Victoria PLC (VCP) Earnings Call Transcript

Good afternoon, and welcome to the Victoria PLC Investor Presentation for the recorded presentation. [Operator Instructions] Before we begin, I'd like to follow I'd now like to hand you to the management team, Geoff, good afternoon, sir.

Good afternoon. Thanks, everybody, joining the call. We'll get straight into it. So that we have a little bit more time for Q&A at the end. And so I'll get like to take you through the financial overview of the year, and then we'll pick up.

All right. Thanks, Geoff. Great. So just to start with a couple of headlines. Obviously, since you updated us at the half year, the revenue outlook was a little bit tougher than we'd anticipated. So revenue for full year '26 was GBP 1.45 million as revenue down about 6%. Volume was a little softer than that, so down almost 9%, really reflecting just that tough macro environment. We'll come on to more recent trading, which has been more positive. But I think that lower volume has been a main driver of for last year came in at GBP 92.3 million. That is broadly in line with the guidance we filed back in February. We have aimed to be relatively conservative on balance sheet movement through the end of the year. And so we think that is a good clean number a little bit of margin pressure there, which we'll come on to explain later. Clearly, financing has been a big focus for the year overall. Net debt was just over GBP 1 billion at GBP 1.063. We will spend a bit of time in the presentation talking through the different sets the refinancing of people delighted to announce the 90% acceptance on our refinancing yesterday, and we'll explain that in a little bit more detail. [indiscernible] our leverage also came up a little bit through the year to 11.5x. obviously, [indiscernible] are reducing that. So we'll explain that in more detail later. So just exact site.

So as Alex just mentioned, the second half of the year was weaker than we expected. A lot of that was driven from the war in Iran breaking out at the very -- towards the very end of the year, and that caused quite a sharp drop off in both commercial demand and consumer demand. And so the final 2 months of the year were much weaker than we expected. However, look, the one encouraging factor during that period was that we were able to improve the average selling price to demonstrate -- which demonstrates the desirability of the group's price got for consumers. The main focus of the business over the last 12 months has been executing the various profit improvement programs that we have in place. We have outlined those to you in the half year and also the full year result last year where those projects are. We've made good progress, most are on track or ahead of schedule. And although the lower volumes that the market is showing at the present time means that the impact is somewhat dampened we are very comfortable that the projects will deliver the upturn in earnings in the medium term. Alex is going to take you through the refinancing shortly and the details of it because I know we want to get a clean balance sheet for everybody to understand exactly what the moving parts have been, so I'll leave that to him. Lastly, the start of this year has been very, very encouraging. We have managed to achieve volume growth. Most of that has been in Australia and the U.K., where some of our competitors have been shrugging badly, and we've made major market share gains volumes up 3%. We put prices up as well. So we've achieved 7% revenue growth. And the profitability for the quarter was ahead of Q1 of last year. And that's particularly encouraging because Q1 of last year was the best quarter the company had during FY '26 and being ahead of that for the first quarter of this year, partly ahead of it is very encouraging.

