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

Welcome to Volution Group half year results. We're delighted to be here to see you this morning, and great to see so many familiar faces. Format's going to be largely similar to what we've done in the past. So quick overview. And actually, I'll spend a little bit less time on the overview. I'm looking forward to giving Andrew a little bit more time, talk about the financial results. And then I'll come back on the business review, summary and outlook, and then Q&A. If we get this right, we're looking to spend about half our time taking you through the results. We think they're reasonably self-explanatory. And then experience from last time, we had quite a lot of Q&A, a lot of interest around -- in many respects, what happens next, so we'll try and reserve a little bit more time for Q&A. And key takeaways here. Look, our group revenue is up 8.9% at the half year and good organic growth of 4% on a constant currency basis. Adjusted operating profit is up just over 10% to GBP 42.6 million. Of course, we acquired Fantech, AUD 280 million acquisition, our largest acquisition to date, we'll talk a little bit more about what's happening there. And look, really good momentum with FY '25 earnings. And we're expecting to be ahead of consensus, and we can talk a little bit more about that. But look, Fantech, I'm mindful that this sort of completed in December. But as you can see on the slide there, we're very excited about Fantech. It is the leading position in Australia and New Zealand. So we've consolidated an overall leadership position, and it was fully funded through cash and RCF. And so if you look at the post deal leverage, it's still very, very manageable. We've been much closer to the business more recently. And we knew this beforehand that there's no substitute for being inside. I spent a bit of time there a couple of weeks ago, and it is as we expected, a very high-quality local management team, and it will effectively form our local leadership for the region. It's a larger business that we've acquired, and that's really helpful. And look, our trading post completion has started really well, particularly in Australia. We'll talk about New Zealand and the New Zealand market later on, but particularly strong in Australia and a little bit more difficult in New Zealand. But in aggregate, very pleased with how things are going. And typical to what we normally do, we're working on cross-selling and new product introduction initiatives. There's significant procurement opportunities, quite a few common suppliers and opportunities there. And over time, we just think there's an ability to be more efficient with the way that we manage our resources locally to leverage the opportunity. I mean I always talk about Australia and those that have spent time there, it's a big country. And logistically, we're very well positioned in all of the major areas to service our customers very well. And just one for us, it's important, and that's focusing on sustainability, healthier, sustainably. This underpins what we do with our customers. Our low carbon revenue in the year was about the same as the prior year. It was 70.4%, 70.5% in the prior year. So actually, no progress there underlyingly. And actually some dilution as we bring Fantech into the group. The Fantech proposition has a much -- well, today, a much lower low-carbon content than we have across the wider group. But look, that's an opportunity over the coming years. U.K. and Europe is decarbonizing. Australia and New Zealand, maybe a little bit further behind, but inevitably will decarbonize as we go into the future. And then our recycled plastics initiative. We've set ourselves an extremely stretching 90% target, 90% target. So only 10% of our material in our facilities will be from a virgin source to move to 84.6%. I still don't know how we get to that 90% target. It's stretching, and we believe in it. And that's been largely driven by U.K. business with good progress in the Nordics more recently. But your credit to the team there, a fantastic job getting up from 77% last year to 84.6%. And this is so important for our customers. Our customers are looking for recycled content in their projects. We get asked in tenders to how much of the content of your product is from a recycled source and this is very helpful. And then -- so lastly, on sustainability, SBTi. So we've had our targets assessed and approved. We're very pleased about that. We could talk a little bit -- probably a little bit more detail at the full year, but very pleased now that we've got targets out there that have been assessed and approved. Developing our people, keeping our people safe, pleased about our excellent frequency rate. It reduced to 0.15 from 0.2 in the prior year. I'm very pleased, witnessed firsthand the sort of health and safety culture that we had in Fantech is similarly strong as with our wider group. And I think there's some sort of cross fertilization and learning there. An important point to draw out now, we continue to grow very well. If you look at the sort of 10-year now, 11-year history and sort of our 12% compounding of revenue and earnings, clearly, there's a leadership bandwidth challenge there that we have to address. And what we're trying to do is to be ahead of the curve there. So delighted that in the period, there was some internal promotions to create what I would call regional leaders. So two regional leaders for our European area, a regional leader designate for the Australasian business, and that will come from within the Fantech acquisition. And also just bringing in attracting some high-quality people to look at some of the opportunities internally. New operations leader in OEM, and we'll talk about OEM and what we've been doing there to turn around that proposition. And also additional support in our technical teams to complement the new Group Technical Director, who joined us early last year. And last but not least, fourth group-wide management development program completed in October last year, and we'll kick off Management Development Program 5 later this year. And there will be a greater participation of people from the Australasian region for obvious reasons. So I'm going to hand over to Andy now. I know he's quite looking forward to taking you through the numbers. So, Andy?

