improve the operating margin and the operating performance of our companies. And we're making really good progress with Ventair. We're introducing new products. We've had some big new customer wins. And the way I talk about Ventair in Australia is effective where we have a #4, #5 position in the market from share. But we believe with the Volution product portfolio, we have the best #1 product portfolio. Healthy Homes Act in New Zealand is driving very, very strong refurbishment demand. And again, my stuck record point, strong revenue improvement in the first couple of months of the new year and margin performance, which isn't a surprise to us. So much of the margin improvement was the initiatives -- are the initiatives that we have been driving, the self-help, if you will, the streamlining, and that's coming through very nicely as we speak. The next slide does this really well. If we go to operational excellence, operating margin greater than or equal to 20%. And we had a slowly opened our Reading facility in December 2019. Those of you that attended will have seen that the Reading facility was and has been working really well. It's an investment I'm delighted that we and the Board had the foresight to make 3 or 4 years ago, and there was absolutely no way we could support what we believe will be good demand for our products, supported by sort of regulatory and consumer drivers into the future had we not made that investment. And it's made and it's supporting us very well. The OEM sourcing and efficiency, we had some issue post the ERP implementation. That was mainly in 2019 and was fixed throughout 2020. So these are, if you like, tailwinds that support our operating margin and the streamlining indirect cost reduction that we accelerated during the second half of last year. Some other themes here, the packaging and waste elimination and when we come on to sustainability, we believe that reducing the amount of packaging that goes with our products into the marketplace is absolutely the right thing to do. It's the responsible thing to do. But it has, of course, an additional benefit in terms of reducing our cost to serve. And those 2 blue rectangular bars that you see on the slide are what I refer to as forever issues. Things that we're always doing. Innovation is the lifeblood of our company, cross-selling into new markets, into existing markets, making better use of the product portfolio is essential. And upselling is something that we do very well. This journey away from more rudimentary ventilation to heat recovery and system ventilation is something that's underway, and we think we're doing particularly well. Value engineering and procurement, we did a lot of good progress in the prior year. And indeed, Andy has already told you that we were 70 basis points of margin improvement in half 1 and, of course, we had the impact in half 2. But I think the takeaway from this slide is that we feel that we're on really good track to deliver our operating margin target of 20% in 2021. So on the next slide now, just before I hand over, I'm really excited about our refreshed sustainability strategy. And usually, it's Andy and I that present the sort of half year and the full year results. But I wanted Lee Nurse, Business Development Director, been with the group for 10 years, just come back from New Zealand, where he spent 2.5 years helping us really well integrate the businesses in New Zealand and Australia into the group. But I hand over to Lee now just to take a little bit through the sort of refreshed sustainability plans.

Okay. [indiscernible]

You're on mute, Lee.

[indiscernible] to mention here really, is that many of our customers already see us as a low-carbon...

No. Come through to here. Charles, bring him through to here.

Unmuted.

We can go back to Lee maybe for a moment. My -- hopefully, I'm back on. Okay. Hopefully -- we're having some technical issues here. I guess [indiscernible] impact that we're having to deal with. I think what we'll do is we'll bring Lee in to use our machine and we'll move out the way so that we properly socially distance. But I'll hand over to Lee now. I'll step away and come back in a moment. So over to you.

