Victoria (LSE:VCP) — Business Update & Key Preliminary Unaudited Financial Data for the year ended 1 April 2023

0:01 Good afternoon, ladies and gentlemen, and welcome to the VICTORIA PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so, and these will be available via your Investor Meet company dashboard.

0:33 Before we begin, I would like to submit the following poll, and I would now like to hand you over to Executive Chairman, Jeff Wilding. Good afternoon, sir. Good afternoon. So thank you everybody for joining the presentation. And before we get into dealing with the results, I'm just gonna talk briefly about the other one in the room, which is the delayed audit. Clearly, as a board and management team, we're very, disappointed in the delay. And it's it's not we we we expected or wanted to see, But, nonetheless, it will be completed in in the near future. What I wanted to emphasize, though, that it is purely routine audit procedures that are being finalized on the business, and it includes things such as and I'm just gonna read the list to keep it very simple. There's only six items.

1:31 Testing and valuations of goodwill, some complexity around the reverse carve out of Balta, testing around finalizing property, plant, and equipment valuations, finalization of pension work, finalization of hyperinflation adjustments. This relates to the business that we have in Turkey, testing of revenue and compliance with regulations of a minor subsidiary, finalization of tax work. So the work that's outstanding is just routine order procedures. So with that, I'll now want to move on to the results that we achieved for the last five FY '23. It was obviously a very difficult year in terms of the macro environment.

2:19 Demand was subdued compared to the previous twelve months. There was inflation. We also had to deal with extreme energy prices during the year. It's easy to forget now. But this time last year, energy prices were running at 2 to €300 a megawatt hour for gas in Europe, and that as opposed to a normal level of anything around 40 to €50 a megawatt hour. Nonetheless, Philip and the operational management team managed to achieve organic growth in the business and achieve revenue of 1,460,000,000. Of course, that does include the acquisition of Vaulta and and and EBITDA of 196,000,000.

3:07 Primarily, the focus of the management team in the last twelve months has been the integration of the acquisitions we've made in recent years. The biggest of these, of course, being Balta. And although I'll leave Philip to talk about the detail of that with you shortly, the the, excuse me, the the workers involved closing a factory in Belgium and moving our copper production to The UK. It's also involved consolidating the rope manufacturing in Belgium onto a single site and also moving some of that rope manufacturing to Turkey. The savings on that that will result from that will be very material.

3:55 I'm pleased to say that when we first announced the acquisition of Balta in April 2022, we said that the integration work would take two to three years. However, here we are seventeen months later and we expect that work to be fully completed next month, eighteen months after, so six months faster than the earliest of our initial expectations.

4:21 Now what this means, of course, is a considerable saving in terms of labor costs, a improvement in operating margins, and the impact on our earnings will be at least £20,000,000 a year in terms of EBITDA, EBIT, and net profit before tax. So what this what is going to result from this is obviously our cash flow will improve and as will earnings, and we're expecting in the current financial year the the consensus numbers in the market, which are I think EBITDA is 214,000,000 is the consensus EBITDA.

5:07 That is entirely based on self help. We're not expecting any recovery in demand. That's a steady state demand even though in recent weeks, we have started to see an increased demand increased volumes coming from customers. However, the focus will be over the next twelve months on reducing leverage. We we expect to be very cash generative this year and next year with with the ending of the exceptional expenditure on redundancies, the exceptional CapEx on relocating plants and machinery with the finishing of these integration projects, and we will be applying that to reducing leverage.

5:53 As most people will be aware now, we have a call option on the preference shares beginning in in November 16, and we will be exercising that call option using the cash that's been generated from the business, and we will be

6:10 we will be buying back a significant portion over the next year or so of the preference shares. We will also look to buy back bonds as appropriate with a goal of reducing the company's overall leverage well before the refinancing that is required just in three years' time in July 2026. So with that sort of summary of background, I just want to hand over to Philip to take you through the key operational activities that have occurred in the last in FY twenty three. Okay. I think Brian will do the the final piece of next question. Okay. Thanks, Jeff. Good afternoon, everyone. I'm pleased to present a few slides on what has been another record year for VICTORIA.

