For Immediate Release

29 November 2022

 

 

Victoria PLC

('Victoria', the 'Company', or the 'Group')

Interim Results
for the six months ended 1 October 2022

 

Record Revenue and Operating Profits

 

 

Victoria PLC (LSE: VCP) the international designers, manufacturers and distributors of innovative floorcoverings, is pleased to announce its interim results for the six months ended 1 October 2022.

 

FINANCIAL AND OPERATIONAL HIGHLIGHTS

Continuing operations	H1 FY23		H1 FY22
Revenue	£776.1m	+58.7%	£489.0m
Underlying EBITDA1	£100.1m	+18.5%	£84.5m
Underlying operating profit1	£61.1m	+4.3%	£58.6m
Operating profit	£82.0m	+196.2%	£27.7m
Profit / (loss) before tax	£53.1m	+1,731.0%	£2.9m
Net debt2	£651.4m		£519.3m
Net debt / EBITDA3	3.4x		3.3x
Earnings / (loss) per share:
- Diluted	36.69p		(2.68)p
- Diluted adjusted1	17.87p		24.32p

 

¹ Underlying performance is stated before exceptional and non-underlying items. In addition, underlying profit before tax and adjusted EPS are also stated before non-underlying items within finance costs

² Net debt shown before right-of-use lease liabilities, preferred equity, bond issue premia and the deduction of prepaid finance costs

³ Leverage shown consistent with the measure used by our lending banks

 

·    7.7% like-for-like organic revenue growth, plus acquisitions, led to Victoria achieving a record operating performance

·    Broadly stable like-for-like operating margins, notwithstanding inflationary pressures. Reported margins were impacted as anticipated by the mix-effect from the acquisition of businesses that currently have lower margins. This mix-effect is expected to reduce as integration synergies are realised - as Victoria has successfully achieved with previous acquisitions

·    Proactive management of raw materials and energy successfully mitigated both inflationary pressures and supply chain constraints

·    Completion of the acquisition of the rugs and UK carpet divisions of Balta to make Victoria Europe's largest manufacturer of soft flooring. Integration is well underway to realise the material potential synergy benefits of this acquisition

·    Despite these significant investments, leverage has been maintained in-line with the Group's financial policy

·    Although macro-economic conditions are challenging, the Board continues to be confident that synergy gains and proactive management actions will enable Victoria's financial performance for FY2023 to be in line with market consensus expectations

 

Geoff Wilding, Executive Chairman of Victoria PLC commented:

 

"Integration of recent acquisitions is proceeding apace and on schedule. Consequently, the Board believes cash flow, after exceptional costs relating to the integration projects, will be in excess of £100 million in H2.

 

In the near term it is likely that disposable incomes in some markets will come under further pressure, from higher interest rates and inflation and the resulting weakening consumer demand may make additional price increases to offset higher input costs more difficult for the Company to implement. Nevertheless, whilst acknowledging these challenges, I am pleased to say that the Board continues to be confident that synergy gains and proactive management actions will enable Victoria's financial performance for FY2023 to be in line with market consensus expectations and the outlook for the business remains positive."

For more information contact:

Victoria PLC Geoff Wilding, Executive Chairman Philippe Hamers, Group Chief Executive Brian Morgan, Chief Financial Officer	+44 (0) 1562 749 610
Singer Capital Markets (Nominated Adviser and Joint Broker) Rick Thompson, Phil Davies, Alex Bond	+44 (0) 207 496 3095
Berenberg (Joint Broker) Ben Wright, Richard Bootle   Peel Hunt (Joint Broker) Adrian Trimmings, Andrew Clark   Buchanan Communications (Financial PR) Charles Ryland, Chris Lane, Jack Devoy	+44 (0) 203 207 7800     +44 (0) 207 418 8900     +44 (0) 20 7466 5000

 

 

About Victoria

Established in 1895 and listed since 1963 and on AIM since 2013 (VCP.L), Victoria PLC, is an international manufacturer and distributor of innovative flooring products. The Group, which is headquartered in Kidderminster, UK, designs, manufactures, and distributes a range of carpet, flooring underlay, ceramic tiles, LVT (luxury vinyl tile), artificial grass and flooring accessories.

