TIDMVCP
RNS Number : 2990J
Victoria PLC
15 August 2023
Victoria PLC
('Victoria' or the 'Company', or the 'Group')
Update on publication of Full Year Results
&
Key Preliminary Unaudited Financial Data
for the year ended 1 April 2023
Record underlying revenue and EBITDA
Confident FY2024 outlook with a sharp increase in earnings and
free cash flow expected due to completion of major integration
projects
Victoria PLC (LSE: VCP), the international designers,
manufacturers and distributors of innovative flooring, advises that
its auditors have requested further time to complete their final
audit procedures. To help keep investors informed Victoria has
decided to announce key numbers from its preliminary unaudited
results for the year ended 1 April 2023 ("FY2023"), the Company's
tenth consecutive year of revenue and underlying profit growth.
For the first time in the Company's history, the total volume of
flooring sold in FY2023 exceed 200 million square metres (more than
29,500 football fields), generating record revenues of GBP1.46
billion.
In FY2023 the Company focussed on the successful integration of
acquisitions to optimise future earnings and free cash flow.
Commenting on FY2024 Outlook and beyond, Geoff Wilding,
Executive Chairman, said:
"With all major integration projects in their final stages, we
expect FY2024 to be a year of two halves, with stronger H2 earnings
as the benefits of the reorganisation are experienced. Completion
of the projects is also expected to result in Victoria's free cash
flow increasing sharply from H2 FY2024, with management focussed on
returning to our long-run average cash conversion of EBITDA to Net
Free Cash Flow of 55%*. Further ahead, FY2025 will see the full
benefit of the successful acquisitions' integration with an
expected uplift in margins driving an additional increase in
earnings and free cash flow."
*Cash generated after replacement capex, interest, and tax as a
percentage of EBITDA.
FY2023 Unaudited Financial and Operational highlights[1]
Year ended % Change
1 April Year ended
2023 2 April 2022
Underlying Revenue GBP1,461.4m GBP1,019.8m +43.3%
Underlying EBITDA[2] GBP196.0m GBP162.8m +20.4%
Underlying free cash flow[3] GBP71.3m GBP34.2m 108.5%
Net debt[4] GBP658.3m GBP406.6m
-- Record revenue and underlying earnings despite challenging macro-economic conditions.
-- Softer demand seen in FY2023 due to near-term macroeconomic
conditions but fundamental sectoral drivers sustain long-term,
steady growth in a global flooring market believed to be worth $200
billion and growth over the last 25 years of c. 3% per annum.
-- Four major acquisition integration projects well ahead of
schedule and now in their final stages of completion. The outcome
is anticipated to conservatively deliver a GBP20+ million per annum
increase in EBITDA and a significant step down in exceptional
capital expenditures.
-- The Group's integration expenditure of the last three years
is coming to an end. Consequently, the Board anticipates free cash
flow to increase sharply. For the five-year period FY2015-2019, the
Group averaged cash conversion of EBITDA to Net Free Cash Flow of
55%(*) , which the Board believes is a sustainable, long-term ratio
and one management is focused on returning to in the near-term.
-- Whilst the Group's FY2024 financial outlook is largely based
on steady-state demand and underpinned by the various integration
projects, each future 5% increase in overall revenue, which is
Victoria's long-run organic growth rate, would be expected to
deliver earnings and cash flow growth of more than GBP25 million
per annum.
*Cash generated after replacement capex, interest, and tax as a
percentage of EBITDA.
In conclusion Geoff Wilding, Executive Chairman commented:
"Victoria benefits greatly from being in a long-duration, steady
growth industry that will drive compounding organic growth for
decades. After making two-dozen careful acquisitions over the last
10 years we have now achieved a scale that, once we have completed
the current integration projects, will result in higher
productivity, more efficient logistics, wider distribution, and
lower input costs than almost all our competitors. Coupling this
scale advantage with the underlying sectoral tailwinds will, the
Board believes, deliver outsized returns for our shareholders for a
very long time."
For more information contact:
Victoria PLC www.victoriaplc.com/investors-welcome
Geoff Wilding, Executive Chairman Via Walbrook PR
Philippe Hamers, Group Chief Executive
Brian Morgan, Chief Financial Officer
Singer Capital Markets (Nominated Adviser
and Joint Broker)
Rick Thompson, Phil Davies, James Fischer +44 (0)20 7496 3095
Berenberg (Joint Broker) +44 (0)20 3207 7800
Ben Wright, Richard Bootle
Peel Hunt (Joint Broker) +44 (0)20 7418 8900
Adrian Trimmings, Andrew Clark
Walbrook PR (Media & Investor Relations) +44 (0)20 7933 8780 or victoria@walbrookpr.com
Paul McManus, Louis Ashe-Jepson, +44 (0)7980 541 893 / +44 (0)7747 515
Alice Woodings 393 /
+44 (0) 7407 804 654
About Victoria PLC ( www.victoriaplc.com )
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 Company, 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 7,300 people across more than 30 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 Company'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.