So obviously, a lot going on the balance sheet over the last 12 months. So I'll step everyone through that. With a lot of detail here. We try to say kind of at the headline level, oboe you can go into in further Q&A of the [indiscernible] 2 main steps this year. So last summer, we basically refinanced all of our 2026 maturities. That was both super senior RCF and the 2026 bonus. That was done through an exchange and basically extended our maturities out 2029 and then obviously, more recently, we announced an extension of a 2028 bonds, which is the next maturity as well as refinancing of cost preferred equity which had the option to convert into order equity in November. So delighted to be able to kind of effectively refinance about GBP 1.2 billion of liabilities which in a great achievement for the team as central and local management. So thank you for an to support in that. Yesterday, we announced 90% approval from the bondholders there is still about 3, 4 months for that fleet, which we are expecting to happen early in H2, but subject to the shareholder vote, we're now very confident that, that will progress. Now in terms of what that brings to the business, the 2 transactions in combination extends our debt matures significantly. So our first maturity is now only in 2029. This gives us a great runway to the operational improvements that we are making. Geoff and I will talk through some of those through the rest of the presentation. Things like good progress this year, somewhat masked by the kind of lower volumes in the market that is certainly coming through very tangibly. We also significantly reduced our balance sheet liabilities by over GBP 300 million. So for our external partners, where our customer suppliers, I can say our shareholders, we think that is a great step forward. And then finally, it also reduces our ongoing finance costs pick dividends by about GBP 34 million. So that also includes a GBP 5 million cash interest reduction. So again, very help to keep more cash in the business and ongoing costs. Now I think overall, what was getting strength is that actually, we do have very strong access to clients. We're very lucky to have a diverse capital structure, lots of different lenders of different types and actually what the loss are shown as the kind of ongoing for the business. Hopefully, the approval of those processes also demonstrate our belief in the recovery profile of the business, which will operate in the coming months. Now as part of the transactions to will become our largest shareholder. They will take approximately a 24.9% stake in the equity, and we'll be providing an additional board member. I think -- a couple of points to note there as part of our process that's been very fulsome. They have gone through a full diligence process with both Geoff and I and the local teams. I'm sure they agree that actually the local management teams are impressive, you've got key points in that lease in the business. And going forward, we're looking forward to the additional skills that were to the board. So very pleased to have them on board for the next. So next page, just go into a little bit more detail on the math, I think you can probably talk through that in more detail on the next page. Key things for the '28, they're exchanging their 2028 bonds into new 2031 maturity notes at EUR 0.75 in the euro. We're also receiving 34.8 million shares, which is approximately 19% of the equity. And then there are some work fees as part of that transaction as well. On the [indiscernible] side, the balance sheet value of the press at the end of March was GBP 394 million. In return for that, they are getting just over EUR 20 million of those new 2021 notes. They're reducing the craft balance down to GBP 50 million of amended craft again, with an extended maturity of 2031. And as we touched on, they'll increase their equity stake up to 24.9%. The final piece is that they will receive a contingent value rights, this is a financial derivative that will sit on the balance sheet. We estimate we'll have a value of about GBP 34 million. We are still working through the [ capping ] tax treatment of that. But a some in providing that number. It has a redemption value of GBP 270 million. That is basically offset against the value of the new shares they have been given. The way to think about that is it's a value protection mechanism for their equity value. So as the share price recovers, the liability comes down. So I think I'd say so novel and unique way of providing that protection whilst demonstrating other recovering the business. Now the CBR has a couple of trigger [indiscernible] derive from that. So once we deliver GBP 400 million tons in EBITDA from closing was the market cap gets GBP 800 million, that has the right to convert I think in those situations, I think all shareholders will be very pleased by the progression of the business at that stage. So what we're aware of, but not a particular construct. So because the next page, so that my laptop rather than we. So a relatively busy page. So I'll just give you a bit an outline of what's here. On the left-hand side, that is a pre-transaction balance sheet and interest rate values as of March. And then on the right-hand side is what happens post transaction. The key changes are obviously with the 2028 and with RAF, so the middle and bottom of the page. I think the key product lines there really highlighted in green. So the net indebtedness goes from that 167, which excludes the lease liabilities that goes down to GBP 945 million. So that's up broadly GBP 300 million reduction balance sheet liabilities and then the ongoing servicing costs of that capital will reduce from about GBP 125 million down to GBP 91 million. Now at the bottom there, we've also just brought out a mature profile extension. So left-hand size is how the balance sheet looks so the maturity profile looks this time last year. And obviously, we've now pushed that out against that operational recovery runway. On the interest going forward, I think it's worth noting the new 2031 bonds, the interest there is paid and pick okay? So that will help us retain more cash within the business. And we're saying to the preferred equity, the new lower value has a lower and at 28%. So the ongoing cost value is much reduced. So moving on to 2026. So this page is the usual overview of performance. I think as we touched on the starts, the key driver of the year has really been the lower volumes, which sector revenues. I think in particular, the second half was weaker than anticipated. Obviously, we lots of macro noise, not only