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

Good morning, and welcome to the Volution Group Interim Results Presentation for 2021. Delighted to be here this morning virtually. Myself, Ronnie George, as the Chief Executive. I'm joined by Andy O'Brien, who is next to me near the camera as we panned across.

Good morning, everybody.

So, delighted to be here. First of all, I hope you're all safe and well at this really difficult time during the pandemic. But look, to matters at hand, Volution Group, healthy air sustainably, as it says on the first page. And we're really delighted, as I say, to take you through our first half results. So on to the following page. The format for this morning, a quick overview. Andy can take us through the financial review. Standard format really, while I'll come back and talk about the business review and strategy. We'll cover summary and outlook. And at the end, we'd like to do the Q&A. So just a little bit more difficult doing this virtually. We think it's more sensible if we can save the questions for the end of the presentation. So moving swiftly now to Slide 3. So 1 more, we go with that. Thank you very much. So look, delighted about the first half of the year. We think we're delivering really well against our strategy, and it's a strong performance in the first half of the year. I mean, first off, it's obvious that we're managing within a huge sort of challenging environment with COVID-19. But just first and foremost, a word about our hugely dedicated employees. And we've successfully managed these challenges. But from our perspective, our dedicated employees have made a tremendous effort. We delivered organic growth across all 3 of our geographic regions. And of course, I don't need to remind you here that we're talking about a pre-COVID impacted period. So this is good organic growth against a pre-COVID period. Delighted about the 20% operating margin target, having been achieved 6 months earlier than anticipated. When Andy and I announced this target back in October 2019, we forecast that we would arrive with an exit rate in our financial year 2021, with a 20% operating margin target. And of course, as you've seen already from the statement, we've delivered the 20% margin throughout the first half of the year. We've delivered our largest acquisition to date with ClimaRad. I'll talk about that in a little bit more detail later on. And our pipeline remains exciting. It's a really important integral part of our strategy and healthy and sustainably. We came up with a strat right at the end of the previous financial year, and we've made very good progress with our refresh ESG targets. We're resuming dividends. It's at 1.9p per share, Andy can take you through that in a little bit more detail. And of course, we thought it was important early on to just explain and confirm that we expect our earnings to be ahead of current market expectations. On the following slide, just a quick summary of the first half. But what I'll just talk to are the first 3 boxes. And then I'd like Andy to go through a lot more detail. But 7.5% organic revenue growth at constant currency, 21.1% operating margin, clearly meets our 20% operating margin target. And of course, with the good organic revenue growth, with the operating margin and, of course, with some benefit now from the ClimaRad acquisition, our adjusted EPS growth is 23.2% in the first half of the year. As I said, I'll leave the other boxes for Andy to talk about in a little bit more detail. On the next slide, the sustainability KPIs and our targets and measurements that we announced at the end of the last financial year. So these are long-term targets, targets that we've set ourselves out to 2025. We believe that sustainability is absolutely core integral to what we do. And first off, when it comes to product, our products helped reduce carbon emissions from buildings. We have some really important targets globally in terms of the 2050 Paris Agreement, and we're delighted that we're making good progress with the revenue target. We've set ourselves 70% by 2025. We've made good progress. So 62.1% in the first half of the year, up from 59% last year. And of course, from a sort of responsible consumption and production perspective, we've targeted using much more recycled, more sustainable materials in our process. We've got an ambitious target here of 90% of the plastic that we process in our own factories, which should be from recycled sources. And we're up from 56% last year already to 63.1% in the first half of the year. We've targeted 0 reportable accidents. We had 1 disappointing reportable accident last year. And I'm disappointed with the 1 accident that we've had in the first half of the year. And certainly, we've been redoubling our efforts and our focus internally and really raising the focus about keeping our people as safe as we possibly can when they're at work. So very pleased with the targets that we've set and the progress that we're making. These are long term. We'll continue to talk about these in more detail as we go forwards. And certainly, we expect to have more of a showpiece around sustainability and so forth at the full year results. So look, that's a very quick introduction from me. I'm going to hand over now to Andy O'Brien to take you through the financial review, and then I'll come back and talk about the business segments in a bit more detail.