Thanks, Ronnie. Okay. As Ronnie mentioned, most of our customers already recognize the steps that we take in relation to sustainability. And many of our technologies will be seen as energy-efficient as well. We're part of the National Calculation Methodology to reduce carbon emissions of buildings in many of the countries we operate in. But we wanted to really encapsulate that and make sure that wider stakeholders, particularly investors, understood that story in the best -- like they could really. So next slide, please. What we've done is we've carried out a materiality assessment, of course, to look at the most important issues for us and the things that we can really influence in our operations and things that we do. We've interviewed stakeholders and wider customer group as well as end users and installers and, of course, our employees. And we've identified a lot of different issues, many around sustainability and the materials that we use in our products as well as the way we apply them. And then, of course, many issues in our operations and the way that we go about our business. And then also people issues with our employees and how we engage with them, how we continue to communicate our health and safety policy, et cetera. And once we've carried out that analysis, it's very clear that many of those issues fit into what we consider 3 pillars. Those 3 pillars being product and issues relating to them, the planet and issue relating to the planet and our environmental impact, and then our people. So we basically created 3 pillars and start to establish our ambitions around those by which we can judge ourselves and measure ourselves moving forward. And I think many of the things that you would anticipate with captured in here. From our product, increasing the sustainability of our product portfolio, looking at the materials we make out of, looking at how we might mitigate carbon emissions and create the most responsible operations and then how we may protect our people. From there, we've developed some KPIs. So next slide, please. For each one of those areas, we looked at what we do, how that perhaps relates to the United Nations Sustainable Development goals. We focused on a few of them, 6 different goals, no more really, within our operations. That's the things that we can really focus on. Our ambition is clear within product. It's to continue to increase the sales of our low-carbon product range, which we've been promoting for some time. And we've set ourselves a target by end of '25 -- or 2025, sorry, for 70% of our sales to come from those low-carbon products. To give you some idea, when we listed in 2014, we're at 43%. And this year, we're at 59%. So we expect that, that will continue to grow, and that's a target we should be able to deliver on. Then, of course, when it comes to manufacturing operations, we do use plastic in a lot of our products. We are tied up to many recycling schemes, of course, like WEEE directive in the U.K. on the waste of electrical goods. So our products can generally be taken apart and recycled quite effectively at the end of their life. But we realized we use a tremendous amount of virgin plastic. We're currently at 56% of our plastic from recycled sources, but we think it's a very reasonable target to get that to 90% over the next 5 years. As more reliable sources of recyclable plastic that's clean comes available, we should be able to purchase that plastic and get it into our production without compromising on the quality of the finished bag of goods, which is the important thing. And then the last measure is really around people, and we would really aim to have zero reportable accidents anyway, but it's something we want to really highlight and make sure that our organization and our companies are focused on delivering that and we want to protect our people, of course. So that's a brief overview of our sustainability strategy and how it's structured. There is some more information at the end of the slide pack that will be shown later on in relation to some of the detail around that. And we'll start to discuss that in more detail later in the year. The next slide, please, really looks at regulations. Of course, there's key trends in all of our markets. What I would say generally is every country in which we operate, we'll have a zero carbon emission target at some point in the future. It varies slightly in slightly different ways and is implemented differently. But everybody is working towards a lower carbon future. If you look at the U.K., we have very clear guidance in the Future Home Standard that came out earlier this year. And certainly, National House-Building Council also recognize the role that high-efficiency heat recovery ventilation will have in those dwellings in the future. We obviously have legislation affecting motor provisions as well for Ecodesign Directive in Europe. That will also influence the U.K. production. And we have continuous focus around healthy indoor homes. It's parliamentary -- all party parliamentary groups now that have been set up around healthy living and air quality. And we're convinced that the direction of travel there is one that will favor our products and solutions in the future. So we're confident that we continue to sell more and more of our low carbon solutions because of the regulatory structure here. In Continental Europe, we have the Energy performance of buildings directive, which will drive all of our markets. The Nordics and Central Europe will both come under the legislation that will help continually make buildings more airtight and better insulated. We'll continue to sell more products there of higher value with more energy efficiency. And then in Australasia, we have new minimum standards around air quality that are really starting to be established. In New Zealand, they have the healthy homes standard, as Ronnie mentioned earlier. That's a case that every rental property in New Zealand has to have a bathroom and kitchen plan now. But at the same time, they've implemented new building regulations around ventilation and increased the provision. Australia will be similar and will follow over time, we're sure. And New Zealand are also just starting to set out their own targets for a zero carbon future, which will lead to more energy efficiency regulation to support more sophisticated solutions. So that's a very brief overview of our strategy and the direction that we're traveling in. I'll pass back to Ronnie now to cover off the summary and outlook.