6:59 I will run through some of the financial highlights of the last twelve months, and then Philip will take you through the detail on each of the divisions. As Jeff said, it's been another record year for VICTORIA with underlying revenue close to 1,500,000,000 and our EBITDA close to 200,000,000 in challenging economic conditions that we've had this year. And this slide here shows the exceptional growth track record achieved over the last five years with revenue growing, a compound annual growth rate of 28% and EBITDA at just under 25% through a mixture of organic growth and acquisitions. We completed three acquisitions in the year, the largest being the Carver and the Rubber's and Broadleaf business, Valsa, based in Belgium, which completed in April 2022, along with another small complementary products manufacturer of Regal also in Belgium, which completed in June 2022.

7:48 These acquisitions now make us the largest software manufacturer in Europe. The final acquisition of the year was IWT, a distributor of ceramic tiles based in the high growth state of Florida in The United States, which complements our acquisition of Cali in the prior year and adds to the significant sales of Delta Rogues in The U. S. Market. We'll move on to the next slide. This bridge is the overall group margin from FY 'twenty two to FY 'twenty three. And as you can see, we finished the year with a group underlying margin of 13.4. On this slide, we've isolated the impact of acquisitions on the results and this acquisition mix effect comes about as we tend to buy businesses with lower margins in their own. And during the integration period, we expect to see a drag on the overall group margin as we complete our synergy projects.

8:37 The most significant impact is in Europe and UK and Europe soft flooring division as we finalize the integration of the Valtz acquisition. Valtz is being fully integrated into our industry leading scaled operations this year and will provide us with significant opportunities in The UK and U. S. Markets. In terms of organic growth, our businesses have addressed challenging environment in terms of demand and inflationary pressures in raw materials, labor and energy to deliver somewhat organic increase in margin. This was achieved by implementing price increases where necessary, being laser focused on cost and synergy initiatives, hedging or managing key input costs were available and working on product engineering with our customers to mutual benefit. Before I hand to Phil, just a couple of things on the overall group performance.

9:26 Revenue growth was over 43% in the past year and 2.8 on a like for like basis when you exclude the impact of acquisitions and foreign currency. And this has resulted in a 33,000,000 increase in the underlying EBITDA year on year for the group. So I hand you to Philip to go through the detail. Okay. Thank you, Brian. So I'll talk you through operational FY 2023 and give you some heads up on the outlook of the current financial year. So first of all, The UK and Europe soft flooring division. This is the largest division, which is mainly UK driven, where we are selling carpet, underlay and LVT. We are manufacturing UK as we are a distributor in UK as well. So the profitability, as you can see, was lower in FY 2023. But as Brian just has explained, the dilution effect of the bulk acquisition has an important role as well as the the inflationary COGS, which have been addressed in.

10:32 So the year in this division, the year was dominated by the Baltic integration. And for the ones don't know and who are on the call, Balta is a Belgian tuft tufted and woven rux manufacturer with revenue of about €350,000,000. So what we did with that with with VOLTA, so we bought and acquired VOLTA mainly for the rep business. And, yes, there was a broken part, so a corporate part there, but that was not the prime objective of the acquisition. We bought it for us because we do a lot of hard flooring in the group, and we know that hard flooring comes with rugs, and rugs we can see a good potential growth in the in the rug market.

11:20 So what we have to do, and we knew that when we acquired it, so we have restructured the Vault operation, and we have closed one plant in Belgium, as Jeff has mentioned in the introduction. So the plant which was closed so some of some of the machinery was relocated to another Belgian plant, and some was relocated to one of the all the two Turkish plants which we have in in the business. On the growth room side, on the corporate side, since 80% of that was of the revenue goes to The UK, we've decided to stop that operation and manufacturing of of broken of carpet in in Belgium and to push it forward to one of our two manufacturing sites, which we have in in The UK. One we have in the South Of Wales and one we have in Yorkshire.

12:15 So this process has has led the Boulder destruction has led to laying off about 500 people. We have conducted two social plans in Belgium, which have led to exceptional cost, which Brian has referred to. But it has, as Jeff has mentioned, this has come to conclusion. The people have been laid off. We have stopped manufacturing already in Belgium for the problem and we are fully testing already product in The UK in one of our two plants. If I go to our second largest division, this is UK and Europe ceramic tiles. Yes, we've seen some softer demand and of course, they have also experienced the inflationary pressure on the cost of goods sold.

