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Victoria PLC
('Victoria' or the 'Company', or the 'Group')
Update on publication of Full Year Results
&
Key Preliminary Unaudited Financial Data
for the year ended 1 April 2023
Record underlying revenue and EBITDA
Confident FY2024 outlook with a sharp increase in earnings and free cash flow expected due to completion of major integration projects
Victoria PLC (LSE: VCP), the international designers, manufacturers and distributors of innovative flooring, advises that its auditors have requested further time to complete their final audit procedures. To help keep investors informed Victoria has decided to announce key numbers from its preliminary unaudited results for the year ended 1 April 2023 ("FY2023"), the Company's tenth consecutive year of revenue and underlying profit growth.
For the first time in the Company's history, the total volume of flooring sold in FY2023 exceed 200 million square metres (more than 29,500 football fields), generating record revenues of £1.46 billion.
In FY2023 the Company focussed on the successful integration of acquisitions to optimise future earnings and free cash flow.
Commenting on FY2024 Outlook and beyond, Geoff Wilding, Executive Chairman, said:
"With all major integration projects in their final stages, we expect FY2024 to be a year of two halves, with stronger H2 earnings as the benefits of the reorganisation are experienced. Completion of the projects is also expected to result in Victoria's free cash flow increasing sharply from H2 FY2024, with management focussed on returning to our long-run average cash conversion of EBITDA to Net Free Cash Flow of 55%*. Further ahead, FY2025 will see the full benefit of the successful acquisitions' integration with an expected uplift in margins driving an additional increase in earnings and free cash flow."
*Cash generated after replacement capex, interest, and tax as a percentage of EBITDA.
FY2023 Unaudited Financial and Operational highlights[1]
| Year ended 1 April 2023 | Year ended 2 April 2022 | % Change |
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Underlying Revenue | £1,461.4m | £1,019.8m | +43.3% |
Underlying EBITDA[2] | £196.0m | £162.8m | +20.4% |
Underlying free cash flow[3] | £71.3m | £34.2m | 108.5% |
Net debt[4] | £658.3m | £406.6m | |
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· Record revenue and underlying earnings despite challenging macro-economic conditions.
· Softer demand seen in FY2023 due to near-term macroeconomic conditions but fundamental sectoral drivers sustain long-term, steady growth in a global flooring market believed to be worth $200 billion and growth over the last 25 years of c. 3% per annum.
· Four major acquisition integration projects well ahead of schedule and now in their final stages of completion. The outcome is anticipated to conservatively deliver a £20+ million per annum increase in EBITDA and a significant step down in exceptional capital expenditures.
· The Group's integration expenditure of the last three years is coming to an end. Consequently, the Board anticipates free cash flow to increase sharply. For the five-year period FY2015-2019, the Group averaged cash conversion of EBITDA to Net Free Cash Flow of 55%*, which the Board believes is a sustainable, long-term ratio and one management is focused on returning to in the near-term.
· Whilst the Group's FY2024 financial outlook is largely based on steady-state demand and underpinned by the various integration projects, each future 5% increase in overall revenue, which is Victoria's long-run organic growth rate, would be expected to deliver earnings and cash flow growth of more than £25 million per annum.
*Cash generated after replacement capex, interest, and tax as a percentage of EBITDA.
In conclusion Geoff Wilding, Executive Chairman commented:
"Victoria benefits greatly from being in a long-duration, steady growth industry that will drive compounding organic growth for decades. After making two-dozen careful acquisitions over the last 10 years we have now achieved a scale that, once we have completed the current integration projects, will result in higher productivity, more efficient logistics, wider distribution, and lower input costs than almost all our competitors. Coupling this scale advantage with the underlying sectoral tailwinds will, the Board believes, deliver outsized returns for our shareholders for a very long time."
For more information contact:
Victoria PLC Geoff Wilding, Executive Chairman Philippe Hamers, Group Chief Executive Brian Morgan, Chief Financial Officer
| www.victoriaplc.com/investors-welcome Via Walbrook PR | ||
Singer Capital Markets (Nominated Adviser and Joint Broker) Rick Thompson, Phil Davies, James Fischer
| +44 (0)20 7496 3095
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Berenberg (Joint Broker) Ben Wright, Richard Bootle
| +44 (0)20 3207 7800
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Peel Hunt (Joint Broker) Adrian Trimmings, Andrew Clark
| +44 (0)20 7418 8900
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Walbrook PR (Media & Investor Relations) Paul McManus, Louis Ashe-Jepson, Alice Woodings | +44 (0)20 7933 8780 or victoria@walbrookpr.com +44 (0)7980 541 893 / +44 (0)7747 515 393 / +44 (0)7407 804 654 | ||
About Victoria PLC (www.victoriaplc.com)
Established in 1895 and listed since 1963 and on AIM since 2013 (VCP.L), Victoria PLC, is an international manufacturer and distributor of innovative flooring products. The Company, which is headquartered in Kidderminster, UK, designs, manufactures and distributes a range of carpet, flooring underlay, ceramic tiles, LVT (luxury vinyl tile), artificial grass and flooring accessories.