And just to put your minds the rest, I'm not going to be waxing on for an hour because I am looking forward to the numbers, but I will make sure there's plenty of time for Q&A. So look, just as an opener slide, reminder, these are our long-standing sort of 6 key financial KPIs. And against each one a little green block is our target number and a little lighter blue above it is where we came out for the half year. And again, I will go through some more of them in more detail in subsequent slides. But I guess, really, really pleasing to see us ahead of the target on all of those key metrics. I just put out a couple of them and just where there's a little bit of additional color here to help you. So revenue growth, Ronnie will obviously go into more detail around the regional picture in the next section of the presentation. But organic, our target of 3% to 5% per year. You may recall, those of you who would have seen our last statement, which was the 4 months statement that we put out early December at the time of the AGM. Then we were talking about the 2.5% for first 4 months constant currency organic growth, that's nudged up to 4% at the half year. So a really -- 4% is a number that we're very, very pleased with. It's flat bang in the middle of our range in, frankly, what still remain mixed markets at best and in some places, quite difficult markets. So to start with the 4% is great. And of course, from a trajectory perspective, that slight uptick in the second period of the half sets us up well going into the balance of the year. I always get asked volume and price. I always give you volume and price, but normally, I don't write it down. So I thought just in case you didn't hear -- rather than wait for Q&A, let's put it out there. This is approximate, but we're saying, look, it's about 1% of that 4% is price and about 3% is volume. And really, that's the normal -- when we think of why we set a 3% to 5% strategy, circa 1% on a like-for-like price basis is really, if you like, normal behavior. So compared to the last few years where each period where we've been dealing with inflation. And therefore, previously going slightly bigger on price, I would say that's now very, very much back in a sort of normal modus operandi. Top right there, I think really pleased with that cash conversion performance there. So we set ourselves a 90% target across the full year. And ordinarily, half two might tend to be slightly stronger than half one. So a 90% number is good for half one. 110% is therefore a really, really pleasing number. And I guess it's doubly pleasing because as we'll talk about later on the cash flow slide, we obviously had a lot of money going out this half for very, very positive reasons, both in terms of Fantech and then also acquiring the remaining 25% of ClimaRad. And so cash generation for us is always super, super important as the engine to fuel our M&A strategy. But the result of our half one performance is that we ended the period at 1.5x pro forma leverage. So still very, very comfortable balance sheet-wise despite a really active period on the M&A front. And then bottom right there, adjusted EPS up almost 12%. And those of you that remember the sort of the 10-year compounding graph slide that we put in our results back in October. 12% is what we've been delivering for the last 10 years, and it's great to sort of keep that trajectory going in this period. A bit of repetition here because obviously, again, we're sort of largely talking about the same indicators and the same KPIs. But I think showing it on the 5-year basis is helpful because again, if you look at the year-by-year progression on all of those graphs. We are very, very proud of this consistency of delivery, just sort of compounding of performance. On both the revenue and operating profit growth there, you'll see that we've also quoted constant currency against each. And it's funny, it seems to be the case every single time that currency is not our friend, but there's about a -- just under 2% adverse headwind on both of those metrics. So 8.9% revenue was actually 10.6% constant currency, profit 10.4% reported, 12% constant currency. All of the currencies got a little bit tougher for us versus sterling, particularly profound in Australia and New Zealand. So -- and I think that at the moment, well sort of broadly speaking, as of today, same as we were in the first half of last year. Euro has got a little bit more helpful to us. Aussie and Kiwi have got a little bit worse again. So it's probably not unreasonable to think that carries on for the next few months, but who knows. I'm not a currency trader. Operating margin is up to 22.7%. So really, really pleased to see that continuing to nudge forward despite a tiny bit of dilution. And I say tiny because it's two months we had Fantech in. And I would also say that, yes, the Fantech margins are lower than our group margins at the point of entry. But actually, the gap is not quite as significant as we thought it might have been when we acquired in September, October. So it's a really, really strong margin business, and they're already executing well, and hopefully, we can help them continue to improve that. And then bottom middle there, operating cash flow up 23%. So that again is back to that sort of cash generation leverage point. I don't think there's too much to pull out here