TIDMVCP
RNS Number : 7925F
Victoria PLC
20 July 2021
For Immediate Release 20 July 2021
Victoria PLC
('Victoria', the 'Company', or the 'Group')
Preliminary Results
for the year ended 3 April 2021
Record Revenues and Operating Profits
Victoria PLC (LSE: VCP) the international designers,
manufacturers and distributors of innovative floorcoverings, is
pleased to announce its preliminary results for the year ended 3
April 2021.
Financial and Operational highlights
Year ended Year ended Change on
Continuing operations 3 April 2021 28 March 2020 prior year
Revenue GBP662.3m GBP621.5m +6.6%
Underlying EBITDA(1) GBP127.4m GBP118.1m +7.9%
Underlying operating profit(1) GBP79.8m GBP77.1m +3.5%
Operating profit / (loss) GBP45.9m GBP(8.5)m -
Underlying profit before tax(1) GBP50.1m GBP48.0m +4.4%
Net profit / (loss) after GBP2.8m GBP(71.8)m -
tax
Underlying free cash flow(2) GBP38.8m GBP39.2m -
Net debt(3) GBP345.7m GBP365.9m -
Net debt / EBITDA(4) 3.10x 3.04x -
Earnings / (loss) per share:
- Basic 2.30 (57.22)p -
- Diluted adjusted(1) 28.66p 28.42p +0.8%
-- 2021 was the eighth consecutive record year for Victoria -
despite challenging operational conditions due to the pandemic.
-- Record revenues of GBP662.3 million were achieved, despite
very material (as much as 80%) revenue declines in Q1 due to
Covid-19 lockdowns.
-- Record underlying EBITDA of GBP127.4 million (FY2020
GBP118.1m) and margin of 19.2% (FY2020: 19.0%).
-- Strong cash generation continues with GBP38.8 million of
underlying free cash flow, which equated to a 49% conversion from
underlying operating profit.
-- Year-end leverage was 3.1x, in accordance with the Group's stated financial policy.
-- The Group successfully refinanced all of its outstanding debt
plus raised additional capital for acquisitions, reducing the
coupon by c.150bps and extending the duration so that the earliest
of the Group's senior debt does not now fall due until August 2026,
and approximately one-third of the total will not be due until
March 2028.
-- Five further earnings-enhancing acquisitions completed
post-year end at very attractive valuations. Victoria continues to
have substantial amounts of capital to deploy. We are in active
discussions with additional high-quality opportunities to grow our
business.
-- Formal earnings guidance is today being reinstated.
(1) Underlying performance is stated before exceptional and
non-underlying items. In addition, underlying profit before tax and
adjusted EPS are stated before non-underlying items within finance
costs. FY20 underlying figures are stated before an increase in
credit loss provision of GBP2.8m at the start of the Covid-19
pandemic; FY21 is stated after all credit losses in the ordinary
course.
(2) Underlying free cash flow represents cash flow after
interest, tax and replacement capital expenditure, but before
investment in growth, financing activities and exceptional
items.
(3) Net debt shown before right-of-use lease liabilities,
preferred equity, bond issue premia and the deduction of prepaid
finance costs.
(4) Leverage shown consistent with the measure used by our
lending banks
Geoff Wilding, Executive Chairman of Victoria PLC commented:
"I want to pay credit to all Victoria's management team, who,
when it really mattered, delivered an extraordinary outcome for
shareholders in a challenging operational environment. The result
of their efforts is that the Group is in an enviable operational
and financial position to take advantage of opportunities to
continue to create wealth for shareholders."
Sell-side analyst presentation:
A conference call for analysts will be held at 10.00am BST
today. If you would like to join the call, please contact Buchanan
for details at victoriaplc@buchanan.uk.com .
There will be a separate meeting for bond holders at 11.30am.
Please contact tsan.wu@credit-suisse.com or
tim.oliver.cornelius@hsbc.com.
For more information contact:
Victoria PLC
Geoff Wilding, Executive Chairman
Philippe Hamers, Group Chief Executive
Michael Scott, Group Finance Director +44 (0) 1562 749 610
Singer Capital Markets (Nominated Adviser
and Joint Broker)
Rick Thompson, Phil Davies, Alex Bond +44 (0) 207 496 3095
Berenberg (Joint Broker)
Ben Wright, Mark Whitmore, Tejas Padalkar
Peel Hunt (Joint Broker)
Adrian Trimmings, Andrew Clark +44 (0) 203 207 7800
Buchanan Communications (Financial PR) +44 (0) 207 418 8900
Charles Ryland, Chris Lane, Vicky Hayns,
Tilly Abraham +44 (0) 20 7466 5000
Chairman and CEO's Review
INTRODUCTION
Victoria has been manufacturing and selling flooring for 125
years. It is a remarkably resilient business, having ultimately
prospered through two world wars, three global pandemics, and
numerous economic recessions. We are delighted to say, thanks to
the remarkable efforts of our operational managers, Victoria has
not only survived the extraordinary events of this past year, but
produced record operating profits and cash generation. As set out
in previous Annual Reports, the historical progression of some KPIs
has been summarised in the table below:
Underlying Underlying Diluted Underlying EBITDA by geography(1)
EBITDA EBITDA margin(1) adjusted operatingcash
per share(1,2) EPS(2) flow per
share(2)
Year GBP % Pence GBP UK % Aus % Eur %
---------------- ----------------- --------- --------------- -------- -------- -------
FY15 0.27 12.5% 10.47 0.30 79.5% 20.5% -
FY16 0.39 12.6% 16.32 0.40 79.3% 20.7% -
FY17 0.50 13.8% 24.42 0.48 75.1% 23.6% 1.3%
FY18 0.64 15.2% 30.61 0.64 48.3% 22.0% 29.7%
FY19 0.78 16.8% 35.25 0.86 25.8% 9.7% 64.5%
FY20 0.86 17.3% 28.42 0.78 26.9% 7.5% 65.6%
FY21 0.91 16.9% 30.21 0.77 33.6% 13.0% 53.4%
---------------- ----------------- --------- --------------- -------- -------- -------
The KPIs in the table above are alternative performance measures
used by management along with other figures to measure performance.
Full financial commentary is provided in the Financial Review
below.
The business is a lot less cyclical than is often thought. Aside
from acquisitive growth, revenues have consistently grown
organically over the last 15 years - a period which includes the
2008 financial crisis and, of course, the Covid-19 pandemic.
Together with the inherent low operational gearing of the business
(just 10% of the total cost base is truly fixed) and the high cash
conversion of earnings, this has important positive implications
for the risk profile of Victoria, which is possibly not always
fully appreciated by investors.
One of the objectives of this review is help investors better
understand the business and, perhaps, better appreciate some of its
unique characteristics that the Board believes makes it an
attractive investment.
[1] In this review, underlying EBITDA in FY20 and FY21 is stated
before the impact of IFRS 16 for consistency of comparison with
earlier years. FY20 is stated before the exceptional increase in
credit loss provision at the year-end following the start of the
Covid-19 pandemic; all other years including FY21 are shown after
any credit loss expense
2 Number of shares based on diluted, weighted-average
calculation consistent with diluted EPS. FY15 adjusted for 5-for-1
share split; FY16 and FY20 figures for continuing operations. FY21
adjusted to remove dilution impact of unutilised preferred equity
funding at the year-end (employed for post-year end
acquisitions).
FY2021 OPERATIONAL REVIEW
Overview
What matters most for business performance - outside of talent -
is culture. A strong corporate culture means people know what is
expected of them even a completely new situation. It means the
company does not have to suffer the inefficiencies of excessive
formal rules and procedures, nor management waiting for orders
before reacting. A rule book tells people what they can't do; a
culture tells people what they should do. Victoria's culture begins
with our mission statement, "To create wealth for shareholders",
and it meant that during the pandemic crisis of the last year,
right across the Group, people knew how to act - that their
decisions and actions needed to reflect the outcome required by the
mission statement. Accordingly, unlike previous years, where we
have commented on specific managers' actions, in this extraordinary
year, we want to give credit to all Victoria's management team,
who, when it really mattered, delivered an extraordinary outcome
for shareholders.
The legendary CEO of Intel, Andy Grove once said, "Bad companies
are destroyed by crisis. Good companies survive them. Great
companies are improved by them." The brilliant performance of our
operational managers gave us the opportunity to strengthen the
business during FY2021, improving its market position, sustainably
improving productivity and margins, and taking advantage of some
unique acquisition opportunities from motivated sellers.
However, before commenting specifically on each of the different
operating divisions, there were three Group-wide events that we
think are worth highlighting.
Bond Refinancing
In previous Annual Reports we have observed that not all debt is
created equal (shareholders may recall the pastry chef versus rugby
forward analogy) and simplistic analysis can be misleading. Whilst
Victoria's board is comfortable deploying debt due to the Group's
strong cash generation, it has given careful consideration to the
structure of that debt to ensure the robust financial stability of
the Group.
The advantages of the Group's financing structure were stark in
2021 and ensured shareholders were protected from value-destroying
discounted equity issuance. The long duration and covenant-lite
features of our debt, coupled with ample cash reserves and
committed credit-lines meant the Group maintained more than
adequate liquidity throughout the year. (In fact, negative
operating cash flow was just GBP6 million in Q1, during the total
lockdown in all our main markets).
Having demonstrated the unquestionable resilience of its
business during the year, Victoria took advantage of strong bond
markets in early calendar 2021 to refinance all its outstanding
debt plus raise additional capital for acquisitions. This action
has three significant benefits for Victoria:
(i) We were able to reduce the coupon rate, saving the Group
c.GBP7 million of annual interest cost versus the original 2024
senior notes;
(ii) The earliest of the Group's senior debt does not now fall
due until August 2026, and approximately one-third of the total
will not be due until March 2028; and
(iii) The additional capital raised, alongside the preferred
equity funding from Koch Equity Development (see further below),
enables us to move quickly on potential acquisitions in the
short-term. Indeed, we have already managed to conclude five
acquisitions since the year-end.
The bond offers were heavily oversubscribed, demonstrating the
credit market's support of Victoria, and we are pleased to note
that the bonds have consistently traded at a premium since their
issue (at the time of writing the yield is just 3.3%).
It is the Board's view that these long-dated bonds, in
conjunction with the Group's strong cash generation, maintains
Victoria's robust financial position.
Koch Equity Investment
One of the significant events of this year was the commitment by
Koch Equity Development, a division of US$115 billion (revenues)
Koch Industries, to invest GBP175 million into Victoria via
convertible preferred equity, alongside the purchase of 12.5
million ordinary shares from an existing institutional
shareholder.
The commercial terms of this October 2020 investment are
detailed in Note 6 to the accounts and we do not propose to repeat
them here. However, part of Koch's investment return on their
preferred equity is expected to come from attached ordinary share
warrants and we thought it would be helpful for shareholders to
update the table provided in the Interim Report illustrating the
maximum number of ordinary shares that can be issued, if the
warrants are exercised:
Number of ordinary shares issued on exercise of warrants
Share Price at GBP10.00 GBP12.00 GBP14.00 GBP16.00 GBP18.00 GBP20.00
exercise date
--------- --------- --------- --------- --------- ---------
GBP75m preferred
shares* 1.01m 0.84m 0.72m 0.63m 0.56m 0.50m
--------- --------- --------- --------- --------- ---------
% of shares on
issue 0.9% 0.7% 0.6% 0.5% 0.5% 0.4%
--------- --------- --------- --------- --------- ---------
GBP175m preferred
shares* 5.11m 4.26m 3.65m 3.19m 2.84m 2.56m
--------- --------- --------- --------- --------- ---------
% of shares on
issue 4.4% 3.6% 3.1% 2.7% 2.4% 2.2%
--------- --------- --------- --------- --------- ---------
*Assuming the follow-on GBP100m preferred equity is either
cancelled or drawn in July 2021, respectively,
and the warrants are exercised 36 months after the initial funds
were received and net settled
Koch have proven to be excellent partners - going far beyond
their contractual obligations to help build value at Victoria. For
example, they have saved us money by sharing their deep knowledge
of the petro-chemical markets, which has allowed us to base our raw
material purchases and hedging on their insights alongside hard
data. Separately, they have actively helped Victoria source growth
opportunities in the US, and then rolled their sleeves up and
helped with diligence and negotiations. We are delighted to have
them as shareholders.
200bps Margin Growth
FY2021 was a year in which we completed no major acquisitions
and therefore the record trading results, including the c.200bps
expansion in underlying EBITDA margin following the end of the
first national lockdowns in May-June 2020, were driven by organic
performance (further details provided in the Financial Review
section).
Previous Annual Reports have set out in detail the productivity
and operational initiatives we have undertaken to drive our margin.
These projects were all completed on time and on budget during
FY2020, but the impact was masked by the Covid crisis in the final
quarter of that year. However, they have delivered exactly as
planned and have driven meaningful and sustainable margin expansion
post lockdown. The Group's H2 underlying EBITDA margin exceeded
20%, delivering a full year margin of 19.2%.
The Group's management has firm plans to further grow the
operating margin, but shareholders should note that many even
well-run businesses that are potential acquisitions have operating
margins of less than 20%. Therefore, until the businesses are fully
integrated and synergies realised, some acquisitions could be
margin dilutive - albeit given the likely difference in size
between Victoria and the acquired business, the impact will likely
be small.
The second function of the reorganisation and capex projects was
to enhance Victoria's service proposition to retailers (our
customers) and, by making us a more attractive supplier, grow our
share of wallet. This has succeeded beyond the Board's
expectations. Despite divisional revenues declining by as much as
80% in the first two months of the financial year due to the
lockdowns, the Group grew revenues in FY2021 by more than GBP40
million (+6.6%).
UK & Europe Soft Flooring - record underlying EBITDA margin
of 17.5%
FY21 FY20 Growth
Revenue GBP280.4 million GBP282.0 million -0.6%
----------------- ----------------- --------
Underlying EBITDA GBP49.0 million GBP41.3 million +18.7%
----------------- ----------------- --------
Underlying EBITDA
margin 17.5% 14.6% +290bps
----------------- ----------------- --------
Underlying EBIT GBP28.7 million GBP21.7 million +32.3%
----------------- ----------------- --------
Underlying EBIT margin 10.2% 7.7% +250bps
----------------- ----------------- --------
The UK & Europe Soft Flooring division delivered an
extraordinarily strong performance, wholly due to organic
growth:
-- Revenues in the second half were nearly GBP155 million,
-- Despite lockdown for the first 10 weeks of FY2021 during
which UK revenues fell by more than 80%, underlying EBITDA for the
full year was higher than that of the prior year at GBP49.0
million,
-- Underlying EBITDA margin for the full year was a record
17.5%, 290bps higher than that of the previous year, with
post-lockdown EBITDA margin some 470bps higher on a like-for-like
basis(3) .
3 UK & Europe Soft Flooring profits in the period include
GBP6.5 million received under the UK Coronavirus Job Retention
Scheme, of which the majority was received during the first
national lockdown in April and May 2020, reducing losses in that
period and enabling the company to avoid taking more significant
cost cutting actions.
There were three reasons for this very pleasing result, which
led Victoria's carpet and underlay divisions outperforming all our
key competitors - domestic and overseas - in the market:
(i) The successful execution of a thorough capex and
reorganisation plan (set out in detail in previous shareholder
communications) over the last two years, which have delivered
precisely as planned and sustainably improved our logistics
efficiency and factory productivity - driving both market share
growth and meaningful margin expansion.
(ii) Management actions taken during the pandemic to minimise
the impact of lockdowns and ensure rapid recovery once
manufacturing was again permitted.
(iii) Strong post-lockdown demand from consumers.
Carpet and underlay Manufacturing
-- There was a continued focus on margin and removal of margin
dilutive products. Also, strong consumer demand for carpet meant
the focus across the business was on production - servicing the
existing best-selling SKU's - and we limited the launch of new
products during FY2021. We will be catching up in the current
financial year to continue to drive profitable growth.
-- During Q4 of FY2021, the global market for synthetic yarns
experienced meaningful price inflation driven by short-term supply
constraints, as well as inflation in global shipping prices.
However, Victoria was able to mitigate the impact of this through
competitive supplier negotiations and immediate increases in
selling prices.
-- The Group invested in brand new production facilities in
Dewsbury, Yorkshire for its prestigious Westex brand during FY2021
and closed the old factory at nearby Cleckheaton. The significantly
improved productivity at the new site has lifted operating margins,
and a full payback on the capital cost is expected in less than
three years.
-- Given our objective of constantly increasing factory
productivity and reducing working capital, the Group installed
carpet-tufters on beams, which have enabled the efficient
manufacture of smaller production runs.
-- Over the year we worked to develop "RENU", a sustainable
carpet underlay made from 98% recycled materials and is itself 100%
recyclable at end-of-life (this includes the use of bio-film made
from sugar cane by-product and PU derived from post-consumer
waste).
Logistics
-- The investment in our logistics capacity has proven to be the
perfect strategy to differentiate Victoria from the continental
carpet suppliers by meaningfully enhancing our service proposition.
On-Time-Delivery for available stock across the country within
three days further increased to 94%, resulting in retailers
favouring Victoria Group products over those from competitors with
slower and less certain delivery.
-- The productivity of the three distribution centres also
jumped as the impact of our investment in FY19 and FY20 arrived. We
are now cutting and delivering 52% more orders with 33% fewer
employees.