Okay. Thank you, Lee. Well shop around and I'll come back. So there's a lot more detail in the appendix of the presentation, which will be uploaded to the Volution website later on. Then you'll find that there's a lot more detail around sustainability and where we go next. If we just go on one more slide. Just a summary there. Of course, I think you've got it very loud and clear, operating cash generation of GBP 43.4 million. It was a record cash generation. And indeed, one of the questions, I think, is we -- there were no sort of one-offs. I mean, one of the things that we prided ourselves on is that although the government was telling us that we could pay some of our taxes a little bit later, indeed, we paid everything on time. It was a normal year in that regard. The debt reduction is really important. The strength of the balance sheet, we think, has sort of shown through the crisis and continues to give us that strength and optionality, of course, for where we go next. Operating margins were expanding strongly prior to COVID, impacted in the second half of the year, but the messaging around our outlook, I think, is very clear. And I know everybody -- most CEOs will be saying this, but I'm really proud to be the leader of this organization. The way in which our employees adapted to the crisis, supported our customers and some of those projects such as the ExCel hospital in London, just one example where we provided essential ventilation equipment very quickly. And I could reel off a whole raft of other products -- sorry, projects that I was proud that we were associated with. Our outlook, and really there, I won't read you the entire statement. You can see the detail of it for yourself. But organic growth of 7% in the first 2 months of the new financial year. Our margins expanding. And of course, us today sort of reconfirming our comfort around the sort of market guidance that exists. Yes, there is uncertainty. This presentation today is, of course, quite different to what we would normally make. COVID-19 is still, sadly, very with us. And we have the uncertainty around Brexit, although 60% of Volution's revenue by target distillation isn't inside the U.K. And we think we have plans for mitigation around Brexit risk, but nevertheless, there are some uncertainties that we are facing. What we are confident of is our own ability to manage our business well within those uncertainties. And we think that margin expansion that we're already telling you about demonstrates that very clearly. So in summary, our diversity, you've seen it very well, the geographic spread of the business, the way in which it's changed materially since we listed in 2014, helps us mitigate some of the challenges that we face. But we look forward to making good progress in this new year. And at that stage, we're delighted to hand over to the 3 of us, we'll try and orchestrate that some way to take your questions. Thank you very much for your time.

So I think the process here is that you should raise your hand for questions. And I think we can see -- yes, we can see if anyone raises their hand. So Clyde. I think, it's Clyde Lewis. So hi, Clyde from Peel Hunt. Sorry Clyde, I need to turn my volume up. My apologies. I'm with you now. Thank you.

A couple of questions, if I may. One, as Lee highlighted, in terms of the changing regulation. As you start to look at your product range, do you see any obvious gaps that you've got to sort of fill in terms of sort of your own organic development or sort of possible sort of bolt-ons. That was the first one. A second one, I had probably for Andy. Just in terms of sort of restructuring costs, should we be looking to see any expenditure in the current year? And the third one, it's very interesting to see that acquisition returns that you put up, Andy. If we took the U.K. deals from 2019, what would that percentage look like for the U.K.? Be intrigued to hear roughly what that number was.

Okay. So the first question about gaps is that -- look, I believe that Volution, as an organization, as a group, has the widest product portfolio bar nobody else that I know in this space. But it isn't to say that we have every product for every market. And so what we would possibly find is that certain geographies where we don't currently have a position, we might find that the products are slightly new on. So to say that are there gaps, I think it's probably more that we think the product portfolio that we have lends itself really well to entering new markets or indeed expanding the positioning within existing markets. But there are still possibilities to add to that portfolio. And I would say that's with particular reference to the residential space. We are clearly much stronger in the residential markets. To say that there aren't any gaps would be churlish. Yes, there's opportunities to infill. But I think more important for us in terms of bolt-ons or add-ons, is access to market. If you look at Australia as an example. The problem we had in Australia was that we weren't there. It wasn't the product portfolio. We believe, and I know the competitors and the landscape very well. We have a really great product portfolio that we can adapt and easily take to Australia. What we didn't have was the root, the people, the brand, the customer relationships and so forth. And that's what we acquired. So typically, acquisitions are about access to market rather than access to more products.