Thanks very much, Ronnie. Good morning, everybody. Delighted you could join us today. Of course the slide show, it's virtual, once again. I think just before we started, Ronnie and I were saying this is now my fourth presentation and roadshow [ freezer won't ] be virtual, but let's hope that with the direction of travel, the 1 in 6 months' time could be in person, but still look, we're delighted you're with us nonetheless. Next slide, please, Sam? So this is our usual slide where we just give the -- lay out the performance of our key metrics over the last 5 reporting periods. And you saw some of them on the highlights introduction slide that Ronnie showed you earlier, but I'm really delighted with performance across all of the key indicators and metrics. So revenue at 10.9% growth, as you see there, a bit of assistance from currency so 8.6%, like-for-like were 7.5%, like-for-like organic dropping -- really, really delighted with the margin performance. So we've talked about our 20% target and achieving 21.1% in the period, meaning that our adjusted operating profit grew by 27% compared to the comparative period last year. And of course, it goes without saying, but reminding that the comparators that we're looking at from half 1 2020 were COVID-unaffected. So for us, our half year period ending 31st of January. So our first half of last year didn't have any of the COVID impacts inside it. Earnings per share of 10.1p, so a 23% improvement. And continuing 1 of the key themes from last year, which we've continued -- in fact, not just last year, but the last 6 or 7 years has been the strong cash generation and cash performance of the business. So turning the profits into cash and that once again really pleased with the operating cash flow of just under GBP 30 million, so a 33% improvement in that number. Allowing us, which we'll talk about later, to do some really interesting acquisitions, but still maintain a very, very good balance sheet position with a leverage of 1.4x at the 31st of January, post the acquisition of ClimaRad. Next slide, if I could, please. So I'm just comparing half 1 '21 and half 1 '20 in a little bit more detail. So revenue touched on, and Ronnie will go through the breakdown by geographies and by segments later on. So I won't talk anymore about that. Our operating margin expansion of 280 basis points, which you can see 5 lines down the slide there. And just to give you a bit of color, that is both an improvement at a gross margin level, so 60 basis points to the gross margin level. But then further improvement in our indirect cost base, both from actual cost reductions such as the restructuring work in the U.K., plus, of course, the benefit of leveraging as our revenue has improved. You'll see, in terms of then dropping down from operating margin through to earnings per share, our effective tax rate compared to where it was half 1 2020 has increased. You saw this at the full year results when we talked about last year's performance, but it was more material in the second half of last year, and that's continued. So 23.3%. But of course, if you think about it, U.K. up 19%. Obviously, our overseas jurisdictions varying. But on average, our overseas rates being sort of 25%, 26%. So 23% being the product of those 2 pieces. Cash flow. I'll talk through that in a little bit more detail on a later slide, where I actually break down what's going on with the constituents or cash flow. And then right at the bottom of the slide there, after the leverage, you see the dividend per share. So we signaled a few months back that we intended to resume dividend activity. So we're declaring a dividend of 1.9p for this half. Last year, we had obviously declared a dividend at this juncture, but then that was subsequently canceled, so it was 1.71p last year, which ended up not being paid. But 1.9p for this half, for example, compares to 1.6p in the equivalent period of FY '19. Next slide, if you would, please, Sam. So just the usual walk here between our adjusted results and our reported results. And the [ all ] essentially activity here, driven by the acquisitions activities to go on in the period. So we have GBP 400,000, nearly, in the corresponding period last year of essentially professional fees relating to the acquisition of ClimaRad. GBP 600,000 then for the -- so when we've acquired ClimaRad, we have had to uplift the fair value of the finished goods inventory. And as that inventory gets sold through and consumed, there's an adjustment to write that back down, so GBP 600,000 there. And then the GBP 2.4 million, that's our assessment of the likely contingent consideration for the Ventair acquisition in Australia. So that measurement period will end on 31st of July 2021. So obviously, we're looking at the first 6 months of that year. And this entry here is really testament to, I'll [ talk ] about it later in the Australasia review, testament to a really good first half performance, both on revenue and on margin and operating profit in that Ventair business, which has caused us to reassess the likely outcome of that contingent consideration. Next slide, if you would, please, Sam? So our 20% operating margin target, which we set just at the start of -- in the early part of FY '20. So as Ronnie said, we gave ourselves 2 years, which would have elapsed at the end of financial year 2021 to reach this 20% operating margin target. I'm really delighted to have got to the target, to have gone on slightly ahead of the target and to have done it 6 months early. So this just breaks down that margin between the group performance and then the performance of the 3 segments. And I think what's particularly pleasing to us is all 3 geographies showing really nice margin expansion and all 3 geographies nicely at and ahead of our target. So this isn't a product of 1 part of the business substantially outperforming the others. Yes, the Continental Europe stands out as particularly strong at almost 26% margin there. But really big and good uplift in improvement in Australasia, which is a product both of the work that we've been doing on upscaling the products portfolio, selling better products, and that's resulting in 260 basis points improvement at a gross margin level. And then as the volumes are very materially increasing in both businesses there, we're benefiting again from leverage at the operating margin level. So 7.1 percentage points' improvement in the margins of Australasia for this half compared to half 1 2020, but also then the U.K., so the 260 basis points there, very much underpinned by the restructuring work and streamlining work that we did in, particularly, the second half of financial year 2020. So really, really pleased with the margin trajectory forwards across all parts of the business. Next slide, please, Sam. So this slide, just walking through the net debt movements and the cash flow performance in the period. So as I said in my sort of first slide, really, really delighted with the continuing good performance on cash conversion, cash generation and that's then giving us the capability to do what we've been doing on the acquisition side of things. So just calling out some of the key boxes on this chart here, working capital. So if you remember last year, we talked at the full year results of having achieved a reduction of GBP 6 million in working capital. And I think we said at the time, look, we do expect a couple of million of that to revert back as activity increases. In the event, only GBP 600,000 has come back. You want -- you mainly see [ of those ] savings very often, but probably, we wouldn't mind it being a tiny bit bigger because, I guess, our biggest driver at the moment is making sure that we can bring our inventory in, we can keep our manufacturing at high levels to sustain the demand. So we're pleased with really good continuing working capital discipline there. Capital expenditure of GBP 2.5 million. We talk about sort of GBP 4.5 million to GBP 5 million, as being a normal number for us for a full year. That GBP 2.5 million includes about GBP 700,000 that we've invested in a really nice new facility, which you'll see 1 picture on later when we get to the European side in our Swedish business. So we moved from our old facility to our new facility in Sweden around Christmas time. That facility is operating really nicely. And as I said about GBP 700,000 of that GBP 2.5 million relates to the investment there. And then the last lock, of course, you see then the GBP 37 million investment being the acquisition of ClimaRad in the period. So all told results in a leverage at the end of the period of 1.4x, and still very, very substantial available liquidity, given, a, the cash generation and b, the new facility that we announced back at the start of December. So that's really it in terms of the financial highlights and key points. Obviously, look to take your questions once we've completed. But at that stage, I'll hand back to Ronnie to talk us through the geographical segments.