reducing economic activity, but also a little bit of a tense confidence. In final quarter, we probably were more conservative on stock provisioning, particularly in our [indiscernible] division, and you can see that the profitability. However, we have we don't see volumes recover pulling down revenue recover, as Jeff mentioned, in Q1. That was the first time that has been consistent to bathe business every a year ago. So really pleasing see that and we can to the reasons that it is outperformance of our local peers, so particularly pleasing on that front. In terms of profitability, it is worth noting that as we transition the Ross manufacturing from to Turkey that has obviously had an impact. So robust division produced GBP 9.5 million less EBITDA than the year before and then 2025 also benefits from about GBP 10 million of hedging benefits. Obviously, comments on those 2 things can't for the majority of that EBITDA decline. Given our guidance on how volume impacts that profitability, you can see that actually a lot of hard work has been done across the business to improve the cost base of the business and so excluding those 2 things, actually, the EBITDA margin improved slightly by 0.3% despite a significant volume decline. So good performance by the team in terms of what we can control. We obviously keep on pushing forward with those business improvements wherever we can. Very quickly on this slide, I think what is screens out splits the volume and pricing dynamic by division. [indiscernible] So you can see, in every case, really, it is actually the volume decline here to the left-hand bar in each case. That is generally has been the main driver. I think in North America, a little bit of mix shift there, which is what's streamed down that ASP rather than any pricing actually generally across the businesses it's a reasonable environment for price changes. But we do obviously have quite a broad portfolio. And so a little bit of that change is really driven by mix. Within the ceramics, we previously mentioned that we are in exiting some lower profitability product lines, possibly counterintuitively, those were actually some of the higher price items within our telling business in particular. And so that's really what's [indiscernible] ASP in Ceramics. But -- the rest of it is actually trend-wise probably on a positive trend. Here we can see the breakout of the EBITDA change. Again, that is largely margin compression. Obviously, because of the operational gearing in the business as you get the volumes come down the margins do compress because of the gross profits, the drops crossed out of the bottom, you can see we have a center looks the saving costs and say actually that was an area of improvement through the year. Just quickly touch on exceptionals. Clearly, a lot of moving products here, in touched on everything. The orange items are the cash items. So whilst the headline numbers are obviously very large, actually, the cash impact is much smaller than that. Q1 there really reorganization costs, we talked about the business changes again on to year broadly about GBP 21 million in costs there. And then obviously, the refinancing has inferred a number of costs, so just over GBP 20 million of cash costs for the refi. There will be more refi costs as we go through FY '27 which will largely land in H1 this year. Worth on, we have taken provisions for the changes in [ Peloton, ] which is our exceptional provision charge of about GBP 30 million. There are also exceptional charges, which is effective goodwill and other write-downs related to historical investments, which no longer part making free cash flow forecast. So moving on to cash flow itself. So again, relatively fulsome slides, not proposing to every block. I think just to pick out the key items there. So in the kind of first heme bar, that is demonstrating the working capital inflow. We discussed at Christmas that we were targeting a GBP 40 million inflow in same state. Key areas are really around receivables, inventory which were in our control. So new processes put in place across the divisions. The team has done a great job chasing down over payments. That is now actually pretty well controlled and say, well, that befit all flow through. On the inventory side, generally, we are looking at sea reduction and making sure that we are using raw materials effectively in terms of the product we are designing. So that has been part of that inflow. Teams have been working with supplier side. So I think a lot of our partners have been very constructive in that we are be more disciplined around asking for longer payment terms there. Again, that will begin to flow through as we go through this year with a slightly longer market transition, I guess, to get benefit of that. Now as Geoff mentioned, we are beginning to see volume growth. So having taken half of that original GBP 40 million target by March I think the guidance for the year ahead is that we are looking to be working capital neutral. That is effectively higher efficiency in our working capital offsetting the growth that we are expecting in the coming months. Other points to mention just on interest costs here. So just over GBP 30 million there in cash interest costs, as you remember, we have -- we benefit for actual on those first priority notes, which we did for the first payment in February. We will do that again in the August payment, we're sorting 1% cash interest for those bonds for this period. The first full cash coupon will be due in February. So from that point, it will be all cash pay. On CapEx for the year, you could see that split out between maintenance of about GBP 40 million and expansion in CapEx of GBP 16 million. So around that 55 million type level, we're expecting to keep that flat for the year to guiding 55 CapEx FY '27. The second tier is on asset disposals. So the teams have been asked to remain focus on cash generation. some of the small property assets. Some of those are all via machine. So that has become -- we'll come on to a sheeter had, but people are already getting on with that, which is great to see. In terms of other bases exception real talk comes cash is about GBP 28 million. So exceptional also flagged about 12.5% of M&A expect expenditure, but it's largely the final material deferred M&A payments which we made in December. So going forward, very limited deferred lens to be made on historical M&A. Okay. The right-hand side of the page there, there are a number of noncash movements in the debt. So broadly GBP 80 million between pick interest of noncash green. So these false balls provide uprate.