Victoria PLC
Chairman and CEO's Review
INTRODUCTION
Victoria's operational management philosophy during FY2023 is
probably best encapsulated by Winston Churchill's advice, "When you
are going through hell, keep going". Dramatic increases in the cost
of raw materials, unprecedented energy prices, labour cost
inflation, subdued consumer demand, and international shipping
disruption created a testing backdrop against which our management
team nevertheless delivered the 10(th) consecutive year of growth
as set out in the table below.
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
----------------- ----- ----- ------ ------ ------ ------ ------ ---------- ---------- ---------- ----------
Underlying
Revenue
(GBP million) 70.9 71.4 127.0 255.2 330.4 417.5 566.8 621.5 662.3 1,019.8 1,461.4
Underlying
EBITDA(1) 2.3 5.1 15.8 32.3 45.7 64.7 96.3 107.2(2) 112.0(2) 143.5(2) 171.3(2)
(GBP million)
EBITDA margin
% 3.3 7.2 12.4 12.7 13.8 15.5 17.0 17.2 16.9 14.1 11.7(3)
(1) The KPIs in the table above are alternative performance
measures used by management along with other figures to measure
performance.
(2) Underlying EBITDA in FY20 through FY23 is stated before the
impact of IFRS 16 for consistency of comparison with earlier years.
IFRS-reported EBITDA for these years are GBP118m, GBP127m, GBP163m,
and GBP196m respectively.
(3) The decline in reported %margin was entirely due to the
acquisition mix effect; LFL organic margins increased by 0.2%
The objectives of this review are to help our shareholders
better understand the business and be able to reach an informed
view of the value of the company, its future prospects, and its
financial resilience.
To achieve these objectives requires data to be shared in a way
that communicates information and this will include both
IFRS-compliant and non-IFRS, performance measures. The 'alternative
performance measures' will be reconciled to IFRS compliant measures
in the full Annual Report. Shareholders are of course free to
accept or discard any of this data, but we want to ensure that you
have access to similar information used by Victoria's board and
management in making decisions.
FY2023 OPERATIONAL REVIEW
Overview
The global flooring market is c. USD 200 billion(1) (GBP 154
billion(2) ), and USD 66 billion (GBP 51 billion) in Victoria's key
markets of Europe and the US, with volume growth over the last 25
years of c. 2.6%(1) per annum. There are fundamental drivers that
sustain this long-term growth and, whilst somewhat subdued demand
was experienced in FY2023, this was due to near-term macroeconomic
conditions and we remain confident that the natural state of the
sector is continued expansion in the regions where Victoria
trades.
Before commenting specifically on each of the different
operating divisions, there were several Group-wide elements in
FY2023 which are worth highlighting.
(1) Freedonia Global Flooring Report 2021
(2) GBP/USD 1.29
Integration Projects
Integrating and reorganising an acquisition is expensive
(especially in Europe where mandated social payments must be made
to redundant workers) but necessary to realise the maximum value
from acquired businesses. Therefore, with the proviso that the
expected return on the investment must exceed our internal hurdle
rate, the Group is willing to invest heavily where required, in
integrating an acquisition in order to optimise future free cash
flow. (To be clear, although the restructuring cash outlay is made
post-completion, the quantum of the investment is scoped out prior
to making the acquisition and is factored into the purchase price
we pay for the business to ensure our targeted return on capital is
achieved).
We have had four major projects underway throughout FY2023, all
of which are now in their final stages and, when completed, are
expected to conservatively result in a GBP20+ million per annum
increase in EBITDA and a significant step down in exceptional
capital expenditures:
(i) Balta's integration consists of three key projects:
a. The relocation of Balta's carpet manufacturing from Belgium
to Victoria's existing UK factories, making full use of the
designed capacity. 80% of Balta's carpet is sold in the UK and this
move will lower production and transport costs whilst enabling
shorter delivery times, thereby improving customer service.
b. The consolidation of the Balta rug manufacturing operation
onto Victoria's large site at Sint-Baafs Vijve, Belgium, alongside
the relocation of some production to Usak, Turkey, where the Group
has two modern rug-making and yarn extrusion factories . These
changes will improve efficiency and lower production costs .
c. The divestment of non-core business and real estate assets
acquired with the Balta transaction where the opportunity for
synergies with the Group's existing businesses are minimal.
