Volution Group plc

interim results presentation for 2021. I'm delighted to be here this morning virtually. Myself, Ronnie George is the chief executive and joined by Andy O'Brien, who is next to me here. The camera hasn't panned across. delighted to be here first of all i hope you're all safe and well at this this really difficult time you know during the pandemic but look to to matters in hand uh volution group healthy air sustainably as it says on the on the first page and we're really delighted as i say to take you through our first half results so on to the following page the format for this morning A quick overview. Andy will take us through the financial review. Standard format, really. I'll come back and talk about the business review and strategy. We'll cover summary and outlook. And at the end, we'd like to do the Q&A. So just a little bit more difficult doing this virtually. We think it's more sensible if we can save the questions up for the end of the presentation. So moving swiftly now to slide three. So one more. Thank you very much. So look, delighted about the first half of the year. We think we're delivering really well against our strategy and it's a strong performance in the first half of the year. I mean, first off, it's obvious that we're managing within a huge sort of challenging environment with COVID-19. But just first and foremost, a word about our hugely dedicated employees. And we've successfully managed these challenges, but from our perspective, our dedicated employees have made a tremendous effort. We've delivered organic growth across all three of our geographic regions. And of course, I don't need to remind you here that we're talking about a pre-COVID impacted period. So this is good organic growth against a pre-COVID period. Delighted about the 20% operating margin target having been achieved six months earlier than anticipated. When Andy and I announced this target back in October 2019, We forecast that we would arrive with an exit rate in our financial year 2021 with a 20% operating margin target. Of course, as you've seen already from the statement, we've delivered the 20% margin throughout the first half of the year. We've delivered our largest acquisition to date with Cleveland Rad. I'll talk about that in a little bit more detail later on. And our pipeline remains exciting. It's a really important integral part of our strategy. And healthy and sustainably, we came up with this strapline at the end of the previous financial year, and we've made very good progress with our refreshed ESG targets. We're resuming dividend. It's at 1.9 pence per share, and you can take you through that in a little bit more detail. And of course, we thought it was important early on to just explain and confirm that we expect our earnings to be ahead of current market expectations. On the following slide, just a quick summary of the first half, but what I'll just talk to the first three boxes, and then I'd like Andy to go through a lot more detail, but 7.5% organic revenue growth at constant currency, 21.1% operating margin clearly meets our 20% operating margin target. And of course, with the with the good organic revenue growth, with the operating margin, and of course, with some benefit now from the Klimarat acquisition, our adjusted EPS growth is 23.2% in the first half of the year. As I say, I'll leave the other boxes for Andy to talk about in a little bit more detail. On the next slide, the sustainability KPIs and our targets and measurements that we announced at the end of the last financial year. So these are long-term targets, targets that we've set ourselves out to 2025. We believe that sustainability is absolutely core integral to what we do. And first off, when it comes to product, Our products help reduce carbon emissions from buildings. We have some really important targets globally in terms of the 2050 Paris Agreement, and we're delighted that we're making good progress with the revenue target. We've set ourselves 70% by 2025. We've made good progress, so 62.1% in the first half of the year, up from 59% last year. And of course, from a sort of responsible consumption and production perspective, we targeted using much more recycled, more sustainable materials in our process. And we've got an ambitious target here of 90% of the plastic that we process in our own factories, which should be from recycled sources, and we're up from 56 last year already to 63.1 in in the first half of the year we've targeted zero reportable accidents we had one disappointing reportable accident last year and i'm disappointed with the one accident that we've had in the first half of the year and certainly we we've been redoubling our efforts and our focus internally and really raising the focus about keeping our people as safe as we possibly can when they're at work So very pleased with the targets that we've set and the progress that we're making. These are long term. We'll continue to talk about these in more detail as we go forwards. And certainly we expect to have more of a showpiece around sustainability and so forth with the full year results. So that's a very quick introduction from me. I'm going to hand over now to Andy O'Brien to take you through the financial review. And then I'll come back and talk about the business segments in a bit more detail.