13:06 So but you've seen, if you look at the result, we have a very positive result there. We are up four ten basis points. And if I look across the geographies,

13:17 so what we can say so the the management team has done a fantastic job in ceramics. First of all, they've done the value engineering on the product. So they make the ceramic tiles. They make them thinner. They make new product out of it. So which has led to an efficiency gain on the clay on the one side and also, of course, on the energy because we are just making more products since the the ovens can run faster. The products can run faster than than the oven. So the reformulation of towers was something which was done with the full knowledge and quality guarantee with customers. Also, and we've said that last year as well, you all know that there was a hedging policy in place and careful hedging policy was continued in FY twenty twenty three as it discontinued in FY 2024.

14:14 And we've also been aggressively selling and basically trying to leverage the distribution which we have in The US. In the meantime, we have four distribution warehouses in The US. We have one distribution warehouse of our ceramics distributed, which we acquired last year in FY 2023 in Florida, so in Palm City. So and then another component of The U. S. Business is Cali Flooring, which is an omni distributor an omni channel distributor in The U. S. And they have a warehouse in Charleston. And then from the Malta acquisition, we have two extra warehouses on the East Coast. So this gives us four warehouses and of course, as you can imagine, we're trying to push forward products in into these into these through to these warehouse. So we have we have a pipeline and we we try to to sell more product in The US, which is Europe manufacture.

15:16 And of course, the in the business, not only the restructuring we've done in Belgium in the corporate business, but we've also done some restructuring in the the tire business, mainly in Spain where we've closed also one factory. And in Turkey where we have stopped producing on some short kilns, which were not very productive. Then two more divisions to come, which are the smaller divisions or the group of the group. First of all, there is Australia. Australia for many years has been a constant factor in the group. They're pretty small, and they have suffered some of the same inflationary pressure, which they have dealt with through price increases, and the demand has been pretty constant. I just want to remember that coming out from the COVID period, they were later out of COVID period,

16:11 the demand was still pent up. So and part of that, we've seen in FY 2023. So they have been delivering on a steady state. So FY 2022, the LVT, so luxury vinyl tile market in Australia was a bit down for us, but we've nicely recovered in FY 2023, we came up with good numbers in LVT as well. So Australia was good in the past year and it's going to be good in this year as well. Then final division is North America. Okay, I've told you what we have in the as a distribution facility already. They like to buy European products.

16:57 And, of course, as I said earlier, we are trying to push more of our product, and this is mainly works next to ceramic tiles and artificial turf through the distribution channels which we we are having.

17:12 Good. So I think this is I would like to to use the time since we we may be running out of time, so I would use like to use the time to go to give you a bit of an outlook of what we are currently seeing as we are in the fifth month of our new financial year. So overall, we can see the inflationary pressure easing in raw materials when we speak about

17:38 the the tough market. So let's say, the soft volume market and we speak about which is mainly acquired in Turkey. We can see that the prices are much lower than in FY '23. So this will definitely generate upside. We see the same effect as well as of an inflationary easing in the ceramic business with the clay and wrapping and plastic and different other components, which are in a cost of goods sold, not to say energy. Of course, energy has is has a much at a much lower base as well. So this is helpful. And and, yes, we're getting pressure from the customers, but there's also the inventory turns and and we we are pushing back to customers. You've seen that we've been working on the productivity, so we don't want to be pushed to fill up the factories. We try to protect the bottom line as we go forward.

18:31 Energy, I've been mentioning, and of course, we've done in the previous year multiple price increases, which were needed to cope with the inflationary pressure. So in terms of demand, the demand outlook, I can see. So if we're talking about UK in the demand, so in the first quarter of next year, so April, June, we've seen that the business was at very good level still in UK, albeit a bit less than the previous year, but we've seen in the last weeks that we are selling more carpet today than we did last week. So the business is definitely in a recovery mode in UK. We haven't seen the full effect of that yet in The US on the rep side, but there'll be accounting on the top season, which is starting in September, let's say. So we should see effect of that in the second half of this year.

19:30 Especially something that I want to mention is the the end customer visibility which we're having in The UK. It is very important. So because we're not selling to the middleman or to the the wholesaler, let's say. So we are mainly working directly

19:47 with the the retailers, whether that's big box retailers or independent retailers. So we have a clear visibility. We're shipping about 20,000 order lines per week to our 240 vehicles. We have our own distribution in The UK, and we have a good visibility. So in order if we we have good evaluation of the footfall, which which is which is there and we can see, we are very confident in what we see coming into these numbers. So there's another slide on the integration of bottlenecks. I've dealt with that in ceramics as well. There is one little pirate out there on. Okay. This is mainly trying to to push the logistic The US logistic platforms, trying to incorporate the logistics platforms across the group.