that I haven't already covered. The -- perhaps just briefly mention the dividend. So we've noted the dividend up to 3 -- the interim up to 3.4p per share, 2.8p was the equivalent last year. So that's up just over 20%. It's not a change of our strategy, but hopefully, that's just a reflection of the confidence that the Board and the management have in the business. So Ronnie, I think, will go into more detail on the geographic breakdown in the next section. But 4% constant currency organic, very, very pleased with that. U.K., again, are sort of strongest. So just over 7% in the U.K., 2.4% in Europe, which was a bit of a tale of two halves. So the Nordics remaining challenging, particularly where we operate in the more new build parts of that market, so places like Denmark and Finland. But I would say Central Europe, so for Central Europe, quite loosely defined geographically. It's everything apart from the Nordics actually had a really, really good second half. And I think to be fair, pretty much all of the businesses contributed to that. So I think ClimaRad particularly strong. Germany getting better, still not where it was a few years ago, but definitely getting better. France developing well along the strategy that we've set out there. I'd say, generally speaking, a positive and encouraging picture in Europe. Very, very small organic reduction in Australasia, so 1.7% constant currency. Australia holding up very nicely. New Zealand, as Ronnie has already trailed, tough. And then you see the impact, obviously, you have 2 months here of Fantech coming in. And of course, not two of their strongest months in Australia because it's Christmas season, which tends to be the longest holiday period. But that's two months of Fantech. And then the adverse currency we've already touched on. On the margin front, so I guess the thing I'd pretty zoom in on here is the bottom left and bottom middle charts. At the bottom left, continuing that half-on-half progression at a group level, which we're really, really pleased about. And no, we're not resetting the target. And then in the middle, how that breaks down geographically by region. So good -- I mean, U.K. margin is now up at almost 26%. I remember sort of 3, 4, 5 years ago, we were -- if you like having to almost explain away why the U.K. margins were not on par with the rest of the group, particularly Europe. And there were reasons at the time. But candidly, we said there's no reason why it shouldn't be the case. So we are delighted with the execution that the U.K. team is delivering. Continental Europe, flat. There's always a business mix effect there. And I'd say, Nordics not easy, and that's one of our higher-margin businesses. So I think to hold the margin there is, again, a good performance. And in Australasia, just to help you out with how does Fantech impact on that regional level, you've got three bars there. So you've got last year's half one, you've got half one this year as reported. And then on the right, you've got half one this year if you just looked at the organic businesses. So I think to be fair, credit to the organic businesses, particularly actually the team in New Zealand, you know, really, really difficult revenue situation, but performing and delivering very well on a margin perspective. So the organic margin in Australasia was actually up slightly. And I'd say Fantech, slightly dilutive, but still a good strong margin that we enjoy there. I definitely won't through the full detail of this slide because there's quite a lot of numbers in here, but just to help lay out a bit more detail for the analysts, the sort of the cash performance in the period. So for me, the key points leverage is say, 1.5x having completed the Fantech deal and the ClimaRad transaction. I think when we announced it back in December, we said that we would indicate -- we would guide to a likely landing at sort of between 1.5 and 1.7x post the transaction. So obviously, we're right at the bottom of that range. As a reminder, we would think of ourselves typically as delevering about 0.5 turn per year absent any acquisitions. So if you apply half a year of that to your 1.5, by the end of the year, we're in a very, very -- I mean, we already are, but we're in a super comfortable position leverage-wise. And -- yes, that's not a promise that there is something coming imminently, but it just means that we're definitely, definitely very well placed to be able to capitalize on acquisition opportunities as and when they arise. Return on invested capital, 25% versus 27.5% a year ago. Clearly, as we've always said, acquisitions will be dilutive at the point of entry because if we're acquiring at a 9, 10x multiple or of course, don't forget Fantech was 8.5, which was really, really good multiple, but it is not 25% return on entry. So actually, I think that's very, very encouraging still. And we've said that organically if we hadn't done Fantech, we would have increased the returns by about 100 basis points. So again, the rest of here is hopefully, continue to acquire. There's an acquisition dilution, improve the acquisitions, continue to drive the organic business. And what we're saying is we're still confident of maintaining above 20% over the medium term while continuing to invest and grow in the business. So with that, I'll hand back across to Ronnie. Thank you very much.