Thank you very much, Ronnie. Good morning, everybody. Delighted you could join us today. Of course, it's a slight shame it's virtual once again. I think just before we started, Ronnie and I were saying this is now my fourth presentation and roadshow, and three of the four have been virtual, but let's hope that with the direction of travel, the one in six months' time could be in person, but still delighted you're with us nonetheless. Next slide, please, Sam. So this is our usual slide where we just give the layout, the performance of our key metrics over the last five reporting periods. And you saw some of them on the highlights introduction slide that Ronnie shared earlier, but it really delighted with performance across all of the key indicators and metrics. So revenue, 10.9% growth as you see there, a bit of assistance from currency, so 8.6% like for like or 7.5% like for like organic. Dropping, really, really delighted with the margin performance. So we talked about our 20% target and achieving 21.1% in the period. meaning that our adjusted operating profit grew by 27% compared to the comparative period last year. And of course, it goes without saying, but reminding that the comparators that we're looking at from half one 2020 were COVID unaffected. So for us, our period ended 31st of January. So our first half of last year didn't have any of the COVID impacts inside it. Earnings per share of £10.1, so a 23% improvement. And continuing, you know, one of the key themes from last year, which we've continued, in fact, not just last year, but the last sort of six or seven years has been the strong cash generation and cash performance of the business. So turning the profits into cash and that once again, you know, really pleased with the operating cash flow of just under £30 million, so a 33% improvement in that number, allowing us, which we'll talk about later, to do some really interesting acquisitions, but still maintain a very, very good balance sheet position with a leverage of 1.4 times at the 31st of January post the acquisition of Klimarat. Next slide, if I could, please. So just comparing half 1.21% and half 120 in a little bit more detail. So your revenue touched on and Ronnie will go through the breakdown by geographies and by segments later on. So I won't talk any more about that. Our operating margin expansion of 280 basis points, which you can see sort of five lines down the slide there. And just to give it a bit of colour, that is both an improvement at a gross margin level, so 60 basis points at a gross margin level, but then further improvement in our indirect cost base, both from actual cost reductions, such as the restructuring work in the UK, plus, of course, the benefit of leveraging as our revenue has improved. And you'll see in terms of then dropping down from operating margin through to earnings per share, our effective tax rate compared to where it was half one 2020 has increased. You saw this at the full year results when we talked about last year's performance, but it was more material in the second half of last year. And that's continued. So 23.3%. But of course, if you think about it, UK at 19%. But on average, our overseas rates being sort of 25, 26%. So 23 being the product of those two pieces. Cash flow, I'll talk through that in a little bit more detail on a later slide where I just sort of break down what's going on with the constituents of cash flow. And then right at the bottom of the slide there, after the leverage, you see the dividend per share. So, you know, we signalled a few months back that we intended to resume dividend activity. So we're declaring a dividend of 1.9 pence for this half last year. We had obviously declared a dividend at this juncture, but then that was subsequently cancelled. cancelled so the 1.71 last year which which ended up not being paid but 1.9 for this half for example compares to 1.6 in the equivalent period of fy 19. um next slide if you would please sam So just the usual walk here between our adjusted results and our reported results and essentially activity here driven by the acquisitions activities we go on in the period. So we have 400,000 pounds nearly in the corresponding period last year of essentially professional fees relating to the acquisition of Clean Morad. 600,000 then for the, so when we've acquired KlimaAd, we had to uplift the fair value of the finished goods inventory and as that inventory gets sold through and consumed, there's an adjustment to write that back down, so 600,000 there. And then the 2.4 million, that's our assessment of the likely contingent consideration for the vent area acquisition in Australia. So that measurement period will end on 31st of July, 2021. So obviously we're looking at the first six months of that year. And this entry here is really testament to, I'm sure we'll talk about it later in the Australasia review, testament to a really good first half performance, both on revenue and on a margin and operating profit in that Ventair business, which has caused us to reassess the likely outcome of that contingent consideration. Next slide, if you would, please, Sam. So our 20% operating margin target, which we set just at the start in the early part of FY20, so as Ronnie said, we gave ourselves end of financial year 2021 to reach this 20% operating margin target and really delighted to have got to the target, to have gone slightly ahead of the target and to have done it six months early. So this just breaks down that margin between the group performance and then the performance of the three segments. And I think what's particularly pleasing to us is all three geographies showing really nice margin expansion. and all three geographies nicely at and ahead of our target. So this isn't a product of, you know, one part of the business substantially outperforming the others. Yes, you know, the continent of Europe stands out as particularly strong at almost 26% margin there, but, you know, really big and good uplift and improvement in Australasia, which is a product both of, you know, the work that we've been doing on upskilling the product portfolio, selling better products, and that's a result resulting in 260 basis points improvement at a gross margin level. And then as the volumes are very materially increasing in both businesses there, we're benefiting again from leverage at the operating margin level. So 7.1 percentage points improvement in the margins of Australasia for this half compared to half on 2020. But also then the UK, so the 260 basis points there, very much underpinned by the restructuring work and streamlining work that we that we did in particularly the second half of financial year 2020 so really really pleased with the margin trajectory and performance across all parts of the business um next slide please sam So this slide, just walking through the net debt movements and the cash flow performance in the period. So as I said in my first slide, really delighted with the continuing good performance on cash conversion, cash generation, and that's then giving us the capability to do what we've been doing on the acquisition side of things. So just calling out some of the key boxes on this chart here working capital so if you remember last year we talked at the full year results of having achieved a reduction of six million pound in working capital uh and i think we said at the time that we do expect a couple of million of that to to to revert back as activity increases in the event only 600 000 has come back um you won't hear many cfo saying this very often but probably we wouldn't mind it being a tiny bit bigger because i guess our biggest driver at the moment is making sure that we can bring our inventory in, we can keep our manufacturing at high levels to sustain the demand. So pleased with really good continuing working capital discipline there. Capital expenditure of two and a half million pounds. We talk about four and a half to five million pounds as being a normal number for us for a full year. That two and a half million includes about 700,000 pounds that we've invested in a really nice new facility, which you'll see one picture of later when we get to European side in our Swedish. business so we moved from our old facility to our new facility in Sweden around Christmas time that facility is operating really nicely and as I say about 700,000 of that 2.5 relates to the investment there and then the last block of course you see there the 37 million pound investment being the acquisition of Klimorad in the period so all told results in a leverage at the end of the period of 1.4 and still very, very substantial available liquidity given A, the cash generation and B, the new facility that we announced back at the start of December. So that's really it in terms of the financial highlights and key points. Obviously, take your questions once we've completed, but at that stage, I'll hand back to Ronnie to talk us through the geographical segments.