Clyde, I'll just take the other 2, hopefully, quite quickly. So first of all, restructuring. So what we -- in terms of the timing, and I guess one of the words we used was accelerating the work we were doing. So whereas pre-COVID, a lot of what we did, we would have done anyway, but we would have done it on a more gradual basis. We use time to think and to act and to really move quicker in some of those pieces. So it is regrettable, but the exits and the departures from the business that are, I say eminently regrettable, they will be essentially concluded by about September time, but we were materially committed to them and have acted upon them. And as such, all of the cost of the restructuring is in the FY '20 financial year. Now, I'm not going to tell you that nobody is going to depart the business over the next 12 months or indeed beyond that, but there is no more -- there's no second wave, if you like -- sorry, bad terminology. There is no second tranche of the restructuring beyond what's already happened. To your other question, the ROAI. So U.K., if I'd looked at 2019, it would have been about 14%. So materially better than the 8.8% on the slide. Slightly below our 18%. And really, that's a product of it mainly being commercial space acquisition. So that's where we've got our breathing buildings and our diffusion businesses where we've taken some good steps pre-COVID and then indeed during COVID to work on the margins and the performance of that business. So we're confident that we can get back there and above it.

Absolutely. And just to add to that, of course, our margin expansion in the U.K. is versus the first half of last year. So I think we would be confident that a lot of the improvements have been made, in particular, in those areas, but across the piece. I just need -- I think next, we have Christen Hjorth from Numis.

Three questions for me, if that's okay. First of all, I mean, you have mentioned that the U.K. market was more challenging in -- during lockdowns, et cetera. And that has come through the numbers. But I was wondering if you could just dive a little bit more deeper in some of the areas which were harder hit, particularly around ventilation, perhaps rather than just sort of general market dynamics. And the second one is, obviously, in a post COVID-19 world, whether you are seeing a lot more sort of inquiries, interest in regards to ventilation, but also, I suppose, whether that's more focused on the commercial side perhaps in the first instance as more families mix there or whether it's coming through just as much in the residential side at this stage. And I think related to that, you were sort of touching on some of the R&D that you've historically done or perhaps are doing in this regard. I know you've talked a lot about silence and app and things like that, but perhaps more on the sort of air quality side or anything that sort of provides a bit of comfort for people around viruses, et cetera?

Okay. I'll try it. So look, in terms of the revenue, and you could see on the U.K. slide, we don't need to go back there, that the impact was reasonably -- it was profound that it was consistent across each of the areas. I think what we are seeing at the moment when we talk about the sort of home improvement in the outlook statement. Certainly, refurbishment has come back much stronger. And maybe not a surprise there. When -- and we see this consistently across all markets. So I think it's sort of an output that as sadly, we can't go to hospitality or we can't go on holiday or whatever else, we are spending more money at home. And of course, on the likelihood that we might be spending more money -- sorry, more time at home or working from home and so forth, then that's a good place to be. Coupled with, I would say, the awareness that was already coming around indoor air quality at home and the upselling and so forth. So I think there, the rebound in terms of refurbishment is stronger. But what I'd like to come back to in terms of regulations, Lee talked about Part F, Part L. We're getting to the stage now where we think it's increasingly difficult, almost impossible, for a housebuilder in the future, to build a new home using traditional HVAC ventilation, they move increasingly towards system and so forth. So those regulatory drivers are really supportive. And some of the customers that we deal with, for example, in the U.K., the major retirement homebuilder stopped. You can see the [ read across ], they stopped, but have resumed very well recently. So we think that helps. In terms of R&D, innovation, I'd put it in our operational excellence bar, innovation is the lifeblood of what we do. And we are seeing an increase in inquiries for the short-term in terms of how do I make my air quality safe inside. We just got involved in a project with negative and positive ions emitted from a fan coil device to provide some protection. We think that will increase. We think that's something that will be sticky beyond the sort of COVID impact. But what we're looking for is that greater awareness around indoor air quality impacts health. And not just that we have a good 6 or 12 months recovery because of COVID, but people actually understand that air quality matters. How long can you go without air? That's the issue here. And of course, it's not often seen and understood. So that's the more helpful driver that we think will underpin our regulations for many years into the future. There was -- yes. Well I think we covered it both. So does that cover it, Christen?

