Victoria (LSE:VCP) — Full year results for the year ended 30 March 2024

0:01 Good afternoon, and welcome to the VICTORIA PLC results investor presentation. Throughout this quarter presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the q and a tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself. However, the company can review all the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Jeff Wilding, executive chairman. Good afternoon to you, sir.

0:32 Good afternoon. Thank you very much for joining the call. As you will have seen from our results, the market was a lot softer in the last twelve months than it has been previously. This is largely due to inflationary pressures impacting consumer discretionary spending and a pull forward of demand when, during the COVID lockdowns, a number of people understandably invested in their property, and and a lot of spending was was conducted in that period. And, consequently, there was a has been a drop in spending in more recent in the last eighteen months. This will obviously normalize over time, but in the meantime, it has impacted our revenue. Although I'm pleased to say that Victoria outperformed the wider market in most of its end markets.

1:18 So with that, I'll hand over to Brian who more than the CFO to take you through the financial results for FY '24. Thanks, Jeff, and good afternoon, everyone. I will skip through to slide seven as for the slides on the our website. I will quickly run through Victoria's financial highlights of the year, which has proven to be challenging for the global flooring industry. And then I'll hand it over to Philip, who will take you through more detail on each of the divisions. So slide seven shows the results of the group for the year. As we announced the market in March, we continue to see tough trading conditions well into the second half of the financial year, and this can be seen in volumes being lower by 12% or up roughly 28,000,000 square meters compared to the prior year.

2:05 The knock on impact of the volume decline was revenue at 1,250,000,000, that being lower than the f one twenty three with all of this being impacted. From our perspective, we have different results across the divisions. The UK and Europe soft flooring, I'm pleased to say that the results of the integration and restructuring we've done in twin FY '23 can be seen with the division showing comparable year on year absolute gross profit of circa 194,000,000 and increased gross margin percentage despite 11% decline in revenue. You will also see a reduction in of 17,000,000 in operating expenses as a result of the reorganization, integration, and other projects delivering improvements in absolute EBITDA to circa 83,000,000 and EBITDA margin of 30 or 370 basis points.

2:55 UK and Europe ceramics has been the hardest hit of our divisions with volumes down 19% as a result of low demand in European and export markets as well as increased competition from Indian manufacturers. The decline in volumes has led to a decline in profitability, and action has been taken and continues to be taken to improve profitability in this division. Moving on to Australia. This division, seeing a downturn in volumes and revenue, continue to perform well from a margin perspective. And the North American division also showed improved EBITDA and margin after the integration of IWT in FY 2023. Overall, the group delivered EBITDA of 160,700,000, in line with the guidance that we issued in March. Moving on to the next slide. Here, you'll see the non underlying items, and I'll spend a little bit of time just going through some of the the larger ones to to explain them.

3:47 We exclude these items from our underlying performance as they tend to be irregular, and therefore, they distort the trends in the business or the technical accounting adjustments, which we have to put through as a result of IFRS, but do not affect the underlying performance of the business. There are two items, two cash items, the rest are noncash. So then the cash items are a million pounds in relation to acquisition and disposal related costs down from 4,000,000 in the prior year, and these are costs that we pay to advisers as we're going through the process of looking at or completing acquisitions. We also have reorganization costs, which is a which is a cash cost. These are from the integration of our acquisitions and mainly relates to the reorganization of Balta.

4:35 We expect over time, these costs will be cash neutral as we dispose of certain real estate from the estate that we acquired with with Balta. We also took some costs through here for some redundancies in in Turkey as we're managing the cost base as a result of continuing lower demand. Point to note here is that the cash flow is it can be different in terms of the timing compared to when we take the accounting charge, and we'll come on and look at the specific cash flow numbers in a couple of slides time. Couple of other points to to highlight here are the imperative goodwill. The accounting standards require us to assess goodwill on an annual basis for historical acquisitions. And to do this, we perform a discounted cash flow modeling using the current trading as the base.