Great. Thanks very much, Andy. As Andy and I have said, we're really very proud of the achievement that we made in the first half of the year, and it's without a doubt our best performing half since the company listed back in 2014. So obviously a very, very strong financial performance. What I want to do now over the next few slides is just talk a little bit more about what's happening in each of our individual markets. If we just move along through the slides here. This operating segment slide summarizes quite nicely. And you can see here a 3% constant currency organic growth in the U.K., 12% in Continental Europe and, of course, 24%, a very, very strong performance in Australasia. And the next slide covers off a really important point for us, which is geographic market diversification. And we talked about this in the last financial year, when we saw the U.K. market, in particular, having sort of an exacerbated impact from COVID. And I think it's fair to say at the moment that the U.K. is still probably the more challenging market of the 3 regions that we trade in. So we're delighted about the diversification of the group. Half of our revenue is in the U.K. The other half is outside of the U.K. and of course, that's been developing very nicely through M&A, and we expect that to continue. But the next slide takes us into the individual geographic regions. So U.K. at 2.7% revenue growth. A bit of a mixed picture when we look at the revenue, and our refurbishment demand in the U.K. is up significantly, 9.3% revenue growth. In actual fact, it's private refurbishment, where we're a market leader with a very significant market share, where we've grown 14%. And Public Housing, I'll remind, this is small organic growth, but it's still not surprisingly quite challenging if we think about the sort of stock that the local authorities and the housing associations are managing, a lot of those refurbishment projects, the more structural projects have been postponed, and we expect that all to come back later. And it's really important to remember here that you can't postpone refurbishment projects in social housing forever. There are 5 million homes in the U.K. that have -- are socially managed, and we've talked about this for some time. Air quality is an issue. It's only raising in terms of awareness. So 1.3% organic growth wasn't so strong as we would like. But we think the future periods look interesting there. Residential New Build declined 3.5%. And we see at the moment that the house builders themselves are very busy. We can see that selling transactions are very strong. And my personal belief here is that what's actually happening is we're selling out stock. So house builders' stocks will be diminishing. And I need to remind you here that we have these long-term drivers in residential new build, which is this path to net 0 carbon. There's a review of building regulations at the moment. We see building regulations, not just in the U.K., but all over our markets, continuing to support us. So we come back to the medium to long-term trends in Residential New Build, which are hugely favorable and indeed the same in commercial. I think Residential New Build and commercial in the U.K. has struggled in terms of getting back to normal. But in both areas, we've seen our order books grow, and we see that the medium-term dynamics are still very positive. In export, 7% organic growth. We've got some significant markets. The Irish market is particularly important for us as a significant share of our exports from the U.K. And recent changes in Irish building regulations have greatly favored mechanical ventilation with or without heat recovery. So again, same as the U.K. Residential New build, so really good underpinning regulatory drivers. And we see in OEM. So OEM, the sales of our EC3, our electrically commutated DC motor. So very energy-efficient motor that goes inside ventilation products, 5.7% organic growth in the first half of the year. And of course, just not to go into it in too much detail, Andy confirmed on the margins. But 260 basis points of margin improvement in the U.K., 21.5% now, really very pleased about that improvement. Next slide is Continental Europe. What you see as these slides go through is that we're actually building the momentum in our organic growth, growth of 12.3% on a constant currency basis in the first half of the year. Operating margins, up 25.7%. And I know 1 of the questions that we've had for some time, and I think probably going back when our margins were declining slightly, is not worry about sustainability of margins and the improvement that we've made in Continental Europe is broad-based. It's across all of the different geographies, both in the Nordics and indeed, in Central Europe, 25.7% is a really stellar improvement. And I've always said this that the European ventilation market is for us, actually, probably more attractive in terms of margin potential than the U.K. I think what it starts to demonstrate is the sort of latent potential of the U.K. market over time as regulations and indeed, the refurbishment agenda starts to gain traction. But the organic growth was 8.9% at constant currency. A couple of highlights, I would say, in the first half of the year. New facility in Vaxjo in Sweden. We moved in on a sort of considered, slow basis. We were certainly learning from our previous experiences here and wanted to make a big success of this. There's only a small photo there on the bottom right of the slide, but we're really proud of this new facility. It's a new building that we've moved into. It's perfectly well laid out. It's much more energy-efficient than our previous location. And importantly, it's got the headroom for us to continue to grow. Very well invested in this facility. That picture that you see in the bottom right is a small robot that's collecting injection molding parts that come off our injection molding machine. So very well placed to underpin our growth. And we've made a couple of acquisitions in the first half of the year, ClimaRad in the Netherlands. And I'll come back to that specifically in a moment and Klimatfabriken in Sweden. And again, back to this investment that we've made. We have the ability to easily incorporate production from Klimatfabriken into our existing facilities. And that's already making