REG - Volution Group plc - Preliminary Results for year ended 31 July 2022
06/10/2022 07:00
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RNS Number : 9526B Volution Group plc 06 October 2022
Embargoed until 07:00 on:
Thursday 6 October 2022
VOLUTION GROUP PLC
Preliminary Full Year Results for the year ended 31 July 2022
Delivering strong growth, sustainably
Volution Group plc ("Volution" or "the Group" or "the Company", LSE: FAN), a
leading international designer and manufacturer of energy efficient indoor air
quality solutions, today announces its audited financial results for the 12
months ended 31 July 2022.
RESULTS SUMMARY
2021 Movement
2022
Revenue (£m) 307.7 272.6 +12.9%
Adjusted operating profit (£m) 64.9 56.9 +13.9%
Adjusted operating margin (%) 21.1% 20.9% +0.2pp
Adjusted profit before tax (£m) 60.9 53.2 +14.5%
Adjusted EPS (pence) 24.0 21.0 +14.3%
Reported operating profit (£m) 50.8 34.2 +48.5%
Reported profit before tax (£m) 47.2 30.0 +57.2%
Reported basic EPS (pence) 18.1 10.5 +72.4%
Adjusted operating cash flow (£m) 50.4 56.9 (11.4)%
Net debt (£m)(1) 85.8 79.2 +6.6
Total dividend per share (pence) 7.3 6.3 +15.9%
(1) 2022 includes lease liabilities of £25.0 million (2021: £25.4
million).
The Group uses some alternative performance measures to manage and assess the
underlying performance of the business. These measures include adjusted
operating profit, adjusted profit before tax, adjusted EPS, adjusted operating
cash flow and net debt. A definition of all the adjusted and non-GAAP measures
is set out in the glossary of terms in note 25 to the condensed consolidated
financial statements. A reconciliation from reported profit after tax to
adjusted profit after tax, adjusted profit before tax and adjusted operating
profit, is set out in note 2 to the condensed consolidated financial
statements.
Financial highlights
• Revenue up 12.9% consisting of 6.6% organic growth at constant
currency (cc) and inorganic growth of 8.5% at cc, offset by adverse currency
impact of 2.2%
• Good organic revenue growth in all three regions, UK, Continental
Europe and Australasia, delivered through both volume and price
• Geographic diversification strategy continues: revenue from non-UK
customers increases from 58.7% to 61.6% in the year
• Adjusted operating margin up 20bps to 21.1% (2021: 20.9%)
underpinned by effective pricing actions and supply chain management
• Adjusted EPS of 24.0 pence, up 14.3%, delivering a compounded
annual growth rate of 13.4% since IPO in 2014. Reported basic EPS up 72.4%
• Strong second half cash generation resulting in a full year
adjusted operating cash flow of £50.4 million (2021: £56.9 million), a full
year cash conversion of 76% (2021: 97%)
• Total dividend for the year increased by 15.9% to 7.3 pence per
share (2021: 6.3 pence)
Operational highlights
• Investment in additional inventory and agile supply chain
management ensured good customer service levels maintained throughout the year
• Acquisition of Energy Recovery Industries (ERI) completed in
September 2021 for an initial consideration of €20 million, gives the Group
a leading position in the manufacture of energy efficient heat exchangers, an
integral component in all heat recovery devices
• €2 million investment commenced in capacity expansion and
automation at ERI to support what we anticipate to be a strong growth area, as
well as an expansion programme for our energy efficient EC3 motorised
impellers in our Torin-Sifan business
• Successful first full year of operation of new Nordics facility in
Växjö
Healthy air, sustainably
• Good progress against our key sustainability targets:
• 67.2% of plastic used in own manufacturing facilities from
recycled sources (2021: 59.7%)
• 66.1% of revenue from low-carbon, energy saving products
(2021: 62.1%)
• Commencement of Group Sustainability Committee as of September
2021, with attendance by our Senior Independent Director at each of the three
meetings to date
• Continued investment and innovation in heat recovery categories,
now over 30% of Group revenue
• Group carbon reduction targets aligned with 2040 net zero
objective
• Signatories to both the CEO Water Mandate and UN Global Compact in
the year
Commenting on the Group's performance, Ronnie George, Chief Executive Officer,
said:
"We have again achieved a strong performance, with good organic revenue growth
across all three of our geographies and maintaining our operating margin in
the face of challenging operating conditions. We further increased the Group's
product and geographic diversification in the year, with non-UK customers now
representing 61.6% of our revenue. Our strategic investment in higher levels
of component and finished goods inventory, a decision taken over one year ago,
has helped underpin excellent service levels and we are delighted with the
progress we have made in delivering "Healthy air, sustainably". I am proud
of the results our committed employees have delivered in the year.
"Progress with sustainability has been equally strong. Recycled plastics
content in our facilities is now up to 67.2% and low carbon content of sales,
additionally boosted by the acquisition of Energy Recovery Industries, is now
at 66.1%. The energy crisis has focused customers' minds on the importance of
heat recovery ventilation and this category now accounts for over 30% of Group
revenue. This desire to reduce heating bills, a tightening of regulations
relating to carbon reduction in buildings, as well as heightened awareness of
the importance of air quality to health, continues to drive demand for our
innovative solutions."
Outlook
The new financial year has started well, delivering revenue and profit ahead
of the same period last year. Whilst we are mindful of macroeconomic
challenges, the regulatory, air quality and energy efficiency agenda
throughout Europe has never been more supportive.
With our excellent levels of customer service, agile manufacturing and supply
chain capability and strong balance sheet position, coupled with significant
geographic revenue diversity, we are well placed to make further progress in
the year ahead.
-Ends-
For further information:
Enquiries:
Volution Group plc
Ronnie George, Chief Executive Officer +44 (0) 1293 441501
Andy O'Brien, Chief Financial Officer +44 (0) 1293 441536
FTI Consulting +44 (0) 203 727 1340
Richard Mountain
Susanne Yule
A meeting for analysts will be held at 9.30am today, Thursday 6 October 2022,
at the offices of Berenberg, 60 Threadneedle Street, London EC2R 8HP. Please
contact connie.gibson@fticonsulting.com to register to attend or for
instructions on how to connect to the meeting via conference facility.
A copy of this announcement and the presentation given to analysts will be
available on our website www.volutiongroupplc.com
(http://www.volutiongroupplc.com) from 9.00 am on Thursday 6 October 2022.
Volution Group plc Legal Entity Identifier: 213800EPT84EQCDHO768.
Note to Editors:
Volution Group plc (LSE: FAN) is a leading international designer and
manufacturer of energy efficient indoor air quality solutions. Volution Group
comprises 19 key brands across three regions:
UK: Vent-Axia, Manrose, Diffusion, National Ventilation, Airtech, Breathing
Buildings, Torin-Sifan.
Continental Europe: Fresh, PAX, VoltAir, Kair, Air Connection, inVENTer,
Ventilair, ClimaRad, rtek, ERI
Australasia: Simx, Ventair, Manrose.
For more information, please go to: www.volutiongroupplc.com
(http://www.volutiongroupplc.com/)
Cautionary statement regarding forward-looking statements
This document may contain forward-looking statements which are made in good
faith and are based on current expectations or beliefs, as well as assumptions
about future events. You can sometimes, but not always, identify these
statements by the use of a date in the future or such words as "will",
"anticipate", "estimate", "expect", "project", "intend", "plan", "should",
"may", "assume" and other similar words. By their nature, forward-looking
statements are inherently predictive and speculative and involve risk and
uncertainty because they relate to events and depend on circumstances that
will occur in the future. You should not place undue reliance on these
forward-looking statements, which are not a guarantee of future performance
and are subject to factors that could cause our actual results to differ
materially from those expressed or implied by these statements. The Company
undertakes no obligation to update any forward-looking statements contained in
this document, whether as a result of new information, future events or
otherwise.
Chairman's Statement
I am pleased to report that Volution has made further significant progress in
the year ended 31 July 2022, both in respect of its financial performance and
delivering against our ESG targets and objectives. As demonstrated by these
results, the resilience of Volution's business model and strategy continues to
be highly effective, despite the unpredictable trading environments, supply
chain challenges, and inflationary pressures experienced across our
operations.
Performance and results
This strong set of results reflects the resilience and responsiveness of the
business and its people, through the challenges of recent times, with the
Group's revenue increasing to £307.7 million (2021: £272.6 million).
Adjusted operating profit was up by 13.9% at £64.9 million (2021: £56.9
million), representing margins of 21.1% (2021: 20.9%). Reported profit before
tax increased to £47.2 million (2021: £30.0 million).
Basic earnings per share for the year was 18.1 pence (2021: 10.5 pence). Our
adjusted earnings per share was 24.0 pence representing a 14.3% increase over
the adjusted earnings per share for the prior year of 21.0 pence. The compound
annual growth rate of adjusted earnings per share since IPO in 2014 was 13.4%,
demonstrating consistent delivery of double-digit earnings growth over the
period.
Adjusted operating cash flow was £50.4 million (2021: £56.9 million) and net
debt at the year end was £85.8 million (2021: £79.2 million), despite
spending £16.5m on acquisitions during the year.
Dividends
We aim to deliver shareholder value through organic and inorganic revenue
growth and reward shareholders through a progressive dividend policy. We paid
an interim dividend of 2.3 pence per share in May 2022 and based on our
results and financial position, the Board has recommended a final dividend of
5.0 pence per share, giving a total dividend for the financial year of 7.3
pence per share (2021: 6.3 pence per share), an increase of 15.9% on the
previous year. As a consequence of this recommendation, the resulting adjusted
earnings dividend cover for the year was 3.3x (2021: 3.3x). Subject to
approval by shareholders at the Annual General Meeting on 14 December 2022,
the final dividend will be paid on 20 December 2022 to shareholders on the
register at 25 November 2022.
Strategy
The three strategic pillars of the Group are organic growth, value-adding
acquisitions and operational excellence. These strategic pillars, together
with our focus on sustainability, provide the platform for the implementation
of the Group's purpose, to provide "healthy air, sustainably", and support the
creation of long-term value for all our stakeholders.
Good progress was made during the year with organic growth, whilst the
acquisition of ERI, based in North Macedonia, and Bera, based in Germany, has
further strengthened the Group's geographic and product diversification. On
behalf of the Board, I am delighted to welcome our new colleagues at ERI and
Bera to the Group.
Environmental, social and governance (ESG) objectives
Volution is committed to high standards of corporate responsibility,
sustainability and employee engagement and continues to focus on its
contribution to a more sustainable world through its operations, culture and
ventilation solutions. We aim to give full consideration to the long-term
impact of all business operations, which means that, where feasible, our
products and services are sustainably sourced.
Board Changes
As previously announced, Tony Reading, who had been a Director of Volution
since the IPO in June 2014, retired at the conclusion of the Annual General
Meeting in December 2021. We were very appreciative of Tony's contribution to
Board discussions over his seven-year tenure. Following Tony's stepping down,
a search process was instigated to find a successor and, on 10 March 2022, we
were pleased to welcome Dr. Margaret Amos to the Board as an Independent
Non-Executive Director, who has close to 30 years of experience at Rolls-Royce
plc, and expertise in a wide range of fields including finance, business
strategy, international M&A, and sustainability.
In addition, we announced the appointment of Amanda Mellor to the role of
Senior Independent Director with effect from 9 December 2021. Amanda has been
a Board member since March 2018 and is also the Board representative for ESG
matters, attending the Management Sustainability Committee meetings of the
Group.
Chairman Succession
At the end of June 2023, I will have been on the Volution Board for nine years
and it will be time to step down. Amanda Mellor, our Senior Independent
Director, will lead the process to find my successor and further announcements
will be made in due course. On a personal note, it has been a pleasure to
serve on the Volution Board and enjoy a front row seat to the continued
development, progress and evolution of the Group. Long may its success
continue.
Governance
The Group continues to be committed to high levels of corporate governance, in
line with its status as a company with a premium listing on the Main Market of
the London Stock Exchange and as a member of the FTSE 250. We are fully
compliant with the 2018 edition of the UK Corporate Governance Code.
During the year, a formal performance evaluation of the Board and Committees
took place to assist in their development, assisted by external evaluator
Independent Audit. The results of the evaluation confirmed that the Board and
Committees were functioning well in terms of effective chairing, quality of
discussion, and focus areas, and that there are no significant concerns among
the Directors about their effectiveness.
Summary
As a Board we continue to believe that Volution is in a strong position to
offer customers ventilation solutions which enhance our indoor environments.
Although many of our products already demonstrate high levels of
sustainability, we continue to work hard to increase the sustainability of all
our products and our Annual Report sets out the strategy and actions we have
set to achieve this.
This ongoing successful performance of the business is only possible due to
the commitment, abilities, and drive of our people. On behalf of the Board, I
would like to thank all our dedicated employees at Volution, for their
continued efforts and allegiance, especially given the difficult environment
of recent years due to the Covid-19 pandemic. I also want to thank Ronnie
George and his executive team for steering the Group so well through what have
been some very testing and turbulent times.
Whilst economic and political uncertainty prevails across the globe,
Volution's performance has demonstrated the strength and resilience of its
business model, helped by our geographic and product diversity.
Paul Hollingworth
Chairman
5 October 2022
Chief Executive Officer's Review
Overview
Volution has delivered another strong set of results and made excellent
progress in the year. At the start of the financial year the Covid-19 pandemic
was still a significant issue in all our local markets and there was
considerable uncertainty about how the situation would evolve. As we finished
the year the pandemic has thankfully moved very much to the background;
however, the strong rebound has created an ongoing industry-wide supply chain
challenge that we have navigated well. Our agile local leadership and the
commitment of our colleagues have enabled us to provide good levels of
customer service throughout. The plan to invest in higher than usual levels of
inventory, a decision taken at the beginning of calendar year 2021, has
underpinned good component part availability for our assembly facilities and
we have exited the financial year 2022 in excellent operational shape.
Along with the industry at large, we have seen an unprecedented period of
significant supply chain disruption and material and labour cost inflation.
These inflationary risks were highlighted by us early in calendar year 2021
and we have remained vigilant, both with respect to managing these input cost
risks as well as quick and transparent actions with regard to pricing to our
customers.
At the start of the financial year, we were continuing to experience strong
demand for private residential refurbishment applications, whilst other areas,
notably public residential refurbishment and residential new build, were
experiencing slower demand. We have now seen a rotation from what was a
Covid-19 induced private refurbishment boom, into good organic growth in the
more regulatory or energy efficiency driven areas of our market. We are
confident that these trends, many of which we expect to be long-term trends
related to carbon reduction and carbon efficiency, are firmly in place, as
well as a longer lasting and more conscious end market connected with the
long-term health risks of poor indoor air quality. The global concerns
regarding energy prices, resulting in significantly higher consumer costs for
heating and powering homes, are already driving more focus on air tightness
and greater energy efficient ventilation. We have always argued, and continue
to do so, that the most effective and cost-effective way to reduce consumer
energy bills is to insulate to avoid energy losses and then structurally
change the way a property is ventilated to provide fresh air with heat
recovery.
Regulations have also evolved in the year supported by the accelerating focus
on carbon reduction from both residential and commercial buildings. Changes to
Part F and Part L of the Building Regulations in the UK were effective in June
2022. For the first time Part F covers ventilation provision for existing
properties where energy efficient measures are subsequently applied in
refurbishment as well as covering new build. The new regulations deliver a 30%
reduction in carbon emissions over the previous regulations and shall
encourage the adoption of heat recovery systems. In addition, we have seen the
Social Housing Decarbonisation Fund influence the adoption of energy efficient
ventilation systems in refurbishment.
We are seeing similar more supportive regulatory changes in all markets with
European changes in the Energy Performance of Buildings Directive. The key
changes help align to the "Fit for 55" package which aims for a 55% reduction
in emissions by 2030. The aim of the changes is to help facilitate more
targeted financing to investments in the building sector through the Green
Deal and the EU Taxonomy supporting vulnerable consumers and fighting energy
poverty. These regulatory changes and supportive local influences are
anticipated to move more quickly in the coming years as our local markets
adopt the changes. In Australia, we are awaiting stage 2 of the National
Construction Code 2022, which covers energy efficiency and condensation
provisions and which is due soon.
Results
The Group delivered revenue of £307.7 million (2021: £272.6 million), an
increase of 12.9% (15.1% at cc), with organic growth of 4.6% (6.6% at cc) and
inorganic growth from the two acquisitions in the year, as well as the full
year effect of the acquisition in the prior year, of 8.3% (8.5% at cc).
Adjusted operating margins increased from 20.9% in the prior year to 21.1%
supported by our early and decisive actions on price rises, as well as the
significant effort in managing the supply chain and input cost challenges.
Reported profit before tax was £47.2 million (2021: £30.0 million), an
increase of 57.2%.
Sustainability
This year we have made good progress with our key sustainability initiatives.
Our teams have been working hard to source, trial and optimise recycled
plastics and this year we hit 67.2% (2021: 59.7%) of the plastic used within
our own facilities now being from a recycled source. The second half of the
year was where we made our most significant step changes and the Group run
rate accelerated in Q4 and was significantly ahead of the previous
three-quarters giving us confidence that we are still on target for our 2025
ambition of 90%.
Revenue from our low-carbon products has increased to 66.1% in the year and is
ahead of this year's target of 63.4%. We remain on track to deliver our target
of 70% of all revenues from low-carbon products by the end of 2025. After the
acquisition of ERI, 30.1% of our revenue is derived specifically from heat
recovery systems and components. This technology is key for avoiding carbon
emissions from heating and cooling of buildings.
This year we have become signatories to the CEO Water Mandate and the UN
Global Compact. Although early in the process, we have started workstreams in
the Direct Operations and Supply Chain and Watershed Management commitment
areas of the Water Mandate, plus we are ensuring that we embed the ten
principles of the UN Global Compact across our organisation. We are committed
to continuous improvement in these areas and will provide greater disclosures
over time.
