Volution Group plc

Good morning and welcome to our analyst briefing. We're delighted and delighted so many of you have made an effort to come out and see us today. So what we'd like to do is together between us we'll cover off our half year results. I'll go through an overview which will be a little bit less financial. I'll hand over to Andy to talk about the financial review. Then we'll come back on the business review and talk about the three geographic areas and then at the end summary outlook and then I think very important around Q&A. But look, we've had a really strong first half performance. We're delighted about our performance in the first half of the year. Organic growth, 6.3% at constant currency. That's through volume and price. So both areas participated well. Our operating margin has been maintained at our sort of long term, above our long term target of being above 20%, so at 21.1%. What's really important here, Volution is a company that provides healthy air sustainably, and these metrics that we're talking about when we talk about sustainability are really important. So our recycled plastics use increased by 18% in the half. So we are now producing 76% of our internal plastic parts from a recycled content. We have a long-term target of 90%. And another statistic that we reported last year is around heat recovery ventilation. I know it's an interesting one. I know people are really keen to see what's happening there. But that increased again in the half to 32.2% of our group's revenue. So look, overall, strong cash generation, robust balance sheet. and significant headroom for acquisitions. It's important. We talked about a well-developed M&A pipeline, and that's essential. So look, strong performance underpinned by structural growth drivers, and we'll work a little bit more on what those structural growth drivers are as we go along. We feel that we're delivering on our strategy. Our strategy hasn't materially changed in the nine years that we've been listed coming up this year. I think what we've done is we've sort of coalesced and refined. But our strategy is hopefully relatively straightforward and easy to understand. But we want to grow organically. We've got a long-term target to grow organically between 3% and 5%. And we delivered 6.3% constant currency organic growth in the first half of the year. We are a company, we're an organisation that throws off cash really well, our operating cash conversion is strong and we have a clear expectation as to what to do with that cash and that's around acquisitions, no material acquisitions in the half but certainly we'd like to talk a little bit more about our well-developed pipeline as we go along and that for us is a really important ingredient in delivering our long-term EPS growth and I think since we've listed it's been around about 12 to 13 percent compounding so clearly this is an important component and then operational excellence and there's a nice slide that Andy's got later on in terms of the margins but what you can see is a consistent delivery now not just one half but consistently half on half maintaining our margins And that's made up of a whole raft of different elements, not least of which are issues such as utilising more recycled plastics. Utilising recycled plastics and having that circular economy type approach is really important to us, but we're also motivated by the fact that if we do it well, it actually gives us a cost advantage. And so from an ESG perspective, it's a great one to drive. Our customers are excited about the fact that we have such a large content of recycled plastics, but it also helps us with our costs. And revenue from low carbon if you like, energy saving products increased again, 69.4%, 65% in the first half of last year. And we'll go through, when we go through the individual areas, a little bit about what's driving that. But it shouldn't be a surprise. We're a company that helps our customers to decarbonize their buildings. And in decarbonizing buildings, you need more energy efficient products. And this is a really good metric. And in actual fact, our target was to reach 70% of our revenue by the end of 2025. So I think there's probably some rethinking to do around our target beyond this year and next. So as I said, we're an organization that helps with the transition to low carbon. If we think about net zero carbon 2050, seems a long way away. But if we think about in the different markets, whether it be the UK or the other markets that we participate, there's a significant stock that needs to be dealt with. And so what we see here is from a sort of decarbonisation perspective, 40% of the energy use or 36% of carbon emissions are from buildings such as the one that we're in today or the ones that we go home to at the end of the day. And we enable carbon avoidance. by providing great solutions to the marketplace. And there's a whole raft of updates. You've got the future home standard from 2025. That's due for consultation in this year. And in Europe, we've had new proposals around what we call EPBD. But these regulations are gently helping us every year. in any one year massively profound, but each year they just layer upon layer. And we can give you some further examples. But it's not just about decarbonising buildings. We provide solutions that ventilate in an energy efficient way, but it's about healthy air. And I think the healthy air dynamic is now much better understood post COVID than it was going in. And COVID hopefully I think is very much in the rear view mirror, but COVID was an airborne transmission risk. And you were more likely to catch COVID inside a building, particularly ones that were poorly ventilated than you were outside. And that's why all of the government guidance was about avoiding contact inside buildings and so forth. But there's also some other quite dreadful stories that have been in the press more recently, if you read our statement in more detail. but it was a very sad story in the UK around a social housing tenant, a little boy who passed away a couple of years ago. This is what will become our law. And what we saw as a result of the coroner's report is Secretary of State wrote to all the social housing providers in the UK on the 19th of November last year and specifically warned, said, you've been warned about the quality of the stock. And when we come on later on, you can see how that has quite a profound impact on the demand in some of our markets. But we all appreciate how important indoor air quality is. It's inextricably linked to health. I remember somebody saying to me, how long can you go without water? Well, go a few days, probably quite a few days. You can't go very long without air. And I think we're understanding the importance of air quality more and more. And the third element is that we provide