good progress. We actually believe we'll have finished that integration by the end of April, such is the progress that we're making already. Next slide is Australasia. It's long way away, I know that was the comment that people made when we made these acquisitions in New Zealand and again more recently in Australia. But we have absolute conviction about these markets. We've traded with them as a supplier for many years. And I'm delighted now that our conviction is, if you like, showing through in terms of the performance, 23.9% organic growth is a stellar growth that we've delivered. And it's both in Australia and New Zealand. In New Zealand, we talked about the Healthy Homes Act regulations, again, underpinning the demand. We're seeing ongoing strong demand. We're introducing new products. We have a very significant market share. And also in Australia, we're introducing new products, and we're growing our proposition. So margins now at 22%, a huge improvement over the prior year. And of course, operating leverage comes into play here. We're now creating a certain critical mass, and we're starting to see the sort of huge drop throughs as we grow. So Australasia is a very, very exciting area for us. Operating profit almost doubling in the first half of the year and becomes really quite meaningful for the group. So that's the sort of revenue slide. If we move on to the next slide and ClimaRad. And in the same, we've talked about our M&A pipeline being exciting. And it's quite incredible how things have changed. I remember when we had the first sort of lockdown end of March last year, and Andy and I were sort of doubling down on doing all the sensible things to protect the business in the short term, and we said no M&A. And let's make sure that we conserve our cash, and let's just take stock of where we are. But it's clear from our revenue performance that as we came into this new financial year, we're very much onto the growth agenda again, and M&A has been absolutely in the crosshairs. Our strong cash generation continues to support M&A. It's a really integral part of our strategy. And ClimaRad is a wonderful acquisition to make. It's a market-leading proposition in the Netherlands. And we've acquired 75% of the business at 25% in agreement, it's contractual that we're obliged and delighted to be buying the other 25% at the end of 2024, and the integration has gone well. The first couple of months trading through January and February have been absolutely in line with our expectations. And we are now starting to think more considered around how we roll these products out into other areas of the group, in particular, into our German market where we think there's some really good potential. So I'm delighted about this. The production facility in Bosnia is also strategically an exciting opportunity for the group, and we think we'll be able to leverage that in a meaningful way in the future. And just really to finish on that sort of M&A pipeline. We said it's exciting. Andy has already talked to you about the leverage at the half year. And of course, as we start to move forwards, and we've given guidance about what we think for the second half of the year, clearly, where our EBITDA sort of leverage calculation is improving from 2 dimensions: we continue to generate cash, and we continue to improve our EBITDA. So we think we've got really good headroom to carry on with M&A, and we're excited, as we say about the pipeline. The next slide talks about regulatory drivers and indoor air quality, healthy air sustainably, that's our mantra. That's what we do. I don't propose to go through all of this in a lot of detail, but there are some really obvious trends that have come through. I was looking at the Public Health England update on the 4th of March, and the guidance around ventilation. It couldn't be more clear. There's never been more awareness about the importance of clean air than there is today. And we're sort of pleased in a way that we decided to resonate, not for the reasons of the pandemic, but we've always said that indoor air quality is super important. The regulations, of course, are about driving indoor air quality, but delivering it in an energy-efficient way. In every one of our markets, we see directionally an improvement in regulations. And I talked about throughout -- I remember back in Reading in December 2019, saying this is a 10- to 15-year gently underpinning trend for us, and that's not going away. It's only going to increase over time. So look, we've tried to whiz through this quite quickly, we think that the statement speaks for itself. If we move to Page 21 now and look at the summary and the outlook. And I'll really be very quick on summarizing the year that we've just had. I mean it's obvious how strong the performance has been. And we're delighted that having not been able to pay dividend last year and having a very sort of clean FY '21, and that we resume the dividends and are coming forward to the 1.9p per share that Andy talked about earlier. But moving to outlook, the first half of the year has been a really strong performance. But there has been some supply chain inefficiency, and we think this is likely to continue. We bring in a lot of small components, proprietary components that we assemble. They're coming from Southeast Asia. And there's been some well-publicized issues there. And we think we're the other side of it. But nevertheless, we've got a very, very close sort of watching brief on that. We've got a strong order book across all areas, and we think that supports the momentum. And there is no doubt more inflationary pressure than we've seen. And we feel that we're on the front foot now with price increase initiatives underway. So look, as we go forwards, there's still a huge degree of uncertainty. Let's hope that we can be optimistic, certainly in the U.K. in terms of vaccine rollout and releasing from these lockdowns, but we're still in this uncertain period. But really underpinned by that margin expansion that we did deliver in the first half of the year. The Board does expect earnings for the full year to be ahead of current market expectations. And that's the sort of formal proceedings of our presentation here this morning. We'd be delighted now to open up to Q&A. And so over to the floor as it were. Thank you very much.