Okay. So at this stage, we've already touched on it already in terms of how the balance sheet will progress to seeing a net debt reduction or transaction, which is the right-hand column. And obviously, the preferred equity, you can see in the bottom right-hand side, reducing very significantly. So we spend any time on that. So yes, I think on to you for the operational review.

So I'll just begin with a more general comment, and then we'll get into the individual businesses because we've made some key management changes in the last 6 months, where it was so effect the business could benefit from renewed energy and experience in the senior management team. So there are -- we've made changes in the U.K. flooring business. In the Roche division and also in our ceramics business. And we're starting to see some results from that. The U.K. business is making some very strong market share gains since the start of this year. One of our major competitors has struggled and continues to struggle with the difficult trading conditions and the management team, our management team are capitalizing on that. The growth that we're securing is essentially down to having superior product availability and our best-in-class logistics service that we have set up a number of years ago and talked about frequently for Reliance. So I think we'll continue to see good growth in the U.K. flooring business this year, both in revenue and also in profitability. It's very, very encouraging. The roles business, the focus remains on execution of the transition of the manufacturing from Belgium to Turkey. We have Turkey is a much lower cost environment to manufacture the savings of labor and energy. And we are well advanced. This is a project that was begun about 14, 15 months ago. It's scheduled to complete in calendar Q3. So we've got a couple of months to go. It's been a very substantial project we had to dismiss some 600 employees in Belgium we have had a high nearly 300 new employees in Turkey. We've moved some 40-odd loans, which is -- and these loans are generally the size of the house, these big pieces of it. and trying to do that while maintaining customers a service to customers has been probably more challenge than we expected the Managing Director of runs division make the analogy of it's kind of like having to change the wheel a flat tire on a car iterate driving on the road. We certainly underestimated the inefficiency as production scaled down in Belgium and that led to higher production costs and also disruption in shipping goods to customers. And you can see that in the lot in earnings in the [indiscernible] business you can just get a little yes. You can see that in the drop in volume and earnings in the rates business. However, I'm pleased to say customers continue to value the product that's made by [ Bolsa. ] And as a result, they continue to place orders, and there's now a back order book of nearly 4 months and as the loans come into production in Turkey, we will start to catch that up, and we're expecting obviously -- that will dramatically change these numbers, both in terms of volume and margin and profitability. The [indiscernible] division, if I talk briefly about Italy first, -- the big change we've made in Italy is we consolidated production into 1 fewer site. That happened in March of this year and the savings from consolidation was about GBP 6 million a year. So that's been fully in effect since the first of April. -- it has left us with 1 hefty site in Italy that we will look now to sell. So that won't be so on leaseback is just be a sale of an empty piece of real estate, and I'll come on to that a little bit later on. In Spain, the key project has been the installation and commissioning of the 4 production line. This has started in production. It is a much more efficient piece of equipment than the equipment that it replaces. And as it scales up production over the next few months, margins will improve and profitability will improve in the Ceramics business in Spain. So we're expecting a much better result this year in the Sac division. Not relying on any major macro recovery in demand, but more because of the cost savings that we've put through the business for the last 12 months. estate. You can see that Australia has continued to produce well. I remain delighted with the consistent performance of Australia -- It's been a remarkably consistent business and growing business now for 15 years. And we're seeing, again, good growth this year. there's another major competitor in that part of the world has continued to struggle quite badly. And we've picked up market share gains there and that's flowing through into the FY '22 performance. The U.S. has, in the last 2 years, and it has suffered from very low housing transactions due to high mortgage rates in the U.S. Mortgage rates have been up around 6% plus, and that has constrained housing transactions. So the in which flows straight through the impact on the flooring sector. However, the business has since balance sheet. So I was in this financial year, our North American business has secured 2 major customer wins that are already giving the business a material boost in revenues and earnings. And you can expect to see a much improved result out of North America in this financial year. So I mentioned earlier that we're looking to sell some real estate. This slide sort of gives a quick summary of the key pieces of real estate. We're targeting this to sell $70 million of real estate. We sold or completed, you will have seen an announcement