Thank you. Thank you, Andy. So on the business review and maybe a little bit less detail but bigger picture stuff. So this is sort of Volution. And if you think about our market exposure, so top left, new build about 1/3, 35% and then RMI 2/3. And then the sort of commercial residential split, but this is actual half one, so it only includes 2 months of Fantech. We will see that sort of split resi commercial change over the fullness of time. So we'd probably move to 40-60 commercial resi. And we've already signaled that from an M&A perspective. We're always interested in expanding our position in the residential market. And we've said for some time, commercial niches, I guess, is Fantech a commercial niche will probably more than that. But we remain interested in both areas of the market. Residential definitely commercial more niche. And the reason I say more niche is that the commercial market opportunity is bigger. It's a much bigger available market, but we are choosing to play in certain parts of it, in certain areas where we believe that the returns are acceptable to us in Volution. And we'll demonstrate that to you over the fullness of time through Fantech. There is some entry dilution. There is plenty of improvement potential. But the opportunity in that local market in Australia and New Zealand is hugely compelling. This -- I was thinking about this in terms of the success of our group over time and the recipe, if you like. And why do we believe that we can continue to sort of outperform the wider market and deliver this sort of 12% plus/minus compounding revenue and earnings growth. And I think this slide shows it really well. We have three geographic areas. So this on the right-hand side is pro forma the revenue that came into the group basis FY '24. And it's a very nice symmetry there. It's almost 1/3 each between the U.K., Continental Europe and Australasia. And as Andy has already taken you through, and I'll go into a little bit more detail in a moment. But not all of our markets go up at the same time, but we do believe that pretty much all of the markets that we operate in, have this sort of regulatory driver that we can exploit through innovation, technology and tactical execution. And so having this geographic diversity is actually a huge help to us through the fullness of time. We're complaining about the New Zealand economy at the moment, but I also remind myself of 4 or 5 years ago where we talked about healthy homes and some of the tailwinds that we had in that market. And I think it would be unreasonable for us, although we can be unreasonable with our demands, but unreasonable for us to expect that every one of our geographic areas will be pointing up all at the same time. So a little bit more detail here, but I don't really want to go into lots of detail. It may be repetitive with Andy there. I mean the U.K. operational performance is outstanding. I call out to the team, exceptional team, delivering great results and very proud of what team have been doing. I know some of them will be listening in this morning, so they should hear it from me because it is an outstanding result. And if you look at it, residential performance, our outstanding performance there is in residential newbuild, which is really counterintuitive. And I've seen some statements. So even over the last couple of days calling out how far the volumes have come off in residential newbuild. So why is this our strongest area of performance. And it's a relatively simple recipe. We brought some new products to market that are capturing that regulatory opportunity. And we've gained share. And so I look forward to this residential newbuild recovery in the U.K. market because we will absolutely benefit from that if we build more houses in the U.K. And maybe we do start to see some of that as we go down the track. Calling out some of the areas that were less well performing. 7% growth in the U.K., but that's in spite of a disappointing -- it is a disappointing 5.5% commercial decline. But in actual fact, the leading indicators that we've got the actual fact we had the commercial representatives gave a little bit of an update to the Board on Tuesday about what we're doing in commercial. And we've got good momentum. We've spent the last 5 years improving our product portfolio and bringing new solutions to market and the order intake in the first half of the year. And it's predominantly a project business, but the order intake was actually quite strong. And that's a really good indicator of what comes next and the direction of travel for half two. And in OEM, the 5.7% decline is actually off the back of a much more severe decline that we talked about in the prior periods. And we've done a lot of work in OEM, consolidating into one facility, quite a lot of indirect cost reduction, a much stronger platform now and more optimistic about the value that the OEM proposition can add to the group going forward. This is third-party revenue. It's worth pointing out that OEM is now contributing about 1/3 of its -- of the production in our facility goes into our own products -- into our own production. And that, of course, is a margin enhancement. Coming back to how do we put 160 basis points of margin on. We've had headwinds. We've got inflation. We're not dissimilar to others in the market. We've got some further inflation to come around national insurance and national minimum wage increases and so forth. But we think with the initiatives, product mix and sort of self-help levers that we're pulling on, we don't have any undue concerns about maintaining margins as we go forward in the U.K. And it is the highest growth number on the page there, although a relatively smaller part of our revenue, but 20% growth in export, of course, is a very strong performance in the half year. Continental Europe, again, I don't want to duplicate what Andy has already said. Nordics has been tough, but our RMI business is actually performing better in the Nordics. We've got some probably better growth momentum in some of the other areas in Europe. Germany has been really hard for us over the last few years. And some of the regional management changes, I think, are helping bring a little bit more focus into what we're doing there and aid some of our cross-selling. So we're actually a little bit more optimistic about our Continental European performance in spite of the fact that it wasn't actually -- it didn't actually add that much to the result in the first half of the year. But still 24% operating profit margins. ClimaRad was probably the standout performance there offsetting some of the weakness that we had in the Nordics. And then finally, into Australasia, and I talked about Fantech. And no doubt there'll be some questions from the floor when we finish now. But Australia has done very well for us. New Zealand has been really tough and been tough for a couple of years, the economy has been tough. And we've sort of got this lens now across a lot of different brands. We have our Simx brand through distribution. We have DVS, which installs direct-to-consumer selling. We have Fantech, which is predominantly a commercial proposition. We have another brand called NCS Acoustics, which is a specialist acoustics play in New Zealand. And when I look at those read across, if you like, for those different brands, we know how tough the market is. And I'm not necessarily calling out New Zealand as being necessarily much stronger in the next 6 months. But we have more to play with now with the addition of Fantech. And how can we take additional share utilizing those brands and those products to benefit. What we've done, this is the first time that we've done it here is -- sorry, I'm on the wrong slide. I'm not keeping up. It's to slip the residential and commercial revenue. So previously, all you saw for Australasia was one number. Now we're splitting it out into residential and commercial. And of course, the 576% growth is because we had a very small existing organic commercial position and Fantech is largely commercial. These numbers will make more sense once we've had a full year of Fantech. But just I already said it there. I was there a couple of weeks ago and only just takes about a week now to get over my jetlag. So second week back isn't too bad. But an absolute pleasure to be with the team. I know quite often, we're asked about investor trips out to see facilities. It's probably just pushing the envelope, but it's an amazing, amazing facility. I was there a couple of weeks ago, Group Technical Director had the first occasion to be there. And it was busy. I walked around the facility. I've seen it now 4 or 5 times. You get a sense of the business and it was really busy. And the product breadth and the way we service that Australian market is very exciting. So very reassuring for us. There's only so much you can do in due diligence before, you get inside, you write the check. There is a bit of a leap of faith, but one that we have complete confidence in. So very, very pleased about Fantech. So look, that was a sort of whistlestop tour of what's going on, repeating ourselves here, but good revenue growth, 8.9%, supported by the Fantech acquisition. Of course, we get more support from the Fantech acquisition in half two. This was 2 months out of 6. Good organic growth of 4%. Andy talked about the 2.5% in December. But look, we've had good momentum over the last couple of months. And certainly, February, just the first month of half two has continued that trend. And the Fantech acquisition, we're super excited about, but that's not the end. We talk to potential suitors. We are serial acquirers. That's what we do. We will continue to acquire. We're continuing to cultivate other opportunities. And our ambition is exactly the same as it was prior to the Fantech opportunity. Andy has talked about the headroom that we have to deploy. And so excited about that. Look good momentum. We're ahead of consensus, I'm pleased to be sort of upgrading our view for the full year with a high degree of confidence. So that's the presentation really. I think we absolutely on the half hour almost. So we've managed to achieve our bit. So over to you guys now for questions.