Yes.

Okay. And Aynsley Lammin at Canaccord next. I think you're on mute there, Aynsley.

Better now?

It is.

Just 2 for me, actually. Just first of all, just want to clarify. In the statement, you say you're comfortable with consensus expectations. And in the slide, obviously, in the pack, you're pointing to 21 -- 20% margins in this current financial year. I'm just trying to see, are you obviously very comfortable with consensus, therefore, and how confident are you to get to that 20% this year? And then secondly, just on the leverage, just reading behind the statement and the tone of what you said, it sounds like acquisitions are back on the road are to a greater extent now. What level of leverage would you be comfortable with this year given that you still got some macro risks, the pandemic, et cetera?

Okay. So -- but the numbers don't lie. You can see the numbers, and we're very clear on the period that we're comparing to. So we are absolutely comfortable around guidance, and that's what we've said today. But it's still uncertain times. We know that we're only a couple of months, 10 weeks, into our new financial year. The pandemic is still very much around us. So we just think it's prudent and sensible at this stage to keep going, keep driving our operating margins, make that good progress that we expect. And no doubt as and when appropriate, if there are any changes, we can advise. But just having -- I think in many respects, a lot of companies are still not guiding. So we think it is a first instance to say that we're comfortable with the numbers that are out there, should at least give our investors and our shareholders that confidence that the company is on a good track. I'll hand over to Andy on the...

Yes. Thank you. Thanks. Look, on the second one, I mean, yes, we ended the year, as you saw, at 1.3x. So that gives us substantial firepower and position to work from. We would think of -- and I think what we have demonstrated above all else in the last 12 months is how quickly we can bring that leverage down in the absence of any spend of note on acquisitions in the year. So if we were to do a good acquisition that took us up to say 2x, we would be more than confident that, first of all, we'd be buying a good business that would bring good earnings into the group. And then secondly, on the other side, we would then be able to bring that down materially again from the 2 to where we are now. So if you want a number, I would say sort of circa 2x would be where we would think of being comfortable for clearly, clearly the right acquisition. So we'll absolutely maintain the, call it, discipline on only doing things which we think are good and value-enhancing.

Okay. Thanks, Aynsley. So Charlie Campbell at Liberum next.

A couple of questions from me. Just looking at the start to the year, the plus 7% you've described, doing a very strong start. Just wondering if that might be explicable by, I suppose, customers restocking into August, just if there's anything sort of out of the ordinary in that, just to kind of help us with that. And the second question, and maybe one for Lee on this one, the Part L and Part F consultations have been going on, I think, for almost 12 months. And the original hope was that the new rules would come up quite soon. Just wondered if he's got a thought about how that will end up and what Part F might say about ventilation standards very shortly?

So just -- Charlie, just first off on the restocking. I don't think there was -- I think there was probably some material destocking that may have taken place in the sort of April period. And I think we're more talking about the U.K. market here. I think it's less profound elsewhere. I don't believe there's a huge sort of restock. I don't think we're seeing an artificial boost from sort of restocking in those first couple of months. I mean, we haven't given explicit detail, but what we have said in each of the sections in the presentation is that each market is seeing a good recovery in terms of volume versus the comparative period, August-September prior year. So no, I don't think it's restocking. One of the things that's really important for us is by providing such great service, and it's been a frustration for me all the way back to the 2008, '09 crisis, is that actually stock is sometimes a bit of a misnomer because we do most of the stocking, and a lot of the stocks are back to back. So I don't see that there's a material increase in stock in the supply chain that should worry us. Certainly no concerns there. I'm going to try and swing over to Lee to talk about Part F, Part L now.