(ii) Saloni Ceramica. With the investment Victoria has made in
production technology in Spain over the last three years, we have
been able to close the Saloni factory and consolidate production
onto the very large Keraben and Ibero site. This move occurred
ahead of schedule and was completed during March 2023. The Saloni
brand continues, with the roll-out of high-end showrooms and social
media presence supporting a renewed focus on the Architect &
Design market.
(iii) Graniser, Victoria's low-cost Turkish ceramics producer,
has two integration projects in progress:
a. Reorganisation and integration with Victoria's Spanish and
Italian factories - increasing spare annual production capacity at
Graniser to 8 million sqm.
b. Investment in new printers and packaging lines alongside
integration into Victoria's existing ceramics distribution network
to increase higher-margin export revenue.
(iv) Cali Flooring 's integration comprises :
a. Access to Victoria's supply chain lowering Cost of Goods Sold (COGS).
b. Integration into Victoria's US logistics platform, improving
delivery times and reducing costs.
c. Commercial excellence projects focussed on "gross to net"
enhancements, which have lifted gross margin by approximately 5%
since April 2022. These projects have covered restructuring
salesforce incentives to encourage maximising margins rather than
volume, minimising claim and product return related expenses,
renegotiating services contracts, and optimising workforce
productivity.
These projects fall into one or more of three broad categories:
investment in productivity-enhancing technology, rationalisation of
production facilities, and logistics integration - all of which are
only possible due to Victoria's scale and business model. Few of
our competitors have the size to justify the investment in
technology that makes these large efficiency gains possible.
Technology is expensive and without the large production volume of
Victoria, the cost cannot be recovered. For example, an energy
co-generation plant, capable of saving millions in energy costs,
requires annual ceramics production at the factory of c. 10 million
sqm to justify the investment - volume that few of our competitors
manufacture. However, without technology, a manufacturer's
production costs will remain permanently higher than that of
Victoria, putting them at a perpetual disadvantage.
In total, these integration projects have reduced headcount by
1,000 FTE's whilst we have maintained our production
capability.
The full GBP20+ million financial effect of these projects
(detailed in the Capital Allocation section below) will be seen in
FY2025, although the benefits will start flowing from later this
year and the anticipated productivity improvements, cost savings,
and working capital enhancements underpin the current year's
expected increased financial performance.
Cash Generation
It is the Board's view that creating wealth for shareholders is
best achieved by maximising the medium-term free cash flow per
share and every decision is viewed through this prism.
Consequently, we set a target of achieving GBP100 million of
cash generation in H2 FY2023. GBP117.0 million was generated from
operating profits and working capital improvement, although we fell
short of the overall target due to three timing related issues:
1. Delayed completion of the divestment of an unneeded factory
building arising from the reorganisation of Balta. Recent Belgium
legislation requires an environmental report prepared prior to
completion and local consultants have significant backlogs. The
report has been recently received and completion of the agreed
c.GBP27 million sale can now proceed.
2. Surprisingly (and pleasingly) fast progress of the
integration projects led to earlier payment of some large cash
reorganisation-related expenditure (largely redundancies and
expansionary capex) that was not expected until FY2024, totalling
c. GBP25 million. Saloni's reorganisation completed earlier than
anticipated in March and, due to the progress made in the last four
months of FY2023, Balta's integration is now expected to finish
shortly although when it was acquired in April, 2022 we said that
integration would take 24-36 months.
3. Working capital (primarily excess ceramics inventory
stockpiled due to energy uncertainty last winter) reduction
proceeded somewhat slower than anticipated due to softer demand,
impacting H2 FY2023 by c GBP20 million although progress is now
well underway with targets and management incentive plans in place
for each business across the Group.
Whilst these factors collectively impacted H2 cash by c. GBP71
million, none represent any fundamental shift in Victoria's
financial position as the cash items paid out in FY2023 are a
saving in FY2024 and the delayed inflows will be received in
FY2024.
4. The Board also decided to invest GBP11.4 million (the equity
component of the purchase) in the acquisition of Florida-based
ceramics distributor, IWT. Similarly, GBP1.6 million was invested
in buying back the Company's shares at prices the Board considered
to represent very good value for shareholders.
Other cash movements were broadly in line with expectations.
For the five year period FY2015-2019, the Group averaged cash
conversion of EBITDA to Net Free Cash Flow of 55%(5) and it is our
view that this is a sustainable, long-term ratio and one management
is focused on returning to in the near-term. Nevertheless, during
the last three years Victoria has chosen to invest heavily in three
areas, which the Board's expects to result in higher future free
cash flow conversion:
(i) Reorganisation/integration of acquisitions. The integration
cost is always factored into our purchase price.