comfort. There's an increasing risk, it's quite an amusing one, but actually in new low-carbon, properly specified new dwellings, there is a risk of overheating. If you've got a London apartment in the summer and you don't have air conditioning, you'll understand what I mean. And so the regulations now are thinking more sympathetically. Part O that came up more recently is thinking about overheating in a modern, airtight and well-insulated home. So these regulations are really helpful and we play to decarbonising healthy air and to comfort. Evolution has what we call our three P's, product, planet, and people. This is just a small snapshot of what's happening here. We've talked about these metrics already, but we had a target to reach 65% of our revenue in 2023 from low carbon solutions. And in the half year, we're already at 69.4%. And that's because the growth in our revenue is generally fastest around the low carbon solutions. We have quite a company called Energy Recovery Industries in September 2021. It provides heat recovery cells. It's a market leading proposition and that company is growing very well. Lots of examples. There's some products on this page. There's a KlimaRad decentralized radiator with heat recovery for the Netherlands for the refurbishment market. There's our positive input ventilation product in the UK. These are all low carbon solutions. And improving our environmental performance around recycled plastics. Again, and we talked about this, this wasn't a surprise, this number. If you look at the exit rate that we had in FY22, the work that we did in the first half of 22 that we knew would give us a platform, a springboard in the second half of the year, it's no surprise to us that we're making great headway with increasing our recycled content. And this is an essential ingredient when we talk to customers. What's happening now is our customers, specifiers, are asking us how much recycled content is in our products. And then finally, really delighted about this around people, we take health and safety as an organisation very seriously and we're delighted that our frequency incident report had come down in this year. Our ambition remains zero harm to have none of these incidents, but we made really good progress with health and safety in the first half of the year. So that was relatively high level. Andy's going to take you through the financial results and then I'd like to come back and talk about the three geographic areas in a bit more detail.

Thanks for any morning, everybody. So yes, just a couple of slides just to highlight the financial performance for the half. So first of all, the slide that we always start with, which is looking back at our key metrics over the last five comparative periods. I must feel like saying it speaks for itself because I think largely speaking it does. Revenue, we'll come into a bit more colour on that shortly in terms of the regional mix, but just to break that down a little bit, so the 7.5% constant currency growth there, 6.3% of that was organic, 1.2% was inorganic from the drag through of a full year operation of our ERI business in North Macedonia. operating margins, you know, really, really pleased in what has been not just the last six months, but the last sort of 18 months, a really difficult environment in terms of supply chain, inflationary pressures, disturbances around, you know, input of materials and costs to maintain our margins above 21%. I think we're absolutely delighted with. I'll give you a bit more colour in a coming slide in terms of the regional shape of that um our earnings per share 12.4 pence for the half up six percent compared to the same half as last year slightly less than the 7.1 growth in operating profit and that's that's testament to two things that's obviously the interest cost burden not because we're carrying more debt but obviously because of the trajectory in bank base rates across all of our across all of our markets and secondly a slight increase in the effective tax rate which went from 22.6 to 23.2 percent in this period really good positive cash flow performance again I'll come on to that shortly you know we did say at the year-end results that you know we made a substantial and deliberate investment in working capital through the the late period of FY21 and the first period of FY22. And what we said at the year end was we were happy with the inventories we had. We were committed to normalising our working capital and maintaining it where it was. And indeed, our key metric there, we talk about a cash conversion target. and we have a target for the full year of 90% and in this period it was 88% and generally or in fact almost invariably half two is stronger than half one so that's a really good performance and the result of that is a leverage X leases at the end of the period of 0.8 times hence the references to headroom etc. revenue fairly easy slide here as well so you know again the regional piece Ronnie will come on to shortly but I guess just a couple of things to draw your attention to so the last time we updated you on numbers was at the AGM in December where we gave you position for the first four months of the year and at that point in time we said that constant currency organic growth for the group was 5.5% So the fact that we concluded the six months at 6.3%, I think shows really good continuing momentum through those last two months of the year. I'm sure the question will come, so let me preempt it in terms of the price volume constituent of our revenue growth. Look, it's not always easy because you've got to try to take out product mix, customer mix, et cetera, et cetera. But to the best that we can... analyse it, we would say about 35 to 40%, probably 40% of the revenue growth is coming through from volume and about 60% or so from price. But actually, if you then went down into some individual markets, so for example, you know, Ronnie will talk to you more about it shortly, but UK residential growth of 15.7%, that is probably 5, 6% price and 10% plus of volume. But then there are a couple of market areas, which again, we'll talk about shortly, where volumes were a little bit more challenged, hence the overall mix. But look, I think really encouraging to see both good delivery from price and from volume. In terms of operating profits and margins, so you're well aware now of our long-term target of 20% plus operating margin delivery and I think that bottom left chart there just shows the consistency over the recent periods in getting to that target and maintaining that target through, as I say, some quite turbulent and difficult supply chain and cost input environments. So really pleased with an outcome of 21.1%. And I think when you look at the regional piece over to the right, I think, again, the thing that we're probably most pleased with in the