 

Victoria has operations in the UK, Spain, Italy, Belgium, the Netherlands, Germany, Turkey, the USA, and Australia and employs approximately 6,500 people across 31 sites. Victoria is Europe's largest carpet manufacturer and the second largest in Australia, as well as the largest manufacturer of underlay in both regions. 

 

The Group's strategy is designed to create value for its shareholders and is focused on consistently increasing earnings and cash flow per share via acquisitions and sustainable organic growth. (Further information about Victoria can be found on its website, www.victoriaplc.com.)

 

Chairman & CEO's Statement

 

There is a supposed curse "May you live in interesting times."

 

Few would argue that we are presently living in "interesting times". Yet, despite the fact that the current uncertain environment creates a meaningful business risk, it simply isn't possible to predict the future with sufficient precision to effectively manage this risk.

 

Our response to this conundrum has been to ensure that Victoria's management remains agile and the business flexible, even as it has grown to have an annual revenue exceeding £1.5 billion. We have maintained the highly decentralised and scalable, 'team of teams' management structure that was first put in place at Victoria ten years ago and remains a key competitive advantage.

 

Being nimble ensures Victoria continues to be well placed to quickly adapt to rapidly changing conditions. Shareholders have seen the benefit of this adaptability in the turmoil that followed the Brexit vote in 2016, Covid lockdowns in 2020, supply chain disruptions in 2021, and inflation and consumer uncertainty in 2022. Over this time, under all conditions, Victoria's earnings and operating cash flow per share continued to increase.

 

	Diluted adjusted EPS2	Underlying operating cash flow per share2,3			Diluted adjusted EPS2	Underlying operating cash flow per share2,3
Full Year	Pence	£		Full Year	Pence	£
FY15	10.47	0.30		FY19	35.25	0.86
FY16	16.32	0.40		FY20	28.24	0.78
FY17	24.42	0.48		FY21	30.21	0.77
FY18	30.61	0.64		FY22	40.21	0.96

 

Consequently, the Board is pleased to report that trading for the half year to 1 October 2022 continued to meet the Board's expectations, with like-for-like ("LFL") organic revenue growth of c.7.7% across the Group, and Victoria continuing to win share in some markets. Overall, the Group has achieved revenue of £776.1 million, versus £489.0 million in the comparative period last year (+58.7%), and underlying EBITDA of £100.1 million compared with £84.5 million last year (+18.5%). These operating results were again a record level for Victoria, as can be seen in the below table.

 

H1, Financial Year	2023	2022	2021	2020	2019	2018
Revenue	£776.1m	£489.0m	£305.5m	£312.9m	£273.4m	£189.5m
Pre IFRS 16 Underlying EBITDA	£88.9m	£75.1m	£44.9m	£53.8m	£45.4m	£24.6m
Post IFRS 16 Underlying EBITDA	£100.1m	£84.5m	£52.4m	£58.5m

 

Although Victoria experienced continued significant inflation in raw material and energy prices during the period, the earnings impact was largely mitigated by management's actions (detailed in the H1 Overview section). The reported margin of 13.0% was the result of the dilutive effects of acquisitions made during the period. This will be offset by synergy benefits and operational improvements as the businesses are integrated into Victoria, as has been seen in previous years with earlier acquisitions.

H1 OVERVIEW

 

Inflation

The last six months saw a continuation of double-digit inflationary pressures in certain costs - most notably energy and polypropylene carpet fibre. We chose to support our customers by sharing the impact of higher input costs with them whilst successfully protecting our cash margin through a combination of actions:

 

·    Victoria has a long-proven ability to increase prices and successfully did so up to four times across each product area during FY2022 to protect earnings. We continued to increase prices where it proved absolutely necessary in FY2023

·    As noted above, management is laser-focussed on delivering a number of carefully planned synergy projects that will increase operating margins, mitigating some inflationary pressures

·    We actively hedge or otherwise manage key input costs to provide management with time to adapt our business and prices to higher input costs, ensuring margins are protected

·    Product engineering in partnership with our customers has helped us achieve targeted price points, whilst still achieving a satisfactory profit for Victoria.