We support the recommendations of the Task Force on Climate-related Financial
Disclosures and have made more detailed disclosures in this year's report
including transparent carbon reduction targets.
Strategy
Organic growth
The financial year ended 31 July 2022 was a year of good growth; we delivered
an organic growth of 6.6% on a constant currency basis driven by price and
volume.
Volution has a significant portion of revenue exposed to applications which
are underpinned by regulatory drivers. This supports demand and also drives
increased unit price as solutions need to be more energy efficient and
increasingly contain smarter technology.
We can complement this opportunity and aid our organic growth through superior
customer service, given Volution is more vertically integrated than most of
its local competitors, and has a far greater breadth of product in its
portfolio and innovation capability. Over the last five years, supported by
many acquisitions and a strong conveyor belt of new product introductions, we
believe that we now have one of the most comprehensive product ranges in the
European and Australasian residential ventilation markets.
In this financial year we have gained share through our vertical integration,
providing continuity of supply for finished products in our markets. This is
most notable in residential refurbishment and new build where several product
lines have gained greater traction than anticipated as we have gained share
from our competitors. We have also won a significant new account in the UK
housebuilding sector and the revenue will commence in this financial year.
In summary, we are benefiting from accelerating regulatory support, a
portfolio of strong local brands, a comprehensive and well serviced product
portfolio and decentralised and empowered local leadership teams motivated to
gain share and grow well organically. Providing healthy air continues to be
our priority and following on from the Covid-19 induced increased awareness of
the importance of indoor air quality, we see many new and emerging
opportunities as landlords and homeowners place greater importance on this
topic.
Acquisitions
We completed two acquisitions in the year. In September we announced the
completion of the acquisition of Energy Recovery Industries (ERI) for an
initial consideration of €20.0 million. ERI designs and manufactures a range
of innovative and highly efficient aluminium heat exchanger cells for use
primarily in commercial heat recovery ventilation systems. Products are
manufactured in ERI's modern, high quality production facility in Bitola,
North Macedonia, and are supplied to heat recovery and air handling unit
manufacturers predominantly in Europe, including existing Volution Group
companies.
The ERI acquisition included an earn-out through to the end of the financial
year 2024. The team has ambitious plans for growth, and we are making good
progress with our previously advised factory extension and capital plant
investment. Once finalised, towards the end of calendar year 2023, the
available capacity to manufacture energy efficient heat exchanger cells will
be double that in place at the time of the acquisition. Increasing automation
at our plant in Bitola, North Macedonia, is key to increasing output at the
same time as significantly increasing plant efficiency. Heat exchangers are an
integral part of all heat recovering ventilation devices with strong
structural growth drivers.
In July we completed the acquisition of Bera, a long-term partner for our
inVENTer business and an important route to market for our business in
southern Germany. This transaction was triggered due to the retirement of the
owner of Bera and was important for us to secure access to our long-term
contractor customers.
Operational excellence
Having delivered an adjusted operating profit margin of 20.9% in the previous
financial year, in line with our long-term operating margin target of greater
than 20%, we have achieved an adjusted operating profit margin of 21.1% in
this year. We strongly believe in a culture of efficiency, elimination of
waste wherever possible and local ownership of the many streamlining and
efficiency initiatives that we drive across the business every year. With
significant labour and material inflation, our initiatives and our medium-term
target to achieve 90% of all of our plastic injection moulding and extrusion
from recycled content, are becoming ever more important in underpinning our
market leading operating margins.
In the year we benefited from the first full financial year operating from our
new facility in Växjö, Sweden, where the plant commissioning was completed
in the early part of calendar year 2021. In the UK we continued to bed down
the consolidated finance function with a substantial step taken towards the
end of this financial year.
People
As anticipated in last year's report we have seen a return to more "normal"
working practices. Where it makes sense, we are applying some hybrid working
arrangements and the autonomy and implementation of these practices is the
responsibility of local teams. There have been some clear gains, such as
working on important innovation projects, where engineers partly working from
home for periods of the project have seen some efficiency gains with this
approach. We also appreciate that there is a huge community spirit within our
Company, and we have again enjoyed being fully face to face with our
colleagues this year. During the year there have been some lunchtime
gatherings where senior management in the UK have rotated the monthly meetings
to attend different sites and hold an employee wide lunch, with everyone
getting to know each other so much more and informal Q&A sessions
providing greater engagement between colleagues.
A key appointment during the year was Michelle Dettman joining as Group Head
of HR. Initial emphasis has been on the UK area which now runs as one senior,
flatter management team across all areas of the UK. This has improved employee
engagement and we are excited about how we can further step up our employee
engagement in the year ahead. We also hold our employee engagement and
communication meetings, attended by Claire Tiney, Non-Executive Director and
chair of the Remuneration Committee.
I am mindful that we have emerged from the Covid-19 pandemic in excellent
shape and am hugely grateful to all of our colleagues for their dedication and
commitment to providing our customers with healthy air, sustainably.
Outlook
The new financial year has started well, delivering revenue and profit ahead
of the same period last year. Whilst we are mindful of macroeconomic
challenges, the regulatory, air quality and energy efficiency agenda
throughout Europe has never been more supportive.
With our excellent levels of customer service, agile manufacturing and supply
chain capability and strong balance sheet position, coupled with significant
geographic revenue diversity, we are well placed to make further progress in
the year ahead.
Ronnie George
Chief Executive Officer
5 October 2022
Market by market
United Kingdom
Market sector revenue 31 July 2022 31 July 2021 Growth (cc)
£m £m %
UK
Residential 75.1 70.2 6.9
Commercial 31.0 31.1 (0.4)
Export 11.7 10.1 18.1
OEM 25.9 24.5 7.5
Total UK revenue 143.7 135.9 6.2
Adjusted operating profit 29.3 27.8 5.3
Adjusted operating profit margin (%) 20.4 20.4 -
Reported operating profit 22.3 17.7 26.1
In the UK our revenues increased from £135.9 million to £143.7 million, a
5.7% increase (6.2% at cc) helped by price increases across the brands.
Adjusted operating profit increased from £27.8 million to £29.3 million with
an adjusted operating margin remaining above the target of 20% at 20.4% (2021:
20.4%). We continued to build on the organisational changes implemented in the
prior year by developing a more functional focused team covering all aspects
of both the UK ventilation and OEM activities where significant logistics and
supply chain experience underpinned a normalising of good customer service and
product availability throughout the year. Having delivered a step up to the
Group adjusted operating profit margin target in the prior year we are
delighted to have maintained margins, despite the significant inflationary
pressure experienced in the year.
Sales in our Residential market sector were £75.1 million (2021: £70.2
million), an organic growth of 6.9%, with revenue growth accelerating in the
second half of the year. Our residential sales activities consist of both new
build housing and refurbishment. New build residential systems delivered much
stronger revenue in the second half of the year. As reported at the interim
results for FY22 we experienced site call-off delays in the first half of the
year with the order book continuing to grow. In the second half of the year
revenue for residential new build systems, including a substantial element of
mechanical ventilation with heat recovery, experienced strong demand. In June
2022 Part F and Part L of the Building Regulations were updated and provide
further regulatory support for energy efficient ventilation to be specified in
new homes. Reducing carbon emissions from new homes is an ongoing objective of
these Building Regulations and the most recent changes will see a further step
up in insulation and air tightness, making the application of heat recovery
more compelling in the design process. We also won a new significant
housebuilder account although the revenue benefits will start early in the
financial year 2023. As energy costs continue to increase, we predict that
home buyers will place even greater emphasis on airtight, well insulated and
low-cost-to-run new dwellings and this will provide further tailwinds for our
market leading range of new build residential system products.
In our residential refurbishment markets, we witnessed a rotation in demand
from private refurbishment, which continued to grow organically but at a lower
rate than in 2021, with public housing refurbishment demand growing strongly
in the second half of the year as the backlog of work not undertaken during
the Covid-19 pandemic was released. In private refurbishment a key initiative
is to increase the proportion of our revenue that provides silent, more energy
efficient solutions. Progress in the year has now delivered almost 30% of our
private refurbishment through this premium range of products and there is
further scope to increase this in the coming years. Ventilation in
refurbishment can be more silent, less intrusive and more energy efficient and
we work closely with our distribution partners to deliver a greater proportion
of sales in this important category.
In public refurbishment we made substantial progress. Our agile approach to
the market wide shortages of electronic components has enabled us to gain
share. These share gains are expected to be retained in the coming months and
with our capability for continuous running ventilation, positive input
ventilation and decentralised heat recovery, we have an unrivalled range of
products to support housing associations with their net zero carbon objectives
for 2030. In July 2022 we arranged for approximately 20 UK colleagues to meet
with their German colleagues, the sole objective being to establish how we
could further enhance our offer to the UK public housing market by utilising
our leading technology from Germany. These cross-selling initiatives had been
more difficult through the Covid-19 pandemic, and it has been a pleasure and a
source of considerable inspiration that these are firmly back on the agenda.
Our objective is to further develop the UK public housing solution,
tailor-made to assist with 2030 net zero carbon targets, by providing the
market with leading technology.
Our three residential product assembly facilities in Crawley, Dudley and
Reading are to be commended for their flexibility and agility in respect of
servicing our customer base in the year as well as the way in which we
successfully navigated the supply chain challenges that have persisted
throughout. Whilst material availability continues to be a challenge the exit
of the year left us with a handful of well managed issues and we start the new
financial year in excellent shape to provide good levels of availability and
customer service.
Sales in our UK Commercial sector were £31.0 million (2021: £31.1 million),
an organic decline of 0.4%. Whilst commercial revenue was broadly flat in the
year, we made good progress with our fan coil production facility in West
Molesey. As a leading provider of fan coil ventilation systems utilised for
heating and cooling buildings, we were awarded significant new orders at the
end of the year. One notable contract, a fan coil project for a prestigious
new commercial building in London, resulted in the most sizeable order of the
year, c.£2 million, with deliveries due to start before the end of calendar
year 2022. During the year we made good progress with key new product
developments, both in our range of fan coils and in enhancements to our
natural ventilation with heat recycling (NVHR). These new developments,
coupled with an investment in new, semi-automated metal cutting capability at
our Dudley facility, put us in a strong position for this financial year.
Sales in our UK Export sector were £11.7 million (2021: £10.1 million), an
organic growth of 18.1% at constant currency. Our main export market in Eire
performed very well. Our distribution partnerships in Eire are long
established and collaborative and together we have a leadership position for
the specification and supply of energy efficient heat recovery ventilation and
for the supply of energy efficient fan coils. The Irish market has embraced
heat recovery technology at a faster rate than in the UK and our mechanical
extract ventilation and mechanic ventilation with heat recovery solutions are
well placed to benefit from further changes underway.
Sales in our OEM sector were £25.9 million (2021: £24.5 million), an organic
growth of 7.5% at constant currency. Our EC3 motorised impeller proposition
delivered good growth in the year both in the UK and export markets. In
October 2021 we commenced an investment plan to substantially increase our
output capability for the manufacture of low energy consuming motorised
impellers. This additional capacity came online in the fourth quarter of FY22
and there are further initiatives underway to increase output. Some of our
competitors are struggling for component availability, we believe our agile
approach to this market and the strong structural underpinning of EC3
motorised impeller demand due to regulatory changes will support further good
growth in the new year.
Continental Europe
Market sector revenue 31 July 2022 31 July 2021 Growth (cc)
£m £m %
Nordics 53.3 51.6 8.1
Central Europe 65.1 43.9 54.5
Total Continental Europe revenue 118.4 95.5 29.4
Adjusted operating profit 29.6 25.4 16.6
Adjusted operating profit margin (%) 25.0 26.6 (1.6)pp
Reported operating profit 23.2 18.1 28.5
Our Continental Europe activities had a very strong year and we delivered
excellent progress with sales at £118.4 million (2021: £95.5 million),
growth of 29.4% at constant currency, within which organic growth was 5.0% on
a constant currency basis. The sector benefited from the acquisition of ERI in
September 2021 and the full year effect of the acquisitions from the prior
year of ClimaRad BV in the Netherlands in December 2020, Klimatfabriken in
Sweden in February 2021 and Rtek in Finland in May 2021. Adjusted operating
profit was up 16.6% at £29.6 million versus a prior year of £25.4 million.
Adjusted operating profit margins declined in the year by 1.6pp to 25.0%,
partly due to the dilutionary impact of the Rtek and ERI acquisitions. Whilst
ERI achieves an operating margin in line with the Group's 20% operating margin
target it is at a lower rate than the 26.6% operating margin delivered in
Continental Europe in the prior year.
Sales in the Nordics region were £53.3 million (2021: £51.6 million), an
increase of 8.1% at constant currency compared to the previous year. Organic
growth was 1.0% on a constant currency basis, with inorganic growth from the
full year effect of the acquisitions of Klimatfabriken in Sweden in February
2021 and Rtek in Finland in May 2021. Nordics refurbishment demand was
exceptionally strong in the prior year, and we were pleased to deliver organic
growth against this strong comparator period. In the early part of the year in
Finland we experienced some Covid-19 related delays to project orders with the
situation markedly better in the second half. Our Nordics business has
established a strong export market in South America and this area was also
impacted by Covid-19 delays in the year hampering our organic growth. The new
acquisitions of Klimatfabriken and Rtek have now been fully integrated into
our Nordics activities in line with our investment plan during the year.
Sales in the Central Europe region were £65.1 million compared to the prior
year of £43.9 million, growth of 54.4% on a constant currency basis. Organic
revenue growth was 9.7% on a constant currency basis, with inorganic growth
coming from the acquisition of ERI in September 2021 and the full year effect
of the acquisition of ClimaRad BV in the Netherlands in December 2020.
Germany again delivered a strong performance in the year with our market
leading range of decentralised heat recovery. Further improvements in the
specification selling process enabled us to again nudge up our market share
and with the nervousness in Germany around spiralling energy prices and gas
supply, we see a positive outlook for our product range in the market. As
homeowners seek to improve the energy efficiency of their dwellings, we expect
further refurbishment projects to grow. The root to this is through air
tightness and often the installation of a heat pump for heating demand. This
is an ideal scenario for us, supporting the specifying of decentralised,
retrofittable heat recovery ventilation.
In the Netherlands, ClimaRad had a slow start to the year with activity much
stronger in the second half. The team in the Netherlands has developed a new
range of heat recovery products that have a compelling argument for major
refurbishments through a total cost of ownership model (TCO). With gas boilers
prohibited in new build applications in the market we have a solution that
works well as a heat emitting device coupled to a heat pump, with heat
recovery ventilation in the same solution. A common theme in our markets is
that with increasing energy costs the payback period for our solutions has
been dramatically reduced.
In Belgium we delayed the launch of our new higher airflow heat recovery
ventilation systems, now scheduled to launch in the first quarter of FY23.
These new ranges have been in development for over two years and will provide
us with a full range of ventilation system units for the residential new build
market. We also continued to make good progress with our Vent-Axia brand sales
to the wholesalers.
In September 2021 the acquisition of Energy Recovery Industries ("ERI"), a
leading manufacturer of aluminium heat exchanger cells, was completed. The
transaction was agreed with an "earn-out" arrangement and the leadership team
is making good progress with the investment plan to materially increase our
output capacity. ERI performed well in the year and in line with our
investment plan. The order book lengthened in the year because of strong
demand for our leading heat cell ranges and the constraint that we currently
have on our output capacity. When finally completed, towards the end of
calendar year 2023, we expect to have significant extra capacity headroom,
some of which will come online towards the midpoint of the new financial year.
Australasia
Market sector revenue 31 July 2022 31 July 2021 Growth (cc)
£m £m %
Total Australasia revenue 45.6 41.2 11.4
Adjusted operating profit 9.9 8.9 11.3
Adjusted operating profit margin (%) 21.8 21.7 0.1pp
Reported operating profit 8.8 4.5 96.1
Sales in our Australasia region were £45.6 million, with strong organic
growth of 11.4% at constant currency. Adjusted operating margins improved to
21.8% versus 21.7% in the prior year. Since first acquiring Simx in March 2018
and subsequently Ventair in March 2019, we have established a strong presence
in the Australasian residential ventilation market.
Simx in New Zealand experienced a more difficult year. Covid-19 related
lockdowns in Auckland persisted through the early part of the year and led to
reduced demand. The prior year had been particularly strong, buoyed by the
Healthy Homes Act and the related Covid-19 induced private refurbishment boom.
Further regulatory changes have occurred in the market, the first step towards
a more European style of energy efficient ventilation, with our Group product
ranges placing us firmly in pole position as the market develops.
In Australia we delivered strong organic growth and a further step up in our
adjusted operating profit margin. Key initiatives in the year included the
roll-out of supply to a market leading distributor for DIY customers and the
successful launch of a new range of low energy ceiling fans. As well as
launching several new product ranges there was a substantial investment in
strengthening the team. Our objective is to become one of the significant
players in the Australian ventilation market and equipping the team with the
bandwidth, skills and capabilities to deliver this is key, with good progress
in the year.
Finance Review
Volution has delivered a strong set of financial results for the year ended 31
July 2022, exceeding all bar one of the Group's key financial targets and
demonstrating the strength of our financial model. Of particular note was our
operating margin performance, with a Group adjusted operating margin of 21.1%
(2021: 20.9%) delivered against a background of significant inflationary cost
pressures.
The one financial target that we missed was cash conversion (target >90%)
where a decision to increase our inventory levels to protect against supply
chain unreliability resulted in Group working capital increasing by £17.7
million compared with 31 July 2021. The investment in working capital occurred
during the first half of the financial year, and good second half cash
generation meant we closed the year with a cash conversion of 76%. As at 31
July 2022 closing leverage, measured as net debt (excluding lease liabilities)
to adjusted EBITDA, stands at 0.9x (2021: 0.9x), and our strong balance sheet
position gives us flexibility and capability to continue to invest in growth.