(ii) Growth capex. Victoria has been steadily growing market
share for several years and additional plant has been required to
produce the increased volume. However, this investment, together
with productivity gains following completion of the integration
projects and selective outsourcing, means the Group now has
sufficient production capacity to cope with existing and
foreseeable demand and this category of expenditure will fall in
the future.
(iii) Ceramics inventory. During FY2023 the uncertainty about
the reliability of gas supplies during the winter months led
Victoria's ceramics businesses to build up additional inventory to
ensure we could maintain supply to customers and protect our
reputation as a reliable partner even in the event production was
suspended due to lack of gas deliveries for up to two months. Given
our ceramics division sells nearly GBP30 million (at cost) of
product per month, the additional six weeks-worth of inventory held
was a substantial commitment.
Gas remained available and, as noted above, we are now returning
inventory levels to normal, and the cash that was invested in the
excess inventory is being released throughout FY2024.
Consequently, it is the Board's expectation that Victoria's free
cash flow will return sharply back to the long-run average
(additional financial detail is provided in the Capital Allocation
section below), and accompanying this evolution is an increased
emphasis on free cash flow in senior management incentive
plans.
(5) Cash generated after replacement capex, interest, and tax as
a percentage of EBITDA.
Operating Margins
As forecasted to shareholders last year, operating margins
increased slightly (0.2% LFL) but remained below our long-term
expected (and historical) high-teen level. This was due partially
to a management decision to focus on protecting our cash margin
(rather than the percentage margin) and using the difficult
conditions to take further market share from struggling
competitors, but is primarily due to the mathematical effect of
acquisitions (Balta, Ragolle and IWT) - very large businesses with
single-digit margins, which were consequently margin dilutive
(-2.5%) prior to integration and benefitting from synergies with
Victoria. There was also some inevitable temporary impact from the
integration disruption (particularly at Balta where plant
relocation was underway).
However, as set out in this Review, the various integration
projects will be completed during H1 FY2024 and therefore we are
anticipating an uplift in margins beginning in the second half of
this financial year and the full benefit to flow in FY2025.
Inflation
Inflation has continued to be a significant factor throughout
FY2023. Labour costs increased by around 10%, and certain key raw
materials and energy costs increased by more than 100% during the
year. This has had two impacts on the Group during the year:
i. Margin pressure. The Group implemented price increases during
the year in order to protect our cash margin, whilst maintaining a
strong competitive position during a period when some market
participants were finding the operating environment very
challenging. We are confident that completion of our integration
projects alongside other actions, will subsequently deliver an
uplift in the percentage margin back to our historical high-teen
level.
ii. Working capital. Inflation-driven increases in raw material
and production costs means the same quantity of inventory costs
more to make and consequently ties up additional cash and, absent
any mitigating actions, reduces cash flow and lowers the return on
capital. Some of the critical cost inputs have returned to more
normal levels and the consequence of this will be that much of the
cash absorbed in working capital last year will return as stock is
sold and replaced with lower input cost inventory.
In summary the Board and management are alive to the risks
imposed by inflation and are carefully balancing the requirement to
increase prices sufficiently to ensure our cash return on equity
remains acceptable, whilst also maintaining our market share growth
momentum , which will help us drive long-term free cash flow
growth.
Demand
Demand softened in FY2023 following very strong volume growth
over the previous 18 months. We believe this to be a function of
(a) some pull-forward of spending in FY2021 and FY2022 (suggested
by sectoral volume growth of c.4.9% in 2021 versus the long-term
average of c.2.6% per annum) due to Covid lockdowns changing
consumer purchasing priorities; (b) lower consumer confidence
affecting spending levels, and (c) a level of de-stocking during
the year by some very large retailers. Nevertheless, Victoria
achieved 2.8% LFL revenue growth.
As can be seen from the FY2023 financial results, Victoria has
been impacted less by weaker demand than many of our
competitors:
-- As a manufacturer and distributor of typically mid to
high-end flooring, Victoria's core end-customers are less sensitive
to economic uncertainty and inflation.
-- Although de-stocking has been a feature of some larger retail
customers, most of our production is supplied to our customers
(retailers) based on end-consumer orders, not supplied for
inventory, reducing Victoria's exposure to de-stocking.
-- The Group has been deliberately structured with low
operational gearing, reducing the impact on earnings of lower
demand.
Although it is too early to make confident predictions, we have,
in recent months, seen some signs of life in certain markets. It is
our strong view that flooring remains a core consumer product and
any period of subdued demand will pass with little impact on the
long-term value of Victoria.