Victoria has operations in the UK, Spain, Italy, Belgium, the Netherlands, Germany, Turkey, the USA, and Australia and employs approximately 7,300 people across more than 30 sites. Victoria is Europe's largest carpet manufacturer and the second largest in Australia, as well as the largest manufacturer of underlay in both regions.
The Company's strategy is designed to create value for its shareholders and is focused on consistently increasing earnings and cash flow per share via acquisitions and sustainable organic growth.
Victoria PLC
Chairman and CEO's Review
INTRODUCTION
Victoria's operational management philosophy during FY2023 is probably best encapsulated by Winston Churchill's advice, "When you are going through hell, keep going". Dramatic increases in the cost of raw materials, unprecedented energy prices, labour cost inflation, subdued consumer demand, and international shipping disruption created a testing backdrop against which our management team nevertheless delivered the 10th consecutive year of growth as set out in the table below.
| FY13 | FY14 | FY15 | FY16 | FY17 | FY18 | FY19 | FY20 | FY21 | FY22 | FY23 |
Underlying Revenue (£ million) | 70.9 | 71.4 | 127.0 | 255.2 | 330.4 | 417.5 | 566.8 | 621.5 | 662.3 | 1,019.8 | 1,461.4 |
Underlying EBITDA1 (£ million) |
2.3 |
5.1 |
15.8 |
32.3 |
45.7 |
64.7 |
96.3 |
107.22 |
112.02 |
143.52 |
171.32 |
EBITDA margin % | 3.3 | 7.2 | 12.4 | 12.7 | 13.8 | 15.5 | 17.0 | 17.2 | 16.9 | 14.1 | 11.73 |
1 The KPIs in the table above are alternative performance measures used by management along with other figures to measure performance.
2 Underlying EBITDA in FY20 through FY23 is stated before the impact of IFRS 16 for consistency of comparison with earlier years. IFRS-reported EBITDA for these years are £118m, £127m, £163m, and £196m respectively.
3 The decline in reported %margin was entirely due to the acquisition mix effect; LFL organic margins increased by 0.2%
The objectives of this review are to help our shareholders better understand the business and be able to reach an informed view of the value of the company, its future prospects, and its financial resilience.
To achieve these objectives requires data to be shared in a way that communicates information and this will include both IFRS-compliant and non-IFRS, performance measures. The 'alternative performance measures' will be reconciled to IFRS compliant measures in the full Annual Report. Shareholders are of course free to accept or discard any of this data, but we want to ensure that you have access to similar information used by Victoria's board and management in making decisions.
FY2023 OPERATIONAL REVIEW
Overview
The global flooring market is c. USD 200 billion1 (GBP 154 billion2), and USD 66 billion (GBP 51 billion) in Victoria's key markets of Europe and the US, with volume growth over the last 25 years of c. 2.6%1 per annum. There are fundamental drivers that sustain this long-term growth and, whilst somewhat subdued demand was experienced in FY2023, this was due to near-term macroeconomic conditions and we remain confident that the natural state of the sector is continued expansion in the regions where Victoria trades.
Before commenting specifically on each of the different operating divisions, there were several Group-wide elements in FY2023 which are worth highlighting.
1 Freedonia Global Flooring Report 2021
2 GBP/USD 1.29
Integration Projects
Integrating and reorganising an acquisition is expensive (especially in Europe where mandated social payments must be made to redundant workers) but necessary to realise the maximum value from acquired businesses. Therefore, with the proviso that the expected return on the investment must exceed our internal hurdle rate, the Group is willing to invest heavily where required, in integrating an acquisition in order to optimise future free cash flow. (To be clear, although the restructuring cash outlay is made post-completion, the quantum of the investment is scoped out prior to making the acquisition and is factored into the purchase price we pay for the business to ensure our targeted return on capital is achieved).