5:22 And given where demand has been this year and also with no imminent recovery being forecast in our models, this has resulted in an impairment which we've taken this year mainly in relation to our Spanish and Turkey ceramics businesses and our accounting business in North America. So moving on to the next slide, cash generation. And you'll see here that operating cash flow before interest tax and exceptional items is a 106,400,000 compared to 157.8 in in FY '23. For the full year, we've seen an an outflow in working capital of 15,200,000, and this is made up of an outflow in the first half of twenty seven point six when poor demand was not aligned with our production and industry levels. And in the second half, the business took action to reduce the inventory levels and to release cash from inventory, resulting in an inflow of 12,400,000.

6:17 We expect to see this inflow continue in FY twenty five. Other points on the slide are capital expenditure, where we now see this returning to normal levels, having had a significant outflow in FY twenty three of close to 100,000,000 with a lot of that in relation to the reorganization of the when we bought it by moving production out of Belgium and into The UK and into into Turkey. The service real estate asset disposal proceeds, This is in relation to the property that we sold in Belgium at the end of the last calendar year. And exceptional cash items, you'll see here that we had 29,300,000 outflow in f y twenty three and an outflow of 33,000,000 in FY twenty four. These relate to the accounting charges on the prior slide, and we expect in cash terms to pay at roughly 11,000,000 in FY twenty five.

7:16 If we look on to the next slide, we've got a graphical representation of the movements in net debt. You'll see that net debt has decreased from 658,300,000 to 632,900,000, and the the building blocks for that are of course the pennies with the free cash flow from before exceptionalizing twenty eight point two. We also had the net impact of the reorganization costs in Delta of twenty three point two, and this is after you net off the proceeds from the disposal of properties. The 15.8 relates to payments that we've made on on prior acquisitions, and that number will become smaller in in future years. Also, we had an inflow from further utilization of factoring, which is not included in the definition of a net debt for this purpose.

8:07 And, also, we've had a benefit of 22,000,000 on the retransmission of our euro denominated debt. Finally, for me, moving on to the last slide and looking at the net debt structure and also the leverage. We the leverage this year has increased from 3.4 to 4.4 despite our net debt, which is used for metric leverage decreasing, and this is purely as a result of EBITDA being lower this year than it was last year.

8:36 Management is committing to reduce this leverage ahead of the next round of financing by generating cash from operations and the sale of noncore assets. And this includes further disposal of real estate in in the Belgium portfolio. We we're expecting we've already completed one. We expect to complete another in the the later stages of this year. You've also seen from this slide that we had 73,000,000 of cash at the end of the year and and also with the lower senior secured debt, partly due to the bond buyback and lower lower drawdown of facilities elsewhere. We have a liquidity position of over 250,000,000 across across the group. All our senior debt is long tenor with the earliest repayments needed to be in August 2026.

9:26 And with that, I'll hand you over to Philip. Thank you, Brian, and good afternoon, everybody. So when being faced with the market challenges last year, management has been focusing on the completion of the integration and the rightsizing of different projects as we have described in the previous published reports. We believe that all of these actions which have led to a reduction of about 1,200 FTEs, which is about 16% of the total workforce of the VICTORIA group, will deliver structural improvements in the company's operating margins due to lower CapEx, also a more competitive position due to the rightsizing projects which we've conducted, a better consumer service level given the investments which we've conducted in our DCs in The UK and The US, a lower cost of manufacturing, and working capital reduction exercises in terms of SKU and a better supply chain.

10:23 This can already be clearly be demonstrated in what happened in our first reported division, which is The UK and Europe soft flooring, where where we have seen a vast margin expansion and a strong outperformance of the wider market. Yeah. Albeit that revenue alone turned down around 11%, which is much better than UK volume drop, which we expect last year has been about 20%. The 11% drop is against a 31% like for like growth in the previous year. The margin or underlying EBITDA improved from 23.8 to 67,000,000 from £67,000,000 to £83,000,000, which is a fast improvement of 370 basis points. So what has happened on operational level? The the broadband manufacturing in Malta, Belgium has been stopped, and the production has been transferred to The UK factories in South Wales and Yorkshire.