 

Our objective remains to manage the business so as to ensure an attractive return on equity for shareholders, after taking into account the effects of inflation.

 

Demand

 

Unsurprisingly, some flooring markets (notably the UK) are not as buoyant as last year. Nevertheless, as a result of the acquisition strategy that has been carefully executed over the last eight years, Victoria is now geographically diversified and demand in some countries is mitigating softer demand elsewhere.

 

Victoria is additionally fortunate with the experience of its senior operational management who have leveraged their decades in the industry by adapting readily to current macro-economic conditions. Actions such as product engineering, enhanced operational efficiencies, and the acceleration of synergistic projects are being implemented across the Group to drive savings and ensure earnings and cash flow remain satisfactory.

 

The Group also benefits from structurally low operational gearing with over half of its cost base made up of raw materials, which is, of course, wholly variable with revenue. A further one third of costs (energy, labour, marketing, logistics) are semi-variable. The result is that if sales were ever to decline, the majority of costs 'automatically' fall as well, reducing the impact of lower sales on profits.

 

The Board remains confident in the future of the business. Consumers have demanded flooring ever since some Palaeolithic cave-dweller decided mud was a sub-optimal surface for the cave and, irrespective of any short-term headwinds, the long-term trend for flooring remains relentlessly positive at c.2.6% per annum (albeit volume growth was 4.9% in 2021). Consequently, any potential period of subdued demand should have little impact on the long-term value of Victoria.

 

Integration

Careful integration of acquisitions is core to Victoria's strategy and the most important component of our value creation strategy.

 

As an example, our United Kingdom carpet business was built through six acquisitions over eight years. Subsequent to the acquisitions, all manufacturing and distribution has been fully integrated into industry-leading, scaled operations, improving earnings and driving our purchase multiple down significantly - even after taking into account capex and reorganisation costs. It is important to note that none of our acquisitions require integration to be financially attractive (they can all stand on their own two legs), but this is always at the forefront of our diligence and post-acquisition plan. The time and money we spend following an acquisition generates far higher returns for Victoria's shareholders than the capital spent on the acquisition.

 

We expect that the integration of our most recent acquisitions will lead to significant growth in profits over the next several years (without the necessity of a significant improvement in macroeconomic conditions). This is currently our team's primary focus and will remain the focus during the rest of FY2023 and FY2024.

 

Cashflow & Liquidity

 

Net operating cash flow before interest, tax and exceptional items was £22.1 million for the half year ended 1 October.

 

It is a core element of our organic growth strategy for Victoria to be a reliable partner for our customers - capable of maintaining supply of product under all circumstances. The profit a retailer makes on flooring that cannot be supplied is precisely zero and the disruption to a construction schedule due to the unavailability of flooring can be crippling. Reliability is consequently highly prized by our customers.

 

To that end, shareholders will recall that in early 2021, the Group invested heavily in raw materials to ensure Victoria could maintain its production schedules in the face of severe disruption to global supply chains. This investment delivered very good organic growth last year with like-for-like revenue increasing by an exceptional 19.2% as we took advantage of the supply difficulties many of our competitors were experiencing to grow our market share.

 

We are pleased to confirm that supply chains have now largely normalised and consequently Victoria is steadily reducing its raw material inventory to normal levels, which is unlocking the cash invested last year.

 

However (unfortunately in the current world there is always a 'however'), shareholders will be acutely aware of 2022's energy security concerns - particularly for natural gas, which is a critical element in the manufacture of ceramic tiles. These fears have abated a little in recent weeks (as have gas prices), but to protect our reputation as a reliable supplier we have selectively built up levels of finished goods to enable us to maintain normal service levels for our customers for up to three months in the event of extreme prices that make production uneconomic or severe gas rationing. Due to the flexibility of our factories, reducing inventory levels in the future is straightforward and inexpensive but, over the winter period, we will maintain higher than normal levels of finished goods.