Revenue for the year ended 31 July 2022 was £307.7 million, an increase of
12.9%, with organic growth of 6.6% at constant currency (cc), inorganic growth
of 8.5% (cc) and adverse foreign exchange impact of 2.2%.
Adjusted operating profit increased by 13.9% in the year to £64.9 million
(2021: £56.9 million), with Group adjusted operating margins of 21.1% (2021:
20.9%). Early price action and disciplined cost management enabled us to
offset the impacts of significant input cost inflation and expand margins by
20bps in the year. The increase of £8.0 million in adjusted operating profit
consisted of £4.6 million from organic growth, £5.0 million from inorganic
growth, with adverse currency impacts of £1.6 million.
Reported and adjusted results
Reported Adjusted1
Year ended Year ended Movement Year ended Year ended Movement
31 July 2022 31 July 2021 31 July 2022 31 July 2021
Revenue (£m) 307.7 272.6 12.9% 307.7 272.6 12.9%
EBITDA (£m) 74.2 59.3 25.2% 73.9 65.2 13.3%
Operating profit (£m) 50.8 34.2 48.5% 64.9 56.9 13.9%
Net finance costs (£m) 2.0 2.9 (29.2)% 3.4 3.2 4.7%
Profit before tax (£m) 47.2 30.0 57.2% 60.9 53.2 14.5%
Basic EPS (p) 18.1 10.5 72.4% 24.0 21.0 14.3%
Total dividend per share (p) 7.3 6.3 15.9% 7.3 6.3 15.9%
Operating cash flow (£m) 50.8 51.0 (0.4)% 50.4 56.9 (11.4)%
Net debt (£m) 85.8 79.2 6.6 85.8 79.2 6.6
Notes
1. The Group uses some alternative performance measures to track and
assess the underlying performance of the business. These measures include
adjusted operating profit, adjusted profit before tax, adjusted EPS, adjusted
operating cash flow, net debt and net debt (excluding lease liabilities. The
reconciliation of the Group's reported profit before tax to adjusted profit
measures of performance is summarised in the table below and in detail in note
2 to the consolidated financial statements. For a definition of all the
adjusted and non-GAAP measures, see the glossary of terms in note 25 to the
consolidated financial statements.
2. Pre-IFRS 16 basis, excludes lease liabilities of £25.0 million
(2021: £25.4 million).
The Board and key management use some alternative performance measures to
track and assess the underlying performance of the business. These measures
include adjusted operating profit, adjusted profit before tax, adjusted basic
EPS and adjusted operating cash flow. These measures are deemed more
appropriate to track underlying financial performance as they exclude income
and expenditure that are not directly related to the ongoing trading of the
business. A reconciliation of these measures of performance to the
corresponding reported figure is shown below and is detailed in note 2 to the
consolidated financial statements.
Adjusted profit before tax of £60.9 million was 14.5% higher than 2021
(£53.2 million). Reported profit before tax was £47.2 million (2021: £30.0
million) and is after charging:
• £14.5 million in respect of amortisation of intangible assets
(2021: £16.8 million);
• Credit balance of £0.4 million (2021: debit of £4.2 million) of
other costs of business combinations of which:
• £0.2 million relates to costs associated with business
combinations (2021: £0.9 million); and
• Credit balance of £0.6 million was in respect of contingent
consideration reduction in ERI due to amendment to the terms of the contingent
consideration payment (2021: £3.3 million);
• £1.4 million gain due to the fair value measurement of financial
instruments (2021: gain of £0.3 million); and
• £1.0 million re-measurement of future consideration relating to
the business combination of ClimaRad (2021: £0.8 million).
Year ended 31 July 2022 Year ended 31 July 2021
Reported Adjustments Adjusted Reported Adjustments Adjusted
£m £m results £m £m results
£m £m
Revenue 307.7 - 307.7 272.6 - 272.6
Gross profit1 147.1 - 147.1 131.6 1.7 133.3
Administration and distribution costs excluding the costs listed below (82.2) - (82.2) (76.4) - (76.4)
Amortisation of intangible assets acquired through business combinations (14.5) 14.5 - (16.8) 16.8 -
Contingent consideration2 0.6 (0.6) - (3.3) 3.3 -
Costs of business combinations3 (0.2) 0.2 - (0.9) 0.9 -
Operating profit 50.8 14.1 64.9 34.2 22.7 56.9
Re-measurement of financial liability (0.6) - (0.6) - - -
Re-measurement of future consideration4 (1.0) 1.0 - (0.8) 0.8 -
Net gain on financial instruments at FV5 1.4 (1.4) - 0.3 (0.3) -
Other net finance costs (3.4) - (3.4) (3.7) - (3.7)
Profit before tax 47.2 13.7 60.9 30.0 23.2 53.2
Income tax (11.5) (2.1)(6) (13.6) (9.2) (2.4) (11.6)
Profit after tax 35.7 11.6 47.3 20.8 20.8 41.6
Notes
1. £nil adjustments in 2022 impacting gross profit (2021: £1.7 million
amortisation of acquired inventory fair value adjustments).
2. Credit balance of £0.6 million was in respect of contingent
consideration reduction in ERI (2021: £3.3 million was in respect of
contingent consideration increase related to Ventair).
3. £0.2 million costs of business combination relating to professional
fees (2021: £0.9 million).
4. £1.0 million revaluation relating to the re-measurement of future
consideration in ClimaRad (2021: £0.8 million).
5. £1.4 million gain due to the fair value of financial derivatives
(2021: £0.3 million gain).
6. £2.1 million tax adjustment relates to the tax on the adjusted items
above (2021: £2.4 million)
Currency impacts
Aside from Sterling, the Group's key trading currencies for our non-UK
businesses are the Euro, representing approximately 23.5% of Group revenues,
Swedish Krona (approximately 10.3%), New Zealand Dollar (approximately 7.2%)
and Australian Dollar (approximately 7.7%). We do not hedge the translational
exchange risk arising from the conversion of the results of overseas
subsidiaries, although we do denominate some of our borrowings in both Euro
and Swedish Krona which offsets some of the translation risk relating to net
assets. We had Euro denominated borrowings as at 31 July 2022 of £71.9
million (2021: £57.3 million) and Swedish Krona denominated borrowings of
£2.4 million (2021: £16.0 million). The Sterling value of these foreign
currency denominated loans net of cash decreased by £0.9 million as a result
of exchange rate movements (2021: decreased by £5.0 million).
During the year Sterling strengthened on average against all four of our
principal non-Sterling revenue currencies, against the Euro by 4.2%, Swedish
Krona by 5.6%, New Zealand Dollar by 0.5% and Australian Dollar by 1.0%. This
gave rise to an unfavourable revenue impact of £6.1 million in the year, with
operating profits being impacted by £1.7 million.
Transactional foreign exchange exposures arise principally in the form of US
Dollar denominated purchases from our suppliers in China. We aim to purchase
80-90% of our expected requirements approximately twelve months forward, and
as such we have purchases in place for approximately 85% of our forecasted
requirements for the 2023 financial year.
Average rate Average rate Movement
2022 2021
Euro 1.1816 1.1343 -4.2%
Swedish Krona 12.2289 11.5799 -5.6%
New Zealand Dollar 1.9522 1.9419 -0.5%
Australian Dollar 1.8253 1.8081 -1.0%
US$ 1.3161 1.3567 3.0%
Finance revenue and costs
Reported net finance costs of £2.0 million (2021: £2.9 million) include a
£1.4 million net gain on the revaluation of financial instruments (2021: net
gain of £0.3 million). Adjusted finance costs were £3.4 million (2021: £3.2
million), with the weighted average interest rates on gross debt at 2.02%
(2021: 2.04%).
Taxation
Our effective adjusted tax rate for the year was 22.4% (2021: 21.8%). The
increase of 0.6pp in the year was substantially driven by the shift in our
relative profit across the Group with our companies in our Australiasia sector
performing well where the tax rates are 28% to 30% compared to the current UK
rate of 19%.
The rate of tax in the UK is currently 19%. Following the Finance Bill 2021,
the rate of tax in the UK had been expected to increase to 25% from 1 April
2023. On 23 September 2022, the Chancellor of the Exchequer announced that the
UK corporation tax rate will remain at 19% from 1 April 2023 - reversing a
previously enacted measure to increase the rate to 25%. The announcement of
the reversal in the tax rate from 1 April 2023 was not enacted or
substantively enacted at the balance sheet date and accordingly has no impact
on the tax balances at 31 July 2022.
If this tax rate change had been substantively enacted or enacted at the
balance sheet date, the deferred tax liability would have decreased by
approximately £1.1 million. We expect our medium-term underlying effective
tax rate to be in the range of 22% to 25% of the Group's adjusted profit
before tax, depending on business mix and the profile of acquisitions.
Capital allocation
Volution aims to deliver strong financial returns and to invest our strong
cash flows in a disciplined manner so as to support continued and sustainable
future earnings growth and cash generation. Our capital allocation policies
are:
1. investment for organic growth, including through capital expenditure
and investment in research and development, new products and innovation, and
the ongoing development of our people;
2. value-adding acquisitions in complementary businesses in current or
close adjacent market niches, expanding our market reach; and
3. regular returns to shareholders through a progressive approach to
dividends, delivering regular cash returns to shareholders without impacting
on our ability for investment in the growth of the business.
Investment for organic growth
The decision to increase inventory levels was a key part of our initiative to
mitigate the challenges of global supply chain uncertainty, ensure good levels
of customer service and product availability, and allow us to capitalise on
organic revenue opportunities across our markets. As a consequence, and
combined with the increase in revenue, the Group's working capital increased
during the year by £17.7 million (2021: increase of £5.8 million). Our
working capital as a percentage of the last twelve months' revenue stood at
18.1% (2021: 12.7%). With inventory levels in a good position across the Group
by half year, the second half of the year saw working capital levels moderate
and we do not expect a further increase as a percentage of revenue.
Capital expenditure of £6.9 million (2021: £4.5 million) was up on last
year, including continued investment in new product development programmes
(£1.2 million) as we continue to develop and expand our product offering
across the Group. We also commenced our planned expansion of the manufacturing
facility and capacity of ERI in North Macedonia, with £0.5 million spent in
2022 and a further £1.4 million anticipated during 2023.
Value-adding acquisitions
We completed one major acquisition in the year, Energy Recovery Industries
(ERI) in September 2021 for an initial consideration of €20.0 million. Based
in North Macedonia, ERI designs and manufactures a range of innovative and
highly efficient aluminium heat exchanger cells for use primarily in
commercial heat recovery ventilation systems. In addition, in July 2022 we
purchased the assets of a long-term partner for our inVENTer business and an
important route to market for our business in southern Germany. Both
acquisitions are fully aligned with our strategic focus on low-carbon,
high-growth market opportunities.
Total spend on business combinations of £24.4 million (2021: £43.7 million)
related to the initial consideration for the acquisition of ERI (see note 13)
of £16.0 million as well as payment of contingent consideration in respect of
Air Connection (£0.5 million) and Ventair (£4.1 million), repayment of ERI
debt acquired (£3.3 million) and part repayment of the ClimaRad vendor loan
(£0.5 million).
Returns to shareholders
Adjusted earnings per share increased by 14.3% to 24.0 pence (2021: 21.0
pence). The Board is recommending a final dividend of 5.0 pence which,
together with an interim dividend paid of 2.3 pence per share, gives a total
dividend per share of 7.3 pence (2021: 6.3 pence), up 15.9% in total. The
final dividend is subject to approval by shareholders at the AGM on 14
December 2022 and, if approved, will be paid on 20 December 2022.
Tax paid of £12.2 million was £4.1 million higher than the prior year (2021:
£8.1 million).
Movements in net debt position for the year ended 31 July 2022
2022 2021
£m £m
Opening net debt 1 August (79.2) (74.2)
Movements from normal business operations:
Adjusted EBITDA 73.9 65.2
Movement in working capital (17.7) (5.8)
Share-based payments 1.1 2.0
Capital expenditure (6.9) (4.5)
Adjusted operating cash flow: 50.4 56.9
- Interest paid net of interest received (2.7) (1.5)
- Income tax paid (12.2) (8.1)
- Cash flow relating to business combination costs (0.2) (0.8)
- Dividend paid (13.3) (3.8)
- Purchase of own shares (1.9) (2.1)
- FX on foreign currency loans/cash 0.7 5.0
- Issue costs of new borrowings (0.3) (1.2)
- IFRS 16 payment of lease liabilities (3.2) (3.5)
- IFRS 16 decrease/(increase) in lease liabilities 0.5 (2.2)
Movements from business combinations:
- Business combination of subsidiaries, net of cash acquired (16.5) (42.2)
- Contingent consideration relating to Ventair from operating activities (3.2) -
- Contingent consideration relating to Ventair from investing activities (0.9) -
- Business combination of subsidiaries, debt repaid (3.8) (1.5)
Closing net debt 31 July (85.8) (79.2)
2022 2021
£m £m
Bank debt (74.3) (73.3)
Cash 13.5 19.5
Net debt (excluding lease liabilities) (60.8) (53.8)
Lease liabilities (25.0) (25.4)
Net debt (85.8) (79.2)
Reconciliation of adjusted operating cash flow
2022 2021
£m £m
Net cash flow generated from operating activities 41.7 52.5
Net capital expenditure (6.9) (4.5)
UK and overseas tax paid 12.2 8.3
Tax refund - (0.2)
Contingent consideration relating to the acquisition of Ventair 3.2 -
Cash flow relating to business combination costs 0.2 0.8
Adjusted operating cash flow 50.4 56.9
Funding facilities and liquidity
In December 2021, the Group exercised the option to extend its £150 million
multicurrency "Sustainability Linked Revolving Credit Facility", together with
an additional accordion of up to £30 million, by a period of twelve months.
The maturity date of the facility is now 2 December 2024.
As at 31 July 2022, we had £75.7 million of undrawn, committed bank
facilities (2021: £50.4 million) and £13.5 million of cash and cash
equivalents on the consolidated statement of financial position (2021: £19.5
million).
Employee Benefit Trust
During the year £1.9 million of non-recourse loans (2021: £2.1 million) were
made to the Volution Employee Benefit Trust for the purpose of purchasing
shares in Volution Group plc in order to meet the Company's obligations under
its share incentive plans. The Volution Employee Benefit Trust acquired
463,000 shares at an average price of £4.10 per share in the period (2021:
£3.24) and 402,407 shares (2021: 401,529 shares) were released by the
trustees with a value of £1,114,667 (2021: £766,920). The Volution Employee
Benefit Trust has been consolidated into our results and the shares purchased
have been treated as treasury shares deducted from shareholders' funds.
Earnings per share
Our reported basic earnings per share for the year is 18.1 pence (2021: 10.5
pence).
Our adjusted basic earnings per share for the year is 24.0 pence (2021: 21.0
pence).
Andy O'Brien
Chief Financial Officer
5 October 2022
DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS
We confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the undertakings
included in the consolidation taken as a whole; and
· the Strategic report includes a fair review of the development and performance
of the business and the position of the Company and the undertakings included
in the consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face. We consider the annual
report and financial statements, taken as a whole, are fair, balanced and
understandable and provide the information necessary for shareholders to
assess the Company's position and performance, business model and strategy.
The contents of this announcement, including the responsibility statement
above, have been extracted from the annual report and accounts for the year
ended 31 July 2022 which may be found at www.volutiongroupplc.com
(https://url4.mailanyone.net/v1/?m=1kPUjX-0006fm-3X&i=57e1b682&c=ajfQEN26VQmirHDwxFurBWgCflrPR8Agr74jU4a5rZgOwqVSYJKYHs1PicgRfKG0dUIUGv29xWm9347_4j62EOtKbyMYIsIDjhT9EjyA0Eo7OB1vGtP2HuGk-mqWJT7AE0xRlSUbXjhUIme8isfmgCOYIujSgZQf_WaD2FVwmvjghZ6AmZGZERknW7dAtFIQjRLbgQJekm0lf01Xw6u1rQ)
and will be despatched to shareholders on or around 21 October 2022.
Accordingly this responsibility statement makes reference to the financial
statements of the Company and the group and to the relevant narrative
appearing in that annual report and accounts rather than the contents of this
announcement.