11:21 This has provided even better cost absorption during due to the increased volumes. And moreover, when extra capacity is needed, we can order these quantities externally with third party manufacturers, which we have lined up in Turkey. The bulk of revenue has also been screened directly, and a lot of bottom slicing has happened whereby nonprofitable revenue has been ditched to the benefit of the of the working capital. Also, simultaneously, in what we call our super DC and super distribution center in Worcester, which is also our headquarters. This has been brought to life last year. So over four Alliance UK distribution centers have delivered 780,000 order lines last year with a 99.2% on time and food delivery and 98.7% within three days.

12:15 We've also acquired the first electric vehicles to which we deliver now 25% from the manufacturing plant to the distribution centers carbon free. I would also like to remind you that the logistics operation for people who have not followed that in the previous years that our logistics operation is a unique differentiating factor for our service which we are offering to The UK. In rubbers, the operational plan has been rolled out where whereby we have closed one one point two million square feet plant and transferred the equipment to one of our two Turkish manufacturing plants for improved cost efficiency. And in the meantime, the Belgian plant has been sold, which has resulted in a €32,000,000 net cash inflow in FY twenty four.

13:05 The next division, yeah, which we are reporting is UK and Europe ceramic tiles division. Following a double digit like for like revenue and EBITDA growth in f y twenty three, the key metrics returned to the f y twenty two levels in f y twenty four. The main reasons for the significant drop or the the volume declines which we've seen in the key markets being France, Germany, Spain, and Italy. We have also decided to hold pricing levels in the face of a weak demand to protect premium brands. Brand equities and board to us and especially with the brands which we're having in in Spain and Italy.

13:53 We've also seen, and that's the third reason, the the sudden and aggressive pricing competition from ceramics manufacturers in India.

14:02 However, in April this year, anti dumping and countervailing duty, so anti subsidy petitions were filed by the industry with the US government seeking to impose substantial tariffs, and the same is to be expected in in Europe anytime soon. Of course, this revenue drop, which is about which is over 20% in in volume and value has had a severe impact on production variances. As you can imagine, there was a lesser cost absorption. So mitigating actions have been taken and which are still in the process of of being taken, which is the full integration of all production sites in the three geographies, which is mainly in Turkey, to optimize the efficiency. Specific sizes are being allocated to specific factories, to specific kilns.

14:52 There's also been investment then in new technologies, such as printers and packaging lines to bring the Turkish production up to European and US standards going forward.

15:02 We've also entered into conversations with customers to discuss value engineering to the benefit of the cost of goods sold. And then thirdly, Saloni, which is our commercial brand, has been completely revamped, and new showrooms have been opened in Spain and elsewhere in in Europe, which are more focused than on the a n AMD, so the architects and designers community.

15:28 So very quickly on the the two remaining reported divisions, North America, I just want to remind you that in North America, we're only distributing. We are not manufacturing. So our larger distribution business in is in in is Is Cali in San Diego, California, mainly offering luxury vinyl tire as an omnichannel distributor to the Charleston DC, followed by the two Boulder warehouses, which we have in the room and in Savannah, and IWT warehouse, which we have in Florida. So The US has always been, for as long as we've there, proved to be a resilient market for Victoria, and the volumes have been up, but revenue was down with about 3%, which which is about £2,500,000.

16:15 So last reported division is Australia. Traditionally, very stable margin margin and a somewhat softer marketplace as we can see in the very start also in the new financial year. Following the double digit organic growth in FY twenty three, demand in Australia was slightly softer across all floating divisions, about 4%. And the revenue fell a bit more with about 12%, but this was mainly due to the product mix.

16:45 Just a reminder, in Australia, we have two carbon plants in Melbourne, and we have distributor in Sydney slash Melbourne, manufactured distributor of and LVT. There has been, in the meantime, no structural change in the Australian market, and we expect demand in Australia to recover due to the onwards or inwards migration and the overall drop of the interest rates, which we expect to happen later in this year. Maybe a couple of words on the outlook, Brian. Thanks. So before we move to that, I would just like to raise the points around the the order this year and last year. So you remember that there's a qualification in the f y 23 orders in relation to a small subsidiary, which is less than 20,000,000 of revenue.