Whilst the Group's FY2024 financial outlook is largely based on
steady-state demand and underpinned by the various integration
projects, it is worthwhile noting that each future 5% increase in
overall revenue, which is Victoria's long-run organic growth rate,
would be expected to deliver earnings and cash flow growth of more
than GBP25 million per annum.
DIVISIONAL REVIEW
This section focuses on the underlying operating performance of
each individual division, excluding exceptional and non-underlying
items, which will be discussed in detail in the Financial Review
and Notes to the full accounts when published.
Everything we do operationally is about increasing productivity
- lowering the cost to manufacture and distribute each square metre
of flooring - and improving the customer (retailers and
distributors) experience, seeking to become an increasingly
valuable part of their business. Both are required in order to
achieve our goal of creating wealth for shareholders by maximising
the free cash flow per share and the purpose of this Divisional
Review is to outline some of the steps we have taken during FY2023
along these two vectors.
UK & Europe Soft Flooring - A year dominated by integration
of recent acquisitions
FY23 FY22 Growth
-------------------------- ------------------ ----------------- ---------
Underlying Revenue GBP 718.8 million GBP423.1 million + 69.9 %
Underlying EBITDA GBP 66.9 million GBP70.3 million -4.8%
Underlying EBITDA margin 9.3 % 16.6% -730bps
Victoria is now Europe's largest soft flooring manufacturer and
distributor. Following very strong growth in FY2022 (LFL organic
revenue growth of 31%), demand for soft flooring was weaker over
the past 12 months, although Victoria has benefitted from its
mid-high end product positioning with LFL revenue -4.7% for FY2023
.
The operating margin reflected the mathematical effect from the
acquisition of the low-margin Balta business (-4.2%) and higher
input costs - particularly polypropylene fibre (-3.4%). As detailed
below, cost savings achieved with the integration of Balta is
expected to address the acquisition-mix effect and many input costs
are returning to more sustainable levels.
Carpet and Underlay
-- The most significant activity in this division over FY2023
has been the integration of Balta's broadloom carpet business,
which was acquired in April 2022. The plan, relocating
manufacturing to the Group's UK facilities, has required extensive
trade union negotiations arising from the factory closures in
Belgium, re-siting of machinery to the UK, and expansion of one of
our UK factories. Although enormously disruptive in the short term
and resulting in little earnings contribution from Balta in FY2023,
the reorganisation is expected to complete shortly, with the
financial benefits showing almost immediately.
-- Interfloor, the Group's underlay subsidiary, has exceeded
growth expectations in the European market, although labour
shortages in the UK held the business back during the year. This
issue is now resolved and we look forward to another strong result
in FY2024.
-- Prices for polypropylene fibre, a major raw material for soft
flooring products, increased more than 50% due to a global mismatch
between supply and demand. The high prices lasted for most of the
financial year, impacting margins, but have more recently returned
to more normal levels, with a benefit to the Group's production
costs and working capital levels.
Rugs (Balta Home)
-- Rugs is an entirely new flooring category for Victoria,
forming part of the Balta acquisition. With hard flooring growing
as a percentage of the total flooring area in Europe and the USA
(from 53.6 % in 2009 to 57.8 % in 2024), and the tendency for
consumers to then immediately cover their new hard floor with a
rug, we believe this to be a sustainably growing flooring
category.
-- The USA is the key market for the rugs manufactured by
Victoria and, after some softness in FY2023 (largely due to large
retailer de-stocking) we are anticipating modest revenue growth in
FY2024. However, the primary focus of the Balta Home management
team, led by Marc Dessein, continues to be finalising the
reorganisation of the business, which will have a materially
positive impact on earnings due to efficiency gains.
-- The reorganisation, which is on schedule, consists of the
consolidation of production facilities in Belgium alongside
transferring significant production capacity to Turkey, where the
company has two modern, certified and low-cost factories.
Logistics
-- Our logistics capability continues to provide Victoria with
what we believe to be an unassailable competitive advantage that
continues to drive market share gains. Retailers value service and
product availability over the last few pennies in price (no margin
at all is made by a retailer on unavailable product!).
-- The Group's state-of-the-art, carbon-neutral, purpose-built
185,000 ft(2) fulfilment centre in Worcester has been completed and
is fully operational, replacing the Kidderminster warehouse. It
also houses the Victoria Group HQ.
-- Apart from further enhancing Victoria service proposition,
our logistics operation, Alliance Flooring Distribution, is also
now generating third-party logistics income.