We have had four major projects underway throughout FY2023, all of which are now in their final stages and, when completed, are expected to conservatively result in a £20+ million per annum increase in EBITDA and a significant step down in exceptional capital expenditures:
(i) Balta's integration consists of three key projects:
a. The relocation of Balta's carpet manufacturing from Belgium to Victoria's existing UK factories, making full use of the designed capacity. 80% of Balta's carpet is sold in the UK and this move will lower production and transport costs whilst enabling shorter delivery times, thereby improving customer service.
b. The consolidation of the Balta rug manufacturing operation onto Victoria's large site at Sint-Baafs Vijve, Belgium, alongside the relocation of some production to Usak, Turkey, where the Group has two modern rug-making and yarn extrusion factories. These changes will improve efficiency and lower production costs.
c. The divestment of non-core business and real estate assets acquired with the Balta transaction where the opportunity for synergies with the Group's existing businesses are minimal.
(ii) Saloni Ceramica. With the investment Victoria has made in production technology in Spain over the last three years, we have been able to close the Saloni factory and consolidate production onto the very large Keraben and Ibero site. This move occurred ahead of schedule and was completed during March 2023. The Saloni brand continues, with the roll-out of high-end showrooms and social media presence supporting a renewed focus on the Architect & Design market.
(iii) Graniser, Victoria's low-cost Turkish ceramics producer, has two integration projects in progress:
a. Reorganisation and integration with Victoria's Spanish and Italian factories - increasing spare annual production capacity at Graniser to 8 million sqm.
b. Investment in new printers and packaging lines alongside integration into Victoria's existing ceramics distribution network to increase higher-margin export revenue.
(iv) Cali Flooring's integration comprises:
a. Access to Victoria's supply chain lowering Cost of Goods Sold (COGS).
b. Integration into Victoria's US logistics platform, improving delivery times and reducing costs.
c. Commercial excellence projects focussed on "gross to net" enhancements, which have lifted gross margin by approximately 5% since April 2022. These projects have covered restructuring salesforce incentives to encourage maximising margins rather than volume, minimising claim and product return related expenses, renegotiating services contracts, and optimising workforce productivity.
These projects fall into one or more of three broad categories: investment in productivity-enhancing technology, rationalisation of production facilities, and logistics integration - all of which are only possible due to Victoria's scale and business model. Few of our competitors have the size to justify the investment in technology that makes these large efficiency gains possible. Technology is expensive and without the large production volume of Victoria, the cost cannot be recovered. For example, an energy co-generation plant, capable of saving millions in energy costs, requires annual ceramics production at the factory of c. 10 million sqm to justify the investment - volume that few of our competitors manufacture. However, without technology, a manufacturer's production costs will remain permanently higher than that of Victoria, putting them at a perpetual disadvantage.
In total, these integration projects have reduced headcount by 1,000 FTE's whilst we have maintained our production capability.
The full £20+ million financial effect of these projects (detailed in the Capital Allocation section below) will be seen in FY2025, although the benefits will start flowing from later this year and the anticipated productivity improvements, cost savings, and working capital enhancements underpin the current year's expected increased financial performance.
Cash Generation
It is the Board's view that creating wealth for shareholders is best achieved by maximising the medium-term free cash flow per share and every decision is viewed through this prism.
Consequently, we set a target of achieving £100 million of cash generation in H2 FY2023. £117.0 million was generated from operating profits and working capital improvement, although we fell short of the overall target due to three timing related issues:
1. Delayed completion of the divestment of an unneeded factory building arising from the reorganisation of Balta. Recent Belgium legislation requires an environmental report prepared prior to completion and local consultants have significant backlogs. The report has been recently received and completion of the agreed c.£27 million sale can now proceed.
2. Surprisingly (and pleasingly) fast progress of the integration projects led to earlier payment of some large cash reorganisation-related expenditure (largely redundancies and expansionary capex) that was not expected until FY2024, totalling c. £25 million. Saloni's reorganisation completed earlier than anticipated in March and, due to the progress made in the last four months of FY2023, Balta's integration is now expected to finish shortly although when it was acquired in April, 2022 we said that integration would take 24-36 months.
3. Working capital (primarily excess ceramics inventory stockpiled due to energy uncertainty last winter) reduction proceeded somewhat slower than anticipated due to softer demand, impacting H2 FY2023 by c £20 million although progress is now well underway with targets and management incentive plans in place for each business across the Group.