17:36 This was due to the fact that there were incomplete accounting records, concerns around the control environments. And the board limited Bramford to scope of orders in relation to solely that subsidiary, which was what the qualification was in relation to. We lifted that limitation after the the cats were signed last year, and Grant Thornton have been in there doing work since that until the end of the orders at the start of this week as has my team. I'm pleased to say that the ground were able to satisfy all the concerns that they had in relation to those early years of the business, and we now have a chain order report for both this year and last year as we'll be seeing in the annual report published in the next couple of weeks.

18:22 Okay. Couple of words on the outlook when analyzing the key indicators for the outlook for FY '25. We do see construction PMI back just over 50, which is suggesting the initial stage of of growth. Consumer confidence also has improved from a very low end '22 and early twenty three to a much better current level, albeit as you can see, there's still way to go there. Mortgage approvals in UK have increased substantial, and we should see the sales of of folks following the same trend anytime soon. The the next slide is listing the upward synergy potential, but, okay, we've gone through that when talking to the division. So just short repeat integration of Baltar and Broadmum and and the RUX.

19:18 So project and Broadmum completely finished, and RUX in the process of happening soon, but which should come to to to the end in the next three to four months. Integration of and ceramics, that's the investment we've done to come more up to speed and have a better kind of product for delivery in Europe and in The US. And then the integration of Califlooring, which will be using the the bulk well, partially the bulk up, but in general, the VICTORIA distribution centers to the benefit of the supply chain.

19:52 Roy? Thank you, Philip. And just to finish off, just talking about our cash generation and our balance sheet. We are conscious the leverage has come up as a result of the performance this year. We're working on a number of different things, a, to improve performance and also run self up in terms of our balance sheet. And what you see from the slide is we're we're looking to the the potential cost will reduce as we've completed the large reorganization of Balta. We're also now returning to a more normal level of CapEx, as I mentioned earlier on. Working capital, the team has been and continues to work on reducing working capital, and we're looking to squeeze more out of that in the coming year. We've also looked at our real estate across the group where we have surplus properties, and we're looking to raise over 50,000,000 in f y twenty five in relation to that. We have one property, which is pretty advanced in the process, and we expect that that will complete in this calendar year.

20:58 And as you can see in terms of capital allocation, the focus for us will be the three items. Predominantly, the priority will be in reducing leverage. It's also worth noting that the the bonds first tranche of the bond is not due till August 26, but we are starting the process now to make sure that we are ready to refinance that when the the market is optimal for us to do that. We talked about the last presentation around our leverage targets and one of the past we've had been with the higher leverage. There are a number of reasons for us to want to get to a lower leverage, And the the right hand side of the slide talks about how ones could go about doing that by both the new helping out in the numerator and the denominator.

21:46 So with that, I think the formal part of the presentation is complete, and we're happy to take questions. Perfect. Geoff, Philippe, Brian, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab, which is situated on the top right hand corner of your screen. But just while the company take a few minutes to review those questions that have been submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. As you can see, we have received a number of questions throughout today's presentation. And if I could just hand back to you to read out the questions and give response to it, it's appropriate to do so. I'll pick up from you at the end. Yeah. Right. Thank you. There's been several questions received about the repurchase of the senior notes, which we were undertaking earlier this year and where we intend to continue with that.

22:37 We have a stated policy, which you will have seen both in the presentation and also in the market announcement yesterday, that it's our intention to reduce leverage. And, clearly, one of the options available to us to do that is to continue to repurchase senior notes. So although we cannot be explicit about what we're undertaking, we're not undertaking in the market at any given point in time, That I just wanna reiterate that it is our intention to reduce leverage. So, again, there's there's a couple of questions around appointing financial advisers to assist with the refinancing.

23:29 No. We haven't appointed any financial adviser at this point in time. We have we're still gathering our thoughts very clearly in terms of the corporate activity of the business. Well, the focus in the last or recent months has been on ensuring we get an unqualified order for FY '24 plus ensuring that the order for FY '23 was revisited and also may have given us a clean order for that for that year. So focus has been there. We will continue to gather our thoughts over the weeks ahead and make a decision in due course about financial advisers now we approach the refi of the of the bonds. So, also, we just on Malta and the reorganization.