Great. Thanks very much, Andy. And as Andy and I have said, we're really very proud of the achievement that we made in the first half of the year. And it's without doubt our sort of best performing half since the company listed back in 2014. So obviously a very, very strong financial performance. What I'll look to do now over the next few slides is just talk a little bit more about what's happening in each of our individual markets. If we just move along through the slides here, this operating segment slide summarizes quite nicely. And you can see here, 3% constant currency organic growth in the UK, 12% in Europe, continental Europe and, of course, 24%, a very, very strong performance in Australasia. And the next slide covers off a really important point for us, which is geographic market diversification. And we talked about this in the last financial year when we saw the UK market in particular having a sort of an exacerbated impact from COVID. And I think it's fair to say at the moment that the UK is still probably the more challenging market of the three regions that we trade in. So we're delighted about the diversification of the group. half of our revenue is in the UK, the other half is outside of the UK and of course that's been developing very nicely through M&A and we expect that to continue. The next slide takes us into the individual geographic regions. So UK, 2.7% revenue growth. A bit of a mixed picture when we look at the revenue. I mean, our refurbishment demand in the UK is up significantly, 9.3% revenue growth. In actual fact, it's private refurbishment, where we're a market leader with a very significant market share, where we've grown 14%. And public housing RMI, there was some small organic growth, but it's still... not surprisingly quite challenging. If we think about the sort of stock that the local authorities and the housing associations are managing, a lot of those refurbishment projects, the more structural projects have been postponed and we expect that all to come back later. And it's really important to remember here that you can't postpone in social housing forever. There are 5 million homes in the UK that have socially managed. And we've talked about this for some time, air quality as an issue is only raising in terms of awareness. 1.3% organic growth wasn't so strong as we would like, but we think the future periods look interesting there. Residential new build declined 3.5%. We see at the moment that the house builders themselves are very busy. we can see that selling transactions are very strong and my personal belief here is that what's actually happening is we're selling out of stock so house builders stocks will be diminishing and i need to remind you here that we have these long-term drivers in residential new build which is this path to net zero carbon there's a review of building regulations at the moment we see building regulations not just in the uk but all over our markets continuing to support us so we we come back to the medium to long-term trends in residential new build which are hugely favorable and indeed the same in commercial i think residential new building commercial in the uk has struggled in terms of getting back to normal but in both areas we've seen our order books grow and we see that the the medium-term dynamics are still very positive In export, 7% organic growth. We've got some significant markets. The Irish market is particularly important for us as a significant share of our exports from the UK. And recent changes in Irish building regulations have greatly favoured mechanical ventilation with or without heat recovery. So again, same as the UK residential new builds, a really good underpinning regulatory drivers. And we see in OEM... So OEM, the sales of our EC3, our electrically commutated DC motor, so very energy efficient motor that goes inside ventilation products, 5.7% organic growth in the first half of the year. And of course, just not to go into too much detail, Andy confirmed on the margins, but 260 basis points of margin improvement in the UK, 21.5% now. I'm really very pleased about that improvement. Next slide is continental Europe. What you'll see as these slides go through is that we're actually building the momentum in our organic growth, growth of 12.3% on a constant currency basis in the first half of the year, operating margins up to 25.7%. And I know one of the questions that we've had for some time, and I think probably going back When our margins were declining slightly is that worry about sustainability of margins and the improvement that we've made in continental Europe is broad basis across all of the different geographies, both in the Nordics and indeed in Central Europe. 25.7% is a really stellar improvement. And I've always said this, that the European ventilation market is for us actually probably more attractive in terms of margin potential than the UK. I think what it starts to demonstrate is the sort of latent potential of the UK market over time as regulations and indeed the refurbishment agenda starts to gain traction. But the organic growth was 8.9% of constant currency. A couple of highlights I would say in the first half of the year. New facility in Bekra in Sweden. We moved in on a sort of considered slow basis. We were certainly learning from our previous experiences here and wanted to make a big success of this. There's only a small photo there on the bottom right of the slide, but we're really proud of this new facility. It's a New building that we've moved into. It's perfectly well laid out. It's much more energy efficient than our previous location. And importantly, it's got the headroom for us to continue to grow. Very well invested in this facility. That picture that you see in the bottom right is a small robot that's collecting injection moulded parts that come off our injection moulding machine. So very well placed to underpin our growth strategy. And we've made a couple of acquisitions in the first half of the year. Klima Rad in the Netherlands, and I'll come back to that specifically in a moment, and Klima Fabriken in Sweden. And again, back to this investment that we've made, we have the ability to easily incorporate production from Klima Fabriken into our existing facilities. And that's already making good progress. We actually believe we'll have finished that integration by the end of April, such as the progress that we're making already. Next slide is Australasia. It's a long way away, and I know that was the comment that people made when we made these acquisitions in New Zealand, then again more recently in Australia. We had absolute conviction about these markets. We traded with them as a supplier for many years, and I'm delighted now that our conviction has, if you like, shown through in terms of the performance. 