UK & Europe Ceramic Tiles - Extraordinary energy costs
successfully managed
FY23 FY22 Growth
-------------------------- ------------------ ----------------- ----------
Underlying Revenue GBP 453.3 million GBP371.6 million + 22.0 %
Underlying EBITDA GBP 105.8 million GBP71.4 million + 48.2 %
Underlying EBITDA margin 23.3 % 19.2% + 414 bps
Successful ceramics production during FY2023 has been
exceptionally challenging due to the unprecedented energy costs and
generally soft demand. Energy costs normally comprise around 15-20%
of revenues for a ceramics business and dealing with prices that at
times were more than 900% of 'normal' levels was an industry-wide
problem that led to many of our competitors simply suspending
production.
Fortunately, Victoria's policy of hedging or contracting the
supply of key raw materials and other inputs (which is ongoing)
stood our ceramics division in very good stead during this
extraordinary period and the division continued to contribute
favourably to the Group's earnings with LFL revenue growth of 12.4%
and an organic margin improvement of 4.2%.
Italy
-- Demand continued throughout FY2023 (and into FY2024) for our
'Made in Italy' ceramics and we have an ongoing order backlog of
many months despite the significant capacity increase in 2022 .
-- We took advantage of the failure of a neighbouring competitor
to purchase their atomizer plant at a fraction of its replacement
cost. At a purchase cost of EUR5 million, this equipment reduces
the cost of atomized clay by c. EUR1.5 million per annum, alongside
securing its supply - vastly reducing our reliance on third-party
suppliers, which was becoming a potential risk to continued growth.
The Italian operation is now vertically integrated and more
resilient.
Spain
-- The final stage of our Spanish ceramics' integration was
completed during the year with the closure of the Saloni plant and
consolidation of production on the Keraben and Ibero sites. This
action, which maintained production capability, but with 15% fewer
employees, had been much delayed due to Covid-19 restrictions,
which lasted much longer in Spain than in other European countries.
However, the resulting higher productivity will help the business
remain competitive in the US market against ceramic tiles arriving
from India, Mexico, and Brazil.
-- The Saloni brand now focusses exclusively on high-end
commercial applications, with stylish new showrooms for the
Architecture & Design community opened in key locations in
Spain.
Turkey
-- Following the acquisition of Graniser in February 2022, we
have right-sized the business, whilst investing in some key
equipment to improve productivity, remove production bottle-necks,
and allow effective integration with our global ceramics
businesses. The result is an increase in spare capacity to 8
million sqm alongside a 30% reduction in FTEs and we are
anticipating an increased contribution from the business in the
current financial year.
Australia - Ongoing demand, some inflationary margin
pressure
FY23 FY22 Growth
-------------------------- ------------------ ----------------- ----------
Underlying Revenue GBP 120.9 million GBP109.5 million + 10.4 %
Underlying EBITDA GBP 15.3 million GBP16.4 million - 6.4 %
Underlying EBITDA margin 12.7 % 15.0% - 227 bps
Although inflation had a small temporary impact on margins, the
Australian market continues to see good demand for flooring,
partially driven by ongoing buoyant residential construction due to
inwards migration. Permanent migration (excluding humanitarian
migrants) is consistently around 190,000 people per annum - all of
whom are of high economic value, creating consistent demand for
additional accommodation.
Australian consumers - particularly in the mid-high end of the
market - are paying increasing attention to sustainability when
selecting products and this has resulted in a strong recovery in
demand for wool-based carpet, which is Victoria Australia's core
manufacturing competency and is highly beneficial to the operating
margins of the Group's spinning mill at Bendigo.
North America - Continued profitable expansion
FY23 FY22* Growth*
-------------------------- ------------------ ----------------- --------
Underlying Revenue GBP 168.4 million GBP115.6 million n/a
Underlying EBITDA GBP 9.3 million GBP6.4 million n/a
Underlying EBITDA margin 5.5 % 5.6% n/a
* FY22 data is for 9 months only as Cali Flooring was not a
Victoria subsidiary until 23 June 2021 and growth comparisons are
not applicable
Our North American business continued to grow in FY2023 with the
acquisition of Florida-based ceramics distributor, International
Wholesale Tiles ("IWT"), bringing the Group's North
American-sourced revenues (including exports to the US from our
European factories) to more than USD 400 million (GBP308
million).
There is strong US-consumer demand for European-branded product
- partially because of the quality and style, and partially because
demand exceeds domestic production capacity by 50%. Ultra-high
quality artificial grass as manufactured by Victoria in Germany and
the Netherlands is a particular high-margin opportunity (as
outlined in last year's Annual Report) but we are also gaining
share in our ceramics business and are exporting increasing
quantities of ceramic tiles from our European factories to North
America. The US remains the single-largest market for our rugs
business.