24:27 We've been talking about this the reorganization since for about eighteen months now. And I just wanted to point it to highlight, given a couple of questions, that despite much softer demand with our revenue down 11 and the market down more like 20% in our in in our soft flooring market, our EBITDA improved and our gross margin improved by some 17,000,000 despite the drop in in in revenue, which points to the success of the the reorganization and the cost that's been taken out of the business. Mathematically, if our revenue returned to f y 23 levels, EBITDA for the for the for for the soft flooring division would be over 100,000,000.

25:22 And I think that's a credit to the operating team at VICTORIA and all is well for the re reorganization that's currently being undertaken in the ceramics division. You'll know that, again, given the soft market, the only division which had materially negative results this year was the ceramics division. The other divisions were either neutral or positive. And so I think you can take some comfort from the fact that we the operational team has has track record now in reorganizing, and I think you can expect to see some better results out of the ceramics division this coming year. Sorry. We're just taking a moment to read the questions that are coming in.

26:16 Hope, do you want the empty dumping? Yeah. Well, this is in the process of happening. We don't have a final decision yet. So, yeah, maybe the question is, is there any more comments on the anti dumping petition regarding this handicapped file in The US? So this is in the process of happening. The petitions have been sent, and the US government is will take any measure anytime soon, which will probably have a a retroactive character of a few quarters. So just picking up, also, we expect the it's our the industry's expectation, including ours, is that the petition will be successful in The US and that Europe will follow or will follow the lead of The US.

27:13 Go on. We stop there. Well, there's a question on competitive positioning in key markets in Europe, North America, UK. So all is due with the product development and service. So we are not in the bottom end of the segment. It's good to remind everybody here that over that we are more in the medium to high end of the market where service is extremely important. So so enhancing our competitive position is just always be in the forefront of service, adding an extra elements of service throughout the whole offer. And this is what we're basically doing mainly in our largest markets, which is The US and so UK and US.

28:29 I think that's it for questions. Let us know anymore. Perfect. Jeff, Philippe, Brian, thank you very much for answering those questions you can from investors. And, of course, company can review all the questions submitted today, and we'll publish those responses on the investor meet company platform. But perhaps just before redirect investors to provide you their feedback, which I know is particularly important to the company, Jeff, could I just ask you for a few closing comments? So I I think the the three messages I'd like people to take away is firstly, and obviously, very importantly, the company received a a unqualified order for this year, and the audit decision of last or or or the audit outcome of last year has been reversed. So we now have two years of clean audits, which is what we should have, and we expect to have that going forward as well.

29:17 So I think that's very important to stress that the entire company now has a clean, ordered opinion. The second issue is that or the second point I would like to make so we could talk about briefly is there is nothing secular, or in other words, nothing structural that has changed about the sector. People will still require flooring. There's obviously some sort of an impact on consumer discretionary spending over the last eighteen months, two years with higher interest rates and high inflation. As that mitigates or moderates over the over the months ahead, we do expect flooring demand to recover, and the company now has much lower operating costs. It has higher gross margins. And as demand recovers, we expect a very sharp recovery in both earnings and cash flow.

30:09 To give you some idea, the the volume of flooring sold today is down some 20% from what it was yeah. Sorry. The volume of flooring sold in 2023 calendar twenty three was down some 20% on the volume sold in this is by the industry more widely in f y sorry, in in calendar two thousand and nineteen. So that is not an exception year. It is a perfectly ordinary year, but demand is now currently 20% lower below that. So that implies that just to return to normal demand levels in terms of volume, the would require a 25% uplift in volumes from where we sit today, and each 5% is worth about 25,000,000 of earnings to VICTORIA.

31:01 So as demand recovers, we're expecting a very sharp improvement in both earnings and cash flow. And that ends the the presentation to to shareholders today. Perfect. Could I just thank you for updating investors today? Please could I ask investors not to close the session as it you know, we automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This then take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of VICTORIA PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.