 

The measures described above, which total a c.£60 million investment are temporary and therefore it remains the Board's expectation that the Group will be highly cash generative in the months ahead (with £100 million positive cash flow after exceptional costs expected in H2) as the business continues to have strong earnings and working capital returns to normal. The Board will seek to deploy that cash in a manner that maximises the medium-term returns for shareholders.

 

Victoria continued to maintain a strong liquidity position and the Group finished the period with cash and undrawn credit lines in excess of £250 million. Furthermore, almost all Victoria's debt financing takes the form of long-dated Senior Notes ("bonds") which, in themselves, have no financial maintenance covenants, and with the earliest tranche not due for repayment until 2026.

 

Capital Allocation

 

Victoria's primary strategy for maximizing shareholder value over the next 12 months is to optimise free cash flow generation. This cash can subsequently be deployed in a number of ways: funding organic growth (working capital and capex), debt reduction, acquisitions, paying dividends, and share buybacks. Prioritising these alternatives at a given point in time is a critical decision as capital allocation is, over time, the single largest determinant of value creation at a company.

 

Since the beginning of FY2023 Victoria has repurchased 1,842,250 shares, all of which have been retained in treasury. Although these share purchases are not the start of a formal and regular programme to return capital to shareholders, if the Company is able to repurchase shares at prices that (a) are well below the Board's view of their value, and (b) will provide a return to the company greater than the alternative uses for the Group's cash at that point in time, and (c) provide a return greater than its cost of capital, then further buybacks may be actively considered.

 

Separately, the Board is aware that Victoria's outstanding senior secured bonds are currently trading at substantial discounts to their principal amounts, as is common across the market. In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, the Company may, from time to time, purchase such bonds for cash in open-market purchases and/or privately negotiated transactions. The amounts involved in any such transactions may be material.

 

Finally, the Board wishes to emphasise that any future share or bond purchases will be made without jeopardising the Group's cash position and liquidity.

 

OPERATIONAL REPORT BY DIVISION

Over the last 10 years, Victoria has grown from a UK-centric £75 million (revenues) carpet manufacturer to a global flooring company with annual revenues exceeding £1.5 billion. The Group is Europe's largest carpet manufacturer with best-in-class logistics; it is one of the largest artificial turf manufacturers and distributors with more than €100 million of sales; it has built a €500+ million ceramics business with sites in Spain, Italy and Turkey that generates industry-leading margins; and, most recently, developed a US distribution business that will contribute more than $400 million of sales to the Group from tiles, LVT, wood, rugs, and artificial turf. This scale of business provides a platform for material earnings and cash flow growth purely from operational improvements and synergy projects.

 

UK & Europe - Soft Flooring

 

The shape of our UK & European soft flooring business altered dramatically in April with the completion of the purchase of the rugs and UK carpet divisions of Balta Group, together with the internationally-known brand, "Balta". This acquisition catapulted Victoria to the position of Europe's largest carpet and rug manufacturer with revenue for the six months of £372.0 million.

 

Integration of Balta is proceeding apace in order to realise the full benefit this scale advantage offers. As expected, there will be some exceptional costs associated with the reorganisation (largely redundancy and factory closure costs) but the cash impact is expected to be zero due to the disposal of assets that will become surplus (primarily real estate) once the integration is completed. The Board anticipates the synergy gains to be no less than €15 million per annum (+2% margin for the division) in 24 months from now.

 

The UK flooring market has softened this year from the extraordinarily strong demand of 2021/22, although Victoria continues to benefit from predominantly serving mid-high price points where demand has been noticeably more resilient.