On behalf of the Board
Ronnie George Andy O'Brien
Chief Executive Officer Chief Financial Officer
5 October 2022 5 October 2022
Consolidated Statement of Comprehensive Income
For the year ended 31 July 2022
Notes 2022 2021
£000 £000
Revenue from contracts with customers 3 307,701 272,588
Cost of sales (160,603) (140,939)
Gross profit 147,098 131,649
Administrative and distribution expenses (96,693) (93,399)
Other operating income 5 - 137
Operating profit before separately disclosed items 50,405 38,387
Costs of business combinations (215) (889)
Contingent consideration 598 (3,287)
Operating profit 50,788 34,211
Finance revenue 6 1,333 397
Finance costs 6 (3,369) (3,272)
Re-measurement of financial liabilities (583) (491)
Re-measurement of future consideration (955) (811)
Profit before tax 47,214 30,034
Income tax 7 (11,542) (9,198)
Profit for the year 35,672 20,836
Attributable to the shareholders 35,610 20,836
Attributable to non-controlling interest 62 -
Other comprehensive income
Items that may subsequently be reclassified to profit or loss:
Exchange differences arising on translation of foreign operations 1,944 (3,199)
(Loss)/gain on currency loans relating to the net investment in foreign (1,744) 5,397
operations
Other comprehensive income for the year 200 2,198
Total comprehensive income for the year 35,872 23,034
Attributable to the shareholders 35,810 23,034
Attributable to non-controlling interest 62 -
Earnings per share
Basic earnings per share 8 18.1p 10.5p
Diluted earnings per share 8 17.8p 10.4p
Consolidated Statement of Financial Position
At 31 July 2022
Notes 2022 2021
£000 £000
Non-current assets
Property, plant and equipment 9 28,235 23,908
Right-of-use assets 18 23,567 24,477
Intangible assets - goodwill 10 142,661 137,710
Intangible assets - others 12 87,592 85,373
282,055 271,468
Current assets
Inventories 14 57,151 44,971
Right of return assets 3 - 99
Trade and other receivables 15 57,526 47,482
Other financial assets 16 1,091 507
Cash and short-term deposits 13,543 19,456
129,311 112,515
Total assets 411,366 383,983
Current liabilities
Trade and other payables 17 (48,837) (47,435)
Refund liabilities 3 (10,268) (10,562)
Income tax (5,564) (4,629)
Other financial liabilities 19 - (4,608)
Interest-bearing loans and borrowings 20 (3,599) (3,454)
Provisions 21 (1,684) (1,869)
(69,952) (72,557)
Non-current liabilities
Interest-bearing loans and borrowings 20 (104,433) (104,863)
Other financial liabilities 19 (14,132) (6,021)
Provisions 21 (319) (376)
Deferred tax liabilities 22 (14,222) (14,876)
(133,106) (126,136)
Total liabilities (203,058) (198,693)
Net assets 208,308 185,290
Capital and reserves
Share capital 2,000 2,000
Share premium 11,527 11,527
Treasury shares (3,574) (3,739)
Capital reserve 93,855 93,855
Share-based payment reserve 5,058 4,090
Foreign currency translation reserve 3,099 2,899
Retained earnings 96,247 74,658
Total shareholders' equity 208,212 185,290
Non-controlling interest 96 -
Total equity 208,308 185,290
The consolidated financial statements of Volution Group plc (registered
number: 09041571) were approved by the Board of Directors and authorised for
issue on 5 October 2022.
On behalf of the Board
Ronnie George Andy O'Brien
Chief Executive Officer Chief Financial Officer
Consolidated Statement of Changes in Equity
For the year ended 31 July 2022
Share Share Treasury Capital Share-based Foreign Retained Shareholders' Non- Total
capital premium shares reserve payment currency earnings equity controlling equity
£000 £000 £000 £000 reserve translation £000 £000 interest £000
£000 reserve £000
£000
At 31 July 2020 2,000 11,527 (2,401) 93,855 1,410 701 68,463 175,555 - 175,555
Profit for the year - - - - - - 20,836 20,836 - 20,836
Other comprehensive income - - - - - 2,198 - 2,198 - 2,198
Total comprehensive income - - - - - 2,198 20,836 23,034 - 23,034
Acquisition of businesses - - - - - - - - 5,603 5,603
Obligation to acquire NCI - - - - - - (11,224) (11,224) (5,603) (16,827)
Purchase of own shares - - (2,105) - - - - (2,105) - (2,105)
Exercise of share options - - 767 - (1,112) - 345 - - -
Share-based payment including tax - - - - 3,792 - - 3,792 - 3,792
Dividends paid (note 23) - - - - - - (3,762) (3,762) - (3,762)
At 1 August 2021 2,000 11,527 (3,739) 93,855 4,090 2,899 74,658 185,290 - 185,290
Profit for the year - - - - - - 35,610 35,610 62 35,672
Other comprehensive income - - - - - 200 - 200 - 200
Total comprehensive income - - - - - 200 35,610 35,810 62 35,872
Acquisition of businesses - - - - - - - - 34 34
Purchase of own shares - - (1,900) - - - - (1,900) - (1,900)
Exercise of share options - - 2,065 - (1,129) - (749) 187 - 187
Share-based payment including tax - - - - 2,097 - - 2,097 - 2,097
Dividends paid (note 23) - - - - - - (13,272) (13,272) - (13,272)
At 31 July 2022 2,000 11,527 (3,574) 93,855 5,058 3,099 96,247 208,212 96 208,308
Treasury shares
The treasury shares reserve represents the cost of shares in Volution Group
plc purchased in the market and held by the Volution Employee Benefit Trust to
satisfy obligations under the Group's share incentive schemes.
Capital reserve
The capital reserve is the difference in share capital and reserves arising
from the use of the pooling of interest method for preparation of the
financial statements in 2014. This is a non-distributable reserve.
Share-based payment reserve
The share-based payment reserve is used to recognise the value of
equity-settled share-based payments provided to key management personnel, as
part of their remuneration.
Foreign currency translation reserve
Exchange differences arising on translation of the Group's foreign
subsidiaries into GBP are included in the foreign currency translation
reserve. The Group hedges some of its exposure to its net investment in
foreign operations; foreign exchange gains and losses relating to the
effective portion of the net investment hedge are accounted for by entries
made to other comprehensive income. No hedge ineffectiveness has been
recognised in the statement of comprehensive income for any of the periods
presented.
Retained earnings
The parent company of the Group, Volution Group plc, had distributable
retained earnings at 31 July 2022 of £120,294,000 (2021: £113,143,000).
Consolidated Statement of Cash Flows
For the year ended 31 July 2022
Notes 2022 2021
£000 £000
Operating activities
Profit for the year after tax 35,672 20,836
Adjustments to reconcile profit for the year to net cash flow from operating
activities:
Income tax 11,542 9,198
Gain on disposal of property, plant and equipment (51) (2)
Costs of business combinations 215 889
Contingent consideration (598) 3,287
Cash flows relating to business combination costs (215) (811)
Re-measurement of financial liability relating to business combination of 583 491
ClimaRad
Re-measurement of future consideration relating to business combination of 955 811
ClimaRad
Finance revenue 6 (1,333) (397)
Finance costs 6 3,369 3,272
Share-based payment expense 1,115 1,974
Depreciation of property, plant and equipment 9 3,816 3,327
Depreciation of right-of-use assets 18 3,612 3,531
Amortisation of intangible assets 12 16,026 18,218
Working capital adjustments:
Increase in trade receivables and other assets (6,418) (11,537)
Increase in inventories (9,805) (11,349)
(Decrease)/increase in trade and other payables (1,235) 18,618
Movement in provisions (242) 208
Cash generated by operations 57,008 60,564
UK income tax paid (3,000) (2,970)
UK income tax refund - 196
Overseas income tax paid (9,155) (5,328)
Contingent consideration relating to the acquisition of Ventair 13 (3,211) -
Net cash flow generated from operating activities 41,642 52,462
Investing activities
Payments to acquire intangible assets 12 (2,238) (1,068)
Purchase of property, plant and equipment 9 (4,773) (3,632)
Proceeds from disposal of property, plant and equipment 179 196
Business combination of subsidiaries, net of cash acquired 13 (15,996) (41,678)
Contingent consideration relating to the acquisition of Air Connection 13 (476) -
Business combination of subsidiaries, paid into escrow 13 - (507)
Contingent consideration relating to the acquisition of Ventair 13 (952) -
Interest received 4 57
Net cash flow used in investing activities (24,252) (46,632)
Financing activities
Repayment of interest-bearing loans and borrowings (33,626) (88,917)
Repayment of debt relating to the business combination of ClimaRad - (1,482)
Repayment of ERI debt acquired (3,227) -
Repayment of ClimaRad vendor loan (504) -
Proceeds from new borrowings 36,428 98,044
Issue costs of new borrowings (330) (1,218)
Interest paid (2,662) (2,088)
Payment of principal portion of lease liabilities (3,202) (2,960)
Dividends paid (13,272) (3,762)
Purchase of own shares (1,900) (2,105)
Net cash flow used in financing activities (22,295) (4,488)
Net (decrease)/increase in cash and cash equivalents (4,905) 1,342
Cash and cash equivalents at the start of the year 19,456 18,493
Effect of exchange rates on cash and cash equivalents (1,008) (379)
Cash and cash equivalents at the end of the year 13,543 19,456
Volution Group plc (the Company) is a public limited company and is
incorporated and domiciled in the UK (registered number: 09041571). The share
capital of the Company is listed on the London Stock Exchange. The address of
its registered office is Fleming Way, Crawley, West Sussex RH10 9YX.
Notes to the Consolidated Financial Statements
For the year ended 31 July 2022
The preliminary results were authorised for issue by the Board of Directors on
5 October 2022. The financial information set out herein does not constitute
the Group's statutory consolidated financial statements for the years ended 31
July 2022 or 2021, but is derived from those accounts. Statutory consolidated
financial statements for 2022 will be delivered to the Registrar of Companies
following the Company's Annual General Meeting. The auditors have reported on
those accounts; their report was unqualified and did not contain a statement
under section 498 (2) or (3) of the Companies Act 2006.
1. Basis of preparation
The financial statements are prepared in accordance with UK-adopted
international accounting standards (IFRS). The consolidated financial
statements have been prepared under the historical cost convention, except as
disclosed in the accounting policies under the relevant notes.
The preparation of the consolidated financial information in conformity with
IFRS requires the use of certain critical accounting estimates and requires
management to exercise judgement in the process of applying the Group's
accounting policies. Accounting policies, including critical accounting
judgements and estimates used in the preparation of the financial statements,
are described in the specific note to which they relate.
The consolidated financial statements are presented in GBP and all values are
rounded to the nearest thousand (£000), except as otherwise indicated.
The financial information includes all subsidiaries. The results of
subsidiaries are included from the date on which effective control is acquired
up to the date control ceases to exist.
Subsidiaries are controlled by the parent (in each relevant period) regardless
of the amount of shares owned. Control exists when the parent has the power,
either directly or indirectly, to govern the financial and operating policies
of an enterprise so as to obtain benefits from its activities.
The financial statements of subsidiaries are prepared for the same reporting
periods using consistent accounting policies. All intercompany transactions
and balances, including unrealised profits arising from intra-group
transactions, have been eliminated on consolidation.
Going concern
The Directors have, at the time of approving the financial statements, a
reasonable expectation that the Company and the Group have adequate resources
to continue in operational existence in the foreseeable future, assessed for
the period up until 31 July 2024.
Our financial position remains robust with committed facilities totalling
£150 million, and an accordion of a further £30 million, maturing in
December 2024 with the option to extend for an additional year.
The financial covenants on these facilities are for leverage (net
debt/adjusted EBITDA) of not more than three times and for adjusted interest
cover of not less than four times.
Our base case scenario has been prepared using robust forecasts from each of
our operating companies, with each considering the risks and opportunities the
businesses face, including those because of the Covid-19 pandemic and from
macroeconomic uncertainty that has arisen post-Covid and since the invasion of
Ukraine early in 2022,
We have then applied a severe but plausible downside scenario in order to
model the potential concurrent impact of:
• a general economic slowdown reducing revenue by 20% compared to
plan;
• supply chain difficulties or input price increases reducing
gross profit margin by 10%; and
• a significant acquisition increasing debt but with no positive
cash flow contribution.
A reverse stress test scenario has also been modelled which shows a revenue
contraction of c35% with no mitigations would be required to breach covenants,
which is considered extremely remote in likelihood of occurring. Mitigations
available within the control of management include reducing dividends,
discretionary capex and discretionary indirect costs. Including these
mitigations, a revenue decline of c42% would be required to breach covenants.
Over the short period of our Climate Change assessment (aligned to our Going
Concern assessment) we have concluded that there is no material adverse impact
of Climate Change and hence have not included any impacts in either our base
case or downside scenarios of our Going Concern assessment. We have not
experienced material adverse disruption during periods of adverse or extreme
weather in recent years and we would not expect this to occur to a material
level over the period of our Going Concern assessment.
The Directors have concluded that the results of the scenario testing combined
with the significant liquidity profile available under the revolving credit
facility confirm that there is no material uncertainty in the use of the going
concern assumption.
Non-controlling interest
Non-controlling interests are identified separately from the Group's equity.
Non-controlling interests consist of the amount of those interests at the date
of the business combination and the non-controlling interest's share of
changes in equity since that date. Non-controlling interests are measured at
the non-controlling interest's share of the fair value of the identifiable net
assets.
Where there is an obligation to purchase the non-controlling interest at a
future date, the non-controlling interest will be recognised on the business
combination, and subsequently when the obligation to purchase liability is
recognised the amount is reclassified from equity to a financial liability and
the non-controlling interest is derecognised. Any difference between the
carrying value of the non-controlling interest and the liability is adjusted
against retained earnings.
The financial liability for the non-controlling interest is subsequently
accounted for under IFRS 9, with all changes in the carrying amount, including
the non-controlling interest share of profit, recognised as a re-measurement
in the income statement. When the obligation or "put liability" is exercised,
the carrying amount of the financial liability at that date is extinguished by
the payment of the exercise price.
Foreign currencies
The individual financial statements of each subsidiary are presented in the
currency of the primary economic environment in which the entity operates (its
functional currency). For the purpose of the Group financial statements, the
results and financial position of each entity are expressed in GBP (£000),
which is the functional currency of the Company and the presentational
currency of the Group.
In preparing the financial statements of the individual entities, transactions
in currencies other than the entity's functional currency (foreign currencies)
are recorded at the rate of exchange prevailing at the dates of the
transactions. At the end of each reporting period, monetary items denominated
in foreign currencies are retranslated at the rate prevailing at the end of
the reporting period.
Non-monetary items that are measured at historical cost in a foreign currency
are translated using the exchange rate at the date of the initial transaction.
Non-monetary items measured at fair value in a foreign currency are translated
using the exchange rate at the date the fair value was determined.
For the purpose of presenting consolidated financial information, the assets
and liabilities of the Group's foreign operations are expressed in GBP using
exchange rates prevailing at the end of the reporting period. Income and
expenses are translated at the average exchange rate for the period. Exchange
differences arising are classified as other comprehensive income and are
transferred to the foreign currency translation reserve. All other translation
differences are taken to profit and loss with the exception of differences on
foreign currency borrowings to the extent that they are used to finance or
provide a hedge against Group equity investments in foreign operations, in
which case they are taken to other comprehensive income together with the
exchange difference on the net investment in these operations.
Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group's accounting policies, management is required
to make judgements, estimates and assumptions about the carrying amounts of
assets and liabilities that are not readily apparent from other sources.
The significant judgements, estimates and assumptions made in these financial
statements relate to: intangible assets - goodwill (note 10), impairment
assessment of goodwill (note 11), intangible assets - other (note 12), refund
liabilities arising from retrospective volume rebates (note 3) and financial
liabilities relating to the business combination of ClimaRad and ERI (note
19).
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods.
The key assumptions concerning the future and other key sources of estimation
uncertainty at the reporting date that have a significant risk of causing a
material adjustment to the carrying amounts of the assets and liabilities
within the next financial year are described under the relevant notes.
The Group based its assumptions and estimates on parameters available when
these financial statements were prepared. Existing circumstances and
assumptions about future developments, however, may change due to market
changes or circumstances arising beyond the control of the Group. Such changes
are reflected in the assumptions when they occur. The Directors have
considered a range of potential scenarios arising from the political and
macroeconomic uncertainty that has arisen post-covid and since the invasion of
Ukraine in early 2022 and how these have impacted the significant judgements,
estimates and assumptions in these financial statements is included under the
relevant notes.
Separately disclosed items
The Group discloses some items on the face of the consolidated statement of
comprehensive income by virtue of their nature, size or incidence to allow a
better understanding of the underlying trading performance of the Group. These
separately disclosed items include, but are not limited to, significant
restructuring costs and significant business combination and related
integration and earn-out costs.
New standards and interpretations
The standards and interpretations listed below have become effective since 1
July 2021 for annual periods beginning on or after 1 January 2022.
The following amendments became effective as at 1 January 2022:
• Reference to the Conceptual Framework - Amendments to IFRS 3
• Property, Plant and Equipment: Proceeds before Intended Use -
Amendments to IAS 16
• Onerous Contracts - Costs of Fulfilling a Contract -
Amendments to IAS 37
• IFRS 9 Financial Instruments - Fees in the '10 per cent' test
for derecognition of financial liabilities
The standards and interpretations listed below have become effective since 1
July 2020 for annual periods beginning on or after 1 January 2021.
The following amendments became effective as at 1 January 2021:
• Interest Rate Benchmark Reform - Phase 2 - Amendments to IFRS
9, IAS 39, IFRS 7, IFRS 4 and IFRS 16
• Covid-19-Related Rent Concessions beyond 30 June 2021
Amendment to IFRS 16
These have not had an impact on these financial statements.
Other new standards or interpretations in issue, but not yet effective, are
not expected to have a material impact on the Company's net assets or results.
2. Adjusted earnings
The Board and key management personnel use some alternative performance
measures to track and assess the underlying performance of the business. These
measures include adjusted operating profit and adjusted profit before tax.
These measures are deemed more appropriate as they remove items that do not
reflect the day-to-day trading operations of the business and therefore their
exclusion is relevant to an assessment of the day-to-day trading operations,
as opposed to overall annual business performance. Such alternative
performance measures are not defined terms under IFRS and may not be
comparable with similar measures disclosed by other companies. Likewise, these
measures are not a substitute for IFRS measures of profit. A reconciliation of
these measures of performance to the corresponding reported figure is shown
below.
2022 2021
£000 £000
Profit after tax 35,672 20,836
Add back:
Contingent consideration (598) 3,287
Cost of business combinations 215 889
Amortisation of acquired inventory fair value adjustment - 1,727
Re-measurement of future consideration relating to the business combination of 955 811
ClimaRad
Net gain on financial instruments at fair value (1,329) (340)
Amortisation and impairment of intangible assets acquired through business 14,485 16,839
combinations
Tax effect of the above (2,085) (2,426)
Adjusted profit after tax 47,315 41,623
Add back:
Adjusted tax charge 13,627 11,624
Adjusted profit before tax 60,942 53,247
Add back:
Interest payable on bank loans, lease liabilities and amortisation of 3,369 3,272
financing costs
Re-measurement of financial liabilities relating to the business combination 583 491
of ClimaRad
Finance revenue (4) (57)
Adjusted operating profit 64,890 56,953
Add back:
Depreciation of property, plant and equipment 3,816 3,327
Depreciation of right-of-use assets 3,612 3,531
Amortisation of development costs, software and patents 1,541 1,379
Adjusted EBITDA 73,859 65,190
For definitions of terms referred to above see note 25, Glossary of terms.