The effectiveness of our strategy of acquiring US distribution
businesses and then driving higher margin organic growth for our
European factories via logistics and distribution synergies, whilst
massively disrupted by the pandemic during 2020 and 2021, shows
considerable promise - as set out in the table below:
Organic growth of US market exports from Victoria's European factories
2019 2023 Growth
---------- ---------- ----------
Revenue (GBP thousands)(a) 4,585 45,322 +888%
---------- ---------- ----------
(a) Excludes revenue from Balta Rugs, Cali Flooring, and IWT,
which were acquired businesses and do not form part of the Group's
US organic growth.
However, we are also continually seeking to profitably expand
our US distribution. One example is the recent soft launch of the
Victoria Home brand on Wayfair.com with Balta rugs and other
flooring products available, although it will be early-2024 before
we plan to scale this effort to ensure the systems are in place to
efficiently manage the expected growth.
The well-publicised West Coast shipping disruption last year
constricted supply of LVT product for several months, impacting
sales. However, this has not continued into the current year and
normal product supply is being experienced.
In Q4 FY2023 the Group finalised the reorganisation of its US
logistics capabilities with four distribution centres across
Georgia (two), South Carolina, and Florida and the US-based
management is continuing to take advantage of revenue and cost
synergies with the wider Group, with opportunities for distribution
of Victoria's European-manufactured product and logistics
efficiencies.
CAPITAL ALLOCATION
Victoria's Board views every investment decision through the
prism of maximising the medium-term free cash flow per share. With
FY2023 being a very significant transformational year due to the
acquisition and integration of Balta, and the integration of Cali
and Graniser, growth/restructuring capex and restructuring costs
totalled GBP98.5 million . It is important to understand that these
costs were factored into the purchase price of the businesses and
are expected to result in higher earnings and free cash flow than
had the investment not been made. Equally significantly, the shift
in allocation of this free cash will be dramatic:
-- Upon completion of the integration projects capex (c.GBP99.6
million in FY2023) will reduce to normal maintenance levels (see
Table A below for details) and exceptional costs (c.GBP 43.8
million in FY2023) associated with reorganisation will be de
minimus (see Table B below for details of the major projects and
their associated costs).
-- With a much lower risk of energy disruption the cash invested
in excess ceramics inventory will flow back out as inventory levels
return to normal.
T able A sets out the breakdown of capex spending for the last
five years to help shareholders better understand normal
maintenance capex levels, with the last major reorganisation
project being in FY2019:
Capex FY19 FY20 FY21 FY22 FY23
GBPm GBPm GBPm GBPm GBPm**
------------------------- ----- ----- ----- ----- -------
Maintenance 23.5 25.4 20.9 40.9 45.5
Growth & Restructuring* 20.9 8.4 7.6 12.4 54.1
------------------------- ----- ----- ----- ----- -------
44.4 33.8 28.5 53.3 99.6
========================= ===== ===== ===== ===== =======
* Includes capital expenditure incurred as part of
reorganizational and synergy projects to drive higher productivity
and lower operating costs.
**The step-up in FY23 is due to the Balta acquisition, which has
both a short-term impact from integration, plus an ongoing increase
in quantum due to the increased size of the Group.
Table B summarises the exceptional expenditure items in FY2023,
which are expected to end as re-organisation/integration projects
complete this financial year.
Redundancy Legal & Asset removal/ Provisions
Exceptional Costs cash costs Professional Impairment /other Total
GBPm GBPm GBPm GBPm GBPm
------------------------ ------------ -------------- --------------- ----------- ------
Balta re-organisation 6.4 0.6 - 24.5 31.5
Saloni re-organisation 2.9 0.4 2.9 1.4 7.6
Graniser integration 0.3 - - - 0.3
Cali integration - - 1.2 0.2 1.4
------------------------ ------------ -------------- --------------- ----------- ------
Total 9.6 1.0 4.1 26.1 40.8
======================== ============ ============== =============== =========== ======
The Board will be prioritising allocation of the Group's free
cash flow to reducing net debt and redeeming preference shares (the
precise mix will depend on several factors). At all times the
allocation decision will be based on prudently optimizing the
Group's balance sheet while analysing what option will maximise the
medium-term free cash flow per share.
DIVIDENDS
For the reasons detailed in previous years' Annual Reports, it
remains the Board's view (as it has been for the last ten years)
that it can continue to successfully deploy capital to optimise the
creation of wealth for shareholders and therefore it has again
resolved not to pay a final dividend for FY2023.
LEVERAGE
Victoria has for the last 10 years maintained its leverage at
around 3-3.5x EBITDA - a policy that made sense to us given the
stable nature of our business, the terms of our debt
(covenant-lite, fixed-rate, long-dated bonds), and ultra-low
interest rates.