 

Significantly higher input costs (primarily raw materials) were experienced in H1 and, as it has done in the past, Victoria shared the impact with its customers to protect market share. The outcome has been a temporary margin compression to 10.0% - an effect accentuated by the inclusion of Balta's contribution for the first time (Balta's historically lower margin of 4.5% has depressed the division's margin by 3.6%, although this is expected to change as integration takes effect). However, as the lower inflation of raw materials experienced in more recent months feeds though into the cost of finished goods and the reorganisation of Balta takes effect, margin growth will resume, which together with our larger market share, ensures the medium-term outcome will be a continuation of Victoria's ten-year trend of becoming a larger, more profitable and more stable business.

 

UK & Europe - Ceramic Tiles

 

Energy, and gas in particular, is a key cost in the manufacture of ceramic tiles, with the largest component being the use of gas in the kilns. This has, obviously, been a challenge over the last six months with energy prices materially elevated throughout the period and spiking to all-time highs in August.

 

The Group has successfully mitigated the impact of higher gas prices through a combination of continual improvements to customer service, product engineering, hedging, carefully negotiated supply agreements, and - where necessary - price increases and/or energy surcharges. The ongoing integration of recent acquisitions and the resulting efficiency gains together with investment in energy co-generation plants has also contributed to the robust performance for the period.

 

Furthermore, many of Victoria's competitors who lack our scale or efficiency have been forced to suspend operations during this period. However, our lower cost structure has enabled us to keep our factories in production and significantly outpace softening demand by supplying customers who have been unable to access product from their usual suppliers. We have also made important inroads into the US tile market this year with new supply agreements being signed with major US retailers and we expect this market to be an area of significant growth over the years ahead.

 

Consequently, although there are variances between the different businesses, across the division, margins have remained broadly flat with the prior year. Total revenue growth of 39.4% to £254.4 million includes LFL organic growth of 15.6%, with the balance due to the acquisition of Graniser.

 

The Turkish ceramic tiles business, Graniser, which was acquired in February 2022 has delivered volumes and profitability in line with our expectations. At the time of acquisition, about 70% of Graniser's revenue was derived from export and our plan for this business is to replace the remaining 30% of domestic sales with export. Accordingly, a c.€9 million exceptional capex plan has been actioned to further align the quality of both the tile produced and its packaging with European and American standards. The plan, which is already in process and with completion targeted by December 2023, is then expected to deliver EBITDA upside of more than €4 million per annum.

 

North America

 

Victoria's North America division now consists of two businesses: CALI and International Wholesale Tiles Inc, which together have annual revenue of c.US$260 million. However, it is worth noting that, including exports from our European factories, total annual revenue derived from the US market now exceeds $400 million per annum (c.25% of Victoria's total revenue). This constitutes valuable geographic diversification.

 

CALI, which was acquired in June 2021, continues to make good progress on all fronts.

 

In October, CALI launched a 250,000 square foot company operated distribution centre in Summerville, South Carolina to further improve service and efficiency in the Eastern United States.

 

While the launch of CALI's new distribution centre is part of a broader operational excellence plan (and other company-run distribution centers will be opened in the coming years) we are already experiencing very positive results. During the two months ended September 2022, CALI achieved 24% fewer fulfilment errors versus the same period in 2021 (and a similar reduction in transportation errors). As a result, customer satisfaction measures improved significantly, increasing from 62% in August and September of 2021 to 81.5% in the same period in 2022.

 

This year, CALI launched two new product categories, sourced from Group companies: rug and artificial turf, and expanded its offerings in vinyl, laminate and wood. In October, CALI became a core supplier to a major cooperative group of dealers, bringing CALI over 2,500 new potential store fronts. CALI has also made significant progress in its home centre channel, where it expanded its partnerships and is in the process of rolling out new product categories across 750+ national home improvement stores.

 

As a result of these initiatives, CALI's revenue is more than 20% higher than when Victoria acquired the business.  

 

Although completion occurred shortly after the half-year balance date, we thought we would briefly cover the acquisition of Florida-based distributor International Wholesale Tiles ("IWT").

