Overview

We have reported a strong performance in the first half of the year, and I want to congratulate our valued colleagues in delivering these results. Our end market activity continues to be characterised by a greater proportion of revenue in providing refurbishment solutions for buildings with, approximately 70% of our revenue being RMI and 30% being in new build applications. A growing focus on decarbonising buildings, the impact that poorly heated and ventilated dwellings can have on our health and a greater awareness post Covid-19 of the inextricable link between good ventilation and healthy homes, is providing a structural underpinning to the long-term revenue trends across our Group. Despite the uncertain global macroeconomic environment, we continue to see a widespread willingness and funding support to invest in good quality ventilation for buildings.

During the first half, our teams successfully navigated supply chain interruptions and inflationary pressures and our customer service levels have been exemplary across all areas of the Group.

I am immensely proud of the progress we have made, not just with our financial performance but also with the key sustainability initiatives that our colleagues champion daily. Progress with recycled content in our production, the proportion of our revenue that is from low carbon products and our improving health and safety performance are some of the highlights of the first half of the year. Well done and thank you to the Volution team.

The strategic investment we made in component inventory in the last two financial years has helped us not only deliver excellent levels of customer service but also allowed us to respond more quickly to some encouraging demand growth opportunities, most notably in the UK refurbishment market. The inventory investments made in prior years have now normalised and we expect inventory levels to remain reasonably constant, relative to revenues in future, well positioned to support our organic growth initiatives.

Our pricing discipline and relentless pursuit of improving efficiency, coupled with tight cost control and initiatives to reduce our material costs have resulted in an adjusted operating margin of 21.1%, in a period when inflationary pressures have been significant.

Across our Group we have started to see material cost inflation pressures subsiding, although facilities and labour cost inflation pressures remain. The impact of these costs has largely been mitigated through higher selling prices, higher factory volumes and improving levels of efficiency, in several cases underpinned by investment in new plant, tooling and equipment.

With excellent levels of customer service across our group, and our supply chains now in good shape, our innovation and product development teams have been focused on the launch of several new products planned for the second half of the year including new MVHR (mechanical ventilation with heat recovery) solutions for both residential and commercial.

Results

Adjusted operating margin was consistent with the last two full financial years at 21.1% (H1 2022: 21.3%).

Revenue grew by 8.5%, 7.5% at constant currency, with revenue growth in all three of our geographic regions enabling the Group to deliver organic growth of 6.3% on a constant currency basis.

Our adjusted operating profit increased 7.1% to £34.2 million in H1 2023 from £31.9 million in the prior period. Reported operating profit was £27.8 million (H1 2022: £23.3 million).

Adjusted operating cash inflow increased to £30.6 million (H1 2022: £16.2 million) as inventory levels normalised with a cash conversion rate of 88% (H1 2022: 50%). Our balance sheet is strong, with leverage (ex-leases) at 0.8x, giving ample headroom to make earnings accretive acquisitions.

In the first half of financial year 2023 we acquired the remaining shares of ERI Corporation UK Limited for consideration of £0.4 million. Our pipeline of potential acquisition opportunities is encouraging, and with our balance sheet strength and headroom, we are optimistic of being able to add further earnings accretive acquisitions to the Group.

Focus on sustainability

Our purpose, to deliver "Healthy Air, Sustainably" is hugely important to us and we made strong progress with our key sustainability initiatives in the first half of the year.

The proportion of our revenue from low carbon, energy saving products increased to 69.4% versus our long term target of 70% by end of FY25 (H1 FY22: 66.1%). This was aided by the growth in heat recovery ventilation which now represents 32.2% of the total revenue of the Group. Our new product innovation team developments are focused on adding innovative new low carbon product solutions to our portfolio.

Continuing the excellent progress we made in H2 2022, where breakthroughs were made in applying alternative types of recycled materials to our injection moulding processes, the proportion of recycled plastics used in our manufacturing increased to 76.4% versus our long term target of 90% by end of FY25 (H1 2022: 67.2%). I would like to thank our technical and operational teams in the UK for delivering this significant progress.

We are also pleased that our continued focus on 'keeping everyone safe' has led to a significant reduction in our accident frequency rate, at 0.15 per 100,000 hours worked compared to 0.25 last year.  As always, our ambition remains that all of our colleagues should go home safely every day.

We are well positioned to make further good progress with these important KPIs in the second half of the year.

Regulatory Drivers and indoor air quality

Following the changes to Part F and Part L of the Building Regulations in the UK, we are now seeing a greater transition to continuous ventilation solutions among housebuilders. This increases our average sales value per house and this trend is expected to continue. We await the Future Homes Standard public consultation from Government due later this year which we expect to further support energy efficient ventilation in new build.