However, capital markets conditions have changed and, with the
higher interest rates that are likely to be experienced for the
foreseeable future, it is the Board's objective to (a) reduce the
Group's net debt/EBITDA ratio ahead of refinancing the current bond
issues; and (b) redeem preference shares .
These goals will be met by both reducing the numerator - the
absolute quantum of debt - from operating cash flow and the sale of
non-core assets and by increasing the denominator - the Group's
earnings - due to completion of the various integration projects
and other actions discussed elsewhere in this Review.
Shareholders will recall that the terms of the preference share
issue incorporated a call option that can be exercised by the
Company from November 2023, giving Victoria the right to repurchase
the preference shares in blocks of GBP25 million at par i.e. their
issue price.
OUTLOOK
Charlie Munger, the other half of the Berkshire Hathaway duo,
once observed that whilst some corporate problems seem large in the
moment, in time they will seem trivial. That is why he believes
long-term investing pays off and why Victoria's management focusses
on creating long-term value rather than reacting to short-term
market noise, which can distort issues out of all proportion to
their real effect on future prosperity. We are confident that all
our businesses benefit from strong economic fundamentals, and
skilled and dedicated management.
Operations
Completion of the various integration projects discussed in this
Review alongside tight cost management and productivity
improvements underpin the expected continued growth in earnings and
cash flow this year, notwithstanding ongoing challenging
macro-economic conditions.
The Board is therefore expecting FY2024 to be a year of two
halves, with the Group's financial performance in H2 being stronger
due to the synergy gains from the projects described in this Review
alongside limited recovery in demand in some markets.
Acquisitions
Although our focus is firmly on the integration projects,
acquisitions remain a core part of Victoria's long-term growth
strategy. Victoria has become a permanent home of choice for
flooring companies in Europe and the US - particularly family-owned
businesses - and the Group's potential pipeline of accretive
acquisitions continues to be compelling.
The worth of a business (or indeed any other investment asset)
is the present value of future cash flows and, with our firm belief
in Benjamin Graham's 'Margin of Safety', we are mindful of the
impact of higher interest rates and inflation on valuations and the
cost of capital.
Private company owners typically take time to adjust their
valuation expectations, but the same selling imperatives remain
(retirement being the most common) and so asking prices will, in
time, reflect the new reality . Consequently, at lower free cash
flow multiples, Victoria's acquisitions will continue to provide
the same Return on Capital as previously, notwithstanding a higher
cost of capital. Therefore, at the right time and within our
leverage policy, we will continue deploy capital to build scale,
expand distribution, broaden our product range, and widen the
economic moat around our business as we have successfully done over
the previous 10 years.
CONCLUSION
Victoria benefits greatly from being in a long-duration, steady
growth industry that will drive compounding organic growth for
decades. After making two-dozen carefully selected acquisitions
over the last 10 years we have now achieved a scale that, once we
have completed the current integration projects, will result in
higher productivity, more efficient logistics, wider distribution,
and lower input costs than almost all our competitors. Coupling
this scale advantage with the underlying sectoral tailwinds will,
the Board believes, deliver outsized returns for our shareholders
for a very long time.
Geoffrey Wilding Philippe Hamers
Executive Chairman Chief Executive Officer
15 August 2023
Disclaimer: The key financial numbers in this announcement have
been extracted from the unaudited financial statements of the Group
for the 52 weeks ended 1 April 2023. The numbers do not constitute
statutory accounts within the meaning of Section 434 of the
Companies Act 2006. Whilst the financial information included in
this announcement are believed by the Company to be correct, this
announcement does not itself contain sufficient information to
comply with international accounting standards. The Group will
publish full financial statements that comply with international
accounting standards in due course.
[1] All the numbers and commentary in this announcement should
be read subject to the Disclaimer at the end of the
announcement.
[2] Underlying performance is stated before exceptional and
non-underlying items.
[3] Underlying free cash flow represents cash flow after
interest, tax and replacement capital expenditure, but before
investment in growth, financing activities and exceptional
items
[4] Net debt shown before right-of-use lease liabilities,
preferred equity, bond issue premia and the deduction of prepaid
finance costs
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms
and conditions, to analyse how you engage with the information
contained in this communication, and to share such analysis on an
anonymised basis with others as part of our commercial services.
For further information about how RNS and the London Stock Exchange
use the personal data you provide us, please see our Privacy
Policy.
END
MSCFFFLVTSISLIV
(END) Dow Jones Newswires
August 15, 2023 02:00 ET (06:00 GMT)
Victoria (LSE:VCP)
Historical Stock Chart
From Sep 2024 to Oct 2024
Victoria (LSE:VCP)
Historical Stock Chart
From Oct 2023 to Oct 2024