I see Clyde Lewis has his hand up.

Oh, smaller boat. I'm lucky I've got in first. A couple of ones. One on pricing, Ronnie. It'd be really useful to, again, get an idea of how your prices are going to move this year. And if you can give us a bit of color around the different geographies, that will be helpful. And the second one was on the U.K. And obviously, you flagged the public sector still being sort of slow to get going. Are you seeing any changes there in terms of inquiry levels for new work coming through? And then last one was on Australasia, and I'm thinking really around the regulation change in New Zealand. Does that -- does the revenue sort of drop back at some point because the activities happened and a new normal level come through and it's 5% or 10% lower? I'm trying to sort of split out, obviously, your market share gains in Aus versus sort of underlying in New Zealand.

Well, look, 3 really good questions there, Clyde, so if I remember back to the first. So price, look, I think to a varying degree, we've been on the front foot with price. Some deliveries already underway and put in place. I would say in the U.K. market, we've been a little bit later. And so there's a whole raft of publicly-announced trade price increases that go live on the 1st of April. And so headline trade increases are sort of in the 3% to 4%, in some cases, a little bit higher. We believe we have strong trade brands, that we've got pricing power. And so we're confident that we're going to deliver really well in terms of those price increases to offset and mitigate some of the inflation. And of course, if you think about Volution versus the peer group, we believe that we're in a stronger position to deal with those inflationary aspects than some of our peers. But our peers are certainly facing that inflation as well. So in some respects, safety in numbers. If this was a specific Volution inflationary impact that others weren't seeing, then I think that would make it more difficult. So confident on price and certainly, some of our proprietary solutions, we believe, are quite unique. And therefore, the pricing power is very strong. And if you take the second issue there that was social housing. Thank you. I am -- what you've got in social housing is 2 types of projects. You've got the daily maintenance and voids, things break, need replacing. That's carrying on. You can't have a property with ventilation that stops and then you -- in particular at this time of the year, all sorts of problems around humidity and mold growth. So that daily churn of work, I think, is happening. But if you were looking at a block somewhere and you were doing some structural refurbishment, that almost certainly has been stalled in part, because I think what people are saying is, "look, we can come back to that later." But we already said prior to this pandemic, let's not forget, we had 4 or 5 years of austerity and, we see that day-to-day. I mean we get some sort of complaints directly from tenants about their ventilation, not because it's us at fault, but because they're saying can somebody come and help fix it? We have to refer it back through the housing authority or the [album] that's responsible for the particular stock. But we've got a great proposition. We were making good traction with revenue beforehand. And we're excited about what happens next. And there's all sorts of other regulatory changes. There was the Habitable Homes Act a few years ago. So it is quite a litigious area of the market. And I think there'll be tenant pressure as well. Let's not forget a lot of people are spending a lot of time at home at the moment. So my sense is the demand is sort of pent up and it comes back. So we're not concerned about the medium-term dynamics. Last question on Australia and New Zealand. Look, it's a really good question. We've enjoyed a strong ride with Healthy Homes Act. And of course, one of the things to bear in mind here is the installed base of our products has increased. And so those products, much as we think about product quality being very strong and our reliability being very good. These products don't last forever. They do need replacing. We've been managing to upsell really well. And we still think that Healthy Homes Act actually comes into play in the summer of 2021, our summer, so June, July. And the idea is that it's when you renew your rental agreement that you have to be compliant. So if you've got a rental agreement that you start in May of this year, that goes for 12 or 18 months, you're actually missing the regs until the next time. So we think the demand continues for a bit longer. But outside of that, it's raised the awareness of indoor air quality in New Zealand, and that's really helpful. Australia is structured share gains, and we're gaining share. It's clear that Australia and New Zealand, from a sort of lockdown perspective, have handled the pandemic much better than parts of Europe and indeed, the U.K. And we've got some really exciting new customer acquisition opportunities, account gains that we think will underpin our sort of revenue growth in that region, particularly in Australia as we go forwards.

On the Zoom call, Lush M is going to ask a question.

I've got a few, if that's okay. The first one really is, obviously, you talk about sort of regulation in the New Build side, in particular. But can we get an idea of perhaps the upsell from a gross profit perspective, as you sort of move up that value chain more to heat recovery, for example? The second question was obviously, great margin performance, but clearly, Europe really stands out, 26%, you sort of touched on it in the call. But is there any reason structurally why the U.K. and Australasia couldn't get there in the midterm? And then the last one was just on Project Liberty. If we can just get an update on that? And how that's perhaps helped your RMI sales as well, that would be great.

I'll do the first and the third, and Andy can probably do the margin. But -- and I've forgotten what the first --

Rates.