-- We have increased the capacity of the fleet to 270 vehicles to meet demand.
-- The reorganisation and productivity enhancements have also
delivered more spare capacity - allowing for future growth of more
than 15% without further capex investment required.
UK & Europe Ceramic Tiles - revenue growth of 15.8%
FY21 FY20 Growth
Revenue GBP282.4 million GBP243.9 million +15.8%
----------------- ----------------- --------
Underlying EBITDA GBP63.1 million GBP68.3 million -7.7%
----------------- ----------------- --------
Underlying EBITDA
margin 22.3% 28.0% -570bps
----------------- ----------------- --------
Underlying EBIT GBP40.4 million GBP51.5 million -21.4%
----------------- ----------------- --------
Underlying EBIT margin 14.3% 21.1% -680bps
----------------- ----------------- --------
The Group's ceramic tile division delivered strong revenues
following the first national lockdowns in May-June 2020.
With regard to margin performance, it is important to note that
the main reason for the difference between FY2020 and FY2021 is the
pro-forma effect of acquisitions. We acquired two ceramic tile
businesses in the prior year (Ibero in August 2019 and Ascot in
March 2020), and one in the current year (Keradom in December
2020), all of which were producing lower margins than the incumbent
businesses in this division. In particular, Ascot was acquired
right at the end of FY2020 (so had little impact on that year) and,
at the time (before integration and synergies), had an EBITDA
margin of less than 5%.
Furthermore, like-for-like average margin performance during
FY2021 was impacted by three factors:
-- Firstly, there is a higher degree of operational leverage
inherent in the ceramic tile manufacturing process compared to soft
flooring (for example, kilns operating at volcano-type temperatures
cannot just be turned off and on at will) and together with nominal
government support during the different lockdowns, margins
suffered.
-- Secondly, although the acquisition of Italian ceramics
factory Ascot in March 2020 delivered immediate production capacity
(as detailed below), full integration was delayed by several months
due to the lockdowns, which resulted in duplicated costs for part
of the year.
-- Finally, during the second phase of national lockdowns across
Europe in the first quarter of calendar 2021 (Q4 of FY2021),
consumers based in Europe were more adversely affected than their
UK counterparts, and this had a much greater impact on our ceramic
tiles business than it did our soft flooring business, the
significant majority of which is a UK business.
Italy
-- Following the successful integration of the factory and
assets we acquired from a neighbouring business (Ascot Gruppo
Ceramiche) in March 2020, substantial production capacity was added
to our Italian business, Ceramiche Serra, which enabled it to more
than double output - adding 1.2m m(2) of red body tiles and 0.7m
m(2) of porcelain tiles - whilst reducing employee numbers from 368
to 250 FTE across the businesses.
-- All the additional production was sold, and with DIY customer
demand still increasing and some manufacturing again being
outsourced, we recently (post year-end) repeated the move of adding
capacity by acquiring the factory and assets of a nearby business
facing closure (Ceramica Santa Maria).
-- This is a highly efficient way of adding production capacity
as it provides more-or-less instantaneous increase in capacity
versus the 18-24 months it would take to build a factory, instal
the plant, and acquire emission rights.
Spain
-- Extended lockdown durations and nominal government support
meant our Spanish businesses were more significantly adversely
affected by Covid-19 lockdown than our Italian ceramics
factories.
-- In order to be able to quickly restart operations when
permitted to do so, we decided not to take certain short-term
operational actions to cut costs that would have been slow to
reverse (for example shutting down kilns take several days to shut
down and then restart carefully).
-- Nonetheless, a strong recovery in consumer demand
post-lockdowns delivered a very good second half to the year, once
inventory shortages were overcome, which has flowed into the
current financial year.
Due to the nature of its raw materials, the Group's ceramics
businesses have seen little inflation in raw material prices or
disruption to the supply chain.
Australia - underlying EBITDA margin growth +590bps
FY21 FY20 Growth
Revenue GBP99.6 million GBP95.6 million +4.1%
---------------- ---------------- --------
Underlying EBITDA GBP16.6 million GBP10.3 million +60.7%
---------------- ---------------- --------
Underlying EBITDA
margin 16.7% 10.8% +590bps
---------------- ---------------- --------
Underlying EBIT GBP11.9 million GBP5.8 million +105.4%
---------------- ---------------- --------
Underlying EBIT margin 12.0% 6.1% +590bps
---------------- ---------------- --------
Our Australian management had to cope with a particularly
uncertain operating environment during FY2021, with numerous
short-term, yet highly disruptive, local lockdowns being imposed
throughout the period. Nonetheless, with the support of loyal
retailers (the Victoria brand is particularly strong in Australia),
new products across our various brands in carpet, underlay and LVT
sustained the post-lockdown momentum seen in the interim results.
Also, the previously announced consolidation of underlay production
into a new factory to Sydney was completed during the year, which
contributed to the margin uplift.
The result was revenues that exceeded the previous year
alongside an extraordinary increase in underlying operating
margins. As with the Group's other divisions, this great result was
purely organic.
ACQUISITIONS
Given the importance of acquisitions to the development of our
business and the creation of shareholder wealth, we thought we
would spend a little more time on it in this review to
shareholders.
Criteria
We meet with dozens of possible acquisition opportunities each
year, seeking to find businesses that generate free cash and with
definable synergy opportunities - whether that be in productivity,
capacity, or distribution. As and when we find a business that meet
the key criteria set out below, we will endeavour to acquire it,
subject to a sensible valuation. This list is not exhaustive and
sometimes we will not acquire a business despite it meeting all our
criteria because of some indefinable factor that makes us
uncomfortable with proceeding.
1. We never buy failing turnarounds. The time and energy
expended on a standalone turnaround is rarely worth it and the
outcome is always sufficiently uncertain to make it too risky for
us;
2. Modern, well-equipped factories. As a company, Victoria is
extremely focussed on cash generation. It is free cash that enables
us to pay down debt, fund growth, whether acquisitions or organic,
and in due course progressively return capital to shareholders
through dividends or share buybacks. So, the last thing we want to
have to do after buying a business is spend all the cash it
generates bringing the factory up to standard;
3. Committed, talented, and honest management. Any fool can
lease a factory and buy the machinery to make flooring (and quite a
few have!). The difference between the average business and the
extraordinary businesses Victoria acquires is the quality of their
management;
4. Broad distribution channels. Victoria's sales are
overwhelmingly made to literally thousands of retailers. We like
the security this diversity provides; and pay close attention to
customer concentration when considering a potential
acquisition;
5. A fair price. In many ways, Victoria's Board is in the same
position as equity investors in that we must carefully choose the
companies we acquire in order to optimise our return on the capital
we invest. Although shareholders can have confidence that we will
never overpay, quality businesses are rarely 'cheap' and we are
mindful of the observation of Buffett's partner, Charlie Munger,
that,
"Over the long term, it's hard for a stock to earn a much better
return than the business which underlies it earns. If the business
earns 6% on capital over 40 years and you hold it for that 40
years, you're not going to make much different than a 6% return -
even if you originally buy it at a huge discount. Conversely, if a
business earns 18% on capital over 20 or 30 years, even if you pay
an expensive-looking price, you'll end up with one hell of a
result."
If one plans to hold a share for the long term (and Victoria
obviously plans to own the shares of companies it buys
indefinitely), the rate of return on capital the business generates
- after synergies - is far more important than the headline
multiple one buys or sells at.
Finally, one thing we don't do. We are investing - building a
business - for the long term. Therefore, when assessing an
acquisition, we do not spend inordinate time on short-term cycles
in top-down factors like monetary policy, macro-economic outlook,
consumer confidence, durable goods orders, and market
sentiment.
Valuation Multiples
We are frequently asked about the multiples we pay for
acquisitions. It is conventional to announce acquisition valuations
as a multiple of EBITDA and, rightly or wrongly, we do the
same.
However, this is not the methodology we use internally to assess
value. Victoria's board strongly believes shareholder value is best
created over time by consistently growing underlying free cash flow
per share and this is the key metric used in capital allocation
decisions - including acquisitions. Consequently, the cash return
(earnings after capex, after tax, after working capital movements,
etc.) on capital - which is what matters in terms of wealth
creation - may lead to significantly different EBITDA multiples
being announced, although the cash return will be similar.
Other factors that influence what we are prepared to pay include
opportunities for cost synergies, growth rates, risk, etc. And, of
course, ultimately, the price paid will also reflect the
negotiation process.
Victoria is also a fan of Benjamin Graham's famous 'margin of
safety'. Having arrived at a view of what a particular business is
worth to us, we ensure that the price we pay is a sufficient
discount to this value to provide us with a margin of safety if
future trading isn't what we expect it to be.
Of course, this means we miss out on some potential
acquisitions. This is where the size of the market opportunity and
our active prospecting becomes invaluable - we never feel pressured
to do a particular deal - there is always another one. As one of
our colleagues is fond of reminding us, "The opportunity of a
lifetime comes along about twice a year".
Origination
Almost all our potential acquisition opportunities result from
cold-calling business owners. Victoria has a very good reputation
in the industry as a reliable and honourable buyer and we spend
time building a one-to-one relationship with successful owners.
Sometimes we are able to conclude a deal immediately, at other
times the timing isn't right for the owner. However, the effort
invested in getting to know a business and its owner is rarely
wasted, as we build a virtual 'bank' of future opportunities.
The reasons owners decide to sell are almost as numerous as
there are deals. However, many owners are facing succession issues
and Victoria represents an opportunity to sell at a fair price to a
friendly buyer, who is known to treat the business and employees
well, post-completion. Together with the opportunity to keep
working in the business for as long as they wish, Victoria's
characteristics can be compelling to owners - many of whom
established the business, perhaps 30 years previously, and feel a
strong emotional connection to it. On more than one occasion,
Victoria's offer has not been the highest, and yet owners have
chosen to sell to us. Our reputation is important and valuable.
Scale of opportunity
Victoria has grown a lot in the last eight years and we are
increasingly asked if we will shortly run out of acquisition
opportunities. So let us reassure shareholders that this is a low
(extremely low!) probability risk factor. The global flooring
market is US$226 billion(4) . Restricting it to the markets in
which we are already active, it is as follows:
-- North America: US$34 billion(4)
-- UK/Europe: US$35 billion(4)
-- Australasia: US$4 billion(5)
Collectively, our existing markets are some 65x larger than
Victoria's current size. It is highly likely we can maintain our
growth rate for many years to come.
Return on Tangible Assets
Finally, whilst on the subject of acquisitions, it is worth
highlighting that, because we focus on buying high quality flooring
businesses, the return on tangible assets (such as working capital
and plant and machinery) is invariably excellent. The 'trade-off'
is that a significant proportion of the purchase price is
invariably goodwill and other intangible assets.
This is of more than academic interest. It is important to
understand that the higher the return achieved on tangible assets,
the better it is for wealth creation. This is for two related
reasons: firstly, the goodwill 'cost' never needs to be replaced
whereas plant and machinery wears out and needs to be replaced,
consuming cash; and, secondly, as revenues grow, less cash needs to
be invested into working capital and less cash is consumed in
adding new fixed assets to manufacture the increased sales. (This
advantage becomes even more acute in times of sustained inflation).
Consequently, businesses achieving a high return on tangible assets
generate more free cash, which is then available to further grow
the value of the business.
So, what does this mean in practice for Victoria's shareholders?
Below is a table setting out Victoria's Return on Tangible Assets
for the last five years. This shows the ability of the company to
generate consistent returns in excess of 20% - despite a very
substantial increase in the capital base - over the long term,
producing cash that we can continue to deploy to grow the value of
the company.
(GBPmillions) Pro-forma Net tangible assets RoTA
underlying
EBIT
FY 2016 28.2 83.4 33.9%
------------ -------------------- ------
FY 2017 40.3 102.6 39.3%
------------ -------------------- ------
FY 2018 76.7 228.1 33.6%
------------ -------------------- ------
FY 2019 76.9 280.3 27.4%
------------ -------------------- ------
FY 2020 82.0 309.4 26.5%
------------ -------------------- ------
FY 2021 84.9 324.4 26.2%
------------ -------------------- ------
4 Freedonia 2021 Global Flooring Report; 5Company estimates
DIVIDS
It is our view that, in a desperate search for yield, in recent
years some investors are failing to see the wood for the trees.
Investors should be trying to maximise their total returns (share
appreciation plus dividends), rather than focussing excessively on
dividend return alone.
Since October 2012, when the current board was appointed, every
GBP1,000 invested in Victoria(5) has become GBP66,060.54, a
compounded annual gain of 61.7% per annum. Had a shareholder
instead sold shares each year to produce a 'dividend yield' of
4%(6) (a yield comfortably in excess of the average FTSE250 yield
over the same period), then as at today, that shareholder would
have received a total income of GBP6,125.13 and still have shares
worth GBP49,634.17, compared with the FTSE250 investor, who would
have received an income of GBP362.68 and have shares worth
GBP1,910.23. (This is even before taking into account the more
advantageous taxation of capital gains on share sales rather than
taxation of dividends, which has been discussed in a previous
Annual Report). Furthermore, following that policy, that same
shareholder would today be receiving an annual 'income' greater
than their original total investment.
It remains the Board's view (as it has been for the last eight
years) that it can continue to deploy capital to optimise the
creation of wealth for shareholders and therefore it has again
resolved not to pay a final dividend for FY2021.
ENVIRONMENTAL MATTERS
The environment matters.
In the last couple of years many annual reports have been awash
with a plethora of pious platitudes about environmental
sustainability or aspirations to the same. Objectively, many of the
vacuous commitments are unsustainable, unmeasurable, and ultimately
meaningless.
Victoria's approach is different. We take our obligations
seriously and to ensure our commitments are sustainable, we seek
ways to meet those obligations that also deliver on our mission
statement, "To create wealth for shareholders" by lowering
production and distribution costs or enhancing our product
offering.
For example, we actively seek opportunities to incorporate
recycled raw materials or consumer waste in our product. A
significant proportion of our ceramic tiles use patented technology
(Victoria owns the patents) to incorporate recycled bricks and
tiles, and we manufacture our own tile glaze from discarded
computer and television screens. We recycle mattress components and
sneaker soles in our underlay production and recycled soft drink
bottles in our artificial grass, which is itself 100% recyclable.
"RENU", our new sustainable carpet underlay is made from 98%
recycled materials (including the use of bio-film made from sugar
cane) and is itself is 100% recyclable at end-of-life.
Waste heat from our ceramic kilns is used to drive turbines in
co-generation plants - making the factories largely self-sufficient
in electricity (in fact we sell surplus generation back to the
national grid). We capture and recycle waste water in our
factories. 85% of the delivery fleet (270 vehicles) is now 'EURO 6'
compliant and we are trialling HVO-fuelled vehicles (Hydrotreated
Vegetable Oil made from 100% renewable raw materials such as fat,
waste vegetables and other oils).
These actions (and numerous others) may not be as flashy as some
of the more headline-grabbing announcements we have observed, but,
because all these changes improve our earnings and return on
capital, there is no risk of backsliding or quietly dropping them
in the future.
5 Assumes that the dividends declared on 20 December 2012 and 3
October 2013 and the special dividend declared on 25 June 2014 were
re-invested in Victoria plc shares on the respective dates.
6 Calculated on the gross value of shares held at the end of
each calendar year.
OUTLOOK
Operations
The foreseeable outlook for the existing business is
encouraging. Demand remains strong and traditional leading
indicators suggest this demand will be sustained:
-- Home price appreciation, savings rates, and consumer
confidence are key for stable and growing residential spending on
flooring. Residential renovation and maintenance spending is
strongly correlated with these factors - in other words the ability
and willingness of home owners to access cash to purchase flooring.
Across our key markets home prices are increasing and consumer
savings rates are at record levels. Therefore, continued growth in
residential renovation and repair spending is likely in the years
ahead.
-- Increased wear and tear. Not surprisingly, with more people
spending more time at home, flooring has suffered from increased
use. Also, the more time people spend at home, the more house proud
they become and consequently, the more aware of faults they
become.
-- Housing transactions are a longer-term guide to residential
flooring demand. Home owners frequently replace the flooring in
their new (to them) home 12-18 months post-purchase. Whether driven
by concerns around hygiene or style preferences, the correlation is
remarkable and, given the high levels of housing sales in many of
our markets, demand is likely to hold up for the medium term.
-- Anecdotally, we understand consumers are buying better
quality flooring than normal, which fits Victoria's product
profile.
Acquisitions
Victoria has completed several high-quality acquisitions since
the end of FY2021. Our operational management team are fully
engaged in integrating them into our business and it is expected
they will have a meaningful impact on Victoria's cash flow and
operating profits this financial year.
Nonetheless, we continue to look at additional opportunities. We
have highlighted earlier in this review the size of the market in
which we operate and our way of identifying potential acquisitions.
We are very confident we will be able to continue to make
value-creating acquisitions in the years ahead.
CONCLUSION
Victoria does not have detailed five- or 10-year plans. We have
a mission ("To create wealth for shareholders") and a fundamental
strategy to deliver on it : to use acquisitions to build
manufacturing and distribution scale, and leverage that scale to
deliver operating synergies and generate cash. Outside of that we
avoid the straitjacket of detailed long-term plans.
Truth be known, we think precise forecasts and excessive
planning are of very limited use. Prussian military theorist, Carl
Von Clausewitz, argued that plans do not survive contact with the
enemy (or, as Mike Tyson, so memorably expressed it, "Everyone has
a plan until they get punched in the mouth"). Therefore, Victoria
focuses on its objective, whilst retaining the necessary
flexibility to adapt to conditions and opportunities.