Whilst these factors collectively impacted H2 cash by c. £71 million, none represent any fundamental shift in Victoria's financial position as the cash items paid out in FY2023 are a saving in FY2024 and the delayed inflows will be received in FY2024.
4. The Board also decided to invest £11.4 million (the equity component of the purchase) in the acquisition of Florida-based ceramics distributor, IWT. Similarly, £1.6 million was invested in buying back the Company's shares at prices the Board considered to represent very good value for shareholders.
Other cash movements were broadly in line with expectations.
For the five year period FY2015-2019, the Group averaged cash conversion of EBITDA to Net Free Cash Flow of 55%5 and it is our view that this is a sustainable, long-term ratio and one management is focused on returning to in the near-term. Nevertheless, during the last three years Victoria has chosen to invest heavily in three areas, which the Board's expects to result in higher future free cash flow conversion:
(i) Reorganisation/integration of acquisitions. The integration cost is always factored into our purchase price.
(ii) Growth capex. Victoria has been steadily growing market share for several years and additional plant has been required to produce the increased volume. However, this investment, together with productivity gains following completion of the integration projects and selective outsourcing, means the Group now has sufficient production capacity to cope with existing and foreseeable demand and this category of expenditure will fall in the future.
(iii) Ceramics inventory. During FY2023 the uncertainty about the reliability of gas supplies during the winter months led Victoria's ceramics businesses to build up additional inventory to ensure we could maintain supply to customers and protect our reputation as a reliable partner even in the event production was suspended due to lack of gas deliveries for up to two months. Given our ceramics division sells nearly £30 million (at cost) of product per month, the additional six weeks-worth of inventory held was a substantial commitment.
Gas remained available and, as noted above, we are now returning inventory levels to normal, and the cash that was invested in the excess inventory is being released throughout FY2024.
Consequently, it is the Board's expectation that Victoria's free cash flow will return sharply back to the long-run average (additional financial detail is provided in the Capital Allocation section below), and accompanying this evolution is an increased emphasis on free cash flow in senior management incentive plans.
5 Cash generated after replacement capex, interest, and tax as a percentage of EBITDA.
Operating Margins
As forecasted to shareholders last year, operating margins increased slightly (0.2% LFL) but remained below our long-term expected (and historical) high-teen level. This was due partially to a management decision to focus on protecting our cash margin (rather than the percentage margin) and using the difficult conditions to take further market share from struggling competitors, but is primarily due to the mathematical effect of acquisitions (Balta, Ragolle and IWT) - very large businesses with single-digit margins, which were consequently margin dilutive (-2.5%) prior to integration and benefitting from synergies with Victoria. There was also some inevitable temporary impact from the integration disruption (particularly at Balta where plant relocation was underway).
However, as set out in this Review, the various integration projects will be completed during H1 FY2024 and therefore we are anticipating an uplift in margins beginning in the second half of this financial year and the full benefit to flow in FY2025.
Inflation
Inflation has continued to be a significant factor throughout FY2023. Labour costs increased by around 10%, and certain key raw materials and energy costs increased by more than 100% during the year. This has had two impacts on the Group during the year:
i. Margin pressure. The Group implemented price increases during the year in order to protect our cash margin, whilst maintaining a strong competitive position during a period when some market participants were finding the operating environment very challenging. We are confident that completion of our integration projects alongside other actions, will subsequently deliver an uplift in the percentage margin back to our historical high-teen level.
ii. Working capital. Inflation-driven increases in raw material and production costs means the same quantity of inventory costs more to make and consequently ties up additional cash and, absent any mitigating actions, reduces cash flow and lowers the return on capital. Some of the critical cost inputs have returned to more normal levels and the consequence of this will be that much of the cash absorbed in working capital last year will return as stock is sold and replaced with lower input cost inventory.
In summary the Board and management are alive to the risks imposed by inflation and are carefully balancing the requirement to increase prices sufficiently to ensure our cash return on equity remains acceptable, whilst also maintaining our market share growth momentum, which will help us drive long-term free cash flow growth.
Demand
Demand softened in FY2023 following very strong volume growth over the previous 18 months. We believe this to be a function of (a) some pull-forward of spending in FY2021 and FY2022 (suggested by sectoral volume growth of c.4.9% in 2021 versus the long-term average of c.2.6% per annum) due to Covid lockdowns changing consumer purchasing priorities; (b) lower consumer confidence affecting spending levels, and (c) a level of de-stocking during the year by some very large retailers. Nevertheless, Victoria achieved 2.8% LFL revenue growth.