3. Revenue from contracts with customers
Accounting policy
Revenue from contracts with customers is recognised when the control of goods
or services is transferred to the customer at an amount that reflects the
consideration to which the Group expects to be entitled in exchange for those
goods and services. The performance obligation is satisfied upon delivery of
the equipment and payment is generally due within 30 to 90 days from delivery.
Sale of ventilation products
Revenue from the sale of ventilation products is recognised at the point in
time when control of the asset is transferred to the buyer, usually on the
delivery of the goods.
The Group considers whether there are other promises in the contract that are
separate performance obligations to which a portion of the transaction price
needs to be allocated (e.g. warranties and volume rebates). In determining the
transaction price for the sale of ventilation products, the Group considers
the effects of variable consideration (if any).
Volume rebates
The Group provides retrospective volume rebates to certain customers once the
quantity of products purchased during the period exceeds a threshold specified
in the contract. To estimate the variable consideration for the expected
future rebates, the Group applies the expected value method for contracts with
more than one volume threshold. The Group then applies the requirements on
constraining estimates of variable consideration and recognises a liability
for the expected future rebates.
Before including any amount of variable consideration in the transaction
price, the Group considers whether the amount of variable consideration is
constrained. The Group determined that the estimates of variable consideration
are not constrained, other than with respect to volume rebates, based on its
historical experience, business forecasts and the current economic conditions.
In addition, the uncertainty on the variable consideration will be resolved
within a short timeframe.
Warranty obligations
The Group typically provides warranties for general repairs of defects that
existed at the time of sale. These assurance-type warranties are accounted for
under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Refer
to the accounting policy on warranty provisions in note 21, Provisions.
Installation services
The Group provides installation services that are bundled together with the
sale of equipment to a customer.
Contracts for bundled sales of equipment and installation services are
comprised of two performance obligations because the promises to transfer
equipment and provide installation services are capable of being distinct and
separately identifiable. Accordingly, the Group allocates the transaction
price based on the relative stand-alone selling prices of the equipment and
the cost plus margin approach for installation services.
The Group recognises revenue from installation services at a point in time
after the service has been performed; this is because installation of the
ventilation equipment is generally over a small timeframe, usually around one
to two days. Revenue from the sale of the ventilation equipment is recognised
at a point in time, generally upon delivery of the equipment.
Contract balances
Contract assets
A contract asset is the right to consideration in exchange for goods and
services transferred to the customer. A contract asset is recognised when the
Group transfers goods or services to the customer before the customer pays
consideration. There is no contract asset included within the statement of
financial position as revenue is recognised at a point in time, after
installation. Consideration is recognised immediately as a receivable and is
unconditional (only the passage of time is required before payment of
consideration is due). The Group's accounting policy on trade receivables is
detailed in note 15.
Contract liabilities
There are no contract liabilities recognised in the comparative period or in
the financial year ended 31 July 2022.
Critical accounting judgements and key sources of estimation uncertainty
Liabilities arising from retrospective volume rebates
The Group has a number of customer rebate agreements that are recognised as a
reduction from sales (collectively referred to as rebates). Rebates are based
on an agreed percentage of revenue, which increases with the level of revenue
achieved. These agreements typically are not coterminous with the Group's year
end and some of the amounts payable are subject to confirmation after the
reporting date.
At the reporting date, the Directors make estimates of the amount of rebate
that will become payable by the Group under these agreements; to estimate the
variable consideration for the expected future rebates, the Group applies the
expected value method for contracts with more than one volume threshold. Where
the respective customer has been engaged with the Group for a number of years,
historical settlement trends are also used to assist in ensuring an
appropriate estimate is recorded at the reporting date and that appropriate
internal approvals and reviews take place before rebates are recorded.
Given that the rebate provision represents an estimate within the financial
statements, there is a risk that the Directors' estimate of the potential
liability may be incorrect.
Revenue recognised in the statement of comprehensive income is analysed below:
2022 2021
£000 £000
Sale of goods 301,097 266,580
Installation services 6,604 6,008
Total revenue from contracts with customers 307,701 272,588
Market sectors 2022 2021
£000 £000
UK
Residential 75,040 70,178
Commercial 31,031 31,145
Export 11,670 10,107
OEM (Torin-Sifan) 25,908 24,455
Total UK 143,649 135,885
Nordics1 53,303 51,584
Central Europe2 65,128 43,872
Total Continental Europe 118,431 95,456
Total Australasia 45,621 41,247
Total revenue from contracts with customers 307,701 272,588
Right of return assets and refund liabilities 2022 2021
£000 £000
Right of return assets - 99
Refund liabilities
Arising from retrospective volume rebates 9,427 9,960
Arising from rights of return 841 602
Refund liabilities 10,268 10,562
Notes
1. Included in the Nordics revenue is £3,514,000 of inorganic revenue
from the business combination of Klimatfabriken and Rtek. (2021: £1,057,000
of inorganic revenue from the business combination of Klimatfabriken and
Rtek).
2. Included in the Central Europe revenue is £18,950,000 of inorganic
revenue from the business combination of ClimaRad BV and ERI. (2021:
£7,306,000 of inorganic revenue from the business combination of ClimaRad
BV).
4. Segmental analysis
Accounting policy
The method of identifying reporting segments is based on internal management
reporting information that is regularly reviewed by the chief operating
decision maker, which is considered to be the Chief Executive Officer of the
Group.
In identifying its operating segments, management follows the Group's market
sectors. These are Ventilation UK including OEM (Torin-Sifan), Ventilation
Europe and Ventilation Australasia. Operating segments that provide
ventilation services have been aggregated as they have similar economic
characteristics, assessed by reference to the gross margins of the segments.
In addition, the segments are similar in relation to the nature of products,
services and production processes, type of customer, method for distribution
and regulatory environment.
The measure of revenue reported to the chief operating decision maker to
assess performance is total revenue for each operating segment. The measure of
profit reported to the chief operating decision maker to assess performance is
adjusted operating profit (see note 25 for definition) for each operating
segment. Gross profit and the analysis below segment profit is additional
voluntary information and not "segment information" prepared in accordance
with IFRS 8.
Finance revenue and costs are not allocated to individual operating segments
as the underlying instruments are managed on a Group basis.
Total assets and liabilities are not disclosed as this information is not
provided by operating segment to the chief operating decision maker on a
regular basis.
Transfer prices between operating segments are on an arm's length basis on
terms similar to transactions with third parties.
Year ended 31 July 2022 UK Continental Australasia Central/ Consolidated
£000 Europe £000 eliminations £000
£000 £000
Revenue from contracts with customers
External customers 143,649 118,431(1) 45,621 - 307,701
Inter-segment 20,318 30,038 179 (50,535) -
Total revenue from contracts with customers 163,967 148,469 45,800 (50,535) 307,701
Gross profit 62,397 61,984 22,456 - 146,837
Results
Adjusted segment EBITDA 33,052 32,810 11,236 (3,239) 73,859
Depreciation and amortisation of development costs, software and patents (3,799) (3,201) (1,292) (677) (8,969)
Adjusted operating profit/(loss) 29,253 29,609 9,944 (3,916) 64,890
Amortisation of intangible assets acquired through business combinations (6,978) (6,365) (1,142) - (14,485)
Business combination-related operating costs - - - 383 383
Operating profit/(loss) 22,275 23,244 8,802 (3,533) 50,788
Unallocated expenses
Net finance cost - - 99 (2,135) (2,036)
Re-measurement of future consideration - - - (955) (955)
Re-measurement of financial liability - - - (583) (583)
Profit/(loss) before tax 22,275 23,244 8,901 (7,206) 47,214
Year ended 31 July 2021 UK Continental Australasia Central/ Consolidated
£000 Europe £000 eliminations £000
£000 £000
Revenue from contracts with customers
External customers 135,885 95,456(1) 41,247 - 272,588
Inter-segment 20,580 9,885 195 (30,660) -
Total revenue from contracts with customers 156,465 105,341 41,442 (30,660) 272,588
Gross profit 60,502 50,839 20,418 (110) 131,649
Results
Adjusted segment EBITDA 31,453 28,120 10,116 (4,499) 65,190
Depreciation and amortisation of development costs, software and patents (3,667) (2,732) (1,183) (655) (8,237)
Adjusted operating profit/(loss) 27,786 25,388 8,933 (5,154) 56,953
Amortisation of intangible assets acquired through business combinations (10,115) (5,566) (1,158) - (16,839)
Amortisation of acquired inventory fair value adjustments - (1,727) - - (1,727)
Business combination-related operating costs - - (3,287) (889) (4,176)
Operating profit/(loss) 17,671 18,095 4,488 (6,043) 34,211
Unallocated expenses
Net finance cost - - - (2,875) (2,875)
Re-measurement of future consideration - - - (811) (811)
Re-measurement of financial liability - - - (491) (491)
Profit/(loss) before tax 17,671 18,095 4,488 (10,220) 30,034
Note
1. Included in the Continental Europe revenue is £22,464,000 of
inorganic revenue from the business combination of ClimaRad BV,
Klimatfabriken, Rtek and ERI. (2021: £8,363,000 of inorganic revenue from the
business combination of ClimaRad BV, Klimatfabriken, and Rtek).
2. The movement of £1.2 million in central costs / eliminations is due
to a combination of bonus and long term incentive costs as well as allocations
Geographic information
Revenue from external customers by customer destination 2022 2021
£000 £000
United Kingdom 119,371 112,661
Europe (excluding United Kingdom and Sweden) 112,886 88,711
Sweden 24,431 26,130
Australasia 45,780 41,276
Rest of the world 5,233 3,810
Total revenue from contracts with customers 307,701 272,588
Non-current assets excluding deferred tax 2022 2021
£000 £000
United Kingdom 117,704 122,148
Europe (excluding United Kingdom and Nordics) 79,408 62,709
Nordics 35,930 37,341
Australasia 49,013 49,270
Total 282,055 271,468
Information about major customers
Annual revenue from no individual customer accounts for more than 10% of Group
revenue in either the current or prior year.
5. Other operating income
Accounting policy
Other operating income relates to government grants which are recognised where
there is reasonable assurance that the grant will be received and all attached
conditions will be complied with. When the grant relates to an expensed item,
it is recognised as income on a systematic basis over the periods that the
related costs, for which it is intended to compensate, are expensed.
2022 2021
£000 £000
Local government receipts - 137
The Group has made no claims in the year ended 31 July 2022. The balance of
£137,000 in the prior year was an adjustment relating to the claims made in
the financial year ended 31 July 2020.
6. Finance revenue and costs
Accounting policy
Finance revenue
Finance revenue is recognised as interest accrues using the effective interest
method. The effective interest rate is the rate that discounts estimated
future cash receipts through the expected life of the financial instrument to
its net carrying amount.
Net financing costs
Net financing costs comprise interest income on funds invested, gains/losses
on the disposal of financial instruments, changes in the fair value of
financial instruments, interest expense on borrowings and foreign exchange
gains/losses. Interest income and expense is recognised as it accrues in the
statement of comprehensive income using the effective interest method.
2022 2021
£000 £000
Finance revenue
Net gain on financial instruments at fair value 1,329 340
Interest receivable 4 57
Total finance revenue 1,333 397
Finance costs
Interest payable on bank loans (1,828) (1,566)
Amortisation of finance costs (442) (792)
IFRS 16-related interest (520) (522)
Other interest (579) (392)
Total finance costs (3,369) (3,272)
Net finance costs (2,036) (2,875)
In the prior year amortisation of finance costs includes £451,000 in relation
to the charging of unamortised costs associated with the Group's previous
£120 million revolving credit facility which was replaced in December 2020.
The net loss or gain on financial instruments at each year-end date relates to
the measurement of fair value of the financial derivatives and the Group
recognises any finance losses or gains immediately within net finance costs.
The fair value of the Group's financial derivatives can be found in note 16.
7. Income tax
Accounting policy
Current income tax assets and liabilities are measured at the amount expected
to be recovered from, or payable to, the taxation authorities. The tax rates
and tax laws used to compute the amount are those that are enacted at the
reporting date.
The Group's deferred tax policy can be found in note 22.
(a) Income tax charges against profit for the year
2022 2021
£000 £000
Current income tax
Current UK income tax expense 4,897 4,069
Current foreign income tax expense 9,075 7,883
Tax credit relating to the prior year (673) (84)
Total current tax 13,299 11,868
Deferred tax
Origination and reversal of temporary differences (2,851) (3,957)
Effect of changes in the tax rate 200 1,118
Tax charge relating to the prior year 894 169
Total deferred tax (1,757) (2,670)
Net tax charge reported in the consolidated statement of comprehensive income 11,542 9,198
(b) Income tax recognised in equity for the year
2022 2021
£000 £000
Increase in deferred tax asset on share-based payments (685) (1,366)
Net tax credit reported in equity (685) (1,366)
(c) Reconciliation of total tax
2022 2021
£000 £000
Profit before tax 47,214 30,034
Profit before tax multiplied by the standard rate of corporation tax in the UK 8,971 5,706
of 19.00% (2021: 19.00%)
Adjustment in respect of previous years 221 85
Expenses not deductible for tax purposes 1,161 1,573
Effect of changes in the tax rate (see explanation below) 200 1,118
Non-taxable income (391) (341)
Higher overseas tax rate 1,602 1,220
Patent box (330) (167)
Other 108 4
Net tax charge reported in the consolidated statement of comprehensive income 11,542 9,198
Our reported effective tax rate for the period was 24.4% (2021: 30.6%). Our
underlying effective tax rate, on adjusted profit before tax, was 22.4% (2021:
21.8%).
The rate of tax in the UK is currently 19%. Following the Finance Bill 2021,
the rate of tax in the UK had been expected to increase to 25% from 1 April
2023. On 23 September 2022, the Chancellor of the Exchequer announced that the
UK corporation tax rate will remain at 19% from 1 April 2023 - reversing a
previously enacted measure to increase the rate to 25%. The announcement of
the reversal in the tax rate from 1 April 2023 was not enacted or
substantively enacted at the balance sheet date and accordingly has no impact
on the tax balances at 31 July 2022. If this tax rate change had been
substantively enacted or enacted at the balance sheet date, the deferred tax
liability would have decreased by approximately £1.1 million. We expect our
medium-term underlying effective tax rate to be in the range of 22% to 25% of
the Group's adjusted profit before tax, depending on business mix and the
profile of acquisitions.
The higher overseas tax rates relate to the Group's profits from subsidiaries
which are subject to tax jurisdictions with a higher rate of tax compared to
the standard rate of corporation tax in the UK.
We expect our medium-term reported effective tax rate to be in the range of
29% to 35% of the Group's reported profit before tax and our underlying
effective tax rate to be in the range of 22% to 25% of the Group's adjusted
profit before tax.
8. Earnings per share (EPS)
Basic earnings per share is calculated by dividing the profit for the year
attributable to ordinary equity holders of the parent by the weighted average
number of ordinary shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing the net profit
attributable to ordinary equity holders of the parent by the weighted average
number of ordinary shares outstanding during the year plus the weighted
average number of ordinary shares that would be issued on conversion of any
dilutive potential ordinary shares into ordinary shares. There are 2,966,484
dilutive potential ordinary shares at 31 July 2022 (2021: 3,270,467).
The following reflects the income and share data used in the basic and diluted
earnings per share computations:
Year ended 31 July 2022 2021
£000 £000
Profit attributable to ordinary equity holders 35,672 20,836
Number Number
Weighted average number of ordinary shares for basic earnings per share 197,522,143 197,821,482
Weighted average number of ordinary shares for diluted earnings per share 200,047,856 200,975,673
Earnings per share
Basic 18.1p 10.5p
Diluted 17.8p 10.4p
Year ended 31 July 2022 2021
£000 £000
Adjusted profit attributable to ordinary equity holders 47,315 41,623
Number Number
Weighted average number of ordinary shares for adjusted basic earnings per 197,522,143 197,821,482
share
Weighted average number of ordinary shares for adjusted diluted earnings per 200,047,856 200,975,673
share
Adjusted earnings per share
Basic 24.0p 21.0p
Diluted 23.7p 20.7p
The weighted average number of ordinary shares has declined as a result of
treasury shares held by the Volution Employee Benefit Trust (EBT) during the
year. The shares are excluded when calculating the reported and adjusted EPS.
Adjusted profit attributable to ordinary equity holders has been reconciled in
note 2, Adjusted earnings.
See note 25, Glossary of terms, for an explanation of the adjusted basic and
diluted earnings per share calculation.
9. Property, plant and equipment
Accounting policy
Property, plant and equipment is stated at cost, net of accumulated
depreciation and impairment losses, if any. Such cost includes the cost of
replacing part of the property, plant and equipment; when significant parts of
property, plant and equipment are required to be replaced at intervals, the
Group recognises such parts as individual assets with specific useful lives
and depreciates them accordingly. All other repair and maintenance costs are
recognised in the statement of comprehensive income as incurred.
Depreciation is charged so as to write off the cost or valuation of assets,
except freehold land, over their estimated useful lives using the straight
line method. The estimated useful lives, residual values and depreciation
methods are reviewed at each year end, with the effect of any changes in
estimates accounted for on a prospective basis.
The following useful lives are used in the calculation of depreciation:
Buildings
- 30-50 years
Plant and
machinery
- 5-10 years
Fixtures, fittings, tools, equipment and vehicles
- 4-10 years
The gain or loss arising on the disposal or retirement of an item of property,
plant and equipment is determined as the difference between the disposal
proceeds and the carrying amount of the asset and is recognised in the
statement of comprehensive income as part of administrative expenses.