As part of our mission, we strive for ways to manage risk - our
financing is long-dated and covenant lite, acquisitions incorporate
contingent earnouts, our focus is on the less cyclical residential
repair and redecorating market, we maintain low operational
gearing, our customer base is highly diversified, we outsource a
portion of our manufacturing to create a buffer in demand
downturns, we are geographically diversified, managers are
empowered to take meaningful decisions so they can react quickly to
changing circumstances, the list is almost endless. Yet, this risk
management approach, which is an integral part of our business
model, stood us in good stead during the tumult of 2020 - and
shareholders have benefitted.
Ultimately, we believe Victoria is a good business because it
earns a very good return on capital and, just as importantly, with
its business model, has the opportunity to continue to deploy the
capital it generates at these excellent returns. As a Board and
management team we strive to thoughtfully invest the capital
generated by operations to maximise the long-term value of the
business. Einstein once remarked that compounding return was the
eighth wonder of the world and it is a mathematical certainty that,
if we are able to continue to do this, the effect on shareholder
wealth over time will be remarkable.
Geoffrey Wilding Philippe Hamers
Executive Chairman Chief Executive Officer
20 July 2021
Strategic Report
BUSINESS OVERVIEW
Victoria PLC is a designer, manufacturer and distributor of
innovative flooring products. The Group is headquartered in the UK,
with operations across the UK, Spain, Italy, the Netherlands,
Belgium and Australia, employing approximately 3,500 people at more
than 20 sites.
The Group designs and manufactures a wide range of wool and
synthetic broadloom carpets, ceramic tiles, flooring underlay, LVT
(luxury vinyl tile) and hardwood flooring products, artificial
grass, carpet tiles and flooring accessories.
A review of the performance of the business is provided within
the Financial Review.
BUSINESS MODEL
Victoria's business model is underpinned by five integrated
pillars:
1. Superior customer offering
Offering a range of leading quality and complementary flooring
products across a number of different brands, styles and price
points, focused on the mid-to-upper end of the market or specialist
products, as well as providing market-leading customer service.
2. Sales driven
Highly motivated, independent and appropriately incentivised
sales teams across each brand and product range, ensuring delivery
of a premium service and driving profitable growth.
3. Flexible cost base
Multiple production sites with the flexibility, capacity and
cost structure to vary production levels as appropriate, in order
to maintain a low level of operational gearing and maximise overall
efficiency.
4. Focused investment
Appropriate investment to ensure long-term quality and
sustainability, whilst maintaining a focus on cost of capital and
return on investment.
5. Entrepreneurial leadership
A flat and transparent management structure, with income
statement 'ownership' and linked incentivisation, operating within
a framework that promoted close links with each other and with the
PLC Board to plan and implement the short and medium-term
strategy.
STRATEGY
The Group's successful strategy in creating wealth for its
shareholders has not changed and continues to be to deliver
profitable and sustainable growth, both from acquisitions and
organic drivers.
In terms of acquisitions, the Group continues to seek and
monitor good opportunities in key target markets that will
complement the overall commercial offering and help to drive
further improvement in our KPIs. Funding of acquisitions is
primarily sought from debt finance to maintain an efficient capital
structure, insofar as a comfortable level of facility and covenant
headroom is maintained.
Organic growth is fundamentally driven by the five pillars of
the business model highlighted above. In addition, the Group
continues to seek and deliver synergies and transfer best operating
practice between acquired businesses, both in terms of commercial
upside, and cost and efficiency benefits to drive like-for-like
margin improvement.
KEY PERFORMANCE INDICATORS
The KPIs monitored by the Board and the Group's performance
against these are set out in the table below and further commented
upon in the Chairman and CEO Review and the Financial Review.
2021 2020
GBP'm GBP'm
-------------------------------------------------- ------- -------
Revenue 662.3 621.5
% growth at constant currency 7.4% 10.2%
--------------------------------------------------- ------- -------
Underlying EBITDA(1) 127.4 118.1
% margin(1) 19.2% 19.0%
Underlying operating profit 79.8 77.1
% margin 12.0% 12.4%
Operating cash flow(2) 93.9 97.6
% conversion against underlying EBITDA(1) 83% 92%
Free cash flow(3) 38.8 39.2
% conversion against underlying operating profit 49% 51%
------- -------
Underlying EBITDA per share(1,4) 91.21p 85.52p
Earnings per share (diluted, adjusted)(4) 30.21p 28.42p
Operating cash flow per share(2,4) 76.59p 77.78p
--------------------------------------------------- ------- -------
Adjusted net debt / EBITDA(5) 3.10x 3.04x
--------------------------------------------------- ------- -------
(1) FY20 EBITDA is stated before the extraordinary increase in
credit loss provision at the start of the Covid pandemic (GBP2.8m);
FY21 stated after credit losses. EBITDA per share shown on a
pre-IFRS 16 basis for consistency with pre 2020 periods.
(2) Operating cash flow shown before interest, tax and
exceptional items.
(3) Free cash flow shown before investment in growth capex,
acquisitions and exceptional items.
(4) The number shares applied does not include dilution impact
of unutilised preferred equity funding at the year-end (employed
for post-year end acquisitions).
(5) Applying our banks' adjusted measure of financial
leverage.
SECTION 172(1) STATEMENT
Section 172 of the Companies Act 2006 requires a Director of a
company to act in the way they consider, in good faith would be
most likely to promote the success of the company for the benefit
of the members as a whole. In doing this, section 172 requires a
Director to have regard, among other matters, to:
-- The likely consequences of any decisions in the long-term;
-- The interests of the company's employees;
-- The need to foster the company's business relationships with suppliers, customers and others;
-- The impact of the company's operations on the community and the environment;
-- The desirability of the company maintaining a reputation for
high standards of business and conduct; and
-- The need to act fairly between shareholders of the company.
During the year ended 3 April 2021 the Directors consider they
have, individually and collectively, acted in a way that is most
likely to promote the success of the Company for the benefit of its
shareholders as a whole and have given due consideration to each of
the above matters in discharging their duties under section 172.
The stakeholders we consider in this regard are our employees, our
shareholders, bondholders and other investors, and our customers
and suppliers. The Board recognises the importance of the
relationships with our stakeholders in supporting the delivery of
our strategy and operating the business in a sustainable
manner.
When considering key corporate decisions, such as material
acquisitions or financing arrangements the Board considers the
interests and objectives of the Company's stakeholders, in
particular its shareholders. In doing so, the potential risk and
rewards of these transactions are carefully balanced. A careful and
consistent financial policy is employed, in particular focusing on
maintaining a level of financial leverage that the Board consider
to be sustainable through economic cycles, and long-dated and
flexible financing terms in relation to covenants and restrictions.
Where there are potential material financial costs or redemption
requirements within financing arrangements, for example the
make-whole provisions in the Company's senior notes and preferred
equity, or the change in control provisions in the preferred
equity, the Board considers the likelihood of these scenarios and
any potential mitigating actions.
Directors are briefed on their duties as part of their induction
and they can access professional advice on these from an
independent advisor throughout the period a director holds office.
The directors fulfil their duties partly through a governance
framework; the Board has adopted the Quoted Companies Alliance
("QCA") Code and the Group's application of this code is detailed
on the Group's website.
The Board recognises the importance of building and maintaining
relationships with all of its key stakeholders in order to achieve
long-term success.
Further details on the Company's strategy and long-term
decisions are set out in the Chairman and CEO's Review.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board and senior management team of Victoria identifies and
monitors principal risks and uncertainties on an ongoing basis.
These include:
Covid-19 - The issues surrounding Covid-19 have the capacity to
impact companies' earnings by interrupting supply chains, workforce
sustainability, and demand. Unquestionably a decline in demand is
the most relevant risk to Victoria.
The Group is well positioned to manage this short-term risk and
uncertainty; the key reasons being:
1. Victoria enjoys comparatively low operational gearing across its businesses;
2. The Group's supply chain is highly diversified and invariably
localised to the key manufacturing plants. Our access to raw
materials remains secure and we will be able to meet demand as it
arises;
3. The Group have a highly experienced and motivated operational
management team with a track record of successfully navigating
through deep economic downturns;
4. The wide geographic spread of both our manufacturing
operations and, more importantly, our customers means that the
virus's impact on Group revenue (and its subsequent recovery) is
likely to occur at varying times and not simultaneously;
5. Victoria currently has EUR750 million of Senior Secured Notes
("bonds") in issue, of which EUR500m falls due in August 2026 and
EUR250m falls due in March 2028. These bonds carry no maintenance
financial covenants;
6. Victoria has a strong balance sheet with sufficient cash on
hand to support the business in even the most severe scenarios we
have modelled. Victoria has not accessed any government credit-line
schemes and does not foresee any current need to raise capital for
normal operating activities.
Competition - the Group operates in mature and highly
competitive markets, resulting in pressure on pricing and margins.
Management regularly review competitor activity to devise
strategies to protect the Group's position as far as possible.
Economic conditions - the operating and financial performance of
the Group is influenced by specific economic conditions within the
geographic areas within which it operates, in particular the
Eurozone, the UK and Australia. Economic risks in any one region is
mitigated by the independence of the Group's three divisions. The
Group remains focused on driving efficiency improvements, cost
reductions and ongoing product development to adapt to the current
market conditions.
Key input prices - material adverse changes in certain raw
material prices - in particular wool and synthetic yarn,
polyurethane foam, and clay - could affect the Group's
profitability. A proportion of these costs are denominated in US
Dollars, a currency in which the Group has no income. Key input
prices are closely monitored and the Group has a sufficiently broad
base of suppliers to remove arbitrage risk, as well as being of
such a scale that it is able to benefit from certain economies
arising from this. Whilst there is some foreign exchange risk
beyond the short-term hedging arrangements that are put in place,
the Group experiences a natural hedge from multi-currency income as
the vast majority of the Group's cost base remains in domestic
currency (Euros, Sterling and Australian Dollars).
Acquisitions - acquisition-led growth is a key part of the
Group's ongoing strategy, and risks exist around the future
performance of any potential acquisitions, unforeseen liabilities,
or difficulty in integrating into the wider Group. The Board
carefully reviews all potential acquisitions and, before
completing, carries out appropriate due diligence to mitigate the
financial, tax, operational, legal and regulatory risks. Risks are
further mitigated through the retention and appropriate
incentivisation of acquisition targets' senior management. Where
appropriate the consideration is structured to include deferred and
contingent elements which are dependent on financial performance
for a number of years following completion of the acquisition.
Other operational risks - in common with many businesses,
sustainability of the Group's performance is subject to a number of
operational risks, including Health & Safety, major incidents
that may interrupt planned production, cyber security breaches and
the recruitment and retention of key employees. These risks are
monitored by the Board and senior management team and appropriate
mitigating actions taken.
CORPORATE RESPONSIBILITY
Victoria PLC is committed to being an equal opportunities
employer and is focused on hiring and developing talented
people.
The health and safety of our employees, and other individuals
impacted by our business, is taken very seriously and is reviewed
by the Board on an ongoing basis.
A Company statement regarding the Modern Slavery Act 2015 is
available on the Company's website at www.victoriaplc.com.
As a manufacturing and distribution business, there is a risk
that some of the Group's activities could have an adverse impact on
the local environment. Policies are in place to mitigate these
risks, and all of the businesses within the Group are committed to
full compliance with all relevant health and safety and
environmental regulations.
On behalf of the Board
Geoffrey Wilding
Executive Chairman
20 July 2021
Financial Review
HIGHLIGHTS
The financial year to March 2021 was characterised by the
Covid-19 pandemic, the resultant social and economic lockdowns in
various countries, and Victoria's reaction to this in terms of
operations and sales. It was a year where the Company demonstrated
its financial robustness in the face of a one-off significant
decline in sales (which occurred during the initial lockdown in
March to June 2020) and its operational flexibility to react
quickly in unpredictable conditions to meet changing customer
needs, fulfil spikes in demand, and conserve cash. It was also a
year where the significant benefits of past restructuring and
synergy-driven investment were clearly apparent.
Victoria is primarily focused on the residential end-market
across all of its product categories. Global residential markets
have proven to me much more resilient than commercial markets
through the pandemic, as household consumers adjusted quickly to a
new way of working and living and have continued to invest in home
improvement, whereas commercial investment decision making -
particularly property-related - stalled. Furthermore, Victoria
operates across numerous geographical end-markets and all of the
key residential distribution channels within these markets. This
diversity has helped the business to remain robust by minimising
individual country, channel and customer risk.
As a result, despite the adverse impact of Covid lockdowns,
Victoria had an extremely strong year in FY21 in terms of
operational and financial performance, delivering higher revenue,
underlying EBITDA and operating profit than in the previous
financial year. This involved a huge, co-ordinated effort from
everyone in the business, across commercial, operational, finance
and administrative teams.
2021 2020 Growth
GBP'm GBP'm
-------------------------------------- ----------- ----------- -------
Revenue GBP662.3m GBP621.5m +6.6%
Gross Profit GBP234.9m GBP226.4m +3.7%
Margin % 35.5% 36.4%
Operating Profit GBP45.9m (GBP8.5m) -
Margin % 6.9% -1.4%
Exceptional and non-underlying
EBITDA items (GBP7.1m) (GBP57.8m) -97.6%
Amortisation of acquired intangibles (GBP26.8m) (GBP25.0m) -
Underlying EBITDA GBP127.4m GBP118.1m +7.9%
Margin % 19.2% 19.0%
Underlying Operating Profit GBP79.8m GBP77.1m +3.5%
Margin % 12.0% 12.4%
Free cash flow(7) GBP38.8m GBP39.2m -
% conversion against underlying
operating profit 49% 51% -
The underlying EBITDA and operating profit figures shown above
are inclusive of charges relating to credit losses (bad debts).
These amounted to 0.23% of revenue in FY21 (FY20: 0.45%, due to
some Covid-specific additional provisions), which is a normal level
for the business. This strong performance reflects the very low
customer concentration of the Group, the financial resilience of
our customers, and the additional efforts from our credit control
teams in the past year to work constructively with them.
Non-underlying items in the year - other than non-cash
amortisation of acquired intangibles recognised on the balance
sheet (primarily brands and customer relationships), which in any
case are below EBITDA - totalled GBP7.1 million (FY20: GBP57.8
million). Further details are provided below.
Cash conversion from underlying operating profit to free cash
flow(7) was 49% (FY20: 51%). This small reduction was driven by
increased interest payments (including due to a change in timing of
payments at the point of the bond refinancing shortly before
year-end, and therefore payments in the period reflecting more than
12 months' worth of interest) and a slightly larger than usual
adverse swing in working capital due to Covid-related timing
differences, offset by lower capital expenditure and lower
corporation tax. Further details and provided below.
7 Cash flow after interest, tax and net replacement capex, but
before exceptional items and investment in growth capital projects
and acquisitions.
PERFORMANCE THROUGH THE YEAR - COVID IMPACT
March to May 2020 - First UK and Europe national lockdowns
During the first two months of the financial year, there was
significant global uncertainty in the face of a new pandemic with
unknown consequences. Our business saw varying impacts in different
territories - whilst in the UK it was a sharp reduction in demand
(as retailers, our customers, were forced to shut), in Europe it
was a mixture of demand and, at times, limited ability to
manufacture as both our Spanish and Italian operations went through
periods of mandatory closure enforced by local governments on their
entire respective regions. Conversely, the Australia division saw a
far smaller impact from Covid during this period.
A set of emergency operational and treasury measures were
implemented across the Group designed to conserve cash and maximise
liquidity. These measures included:
-- Cancellation of all non-essential and uncommitted capital
expenditure;
-- Cancellation of all non-essential expenditure relating to
sales, marketing and administration;
-- Selective shutting down of manufacturing and distribution
operations - continuing to operate only where and when profitable
and safe to do so;
-- Postponing of raw material purchases;
-- Reduction in direct labour costs - through removal of
overtime, reduction in the number of shifts and removal of agency
staff, whilst avoiding any longer-term redundancies;
-- Reduction in manager and senior manager salaries;
-- Implementation of enhanced credit control - working with our
customers to understand their cash flow situation, collect cash
where possible and support struggling customers where
appropriate;
-- Close collaboration with suppliers and credit insurers to
ensure understanding of our strong financial standing and agreed
continuation of payment terms;
-- More frequent, daily monitoring at Group level of overdue
debtor and creditor balances in addition to other regular treasury
data;
-- Full draw of the Group's GBP75 million bank revolving credit
facility (in mid-March 2020) for six months, as at that time we
didn't know if a liquidity-squeeze would follow - this was repaid
in September 2020 and the Group incurred some exceptional interest
costs for that period;
-- Increases where available in local working capital facility
limits for the operating businesses across the Group.
The primary objective of these measures was focused on cash and
not profit. Whilst cash and profit are positively correlated in the
medium-to-long term, they are often inversely correlated in the
very short-term. For example, maximising profit within the period
would have involved continuing to manufacture throughout in order
to avoid adverse variances taking production overheads directly to
the income statement (as long as one expects to sell the resulting
stock in the future at above cost), whereas this would have clearly
been detrimental to cash.