As can be seen from the FY2023 financial results, Victoria has been impacted less by weaker demand than many of our competitors:
· As a manufacturer and distributor of typically mid to high-end flooring, Victoria's core end-customers are less sensitive to economic uncertainty and inflation.
· Although de-stocking has been a feature of some larger retail customers, most of our production is supplied to our customers (retailers) based on end-consumer orders, not supplied for inventory, reducing Victoria's exposure to de-stocking.
· The Group has been deliberately structured with low operational gearing, reducing the impact on earnings of lower demand.
Although it is too early to make confident predictions, we have, in recent months, seen some signs of life in certain markets. It is our strong view that flooring remains a core consumer product and any period of subdued demand will pass with little impact on the long-term value of Victoria.
Whilst the Group's FY2024 financial outlook is largely based on steady-state demand and underpinned by the various integration projects, it is worthwhile noting that each future 5% increase in overall revenue, which is Victoria's long-run organic growth rate, would be expected to deliver earnings and cash flow growth of more than £25 million per annum.
DIVISIONAL REVIEW
This section focuses on the underlying operating performance of each individual division, excluding exceptional and non-underlying items, which will be discussed in detail in the Financial Review and Notes to the full accounts when published.
Everything we do operationally is about increasing productivity - lowering the cost to manufacture and distribute each square metre of flooring - and improving the customer (retailers and distributors) experience, seeking to become an increasingly valuable part of their business. Both are required in order to achieve our goal of creating wealth for shareholders by maximising the free cash flow per share and the purpose of this Divisional Review is to outline some of the steps we have taken during FY2023 along these two vectors.
UK & Europe Soft Flooring - A year dominated by integration of recent acquisitions
| FY23 | FY22 | Growth |
Underlying Revenue | £718.8 million | £423.1 million | +69.9% |
Underlying EBITDA | £66.9 million | £70.3 million | -4.8% |
Underlying EBITDA margin | 9.3% | 16.6% | -730bps |
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Victoria is now Europe's largest soft flooring manufacturer and distributor. Following very strong growth in FY2022 (LFL organic revenue growth of 31%), demand for soft flooring was weaker over the past 12 months, although Victoria has benefitted from its mid-high end product positioning with LFL revenue -4.7% for FY2023.
The operating margin reflected the mathematical effect from the acquisition of the low-margin Balta business (-4.2%) and higher input costs - particularly polypropylene fibre (-3.4%). As detailed below, cost savings achieved with the integration of Balta is expected to address the acquisition-mix effect and many input costs are returning to more sustainable levels.
Carpet and Underlay
· The most significant activity in this division over FY2023 has been the integration of Balta's broadloom carpet business, which was acquired in April 2022. The plan, relocating manufacturing to the Group's UK facilities, has required extensive trade union negotiations arising from the factory closures in Belgium, re-siting of machinery to the UK, and expansion of one of our UK factories. Although enormously disruptive in the short term and resulting in little earnings contribution from Balta in FY2023, the reorganisation is expected to complete shortly, with the financial benefits showing almost immediately.
· Interfloor, the Group's underlay subsidiary, has exceeded growth expectations in the European market, although labour shortages in the UK held the business back during the year. This issue is now resolved and we look forward to another strong result in FY2024.
· Prices for polypropylene fibre, a major raw material for soft flooring products, increased more than 50% due to a global mismatch between supply and demand. The high prices lasted for most of the financial year, impacting margins, but have more recently returned to more normal levels, with a benefit to the Group's production costs and working capital levels.
Rugs (Balta Home)
· Rugs is an entirely new flooring category for Victoria, forming part of the Balta acquisition. With hard flooring growing as a percentage of the total flooring area in Europe and the USA (from 53.6% in 2009 to 57.8% in 2024), and the tendency for consumers to then immediately cover their new hard floor with a rug, we believe this to be a sustainably growing flooring category.
· The USA is the key market for the rugs manufactured by Victoria and, after some softness in FY2023 (largely due to large retailer de-stocking) we are anticipating modest revenue growth in FY2024. However, the primary focus of the Balta Home management team, led by Marc Dessein, continues to be finalising the reorganisation of the business, which will have a materially positive impact on earnings due to efficiency gains.
· The reorganisation, which is on schedule, consists of the consolidation of production facilities in Belgium alongside transferring significant production capacity to Turkey, where the company has two modern, certified and low-cost factories.