23.9% organic growth is a seller growth that we've delivered, and it's both in Australia and New Zealand. In New Zealand, we talked about the Healthy Homes Act, Regulations, again, underpinning the demand. We're seeing ongoing strong demand. We're introducing new products. We have a very significant market share. And also in Australia, we're introducing new products and we're growing our proposition. So margins now at 22%, a huge improvement over the prior year. And of course, operating leverage comes into play here. We're now creating this certain critical mass of and we're starting to see the sort of huge drop-throughs as we grow. So, Australasia is a very, very exciting area for us, operating profit almost doubling in the first half of the year and becomes really quite meaningful for the group. So, that's the sort of revenue slide. If we move on to the next slide and KlimaRad, and in the same, we talked about our M&A pipeline being exciting. And it's quite incredible how things have changed. I remember when we had the first sort of lockdown end of March last year, and Andy and I were sort of doubling down on doing all the sensible things to protect the business in the short term. And we said, no M&A, let's make sure that we conserve our cash and let's just take stock of where we are. But it's clear from our revenue performance as we came into this new financial year that We're very much onto the growth agenda again and M&A has been absolutely in the crosshairs. A strong cash generation continues to support M&A. It's a really integral part of our strategy and Klima Rad is a wonderful acquisition to make. It's a market-leading proposition in the Netherlands. And we've acquired 75% of the business and 25% in agreement. It's contractual and we're obliged and delighted to be buying the other 25% at the end of 2024. And the integration has gone well. The first couple of months trading through January and February have been absolutely in line with our expectations. And we are now starting to think more strategically. more considered around how we roll these products out into other areas of the group, in particular into our German market, where we think there's some really good potential. So I'm delighted about this. The production facility in Bosnia is also strategically an exciting opportunity for the group, and we think we'll be able to leverage that in a meaningful way in the future. And just really to finish on that sort of M&A pipeline, we've said it's exciting. Andy's already talked to you about the leverage at the half year. And of course, as we start to move forwards and we've given guidance about what we think for the second half of the year, clearly with our EBITDA sort of leverage calculation is improving from two dimensions. We continue to generate cash. and we continue to improve our EBITDA so we think we've got really good headroom to carry on with M&A and we're excited as we say about the pipeline the next slide talks about regulatory drivers and indoor air quality healthy air sustainably that's our mantra that's what we do I don't propose to go through all of this in a lot of detail, but there are some really obvious trends that have come through. I was looking at a Public Health England update on the 4th of March and the guidance around ventilation, it couldn't be more clear. There's never been more awareness about the importance of clean air than there is today and we're sort of pleased in a way that this is starting to resonate, not for the reasons of the pandemic, but we've always said that indoor air quality is super important. The regulations, of course, are about driving indoor air quality, but delivering it in an energy efficient way. In every one of our markets, we see directionally an improvement in regulations. And I've talked about throughout, I remember back in Reading in December 2019, saying this is a 10 to 15 year, gently underpinning trend for us. And that's not going away. It's only going to increase over time. So look, we've tried to whiz through this quite quickly. We think that the statement speaks for itself. If we move to page 21 now and look at the summary and the outlook, and I'll really be very quick on summarising the year that we've just had. I mean, it's obvious how strong the performance has been. And we're delighted that having not been able to pay dividend last year and having a very sort of clean FY21 year, and that we're resuming the dividends and coming forward with the 1.9 pence per share that Andy talked about earlier. But moving to Outlook, The first half of the year has been a really strong performance, but there has been some supply chain inefficiency. And we think this is likely to continue. We bring in a lot of small components, proprietary components that we assemble. They're coming from Southeast Asia. And there's been some well-publicized issues there. And we think we're the other side of it. But nevertheless, we've got a very, very close sort of watching brief on that. And we've got a strong order book across all areas, and we think that supports the momentum. And there is no doubt more inflationary pressure than we've seen. And we feel that we're on the front foot now with price increase initiatives underway. So look, as we go forward, there's still a huge degree of uncertainty. Let's hope that we can be optimistic, certainly in the UK, in terms of vaccine rollout and releasing from these lockdowns. But we're still in this uncertain period. But really underpinned by that margin expansion that we've delivered in the first half of the year, the board does expect earnings for the full year to be ahead of current market expectations. And that's the sort of formal proceedings of our presentation here this morning. We'd be delighted now to open up to Q&A. So over to the floor, as it were. Thank you very much.