We're going to Tania first, sorry.

Tania from RBC. Just a couple of questions. I guess I'll start with Fantech. Margins were better than expected. Do you expect further margin improvement from the integration of Fantech? And are there any restructuring plans that you can share with us at this point? And then just on U.K. margins, those continue to be strong and growing. Do you expect those to improve further? And how do you...

Two good questions. So Tania, yes, the margins -- we said there was going to be a delta. I think at the time we said maybe about 6%. There is a delta, but it's a little bit less than we thought, which is good. So maybe more like 3.5%, 4% gap to the group sort of 22.5%, 23% level. So as we did say at the time, I don't think that this is some low-margin business joining the group that needs a lot of improvement. Think about this as an already very, very well run, well executing, strong margin business that hopefully we can bring a little bit more to. So like I mentioned on the slide, there is going to be some product opportunity. More about the residential piece than the commercial piece. So on the commercial piece, we're not saying that we can bring product to the commercial offering. No. We might be able to help with some of the cost pieces on the procurement side of things. But I think the residential, there is probably both a product sharing opportunity and procurement opportunity, although, again, they are buying generally pretty well. On the commercial, maybe it's more on the costing side of things. So I think really there, it's thinking about the things that we think about in all of the existing businesses already. It's less about going or wow, there's a really obvious 50% cost out that we can do on component A or component B. That's what we get on some of the smaller acquisitions. I think that's not the case here, but there is definitely opportunities and more to the point, an agenda as it is with everybody to carry on improving. You used the word restructuring. I wouldn't use the word restructuring, but I think what there is, is probably facility and footprint opportunities, and it's both way opportunities because one of the beauties of Fantech, it's got this complete coverage across what is a pretty large land mass in Australia. For example, we've got good presence with our preexisting Ventair business, but it's by no means complete and comprehensive. So can our existing Ventair business benefit from being able to use some of Fantech's distribution and network capability? Almost certainly, yes. But over time, will there be sort of some -- you think about a little bit what we've done in the U.K., where we've had multiple brands that have come through time over various acquisitions and then not in a big bang, not dramatic change, but progressively, we've looked at how to synergize the back offices, for example. So you're not changing your go-to-market, you're not changing your brands, but there's some back-office opportunities. There'll be some of those as well. So that's sort of how we're thinking about Fantech. I think on the U.K., no, I mean, it's just really, really good execution, again, continuing it as the thing things I just mentioned in terms of what we're always focused on. So are there -- can we continue to use our sort of procurement capability and power? Can we bring innovative new products to market and hopefully get improved and enhanced margins as those sort of start to sell through? Commercial, there may be a tiny bit of a mixed effect if commercial and OEM start to get more in line with the growth levels of residential because we do typically make slightly stronger margins on residential, but I wouldn't overthink that. So no, look, we knew we could get to here. We're really pleased that we've got here, and we just keep on looking for small incremental gains. Just to answer it's -- I said about why do I feel confident? Are we confident about the sort of growth that we've been delivering is that we've had this vision for some time. We've set it up with the infrastructure through innovation. Our innovation is coordinated across all of the group. It's locally managed, but coordinated group-wide. I had the Martin directors -- sorry, the technical director's report the other day. And I can see every project that's running in the group and how it's running. And so what we're doing is we're plugging in more brands, more opportunities over time to scale up, and that scale is eminently helpful for us, whether it be procurement initiatives, technical innovation. We've been doing a lot of work on apps. And we were talking about rolling out some new products in Australia. We've got the infrastructure. We want to have the products branded locally under Fantech, we'll launch some heat recovery -- residential heat recovery products into the market. It's a relatively easy play. So the margin issue for us is all of the work that's been going on over the last couple of years, and it just keeps rolling forward rather than necessarily a new -- specifically new initiative, and it's absolutely part of that DNA. So I'm very proud of the way that continues to run forward.

Aynsley Lammin from Investec. I think I've just got two, actually. Just in Europe, interested to see any kind of improvement, maybe the market's bottoming in Nordics, et cetera. So some of the kind of a bit more color around trends on trade in there? And then the second question, just obviously, EPS has grown amazingly strongly last 10 years. The margin level where it is, is it fair to say that maybe the group's got more emphasis going forward on kind of delivering a bit more organic growth towards that 5% rather than the 3% to keep that compound growth rate in earnings? And are you confident you can do that with upselling and cost products, et cetera?

The market, Nordics has been a frustration for some time, and the split is predominantly RMI but some newbuilds. So I talk about Denmark as an example, newbuild construction in Denmark still very weak. We had lots of projects previously. I would say a little while ago, the local leader was showing you all these apartments that hadn't sold. But look, lower interest rates are going to be helpful. And I think the good news is that Europe is seeing an interest rate roll over faster than anywhere else. So I'm not saying necessarily in the next couple of months, but I think directionally, that's really helpful. And of course, lots of chatter around Germany at the moment in terms of actually taking the brake off and maybe seeing a bit more activity there. We've certainly seen stronger performance, I think, through the half. The Continental European business performed better. We've been able to hedge some of that weakness because ClimaRad has had some outstanding performance to offset. But if you look at ERI, it's an acquisition still super excited about ERI and the investments that we're making in North Macedonia to scale up our aluminum heat exchanger production, but that's predominantly newbuild. And it's done quite well in spite of the fact that newbuild projects have been lower. So cautiously optimistic, I would say, and certainly feels as if that we'd probably come off the bottom now, and it's been a couple of difficult years. The EPS point and you're absolutely right. One thing that's quite interesting is we've actually delivered 4% organic growth on average since we listed now. So assuming we only deliver 4% for this year, it will be 4% in 11 years. And I know it's the holy grail. And of course, we want to push harder on it. But I think the recipe to that continuing 12%, Andy can take you through it in more detail. But actually, if all we do is generate good cash over the next 12 months and pay down debt and have lower interest that's a tailwind to EPS. So we've got quite a bit in our back pocket as it were. That doesn't mean we won't do more M&A or we're not focusing on more M&A. We just got that optionality, pay down debt. And in actual fact, the EPS growth is probably harder now than it was when we first listed because the interest costs are higher. Our interest costs, I remember one of our banking arrangements. We actually had a floor on the interest rate so that it couldn't go negative. But that was the sort of period that we were in and money was much cheaper. And in spite of that, we were still delivering 12%. We're now at a higher interest rate. But of course, we've got that debt in, we're generating cash really well. We'll continue to -- I mean the track record, I don't think there's a year in -- since we listed that we've been under 90%, was a 99% one year. I think the track record. And of course, that just brought a high degree of confidence if we're proposing new acquisitions and maybe pushing the debt level slightly higher than 1.5x. So yes, I think the one point that's obviously in continuing with the compound EPS is we're going to need to do more or bigger deals. And it's quite helpful that we've just done our biggest deal to show that we can. But that's going to be the challenge. But I just think it's a component of 1/3 organic, 2/3 inorganic still. And if the organic can grow a little bit faster, that would be helpful. But back to that, hopefully, conservative over time 3% to 5% range. David. David?