The Group's impairment policy can be found in note 11.
2022 Land and Plant and Fixtures, Total
buildings machinery fittings, tools, £000
£000 £000 equipment
and vehicles
£000
Cost
At 1 August 2021 15,370 13,840 11,544 40,754
On business combinations 2,046 1,739 92 3,877
Additions 341 2,237 2,195 4,773
Disposals - (531) (812) (1,343)
Net foreign currency exchange differences (277) (263) (96) (636)
At 31 July 2022 17,480 17,022 12,923 47,425
Depreciation
At 1 August 2021 4,542 5,795 6,509 16,846
Charge for the year 517 1,339 1,960 3,816
Disposals - (523) (709) (1,232)
Net foreign currency exchange differences (48) (118) (74) (240)
At 31 July 2022 5,011 6,493 7,686 19,190
Net book value
At 31 July 2022 12,469 10,529 5,237 28,235
2021 Land and Plant and Fixtures, Total
buildings machinery fittings, tools, £000
£000 £000 equipment
and vehicles
£000
Cost
At 1 August 2020 13,852 12,110 10,938 36,900
On business combinations 2,167 197 411 2,775
Transferred to right-of-use assets (419) - - (419)
Additions 66 2,063 1,503 3,632
Disposals - (464) (895) (1,359)
Net foreign currency exchange differences (296) (66) (413) (775)
At 31 July 2021 15,370 13,840 11,544 40,754
Depreciation
At 1 August 2020 4,219 5,221 5,946 15,386
Transferred to right-of-use assets (90) - - (90)
Charge for the year 502 1,027 1,798 3,327
Disposals - (350) (815) (1,165)
Net foreign currency exchange differences (89) (103) (420) (612)
At 31 July 2021 4,542 5,795 6,509 16,846
Net book value
At 31 July 2021 10,828 8,045 5,035 23,908
10. Intangible assets - goodwill
Accounting policy
Goodwill
Following initial recognition, goodwill is measured at cost less any
accumulated impairment losses. For the purpose of impairment testing, goodwill
is allocated to the Group's cash generating units that are expected to benefit
from the synergies of the combination, irrespective of whether other assets or
liabilities of the Group are assigned to those units.
Goodwill is reviewed for impairment annually or more frequently if there is an
indication of impairment. Impairment of goodwill is determined by assessing
the recoverable amount of the cash generating unit to which the goodwill
relates. Where the recoverable amount of the cash generating unit is less than
the carrying value of the cash generating unit to which goodwill has been
allocated, an impairment loss is recognised. Impairment losses relating to
goodwill cannot be reversed in future periods.
See note 11 for the Group's impairment assessment.
Goodwill £000
Cost and net book value
At 1 August 2020 116,778
On the business combination of ClimaRad BV 20,258
On the business combination of Klimatfabriken 2,646
On the business combination of Rtek 1,096
Net foreign currency exchange differences (3,068)
At 31 July 2021 137,710
On the business combination of ERI 5,134
Net foreign currency exchange differences (183)
At 31 July 2022 142,661
11. Impairment assessment of goodwill
Accounting policy
Intangible assets, including goodwill, that have an indefinite useful life or
intangible assets not ready to use are not subject to amortisation and are
tested annually for impairment. Assets that are subject to amortisation are
reviewed for impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is recognised for
the amount by which the asset's carrying amount exceeds its recoverable
amount, where the recoverable amount is the higher of the asset's fair value
less costs of disposal and value in use.
Goodwill acquired through business combinations has been allocated, for
impairment testing purposes, to a group of cash generating units (CGUs). These
grouped CGUs are: UK Ventilation, Central Europe, Nordics, Australasia and
OEM. This is also the level at which management is monitoring the value of
goodwill for internal management purposes.
Critical accounting judgements and key sources of estimation uncertainty
Impairment of goodwill
The Group's impairment test for goodwill is based on a value in use
calculation using a discounted cash flow model. The test aims to ensure that
goodwill is not carried at a value greater than the recoverable amount, which
is considered to be the higher of fair value less costs of disposal and value
in use.
The cash flows are derived from the business plan for the following three
years. The recoverable amount is very sensitive to the discount rate used for
the discounted cash flow model as well as the expected future cash flows and
the growth rate used for extrapolation purposes.
The identification of the Group's cash generating units (CGUs) used for
impairment testing involves a degree of judgement. Management has reviewed the
Group's assets and cash inflows and identified the lowest aggregation of
assets that generate largely independent cash inflows. The current economic
and political uncertainty has increased the level of estimation uncertainty as
the impact on countries and markets continues to be uncertain; however, the
Group has modelled a range of scenarios to consider the impact on the carrying
value of its assets as described in the going concern statement in the risk
management and principal risks section.
31 July 2022 UK OEM Nordics Central Europe Australasia
Ventilation (Torin-Sifan) £000 £000 £000
£000 £000
Carrying value of goodwill 55,899 5,101 19,022 35,165 27,474
CGU value in use headroom1 152,066 21,821 71,987 61,517 32,446
As at 31 July 2021 calculated headroom was:
31 July 2021 UK OEM Nordics Central Europe Australasia
Ventilation (Torin-Sifan) £000 £000 £000
£000 £000
Carrying value of goodwill 55,899 5,101 19,548 30,644 26,518
CGU value in use headroom1 255,944 34,959 123,224 81,609 76,074
Note
1. Headroom is calculated by comparing the value in use (VIU) of a group
of CGUs to the carrying amount of its asset, which includes the net book value
of fixed assets (tangible and intangible), goodwill and operating working
capital (current assets and liabilities).
Impairment review
Under IAS 36 Impairment of Assets, the Group is required to complete a full
impairment review of goodwill, which has been performed using a value in use
calculation. A discounted cash flow (DCF) model was used, taking a period of
five years, which has been established using pre-tax discount rates of 12.1%
to 15.7% (2021: 10.5% to 14.7%) over that period. In all CGUs it was concluded
that the carrying amount was in excess of the value in use and all CGUs had
positive headroom.
When assessing for impairment of goodwill, we have considered the impact of
climate change, particularly in the context of the risks and opportunities
identified in the TCFD disclosure in the Annual Report. We have not identified
any material short and medium term impacts from climate change that would
impact the carrying value of Goodwill. Over the long term, the risks and
opportunities are more uncertain and we will continue to assess these risks at
each reporting period.
Key assumptions in the value in use calculation
The calculation of value in use for all CGUs is most sensitive to the
following assumptions:
• specific growth rates have been used for each of the CGUs for the
five-year forecast period based on historical growth rates and market
expectations;
• long-term growth rates of 2% (2021: 2%) for all CGUs have been
applied to the period beyond which budgets and forecasts do not exist, based
on historical macroeconomic performance and projections for the geographies in
which the CGUs operate; and
• discount rates reflect the current market assessment of the risks
specific to each operation. The pre-tax discount rates used for each CGU are:
UK Ventilation: 13.0% (2021: 10.5%); OEM (Torin-Sifan): 14.0% (2021: 11.7%);
Nordics: 12.1% (2021: 12.4%); Central Europe: 12.2% (2021: 13.6%); and
Australasia: 15.7% (2021: 14.7%).
The value in use headroom for each CGU has been set out above. We have tested
the sensitivity of our headroom calculations in relation to the above key
assumptions and the Group does not consider that changes in the key
assumptions that could cause the carrying value of the CGUs to materially
exceed their recoverable value are reasonably possible.
12. Intangible assets - other
Accounting policy
Intangible assets acquired in a business combination
Intangible assets acquired in a business combination are identified and
recognised separately from goodwill where they satisfy the definition of an
intangible asset and their fair values can be measured reliably. The cost of
such intangible assets is their fair value at the business combination date.
The fair value of patents, trademarks and customer base acquired and
recognised as part of business combination is determined using the
relief-from-royalty method or multi-period excess earnings method.
Subsequent to initial recognition, intangible assets acquired in a business
combination are reported at cost less accumulated amortisation and accumulated
impairment losses.
Research and development
Research costs are expensed as incurred. Development expenditure on an
individual project is recognised as an intangible asset when the Company can
demonstrate: the technical feasibility of completing the intangible asset so
that it will be available for use or sale; its intention to complete and its
ability to use or sell the asset; how the asset will generate future economic
benefits; the availability of resources to complete the asset; and the ability
to reliably measure the expenditure during development.
Subsequent measurement of intangible assets
Intangible assets with a finite life are amortised on a straight line basis
over their estimated useful lives as follows:
Development costs - 10 years
Software costs
- 5-10 years
Customer base
- 5-15 years
Trademarks
- 15-25 years
Patents/technology - 5-25
years
Other
- 5 years
The estimated useful life and amortisation methods are reviewed at the end of
each reporting period, with the effect of any changes in estimate being
accounted for on a prospective basis.
Critical accounting judgements and key sources of estimation uncertainty
Impairment of other intangible assets excluding goodwill
At each reporting date, the Group reviews the carrying amounts of its other
intangible assets to determine whether there is any indication that those
assets have suffered an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated in order to determine the extent
of the impairment loss, if any. Where it is not possible to estimate the
recoverable amount of an individual asset, the Group estimates the recoverable
amount of the cash generating unit to which the asset belongs. Where a
reasonable and consistent basis of allocation can be identified, corporate
assets are also allocated to individual cash generating units, or otherwise
they are allocated to the smallest group of cash generating units for which a
reasonable and consistent allocation basis can be identified.
The recoverable amount is the higher of fair value less costs to sell and
value in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific
to the asset for which the estimates of future cash flows have not been
adjusted.
If the recoverable amount of an asset (or cash generating unit) is estimated
to be less than its carrying amount, the carrying amount of the asset (or cash
generating unit) is reduced to its recoverable amount. Impairment losses are
immediately recognised in the statement of comprehensive income.
The assumptions and sensitivities in respect of the Group's other intangible
assets are included in note 11.
2022 Development Software Customer Trademarks Patents/ Other Total
costs costs base £000 technology £000 £000
£000 £000 £000 £000
Cost
At 1 August 2021 6,783 9,698 147,582 51,447 3,410 1,163 220,083
Additions 1,245 238 755 - - - 2,238
On business combinations 6 39 12,957 2,933 19 - 15,954
Disposals (25) (122) - - - - (147)
Net foreign currency exchange differences (53) (18) (1,280) (275) (65) - (1,691)
At 31 July 2022 7,956 9,835 160,014 54,105 3,364 1,163 236,437
Amortisation
At 1 August 2021 2,039 5,503 106,202 18,127 1,676 1,163 134,710
Charge for the year 620 932 9,207 4,868 399 - 16,026
Disposals (8) (122) - - - - (130)
Net foreign currency exchange differences (50) (31) (1,289) (317) (74) - (1,761)
At 31 July 2022 2,601 6,282 114,120 22,678 2,001 1,163 148,845
Net book value
At 31 July 2022 5,355 3,553 45,894 31,427 1,363 - 87,592
Included in software costs are assets under construction of £48,000 (2021:
£27,000), which are not amortised. Included in development costs are assets
under construction of £1,501,000 (2021: £26,000), which are not amortised.
2021 Development Software Customer Trademarks Patents/ Other Total
costs costs base £000 technology £000 £000
£000 £000 £000 £000
Cost
At 1 August 2020 6,023 9,338 132,376 46,287 3,542 1,163 198,729
Additions 788 279 - - 1 - 1,068
On business combinations - 149 17,751 5,906 - - 23,806
Disposals - (4) - - - - (4)
Net foreign currency exchange differences (28) (64) (2,545) (746) (133) - (3,516)
At 31 July 2021 6,783 9,698 147,582 51,447 3,410 1,163 220,083
Amortisation
At 1 August 2020 1,494 4,692 95,004 15,206 1,357 1,163 118,916
Charge for the year 547 832 13,168 3,290 381 - 18,218
Disposals - (4) - - - - (4)
Net foreign currency exchange differences (2) (17) (1,970) (369) (62) - (2,420)
At 31 July 2021 2,039 5,503 106,202 18,127 1,676 1,163 134,710
Net book value
At 31 July 2021 4,744 4,195 41,380 33,320 1,734 - 85,373
The remaining amortisation periods for acquired intangible assets at 31 July
2022 are as follows:
Customer base Trademark Patent/
technology/
other
Volution Holdings Limited and its subsidiaries 1 year 15 years -
Fresh AB and its subsidiaries - 10 years -
PAX AB and PAX Norge AS - 11 years -
inVENTer GmbH 1 year 12 years 12 years
Ventilair Group International BVBA and its subsidiaries 1 year 3 years -
Energy Technique Limited and its subsidiaries 2 years 14 years -
NVA Services Limited and its subsidiaries 4 years 9 years -
Breathing Buildings Limited 4 years 9 years -
VoltAir System AB 10 years 10 years -
Simx Limited 11 years 21 years -
Oy Pamon Ab 6 years 16 years 6 years
Air Connection ApS 6 years - -
Nordic Line ApS - - -
Ventair Pty Limited 8 years 18 years -
ClimaRad BV 7 years 14 years -
Nordiska Klimatfabriken AB 4 years 9 years -
Energent Oy 4 years 9 years -
ERI 9 years 19 years -
13. Business combinations
Accounting policy
Business combinations are accounted for using the acquisition method. The cost
of the business combination is measured as the aggregate of the consideration
transferred, measured at fair value on the date of the business combination.
The business combination costs incurred are expensed.
When the Group acquires a business it assesses the financial assets and
liabilities assumed for appropriate classification and designation in
accordance with the contractual terms, economic circumstances and pertinent
conditions at the business combination date.
Contingent consideration resulting from business combinations is accounted for
at fair value at the acquisition date as part of the business combination.
When the contingent consideration meets the definition of a financial
liability, it is subsequently re-measured to fair value at each reporting
date, with changes in fair value recognised in profit or loss. The
determination of fair value is based on discounted cash flows. The key
assumptions used in determining the discounted cash flows take into
consideration the probability of meeting each performance target and a
discount factor.
Goodwill is initially recognised at cost, being the excess of the aggregate of
the consideration transferred over the net identifiable assets acquired and
liabilities assumed.
After initial recognition, goodwill is measured at cost less any accumulated
impairment losses. For the purpose of impairment testing, goodwill acquired in
a business combination is, from the acquisition date, allocated to each of the
Group's cash generating units (CGUs) that are expected to benefit from the
combination, irrespective of whether assets or liabilities of the business
combination are assigned to those units.
Non-controlling interests are identified separately from the Group's equity.
Non-controlling interests consist of the amount of those interests at the date
of the business combination and the non-controlling interest's share of
changes in equity since that date. Non-controlling interests are measured at
the non-controlling interest's share of the fair value of the identifiable net
assets.
Where there is an obligation to purchase the non-controlling interest at a
future date, the non-controlling interest will be recognised on the business
combination, and subsequently when the obligation to purchase liability is
recognised the amount is reclassified from equity to a financial liability and
the non-controlling interest is derecognised. Any difference between the
carrying value of the non-controlling interest and the liability is adjusted
against retained earnings.
The financial liability for the non-controlling interest is subsequently
accounted for under IFRS 9, with all changes in the carrying amount, including
the non-controlling interest share of profit, recognised as a re-measurement
in the income statement. When the obligation or "put liability" is exercised,
the carrying amount of the financial liability at that date is extinguished by
the payment of the exercise price.
Business combinations in the year ended 31 July 2022
ERI
On 9 September 2021, Volution Group acquired ERI Corporation, a leading
manufacturer and supplier of low-carbon, energy efficient heat exchanger
cells, for an initial consideration of €20.0 million with a further
contingent cash consideration of up to €12.4 million based on stretching
targets for the financial results for the year ending 31 December 2024. The
acquisition of ERI Corporation is in line with the Group's strategy to grow by
selectively acquiring value-adding businesses in new and existing markets and
geographies.
ERI designs and manufactures a range of innovative and highly efficient
aluminium heat exchanger cells for use primarily in commercial heat recovery
ventilation systems. Products are manufactured in ERI's modern, high quality
production facility in Bitola, North Macedonia, and are supplied to heat
recovery and air handling unit manufacturers predominantly in Europe,
including existing Volution Group companies. The business combination
encompasses 100% of the issued share capital of ERI Corporation DOO Bitola
(North Macedonia), ERI Corporation S.R.L. (Italy) and Energy Recovery
Industries Trading SLU (Spain) and 51% of the issued share capital of Energy
Recovery Industries Corporation Ltd (UK). For the financial year ended 31
December 2020, ERI generated revenue of €11.3 million and profit before tax
of €2.0 million.
The fair value of the net assets acquired were as follows:
Book value Fair value Fair value
£000 adjustments £000
£000
Intangible assets 418 15,536 15,954
Property, plant and equipment 3,130 747 3,877
Inventory 2,276 - 2,276
Trade and other receivables 3,626 - 3,626
Trade and other payables (2,343) - (2,343)
Deferred tax liabilities - (1,589) (1,589)
Bank debt (3,227) - (3,227)
Cash and cash equivalents 896 - 896
Total identifiable net assets 4,776 14,694 19,470
Non-controlling interest in ERI UK (34)
Goodwill on the business combination 5,134
Discharged by:
Cash consideration (including deferred cash consideration) 16,892
Contingent consideration 7,678
Goodwill of £5,134,000 reflects certain intangibles that cannot be
individually separated and reliably measured due to their nature. These items
include the value of expected synergies arising from the business combination
and the experience and skill of the acquired workforce. The fair value of the
acquired trademark and customer base was identified and included in intangible
assets.
The gross amount of trade and other receivables is £3,626,000. All of the
trade receivables are expected to be collected in full. Transaction costs
relating to professional fees associated with the business combination in the
period ended 31 January 2022 were £126,000 and have been expensed.