Logistics
· Our logistics capability continues to provide Victoria with what we believe to be an unassailable competitive advantage that continues to drive market share gains. Retailers value service and product availability over the last few pennies in price (no margin at all is made by a retailer on unavailable product!).
· The Group's state-of-the-art, carbon-neutral, purpose-built 185,000 ft² fulfilment centre in Worcester has been completed and is fully operational, replacing the Kidderminster warehouse. It also houses the Victoria Group HQ.
· Apart from further enhancing Victoria service proposition, our logistics operation, Alliance Flooring Distribution, is also now generating third-party logistics income.
UK & Europe Ceramic Tiles - Extraordinary energy costs successfully managed
| FY23 | FY22 | Growth |
Underlying Revenue | £453.3 million | £371.6 million | +22.0% |
Underlying EBITDA | £105.8 million | £71.4 million | +48.2% |
Underlying EBITDA margin | 23.3% | 19.2% | +414bps |
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Successful ceramics production during FY2023 has been exceptionally challenging due to the unprecedented energy costs and generally soft demand. Energy costs normally comprise around 15-20% of revenues for a ceramics business and dealing with prices that at times were more than 900% of 'normal' levels was an industry-wide problem that led to many of our competitors simply suspending production.
Fortunately, Victoria's policy of hedging or contracting the supply of key raw materials and other inputs (which is ongoing) stood our ceramics division in very good stead during this extraordinary period and the division continued to contribute favourably to the Group's earnings with LFL revenue growth of 12.4% and an organic margin improvement of 4.2%.
Italy
· Demand continued throughout FY2023 (and into FY2024) for our 'Made in Italy' ceramics and we have an ongoing order backlog of many months despite the significant capacity increase in 2022.
· We took advantage of the failure of a neighbouring competitor to purchase their atomizer plant at a fraction of its replacement cost. At a purchase cost of €5 million, this equipment reduces the cost of atomized clay by c. €1.5 million per annum, alongside securing its supply - vastly reducing our reliance on third-party suppliers, which was becoming a potential risk to continued growth. The Italian operation is now vertically integrated and more resilient.
Spain
· The final stage of our Spanish ceramics' integration was completed during the year with the closure of the Saloni plant and consolidation of production on the Keraben and Ibero sites. This action, which maintained production capability, but with 15% fewer employees, had been much delayed due to Covid-19 restrictions, which lasted much longer in Spain than in other European countries. However, the resulting higher productivity will help the business remain competitive in the US market against ceramic tiles arriving from India, Mexico, and Brazil.
· The Saloni brand now focusses exclusively on high-end commercial applications, with stylish new showrooms for the Architecture & Design community opened in key locations in Spain.
Turkey
· Following the acquisition of Graniser in February 2022, we have right-sized the business, whilst investing in some key equipment to improve productivity, remove production bottle-necks, and allow effective integration with our global ceramics businesses. The result is an increase in spare capacity to 8 million sqm alongside a 30% reduction in FTEs and we are anticipating an increased contribution from the business in the current financial year.
Australia - Ongoing demand, some inflationary margin pressure
| FY23 | FY22 | Growth |
Underlying Revenue | £120.9 million | £109.5 million | +10.4% |
Underlying EBITDA | £15.3 million | £16.4 million | -6.4% |
Underlying EBITDA margin | 12.7% | 15.0% | -227bps |
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Although inflation had a small temporary impact on margins, the Australian market continues to see good demand for flooring, partially driven by ongoing buoyant residential construction due to inwards migration. Permanent migration (excluding humanitarian migrants) is consistently around 190,000 people per annum - all of whom are of high economic value, creating consistent demand for additional accommodation.
Australian consumers - particularly in the mid-high end of the market - are paying increasing attention to sustainability when selecting products and this has resulted in a strong recovery in demand for wool-based carpet, which is Victoria Australia's core manufacturing competency and is highly beneficial to the operating margins of the Group's spinning mill at Bendigo.
North America - Continued profitable expansion
| FY23 | FY22* | Growth* |
Underlying Revenue | £168.4 million | £115.6 million | n/a |
Underlying EBITDA | £9.3 million | £6.4 million | n/a |
Underlying EBITDA margin | 5.5% | 5.6% | n/a |
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* FY22 data is for 9 months only as Cali Flooring was not a Victoria subsidiary until 23 June 2021 and growth comparisons are not applicable
Our North American business continued to grow in FY2023 with the acquisition of Florida-based ceramics distributor, International Wholesale Tiles ("IWT"), bringing the Group's North American-sourced revenues (including exports to the US from our European factories) to more than USD 400 million (GBP308 million).