David Farrell from Jefferies. Just following up on that point. Obviously, from an M&A perspective, you've got a dominant position in the U.K. and Australia now in residential. Is the increased focus on commercial, the fact that actually if you want to grow it the 10% top line growth, you actually have to grow either more in European residential and now giving yourself the option to grow in the commercial market where you have such high market shares?

Yes. I said at the beginning just having more optionality but not losing our focus. It's so important. I have been and completely aligned with the Board. We want to be a ventilation leader and focus on [indiscernible] because there's no point bringing stuff into the group that we then can't improve. We've got a high bar in terms of return on invested capital. And if we can't improve things, then why do we believe that we're the right next owner for an opportunity. But you're right. In U.K., we are underweight in commercial. I think it's an organic play. There's an opportunity to do better there. But if the right opportunity arises in the U.K. for commercial, we'll avail ourselves of that. And the nice thing is we've got to slot it into an infrastructure that works really well. Credit to the way our U.K. finance team has consolidated all of the sort of back office and that works really well. So bringing in other brands would be complementary. I think that interesting one in Australasia because we probably could do more in the resi space. I think we're probably more dominant in the commercial space. So the resi might still have opportunities. I think in New Zealand will be a little bit more difficult now. And then Continental Europe, we are still materially underweight in Germany, in France, in -- not in Spain. So yes, lot to do more in Europe. And look, over time, I think it's early days yet, but just maybe thinking about other geographic areas over time. But look, at the moment, we're still -- we saw a relatively small market share, and there's still plenty to go after. And having that commercial -- demonstrating that we can add a lot of value through big commercial acquisition, I think it gives more confidence to do more in the future.

I've a follow-up question for Andy, just on inventories. Obviously, to release some cash there again in the first half of this year. How much is there left to go on inventories? Or is that pretty much it?

Yes. There wasn't -- it was a nice reduction in the first half, but it wasn't dramatic. It's about GBP 1 million or so organically if we strip out the acquisition piece. So there are parts of our business still where we think that people have got a little bit too much. But it's not profound or it's not profound to the level at which we're going to have too much focus on it because I think the problem is if you overstress that as an indicator, people have a nasty habit of cutting down the inventories that are easier to cut, which tends to be the stuff that you sell more of, and that's the last thing we want to do. So it's a careful balance. Are there bits that we could still do a little bit better on? Definitely. Fantech carries quite a large inventory, which is, again, partly a function of geography because the long supply chain to get to Australasia, same our existing business there. But probably, they could be a little bit tighter on it, too. So I think we'll just carry on looking for small optimizations, but it's not going to be -- I think we said 2, 3 years ago when we had the big inventory put in, we said, look, we can probably nudge it down period by period, but we're not going to crash it down because that could have an unintended consequence.

Rob Chantry from Berenberg. Just three questions, so two on Germany and then one on M&A. So in Germany, could you just try to comment a bit on how much is market versus focus? I think was there an internal management change in the terms of the business, has that had an impact? Secondly, also in Germany, obviously, this kind of relatively early stages of a recovery there. Can you just comment on, I guess, the products and channels that are moving first and are working kind of leading that recovery? And then thirdly, obviously lots of progress on M&A. How do you -- would you ever consider the U.S. as a geography to go into in any material way?

Okay. I mean, Germany, we are one of the leading providers of what we call decentralized recovery with a route that supplies direct to contractors and is specified. And there wasn't an internal change in local management, but it's a part of the regional structure now. So Koen Groenewold, who we hired to look after ClimaRad, but we now own 100% of, runs a larger region that includes Germany. And I think that's eminently sensible because the ClimaRad proposition is decentralized heat recovery and we think there's cross-selling opportunities into Germany and vice versa. We had intentionally pivoted a little bit more towards RMI over the last couple of years because of the challenges in newbuilds. So I think those -- that pivoting towards RMI, some new product innovation quite detailed now, but we bought a new -- it's all into market about a year ago, we brought some new sound installation products, and that's really important. If you're retrofitting heat recovery in areas that are in the city, close to railway station, noise ingress that was a gap in the product portfolio. So I think some good tactical plays. And I know we're further professionalizing our approach through our agents. So I think all of that has been helpful. I believe our early more recent success in Germany is as a result of self-help and maybe the market gets a little bit more helpful for us next. But I would say more generally, the market is still tough. New build construction is still very low. And typically, as we talk about in almost every country in Europe, now there is this housing shortage and they do need to build more homes. So I think that could be helpful. Andy and I can sort of talk about this next question on M&A. I mean, look, we still -- we don't want to lose focus on the markets that we're operating in. And clearly, there is a big North American market. And we've started to do a little bit of sort of early investigatory work about the opportunity. I think there are some niche plays there around heat recovery ventilation that could grow in the U.S. or certainly in Canada and so forth. And so it just makes sense. If you think medium to long term, then if we carry on growing at 12% compounding, then I think that doubles the size of the business every 6 or 7 years. At some point, we're going to have both the firepower and maybe the requirement to look at other geographic areas in order to support our ongoing growth ambition. So yes, just sort of tentatively, but not -- it's not -- we're not expecting to turn up with the next acquisition in North America, but I would be remiss not to sort of think about how that fits in the bigger picture I've drawn.