ERI generated revenue of £15,215,000 and profit after tax of £2,642,000 in
the period from acquisition to 31 July 2022 that are included in the
consolidated statement of comprehensive income for this reporting period. If
the combination had taken place at 1 August 2021, the Group's revenue would
have been £309,231,000 and the profit before tax from continuing operations
would have been £47,559,000.
Business combinations in the year ended 31 July 2021
ClimaRad Holding B.V. and subsidiaries
On 17 December 2020 Volution Group plc acquired 75% of the issued share
capital of ClimaRad Holding B.V. and subsidiaries (ClimaRad), a company based
in the Netherlands. The business combination of ClimaRad is in line with the
Group's strategy to grow by selectively acquiring value-adding businesses in
new and existing markets and geographies, across the residential ventilation
market and, where appropriate, in the commercial ventilation market. The
integration of ClimaRad into the Volution Group will provide an opportunity
for further growth in the Netherlands and the combination of its product
portfolio with that of Ventilair (the Netherlands and Belgium) will enable us
to enhance our offer in the European markets.
Total consideration for the purchase of 75% of the issued share capital was
€41,100,000 (£37,100,000) with a commitment to purchase the remaining 25%
on or before 28 February 2025. The future consideration for the purchase of
the remaining 25% is set at 25% of 13 times the EBITDA of ClimaRad for the
financial year ending 31 December 2024, plus the non-controlling interest
share of profits earned in the periods up to and including 31 December 2024,
and is subject to a cap.
The non-controlling interest on the business combination was valued at 25% of
the total identifiable net assets, at £5,603,000. On recognition of the
financial liability to purchase the remaining 25%, the non-controlling
interest of £5,603,000 was derecognised from equity.
The expected value of the future consideration is partially in the form of a
vendor loan (ClimaRad vendor loan) of €12,000,000 (£10,551,000) payable to
certain individuals including the co-founder and management team of ClimaRad
on completion of the purchase of the remaining 25% on or before 28 February
2025, and an additional element of contingent consideration.
At 31 July 2021, the financial liability for the future consideration has been
re-measured to include the non-controlling interest's share in profit of
ClimaRad for the period (£820,000), less interest already charged to the
income statement on the ClimaRad vendor loan (£329,000), a net re-measurement
of £491,000. At 31 July 2021, the financial liability for the future
consideration has also been re-measured to include the net unwinding of the
discounted present value of £811,000. As a result, at 31 July 2021, the
contingent consideration was assessed based on the current estimate of the
future performance of the business as £5,514,000, discounted to present
value.
Transaction costs relating to professional fees associated with the business
combination in the period ended 31 July 2021 were £506,000 and have been
expensed.
The fair value of the net assets acquired is set out below:
Book value Fair value Fair value
£000 adjustments £000
£000
Intangible assets 149 21,554 21,703
Property, plant and equipment 2,783 150 2,933
Inventory 2,399 1,727 4,126
Trade and other receivables 1,035 - 1,035
Trade and other payables (948) 24 (924)
Bank debt (1,482) - (1,482)
Deferred tax liabilities - (5,858) (5,858)
Cash and cash equivalents 879 - 879
Total identifiable net assets 4,815 17,597 22,412
Non-controlling interest on the business combination, subsequently (5,603)
derecognised
Goodwill on the business combination 20,258
Discharged by:
Total consideration 37,067
Goodwill of £20,258,000 reflects certain intangible assets that cannot be
individually separated and reliably measured due to their nature. These items
include the value of expected synergies arising from the business combination
and the experience and skill of the acquired workforce. The fair value of the
acquired tradename and customer base was identified and included in intangible
assets.
The gross amount of trade and other receivables is £1,035,000. The amount for
trade and other receivables not expected to be collected is £nil.
Inventories recorded on the business combination were recognised at fair
value. The book value of the inventories is charged to adjusted gross profit
and the fair value uplift is charged to gross profit as the inventories are
sold.
ClimaRad generated revenue of £7,306,000 and profit after tax of £2,141,000
in the period from the business combination to 31 July 2021 that are included
in the consolidated statement of comprehensive income for this reporting
period.
If the combination had taken place at 1 August 2020, the Group's revenue would
have been £4,502,000 higher and the profit after tax from continuing
operations would have been £1,233,000 higher than reported.
Critical accounting judgements and key sources of estimation uncertainty
Financial liabilities relating to the business combination of ClimaRad
The financial liability for the non-controlling interest is sensitive to the
estimation of the expected future performance of ClimaRad which is used to
calculate the future amount payable - based on an EBITDA multiple. If EBITDA
for the financial year ended 31 December 2024 is 10% higher than expected,
contingent consideration would be £1,500,000 higher, discounted to present
value.
Business combination in the year ended 31 July 2021
Nordiska Klimatfabriken AB
On 3 February 2021, Volution Group plc acquired the entire share capital of
Nordiska Klimatfabriken AB, a company based in Sweden. The business
combination is in line with the Group's strategy to grow by selectively
acquiring value-adding businesses in new and existing markets and geographies,
across the residential ventilation market and, where appropriate, in the
commercial ventilation market.
Total consideration for the purchase of the entire issued share capital was
SEK40,082,000 (£3,489,000), including deferred consideration of £251,000.
Transaction costs relating to professional fees associated with the business
combination in the year ended 31 July 2021 were £74,000 and have been
expensed.
The fair value of the net assets acquired is set out below:
Book value Fair value Fair value
£000 adjustments £000
£000
Intangible assets 49 852 901
Property, plant and equipment 69 - 69
Inventory 55 - 55
Trade and other receivables 95 - 95
Trade and other payables (159) - (159)
Deferred tax liabilities - (188) (188)
Cash and cash equivalents 70 - 70
Total identifiable net assets 179 664 843
Goodwill on the business combination 2,646
Discharged by:
Total consideration 3,489
Goodwill of £2,646,000 reflects certain intangible assets that cannot be
individually separated and reliably measured due to their nature. These items
include the value of expected synergies arising from the business combination
and the experience and skill of the acquired workforce. The fair value of the
acquired tradename and customer base was identified and included in intangible
assets.
The gross amount of trade and other receivables is £95,000. The amounts for
trade and other receivables not expected to be collected are £nil.
Nordiska Klimatfabriken generated revenue of £604,000 and profit after tax of
£252,000 in the period from the business combination to 31 July 2021 that are
included in the consolidated statement of comprehensive income for this
reporting period.
If the combination had taken place at 1 August 2020, the Group's revenue would
have been £521,000 higher and the profit after tax from continuing operations
would have been £100,000 higher than reported.
Rtek
On 28 May 2021, Volution Group plc, through one of its wholly owned
subsidiaries, Oy Pamon, acquired the trade and assets of Energent Oy, known in
the market as Rtek. The transaction was funded from the Group's cash reserves.
Total consideration for the transaction was cash consideration of €3,000,000
(£2,578,000), including deferred consideration of £256,000.
Transaction costs associated with the business combination in the year ended
31 July 2021 were £143,000 and have been expensed.
The fair value of the net assets acquired is set out below:
Book value Fair value Fair value
£000 adjustments £000
£000
Intangible assets - 1,251 1,251
Property, plant and equipment 73 - 73
Inventory 429 - 429
Trade and other payables (21) - (21)
Deferred tax liabilities - (250) (250)
Total identifiable net assets 481 1,001 1,482
Goodwill on the business combination 1,096
Discharged by:
Total consideration 2,578
Goodwill of £1,096,000 reflects certain intangible assets that cannot be
individually separated and reliably measured due to their nature. These items
include the value of expected synergies arising from the business combination
and the experience and skill of the acquired workforce.
The Rtek business generated revenue of £842,000 and profit after tax of
£55,000 in the period from the business combination to 31 July 2021 that are
included in the consolidated statement of comprehensive income for this
reporting period.
If the combination had taken place at 1 August 2020, the Group's revenue would
have been £4,208,000 higher and the profit after tax from continuing
operations would have been £275,000 higher than reported.
Cash outflows arising from business combinations are as follows:
2022 2021
£000 £000
ERI
Cash consideration 16,892 -
Less: cash acquired with the business (896) -
Ventair
Deferred cash consideration paid 4,163 -
Air Connection
Deferred cash consideration paid 476 -
ClimaRad Holding B.V.
Cash consideration - 37,067
Less: cash acquired with the business - (879)
Nordiska Klimatfabriken AB
Cash consideration - 3,489
Less: cash acquired with the business - (70)
Rtek
Cash consideration - 2,578
Less: cash acquired with the business - -
Total 20,635 42,185
In the prior year £507,000 was paid into escrow as part of consideration but
deferred relating to Nordiska Klimatfabriken AB £251,000 and Rtek £256,000.
These amounts are included as other financial assets in note 16 and have been
settled in the current period.
14. Inventories
Accounting policy
Inventories are stated at the lower of cost and net realisable value. The cost
of raw materials is purchase cost on a first in, first out basis. The cost of
work in progress and finished goods includes the cost of direct materials and
labour and an appropriate portion of fixed and variable overhead expenses
based on normal operating capacity, but excludes borrowing costs.
Net realisable value represents the estimated selling price for inventories
less all estimated costs of completion and costs to sell.
2022 2021
£000 £000
Raw materials and consumables 24,247 16,961
Work in progress 3,523 2,004
Finished goods and goods for resale 29,381 26,006
57,151 44,971
During 2022, £865,000 (2021: £921,000) was recognised as cost of sales for
inventories written off in the year.
Inventories are stated net of an allowance for excess, obsolete or slow-moving
items which totalled £5,473,000 (2021: £5,165,000). This provision was split
amongst the three categories: £2,926,000 (2021: £2,778,000) for raw
materials and consumables; £146,000 (2021: £201,000) for work in progress;
and £2,401,000 (2021: £2,186,000) for finished goods and goods for resale.
15. Trade and other receivables
Accounting policy
Trade and other receivables are recognised when it is probable that a future
economic benefit will flow to the Group. Trade and other receivables are
carried at original invoice or contract amount less any provisions for
discounts and expected credit losses. Provisions are made where there is
evidence of a risk of non-payment taking into account ageing, previous
experience and general economic conditions.
Allowance for expected credit losses
Allowance for expected credit losses is measured at an amount equal to
lifetime expected credit losses (ECLs). For trade receivables the Group
applies a simplified approach in calculating ECLs. Trade receivables have been
grouped based on historical credit risk characteristics and the number of days
from date of invoice. The expected loss rates are calculated using the
provision matrix approach.
Trade receivables are categorised by common risk characteristics that are
representative of the customers' abilities to pay all amounts due in
accordance with the contractual terms. The provision matrix is determined
based on historical observed default rates over the expected life of the trade
receivables and is adjusted for forward-looking estimates.
Rebates receivable
The Group has a number of supplier rebate agreements that are recognised as a
reduction of cost of sales (collectively referred to as rebates). Rebates are
based on an agreed percentage of purchases, which will increase with the level
of purchases made. These agreements typically are not coterminous with the
Group's year end and some of the amounts payable are subject to confirmation
after the reporting date.
2022 2021
£000 £000
Trade receivables 53,431 43,755
Allowance for expected credit loss (772) (553)
52,659 43,202
Other debtors 2,069 919
Prepayments 2,798 3,361
Total 57,526 47,482
Movement in the allowance for expected credit losses is set out below:
2022 2021
£000 £000
At the start of the year (553) (574)
Charge for the year (231) (111)
Amounts utilised 19 122
Foreign currency adjustment (7) 10
At the end of the year (772) (553)
Gross trade receivables are denominated in the following currencies:
2022 2021
£000 £000
Sterling 30,639 24,241
US Dollar 677 945
Euro 9,665 6,807
Swedish Krona 3,216 3,366
New Zealand Dollar 3,073 3,749
Australian Dollar 4,262 3,016
Other 1,899 1,631
Total 53,431 43,755
Net trade receivables are aged as follows:
2022 2021
£000 £000
Neither past due nor impaired 41,297 35,999
Past due but not impaired
Overdue 0-30 days 5,273 4,534
Overdue 31-60 days 2,283 228
Overdue 61-90 days 932 1,011
Overdue more than 90 days 2,874 1,430
Total 52,659 43,202
The credit quality of trade receivables that are neither past due nor impaired
is assessed by reference to external credit ratings where available;
otherwise, historical information relating to counterparty default rates is
used. The Group continually assesses the recoverability of trade receivables
and the level of provisioning required.
16. Other financial assets
2022 2021
Current Current
£000 £000
Financial assets
Funds held in escrow relating to the business combination in the year - 507
Foreign exchange forward contracts 1,091 -
Total 1,091 507
17. Trade and other payables
2022 2021
£000 £000
Trade payables 27,715 26,703
Social security and staff welfare costs 1,737 1,712
Accrued expenses 19,385 19,020
Total 48,837 47,435
18. Leases
Group as a lessee
Accounting policy
The Group leases a range of assets including property, plant and equipment and
vehicles. Leases of property generally have lease terms of up to 20 years,
plant and machinery between three and six years and motor vehicles and other
equipment between two and five years.
Right-of-use assets are initially measured at cost, and subsequently at cost
less any accumulated depreciation and impairment losses and adjusted for
certain re-measurements of the lease liability. The cost of right-of-use
assets includes the amount of lease liabilities recognised, initial direct
costs incurred, restoration costs and lease payments made at or before the
commencement date less any lease incentives received. The right-of-use assets
are depreciated on a straight line basis over the shorter of their estimated
useful life and the lease term.
At the commencement date of the lease, the Group recognises lease liabilities
measured at the present value of lease payments to be made over the lease
term. The lease payments include fixed payments (including in-substance fixed
payments) less any lease incentives receivable. The lease payments also
include the exercise price of a purchase option reasonably certain to be
exercised by the Group and payments of penalties for terminating a lease, if
the lease term reflects the Group exercising the option to terminate.
In calculating the present value of lease payments, the Group uses its
incremental borrowing rate at the lease commencement date because the interest
rate implicit in the lease is not readily determinable. After the commencement
date, the amount of lease liabilities is increased to reflect the accretion of
interest and reduced for the lease payments made. In addition, the carrying
amount of lease liabilities is re-measured if there is a modification, a
change in the lease term, a change in the lease payments (e.g. changes to
future payments resulting from a change in an index or rate used to determine
such lease payments) or a change in the assessment of an option to purchase
the underlying asset. The Group's lease liabilities are included in
interest-bearing loans and borrowings.
The Group applies the short-term lease recognition exemption to its short-term
leases of machinery and equipment (i.e. those leases that have a lease term of
twelve months or less from the commencement date and do not contain a purchase
option). It also applies the lease of low-value assets recognition exemption
to leases of office equipment that are considered to be low value. Lease
payments on short-term leases and leases of low-value assets are recognised as
expense on a straight line basis over the lease term.
Set out below are the carrying amounts of right-of-use assets recognised and
movements during the year:
Right-of-use assets Land and Plant and Fixtures, Total
2022 buildings machinery fittings, tools, £000
£000 £000 equipment
and vehicles
£000
Cost
At 1 August 2021 28,073 203 2,819 31,095
Additions 2,657 30 639 3,326
Disposals - (19) (149) (168)
Expiration of leases (1,634) (78) (184) (1,896)
Net foreign currency exchange differences (27) 191 164 328
At 31 July 2022 29,069 327 3,289 32,685
Depreciation
At 1 August 2021 5,298 139 1,181 6,618
Charge for the period 2,967 99 546 3,612
Disposals - (15) (51) (66)
Expiration of leases (1,634) (78) (184) (1,896)
Net foreign currency exchange differences 689 126 35 850
At 31 July 2022 7,320 271 1,527 9,118
Net book value
At 31 July 2022 21,749 56 1,762 23,567
Right-of-use assets Land and Plant and Fixtures, Total
2021 buildings machinery fittings, tools, £000
£000 £000 equipment
and vehicles
£000
Cost
At 1 August 2020 23,069 201 2,513 25,783
Transferred from property, plant and equipment 419 - - 419
Additions 4,938 - 557 5,495
Disposals - - (244) (244)
Expiration of leases (508) - - (508)
Net foreign currency exchange differences 155 2 (7) 150
At 31 July 2021 28,073 203 2,819 31,095
Depreciation
At 1 August 2020 2,759 70 880 3,709
Transferred from property, plant and equipment 90 - - 90
Charge for the period 2,964 71 496 3,531
Disposals - - (167) (167)
Expiration of leases (508) - - (508)
Net foreign currency exchange differences (7) (2) (28) (37)
At 31 July 2021 5,298 139 1,181 6,618
Net book value
At 31 July 2021 22,775 64 1,638 24,477
Set out below are the carrying amounts of lease liabilities (included under
interest-bearing loans and borrowings) and the movements during the year:
Lease liabilities Land and Plant and Fixtures, Total
2022 buildings machinery fittings, tools, £000
£000 £000 equipment and
vehicles
£000
At 1 August 2021 24,281 75 1,073 25,429
Additions to lease liabilities 2,657 30 639 3,326
Early termination - (19) (149) (168)
Interest expense 470 6 44 520
Lease payments (3,362) (61) (300) (3,722)
Foreign exchange movements (271) 5 (151) (418)
At 31 July 2022 23,775 36 1,156 24,967
Analysis
Current 3,116 28 455 3,599
Non-current 20,659 8 701 21,368
At 31 July 2022 23,775 36 1,156 24,967
Lease liabilities Land and Plant and Fixtures, Total
2021 buildings machinery fittings, tools, £000
£000 £000 equipment and
vehicles
£000
At 1 August 2020 22,113 144 916 23,173
Additions to lease liabilities 4,938 - 557 5,495
Early termination - - (244) (244)
Interest expense 486 9 27 522
Lease payments (3,191) (76) (215) (3,482)
Foreign exchange movements (65) (2) 32 (35)
At 31 July 2021 24,281 75 1,073 25,429
Analysis
Current 2,878 50 526 3,454
Non-current 21,403 25 547 21,975
At 31 July 2021 24,281 75 1,073 25,429
The following are amounts recognised in the statement of comprehensive income:
2022 2021
£000 £000
Depreciation expense of right-of-use assets (cost of sales) 2,081 1,983
Depreciation expense of right-of-use assets (administrative expenses) 1,531 1,369
Interest expense 520 503
19. Other financial liabilities
2022 Air Connection Ventair Pty ClimaRad BV Nordiska Energent Ab Total
ApS Limited £000 Klimatfabriken £000 £000
£000 £000 AB ERI
£000 £000
Contingent consideration
At 1 August 2021 483 4,070 5,514 251 256 - 10,574
Re-measurement of contractual liability to purchase remaining non-controlling - - 1,538 - - - 1,538
interest
Further consideration recognised - - - - - 7,080 7,080
Consideration paid (476) (4,163) - (240) (256) - (5,135)
Foreign exchange (7) 93 - (11) - - 75
At 31 July 2022 - - 7,052 - - 7,080 14,132
Analysis
Current - - - - - - -
Non-current - - 7,052 - - 7,080 14,132
Total - - 7,052 - - 7,080 14,132
2021 Air Connection Ventair Pty ClimaRad BV Nordiska Energent Ab Total
ApS Limited £000 Klimatfabriken £000 £000
£000 £000 AB
£000
Contingent consideration
At 1 August 2020 508 960 - - - 1,468
Contractual liability to purchase remaining non-controlling interest (note 16) - - 5,514 - - 5,514
Further consideration recognised - 3,287 - 261 258 3,806
Foreign exchange (25) (177) - (10) (2) (214)
At 31 July 2021 483 4,070 5,514 251 256 10,574
Analysis
Current 483 4,070 - - - 4,553
Non-current - - 5,514 251 256 6,021
Total 483 4,070 5,514 251 256 10,574
Non-current
On 17 December 2020, Volution Group plc acquired 75% of the issued share
capital of ClimaRad Holding B.V. and subsidiaries (ClimaRad), a company based
in the Netherlands. Total consideration for the purchase of 75% of the issued
share capital was €41,100,000 (£37,100,000) with a commitment to purchase
the remaining 25% on or before 28 February 2025. The future consideration for
the purchase of the remaining 25% is set at 25% of 13 times the EBITDA of
ClimaRad for the financial year ended 31 December 2024, plus the
non-controlling interest share of profits earned in the periods up to and
including 31 December 2024, and is subject to a cap. The expected value of the
future consideration is partially in the form of a vendor loan of
€12,000,000 (£10,686,000) payable to certain individuals including the
co-founder and management team of ClimaRad on completion of the purchase of
the remaining 25% on or before 28 February 2025, and an additional element of
contingent consideration. The contingent consideration was assessed based on
the current estimate of the future performance of the business as £7,052,000,
discounted to present value (2021: £5,514,000).