Sorry. Okay. And the margin, my apology. I was so intently listening to 2 and 3. One wants to bear in mind in terms of regulation. So if we look at the U.K. and the move from intermittent extract fans into heat recovery is that in actual fact the gross margin that we deliver across the different categories is very similar. So if we talk about our 48%-plus gross margin, it's not as if that moving from intermittent extract ventilation, I'll explain a bit more about that in a moment, to heat recovery grows the gross margin, but it definitely grows the value per unit. And I think what we're alluding to, Lush, is that building regulations in the U.K. still permit old style, the application of intermittent extract fan in a New Build house. It's diminishing, but nevertheless, a house builder building to all the regs could fit a GBP 20 fan, GBP 25 fan, fit 3 or 4 or 5 of them in a property with deducting in the accessories, and we get 50% gross margin, and we're very happy about that. But as you move towards MEV or DME MEV and heat recovery, the value per unit increases, if not necessarily the gross margin percent, but of course, the value, it helps us grow more quickly. We talked about our Residential New Build typically growing between 5% and 10% every year. It's a little bit confusing at the moment because we've had clearly, the sort of construction slowdown second half of last year. But we believe with the change in the building regulations that's happening now will prohibit the use. It will be impossible to develop a new house using intermittent extractor fans. So you move away from GBP 100 to GBP 200 of ventilation at the entry-level to GBP 300 to GBP 400 and up to, in some cases, GBP 1,000-plus. So many other regulations as well that are helping us. I mean, noise [ increase ] is an issue in apartments, and that's why you typically build with MEV and heat recovery. So this is continuing. But of course, we're not there yet. We think there are only maybe 40% of all U.K. homes using a heat recovery device in construction. And if you went to Finland, for example, where we have a nice market position in terms of ventilation, you cannot build without heat recovery in the new sector. And so it's a little bit of an indicator as to where markets can get to, and I'm not saying in the next couple of years, but over the next 5 to 10 years, yes. You've got to move to high-value propositions. I'll let Andy take the margin question, then I'll come back on Liberty.

Yes. And as you rightly point out, the European margin does stand out particularly strongly and is ahead of the other 2 segments. But probably worth pointing out, 12 months ago, if you looked at the gap between Europe, which was still a leader at that time. And Australasia, which was the sort of the laggard of the 3 at that time, then the gap was over 7 percentage points of margin. Now it's under 4, and that coalescing and that shrink in the gap isn't because Europe has fallen back. It's because the others have gone a bit faster. So yes, there's still a gap, but I think it is closing. I mean, I think Europe is very much the most sophisticated customer base and the best opportunity at the moment for us at premium and top, top products, particularly in the heat recovery space. So I think that does -- the others are in catch-up mode. And I don't think -- I think it will take a while for that catch-up to happen. Probably worth pointing out in the U.k. small impact where the U.K. is sort of supporting some of the cost base, which then actually benefits all of the group. So if we look at our technical capability, some of our procurement support, a bit -- a piece of that cost, that essentially sits in the U.K. because most of the resources sit in the U.K., but to an extent, it supports across the group. So perhaps, the true like-for-like wouldn't be quite such a gap between those 2. But again to answer your question, we want to move everybody up. I think the product portfolio is the key way to do that. It's not going to happen overnight. But as we've shown compared to last half, it is already closing that differential.

Absolutely. I mean, look, it's not about stating a new target today. We've said over the medium term, the cycle is 20% operating margin. But from an ambition perspective, Andy and I, we're still very ambitious and we still want to drive the margins as high as we possibly can. Liberty. So, interesting, Liberty is a project that we talked about a couple of years ago. In actual fact, it ran in parallel with the Reading facility upgrade. And this was about simplifying our product platform to give us more variations on the final product, but making production less complex. And that's been finished now for about 9 months. So we've got a product platform in place. It makes it easier for us to introduce new propositions into different markets. So for example, in Australia, and I've alluded to some of the rollout with new customers. It makes it nice and easy to take the components that we have around our capability and assemble them into something compelling for an individual market. It's about speed, reducing complexity and helping us to scale up our manufacturing output. So really delighted about Liberty. It was an investment of about a couple of million pounds of product tuning, but over a couple of years, a refresh of our RMI product portfolio. And I say this on a pretty considered basis, I do genuinely believe that Volution across its different markets has overwhelmingly the best RMI product portfolio in this space bar none. And that's a claim I think we can make with complete confidence.

Our next question is from Charlie Campbell.

Just a few questions from me. I suppose just going on from that margin question. Sort of record margin, I think, for the group was 22.5%, roughly. Is there any reason structurally why you couldn't get back to that level? Is there anything about the composition of the group sort of between now and then that makes that hard? Or is that sort of something we could think about as a potential kind of possibility for margins? Another question, you mentioned in the statement about using some components for heat pumps, which I found very interesting, given the way that things are moving in that direction. Can that be used sort of widely against -- across heat pumps, that could be interesting? And then lastly, on the cash flow, obviously, record levels of cash last year. Very strong again in the half. Anything unusual in the first half that sort of unwinds second half, just in terms of thinking about cash flows this year and maybe next as well?