Nevertheless, whilst revenues during this two-month period saw a
temporary significant drop - in line with the rest of the industry
and many other industries - of approximately 50%, the Group's
ability to quickly implement the above measures and its resultant
low operational gearing meant that EBITDA over this period remained
positive. To give a simple illustrative example for context,
mathematically a business that normally delivers a c. 20% margin
would break-even when falling to 50% revenue if 25% of its costs
were fixed and 75% of its costs were fully variable with revenue -
so this provides some colour as to the level of operational
flexibility that we retain in the Group, being far higher than in
many businesses and industries.
Covid employment support schemes
The Group did benefit in the year from certain government-backed
schemes designed to support employment, in particular the UK
Coronavirus Job Retention Scheme. It received a total of GBP6.9m,
of which GBP6.5m in the UK, the majority of which related to the
first national lockdown. It is important to note that as a result
of this scheme the Group thankfully did not have to consider any
Covid-related restructuring of its UK operations during that period
in order to further reduce costs. Since that time - as discussed
further below - trading has picked up significantly in all key
geographies and government-backed Covid grants or similar schemes
are no longer required or utilised.
Remainder of H1 - Summer 2020
After the conservation of cash, the secondary objective of the
Group's emergency Covid measures described above was to ensure
maximum flexibility to re-start sales quickly in response to a
return of the market, both operationally and financially. This took
the form of, for example, supporting the Group's staff and avoiding
any structural changes that may have cut costs further but would
have been more difficult to reverse, ensuring that a minimum
operational team were available even when manufacturing and
distribution sites were fully closed, and supporting our customers
and suppliers with a conservative yet sustainable working capital
policy.
Indeed, June 2020 saw rapid change in Victoria's UK and European
markets as retailers started to adjust and re-open and consumers
very quickly ramped-up demand for our products. The Group wholly
capitalised on this change as a result of the initiatives noted
above, leading the industry in reaction time and therefore
positioning itself optimally to service retailers in generating new
sales as early as possible.
Group revenue outside of lockdown during the following four
months to September 2020 was almost 10% up on the prior year on a
like-for-like basis(8) , driven in particular by very strong growth
in the UK. In Australia, due to different timings and severity of
the spread of the pandemic compared to Europe, a national Covid
lockdown was in place much later, from late August and through
September resulting in lower overall revenue in the period for that
segment. Albeit prior to this lockdown, Australia divisional
revenue was up by a similar amount on the prior year.
June to Sep FY21
UK & Europe Soft Flooring
Jun to Sep Jun to Sep Growth
FY21 FY20
Revenue GBP116.1m GBP90.9m +27.8%
------------------- ----------- ----------- ----------
Underlying EBITDA GBP21.5m GBP11.8m
+500 bps
Margin % 18.5% 13.0% LFL
------------------- ----------- ----------- ----------
UK & Europe Ceramics
Jun to Sep Jun to Sep Growth
FY21 FY20
Revenue GBP100.5m GBP78.9m +27.4%
------------------- ----------- ----------- ---------
Underlying EBITDA GBP24.3m GBP21.5m
+150 bps
Margin % 24.2% 27.3% LFL
------------------- ----------- ----------- ---------
Australia
Jun to Sep Jun to Sep Growth
FY21 FY20
Revenue GBP32.3m GBP33.1m -2.4%
------------------- ----------- ----------- ---------
Underlying EBITDA GBP4.5m GBP3.3m
+260 bps
Margin % 14.0% 10.1% LFL
------------------- ----------- ----------- ---------
Margins delivered during this period were at all-time record
highs, with underlying EBITDA margin in excess of 20%, a circa
300bps improvement over the same period in the prior year on a LFL
basis(9) . The margin of the UK & Europe Ceramic Tiles division
is not directly comparable due to the margin-dilutive full-year
effect of prior year acquisitions (being Ibero, which was acquired
in August 2019 and was a circa 13% EBITDA margin business prior to
acquisition and synergies, and Ascot, which was acquired in March
2020 and was a circa 3% EBITDA margin business prior to acquisition
and synergies).
Margin improvement was delivered across all divisions, enabled
by the 2018-19 investments in manufacturing and distribution
synergy projects. In fact, not only did these investments drive
improved margins, they also allowed for the increased capacity and
efficiency required to deliver the level of sales seen
post-lockdown.
8 Like-for-like revenue growth on a constant-currency basis,
after removing the impact of prior year acquisitions, and the extra
trading week in the current year
9 Like-for-like margin variance assessed after removing the
impact of prior year acquisitions
H2 - Regional lockdowns in Q3, followed by second national
lockdowns in Q4
From October 2020 onwards, the UK and European governments
started to implement new regional-based lockdown systems. However
this did not have a major impact on the sales and financial
performance of the business given, by this time, retailers had
developed their sales approach to consumers, with a greater focus
on:
-- Mailing of samples (which until this year was less common at
the higher-end of the market and with soft flooring);
-- Online or over-the-phone collation of order information
regarding room sizes and required product characteristics;
-- Appointment-based sales (whether at home or in store, subject
to the rules);
-- Where appropriate, a full e-commerce model.
H2 FY21
UK & Europe Soft Flooring
Oct to Mar Oct to Mar Growth
FY21 FY20
Revenue GBP154.4m GBP137.8m +12.0%
------------------- ----------- ----------- ---------
Underlying EBITDA GBP29.9m GBP21.0m
+420 bps
Margin % 19.3% 15.2% LFL
------------------- ----------- ----------- ---------
UK & Europe Ceramics
Oct to Mar Oct to Mar Growth
FY21 FY20
Revenue GBP149.9m GBP121.8m +23.1%
------------------- ----------- ----------- --------
Underlying EBITDA GBP35.4m GBP33.0m
+40 bps
Margin % 23.6% 27.1% LFL
------------------- ----------- ----------- --------
Australia
Oct to Mar Oct to Mar Growth
FY21 FY20
Revenue GBP52.6m GBP45.9m +14.4%
------------------- ----------- ----------- ---------
Underlying EBITDA GBP10.4m GBP5.1m
+870 bps
Margin % 19.8% 11.1% LFL
------------------- ----------- ----------- ---------
Strong Group revenue performance continued throughout the second
half of the year, with overall LFL growth in excess of 5% over the
prior year. Continued high growth was seen in the UK in particular
as the business' product, manufacturing and logistics strategies
all came together to provide customers with an optimised offering.
This dynamic continued through the second full lockdown in the UK,
starting in January 2021, which didn't have a substantive effect on
the Group's UK sales. Revenues in Australia also remained robust
throughout the period. European markets, mainly relevant to the
Group's UK & Europe Ceramic Tiles division, were the most
adversely impacted in H2 by ongoing lockdowns across various
countries, with the slower decline in Covid cases (and potentially
slower uptake of vaccination) having an impact.
Margin performance in H2 followed a similar story to revenue.
Covid lockdown challenges in Europe meant that the full benefits of
previous Ceramic Tile synergy projects could not yet be seen, and
in addition the integration of Ascot into the incumbent Italian
ceramic tile business was delayed versus the original plan, hence
full margin benefits of these initiatives will not be apparent
until sometime during the current year, FY22. As a result, UK &
Europe Ceramic Tile margins in H2 fell back to prior year levels on
a like-for-like basis(10) . On the other hand, the UK & Europe
Soft Flooring and Australia divisions continued to improve their
margins on the H1 post-lockdown period and deliver incredibly
strong results.
(10) Like-for-like margin performance in H2 was analysed by
removing the impact of current year acquisitions, but including a
full year effect of prior year acquisitions in the comparative
figures due to ongoing integration making disaggregation of prior
year acquisitions challenging.
ACQUISITIONS
FY21 was not significantly impacted by new acquisitions.
The Group made only two small acquisitions, both late in the
financial year - Keradom in December 2020, an Italian ceramic tiles
manufacturer making approximately EUR3.2 million (GBP2.8 million)
of underlying operating profit on an annual basis, and Hanover in
January 2021, a UK-based flooring distributor making approximately
GBP2.2 million of operating profit on an annual basis. Total
operating profit contribution from these acquisition in FY21 was
GBP0.7 million.
Following the year-end, the Group has also acquired two small
ceramic tile distributors based in Italy, one small ceramic tile
manufacturer based in Italy, a manufacturer of artificial grass
based in the Netherlands and a distributor of hard flooring wood
and vinyl products in the US. Material synergy benefits are
expected to be delivered from the integration of all of these
acquisitions into the existing business and operations of the
Group.
Further details of these acquisitions are provided in Note 8 to
the accounts.
RESTATEMENT OF ACQUISITION ACCOUNTING
A decision has been made to change the accounting treatment of
contingent earn-out consideration payable in certain circumstances.
This change has no impact on the underlying results, the cash flow
or the tax position of the Group.
Earn-outs are deferred elements of consideration, typically paid
in cash over a three to four-year period following acquisition,
that are contingent on the financial performance of the target
business meeting pre-determined targets over that period. Whilst
these form part of the purchase price that is negotiated with each
respective seller and are contractually payments in exchange for
the shares or assets of a business, on review of guidance regarding
interpretation of the relevant standard, IFRS 3 (business
combinations), the accounting treatment has been remedied where
leaver provisions exist that result in the earn-out effectively
being contingent on the continued employment of the seller(s)
following the acquisition.
Such leaver provisions are included in our acquisitions in order
to protect the goodwill being acquired over the first few years of
ownership. However, in accordance with the interpretation noted
above, in such circumstances the relevant earn-outs are now being
treating as non-underlying remuneration costs, accrued over the
earn-out period. Previously they were fully recognised at fair
value at the point of acquisition, thereby forming part of
goodwill. We have restated our prior year accounts accordingly, as
shown in the comparative numbers within the financial
statements.
Further details are provided in Note 10 to the accounts.
FINANCING - PREFERRED EQUITY
On 22 October 2020, the Company announced the issuance of
convertible preferred equity to Koch Equity Development, LLC
('KED'), initially for GBP75 million but with the ability to
increase this to GBP175 million at the Company's option. This
financing is for the sole purpose of funding acquisitions.
At the time, with a depressed share price due to the Covid
pandemic, it was not attractive to the Board to issue new ordinary
equity, hence the issuance of preferred equity was an ideal
solution to raising funds for acquisitions whilst not breaching the
Board's financial policy, around leverage in particular. In
addition, KED is an ideal financing and strategic partner for the
Group, given Koch Industries' scale and firepower, broader industry
experience and existing interests in the flooring sector (in the
US). At the same time as receiving the preferred equity, KED also
acquired a meaningful stake in the ordinary equity of the Company
on the secondary market.
As part of the preferred equity financing, KED was also issued
with ordinary equity warrants vesting after three years with an
exercise price of GBP3.50 (the share price at the time of issue).
Whilst technically these allow a subscription of up to a maximum of
12.402 million shares, the maximum number of shares that will be
issued depends on the share price at the time and, in any case, is
much lower. This is due to two factors: the Company's ability to
net settle the warrants (which is the current intention), and a
built-in cap mechanism limiting the overall returns available to
KED. For example, the number of shares that would be issued if
exercised after three years and if the share price at the time is
the same as the year-end (GBP8.46) would be 1.19 million.
This preferred equity is legally structured as an equity
instrument and, whilst it ranks ahead of ordinary equity, it has
many equity-like features, including:
-- Being a perpetual instrument - the Company never has to repay
(ultimately KED's protection is that they are convertible into
ordinary equity after six years);
-- No enforced cash servicing - the Company can choose whether
to settle the preferred dividends in cash (9.35% per annum) or by
way of a Payment In Kind ('PIK') issuance of further preferred
shares (9.85% per annum, PIK every quarter);
-- Ranking behind debt, with no ability for the Company to
default, or for the preferred shares to accelerate a claim
alongside any debt instruments.
Despite the above, the preferred equity is classed as a
financial instrument under IFRS 9 rather than equity on the balance
sheet, one of the key reasons being that the conversion price into
ordinary shares (convertible after six years) is based on the
prevailing share price at the time, rather than being fixed at the
outset. Whilst this reduces any potential dilution of ordinary
equity in the future as the share price grows, from an accounting
perspective it means that the instrument cannot be classified as
equity in accordance with the standards, given that it results in a
variable number of converted ordinary shares for a fixed number of
preferred shares.
As required under IFRS 9, the preferred equity is being
accounted for as a host contract (net of pre-paid fees), carried in
the balance sheet at amortised cost, along with a number of
separate 'non-closely related' embedded derivatives. There are two
embedded derivatives that have been deemed, from an accounting
perspective, to have to be valued separately from the host:
(1) the ability of the Company to cash redeem the preferred
equity at any time (for a premium), held at fair value through
profit and loss; and
(2) the ability of KED to convert the preferred equity into
ordinary equity after six years or longer, however this is valued
at GBPnil.
Separately, financial instruments have also been recognised
for:
(1) the ability of the Company to issue an additional GBP100m of
preferred equity to KED for a period of 18 months, held at
amortised cost; and
(2) the ordinary equity warrants described above, held at fair
value through profit and loss.
Further details are provided in Note 6 to the accounts.
FINANCING - BONDS
On 23 February 2021 and 9 March 2021, the Company announced two
new bond issuances of EUR500 million maturing in August 2026, and
EUR250 million maturing in March 2028, respectively. The proceeds
from these bonds were for two purposes: (1) the refinance of the
previous EUR500 million 2024 bonds (including payment of the
associated early redemption premium), and (2) to hold on balance
sheet alongside the preferred equity proceeds for short-term future
anticipated acquisitions (as it happens, since that time several
acquisitions have been made).
Whilst the previous bonds did not mature until 2024, the reason
for refinancing at that time was the materially improved terms that
the Company was able to achieve. These deliver significant benefits
to the Company over the medium-term despite it having to pay an
early redemption premium. Hence the Company made an opportunistic
approach to the market. The new coupon rates are 3.625% and 3.75%
on the 2026 and 2028 bonds, respectively. This compares to 5.25% on
the previous bonds that have now been redeemed. As a result, the
Company is now paying additional annualised cash interest on the
bonds of only EUR1.25 million (GBP1.1 million) whilst having
additional financing of EUR250 million (+50%) in gross terms.
Under IFRS 9, as with the previous bonds last year, the new
bonds are accounted for with a separately-identified embedded
derivative asset, being the ability of the Company to redeem at any
time (for a premium). The underlying bond instruments are carried
in the balance sheet at amortised cost, whilst the embedded
derivatives are carried in the balance sheet at fair value (with
fair value differences at each reporting date going through the
income statement as an income or expense, depending on the
movement). Further details are provided in Note 6 to the
accounts.
EXCEPTIONAL AND NON-UNDERLYING ITEMS
This section of the Financial Review runs through all of items
classified as exceptional or non-underlying in the financial
statements. The nature of these items is, in many cases, the same
as the prior year as the financial policy around these items has
remain unchanged, for consistency. Hence, whilst the quantum of
these items are all slightly different to FY20, many of the
explanations below are identical to those given previously.
Exceptional costs relate entirely to third-party expenditure.
Victoria does not treat any recurring internal costs (such as
employee time spent on restructuring or acquisition projects) as
exceptional, given these resources are recurring.
The Group incurred GBP7.8 million of exceptional costs during
the year (FY20: GBP49.9 million). Exceptional items are one-offs
that will not continue or repeat in the future, for example the
legal and due diligence costs for a business acquisition, as whilst
further such costs might arise if new acquisitions are undertaken,
they will not arise again on the same business and would disappear
if the Group adopted a purely organic strategy.
These main reason for the significant year-on-year decrease was
a GBP50 million goodwill impairment recognised in the prior year
following the start of the Covid pandemic. No further goodwill
impairment was recognised in FY21 as the market outlook is now
significantly different compared to during the first national
lockdown last year.
2021 2020
GBP'm GBP'm
-------------------------------------------------------- ------ -------
Exceptional items
Acquisition and disposal related costs (3.0) (2.2)
Reorganisation costs (5.5) (3.5)
Negative goodwill arising on acquisition 6.5 5.8
Contingent consideration linked to positive tax ruling (5.7) -
Exceptional goodwill impairment - (50.0)
Total exceptional items (7.8) (49.9)
--------------------------------------------------------- ------ -------
Other than the prior-year goodwill impairment, exceptional costs
in FY21 were GBP7.9 million higher than in FY20, primarily due to a
one-off charge in the year reflecting the final instalment of
contingent consideration on the acquisition of Keraben, which was
linked to a positive ruling over the tax deductibility of certain
pre-acquisition costs.
In addition, exceptional reorganisation costs were GBP2.0
million higher than in FY20. During the year, there was a
significant restructuring project in the UK relating to the
amalgamation of the Westex and G Tuft carpet manufacturing
operations, involving significant redundancy costs. Furthermore,
the delivery of synergies between Ascot's manufacturing site and
the Group's incumbent operations in Italy (albeit delayed versus
the original timeline due to Covid as noted above) involved
redundancy and other operational restructuring costs.
Non-underlying items are ones that do continue or repeat, but
which are not deemed to fairly represent the underlying business.
Typically, they are non-cash in nature and / or will only continue
for a finite period of time. There were three non-underlying items
in the year:
-- Acquisition-related performance plan charge - this represents
the accrual of contingent earn-out liabilities on historical
acquisitions where those earn-outs are linked to the ongoing
employment of the seller(s), resulting from an accounting
restatement implemented this year, as described above.
