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.