No problem. Thank you. Yes. I mean, it's a very valid question around Part L and Part F, and the Future Homes consultation was issued last November-December time. And we are waiting for the final publication as well. But I'm pretty convinced that the direction of traffic in this is quite clear. A lot of the research that went in supporting the proposals in those documents are quite transparent. Certainly, there is a very clear transition away from intermittent ventilation towards continuous, but that's very, very clear, and research really doesn't favor intermittent ventilation. In effect, the proposal is that in apartments, for example, you probably won't be able to use an intermittent vent in the future, which is good. The move towards the Future Homes Standard in relation to the energy saving, the carbon emission reduction, is very, very clear. Heat recovery ventilation in the medium to long-term will certainly be [ phased ]. But what we don't understand is really the phasing that they will finalize on but we are reaching a period, as Ronnie alluded to, I think, where the legislation that has been promising so much for so many years will start to deliver the more efficient energy targets for housing, of which we will play a vital role, for sure.

Okay. Thank you, Lee. So just going next, Graeme Kyle at Shore Capital.

Yes. Just 2 questions from me. The first one is in the U.K. Are there any market share gains in the U.K. since lockdown began in March? So I'm thinking you had really kind of small local competitors exiting the market due to financial distress, et cetera. So that's plus one. Second question is, I wonder if you could break some more detail just on the rollout of Volution's brands in Australia, and particularly in the market share gains that you expect in Australia over the next 12 months.

Okay. Look, I think in terms of market share gains, it would be too early to tell. We're not aware of -- we haven't seen any exits as such. I believe that our service, one of the points I made early on is our service, our ability to continue to operate close to normal, it will be at a lower level of demand, has given us an advantage. So I think that some peers have struggled to -- I think it's the agility point. I do genuinely believe we're more agile, and we've been able to sort of use that to our advantage. In terms of exact share gains, I think difficult to tell. I think over time, that will become more clear and interesting. Just for efficiency, I could hand over to Lee to talk about Australia and what we're doing there. Lee is, and continues, although from a distance, to have a big hand in what we're doing. But we acquired a business that was strong in a particular segment of the market, had good relationships with wholesalers, but what we wanted to do was extend the range. And we can see that coming through really well now. In actual fact, just in the last few days, we've had some really good news about some additional account wins. And what we're doing here is using both our Manrose and Vent-Axia brand that we've launched into the space. Not recently. We did some of that probably 9, 12 months ago, but we're starting to see the traction. So we're really very pleased and optimistic about what's coming next in Australasia. Okay. I believe from looking -- from what I can see here, no further questions. So I just -- any other questions? Okay. Just to make sure I haven't missed anyone. Sorry, Clyde has got -- one last question then, Clyde.

One question I had really on acquisitions. And you obviously made the point about Australia very clearly, about needing to get into the market. But when you look at the different markets, the different geographies out there, are you more attracted to countries with tighter regulations or those with looser regulations? Because obviously, those with looser regulation are probably going to catch up more over time, but there may be less benefit, I suppose, in terms of sort of, I suppose, setting the standards in terms of sort of product there compared to those countries that have already got pretty tight and the product evolution has already moved on quite away?

Yes. Good question. And actually relatively easy to answer. If you think about Europe generally, the regulations are actually pretty tight across the piece. There is a local interpretation, but things like the energy products in building directive, EBPD, is a really good regulation that drives all of those European markets very nicely. So maybe a little bit of a churlish answer, but actually, what we absolutely want is to increase that sort of geographic presence. And in many respects, being in a new geography or being in a new area of an existing market will help us. And even Australasia, I know the climate, particularly in Australia, is clearly much warmer. But as Lee already talked about, the regulatory change, if we're very honest with ourselves here, that we helped drive. Lee was part of the committee that helped sort of form the regulations. And of course, that's very helpful when you have a 70% market share of the refurbishment market. But the impact is profound, if you look at the revenue growth we had in New Zealand in the first half of last year. And indeed, still growing organically with 1 month mixing in half 2. Just shows you the impact that regulation is going to have. So I think generally, it's straight down the middle of the fairway, my analogy, in terms of what we're looking for. Residential, commercial, but absolutely ventilation, healthy air sustainably, probably the best way to finish. So look, we're just over time. Thanks, everyone. I still -- we still got close to 50 people on the call this morning with. Sorry about some of the logistics troubles that we had, but I hope you enjoyed our presentation and look forward to seeing some of you over -- well at least virtually over the next week or so. Okay. Thank you.