There is strong US-consumer demand for European-branded product - partially because of the quality and style, and partially because demand exceeds domestic production capacity by 50%. Ultra-high quality artificial grass as manufactured by Victoria in Germany and the Netherlands is a particular high-margin opportunity (as outlined in last year's Annual Report) but we are also gaining share in our ceramics business and are exporting increasing quantities of ceramic tiles from our European factories to North America. The US remains the single-largest market for our rugs business.
The effectiveness of our strategy of acquiring US distribution businesses and then driving higher margin organic growth for our European factories via logistics and distribution synergies, whilst massively disrupted by the pandemic during 2020 and 2021, shows considerable promise - as set out in the table below:
Organic growth of US market exports from Victoria's European factories | |||
| 2019 | 2023 | Growth |
Revenue (GBP thousands)a | 4,585 | 45,322 | +888% |
a Excludes revenue from Balta Rugs, Cali Flooring, and IWT, which were acquired businesses and do not form part of the Group's US organic growth.
However, we are also continually seeking to profitably expand our US distribution. One example is the recent soft launch of the Victoria Home brand on Wayfair.com with Balta rugs and other flooring products available, although it will be early-2024 before we plan to scale this effort to ensure the systems are in place to efficiently manage the expected growth.
The well-publicised West Coast shipping disruption last year constricted supply of LVT product for several months, impacting sales. However, this has not continued into the current year and normal product supply is being experienced.
In Q4 FY2023 the Group finalised the reorganisation of its US logistics capabilities with four distribution centres across Georgia (two), South Carolina, and Florida and the US-based management is continuing to take advantage of revenue and cost synergies with the wider Group, with opportunities for distribution of Victoria's European-manufactured product and logistics efficiencies.
CAPITAL ALLOCATION
Victoria's Board views every investment decision through the prism of maximising the medium-term free cash flow per share. With FY2023 being a very significant transformational year due to the acquisition and integration of Balta, and the integration of Cali and Graniser, growth/restructuring capex and restructuring costs totalled £98.5 million. It is important to understand that these costs were factored into the purchase price of the businesses and are expected to result in higher earnings and free cash flow than had the investment not been made. Equally significantly, the shift in allocation of this free cash will be dramatic:
· Upon completion of the integration projects capex (c.£99.6 million in FY2023) will reduce to normal maintenance levels (see Table A below for details) and exceptional costs (c.£43.8 million in FY2023) associated with reorganisation will be de minimus (see Table B below for details of the major projects and their associated costs).
· With a much lower risk of energy disruption the cash invested in excess ceramics inventory will flow back out as inventory levels return to normal.
Table A sets out the breakdown of capex spending for the last five years to help shareholders better understand normal maintenance capex levels, with the last major reorganisation project being in FY2019:
Capex | FY19 | FY20 | FY21 | FY22 | FY23 |
| £m | £m | £m | £m | £m** |
Maintenance | 23.5 | 25.4 | 20.9 | 40.9 | 45.5 |
Growth & Restructuring* | 20.9 | 8.4 | 7.6 | 12.4 | 54.1 |
| 44.4 | 33.8 | 28.5 | 53.3 | 99.6 |
* Includes capital expenditure incurred as part of reorganizational and synergy projects to drive higher productivity and lower operating costs.
**The step-up in FY23 is due to the Balta acquisition, which has both a short-term impact from integration, plus an ongoing increase in quantum due to the increased size of the Group.
Table B summarises the exceptional expenditure items in FY2023, which are expected to end as re-organisation/integration projects complete this financial year.
Exceptional Costs | Redundancy cash costs | Legal & Professional | Asset removal/ Impairment | Provisions /other | Total |
| £m | £m | £m | £m | £m |
Balta re-organisation | 6.4 | 0.6 | - | 24.5 | 31.5 |
Saloni re-organisation | 2.9 | 0.4 | 2.9 | 1.4 | 7.6 |
Graniser integration | 0.3 | - | - | - | 0.3 |
Cali integration | - | - | 1.2 | 0.2 | 1.4 |
Total | 9.6 | 1.0 | 4.1 | 26.1 | 40.8 |
The Board will be prioritising allocation of the Group's free cash flow to reducing net debt and redeeming preference shares (the precise mix will depend on several factors). At all times the allocation decision will be based on prudently optimizing the Group's balance sheet while analysing what option will maximise the medium-term free cash flow per share.