I think last week, we've been taped on one piece of real estate, which was EUR 34 million. There are 2 more of real estate that are on the market. Some others will be placed on the market shortly. And we are quite confident that this year, given the quality of the real estate and the location we will achieve $70 million of real estate sales during this financial year. I mean, the pictures on the right-hand side, just a selection of properties we're looking at -- that is a broad mix of things across U.K., Italy and Spain, okay? So on the right, the pictures on the right versus manufacturing sites top right, which will be leaseback, bottom right, just an example of some of the unused land that we do own that is adjacent to a commercial park -- so timing is going through to increase the value. Bottom left here is a large distribution sites just off the right of picture is actually one of our large manufacturing sites, effectively some of these covered and uncovered distribution space as part of the consolidation within that business, that side will become free. Again, that can be sold on service back. And then the pictures in the top left of the run side, obviously 3 of our senses. So look like big buildings are most all sales but we are working through ways over the coming weeks and months. And so that portfolio is one underpins that GBP 70 million target through. There will be some additional sales in FY '28, but it will be a small . So the final slide here before Q&A. So there's current an outlook, really great performance in Q1. So revenue up 7% [indiscernible] this is all kind of market share or largely market share based profitability also up versus down that's profitable to last year. So a really strong start. I think that's what gives us confidence in the year ahead. This is kind of a theme that we were hoping seating probably this time last year of smaller capacities beginning to struggle cycle. I think it is a good demonstration that actually we do not need aggressive market growth to take share and grow volumes over the next couple of years. It's good to see that coming through right now. That is all about [indiscernible] pushing to kind of like pace within our local markets. So as we look at the guidance the year ahead, it is really about what we have already achieved rather than hopefully we're going to do more of that for the last of the year. Obviously, the Iran conflict has flared up a little bit over the last few days. I think the way to think about that, obviously, the biggest impact there really is around input cost prices. So we or diesel and that for moving things around that hits our P&L very quickly. Obviously, stocks go up. You then also have gas input prices on the ceramic side. So very ballpark the cost of time is about 20% energy normally. And then on the synthetic carpet side, obviously, that is mainly from oil derivatives as well. Now the teams have a pretty well well-established trade book from the Ukraine disruption a few years ago. So I think we've been very pleased with how quickly everyone reacted -- in some markets, that has meant cost increases, we relevant in others actually, we use it as opportunity to kind of reposition at price points within markets. But that has been very flat managed. Clearly, there's a bit of disconnect between the speed at which will enterprise side and how we dose fastest conflate to our customers. So there is a little bit of a to before. In total, we've guided to at least GBP 15 million EBITDA in the year ahead. That's obviously good strong growth that is primarily driven by those market share gains being offset by temporary margin dilution from these high energy input prices. Obviously, the lower starting volumes at the start of this year has meant that certain EBITDA improvement initiatives that were related to FY '27, we'll probably only get the full benefit of those into FY '28 and '29 now. So pushing back some of those synergies we work at. But that's already factored into 15. And we are assuming a gradual easing of energy prices. I don't think any of us particularly today and say we know which way that goes how quickly but we have factored in a very assertive level of oil and gas things how we're budgeting that. Obviously, these are guidance on cash flow. So property and asset sales, starting about GBP 70 million. CapEx will remain in line with last year, about $55 million. And then as we execute that move from [indiscernible] Turkey, some other initiatives. We expect about GBP 55 million of cash exceptional through the year. Along with working capital neutrality, as you've touched on previously, basically means we're looking to have cash levels remain flat through the year. There will be a little bit of increase in debt due to some of the pick interest that we in turn, but I think -- well, well that year ahead. At this points we were saying was having to get to the route -- so as the forecast, which really on our [indiscernible] and we move from Belgium Turkey [indiscernible] The run rate benefits of those will come through in FY '28 okay, so as well as [indiscernible] pricing growth that we'd expect to see then we will get those cost improvements in FY '28, so people to get on those as we're building your models. And then just a reminder that each 5% of volume growth we would typically expect to get about GBP 20 million of EBITDA improvement. So yes, I guess, with that, I guess, as you Geoff, to summarize and then move on to questions. Bit summary at the end. But we can just hope we'll take questions in it.