Following several widely reported cases of health issues and fatalities linked to exposure to mould, we are seeing an increased urgency and focus on air quality in social housing. We also await the publication of the Decent Home Standard for the Private Rented sector after the consultation completed in October 2022.

In Continental Europe, The Industry, Research and Energy Committee adopted its position on the proposed revision of the Energy Performance of Buildings Directive (EPBD). According to the text, residential buildings would have to achieve at least energy performance class E by 2030, and D by 2033. Non-residential and public buildings would have to achieve the same classes by 2027 and 2030 respectively. These changes support further air tightness improvements to buildings and therefore the requirement for energy efficient ventilation solutions.

Interim dividend

The Board has declared an interim dividend of 2.5 pence per share, up 8.7% (H1 2022: 2.3 pence), reflecting the strong first half performance and demonstrating the Board's confidence in the performance of the Group. The interim dividend will be paid on 2 May 2023 to shareholders on the register at the close of business on 24 March 2023.

Outlook

Looking ahead, although mindful of the cautious sentiment in some of our segments, residential refurbishment demand remains supportive, and inflationary pressures and supply chain challenges are easing. 

With our excellent levels of customer service, agile manufacturing, a well-developed M&A pipeline and strong balance sheet position, coupled with significant geographic revenue diversity, we are well placed to make further progress.

Ronnie George

Chief Executive Officer

8 March 2023

MARKET BY MARKET

UK revenue grew by 5.5% (5.3% at constant currency) to £73.7 million with adjusted operating profit at £15.6 million, an increase of £1.7 million on the prior year. Adjusted operating profit margin was 21.2% compared to the first half of 2022 of 19.9%, an increase of 1.3 percentage points. This brings the UK operating profit margin close to our other two market sector areas, Continental Europe, and Australasia.

A year ago, we made some changes to the UK's organisational structure to strengthen the performance of the region. The development of the leadership team focusing on our three key areas of UK residential RMI, UK residential new build and commercial ventilation has enabled us to more closely focus and support each of these areas. The residential growth of 15.7% in the first half of the year is an outstanding performance and offsets the more difficult commercial end market.

Pricing discipline, cost reduction and efficiency initiatives and a growing mix shift towards higher value, higher gross margin low carbon and innovative solutions has been a key driver of performance. Excellent customer service and stock availability across the UK business have also enabled us to make further share gains in the residential market.

Revenue in our Residential sector was up 15.7% to £41.4 million (H1 2022: £35.8 million). The detail of our key residential end markets is as follows.

Social housing refurbishment demand has delivered the strongest revenue growth in our UK residential market. On 19 November 2022, Housing Secretary Michael Gove, wrote a letter to all providers of social housing, headed, "Ensuring Quality in Social Housing." This letter was in response to the tragic death of Awaab Ishak, a two-year-old boy, with the Coroner citing mould and poor-quality ventilation in his home as the direct reason attributable to his death. Amendments have since been tabled to the Social Housing Regulation Bill to introduce 'Awaab's law' which will require social housing landlords to fix reported health hazards within specified timeframes.

Alongside this issue we are witnessing a winter period where fuel bills have been the highest on record. As some households understandably reduce their heating use, the lower temperatures drive a higher incidence of mould and condensation. These factors, as well as an accelerated approach to delivering the net zero carbon targets for the future, have driven strong demand for our low carbon ventilation solutions. Our Vent-Axia brand is the first in the UK to launch a fully PAS2035 compliant decentralised heat recovery solution fully suitable for retrofit.

We have also achieved strong revenue growth in our private RMI market with similar demand drivers as public housing. Homeowners as well as private landlords and their tenants are increasingly aware of the dangers of damp, mould and indoor pollutants, and are turning to ventilation products as part of the solution. Whilst wider discretionary building products purchases have been under pressure in the last twelve months, we continue to believe that ventilation refurbishment in our dwellings is being seen as an increasingly necessary and worthwhile investment required to maintain the health of both the building and its occupants.

Sales in our UK New Build Residential Systems sector were also strong in the first half of the year with revenue considerably up on the same period last year. Building regulations changes in June 2022 will move the market to a "systems only" approach soon, where all new build housing will incorporate higher value, whole building ventilation systems, and we predict that very few new developments will utilise traditional, less energy efficient single exhaust fans in the future. We have been pleased to work closely with our trade association and house builders in helping define an energy efficient and cost-effective ventilation strategy for the homes of the near future.

Order intake levels remain encouraging, but we are mindful of the significant reduction in sales rates across the housebuilder community since the "mini budget" late in 2022. We expect unit revenue rates per new dwelling to continue to increase as newer, more energy efficient products, including heat recovery system solutions, are applied. This will help to offset any potentially weaker volumes in the period ahead.