-- Non-cash share incentive plan charge - the charge under IFRS
2 relating to the pre-determined fair value of existing senior
management share incentive schemes, including the share options
plan announced on 26 June 2020. This charge is non-cash as these
schemes cannot be settled in cash. The charge in FY21 was
significantly lower than the prior year due to FY20 containing an
'accelerated' accounting charge under IFRS 2 resulting from certain
participants exiting a historical scheme.
-- Amortisation of acquired intangibles - the amortisation over
a finite period of time of the fair value attributed to, primarily,
brands and customer relationships on all historical acquisitions
under IFRS. It is important to note that these charges are non-cash
items and that the associated intangible assets do not need to be
replaced on the balance sheet once fully written-down. Therefore,
this cost will ultimately disappear from the Group income
statement. The charge has increased in FY21 due to additional
acquisitions having been completed (coupled with the fact that the
intangible assets from the original acquisitions starting in 2013
are not yet fully written-down).
2021 2020
GBP'm GBP'm
--------------------------------------------- ------- -------
Other non-underlying operating items
Acquisition-related performance plan charge 1.7 (2.0)
Non-cash share incentive plan charge (1.0) (5.9)
Amortisation of acquired intangibles (26.8) (25.0)
(26.1) (32.9)
--------------------------------------------- ------- -------
Further details of exceptional and non-underlying operating
items are provided in Note 2 to the accounts.
In addition to the above operating items, there were a number of
non-underlying financial items in the year.
2021 2020
GBP'm GBP'm
---------------------------------------------------------------------------- ------ ------
Non-underlying financial costs
Release of prepaid finance costs 7.3 4.4
Net cost of redemption premium on refinancing of previous senior notes 6.3 -
Underwriting fees and costs relating to previous bank facilities - 6.5
----------------------------------------------------------------------------- ------ ------
One-off refinancing related 13.6 10.9
----------------------------------------------------------------------------- ------ ------
Finance items related to preferred equity 13.1 -
---------------------------------------------------------------------------- ------ ------
Acquisition related items 2.1 3.0
----------------------------------------------------------------------------- ------ ------
Interest on short-term draw of Group Revolving credit facility 1.4 -
Fair value adjustment to notes redemption option (4.6) 7.3
Unsecured loan redemption premium charge / (credit) 0.2 (0.2)
Mark to market adjustments and gains on foreign exchange forward contracts 4.2 (3.2)
Translation difference on foreign currency loans (6.3) 13.0
----------------------------------------------------------------------------- ------ ------
Other non-underlying (5.1) 16.9
23.7 30.8
---------------------------------------------------------------------------- ------ ------
The significant items are described below:
-- Release of prepaid finance costs - when any new debt funding
is raised, we account for the attributable one-off, up-front costs
(e.g. bank or bookrunner fees, legal costs, accounting and rating
fees) as a prepayment that is amortised over the expected life of
the debt. If that debt is then refinanced earlier than originally
expected, any remaining prepayment is 'released' in one go as a
financial cost in the income statement. This 'release' is a
non-cash item, as the associated costs were already paid at the
time of the new funding. Whilst a refinancing occurred in FY20 and
therefore was not expected at that time to re-occur for a number of
years, a further refinancing was undertaken in March 2021 to
capitalise on strong credit markets and highly-positive credit
sentiment towards Victoria. Whilst this resulted in a short-term
subsequent release of prepaid finance costs as shown in the table,
this was deemed to be worth the significant upside of a reduction
in coupon of more than 160bps as well as extended maturity.
-- Net cost of redemption premium on refinancing of previous
senior notes - as described above, in March 2021 the Group
refinanced its 2024 senior secured notes with new 2026 and 2028
notes due to materially improved pricing and maturity, which
outweighed the cost of early redemption. This charge represents the
redemption premium on the 2024 notes, offset in part by the release
of the liability premia attached to the host debt, which were
extinguished.
-- Preferred equity finance charge - the preferred equity issued
in November 2020 is treated under IFRS 9 as a financial instrument
with a number of associated embedded derivatives (as discussed
above). There are a number of resulting financial items taken to
the income statement in each period, including the cost of the
underlying host contract, amortisation of pre-paid costs and fees,
and the income or expense related to the fair-valuation of the
warrants and embedded derivatives. However, the preferred equity is
legally structed as equity and is also equity-like in nature (see
further details above), including the fact that it never has to be
serviced in cash.
-- Acquisition related items - costs that relate to value
adjustments to deferred consideration and contingent earn-outs on
historical acquisitions (including acquisition-related performance
plans under the new accounting treatment described above),
comprising the unwinding of present value discounts and adjustments
in relation to forecast performance against earn-out targets.
-- Interest charge on exceptional RCF draw-down - as noted
above, in March 2020 the Company fully drew its GBP75 million bank
revolving credit facility for a period of six months, as a one-off
Covid-related emergency treasury measure at the start of the
pandemic. This cash sat untouched on the balance sheet for the
duration and was repaid in September 2020.
-- Fair value adjustment to notes redemption option - the
corporate bonds originally issued in FY20 matured in FY25, and the
two tranches of bonds subsequently issued in FY21 mature in FY27
and FY28, respectively. However, the company can choose to repay
early if it pays a redemption premium, the level of which varies
over time (a very high cost within the first two to three years,
followed by comparatively lower costs, stepping-down over the
remaining term). Under IFRS 9, this 'embedded call option' must be
separately disclosed as a financial asset on the balance sheet and
fair-valued at each reporting date. The income or charge resulting
from this revaluation exercise at each reporting is a non-cash
item.
-- Mark to market adjustments on foreign exchange forward
contracts - across the group we analyse our upcoming currency
requirements (for raw material purchases) and offset the exchange
rate risk via a fixed, diminishing profile of forward contracts out
to 12 months. This non-cash cost represents the mark-to-market
movement in the value of these contracts as exchange rates
fluctuate.
-- Translation difference on foreign currency loans - this
represents the impact of exchange rate movements in the translation
of non-Sterling denominated debt into the Group accounts. The key
items in this regard are the Euro-denominated EUR500m 2026
corporate bonds, and EUR250m 2028 corporate bonds.
Further details of non-underlying finance items are provided in
Note 3 to the accounts.
OPERATING PROFIT AND PBT
The table below summarises the underlying and reported profit of
the Group, further to the commentary above on underlying
performance and non-underlying items.
Operating profit and PBT 2021 2020
GBP'm GBP'm
----------------------------------------------------- ------ -------
Underlying operating profit 79.8 77.1
Reported operating profit (after exceptional items) 45.9 (8.5)
Underlying profit before tax 50.1 48.0
Reported loss before tax (after exceptional items) (7.5) (65.6)
Reported operating profit (earnings before interest and
taxation) increased to GBP45.9 million (FY20: loss of GBP8.5
million), driven by strong operating and financial performance as
described above. In addition, the prior year was impacted by a
one-off GBP50 million impairment of goodwill following the start of
the Covid pandemic. After removing the exceptional and
non-underlying items described above, underlying operating profit
was GBP79.8 million, representing a 3.5% increase over the prior
year.
TAXATION
The reported tax credit in the year of GBP10.3 million was
distorted by the impact of the exceptional and non-underlying
costs, many of which have been treated as non-deductible for tax
purposes. On an underlying basis, the tax charge for the year was
GBP13.0 million against adjusted profit before tax of GBP50.1
million, implying an underlying effective tax rate of 25.9%.
EARNINGS PER SHARE
The Group delivered basic earnings per share of 2.30p (FY20:
loss per share of 57.22p). However, adjusted earnings per share
(before non-underlying and exceptional items) on a fully-diluted
basis was 30.21p (FY20: 28.42p). This figure does not include the
diluted impact of unutilised preferred equity funding, which was
deployed for acquisitions post year-end. This represents a 6.3%
increase in earnings over the prior year.
Earnings per share 2021 2020
Basic earnings / (loss) per share 2.30p (57.22p)
Diluted adjusted earnings per share 28.66p 28.42p
Diluted adjusted earnings per share (excluding dilution impact of unutilised preferred equity
funding at year end) 30.21p 28.42p
OPERATING CASH FLOW
Cash flow from operating activities before interest, tax and
exceptional items was GBP93.9 million which represents a conversion
of 83% of underlying EBITDA (pre-IFRS 16).
Operating and free cash flow 2021 2020
GBP'm GBP'm
Underlying operating profit 79.8 77.1
Add back: underlying depreciation & amortisation 47.6 41.0
Underlying EBITDA 127.4 118.1
Payments under right-of-use lease obligations (14.4) (11.6)
Non-cash items (0.8) (0.8)
Underlying movement in working capital (18.3) (8.0)
Operating cash flow before interest, tax and exceptional items 93.9 97.6
% conversion against underlying operating profit 118% 127%
% conversion against underlying EBITDA (pre-IFRS 16) 83% 92%
Interest paid (30.4) (25.0)
Corporation tax paid (5.0) (8.6)
Capital expenditure - replacement / maintenance of existing capabilities (20.9) (25.4)
Proceeds from fixed asset disposals 1.2 0.7
Free cash flow before exceptional items 38.8 39.2
% conversion against underlying operating profit 49% 51%
% conversion against underlying EBITDA (pre-IFRS 16) 34% 37%
Pre-exceptional free cash flow of the Group - after interest,
tax and net replacement capex - was GBP38.8 million. Compared with
underlying operating profit (i.e. post-depreciation), this
represents a conversion ratio of 49%. The difference in free cash
flow conversion versus the prior year is primarily due to slightly
larger adverse working capital absorption in the year due to Covid
(which is ultimately expected to unwind) and higher interest cash
payments, in part resulting from the timing of refinancing meaning
that more than 12 months' worth of interest was paid in the
year.
A full reported statement of cash flows, including exceptional
and non-underlying items, is provided in the Consolidated Statement
of Cash Flows.
NET DEBT
As at 3 April 2021, the Group's net debt position (excluding
IFRS 16 right-of-use leases and preferred equity) was GBP20.2
million lower than at the prior year-end. Free cash flow of GBP38.8
million was generated in the year, of which GBP13.1 million was
invested in organic growth / synergy initiatives and GBP12.7
million in acquisition-related expenditure (including debts assumed
on acquisition). In terms of financing activities, net cash
proceeds from the preferred equity (after fees) were GBP65.3
million, and GBP30.0 million was spent on the share buy-back that
immediately followed as part of that transaction. The redemption
premium on refinancing of the bonds, plus other associated fees,
totalled a further GBP17.6 million.
Applying our banks' adjusted measure of financial leverage, the
Group's year end net debt to EBITDA ratio was 3.10x (FY20:
3.04x).
Current leverage is consistent with our financial strategy to
use a sensible but cautious level of debt in the overall funding
structure of the Group.
Free cash flow to movement in net debt 2021 2020
GBP'm GBP'm
Free cash flow before exceptional items (see above) 38.8 39.2
Capital expenditure - growth (7.6) (8.4)
Exceptional reorganisation cash cost (5.5) (3.5)
Investment in organic growth / synergy projects (13.1) (11.8)
Acquisitions of subsidiaries (2.8) (11.0)
Total debt acquired or refinanced (9.9) (1.5)
Deferred and contingent consideration payments (21.3) (12.1)
Exceptional M&A costs (3.0) (2.2)
Proceeds from discontinued operations - 1.0
Acquisition-related expenditure (37.0) (25.8)
Buy back of ordinary shares (30.0) -
Preferred equity 65.3 -
Refinanced bonds - redemption premia (17.6) -
Net refinancing cash flow 17.7 -
Other debt items including prepaid finance costs (6.8) (2.8)
Translation differences on foreign currency cash and loans 20.6 (24.8)
Other exceptional items 13.8 (27.6)
Total movement in net debt 20.2 (26.0)
Opening net debt (365.9) (339.9)
Closing net debt (345.7) (365.9)
Net debt 2021 2020
GBP'm GBP'm
----------------------------------------------------------------------- -------- --------
Net cash and cash equivalents 344.8 174.7
Senior secured debt (at par) (637.7) (523.4)
Unsecured loans (51.7) (15.6)
Finance leases and hire purchase arrangements (pre IFRS 16) (1.1) (1.6)
Net debt before obligations under right-of-use leases (345.7) (365.9)
Adjusted net debt / EBITDA 3.10x 3.04x
Bond embedded redemption option 9.0 -
Bond issue premium - cash - (7.5)
Bond issue premium - non-cash (related to embedded redemption option) (4.3) (6.8)
Pre paid finance costs on senior debt 10.9 9.9
Preferred equity, associated warrants and embedded derivatives (76.2) -
Obligations under right-of-use leases (incremental) (86.0) (78.2)
Statutory net debt (net of prepaid finance costs) (492.2) (448.5)
Michael Scott
Group Finance Director
20 July 2021
Consolidated
Income
Statement
For the 53
weeks ended 3
April 2021
53 weeks ended 3 April 52 weeks ended 28 March
2021 2020
(restated)
Non- Non-
Underlying underlying Reported Underlying underlying Reported
performance items numbers performance items numbers
Notes GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ---------- ------ ------------ ------------- --------- ------------ ------------- ---------
Continuing
Operations
Revenue 1 662.3 - 662.3 621.5 - 621.5
Cost of Sales (427.4) - (427.4) (395.1) - (395.1)
Gross profit 234.9 - 234.9 226.4 - 226.4
Distribution costs (74.8) - (74.8) (73.2) - (73.2)
Administrative expenses (84.2) (33.9) (118.1) (82.9) (82.8) (165.7)
Other operating income 3.9 - 3.9 4.0 0.0 4.0
---------------------------- ------ ------------ ------------- --------- ------------ ------------- ---------
Operating profit / (loss) 79.8 (33.9) 45.9 74.3 (82.8) (8.5)
Comprising:
Operating profit before
credit losses,
non-underlying and
exceptional items 81.3 - 81.3 77.1 - 77.1
Increase in credit loss
provision (1.5) - (1.5) (2.8) - (2.8)
Amortisation of acquired
intangibles 1,2 - (26.8) (26.8) - (25.0) (25.0)
Other non-underlying items 1,2 - 0.7 0.7 - (7.9) (7.9)
Exceptional goodwill
impairment 1,2 - - - - (50.0) (50.0)
Other exceptional items 1,2 - (7.8) (7.8) - 0.1 0.1
---------------------------- ------ ------------ ------------- --------- ------------ ------------- ---------
Finance costs 3 (29.7) (23.7) (53.4) (26.3) (30.8) (57.1)
Comprising:
Interest on loans and notes 3 (23.9) (1.4) (25.3) (21.5) - (21.5)
Amortisation of prepaid
finance costs and accrued
interest 3 (2.6) (7.3) (9.9) (2.1) (4.4) (6.5)
Unwinding of discount on
right-of-use lease
liabilities 3 (3.0) - (3.0) (2.6) - (2.6)
Preferred equity items 3 - (13.1) (13.1) - - -
Other finance items 3 (0.2) (1.9) (2.1) (0.1) (26.4) (26.5)
---------------------------- ------ ------------ ------------- --------- ------------ ------------- ---------
Profit / (loss) before tax 50.1 (57.6) (7.5) 48.0 (113.6) (65.6)
Taxation (charge) / credit (13.0) 23.3 10.3 (12.4) 8.2 (4.2)
Profit / (loss) for the
period from continuing
operations 37.1 (34.3) 2.8 35.6 (105.4) (69.8)
Loss from discontinued
operations - - - - (2.0) (2.0)
Profit / (loss) for the
period 37.1 (34.3) 2.8 35.6 (107.4) (71.8)
---------------------------- ------ ------------ ------------- --------- ------------ ------------- ---------
Earnings /
(loss) per
share - pence basic 4 2.30 (57.22)
diluted 4 2.29 (57.22)
--------------------------- ------ ------------ ------------- --------- ------------ ------------- ---------
Consolidated Statement of Comprehensive Income
For the 53 weeks ended 3 April 2021
53 weeks ended 52 weeks ended
3 April 2021 28 March 2020
(restated)
Note GBPm GBPm
------------------------------------------------------------------------- ----- --------------- ---------------
Profit / (loss) for the period 2.8 (71.8)
------------------------------------------------------------------------- ----- --------------- ---------------
Other comprehensive income / (expense)
Items that will not be reclassified to profit or loss:
Actuarial (loss) / gain on defined benefit pension scheme 7 (0.1) 1.4
Decrease in deferred tax asset relating to pension scheme liability - (0.1)
Items that will not be reclassified to profit or loss (0.1) 1.3
------------------------------------------------------------------------- ----- --------------- ---------------
Items that may be reclassified subsequently to profit or loss:
Retranslation of overseas subsidiaries (6.1) 3.1
Items that may be reclassified subsequently to profit or loss (6.1) 3.1
------------------------------------------------------------------------- ----- --------------- ---------------
Other comprehensive (expense) / income (6.2) 4.4
------------------------------------------------------------------------- ----- --------------- ---------------
Total comprehensive expense for the period attributable to the owners of
the parent (3.4) (67.4)