20:39 And maybe there's another slide, Brian, but maybe you will that on cash generation. Yeah. So yeah. Thanks, Philip. So what does Office mean in cash terms? We've gone through a a period of high spend around the integration of the projects that we've had. Jeff mentioned the projects right at the start. We're coming out of that now. We have we have some some spend that we spent so far in FY twenty four. As Jeff said, finalizing the Valsa acquisition. We've also had the non normal, the high level of of CapEx in relation to moving these the equipment of some of these plants into the right place. So what we expect to see is an upturn in in the earnings and also an upturn in the cash generation. One area of focus, we mentioned this at the half year was around inventory management and working capital management, and the business has made some good progress on that so far in FY 2023 and continues that into FY 2024.

21:37 One other area that we mentioned at the half year was around the integration costs of Valsa. We expect those to be pretty much offset by the sale of noncore assets. We have sold one building in Belgium where cash will arrive in in September, and we are looking at to make sure that our property portfolio is is the right size for us. We will continue where we have gotten on core assets to to generate cash and bills. And then as a board, we just we we have a proactive view of our capital allocation. And as a predictor of project comes up, we look at that on that individual basis to make sure that we're doing the right thing with our cash to generate the best value for our shareholders. And then overall, we expect that the our ratio of leverage will will start to come down as we generate cash, as we pay down debt.

22:28 With the current high interest rates, we are looking to reduce our overall leverage, which we've been comfortable with for the last number of years. And we'll do that, as I said, through increased earnings and also through through reducing debt. And I think just finally on this slide, one of the options that we have from a capital allocation point of view is whether we buy back the preference shares. They they come open to redemption in 25,000,000 blocks in November 23. And that along with other allocations of our capital such as buying back bonds would be something that the board will keep keep a continuous eye on. And with that, I'll hand you back to Jeff. Okay. Well, this ends the presentation component, and we'll now open it up to the Q and A.

23:14 Jeff, Philip, Brian, that's great. And thank you very much indeed for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab that situates on the top right hand corner of your screen. But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. Guys, as you can see in the q and a tab, we have received a number of questions throughout your presentation this afternoon, and thank you to all of those for submitting their questions. But, Jeff, if I may just hand back to you to chair the q and a with the team, and then I'll pick up from you at the end. Thank you. Alright. Well, look, as as was just said, there's quite a number of questions. I just wanna preface the answers that we give with the fact that some of these questions I can see asking nonpublic inside asking for a nonpublic inside information. Clearly, we can't answer those questions. It's not appropriate.

24:14 And so there may be some questions we end up either answering only partially or not answering at all because we want us obviously, we need to stay within the regulations. So the the first question is asking about whether we are going to buy back bonds before we refinance or just for preference shares. As Brian said in the last part of his commentary a couple of minutes ago, we're always looking as a board, we are always looking to optimize the deployment of our free cash flow to maximize the creation of value on a risk weighted basis. So initially, it would be fair to say that in November, we would expect to be buying back some preference shares. That is our expectation.

25:03 However, we all we will not be buying back all of them. The intention is just to significantly reduce the amount that we have that are currently issued, and then the we would deploy our capital elsewhere, including buying back bonds ahead of the ahead of refinance. Sorry. Just give me a pause too. We've been asked about where Victoria's head office is. The head office is formally now in Worcester, and that is also where so head office is based in Worcester, and the Ketterment's site has been completely closed where the company's been for the last thirty or forty no. More like fifty years.

25:52 The Ketaminster site is now completely closed. Head office is in Worcester, and that is also where our Alliance Logistics operation is headquartered. Although it's also worth noting that Alliance has a number of other warehouses around The UK in order to maintain the service levels that our customers require. So, Philip, do you wanna ask the question about how fragmented the market is across the because it depends on which country we're talking about. Yeah. Is that soft loading or workflow? It doesn't matter. It's everything. It's Yeah. So first of all, in terms of if we talk about ceramics, the fragmentation of the market, it's it's it's massively fragmented only in Europe. I think there's about three hundred and three hundred and fifty suppliers.

