REG - Victoria PLC - Update on publication of Full Year Results
15/08/2023 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230815:nRSO2990Ja&default-theme=true
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 £1.46 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 Year ended % Change
1 April 2023 2 April 2022
Underlying Revenue £1,461.4m £1,019.8m +43.3%
Underlying EBITDA 2 £196.0m £162.8m +20.4%
Underlying free cash flow 3 £71.3m £34.2m 108.5%
Net debt 4 £658.3m £406.6m
· 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 £20+ 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 £25 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
(http://www.victoriaplc.com/investors-welcome)
Geoff Wilding, Executive Chairman
Via Walbrook PR
Philippe Hamers, Group Chief Executive
Brian Morgan, Chief Financial Officer
+44 (0)20 7496 3095
Singer Capital Markets (Nominated Adviser and Joint Broker)
Rick Thompson, Phil Davies, James Fischer
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
(mailto:victoria@walbrookpr.com)
Paul McManus, Louis Ashe-Jepson,
+44 (0)7980 541 893 / +44 (0)7747 515 393 /
Alice Woodings
+44 (0)7407 804 654
About Victoria PLC (www.victoriaplc.com (http://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 70.9 71.4 127.0 255.2 330.4 417.5 566.8 621.5 662.3 1,019.8 1,461.4
(£ million)
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)
(£ 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 £118m, £127m, £163m, and £196m 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 £20+ 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 £20+ 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 £100 million of cash generation in
H2 FY2023. £117.0 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.£27 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. £25 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 £20 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. £71 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 £11.4 million (the equity component
of the purchase) in the acquisition of Florida-based ceramics distributor,
IWT. Similarly, £1.6 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 £30 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 £25 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 £718.8 million £423.1 million +69.9%
Underlying EBITDA £66.9 million £70.3 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
ft² 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 £453.3 million £371.6 million +22.0%
Underlying EBITDA £105.8 million £71.4 million +48.2%
Underlying EBITDA margin 23.3% 19.2% +414bps
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 €5 million, this equipment reduces the cost of atomized
clay by c. €1.5 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 £120.9 million £109.5 million +10.4%
Underlying EBITDA £15.3 million £16.4 million -6.4%
Underlying EBITDA margin 12.7% 15.0% -227bps
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 £168.4 million £115.6 million n/a
Underlying EBITDA £9.3 million £6.4 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 £98.5 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.£99.6 million
in FY2023) will reduce to normal maintenance levels (see Table A below for
details) and exceptional costs (c.£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.
Table 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
£m £m £m £m £m**
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.
Exceptional Costs Redundancy cash costs Legal & Asset removal/ Provisions Total
Professional Impairment /other
£m £m £m £m £m
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 £25 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 (mailto:rns@lseg.com)
or visit
www.rns.com (http://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 (https://www.lseg.com/privacy-and-cookie-policy)
. END MSCFFFLVTSISLIVRecent news on Victoria
See all newsREG - Victoria PLC - Holding(s) in Company
AnnouncementREG - Victoria PLC - Purchase of Own Shares
AnnouncementREG - Victoria PLC - Purchase of Own Shares
AnnouncementREG - Victoria PLC - Purchase of Own Shares
AnnouncementREG - Victoria PLC - Purchase of Own Shares
Announcement