------------------------------------------------------------------------- ----- --------------- ---------------
Consolidated Balance Sheet
As at 3 April 2021
Group
3 April 2021 28 March 2020 30 March 2019
(restated) (restated)
Notes GBPm GBPm GBPm
----------------------------------------------------- ------ ------------- -------------- --------------
Non-current assets
Goodwill 164.8 172.6 203.7
Intangible assets other than goodwill 224.2 244.3 241.4
Property, plant and equipment 202.1 211.6 190.6
Right-of-use lease assets 82.6 78.5 -
Investment property 0.2 0.2 0.2
Investments in subsidiaries - - -
Trade and other non-current receivables - - -
Deferred tax assets 17.2 6.4 5.8
Total non-current assets 691.1 713.6 641.7
----------------------------------------------------- ------ ------------- -------------- --------------
Current assets
Inventories 164.4 165.4 140.5
Trade and other receivables 150.1 144.1 116.0
Cash and cash equivalents 348.8 176.8 66.4
Total current assets 663.3 486.3 322.9
------------- -------------- --------------
Total assets 1,354.4 1,199.9 964.6
----------------------------------------------------- ------ ------------- -------------- --------------
Current liabilities
Trade and other current payables 213.8 241.2 168.4
Current tax liabilities 5.1 - -
Obligations under right-of-use leases - current 13.0 11.8 -
Other financial liabilities 30.2 4.9 10.4
Total current liabilities 262.1 257.9 178.8
----------------------------------------------------- ------ ------------- -------------- --------------
Non-current liabilities
Trade and other non-current payables 17.0 16.6 17.5
Obligations under right-of-use leases - non-current 74.0 68.0 -
Other non-current financial liabilities 647.5 540.6 392.3
Preferred equity 70.1 - -
Preferred equity - contractually-linked warrants 6.1 - -
Deferred tax liabilities 62.9 69.9 66.1
Retirement benefit obligations 7 6.5 6.3 7.8
Total non-current liabilities 884.1 701.4 483.7
----------------------------------------------------- ------ ------------- -------------- --------------
Total Liabilities 1,146.2 959.3 662.6
------------- -------------- --------------
Net Assets 208.2 240.6 302.1
----------------------------------------------------- ------ ------------- -------------- --------------
Equity
Share capital 6.3 6.3 6.3
Share premium - 288.7 288.7
Retained earnings 198.7 (62.7) 2.5
Foreign exchange reserve (0.4) 5.7 2.6
Other reserves 3.6 2.6 2.0
Total equity 208.2 240.6 302.1
----------------------------------------------------- ------ ------------- -------------- --------------
Consolidated Statement of Changes in
Equity
For the 53 weeks ended 3
April 2021
Share Share Retained Other Total
capital premium earnings Foreign exchange reserve reserves equity
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- --------- --------- ---------- ------------------------- ---------- --------
At 30 March 2019 on previous
basis 6.3 288.7 20.6 2.3 2.0 319.9
Impact of restatement (Note
10) - - (18.1) 0.3 - (17.8)
At 30 March 2019 (restated) 6.3 288.7 2.5 2.6 2.0 302.1
------------------------------- --------- --------- ---------- ------------------------- ---------- --------
Loss for the period to 28
March 2020 - - (71.8) - - (71.8)
Other comprehensive income for
the period - - 1.3 - - 1.3
Retranslation of overseas
subsidiaries - - - 3.1 - 3.1
Total comprehensive loss - - (70.5) 3.1 - (67.4)
------------------------------- --------- --------- ---------- ------------------------- ---------- --------
Issue of Share capital - - - - - -
Transfer between reserves - - 5.3 - (5.3) -
Share-based payment charge - - - - 5.9 5.9
Transactions with owners - - 5.3 - 0.6 5.9
------------------------------- --------- --------- ---------- ------------------------- ---------- --------
At 28 March 2020 (restated) 6.3 288.7 (62.7) 5.7 2.6 240.6
------------------------------- --------- --------- ---------- ------------------------- ---------- --------
At 28 March 2020 on previous
basis 6.3 288.7 (42.9) 5.9 2.6 260.6
Impact of restatement (Note
10) - - (19.8) (0.2) - (20.0)
At 28 March 2020 (restated) 6.3 288.7 (62.7) 5.7 2.6 240.6
------------------------------- --------- --------- ---------- ------------------------- ---------- --------
Profit for the period to 3
April 2021 - - 2.8 - - 2.8
Other comprehensive loss for
the period - - (0.1) - - (0.1)
Retranslation of overseas
subsidiaries - - - (6.1) - (6.1)
Total comprehensive
profit/(loss) - - 2.7 (6.1) - (3.4)
------------------------------- --------- --------- ---------- ------------------------- ---------- --------
Cancellation of share premium
account - (288.7) 288.7 - - -
Buy back of ordinary shares - - (30.0) - - (30.0)
Share-based payment charge - - - - 1.0 1.0
Transactions with owners - (288.7) 258.7 - 1.0 (28.9)
------------------------------- --------- --------- ---------- ------------------------- ---------- --------
At 3 April 2021 6.3 - 198.7 (0.4) 3.6 208.2
------------------------------- --------- --------- ---------- ------------------------- ---------- --------
Consolidated Statements of Cash Flows
For the 53 weeks ended 3 April 2021
Group
53 weeks ended 52 weeks ended
3 April 2021 28 March 2020
(restated)
GBPm GBPm
------------------------------------------------------------------------------ --------------- ---------------
Cash flows from operating activities
Operating profit / (loss) 45.9 (8.5)
Adjustments For:
Depreciation and amortisation of IT software 47.7 40.9
Amortisation of acquired intangibles 26.8 25.0
Negative goodwill arising on acquisition (6.5) (5.8)
Goodwill impairment - 50.0
Amortisation of government grants (0.5) (0.5)
Profit on disposal of property, plant and equipment (0.1) (0.2)
Share incentive plan charge 1.0 5.9
Defined benefit pension (0.1) (0.1)
Net cash flow from operating activities before movements in working capital,
tax and interest
payments 114.2 106.7
Change in inventories 7.6 (4.4)
Change in trade and other receivables (0.3) (10.8)
Change in trade and other payables (25.6) 9.9
Cash generated by continuing operations before tax and interest payments 95.9 101.4
Interest paid on loans and notes (30.4) (25.0)
Interest relating to right-of-use lease assets (3.0) (2.6)
Income taxes paid (5.0) (8.6)
Net cash flow from discontinued operations - 0.1
Net cash inflow from operating activities 57.5 65.3
-------------------------------------------------------------------------------- --------------- ---------------
Investing activities
Purchases of property, plant and equipment (27.6) (32.7)
Purchases of intangible assets (0.9) (1.1)
Loan to subsidiary companies - -
Proceeds on disposal of property, plant and equipment 1.2 0.7
Deferred consideration and earn-out payments (15.6) (10.0)
Acquisition of subsidiaries net of cash acquired (2.8) (11.0)
Proceeds from disposal of subsidiaries - 0.9
Net cash used in investing activities (45.7) (53.2)
-------------------------------------------------------------------------------- --------------- ---------------
Financing activities
Increase in new borrowings, net of refinancing costs 303.7 109.0
Repayment of borrowings (164.7) -
Issue of preferred equity, net of refinancing costs 65.3 -
Buy back of ordinary shares (30.0) -
Payments under right-of-use lease obligations (11.3) (9.0)
Net cash generated in financing activities 163.0 100.0
-------------------------------------------------------------------------------- --------------- ---------------
Net increase in cash and cash equivalents 174.8 112.1
Cash and cash equivalents at beginning of period 174.7 60.2
Effect of foreign exchange rate changes (4.7) 2.4
Cash and cash equivalents at end of period 344.8 174.7
-------------------------------------------------------------------------------- --------------- ---------------
Comprising:
Cash and cash equivalents 348.8 176.8
Bank overdrafts (4.0) (2.1)
344.8 174.7
------------------------------------------------------------------------------ --------------- ---------------
1. Segmental
information
The Group is organised into three operating segments: soft flooring products in UK & Europe;
ceramic tiles in UK & Europe; and flooring products in Australia. The Executive Board (which
is collectively the Chief Operating Decision Maker) regularly reviews financial information
for each of these operating segments in order to assess their performance and make decisions
around strategy and resource allocation at this level.
The UK & Europe Soft Flooring segment comprises legal entities in the UK, Republic of Ireland,
the Netherlands and Belgium, whose operations involve the manufacture and distribution of
carpets, flooring underlay, artificial grass, LVT, and associated accessories. The UK & Europe
Ceramic Tiles segment comprises legal entities primarily in Spain and Italy, whose operations
involve the manufacture and distribution of wall and floor ceramic tiles. The Australia segment
comprises legal entities in Australia, whose operations involve the manufacture and distribution
of carpets, flooring underlay and LVT.
Whilst additional information has been provided in the operational review on sub-segment activities,
discrete financial information on these activities is not regularly reported to the CODM for
assessing performance or allocating resources.
No operating segments have been aggregated into reportable segments.
Both underlying operating profit and reported operating profit are reported to the Executive
Board on a segmental basis.
Transactions between the reportable segments are made on an arm length's basis. The reportable
segments exclude the results of non revenue generating holding companies, including Victoria
PLC. These entities' results have been included as unallocated central expenses in the tables
below.
Income statement
52 weeks ended 28 March 2020
53 weeks ended 3 April 2021 (restated)
UK & UK & UK & UK &
Europe Europe Unallocated Europe Europe Unallocated
Soft Ceramic central Soft Ceramic central
Flooring Tiles Australia expenses Total Flooring Tiles Australia expenses Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- --------- -------- ---------- ------------ ---------- ---------- -------- -------------- ------------- -------
Income statement
Revenue 280.4 282.4 99.6 - 662.3 282.0 243.9 95.6 - 621.5
Underlying
operating
profit 28.7 40.4 11.9 (1.3) 79.8 20.0 50.5 5.7 (1.9) 74.3
Non-underlying
operating items (5.0) (18.9) (1.7) (0.5) (26.1) (5.8) (18.8) (1.7) (6.6) (32.9)
Exceptional
goodwill
impairment - - - - - - (50.0) - - (50.0)
Other
exceptional
operating items 0.1 (4.3) - (3.6) (7.8) (1.0) 3.7 (0.7) (1.9) 0.1
Operating profit
/ (loss) 23.8 17.2 10.2 (5.4) 45.9 13.2 (14.6) 3.3 (10.4) (8.5)
Underlying net
finance costs (29.7) (26.3)
Non-underlying
finance costs (23.7) (30.8)
Loss before tax (7.5) (65.6)
Tax 10.3 (4.2)
----------------- --------- -------- ---------- ------------ ---------- ---------- -------- -------------- ------------- -------
Loss from
discontinued
operations - (2.0)
Profit / (loss)
for the period 2.8 (71.8)
----------------- --------- -------- ---------- ------------ ---------- ---------- -------- -------------- ------------- -------
During the year, no single customer accounted for 10% or more of the Group's revenue.
Inter-segment
sales in the year and in the prior year were immaterial.
All revenue generated across each operating segment was from the sale of flooring products
recognised at a point in time in accordance with IFRS 15. The flooring products sold across
each operating segment have similar production processes, classes of customers and economic
characteristics such as similar rates of profitability, similar degrees of risk, and similar
opportunities for growth.
The Group's revenue for the period was split geographically (by origin) as follows:
2021 2020
GBPm GBPm
----------------- --------- -------- ---------- ------------------------
Revenue
United Kingdom 243.4 259.5
Spain 197.2 209.3
Italy 85.2 34.6
Netherlands 36.9 22.5
Australia 99.6 95.6
662.3 621.5
----------------- --------- -------- ---------- ------------------------
Balance sheet
53 weeks ended 3 April 2021 52 weeks ended 28 March 2020 (restated)
UK & UK & UK & UK &
Europe Europe Europe Europe
Soft Ceramic Soft Ceramic
Flooring Tiles Australia Central Total Flooring Tiles Australia Central Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- --------- -------- ---------- ------------ ---------- ---------- -------- -------------- ------------- -------
Total Assets 274.5 692.2 91.7 296.0 1,354.4 265.5 703.3 78.2 152.9 1,199.9
Total
Liabilities (136.7) (246.4) (32.4) (730.6) (1,146.2) (122.5) (254.0) (26.3) (556.5) (959.3)
Net Assets 137.7 445.8 59.3 (434.6) 208.2 143.0 449.3 51.9 (403.6) 240.6
The Group's non-current assets (net of deferred
tax) as at 3 April 2021 were split geographically
as follows:
2021 2020
GBPm GBPm
----------------- ---------
Non-current
assets (net of
deferred tax)
United Kingdom 171.9 167.4
Spain 389.1 430.9
Italy 72.3 70.7
Netherlands 0.9 0.2
Australia 39.7 38.0
673.9 707.2
Other segmental
information
53 weeks ended 3 April 2021 52 weeks ended 28 March 2020
UK & UK & UK & UK &
Europe Europe Unallocated Europe Europe Unallocated
Soft Ceramic central Soft Ceramic central
Flooring Tiles Australia expenses Total Flooring Tiles Australia expenses Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Depreciation and
amortisation of IT
software (including
depreciation of
right-of-use lease
assets) 20.3 22.6 4.7 - 47.6 19.6 16.8 4.5 - 40.9
Amortisation of acquired
intangibles 4.9 20.2 1.7 - 26.8 4.7 18.6 1.7 - 25.0
25.2 42.9 6.4 - 74.4 24.3 35.4 6.2 - 65.9
53 weeks ended 3 April 2021 52 weeks ended 28 March 2020
UK & UK & UK & UK &
Europe Europe Europe Europe
Soft Ceramic Soft Ceramic
Flooring Tiles Australia Central Total Flooring Tiles Australia Central Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Capex - PPE (incl.
finance lease / HP) 12.7 12.7 2.2 - 27.6 13.1 16.8 2.7 - 32.7
Disposals of property,
plant and equipment (0.9) (0.2) - - (1.1) (0.5) (0.1) (0.1) - (0.7)
Capex - intangibles
(incl. finance lease /
HP) 0.1 0.8 - - 0.9 0.3 0.7 - 0.1 1.1
Total capital
expenditure (cashflow) 11.9 13.3 2.2 - 27.4 12.9 17.5 2.6 0.1 33.1
2. Exceptional and non-underlying items
2021 2020
(restated)
GBPm GBPm
Exceptional items
(a) Acquisition and disposal related costs (3.0) (2.2)
(b) Reorganisation and Covid-related exceptional costs (5.5) (3.5)
(c) Negative goodwill arising on acquisition 6.5 5.8
(d) Contingent consideration linked to positive tax ruling (5.7) -
(e) Exceptional goodwill impairment - (50.0)
Total exceptional items ( 7.8) (49.9)
Non-underlying operating items
(f) Acquisition-related performance plans 1.7 (2.0)
(g) Non-cash share incentive plan charge (1.0) (5.9)
(h) Amortisation of acquired intangibles (26.8) (25.0)
(26.1) (32.9)
All exceptional items are classified within administrative expenses.
(a) One- off third-party professional fees in connection with prospecting and completing specific
acquisitions during the period. The prior year also includes costs associated with disposals.
(b) One-off costs relating to a few small efficiency projects during the year, of which the
majority were redundancy costs, plus one-off expenditure relating to precautionary measures
for health and safety in light of Covid-19. Other than redundancy payments these items relate
entirely to exceptional third-party purchases and fees, and do not include any allocation
of internal resources. The largest of the new efficiency projects were the merger of our Westex
manufacturing operations into one of the other UK factories, and the integration of Ascot
(acquired in March 2020) with our incumbent Italian business, Serra. Prior year costs relate
to synergy projects and performance improvement programmes.
(c) Negative goodwill arising on consolidation of subsidiaries acquired during the prior year,
achieved through favourable bilateral negotiations.
(d) One-off charge in the year reflecting the final instalment of contingent consideration
on the acquisition of Keraben, which was linked to a positive ruling over the tax deductibility
of certain pre-acquisition costs.
(e) One-off goodwill impairment charge during the prior year.
(f) Credit/(charge) relating to the accrual of expected liability under acquisition-related
performance plans.
(g) Non-cash, IFRS2 share-based payment charge in relation to the long-term management incentive
plans.
(h) Amortisation of intangible assets, primarily brands and customer relationships, recognised
on consolidation as a result of business combinations.
3. Finance costs
2021 2020
(restated)
GBPm GBPm
Underlying finance items
Interest on bank facilities and notes 23.1 20.7
Interest on unsecured loans 0.8 0.8
Total interest on loans and notes 23.9 21.5
Amortisation of prepaid finance costs on loans and
notes 2.6 2.1
Unwinding of discount on right-of-use lease liabilities 3.0 2.6
Net interest expense on defined benefit pensions 0.2 0.1
29.7 26.3
Non-underlying finance items
(a) Release of prepaid finance costs 7.3 4.4
(b) Net cost of redemption premium on refinancing
of previous senior notes 6.3 -
(c) Underwriting fees and costs relating to previous
bank facilities - 6.5
One-off refinancing related 13.6 10.9
(d) Finance items related to preferred equity 13.1 -
Preferred equity related 13.1 -
(e) Unwinding of present value of deferred and contingent
earn-out liabilities 0.3 0.8
(f) Other adjustments to present value of contingent
earn-out liabilities 0.7 0.9
(g) Unwinding of present value of deferred and contingent
earn-out liabilities 1.1 1.3
Acquisitions related 2.1 3.1
(h) Interest on short term-term draw of Group revolving
credit facility 1.4 -
(i) Fair value adjustment to notes redemption option (4.6) 7.3
(j) Unsecured loan redemption premium charge / (credit) 0.2 (0.2)
(k) Mark to market adjustments and gains on foreign
exchange forward contracts 4.2 (3.2)
(l) Translation differences on foreign currency loans (6.3) 13.0
Other non-underlying (5.1) 16.9
23.7 30.8
(a) Non-cash charge relating to the release of prepaid costs on previous bank facilities on
refinancing. In light of positive market conditions, the company opportunistically approached
the bond market in March 2021 to refinance its 2024 senior secured notes despite only having
issued these notes during the prior year, securing a reduction in coupon from 5.25% to 3.625%.