On the margin, if you look back at 2014, '15 and indeed, prior to listing, I think the complexion of the group is considerably different. I think when we first came to market, it was sort of an 80% U.K. revenue story. And the fact that it's 50-50 is not because the U.K. has necessarily gone backwards. It's just that outside of the U.K. is going forwards at a faster rate and [ include in ] that's M&A driven. And I'll come back to what I said earlier. Ambition-wise, why not, but we're not setting any wild new targets today to -- it's 22% next. We're delighted about where we are. One of the criticisms I've had over time is, are your margins sustainable, Ronnie? This is a sector that surely the barriers to entry aren't that high. I disagree. And are you margins sustainable? Yes, they are. So I think the important thing for us to do now is maintain our margins. And if we came to higher than that, then that's upside. But there's a little bit more commercial around the group, which has probably got a little bit lower margin. But of course, we'd like to think as we build up scale over time that we start to sort of offset that. So the margin's ambition is as high as we can do, but no new targets now. We're just really pleased about what we've achieved to date. And when it comes to heat pumps, heat pumps are really interesting. It's something that we talked about a lot in different markets. We see heat pump technology as hugely complementary to what we do. A heat pump doesn't work in a leaky house. You wouldn't install a heat pump in a leaky house, there's just no point. And we're seeing some revenue drivers in Germany and the Nordics at the moment. And indeed, I didn't go into the detail of it in Ireland. But as Ireland is starting to install heat pumps into dwellings, they're starting to use some of our filtered air inlet grilles, which we perfect in the Nordics. We've been selling quite a lot of them into Ireland at the moment. We've got some strong demand. In Germany, we're seeing more demand for our decentralized heat recovery off the back of heat pumps. And in Nordics, we do very well because we actually provide filtered input air ventilation into properties that use heat pumps. So the heat pump dynamic, the move from fossil fuel powered, if you like, heating into heat pumps is really exciting for us. Specifically, in the Nordics and Finland, we provide some cooling. And we do that with some compressor technology inside our products. And it is an area that we keep an eye on, and it's hugely complementary. So long may that continue, and it will. In terms of the cash, yes, I mean, just quickly, Charlie. So there's nothing unusual in terms of exception, if you like, in the first half of the year, except perhaps to think about the dividend. So obviously, normally in a half 1 we would be paying in cash, the final dividend from the year before, which clearly was not -- there wasn't 1 in FY '20, hence, 0 in H1, but we will be obviously outflowing that interim dividend in half 2. Tax will be a little bit higher in terms of cash outflow in half 2 than half 1 because, obviously, half 1, we were still sort of paying against last year's earnings, if you like. That said, working capital, I think I sort of touched on and Andy sort of touched on early as well. We were -- I think we -- when we gave the full year back in October, we were saying that we expected as activity resumed, a couple of million of working capital outflows. So the 6 million that we benefited last year, we felt that our activity resumed a couple of million of that would net naturally sort of go back out. In the event, in the first half it was only GBP 600,000. But that was probably because of inventory constraints rather than deliberate management. So maybe that inventory just increases a little bit as supply chains become more normalized, perhaps they've started counteracting that CapEx. We would expect it to be a little bit lower in half 2 because we're not going to repeat the Swedish facility investment in half 1. But look, nothing earth-shattering, just those sort of fairly normal constituents.

We have a question from Christen now.

Three questions for me, please. First of all, you mentioned you've done your largest deal to date quite recently. I was just wondering what sort of the view was potentially of looking for more transformational deals, given that, that deal was not the largest in terms of your market cap, for example. And also I [ saw you've ] seen the multiple move up and potentially could leverage equity for something transformational. So that's the first one. The second one, just with Australia. Could you just remind us of market structure over there, where you sit currently. And I [ think ] this is longer-term opportunity for Volution there? And then just a final one on margins. I know you've been asked a lot on this. But I suppose if you look back from the IPO and just ignoring Reading and the impact there, and as you've alluded to, there was sort of a slight sort of fall of the margins just over time. Just kind of looking back, what was the driver of that? And how comfortable are you that, that won't happen again from this great base that you've got back to?

Would you like me to take the last 1 and then you go back to the first 2, Ronnie. Yes. Yes. So I mean I -- so the margins, the -- I suppose the progression over the previous years, leaving Reading aside, a meaningful part of it was acquisitions coming in and typically coming in at maybe sort 8, 10 percentage points lower margin than group average, and therefore, a bit of dilution. So that's a natural piece. I think -- so would we expect in the future some of our acquisitions to come in and be dilutive? Yes. So we certainly wouldn't rule out an acquisition of a nice sort of 8%, 10%, 12% margin business that we can see absolute potential to drive meaningful improvements quickly. And so that will definitely be there. But of course, I guess, absent it being to your transformational work, assuming it's the normal sort of size that we acquire as the group gets bigger, that dilutive effect gets a little bit smaller. I guess one thing that hasn't been done on the way through up until the half 2 of last year was all the work that we've done around where we've done more than 1 acquisition in single geographies. There was then that sort of follow-on after the event to really try and sort of streamline and make efficient the cost base and the indirect cost that supports all those brands. So I guess we've been doing it along the way in the Nordics, and that's part of the reason why the Nordic and European margins were so good. We haven't been doing it to the same extent in the U.K., where we've been bolting on those additional acquisitions in the U.K., but keeping sort of separate cost bases supporting them. And actually, the work we did in last year, particularly in the U.K., a lot of it was around taking the opportunity to leverage single back office capabilities for multiple businesses. So I think that -- having done that bit of structuring, I think that sort of protects against that bit. The acquisition dilution is, let's say, in a way, at times it's deliberate, as long as we're making good, well-informed acquisitions. And yes, so I can't see nothing else that would imply that it will sort of reverse back.