26:43 I think even the largest one has a market share of about two to two and a half percent. So very fragmented. The if you compare that with soft loading, that's a bit less fragmented. So let's say there's about major manufacturers, six, seven larger manufacturers left of groups left, which are dealing with the The UK market. It was okay. Mainly when we talk a bit, so I just want to reiterate that when we talk a bit, we talk mainly carpet into The UK market and into Australia. That's where we're having plants. And if I say carpet, I'm talking rotten, not rugs. If we're talking rugs, we are talking for 50% US market and 50% non US.

27:32 Yeah. Anything else there? There's also a question on talking about current demand and volume and price development. Maybe you can expand a bit further on that. Well, I think I've I've touched on demand and definitely in UK, so I don't need to repeat that. So but maybe in in ceramics, we can see that the ceramics business, especially the component from Italy where we're doing most of the DIY business, it's still going strong and strong and from strong to from strength to strength. So we are we are okay with the current demand. Let me see what other questions.

28:17 I'll just keep scrolling down. There's a sorry. We just there's a whole pile of questions just asking about what current demand is like, which looks on. So I'm just trying to scroll through those. Okay. Sure. So somebody has asked just for a bit more color around why we would buy back the preference shares. And I just want to emphasize that it's all about deploying capital to maximize the value of VICTORIA on a risk weight basis. And the preferred shares carry a carry a dividend, which is so they're they're not free and by end, since we have the free the free cash flow, it makes sense to buy them back.

29:06 Having said that, Coke, I just want to make clear, also holds about 11.5% of the ordinary shares, which is where they expect to make most of their gain, and so we have a Coke director on our board who has also is supportive of us buying back the preferred shares, and I want to make that clear that this is Coke have been a fantastic partner for us. They will continue to be in the years ahead, and the relationship is very, very strong. They are they they've been extremely helpful in get in helping us to grow in The United States, whereas I think Philip mentioned earlier, our revenues now, they are around $400,000,000 a year, and we expect to see significant growth going forward.

30:06 You've covered most of those. Yeah. Sorry. This is there's an enormous amount of repetition. I appreciate everybody can't see that, but I'm scrolling down. So there is and I there's a question again about assuming that the market just stays at current levels rather than recovery in demand, how confident we are in the outlook for our numbers, I wanted to make it really clear that the numbers and in our the f y twenty four and and f y twenty five numbers that are in the consensus for the the city consensus numbers do not incorporate any recovery in demand. We are assuming flat demand.

30:53 The uplift in earnings that you or the increased earnings you can see in the f y twenty four and f y twenty five in the consensus is based purely on self help. Philip mentioned that we have made more than a thousand people redundant in the last twelve months as a result of the integration projects, and so those salary costs no longer being paid, and that's the and that plus a few other components around productivity improvements in the factories as a result of the integration is what's driving the uplift in earnings. So in the it's our expectation that if there is a recovery in demand, every 5% improvement in revenue would lead to a £25,000,000 plus increase in earnings.

31:44 Now the reason I've chosen 5% is that happens to be the long run average organic growth rate of VICTORIA. So none that is not built into the numbers again, but should recovery recovery happens, every 5% increase in revenue will drop through to a 5% in to sorry, to 25,000,000 improvement in earnings and 25,000,000 improvement in cash flow. There's just a quick question about the coupon on the preference shares. I think it's 8.358.35%. I think that's pretty much the last question. Yes, it is. Well, sorry, there's a question about headwinds to earnings from energy hedges. I just want to make it clear that we the way we structure our energy hedges is and energy contracts is they're rolling.

32:41 We we don't have a drag on earnings. So in other words, we are not contracted to pay higher than market prices in f y twenty four for our for our energy costs. So the the short answer to the question is there is no drag. Yeah. Wanna take the last question, Jeff? That's it. That's it. Alright. Well, thank thank you very much. And that's the end of the presentation. And, of course, if anybody wishes to submit further questions on, we'll be happy to look at them and provide answers in right through the through through your investment company. Jeff, Philip, Brian, absolutely. And thank you very much indeed for being so generous of your time there and addressing all of those questions that came in from investors this afternoon. And, of course, as you kindly just said, we will be able to give you back all of the questions and any further questions that do come through just for you to review.

33:38 And, of course, we'll be able to add to those responses when we publish them out on the platform. But thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of VICTORIA PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all. Thanks very much. Thank you.