So Clyde Lewis has his hand up. Let's go to Clyde, please.

I'm lucky I've got it in first. A couple of ones. One on pricing, Ronnie. It'd be really useful to, again, get an idea of how your prices are going to move this year, and if you can give us a bit of colour around the different geographies, that would be helpful. The second one was on the UK, and obviously you flagged the public sector still being sort of slow to get going. Are you seeing any changes there in terms of inquiry levels there? for new work coming through. And the last one was on Australasia. And I'm thinking really around the regulation change in New Zealand. Does the revenue sort of drop back at some point because the activities happened and a new normal level comes through and it's five or 10% lower? I'm trying to sort of split out obviously your market share gains in ours versus sort of underlying in New Zealand.

Well, look, three really good questions there, Clyde. So I'll try and remember back to the first. So price, look, I think to a varying degree, we've been on the front foot with price. So some deliveries already underway and put in place. I would say in the UK market, we've been a little bit later. And so there's a whole raft of publicly announced trade price increases that go live on the 1st of April. And so headline trade increases are sort of in the 3% to 4%, in some cases a little bit higher. We believe with our strong trade brands that we've got pricing power. And so we're confident that we'll be able to deliver really well in terms of those price increases. to offset and mitigate some of the inflation. Of course, if you think about pollution versus its peer group, we believe that we're in a stronger position to deal with those inflationary aspects than some of our peers, but our peers are certainly facing that inflation as well. In some respects, safety in numbers. If this was a specific pollution inflationary impact that others weren't seeing, then I think that would make it more difficult. confident on price and certainly some of our proprietary solutions we believe are quite unique and therefore the pricing power is very strong. And if you take the second issue there that was social housing, thank you. What you've got in social housing is two types of projects. You've got the daily maintenance and voids, things need replacing, that's carrying on. You can't have a property with ventilation that stops and then, particularly at this time of the year, all sorts of problems around humidity and mould growth. So that daily churn of work, I think, is happening. But if you were looking at a block somewhere and you were doing some structural refurbishment, That almost certainly has been stalled in part because I think what people are saying is, look, we can come back to that later. But we already said prior to this pandemic, let's not forget, we've had four or five years of austerity. And we see that day to day, and we get some sort of complaints directly from tenants about their ventilation, not because it's out at fault, but because they're saying, can somebody come and help fix it? We have to refer it back through the housing authority or the ALMO that's responsible for the particular stock. But we've got a great proposition. We were making good traction with revenue beforehand and we're excited about what happens next. And there's all sorts of other regulatory changes. There was the Habitable Homes Act a few years ago. So it is quite a litigious area of the market. And I think there'll be tenant pressure as well. And let's not forget, a lot of people are spending a lot of time at home at the moment. My sense is the demand is sort of pent up and it comes back. So we're not concerned about the medium term dynamics. Last question on Australia, New Zealand. Look, it's a really good question. We've enjoyed a strong ride with Healthy Homes Act. And of course, one of the things to bear in mind here is the installed base of our products has increased. Rupert Clayton- And, and so those products, much as we think about product quality being very strong and reliability very green very good these products don't last. Rupert Clayton- Forever they do need replacing we've been managing to upsell really well and we still think that healthy healthy home tech actually comes into play in the summer of 2021 our summer so June, July and and. The idea is that it's when you renew your rental agreement that you have to be compliant. So if you've got a rental agreement that you start in May of this year and it goes for 12 or 18 months, you're actually missing the regs until the next time. So we think the demand continues for a bit longer. But outside of that, it's raised the awareness of indoor air quality in New Zealand, and that's really helpful. Australia is structural share gains. We're gaining share. It's clear that Australia and New Zealand, from a sort of lockdown perspective, have handled the pandemic much better than parts of Europe and indeed the UK. And we've got some really exciting new developments.

customer acquisition opportunities account gains that we think will underpin our sort of revenue growth in that region particularly in australia as we go forwards okay got it thanks uh it's the zoom call at lush m uh is going to ask a question hi morning morning guys i've got a few if that's okay um the first one really is obviously you talk about sort of regulation in the new build side in particular but Can we get an idea of perhaps the upsell, you know, from a gross profit perspective as you sort of move up that value chain and sort of more to heat recovery, for example? The second question was obviously, you know, great margin performance, but clearly, you know, Europe really stands out sort of 26%. You sort of touched on it in the call, but is there any reason structurally why the UK and Australia couldn't get there in the midterm? And then the last one was just on Project Liberty. If we can just get an update on that and how that's perhaps helped your RMI sales as well. That'd be great. Thank you.