Just to add on the sort of misstep because I saw somebody quote in the press that Reading one also said management is some way behind us. I think the test that we've had through COVID just reassures Andy and I that Reading is in really great shape. The fact of it is that most of the back office that support production facility, and indeed across the wider group, are working remotely. And I think that if our systems and our structure and our processes were threadbare, it would have been exposed through this, with the supply chains and everything else. And it's not easy. And I said at the beginning, dedicated employees have really pulled up [ freeze ] to get us through this difficult period. But it's -- the RMI growth, we delivered 14% RMI growth in the first half of the year. Let's not forget the growth in New Zealand is, of course, a lot of it powered by products that are manufactured in Reading. Those of you that came along and saw the Reading inventory in December '19, we're shipping a container a week at the moment out of the U.K. into New Zealand, and they're 40 foots. And they are underpinning that there's a strong demand. So Reading is -- one of them is that's a distant memory for us now, but delighted, absolutely delighted that we did it. It's without a doubt the most comprehensive facility of its type in Western Europe. There's not another one like it, and it supports our growth. M&A, a really interesting one. And of course, there's been some interesting larger equity raises for larger deals more recently. And I've had a few questions. But look, our strategy is fragmented European ventilation market, in particular. We know it intimately. Volution is already one of the largest ventilation players in the space. So there aren't a lot of big deals out there for us to go and do. But we're very happy to keep going with our strong cash generation buying things. I mean, Andy and I will be delighted to put up the return on acquisition investment slide at the end of this year with the recovery and the sort of returns that we're making. And that, we think if we can carry on doing what we've been doing, it may be a few bigger deals with a larger cash generation. And yes, the equity potential is there, but it has to be ultra compelling and be a no-brainer for us because we sort of cherish our reputation of financing all of our deals from our own cash generation to date. But that isn't ruling it out. But I'm certainly not saying that as a result of where we are now, that we'd make an extra effort. And another question about Australia, if -- you and I actually touched on things briefly this morning. I know we had a quick call. But -- so I'm repeating some of what I said. But if you thought about the Australian market as a country of size in Europe, that's a bit of a stupid read across. But it would be 1 of the fifth or sixth largest countries in Europe. And what I've always said is we've got a market-leading proposition, but with probably a fourth or fifth place share. So we're eating up share at the moment, which gives us a huge runway of opportunity. And back to Clyde's question earlier on, I still feel confident that we can continue to grow really well organically because there's 30 million people and we're actually still quite small in the market, but growing nicely. So that's hugely exciting for us. New Zealand is slightly different. Smaller country with a big share, and we're on the upselling path there. How do we extract more value, no pun intended, but from the units that we sell, moving up the curve.

We have a final question from Graeme Kyle.

Two questions for me. First one, you mentioned price increases to offset raw material price increases. Is this on a pound-for-pound basis? Are you able to calculate these sort of gross margin is not diluted? And the second one, again, taking you back to M&A I'm afraid. So you mentioned it's the European kind of higher tech business is the focus. But I'm just wondering, is the U.S. market, is that now interesting now Biden is in the White House?

I'll do that one, and then I'll let Andy talk about sort of the price of what we're doing. Look, there's a very large listed group that owns, have been a huge ventilation player in North America, and that's Nortek, and it's a very, very significant organization. I'm not alluding to us doing anything there, that's not the case. But we've said that the runway of opportunity in our existing markets for M&A is more sensible. And I think heat recovery ventilation in North America, and indeed in Canada, is interesting. But look, for us, I think scale is really important. And if you look at the synergies that we're able to deliver through M&A, just the R&D pipeline, the procurement, all of the things that we bring along, it's not really an area of focus. There's just so much fertile ground for us in the U.K., Continental Europe in particular, particularly Continental Europe.

Yes, and on the other one, Graeme. So undoubtedly, we are seeing and have seen this cost pressure and whether it's strong raw materials and plastics, commodity inputs, whether it's freight. We'd like to think that the freight, whilst it might not get back to normal in the next few weeks, is it has sort of come off from the absolute peak and should return to some more normal level as we move forward. But look, definitely, a piece of that cost pressure will stay. I mean, obviously, our procurement efforts and our scale. One route we're trying to do is to try to combat and offset and fight as much of those increases as we can. And I think our procurement capability does give us some potential to do that. We also clearly look at things like currency. So when we're buying from China and the Far East, it's denominated in U.S. dollars. So to the extent that we can manage that quite nicely. There's sort of [ pang ] dollar movements over the last few months, will give us a little bit of a natural compensation and offset against some of those input cost increases from China. But yes, we absolutely do need to get price, and we're targeting our teams quite hard on price. If we deliver it well, it should be able to offset what's there and potentially add a little bit besides. We want to do it carefully, considerably and clearly at a level that we're not going to give away and lose volume by irritating customers too much. But we believe if we manage it well plus manage the supply chain and procurement aspects well, we can see our way, manage our way through it and hopefully have a bit of accretion into the volume.

Okay. Look, I'm mindful that it's just on -- just coming up to the hour now. So really great questions there. Thank you for your attendance this morning. And I know Andy and I have no doubt the rest of you hope that we might get to see you in person at our full year results in October. So let's keep our fingers crossed on that one. And thanks, again. That's it from us. Thank you very much. Thank you.

Thank you.