DIVIDENDS
For the reasons detailed in previous years' Annual Reports, it remains the Board's view (as it has been for the last ten years) that it can continue to successfully deploy capital to optimise the creation of wealth for shareholders and therefore it has again resolved not to pay a final dividend for FY2023.
LEVERAGE
Victoria has for the last 10 years maintained its leverage at around 3-3.5x EBITDA - a policy that made sense to us given the stable nature of our business, the terms of our debt (covenant-lite, fixed-rate, long-dated bonds), and ultra-low interest rates.
However, capital markets conditions have changed and, with the higher interest rates that are likely to be experienced for the foreseeable future, it is the Board's objective to (a) reduce the Group's net debt/EBITDA ratio ahead of refinancing the current bond issues; and (b) redeem preference shares†.
These goals will be met by both reducing the numerator - the absolute quantum of debt - from operating cash flow and the sale of non-core assets and by increasing the denominator - the Group's earnings - due to completion of the various integration projects and other actions discussed elsewhere in this Review.
†Shareholders will recall that the terms of the preference share issue incorporated a call option that can be exercised by the Company from November 2023, giving Victoria the right to repurchase the preference shares in blocks of £25 million at par i.e. their issue price.
OUTLOOK
Charlie Munger, the other half of the Berkshire Hathaway duo, once observed that whilst some corporate problems seem large in the moment, in time they will seem trivial. That is why he believes long-term investing pays off and why Victoria's management focusses on creating long-term value rather than reacting to short-term market noise, which can distort issues out of all proportion to their real effect on future prosperity. We are confident that all our businesses benefit from strong economic fundamentals, and skilled and dedicated management.
Operations
Completion of the various integration projects discussed in this Review alongside tight cost management and productivity improvements underpin the expected continued growth in earnings and cash flow this year, notwithstanding ongoing challenging macro-economic conditions.
The Board is therefore expecting FY2024 to be a year of two halves, with the Group's financial performance in H2 being stronger due to the synergy gains from the projects described in this Review alongside limited recovery in demand in some markets.
Acquisitions
Although our focus is firmly on the integration projects, acquisitions remain a core part of Victoria's long-term growth strategy. Victoria has become a permanent home of choice for flooring companies in Europe and the US - particularly family-owned businesses - and the Group's potential pipeline of accretive acquisitions continues to be compelling.
The worth of a business (or indeed any other investment asset) is the present value of future cash flows and, with our firm belief in Benjamin Graham's 'Margin of Safety', we are mindful of the impact of higher interest rates and inflation on valuations and the cost of capital.
Private company owners typically take time to adjust their valuation expectations, but the same selling imperatives remain (retirement being the most common) and so asking prices will, in time, reflect the new reality. Consequently, at lower free cash flow multiples, Victoria's acquisitions will continue to provide the same Return on Capital as previously, notwithstanding a higher cost of capital. Therefore, at the right time and within our leverage policy, we will continue deploy capital to build scale, expand distribution, broaden our product range, and widen the economic moat around our business as we have successfully done over the previous 10 years.
CONCLUSION
Victoria benefits greatly from being in a long-duration, steady growth industry that will drive compounding organic growth for decades. After making two-dozen carefully selected acquisitions over the last 10 years we have now achieved a scale that, once we have completed the current integration projects, will result in higher productivity, more efficient logistics, wider distribution, and lower input costs than almost all our competitors. Coupling this scale advantage with the underlying sectoral tailwinds will, the Board believes, deliver outsized returns for our shareholders for a very long time.
Geoffrey Wilding | Philippe Hamers |
Executive Chairman | Chief Executive Officer |
15 August 2023
Disclaimer: The key financial numbers in this announcement have been extracted from the unaudited financial statements of the Group for the 52 weeks ended 1 April 2023. The numbers do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. Whilst the financial information included in this announcement are believed by the Company to be correct, this announcement does not itself contain sufficient information to comply with international accounting standards. The Group will publish full financial statements that comply with international accounting standards in due course.
[1] All the numbers and commentary in this announcement should be read subject to the Disclaimer at the end of the announcement.
[2] Underlying performance is stated before exceptional and non-underlying items.
[3] Underlying free cash flow represents cash flow after interest, tax and replacement capital expenditure, but before investment in growth, financing activities and exceptional items
[4] Net debt shown before right-of-use lease liabilities, preferred equity, bond issue premia and the deduction of prepaid finance costs
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