I'll do the first and the third, and Andy can probably do the margin. And I forgot what the first question was. Sorry. Okay. And the margin. My apologies. I was so intently listening to two and three. One thing to bear in mind in terms of regulation, so if we look at the UK and the move from intermittent extract fads into heat recovery, is that in actual fact the gross margin that we deliver across the different categories is very similar. So if we talk about our 48% plus gross margin, it's not as if that moving from intermittent extract ventilation i'll explain a bit more about that in a moment to heat recovery grows the growth margin but it definitely grows the value per unit and i think what we're alluding to lush is that building regulations in the uk still permit old style the application of intermittent extract fan in a new build house it's it's diminished according to all regs, could fit a 20-pound fan, 25-pound fan, fit three or four or five of them in a property with the ducting and the accessories, and we get 50% gross margin, and we're very happy about that. But as you move towards MEV or DMEV, MEV and heat recovery, the value per unit increases, if not necessarily the gross margin percent, but of course the value helps us grow more quickly. We talked about our residential new build typically growing between five and 10% every year. It's a little bit confusing at the moment because we've had clearly the sort of construction slow down second half of last year. and but we believe that the change in the building regulations that's happening now will prohibit the use it will be impossible to develop a new house using intermittent extractor fans so you move away from 100 to 200 pounds of ventilation at the entry level to three to four hundred and up to in some cases a thousand pounds plus so many other regulations as well that are helping us i mean noise interest is an issue in apartments and that's why you typically only build with mev and heat recovery um so so this is continuing but of course when we're not there yet we think of only maybe 40 of all uk homes using a heat recovery device in construction and if you went to finland for example where we have a nice market position in terms of ventilation you cannot build without heat recovery in the new sector And so as a little bit of an indicator as to where markets can get to, and I'm not saying the next couple of years, but over the next five to 10 years, yes, you've got to move to higher value propositions. I'll let Andy take the margin question, then I'll come back on liberty.

Yes, as you rightly point out, the European margin does stand out particularly strongly and is ahead of the other two statements. But I guess probably worth pointing out, 12 months ago, if you looked at the gap between Europe, which was still the leader at that time, and Australasia, which was the laggard of the three at that time, then the gap was over 7 percentage points. margin now it's you know under four um and that that coalescing and that shrink of the gap isn't because um europe has fallen back it's because the others have gone a bit faster so you know yes there's still a gap but i think it is it is it is closing i mean i think you know europe is very much the most sophisticated customer base and the best opportunity at the moment for our premium and top top products, particularly on the heat recovery space. So I think that does, you know, the others are in catch-up mode and I think it will take a while for that catch-up to happen. Probably worth pointing out, you know, UK, small impact where the UK is sort of supporting some of the cost base, which then actually benefits all of the groups. If we look at our technical capability, some of our procurement support, a piece of that cost essentially sits in the UK because most of the resources sit in the UK, but to an extent supports across the group. So perhaps the true like-for-like wouldn't be quite such a gap between those two. But in answer to your question, we want to move everybody up. I think the product portfolio is the key way to do that. It's not going to happen overnight, but as we've shown compared to last half, it is already closing that differential.

Absolutely. I mean, look, it's not about stating a new target today. We've said over the cycle, it's 20% operating margin. But from an ambition perspective, Andy and I, we're still very ambitious and we still want to drive the margins as high as we possibly can. Liberty. So interesting, Liberty is a project that we talked about a couple of years ago. In actual fact, it ran in parallel with the Reading facility upgrade. And this was about simplifying our product platform to give us more variations on the final product, but making production less complex. And that's been finished now for about... about nine months so we've got the product platform in place it makes it easier for us to introduce new propositions into different markets so for example in Australia and I've alluded to some of the rollout with new customers it makes it nice and easy to take the components that we have around our capability and assemble them into something compelling for an individual market so it's about speed reducing complexity and helping us to scale up our manufacturing output. So really delighted about Liberty. It was an investment of about a couple of million pounds of product tooling, but over a couple of years, a refresh of our RMI product portfolio. And I say this on a very considered basis. I do genuinely believe that pollution across its different markets has you know, overwhelmingly the best RMI product portfolio in this space bar none. And that's a claim I think we can make with complete confidence. Okay.

Our next question is from Charlie Campbell.

Hi, Charlie. Morning, all. Just a few questions from me. I suppose just sort of going on from that margin question. sort of record margin I think for the group was 22 and a half roughly. Is there any reason structurally why you couldn't get back to that level? Is there anything about the composition of the group sort of between now and then that makes that hard or is that sort of something we could think about as a potential kind of possibility for margins? Another question, you mentioned in the statement about using some components for heat pumps, which I found very interesting given the way that things are moving in that direction. Can that be used widely across heat pumps? That could be interesting. And then lastly on the cash flow, obviously record levels of cash last year, very strong again in the half. Anything unusual in the first half that unwinds second half? just in terms of thinking about cash flows this year and maybe next as well. Thank you.