Hence why a charge has occurred in both the current and prior periods.
(b) Cost of early redemption in relation to the refinancing of the 2024 senior secured notes,
offset in part by the release of the liability premium relating to the embedded derivatives
attached to the host debt.
(c) One off fees paid in the prior year in relation to underwritten bank facilities obtained
to provide certainty around the company's inaugural refinancing processes, plus deferred costs
relating to previous 2018 bank facilities.
(d) The net impact of non-cash items relating to preferred equity issued to Koch Equity Development
during the year. This comprises: i) accrual of preferred dividends and other value movements
of the host contract (GBP3.4m); ii) fair value adjustment to embedded derivative representing
a cash settlement option (GBP5.2m); iii) amortisation of associated instrument representing
the option to issue additional preferred equity (GBP0.7m); iv) fair value adjustment to contractually-linked
warrants (GBP1.6m); and iv) 6% ticking fee on option to issue GBP100.0m additional preferred
equity (GBP2.2m) .
(e) Non-cash costs relating to the unwinding of present value discounts applied to deferred
consideration and contingent earn-outs on historical business acquisitions. Deferred consideration
is measured at amortised cost, while contingent consideration is measured under IFRS 3 at
fair value. Both are discounted for the time value of money.
(f) Non-cash items relating to changes in contingent earn-out consideration arising from the
evolution of actual and forecast financial performance of the relevant acquisitions.
(g) Non-cash cost relating to unwinding of the present value discount on acquisition-related
performance plans.
(h) Interest cost associated with the drawing of the Group's GBP75m revolving credit facility
in March, as a precautionary measure in response to the Coronavirus pandemic. This has subsequently
been repaid.
(i) Fair value adjustment to embedded derivative representing the early redemption option
within the terms of the senior secured notes. See Note 6 for further details.
(j) Unsecured loan redemption premium charge / credit - Non-cash item relating to the GBP2.1
million redemption premium on the BGF loan. During the prior year it was agreed with the BGF
to defer payment from December 2019 to December 2021, resulting in a one off credit to the
income statement.
(k) Non-cash fair value adjustments on foreign exchange forward contracts. In the period this
was offset by a realised cash gain on certain FX contracts (GBP0.5m).
(l) Net impact of exchange rate movements on third party and intercompany loans.
See Financial Review for further details of these items.
4. Earnings per share
The calculation of the basic, adjusted and diluted earnings / loss per share is
based on the
following data:
53 weeks ended 3 April 2021 52 weeks ended 28 March 2020
Basic Adjusted Basic Adjusted
(restated) (restated)
GBPm GBPm GBPm GBPm
Earnings / (loss) attributable to ordinary equity
holders of the parent entity 2.8 2.8 (69.8) (69.8)
Exceptional and non-underlying items:
Income statement impact of preferred equity - 13.1 - -
Amortisation of acquired intangibles - 26.8 - 25.0
Other non-underlying items - (0.7) - 7.9
Exceptional goodwill impairment - - - 50.0
Other exceptional items - 2.1 - (0.1)
Interest on short -term draw of Group revolving
credit facility - 1.4 - -
Amortisation of prepaid finance costs - 7.3 - 4.4
Fair value adjustment to notes redemption option - (4.6) - 7.3
Translation difference on foreign currency loans - (6.4) - 13.0
Other non-underlying finance items - 18.6 - 6.1
Tax effect on adjusted items where applicable - (23.3) - (8.2)
Earnings / (loss) for the purpose of basic and
adjusted earnings per share from continuing
operations 2.8 37.1 (69.8) 35.6
Loss attributable to ordinary equity holders of the
parent entity from discontinued operations - - (2.0) -
Earnings / (loss) for the purpose of basic and
adjusted earnings per share 2.8 37.1 (71.8) 35.6
Weighted average number of shares
2021 2020
Number Number
of shares of shares
(000's) (000's)
Weighted average number of shares for the purpose of basic and adjusted earnings per
share 122,257 125,398
Effect of dilutive potential ordinary shares:
Share options 530 -
Weighted average number of ordinary shares for the purposes of diluted earnings per
share 122,787 125,398
Preferred equity and contractually-linked warrants 6,625 -
Weighted average number of ordinary shares for the purposes of diluted adjusted
earnings per
share 129,412 125,398
The potential dilutive effect of the share options has been calculated in accordance with
IAS 33 using the average share price in the period.
The Group's earnings / loss per share are as
follows:
2021 2020
(restated)
Pence Pence
Earnings / loss per share from continuing operations
Basic earnings / (loss) per share 2.30 (55.63)
Diluted earnings / (loss) per share 2.29 (55.63)
Basic adjusted earnings per share 30.34 28.42
Diluted adjusted earnings per share 28.66 28.42
Loss per share from discontinued operations
Basic loss per share - (1.60)
Diluted loss per share - (1.60)
Earnings / loss per share
Basic earnings / (loss) per share 2.30 (57.22)
Diluted earnings / (loss) per share 2.29 (57.22)
Basic adjusted earnings per share 30.34 28.42
Diluted adjusted earnings per share 28.66 28.42
Diluted earnings per share for the period is not adjusted for
the impact of the potential future conversion of preferred equity
or potential future exercise of contractually linked warrants (see
Note 6) due to these instruments having an anti-dilutive effect,
whereby the positive impact of adding back the associated financial
costs to earnings outweighs the dilutive impact of
conversion/exercise. Diluted adjusted earnings per share does take
into account the impact of these instruments as shown in the table
above setting out the weighted average number of shares.
5. Rates of exchange
2021 2020
Average Year end Average Year end
Australia - A$ 1.8392 1.8172 1.8685 2.0202
Europe - EUR 1.1244 1.1761 1.1442 1.1152
6. Net Debt
Analysis of net debt
Reconciliation of
movements in the
Group's net debt
position:
At 29 Other At 3
March Capital non-cash Exchange April
Group 2020 Cash flow expenditure Acquisitions changes movement 2021
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cash and cash
equivalents 176.8 172.9 - 3.8 - (4.7) 348.8
Bank overdraft (2.1) (1.9) - - - - (4.0)
Net cash and cash
equivalents 174.7 171.1 - 3.8 - (4.7) 344.8
Senior secured debt
(gross of prepaid
finance costs):
- Senior notes
redeemed in the
period - due in
more than one year (463.3) 88.7 - - 355.9 18.6 -
- Senior notes
issued in the
period - due in
more than one year - (287.4) - - (353.7) 8.2 (633.0)
- Revolving credit
facility - due in
more than one year (74.4) 76.0 - - - (1.5) -
Unsecured loans:
- due in less than
one year (2.8) (27.1) - (2.4) 6.1 - (26.2)
- due in more than
one year (12.8) - - (7.5) (5.1) - (25.5)
Net debt (378.6) 21.2 - (6.2) 3.1 20.6 (339.9)
Obligations under
right-of-use leases:
- due in less than
one year (11.8) 11.3 (1.7) (0.1) (10.8) - (13.0)
- due in more than
one year (68.0) - (9.9) (6.7) 10.2 0.4 (74.0)
Preferred equity
(gross of prepaid
finance costs) - (66.3) - - (10.9) - (77.1)
Prepaid finance
costs:
- In relation to
preferred equity - 0.9 - - - - 0.9
- In relation to
senior debt 9.9 10.8 - - (10.0) 0.2 10.9
Net debt including
right-of-use lease
liabilities, issue
premia, preferred
equity and prepaid
finance costs (448.5) (22.0) (11.6) (13.0) (18.3) 21.2 (492.2)
The cashflows therein included represent the physical cash inflows received by the Group as
a result of the refinancing exercise in the period, the majority of which was directly paid
by the new debt holders to the existing debt holders, with the remainder of the cash being
held by the Company. The Group determined that the financial institution that handled the
transactions with bond holders acted in their capacity as principal.
Senior debt
Senior debt as at 3 April 2021 relates to EUR750m of senior secured notes, split between
two tranches: EUR500m 3.625% notes maturing in 2026; and EUR250m 3.75% notes maturing in 2028.
The coupon on the notes is paid bi-annually. These notes were issued in March 2021, at which
time the previous EUR500m 5.25% notes were refinanced. One-off early redemption costs were
incurred in relation to the refinanced notes (see Note 3). The additional funds raised of
EUR250m less redemption and financing costs were held on balance sheet at the year end for
the purpose of funding future acquisitions.
Attached to both sets of notes are early repayment options, which have been identified as
embedded derivative assets, separately valued from the host contracts. Changes in the Group's
credit rating and market pricing of the notes would have an impact on the value of the options.
The redemption price of the repayment option on the EUR500m 2026 notes is the par value of
the notes plus any accrued interest, plus the following premia: within the first two years
1.813% plus a make-whole of the present value of interest that would otherwise have been payable
in that period; in the third year 1.813%; in the fourth year 0.906%; in the fifth year 0%.
The redemption price of the repayment option on the EUR250m 2028 notes is the par value of
the notes plus any accrued interest, plus the following premia: within the first three years
1.875% plus a make-whole of the present value of interest that would otherwise have been payable
in that period; in the fourth year 1.875%; in the fifth year 0.938%; in the final two years
0%.
These options have been valued based on the contractual redemption terms and measuring the
Group's forward assessment of the notes' market value based on an option pricing model. The
fair value of the derivative assets at inception of the first and second tranches of the notes
was GBP4.3m in aggregate. The value of the senior debt liabilities recognised were increased
by a corresponding amount at initial recognition, which then reduces to par at maturity using
an effective interest rate method. The fair value of the derivative asset at the year end
was GBP9.0m, and therefore an associated non-cash credit was recognised through the income
statement for the period of GBP4.6m.
Prepaid legal and professional fees associated with the issue of the new notes totalling
GBP10.8m (1.7% of gross debt raised) is offset against the senior debt liability and is amortised
over its life (GBP0.1m in the year).
As a result, as at 3 April 2021 there is a total liability recognised of GBP622.1m in relation
to notes with a par value of GBP637.7m (EUR750m).
Additionally, the Group has a variable rate GBP75m multi-currency revolving credit facility
maturing in 2024, which at the year end was undrawn.
Unsecured loans
Unsecured loans comprises the GBP11.9m loan from the BGF maturing in December 2021 and a
number of smaller local loans and credit lines utilised by the Group's operating subsidiaries
for working capital purposes. During the year a number of additional unsecured loans and facilities
were drawn as part of the special treasury measures put in place at the start of the Covid-19
pandemic.
Preferred equity
Background and key terms
On 30th October 2020 the company entered into an agreement whereby Koch Equity Development,
LLC. (via its affiliate KED Victoria Investments, LLC) committed to invest a total of GBP175m
by way of convertible preferred equity to be issued by the Company. As part of this agreement,
GBP75m of preferred equity was issued immediately, on 16 November 2020. A structuring discount
of 5% was payable at the outset.
The balance of up to GBP100m can be issued at any time during the following 18 months at
the Company's option. A 'ticking' fee of 6% is payable on the unissued commitment during this
period, although the Company can ask KED to cancel the commitment at any time.
The preferred equity attracts a dividend of 9.35% if cash settled, or 9.85% if Paid In Kind
by way of issue of additional preferred shares (such PIK occurring quarterly). Starting in
year five, the dividend moves from a fixed rate to a spread over three-month LIBOR. The spread
starts at 9.35% and 9.85% (for cash and PIK settlement respectively) and increases by 1% in
each subsequent year up to year nine, after which it remains flat.
The preferred equity is a perpetual instrument, albeit the Company can choose to redeem it
in cash at any time, subject to a redemption premium. The redemption price of this repayment
option is the face value of the preferred shares plus any accrued dividends, plus the following
premia: within the first three years 6.0% plus a make-whole of the present value of dividends
that would otherwise have accrued in that period; in the fourth year 6.0%; in the fifth year
3.0%; and after the fifth anniversary 0%. There are two scenarios in which mandatory cash
redemption of the preferred equity can occur outside of the Company's control, both of which
are highly unlikely in management's view: (i) if the Group becomes insolvent (being bankruptcy,
placing into receivership or similar events), or (ii) a change in control of the Company where
the offer for the ordinary shares is not all-cash and, at the same time, the offeror (on an
enlarged pro-forma basis) is deemed to be sub-investment grade.
After the sixth anniversary, KED can elect to convert the outstanding preferred equity and
PIK'd dividends into ordinary shares, with the conversion price being the prevailing 30 business
day VWAP of the Company's ordinary shares.
In the event of a change of control of the Company (for example a tender offer, merger or
scheme of arrangement in relation to the ordinary shares of the Company), the terms of the
preferred equity envisage three scenarios: (i) where an all-cash offer is made and accepted,
the preferred equity and any PIK'd dividends will convert into ordinary shares which are then
subject to the same offer price per share made to other shareholders and acquired by the offeror;
(ii) where an offer is made and accepted that is not all-cash and the offeror (on an enlarged
pro-forma basis) is deemed to be investment grade, the preferred equity and any PIK'd dividends
plus a material penalty fee will convert into ordinary shares which are then subject to the
same offer price per share made to other shareholders and acquired by the offeror (such penalty
fee having the effect of doubling the number of ordinary shares that KED would otherwise receive
on conversion that would then be subject to the offer price per share; this being designed
to incentivise the offeror to consider agreeing to fund redemption of the preferred equity
rather than conversion); and (iii) where an offer is made and accepted that is not all-cash
and the offeror (on an enlarged pro-forma basis) is deemed to be sub-investment grade, the
preferred equity will be subject to mandatory redemption as described above.
Attached to the preferred equity are warrants issued to KED over a maximum of 12.402m ordinary
shares. These warrants are only exercisable following the third anniversary (unless the preferred
shares have been cash redeemed or there has been a change in control of the Company) at an
exercise price of GBP3.50. The terms include a total maximum return for KED, across both the
preferred equity and the warrants, of the greater of 1.73x money multiple or 20% IRR. If this
limit is exceeded at the point of exercising the warrants (calculated as if the preferred
equity was being redeemed at the same time), then the number of shares receivable on exercise
is reduced until the returns equal the limit.
Accounting recognition
Whilst the preferred equity is legally structured as an equity instrument through the Company's
articles of association and have many equity-like features, they must be accounted for as
a financial instrument under IFRS. This primarily relates to the fact that the conversion
option is based on the prevailing share price, and therefore it fails the 'fixed-for-fixed'
criteria as prescribed in the standard.
Based on the terms of the preferred equity, the underlying host instrument was identified
alongside a number of embedded derivatives and other associated instruments. Furthermore the
embedded derivatives were assessed to identify those that are deemed to be closely-related
to the host instrument and those that are not, the latter of which are required to be separately
valued in the balance sheet. The underlying host instrument is held at amortised cost and
valued into perpetuity on the assumption of PIK'd dividends for the first ten years and then
a terminal value assuming cash dividends thereafter. This has been valued using a binomial
option pricing model, which uses standard option pricing techniques to calculate the optimal
time to exercise the respective options, taking into account the specific contractual details
of the instruments and their interconnectedness. The 5% structuring discount is accounted
for within this valuation. On this basis it was valued at GBP69.3m at initial recognition,
which is net of GBP0.9m of prepaid advisory fees. At each reporting date the terminal value
is re-assessed based on long-term LIBOR curves and a revised accrued value of the instrument
is calculated at that date using an effective interest rate method, with the increase in value
taken to the income statement as a financial charge. The value as at the year end was GBP72.6m.
The KED commitment to invest in up to GBP100m additional preferred equity at Victoria's election
was identified as an associated financial instrument. This asset was fair valued at GBP2.8m
at initial recognition and is subsequently amortised over the 18 month period of the commitment,
with a value of GBP2.1m as at the year end. As the terms of the preference shares are fixed,
issuance of more of these shares may become advantageous relative to market financing rates
in the future. The initial valuation has been determined by calibrating the valuation of the
various elements of the financing package to the transaction price. This asset has been netted
off against the preferred equity host instrument.
Two non closely-related embedded derivatives were identified:
i) the Victoria option to cash redeem (rather than the instrument running into perpetuity
or conversion, see below) - asset valued at GBP5.7m at initial recognition, fair valued at
each subsequent reporting date through the income statement, with a value of GBP0.5m as at
the year end. This option has been valued based on the contractual redemption terms and the
Group's forward assessment of the preferred equity value based on an option pricing model.
ii) the KED option to convert into ordinary shares - this was valued at GBPnil. The model
uses standard option pricing techniques to calculate the optimal time to exercise the respective
options. As such, the valuation technique assumes that all interest will be accrued and rolled
into the preference share balance and that there will be no conversion of the preference shares
into ordinary shares due to their coupon and enhanced liquidity preference. As a result, nil
value has been attributed to this feature.
Finally, the KED ordinary equity warrants have been separately identified. This financial
instrument was recognised as a liability of GBP4.5m at initial recognition and is subsequently
fair valued at each reporting date through the income statement, with a value of GBP6.1m as
at the year end. These warrants have been valued using a binomial option pricing model. The
model uses standard option pricing techniques to calculate the optimal time to exercise the
respective options, taking into account the specific contractual details of the instruments
and their interconnectedness.