On 9 September 2021, Volution Group plc acquired 100% of the issued share
capital of ERI Corporation DOO Bitola (North Macedonia), ERI Corporation
S.R.L. (Italy) and Energy Recovery Industries Trading SLU (Spain) and 51% of
the issued share capital of Energy Recovery Industries Corporation Ltd (UK).
The contingent consideration was assessed based on the current estimate of the
future performance of the business as £7,080,000.
2022 2021
£000 £000
Financial liabilities
Foreign exchange forward contracts - 55
Total - 55
The foreign exchange forward contracts are carried at their fair value with
the gain or loss being recognised in the Group's consolidated statement of
comprehensive income.
20. Interest-bearing loans and borrowings
Accounting policy
Borrowings and other financial liabilities, including loans, are initially
measured at fair value, net of transaction costs.
Borrowings and other financial liabilities are subsequently measured at
amortised cost using the effective interest method.
The effective interest method is a method of calculating the amortised cost of
a financial liability and of allocating interest expense over the relevant
period. The effective interest rate is the rate that exactly discounts
estimated future cash payments through the expected life of the financial
liability or, where appropriate, a shorter period.
Borrowing costs consist of interest and other costs that an entity incurs in
connection with the borrowing of funds.
2022 2021
Current Non-current Current Non-current
£000 £000 £000 £000
Unsecured - at amortised cost
Borrowings under the revolving credit facility (maturing 2024) - 74,351 - 73,293
Cost of arranging bank loan - (843) - (956)
- 73,508 - 72,337
IFRS 16 lease liabilities (note 18) 3,599 21,368 3,454 21,975
ClimaRad vendor loan - 9,557 - 10,551
Total 3,599 104,433 3,454 104,863
In December 2021, the Group took the option to extend its multicurrency
"Sustainability Linked Revolving Credit Facility", together with an accordion
of up to £30 million, by a period of twelve months; the maturity date is now
December 2024.
Revolving credit facility - at 31 July 2022
Currency Amount Termination Repayment Rate %
outstanding date frequency
£000
GBP - 2 December 2024 One payment Sonia + margin%
Euro 71,932 2 December 2024 One payment Euribor + margin%
Swedish Krona 2,419 2 December 2024 One payment Stibor + margin%
Total 74,351
During the year the rate of interest used by the bank on our GBP loans has
transitioned from the London Interbank Offered Rate (LIBOR) to Sterling
Overnight Indexed Average (SONIA).
Revolving credit facility - at 31 July 2021
Currency Amount Termination Repayment Rate %
outstanding date frequency
£000
GBP - 2 December 2023 One payment Libor + margin%
Euro 57,304 2 December 2023 One payment Euribor + margin%
Swedish Krona 15,989 2 December 2023 One payment Stibor + margin%
Total 73,293
The interest rate on borrowings includes a margin that is dependent on the
consolidated leverage level of the Group in respect of the most recently
completed reporting period. For the year ended 31 July 2022, Group leverage
was below 1.0:1 and therefore the margin will reduce to 1.25%.
At 31 July 2022, the Group had £75,649,000 (2021: £76,707,000) of its
multicurrency revolving credit facility unutilised.
Changes in liabilities arising from financing activities
1 August Cash flows Foreign New leases Other 31 July
2021 £000 exchange £000 Changes due £000 2022
£000 movement to business £000
£000 combination
£000
Non-current interest-bearing loans and borrowings (excluding lease 73,293 2,802 (1,744) - - 74,351
liabilities)
-
Debt related to the business combination of ERI (see note 13) - (3,227) - - - -
3,227
Lease liabilities 25,429 (3,202) (418) 3,326 - (168) 24,967
ClimaRad vendor loan 10,551 (504) (490) - - - 9,557
Total liabilities from financing activities 109,273 (4,131) (2,652) 3,326 (168) 108,875
3,227
1 August Cash flows Foreign New leases Changes due Other 31 July
2020 £000 exchange £000 to business £000 2021
£000 movement combination £000
£000 £000
Non-current interest-bearing loans and borrowings (excluding lease 69,563 9,127 (5,397) - - - 73,293
liabilities)
Debt related to the business combination of ClimaRad - (1,482) - - 1,482 - -
Lease liabilities 23,173 (2,960) (35) 5,495 - (244) 25,429
ClimaRad vendor loan - - (135) - - 10,686 10,551
Total liabilities from financing activities 92,736 4,685 (5,567) 5,495 1,482 10,442 109,273
21. Provisions
Accounting policy
Provisions are recognised when the Group has a present obligation (legal or
constructive) as a result of a past event, it is probable that the Group will
be required to settle the obligation and a reliable estimate can be made of
the amount of the obligation.
Provisions for the expected costs of maintenance guarantees are charged
against profits when products have been invoiced.
The amount recognised as a provision is the best estimate of the consideration
required to settle the present obligation taking into account the risks and
uncertainties surrounding the obligation. The timings of cash outflows are by
their nature uncertain and are therefore best estimates. Provisions are not
discounted as the time value of money is not considered material.
Provisions for warranties and property dilapidations
Provisions for warranties are made with reference to recent trading history
and historical warranty claim information, and the view of management as to
whether warranty claims are expected.
Warranty provisions are determined with consideration given to recent customer
trading and management experience.
Dilapidation provisions relate to dilapidation charges relating to leasehold
properties. The timing of cash flows associated with the dilapidation
provision is dependent on the timing of the lease agreement termination.
2022 Product Property Total
warranties dilapidations £000
£000 £000
At 1 August 2021 1,787 458 2,245
Arising during the year 921 9 930
Utilised (1,142) - (1,142)
Foreign currency adjustment (26) (4) (30)
At 31 July 2022 1,540 463 2,003
Analysis
Current 1,279 405 1,684
Non-current 261 58 319
Total 1,540 463 2,003
2021 Product Property Total
warranties dilapidations £000
£000 £000
At 1 August 2020 1,629 445 2,074
Arising during the year 1,367 61 1,428
Utilised (1,343) (107) (1,450)
Foreign currency adjustment 134 59 193
At 31 July 2021 1,787 458 2,245
Analysis
Current 1,453 416 1,869
Non-current 334 42 376
Total 1,787 458 2,245
Product warranties
A provision is recognised for warranty costs expected to be incurred in the
following twelve months on products sold during the year and in prior years.
Product warranties are typically one to two years; however, based on
management's knowledge of the products, claims in relation to warranties after
more than twelve months are rare and highly immaterial.
Property dilapidations
A provision has been recognised for dilapidations relating to obligations
under leases for leasehold buildings and will be payable at the end of the
lease term.
22. Deferred tax
Accounting policy
Deferred tax is recognised on all temporary differences arising between the
tax bases of assets and liabilities and their carrying amounts in the
financial statements, with the following exceptions:
• where the temporary differences arise from the initial recognition
of goodwill or of an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects neither the
accounting profit nor taxable profit or loss; and
• in respect of taxable temporary differences associated with
investments in subsidiaries where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
differences will not reverse in the foreseeable future.
Deferred tax assets are recognised only to the extent that the Directors
consider it is probable that there will be taxable profits from which the
deductible temporary differences, carried forward tax credits or tax losses
can be utilised.
Deferred tax assets and liabilities are measured on an undiscounted basis at
tax rates that are expected to apply when the related asset is realised or
liability is settled, based on tax rates enacted or substantively enacted by
the reporting date.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to offset current tax assets against current tax liabilities
and when the deferred tax assets and liabilities relate to income taxes levied
by the same taxation authority on either the same taxable entity or different
taxable entities and there is an intention to settle the balances on a net
basis.
The carrying amount of deferred tax assets is reviewed at each reporting date.
Deferred tax assets and liabilities are offset only if a legally enforceable
right exists to set off current tax assets against current tax liabilities,
the deferred taxes relate to the same taxation authority and that authority
permits the Group to make a single net payment.
Deferred tax is charged or credited to other comprehensive income if it
relates to items that are charged or credited to other comprehensive income.
Similarly, deferred tax is charged or credited directly to equity if it
relates to items that are credited or charged directly to equity.
Management judgement is required to determine the amount of deferred tax
assets that can be recognised, based on the likely timing and level of future
taxable profits together with an assessment of the effect of future tax
planning strategies. Uncertainties exist with respect to the interpretation of
complex tax regulations, changes in tax laws and the amount and timing of
future taxable income. Given the wide range of international business
relationships and the long-term nature and complexity of existing contractual
agreements, differences arising between the actual results and the assumptions
made, or future changes to such assumptions, could necessitate future
adjustments to tax income and expense already recorded.
At 31 July 2022, the Group had not recognised a deferred tax asset in respect
of gross tax losses of £5,195,000 (2021: £5,195,000) relating to management
expenses, capital losses of £3,975,000 (2021: £3,975,000) arising in UK
subsidiaries and gross tax losses of £nil (2021: £153,000) arising in
overseas entities as there is insufficient evidence that the losses will be
utilised. These losses are available to be carried indefinitely.
At 31 July 2022, the Group had no deferred tax liability (2021: £nil) to
recognise for taxes that would be payable on the remittance of certain of the
Group's overseas subsidiaries' unremitted earnings. Deferred tax liabilities
have not been recognised as the Group has determined that there are no
undistributed profits in overseas subsidiaries where an additional tax charge
would arise on distribution.
The movement in deferred tax assets and liabilities during the year, without
taking into consideration the offsetting of balances within the same tax
jurisdiction, is as follows:
2022 1 August (Charged)/ Credited Translation On 31 July
2021 credited to equity difference business 2022
£000 to income £000 £000 combinations £000
£000 £000
Temporary differences
Depreciation in advance of capital allowances (1,721) 11 - (4) - (1,714)
Fair value movements of derivative financial instruments 11 (193) - - - (182)
Customer base, trademark and patent (17,274) 2,409 - (10) (1,589) (16,464)
Losses 407 (344) - - - 63
Other temporary differences 1,246 (176) - 55 - 1,125
Share based payments 2,455 50 445 - - 2,950
Deferred tax liability (14,876) 1,757 445 41 (1,589) (14,222)
2021 1 August (Charged)/ Credited Translation On 31 July
2020 credited to equity difference business 2021
£000 to income £000 £000 combinations £000
£000 £000
Temporary differences
Depreciation in advance of capital allowances (1,028) (655) - (4) (34) (1,721)
Fair value movements of derivative financial instruments (9) 20 - - - 11
Customer base, trademark and patent (14,409) 2,520 - 439 (5,824) (17,274)
Losses 318 89 - - - 407
Other temporary differences 1,480 230 - (26) (438) 1,246
Share based payments 620 469 1,366 - - 2,455
Deferred tax liability (13,028) 2,673 1,366 409 (6,296) (14,876)
23. Dividends paid and proposed
Accounting policy
Dividends are recognised when they meet the criteria for recognition as a
liability. In relation to final dividends, this is when the dividend is
approved by the Directors in the general meeting and, in relation to interim
dividends, when paid.
2022 2021
£000 £000
Cash dividends on ordinary shares declared and paid
Interim dividend for 2022: 2.30 pence per share (2021: 1.90 pence) 4,553 3,762
Proposed dividends on ordinary shares
Final dividend for 2022: 5.00 pence per share (2021: 4.40 pence) 9,891 8,719
An interim dividend payment of £4,553,000 is included in the consolidated
statement of cash flows (2021: £3,762,000).
A final dividend payment of £8,719,000 is included in the consolidated
statement of cash flows relating to 2021 (2021: £nil).
The proposed final dividend on ordinary shares is subject to approval at the
Annual General Meeting and is not recognised as a liability at 31 July 2022.
24. Related party transactions
Transactions between Volution Group plc and its subsidiaries, and transactions
between subsidiaries, are eliminated on consolidation and are not disclosed in
this note. A breakdown of transactions between the Group and its related
parties is disclosed below.
No related party loan note balances exist at 31 July 2022 or 31 July 2021.
There were no material transactions or balances between the Company and its
key management personnel or members of their close family other than the
compensation shown below. At the end of the period, key management personnel
did not owe the Company any amounts.
The Companies Act 2006 and the Directors' Remuneration Report Regulations 2013
require certain disclosures of Directors' remuneration.
Compensation of key management personnel
2022 2021
£000 £000
Short-term employee benefits 3,517 4,139
Share-based payment charge 1,049 1,605
Total 4,566 5,744
Key management personnel is defined as the CEO, the CFO and the thirteen
(2021: eleven) individuals who report directly to the CEO.
25. Glossary of terms
Adjusted basic and diluted EPS: calculated by dividing the adjusted
profit/(loss) for the period attributable to ordinary equity holders of the
parent by the weighted average number of ordinary shares outstanding during
the period.
Diluted earnings per share amounts are calculated by dividing the adjusted net
profit/(loss) attributable to ordinary equity holders of the parent by the
weighted average number of ordinary shares outstanding during the period plus
the weighted average number of ordinary shares that would be issued on
conversion of any dilutive potential ordinary shares into ordinary shares.
There are 2,966,484 dilutive potential ordinary shares at 31 July 2022 (2021:
3,270,467).
Adjusted EBITDA: adjusted operating profit before depreciation and
amortisation.
Adjusted finance costs: finance costs before net gains or losses on financial
instruments at fair value and the exceptional write off of unamortised loan
issue costs upon refinancing.
Adjusted operating cash flow: adjusted EBITDA plus or minus movements in
operating working capital, less net investments in property, plant and
equipment and intangible assets.
Adjusted operating profit: operating profit before exceptional operating
costs, release of contingent consideration and amortisation of assets acquired
through business combinations.
Adjusted profit after tax: profit after tax before exceptional operating
costs, release of contingent consideration, exceptional write off of
unamortised loan issue costs upon refinancing, net gains or losses on
financial instruments at fair value, amortisation of assets acquired through
business combinations and the tax effect on these items.
Adjusted profit before tax: profit before tax before exceptional operating
costs, release of contingent consideration, exceptional write off of
unamortised loan issue costs upon refinancing, net gains or losses on
financial instruments at fair value and amortisation of assets acquired
through business combinations.
Adjusted tax charge: the reported tax charge less the tax effect on the
adjusted items.
CAGR: compound annual growth rate.
Cash conversion: is calculated by dividing adjusted operating cash flow by
adjusted EBITA.
Constant currency: to determine values expressed as being at constant currency
we have converted the income statement of our foreign operating companies for
the year ended 31 July 2022 at the average exchange rate for the year ended 31
July 2021. In addition, we have converted the UK operating companies' sale and
purchase transactions in the year ended 31 July 2022, which were denominated
in foreign currencies, at the average exchange rates for the year ended 31
July 2021.
EBITDA: profit before net finance costs, tax, depreciation and amortisation.
Net debt: bank borrowings and lease liabilities less cash and cash
equivalents.
Operating cash flow: EBITDA plus or minus movements in operating working
capital, less share-based payment expense, less net investments in property,
plant and equipment and intangible assets.
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