At a margin, if you look back at 2014, 15, and indeed prior to this thing, I think the complexion of the group is considerably different. I think when we first came to market, it was sort of an 80% UK revenue story. And the fact that it's 50-50 is not because the UK has necessarily gone backwards. It's just that... outside of the UK has gone forwards at a faster rate, and clearly that's M&A driven. I come back to what I said earlier. Ambition-wise, why not? But we're not setting any wild new targets today. It's 22% next. We're delighted about where we are. One of the criticisms I've had over time is, are your margins sustainable, Ronnie? This is a sector that surely the barriers to entry aren't that high. I disagree. And are your margins sustainable? Yes, they are. So I think the important thing for us to do now is maintain our margins. And if we can go higher, then that's that's upside. But there's a little bit more commercial around the group, which has probably got a little bit lower margin. But of course, we'd like to think as we build up scale over time that we start to just sort of offset that sort of margins. Ambition is as high as we can do, but no new targets now. We're just really pleased about what we've achieved to date. When it comes to heat pumps, heat pumps are really interesting. It's something that's been talked about a lot in different markets. We see heat pump technology as hugely complementary to what we do. A heat pump doesn't work in a leaky house. You wouldn't install a heat pump in a leaky house. There's just no point. And we're seeing some revenue drivers in Germany and the Nordics at the moment. And indeed, I didn't go into the detail of it in Ireland, but as Ireland's starting to install heat pumps into dwellings, they're starting to use some of our filtered air inlet grills, which we perfect in the Nordics. We've been selling quite a lot of them into Ireland at the moment. We've got some strong demand. In Germany, we're seeing more demand for our decentralized heat recovery off the back of heat pumps. In the Nordics, we do very well because we actually provide filtered input air ventilation into properties that use heat pumps. So the heat pump dynamic, the move from fossil fuel powered, if you like, heating into heat pumps is really exciting for us. Specifically in the Nordics, in Finland, we provide some cooling and we do that with some compressor technology inside our products. And it is an area that we keep an eye on And it's hugely complimentary. So long may that continue and it will. In terms of the cash. Yeah, I mean, just quickly, Charlie.

So there's nothing unusual in terms of exception, if you like, in the first half of the year, except perhaps to think about the dividends. So obviously normally in a half one, we would be paying in cash the final dividend from the year before, which clearly was not, there wasn't one in FY20, hence zero in H1. But we will be obviously outflowing that interim dividend in half two um you know tax will be a little bit higher in terms of cash outflow in half two and half one because obviously half one we were still sort of paying against last year's earnings if you like um that said working capital i think i sort of touched and i sort of touched on earlier as well um you know we were expect i think we you know when we when we gave the full year back in october we were saying that we expected as activity resumed, you know, a couple of million of working capital outflow. So the six that we benefited last year, we felt that as activity resumed, a couple of million of that would naturally sort of go back out in the event. In the first half, it was only 600,000, but that was probably because of, you know, inventory issues. inventory constraints rather than deliberate management. So maybe that inventory just increases a little bit as supply chains become more normalized. Perhaps they're slightly counteracting that capex. We would expect it to be a little bit lower in half two because we're not going to repeat the Swedish facility investment of half one. But look, nothing earth shattering, just those sort of fairly normal constituents.

We have a question from Christian now. Thank you.

Thank you very much. Good morning, guys. Three questions from me, please. First of all, you mentioned you've done your largest deal to date quite recently. I was just wondering what sort of the view was potentially of looking for more transformational deals, you know, given that deal was not the largest in terms of your market cap, for example. And also, I suppose, you've seen the multiple move up and potentially could leverage equity for something transformational. So that's the first one. The second one, just with Australia, can you remind us of market structure over there, where you sit currently? And I suppose for some longer term markets, opportunity for Volusion there. And then just the final one on margins, I know you've been asked a lot on this, but I suppose if you look back from the IPO and just ignoring Redding and the impact there, and as you've alluded to, there was a slight fall of the margins just over time. Just looking back, what was the driver of that and how comfortable are you that that won't happen again from this great base that you've got back to?

Shall I take the last one and then you go back to the first two? So the margins, I suppose the progression over the previous years, leaving Reading aside, a meaningful part of it was was acquisitions coming in and typically coming in at maybe 8, 10 percentage points lower margin than group average and therefore a bit of dilution. So that's a natural piece. So would we expect in the future some of our acquisitions to come in and be dilutive? Yes. So we certainly wouldn't rule out an acquisition of a nice 8, 10, 12% margin business that we can see absolute potential to you know to drive meaningful improvements quickly and so that that'll definitely be there but but of course i guess you know absent it being to your transformational word assuming it's the normal sort of size that we acquire as the group gets bigger that dilutive effect gets gets a little bit smaller um i guess one thing that hasn't been done on the way through up until half two of last year was was all the work that we've done around you know where we've done more than one acquisition in single geographies there was then that sort of follow-on after the event to really try and sort of streamline and and make efficient the cost base and the indirect cost that supports all those brands so i guess we've been doing it along the way in the nordics and that's part of the reason why the the nordic and european margins were so good we hadn't been doing it to the same extent in the UK, where we'd been bolting on those additional acquisitions in the UK, but keeping separate cost bases supporting them. And actually, the work we did in last year, particularly in the UK, a lot of it was around taking the opportunity to leverage single back office capabilities for multiple businesses. So I think that, having done that bit of structuring, I think that protects against that bit. you know the acquisition dilution is say in a way at times it's deliberate as long as we're making good well-informed acquisitions and yeah so I can't see nothing else that would imply that it'll sort of reverse back.