 

Even with domestic production running at 100% of capacity, the US needs to import 65% of its ceramic tiles and IWT is one of a number of businesses across the country that fill this function. We were attracted to the business by its focussed and committed management (who have successfully grown revenue by 11.6% CAGR for the last 10 years), its highly diversified customer base, its focus on Florida, which has well above average economic and population growth, the significant synergy opportunities utilising our European factories, and high cash conversion.

 

Victoria's Board believes that IWT presents an excellent strategic fit with Victoria's existing business and will have strong long term growth prospects as part of the Group.

 

Australia

 

Australia represents around 8% of Group underlying EBITDA. Following 18 months of very difficult trading conditions due to government-mandated Covid lockdowns that only ended in October 2021, the Australian market is experiencing good trading conditions this year. Victoria's Australian operations recorded LFL revenue growth of +15.5% in H1 as consumers take advantage of savings accumulated during the lockdowns. Inflation on input prices has also been less severe than in Europe and earnings were also up 15.8% to £8.2 million for the period.

 

The outlook remains positive - particularly for the Dunlop LVT brands, where the new collection and better service proposition have been very well received. The Group is fortunate in having very strong management at Victoria Australia, Quest, and Dunlop Flooring, who have developed plans to ensure further improved performance next year. The Board has a high degree of confidence in them to deliver these improvements.

 

 

OUTLOOK

 

Operations

 

The Board is confident in the successful future of Victoria despite challenging economic conditions for the immediate future.

 

This is not misplaced optimism but is based upon some distinct features of the sector and competitive advantages of Victoria itself:

·    Flooring is a core global industry, and Victoria's products are universally needed and over time demand is consistent, predictable, and increasing

·    The Company benefits from highly effective operational management. Their decades of experience mean that they have lived through several economic cycles and they know how to respond to changing conditions to protect the business

·    Victoria has highly diversified economic exposure with manufacturing facilities in eight countries (Spain, the UK, Belgium, the Netherlands, Germany, Australia, Turkey, and Italy), but it exports product all over the world, reducing the Group's exposure to any one economy

·    Victoria is one of the sector's most cost-efficient producers, with the advantage of modern and well-invested factories. The Group's industry-leading operating margins provide room for manoeuvre against struggling competitors

·    Low operational gearing. Over half of Victoria's cost base fluctuates directly with sales (e.g. raw materials and energy) and a further circa 30% is capable of being varied within a few weeks (e.g. labour, logistics and marketing costs), should conditions change

·    Financial resilience. With cash balances and undrawn credit-lines exceeding £250 million, long-dated 'covenant-lite' bond debt, and growing free cash flow after all exceptional costs, Victoria is strongly positioned to ride-out and capitalise upon any economic turbulence

·    The Group's focus on mid-to-high product ranges and emphasis on the residential repair and remodel end market have historically manifested in dampened revenue volatility for Victoria (relative to some competitors who focus more on builder or commercial end-markets)

 

Acquisitions

 

The focus of Victoria's management team is firmly on operations and integrating recent acquisitions because doing so will, by far, deliver the highest return on capital and management time given there are meaningful synergies to be realised, which will drive material earnings and cash-flow growth over the next two years.  

 

Having said that, we are also aware that present macro-economic conditions will not last. A favourite aphorism of Abraham Lincoln was apparently, "This too shall pass". Therefore, we continue to maintain existing active dialogues and relationships with potential sellers and actively seek out new possible acquisition opportunities as Victoria remains the natural 'home of choice' for owner-operator businesses. If you believe Victoria is the right home for your business, we encourage you to give us a call.

 

CONCLUSION

 

Despite the macro-economic fears, our fellow investors can rest assured that Victoria has been structured with resilience in mind and is well positioned to navigate a variety of economic environments. Whilst we cannot predict precisely when global macro-economic conditions will improve, we can predict that Victoria is well positioned to benefit from that moment and we are therefore confident in stating that the Company will continue to create wealth for shareholders.