[Operator Instructions] Can I please ask you to read out the questions and give response to appropriate to do so. I'm going to pick up for you at the end.

So I'll read the first question and then I think the second question -- I'll hand over to Alex to answer. First question is, the company is guiding earnings up about 30% in FY '27 with further improvements in FY '28 and '29, why should investors believe that Victoria has reached an inflection point after several difficult years. . So it's a fair question. And the most encouraging evidence is that we've already seen the first signs of recovery. Q1 FY '27 delivered growth in both volumes and revenue with profitability ahead of the prior year, even though that was the optimum quarter of FY '26. So I think that demonstrates that the operational improvements made during FY '26, I begin to translate into financial performance. The important thing to appreciate is that the ongoing recovery in earnings is not dependent solely on a market rebound. We have improved our manufacturing footprint. We've reduced costs integrated the acquisitions more effectively instant results of that is that our cost base is lower. Our productivity is higher, and we're more efficient. And all those initiatives are in taint control and continue to be delivered. So I think we can safely say that we are through an inflection point in the property. There's a question revenue for the coming year. We've talked about earnings being up 30%, but at that revenue.

So it [indiscernible] digits. So yes, probably approaching $100 million of growth as what we're targeting. The majority of that is kind of market share and gains as we mentioned, in the U.K. plus strong growth in the U.S. I think there is a little bit of outperformance we saw in Q1 gross business as well, which is basically off the back of very poor weather which is never a good reason for poor weather last year, which didn't repeat this [indiscernible] that are positive reasons that aren't falling in the last few months.

Okay. So we asked how much upside is if the flooring market recovers. And I've commented previously in notes to shareholders that prior to 2022, the sector had a 25-year track record of volume growth of 1.5% to 3% per annum and price increases contributing another 2% to 3%. Now we've only got the data going back for the 25 years, but that is consistent right across that period. And since 2022, demand has been negative for each of the last 4 years. So excellent structural changes in the sector, and we're confident there aren't heating. In other words, people will still continue to need and buy flooring, reversion to the mean powerful concept. And that suggests to us the volume could be 20-plus percent higher than it is today. The important factor for Victoria is that we have quite high operational leverage in the business at the current level of volume. So as Alex said a couple of minutes ago, every incremental increase in volume flows through very strong in profitability. So I think we have a view that every 5% increase in volume contributes approximately GBP 20 million of operating profit. So if we think that volume is currently 20% below where it should be or maybe 25%, there is very material upside for the business as demand recovers. What will drive that will be a factor of 3 main fleet. Housing transactions, consumer discretionary spending and interest rates that you can read out the question like iron or a very long room with [indiscernible].