Just to add on the sort of misstep, as I saw somebody quote in the press at Reading, but what also said, you know, management's somewhere behind us. I think the tests that we've had through COVID just reassures Andy and I that Reading is in really great shape. You know, the fact of it is that... most of the back office that support the production facility and indeed across the wider group are working remotely. And I think that if our systems and our structure and our processes were threadbare, it would have been exposed through this, you know, with the supply chains and everything else. And it's not easy. And I said at the beginning, you know, dedicated employees have really pulled up trees to get us through this difficult period. But it's, you know, the RMI growth, we delivered 14%. RMI growth in the first half of the year. Let's not forget the growth in New Zealand is, of course, a lot of it powered by products that are manufactured in Reading. Those of you that came along and saw the Reading tour in December 19, We're shipping a container a week at the moment out of the UK into New Zealand and they're 40 foot and they are underpinning the strong demand. So Reading is one of those that's a distant memory for us now but delighted, absolutely delighted that we did it. It's without doubt the most comprehensive facility of its type in Western Europe. There's not another one like it and it supports our growth. M&A, a really interesting one and of course there's been you know some interesting you know larger equity raises for larger deals more recently and i've had a few questions but look our strategy is fragmented european ventilation market in particular we know it intimately pollution is already one of the largest ventilation players in the space so there aren't a lot of big deals out there for us to go and do um but we we're very happy to you keep going with our strong cash generation by things. I mean, Andy and I would be delighted to put up the return on acquisition investment slide at the end of this year with the recovery and the sort of returns that we're making. And look, we think if we can carry on doing what we've been doing and maybe a few bigger deals with the larger cash generation. And yes, the equity potential is there, but it has to be ultra compelling and be a no brainer for us because we sort of cherish our reputation of financing all of our deals from our own cash generation to date. But that isn't ruling it out. But I'm certainly not saying as a result of where we are now that we'd make an extra effort. And the other question about Australia. If you and I actually touched on things briefly this morning, I know we had a quick call, but so I'm repeating some of what I said. But if you thought about the Australian market as a country of size in Europe, that's a bit of a stupid read across, but it would be one of the fifth or sixth largest countries in Europe. And what I've always said is we've got a market leading proposition, but with probably a fourth or fifth place share. So we're eating up share at the moment, which gives us a huge runway of opportunity. And it's back to Clyde's question earlier on. I still feel confident that we can continue to grow really well organically. because there's 30 million people, and we're actually still quite small in the market, but growing nicely. So that's hugely exciting for us. New Zealand's slightly different, smaller country with a big share, and we're on the upselling path now. How do we extract more value, no pun intended, but from the units that we sell, moving up the curve?

We have a final question from Graham Kyle.

Hi, Graham. Morning, Graham.

You're on mute. It lasted an hour before someone had to say you're on mute.

We've all done it. Thanks for that. Two questions for me. First one, you mentioned price increases to offset raw material price increases. Is this on a pound-for-pound basis? Are you going to calculate these so the cost margin is not diluted? And the second one, again, taking it by terminate, I'm afraid. So you mentioned the European kind of higher tech business is the focus. But just wondering, is the US market, is that now interesting, now Biden's in the White House?

I'll do that one, and then I'll let Andy talk about sort of the price of what we're doing. Look, there's a very large... listed group that owns a huge ventilation player in North America, and that's Nortec. And it's a very, very significant organization. I'm not alluding to us doing anything there. That's not the case. But we said that the runway of opportunity in our existing markets for M&A is most sensible. I think heat recovery ventilation in North America and indeed in Canada is interesting. But look, for us, I think scale is really important. And if you look at the synergies that we're able to deliver through M&A, just the R&D pipeline, the procurement, all of the things that we bring along, it's not really an area of focus. There's just so much fertile ground for us in UK, continental Europe in particular, particularly continental Europe.

Yeah, and on the other one, Graham, so undoubtedly we are seeing and have seen this cost pressure and whether it's from super materials and plastics, commodity inputs, whether it's freight, we'd like to think that the freight, whilst it might not get back to normal in in the next few weeks has sort of come off from the absolute peak and should return to some more normal level as we move forward. But definitely a piece of that cost pressure will stay. I mean, obviously our procurement efforts and our scale One route we're trying to do is to try to combat and offset and fight as much of those increases as we can. And I think our procurement capability does give us some potential to do that. We also clearly look at things like currency. So when we're buying from China and the Far East, it's denominated in US dollars. So, you know, to the extent that we can manage that quite nicely, you know, this sort of pound dollar movements over the last few months will give us a little bit of a natural compensation and offset against some of those input cost increases from China. But yes, we absolutely do need to get price and we're targeting our teams quite hard on price. If we deliver it well, it should be able to offset what's there and potentially add a little bit besides. We want to do it carefully, considerably and clearly at a level that we're not going to give away and lose volume by irritating customers too much. But we believe if we manage it well, plus manage the supply chain and procurement aspects well, we can see our way and manage our way through it and hopefully have a bit of accretion into the bargain.

Okay. Look, I'm mindful that it's just coming up to the hour now. So some really great questions there. Thank you for your attendance this morning. And I know Andy and I, and no doubt the rest of you, hope that we might get to see you in person at our full year results in October. So let's keep our fingers crossed on that one. And thanks again. That's it from us. Thank you very much. Thank you.