UK Commercial market revenue declined by 9.3% in the period to £14.3 million (H1 2022: £15.8 million). Commercial refurbishment was more challenged in the first half of the year. The prior year comparator period was a strong post-Covid-19 restart for many retailers, restaurants and offices, whilst we witnessed weak demand for our refurbishment solutions in the first half. Our solutions for the new build education sector also performed weakly although a further enhancement to the product range was added at the end of the period with expectations to recover market share in the months ahead. The better performer in our commercial revenue stream was our range of energy efficient fan coils where the order book remains strong and there is a further range enhancement planned for the second half of the year.

UK Export market revenue was £5.3 million, down 5.9% (6.7% at constant currency). Weaker demand in the period from the Republic of Ireland market notably in December and January was exacerbated by some customer destocking over the calendar year end to meet reducing demand. However, we have already seen this demand return at the start of the second half of the financial year.

OEM revenue was £12.7 million, an increase of 0.2% (decline 0.7% at constant currency). Whilst overall this is a disappointing revenue performance, we have seen a continuation of the revenue mix trend away from older, less energy efficient technology towards newer, leading low carbon EC3 range of products. The shift in demand has been so pronounced in the period that our existing EC3 production capacity is largely full, and we have now added new capacity. This investment commenced in early FY23 and, became operational at the beginning of March 2023. The shift away from older technology products will continue, but the reducing significance of this category lessens the impact of the decline, whilst we are optimistic about the continued growth of our EC3 ranges.

Continental Europe

Revenue in Continental Europe was £64.3 million, with growth of £6.9 million, an increase of 12.0% (11.4% at constant currency). Organic revenue grew by 8.9% (8.2% at constant currency) and adjusted operating profit was £15.4 million, up from £14.8 million, in the same period in the prior year. The margin reduction year-on-year in Continental Europe is primarily due to business mix, although European margins remain the highest in the Group. ERI, our heat exchanger business acquired in September 2021 grew strongly, as did ClimaRad in the Netherlands, with the Nordics broadly flat and a decline in Germany after three and a half years of exceptionally strong revenue growth.

Revenue in the Nordics was £26.6 million (H1 2022: £27.0 million), a decrease of 1.4% (growth 0.4% at constant currency). Sales in the Nordics have been challenging in the first half of the year. The weakness is predominantly across the new build market in Sweden, Denmark, and Finland. Our DIY and trade routes to market for refurbishment solutions meanwhile have performed well over the period and our disciplined approach to pricing has enabled us to maintain our adjusted operating margins.

We continued to make strong progress in Central Europe, delivering revenue of £37.7 million and growth of 23.9% (21.2% at constant currency) compared to the previous period, helped by the acquisition of ERI. Organic revenue grew by 18.0% (15.2% at constant currency).

Our InVENTer brand in Germany had a weaker performance in the first half of the year as activity and sentiment in the market was much softer. The local nervousness over gas supplies during the winter period and higher interest rates impacting new build demand made for a challenging backdrop in the period. InVENTer has delivered strong organic growth over the last three and a half years, and we see the most recent period as a temporary setback. Quote levels remain high, supply chain difficulties have eased and we are optimistic about the long-term growth drivers for decentralised heat recovery ventilation products in this market.

The trend towards decentralised heat recovery solutions, particularly for major refurbishments, is demonstrated by the strong performance delivered by our ClimaRad brand in the Netherlands. The project order pipeline is also strong, and we are confident about the direction of travel for the second half of the year. The investment payback for decentralised heat recovery is now much shorter than before due to higher energy costs.

In Belgium the late launch of our new and upgraded range of mechanical ventilation with heat recovery held back revenues in the first half but we have now launched our upgraded range of products into the market. The project, whilst delayed by Covid-19 and our own electronics development, is now available to the market and enables us to access areas of the market previously unavailable to us.

ERI continues to deliver strong growth and our investment to substantially increase capacity remains on track to deliver benefits in the balance of FY23 and into the following year. We continue to develop new, innovative, and more efficient product solutions and have had some success in developing the North American market for additional business. The long-term structural underpinning of the demand for aluminium cross counterflow heat exchangers remains exciting and we will add additional capacity headroom to grow in the coming months.

Australasia

Revenue in Australasia was £24.3 million, and grew by 8.9% (4.5% at constant currency). Adjusted operating profit increased by 11.3% to £5.5 million, with our adjusted operating margin increasing to 22.6% (H1 2022: 22.1%).

We continue to develop our product portfolio for both the New Zealand and Australian markets and despite the slower activity in the new build construction market we are confident about our opportunities for further growth and are capturing further market share in our key area of residential refurbishment. Delivering a 22.6% operating profit margin, with excellent levels of customer service and the widest offering of residential product solutions in the Australasian market, we are delighted about the continuing progress made in the first half of the year.