Charlie Campbell, Stifel. I've got two actually, just to sort of pursue the commercial theme a bit more and the M&A. Presuming that's kind of margin dilutive, we've seen that in the past. Should we therefore think about the 20% operating margin target is kind of a floor, therefore, as commercial kind of picks up, that you wouldn't want to see it much below that? Does that also mean kind of we should think about kind of the M&A spend accelerating as there's presumably more options in that space? And then the second question was about indoor air quality. Obviously, a lot of the regulation changes to now seem to be about energy efficiency and also mold and not so much about indoor air quality. Just wondering if that might change and whether that maybe means more kind of monitoring and that kind of thing in the group when you need to...

Yes. So commercial, say, so is it margin dilutive? I mean, probably more commercial businesses will be lower than residential businesses, I agree. We've always used the word nation, as we said, Fantech is perhaps not a niche. But what we have also said is there are really big industrial low-margin, massive -- handling that's not going to -- that's not our bag and it's never going to be our bag. Why was Fantech really, really appealing aside from its size and its performance, but actually, it's got really good fundamental financial characteristics. Had that been an 8%, 10% margin business with no obvious prospects of it moving forward, it probably wouldn't have been of interest for us. So I think they might be slightly margin dilutive, but we would not be likely to pursue something that was materially lower than the group margin without a route to improve it. And I think the route to improve tends to be easier in residential because there is more product synergy. The products are smaller, you can move them around more. The procurement synergies are more obvious, as we said to the earlier question. The cross-selling type opportunities on Fantech commercial are going to be limited. So had that -- if it needed a massive gap to make [indiscernible], it would have been less attractive. So there might be a small amount of dilution if more commercial came in. But I think I wouldn't overthink it because we won't pursue things that are materially lower that can't improve. 20% is a floor -- language, isn't it? Is it a floor? Is it a target? I mean we've always said why we're not going to up the target. So if that means it's a floor, then happy for you to use that language. We just carry on looking for the routes to improve both the existing businesses and newly acquired ones. Will M&A accelerate? Well, hopefully, just by dint of if you were to carry on drawing the graphs and go 12% per year, you're throwing off more cash and therefore, you've got more to spend. I wouldn't say it's -- we are delighted that even after doing something which is materially bigger than anything we've done before, we still look at the balance sheet now and go if the right thing was there tomorrow, we'd happily go ahead and execute it. So look, I think the opportunity is there. We will have to do more in total Pound notes to carry on supporting that growth, and we think the opportunity is there too.

Great question on regulations and energy efficiency and driving that has been supportive. But the indoor air quality awareness, I've been in this industry now for 17 years. I joined in 2008, and we talk about indoor air quality in a way that we never did previously. And some of that is -- for example, in the U.K., we're benefiting in residential new build from cooling, a part of building regulations, overheating risks. And we've got a very, very good cooling arrangement. I saw them fitting it the other day in the factory, and I looked at all the component parts. And thought this is a strength of ours because there were bits coming from Belgium and bits come in -- and put into a box and providing a cooling solution. And I think that's just the strength of our product portfolio and how we exploit the opportunity we take solutions to our customers. Indoor air quality, mold and condensation, a big program on Panorama a few weeks back. It's still in a bad way. It is an impact on your health. So I think this health issue is gaining traction. But I said this throughout, we just have this gentle tailwind that every year gets a little bit stronger. And it's not boom bust. And I don't want it to be. If all of a sudden, we had a whole lot of regulatory changes that when for stellar growth over a couple of years, we've been inevitably coming back later. So I just do not see anywhere in any jurisdiction where regulations become less helpful. They just become more helpful over time with more of an emphasis on indoor air quality and monitoring and so forth. We talked about apps -- and that's becoming important because consumers do want to see or visualize what's happening.

Okay, Christen.

Christen Hjorth from Deutsche Numis. Two for me, please. Just first of all, just trying to get a sense of this underlying market recovery potential that you have obviously grown nicely, but markets have been challenging. Should I think about the 1/3 that house building will just recover perhaps you get your outperformance on top of that? But the 2/3 RMI, I suppose you've had that social housing structurally higher in the U.K. And just generally where you think that is? And I think you get a similar question to this every time, but given the U.K. margin keeps on ramping up. Are you seeing anything in terms of competitive backdrop and changes -- you obviously got a really high margin at pretty low capital-light base? So you think that maybe attracts some new people in the -- that's my two.