7. Retirement
benefit
obligations
Defined
contribution
schemes
The Group operates a number of defined contribution pension schemes. The companies
and the
employees contribute towards the schemes.
Contributions are charged to the Income Statement as incurred and amounted to GBP4,634,000
(2020: GBP3,877,000), of which GBP2,350,000 (2020: GBP2,245,000) relates to the UK schemes.
The total contributions outstanding at year-end were GBPnil (2020: GBPnil).
Defined benefit
schemes
The Group has two defined benefit
schemes, both of which relate to
Interfloor Limited.
Interfloor Limited sponsors the Final Salary Scheme ("the Main Scheme") and the Interfloor
Limited Executive Scheme ("the Executive Scheme") which are both defined benefit arrangements.
The defined benefit schemes are administered by a separate fund that is legally separated
from the Group. The trustees of the pension fund are required by law to act in the interest
of the fund and of all relevant stakeholders in the scheme. The trustees of the pension fund
are responsible for the investment policy with regard to the assets of the fund.
The last full actuarial valuations of these
schemes were carried out by a qualified
independent
actuary as at 31 July 2018.
The contributions made by the employer over the financial period were GBP136,000 (2020:
GBP136,000)
in respect of the Main Scheme and GBPnil (2020: GBPnil) in respect of the Executive Scheme.
Contributions to the Executive and Main Schemes are made in accordance with the Schedule of
Contributions. Future contributions are expected to be an annual premium of GBP136,000 in
respect of the Main Scheme and GBPnil contributions payable to the Executive Scheme. These
payments are in line with the certified Schedules of Contributions until they are reviewed
on completion of the triennial valuations of the schemes as at 1 August 2021.
As both schemes are closed to
future accrual there will be no
current service cost in future
years.
The defined benefit schemes typically expose the Company to actuarial
risks such as: investment
risk, interest rate risk and longevity risk.
2021 2020
GBPm GBPm
Net interest expense 0.1 0.1
Curtailments /
Settlements - (0.1)
Past service cost - -
Components of defined
benefit costs
recognised in profit or
loss 0.1 -
The net interest expense has been included within finance costs. The remeasurement of the
net defined benefit liability is included in the statement of comprehensive income.
Amounts recognised in the
Consolidated Statement of
Comprehensive Income are as
follows:
2021 2020
GBPm GBPm
The return on plan
assets (excluding
amounts included in net
interest expense) 3.6 (1.5)
Actuarial gains
arising from
changes in
demographic
assumptions (0.4) -
Actuarial (losses) /
gains arising from
changes in financial
assumptions (3.2) 2.9
Actuarial gains
arising from
experience
adjustments - -
Remeasurement of the net
defined benefit
liability (0.1) 1.4
The amount included in the Consolidated Balance Sheet arising from the Group's
obligations
in respect of its defined benefit retirement benefit schemes is as follows:
2021 2020
GBPm GBPm
Present value of defined
benefit obligations (31.2) (28.4)
Fair value of plan
assets 24.7 22.1
Net liability arising
from defined benefit
obligation (6.5) (6.3)
Deferred tax applied to
net obligation 1.2 1.2
The Group expects to make a contribution of GBP136,000 (2020: GBP136,000)
to the defined benefit
schemes during the next financial period
8. Acquisition of subsidiaries
(a) Keradom S.R.L.
On 17th December 2020, the Group acquired 100% equity of Keradom S.R.L., a specialist manufacturer
of decorative porcelain floor tiles and special pieces. Operating in Sassuolo, Italy, Keradom
is located close to the existing Victoria Italy ceramics operations.
The total consideration is EUR14.1m (GBP13.3m(1) ), with an initial cash consideration of
EUR6.1m (GBP5.5m(1) ) and contingent consideration of up to EUR8m (GBP7.8m(1) ) depending
on future EBITDA performance over a four-year period.
Due to a change in accounting treatment (see Note 10), the contingent consideration is not
being classed as consideration for the purpose of accounting for business combinations and
is therefore not recognised at fair value on acquisition. Instead, this will be accrued over
the four-year period as an acquisition-related performance plan liability, with a corresponding
non-underlying remuneration cost going through the income statement. This accounting treatment
for contingent consideration has resulted in negative goodwill arising from acquisition, driving
a gain on bargain purchase shown as non-underlying in the income statement.
The Group results for the 53 weeks ended 3 April 2021 include contribution from Keradom of
EUR6.0m (GBP5.4m(2) ) of revenue and EUR0.7m (GBP0.6m(2) ) of profit before tax (before amortisation
of acquired intangibles and acquisition costs). If the acquisition had been completed on the
first day of the financial year, Group revenue and profit before tax would have been higher
by EUR16.7m (GBP15.0m(2) ) and EUR2.5m (GBP2.2m(2) ) respectively.
(1) Applying the GBP to EUR exchange rate at the date of acquisition of 1.1031
(2) Applying the average exchange rate over the financial year of 1.1244
(b) Hanover Flooring Limited
On 26 January 2021 the Group acquired the business and assets of Hanover Flooring Limited.
Hanover is a distributor of soft flooring products for both the residential and contract markets.
It sells to wholesalers, retail groups, and independent stores throughout the UK.
The Group results for the 53 weeks ended 3 April 2021 include contribution from Hanover of
GBP0.9m of revenue and GBP0.1m of profit before tax (before amortisation of acquired intangibles
and acquisition costs). If the acquisition had been completed on the first day of the financial
year Group revenue and profit before tax would have been higher by GBP13.2m and GBP2.1m respectively.
The total consideration is GBP25m, with an initial cash consideration of GBP1.0m (subject
to working capital normalisation), deferred consideration of up to GBP11.5m payable over three
to four years, and contingent consideration of up to GBP12.5m depending on future EBITDA performance
over a four-year period.
Due to a change in accounting treatment (see Note 10), the contingent consideration is not
being classed as consideration for the purpose of accounting for business combinations and
is therefore not recognised at fair value on acquisition. Instead, this will be accrued over
the four-year period as an acquisition-related performance plan liability, with a corresponding
non-underlying remuneration cost going through the income statement.
9. Post balance sheet events
Acquisitions of Italian Businesses
On 21 April 2021 the Group completed the purchase of the business and assets of ceramic tile
distributors, Ceramica Colli and Vallelunga. The Group also acquired 100% of the equity of
ceramic tile manufacturer, Ceramiche Santa Maria.
Located near Victoria's existing Italian operations, these successful, growing brands also
bring significant additional spare production capacity. As a result, they will not only provide
an immediate earnings contribution to the Group in their own right, but will enable continued
profitable growth at Victoria's already established Italian business through the utilisation
of that spare production capacity.
The total cash consideration was EUR35m (GBP30.2m(1) )
(1) Applying the GBP to EUR exchange rate at the date of acquisition of 1.1573.
At the time when the financial statements were authorised for issue, the determination of
the fair values of the assets and liabilities acquired had not been finalised, because the
independent valuations had not been concluded. It was also not possible to provide detailed
information about each class of acquired receivables and any contingent liabilities of the
acquired entity.
Acquisition of Edel Group BV
On 4 May 2021 the Group acquired 100% of the equity of Edel Group BV ("Edel"), Netherlands-based
designers, manufacturers, and distributers of artificial grass and carpets.
Established in 1918, Edel primarily supplies artificial grass for domestic and landscaping
purposes across Europe, a market in which Victoria already has a strong presence following
its February 2017 acquisitions of Avalon and GrassInc.
The consideration of EUR49.4m (GBP42.9m(2) ) was paid in cash on completion.
(2) Applying the GBP to EUR exchange rate at the date of acquisition of 1.1500.
At the time when the financial statements were authorised for issue, the determination of
the fair values of the assets and liabilities acquired had not been finalised, because the
independent valuations had not been concluded. It was also not possible to provide detailed
information about each class of acquired receivables and any contingent liabilities of the
acquired entity.
Acquisition of Cali Bamboo Holdings Inc
On 23 June 2021 the Group acquired 100% of the equity of Cali Bamboo Holdings Inc. ("Cali").
Cali is an exceptionally high-growth US-based business that has achieved an organic CAGR
of 17% for the past five years via its online B2C customer acquisition model, data-driven
analytics, a high-touch consultative sales team, and direct delivery capability, alongside
B2B channels.
The consideration of US$76.1m (GBP55.1m(3) ) was paid in cash on completion.
(3) Applying the GBP to USD exchange rate at the date of acquisition of 1.3800
At the time when the financial statements were authorised for issue, the determination of
the fair values of the assets and liabilities acquired had not been finalised, because the
independent valuations had not been concluded. It was also not possible to provide detailed
information about each class of acquired receivables and any contingent liabilities of the
acquired entity.
10. Restatement of acquisition accounting
Impact on the consolidated financial results and position of the Group
The prior period income statement, balance sheet, cash flow statement and related other statements
and notes have been re-stated to reflect a change in accounting treatment of the contingent earn-out
consideration payable on certain historical acquisitions. Earn-outs are deferred elements of
consideration, typically paid in cash over a three to four-year period following acquisition,
that are contingent on the financial performance of the target business meeting certain pre-determined
targets over that period.
This accounting change has no impact on the underlying results, the cash flow or the tax position
of the Group.
Whilst earn-outs form part of the purchase price that was negotiated in the past with each respective
seller, and are contractually payments in exchange for the shares or assets of a business, on
review of developing and developed guidance regarding interpretation of the relevant standards
(including revisiting our assessment of IFRS Interpretations Committee decision "IFRS 3 Business
Combinations-Continuing employment") the Group has remedied the accounting treatment of these
items where leaver provisions exist that result in the earn-out effectively being contingent
on the continued employment of the seller(s) following the acquisition. This is relevant where
the leaver provisions included in the acquisition agreement result in a "good leaver" scenario
being highly unlikely or outside the control of the seller (a good leaver scenario is where the
seller is able to leave employment but still retain all or a proportion of their unpaid earn-out).
Such leaver provisions are included in our acquisitions in order to protect the goodwill being
acquired over the first few years of ownership. However, in accordance with the IFRS interpretation
noted above, in such circumstances the relevant earn-outs are now being treating as non-underlying
remuneration costs, accrued over the earn-out period (i.e. the period over which the effective
employment condition is applicable). Previously they were fully recognised at fair value at the
point of acquisition, thereby forming part of goodwill.
Consequently, the FY20 results, including the March 2019 opening balance sheet, have been restated
in these financial statements to reflect a decrease in goodwill corresponding to the fair value
initially recognised for the relevant earn-outs on these acquisitions (subject to subsequent
exchange rate movements where applicable), being GBP21.8m as at 28 March 2020 (2019: GBP20.0m).
For those historical acquisitions where the relevant earn-outs had been fully paid by 28 March
2020 - being Westex, Abingdon, Whitestone and Avalon - the only other impact of this accounting
restatement in the Group FY20 balance sheet, and all subsequent Group financial accounts, is
a corresponding reduction in retained earnings (subject to subsequent exchange rate movements
where applicable going to the foreign exchange reserve). For those acquisitions where the relevant
earn-outs periods have not ended by 28 March 2020, the restated FY20 balance sheet includes the
removal of all related earn-out liabilities, with fair values totalling GBP22.0m as at 28 March
2020 (2019: GBP20.1m), and the inclusion instead of an 'acquisition-related performance plan
liability' which represents the outstanding balance of the above-mentioned accrued non-underlying
remuneration costs, being GBP20.2m as at 28 March 2020 (2019: GBP17.9m).
Group Balance
Sheet
As at 28 March 2020 As at 30 March 2019
Previous Impact of Previous Impact of
basis restatement Restated basis restatement Restated
GBPm GBPm GBPm GBPm GBPm GBPm
Goodwill 194.4 (21.8) 172.6 223.7 (20.0) 203.7
Other non-current
assets 541.0 541.0 438.0 - 438.0
Total non-current
assets 735.4 (21.8) 713.6 661.7 (20.0) 641.7
Current assets 486.3 - 486.3 322.9 - 322.9
Trade and other
current
payables 242.0 (0.8) 241.2 168.6 (0.2) 168.4
Other current
liabilities 16.7 - 16.7 10.4 - 10.4
Total current
liabilities 258.7 (0.8) 257.9 179.0 (0.2) 178.8
Trade and other
non-current
payables 17.5 (0.9) 16.6 19.5 (2.0) 17.5
Other non-current
liabilities 684.8 - 684.8 466.2 - 466.2
Total non-current
liabilities 702.3 (0.9) 701.4 485.7 (2.0) 483.7
Net assets 260.7 (20.1) 240.6 319.9 (17.8) 302.1
Share capital 6.3 - 6.3 6.3 - 6.3
Share premium 288.7 - 288.7 288.7 - 288.7
Retained earnings (42.8) (19.9) (62.7) 20.6 (18.1) 2.5
Foreign exchange
reserve 5.9 (0.2) 5.7 2.3 0.3 2.6
Other reserves 2.6 - 2.6 2.0 - 2.0
Total equity 260.7 (20.1) 240.6 319.9 (17.8) 302.1
The impact on the FY20 income statement is the removal of a net financial cost representing the
fair value adjustments to the previously recognised earn-out liabilities, including the unwinding
of present value discounting, totalling GBP1.7m, the inclusion of the above mentioned non-underlying
remuneration costs, totalling GBP2.0m, and the inclusion of an adjustment to the non-current
portion of the new 'acquisition-related performance plan liability', totalling GBP1.3m, which
represents the unwinding of present value discounting on that item.
Group Income Statement
52 weeks ended 28 March 2020
Previous Impact of
basis restatement Restated
GBPm GBPm GBPm
Revenue 621.5 - 621.5
Underlying operating profit 74.3 - 74.3
Non-underlying operating items (30.9) (2.0) (32.9)
Other exceptional operating items (49.9) - (49.9)
Operating loss (6.5) (2.0) (8.5)
Interest on loans and notes (21.5) - (21.5)
Other finance costs (4.8) (4.8)
Other non-underlying finance
items (31.2) 0.4 (30.8)
Loss before tax (64.0) (1.6) (65.6)
Taxation (4.2) - (4.2)
Loss after tax from continuing
operations (68.2) (1.6) (69.8)
Loss from discontinued operations (2.0) - (2.0)
Loss for the period (70.2) (1.6) (71.8)
The resultant impact of the restatement on the earnings per share of the Group are summarised
below.
Earnings Per Share
52 weeks ended 28 March 2020
Impact of
change
in
Previous accounting
basis policy Re-stated
Earnings/ loss per share
Basic loss per share (55.97p) (1.25p) (57.22p)
Diluted loss per share (55.97p) (1.25p) (57.22p)
Basic adjusted earnings
per share 28.42p - 28.42p
Diluted adjusted earnings
per share 28.42p - 28.42p
The restatement has no impact on capital expenditure, depreciation or amortisation.
The restatement has an impact on the cash flow statement whereby the GBP2.0m increase in operating
loss at the top of the reconciliation is offset by a GBP2.1m reduction in 'investing activities'
outflow (representing earn-out payments on the old basis) and a GBP0.1m decrease in movements
in 'trade and other payables' (representing the difference between the new accrued 'acquisition-related
performance plan' liability and the amount paid in the year).
11. Basis of preparation
The consolidated financial statements for the Group have been prepared on a going-concern
basis. The Group's business activities, together with the factors likely to affect its future
development, performance and position, are set out in the Chairman and CEO Statement, the
Strategic Report and the Financial Review.
The Board remains satisfied with the group's funding and liquidity position. During the year
ended 3 April 2021 there has been no period where financial covenant tests applied. The Group's
cash position as at the year ended 3 April 2021 was GBP348.8m, compared with GBP176.8m as
at 28 March 2020. The Group expects to continue to generate positive operating cash flows
in the forecast period to Mar-23. During the year the Group refinanced its existing EUR500m
of Senior Secured Notes ("bonds") due in 2024, with EUR500m of bonds maturing in August 2026
as well as raising an additional EUR250m of bonds with a maturity in March 2028. The bonds,
in themselves, carry no maintenance financial covenants. The Group also has access to a GBP75m
multi-currency revolving credit facility ('RCF') maturing in 2024, which was undrawn as at
year end.
The Directors are therefore of the view that the Group is well placed to manage its business
risks. Accordingly, the Directors continue to adopt the going concern basis in preparing the
Annual Report and Accounts.
The results have been extracted from the audited financial statements of the Group for the
53 weeks ended 3 April 2021. The results do not constitute statutory accounts within the meaning
of Section 434 of the Companies Act 2006. Whilst the financial information included in this
announcement has been computed in accordance with the principles of international accounting
standards in conformity with the requirements of the Companies Act 2006, 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. The audited financial statements incorporate an unqualified audit report. The Auditor's
report on these accounts did not draw attention to any matters by way of emphasis and did
not contain statements under S498(2) or (3) Companies Act 2006.
Statutory accounts for the 52 weeks ended 28 March 2020, which incorporated an unqualified
auditor's report, have been filed with the Registrar of Companies. The Auditor's report on
these accounts did not draw attention to any matters by way of emphasis and did not contain
statements under S498(2) or (3) Companies Act 2006. With the exception of the change in accounting
treatment referred to in Note 10, the accounting policies applied are consistent with those
described in the Annual Report & Accounts for the 52 weeks ended 28 March 2020.
The Annual Report & Accounts will be posted to shareholders in due course. Further copies
will be available from the Company's Registered Office: Worcester Road, Kidderminster, Worcestershire,
DY10 1JR or via the website: www.victoriaplc.com.
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END
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