Yes, good question. The way we look at our margin is, our margin is because we are selling at a higher price than everyone else. I guess what I'm arguing is we're executing to be more effective. So in actual fact, we brought some very competitive solutions to house builders because we know that they demand competitive solutions to solve their problems. But earning decent margins off the back of it, but satisfying the customers' needs and not leaving ourselves unduly open to attack from existing or new competition. I think the competitive landscape, particularly we talk about the U.K. is the same brands in the same sectors doing a better or worse job as we go along. And of course, tactically, we're competing with them all the time. New entrant wise, I think the barriers are quite high for us and for others. So I don't see -- I'm not going to go into explicit detail, but I could. If I look at the competitive landscape in the U.K., there are fewer competitors, but still very strong ones, ones that we admire and we respect greatly. And this is the sort of mantra that I demand internally is that we have to be at our best. Customer service has to be excellent. Quality has to be excellent. Innovation and closeness to regulations. And I think we've got some advantages there just in terms of our association with the trade body in the U.K., our insights about regs and also the read across. We're able to look at what's happening trends. We sat with the team in Australia talking about what's happening in different markets. And we have a very, very good sharing, the business development director, Lee Nurse. He's got double the experience in this industry that I have, and I'm catching up. But the way we share this knowledge about tactically what we do. But competition is there. The space is attractive, and we take it very seriously. And I mean, on the margin piece -- sorry, on the wider market piece, you're absolutely right, residential newbuild volumes are not great. Although some of the noises from house builders are definitely better. And government's trying and if the regulatory framework improves, and we get actual cost of mortgages, then maybe, maybe there is a bit of a recovery coming in later in that sector, and we would absolutely benefit from that. And it's been our fastest-growing area already. So that would be most welcome. Social housing refurbishment, there's still an awful lot of work to do. I mean I'm nervous about Awaab's Law that goes live in October. This is a 24-hour remedial requirement to distress properties. I mean social housing, they're also already struggling to keep up, and that's only going to flip the switch and make it harder. But we're there to support them. And I think we've got some great solutions doing a really good job there. And look, private RMI demand isn't particularly strong. It's the cost of living, and it's not particularly great. What we try to do is upsell. I've always said this, ventilation in your home doesn't have to be noisy. We can help you out. It can be more silent. It can be more energy efficient. It can be better controlled. And the premium that we charge for the product is relatively small compared to the install cost. Almost not noticeable as part of your install. So that's the self-help piece and how do we keep going. Because as you're quite right, you say, Christen, the markets are -- they're okay, but they're not easy, definitely not easy. Toby, we've got to stop on the half hour. So we do -- we've got time. Sorry.

It's only one question, but quite a broad one. Can I bring you back to U.K. margins, please. Eye-catching number. Gross margin improved by 260 basis points from a decent number or red, you're just extraordinarily good. Can you just give us a bit more insight behind that, please. So obvious place to go is lower raw material costs interested in that respect. How much the recycling content increases contributing to that? I'd also be interested in sort of vitality index, if you like, for the U.K., if that's a number you track whether that's a material contributor to the improvement also?

160, wasn't it?

Yes.

I'm sorry -- sorry.

I think in terms of the gross margins, operating margins you talked about raw material costs and I'd say product cost is super, super important to us, but don't think about it as some sort of tracking of commodities that just ebb and flow. It's absolutely through a procurement driven strategy, engineering and procurement driven strategy just to say, if we're bringing a new product in, setting a really clear cost, to Ronnie's point about, we're not -- it's not that we're selling for a lot more than anybody else. We're saying, if we're going to develop that new product. This is the cost that it's going to come to market at. And if our teams bring it forward and it's not hit that cost, they've got to carry on work until it hits that cost. It might maybe it takes a few months longer to get there, but that's better in the long run. So really -- being really, really diligent on the engineering and the design, not putting in anything. Putting in the right functionality and the right features, but not putting in stuff that effectively the customers are not paying for that costs money. Looking at how well we can source things and of course, hopefully, outsourcing opportunity only gets bigger as the group gets bigger and the aggregation of spend gets bigger, and we can sort of play that size piece. Going back around on pre-existing products and seeing if we can improve their cost through engineering and redesign and tweaking and changing of supplier or component input without changing the functionality and the improvement of it. While you were on products, you talked about vitality index, we don't track or follow that. We believe in bringing good innovation to the market at the appropriate pace, but it's not a market that demands lots and lots of change all the time. Recycled is helpful, absolutely. So recycled plastic is cheaper than virgin and it's also not gotten the volatility of virgin. And so that's helpful. But I think it's a lot of small things done very well rather than one massive lever that sort of changes it dramatically, which hopefully also means that it's more sustainable because it's not something that then flips back to the main.

OEM was dragged in the first half of last year as well. We've obviously consolidated two facilities into one. But as Andy says, we -- it won't come as any surprise to you that we track all of these initiatives in intimate detail. I said it's part of our DNA and I want to say I mean the wider organization. We've got a strong U.K. management team that are holding themselves to account. And you can see it's not price. We talked about our price improvement over time. It's been relatively low. We have got some price increases going in now because we've got inflationary headwinds around national insurance and people costs and facilities costs. One of the things I've noticed, we leased quite a few of our properties in the Southeast of England and property lease costs have gone up substantially, but that's already largely included in our numbers. It's just little and often that desire to seek out to be as good as we can be. Okay. Brilliant. Do we have any -- no questions on -- Perfect timing. Look, thank you very much for your attention. We're really delighted with our first half year results. We think we've got good momentum, and look forward to seeing some of you in a bit more detail during the course of the next week or so. Thank you. Thank you.