period is the uptick in the UK margins. So a year ago when we delivered our interim results, that was 19.9% in the UK. So we're now up to 21.2, so 130 basis points improvement. a little bit of softening in the European margin which again I think we sort of trailed at the year end and predominantly that's a mixed point because the highest growth area in the first half of the year has been our most recent acquisition in ERI in North Macedonia which has a nice margin but it's sort of 20-21% margin versus high 20s, 30s in some of our other territories. So the margin, the mix effect has brought that down slightly, but still look at 24% margin for that region is very, very strong and really good strong margins being sustained in Australasia as well. They're at 22.6%. Cash flow. So as I mentioned, one of the things that we had talked about when we spoke in October was our commitment and our imperative on holding working capital where it was and returning to really good, strong cash generation. And I think this slide demonstrates that. So 88% cash conversion, as I've already mentioned, a leverage of 0.8 times. So our net debt on the right there obviously includes the IFRS 16 finance leases. If you take that out, it was just under £56 million at the end of the period. And we typically generate more cash in the second half than the first half. Dividend is lower, etc. So I think there's one missing box there, which hopefully we'll fill in the second half of the acquisitions. There was no acquisition spend in the period. There was a little bit of spend on CapEx. So we spent just over £4 million. A fair amount of that was redirected at new product development. So I think one thing we've said, and again, I'm sure we'll talk about it some more, is is that new product introduction was something which we almost deliberately put on hold a little bit through the COVID, the early post COVID period. It was more important to focus on the business as usual delivery, but over the last sort of six, nine months with the operations being in a really good steady state, you know, we've absolutely put the foot down again on some of these really important new product introduction programmes. So that was a key piece of it. There was also some interesting investments that are ongoing in our facility in Macedonia, our facility in Bosnia with Klimorad. So, you know, all developing for the future opportunities for the business. So with that, I will pass back to Ronnie.

Thank you very much. So on to our operating segments. What's really important from our perspective is we think about Volution as being a ventilation group and being in this sort of EVAC industry. And so it's important here in terms of our sort of available market. We're focusing on the UK, on continental Europe, and Australasia. And what you've seen develop over the last eight and a half, nearly nine years, is a situation where Our UK is becoming a smaller proportion of the group's revenue. But of course, that's not because it's in itself becoming smaller. It's because we're growing faster, mainly by M&A, but also organically in the other two regions. So first off, revenue in the UK is 73.7 million, but that's revenue from the UK. It's actually not all in the UK market. A couple of things to bear in mind here is our UK export is obviously outside of the UK and our OEM is about half exported. So what you actually see is about 35% to 40% of the group's revenue is in the UK. And it's a really important point because I know what can happen frequently is that the evolution – can sometimes be compared only to UK companies. And we think of ourselves as a more international group in this HVAC sector. And I'll just leave you with that thought, because that's how we judge our performance against others. And we're not looking exclusively at the UK, let's call it building products market, for example. So I'll take you through a little bit more detail and just try and bring that to life. But in the UK, We're a residential leader and we have a plethora of brands. We've acquired probably as many as we are able to over recent years because we have a very significant market share. And so by definition, it's going to be much harder for us to grow inorganically in the UK for obvious reasons. But the particular highlight in the first half of the year was a 15.7% residential revenue growth, which I think is probably a little bit counterintuitive. I think the CPA are forecasting UK residential RMI at minus 9% for this year. We don't certainly think our markets are operating at minus nine, or certainly we don't believe our performance is expected to come out. But that's because the residential RMI bucket is quite a generic one. And one of the areas to think about is discretionary versus non-discretionary, if you like. And so what's happening in our residential ventilation is we have three component parts. We have the public RMI. the private RMI and the new build, and all three were growing organically. And there's quite a bit of detail in the individual statement that I would sort of refer you to later on. But if I just pick the major highlight was about public housing refurbishment. And this was particularly pleasing for me because I've been in this chair for long enough now to have to explain to you in previous occasions why it was underperforming. And we were underperforming and I know the question was, but is this really an underperformance or are you losing share? So I would say we weren't losing share. The sector was underperforming and this has been a built up problem in UK social housing that needs to be dealt with and it can't be dealt with in six months. And so the strength that we're seeing here is not necessarily just a six month hiatus. We've got five million properties in the UK, in UK social housing. What's particularly exciting, and I believe we're leading this from a ventilation perspective, is we're now starting to think about more deep refurbishment of these properties. And when you deep refurbish you move to insulating really well. And when you insulate really well, it becomes obvious that the impact of ventilation is much more profound in a well-insulated property than one that's leaky. And we've started to move some of these refurbishments towards the use of decentralised heat recovery. And I'm particularly proud of that. I sat here in this room in October last year telling you about taking 20 of our UK social housing specification and product management teams to Germany to work with our German colleagues on the proposition they had there, and we're getting traction. It's relatively small. It's hundreds of units, but there's 5 million properties to go out over time. This is what's happening in UK social housing. There's a tailwind in respect of awareness. There's a decarbonising issue, and I am confident that not only do we have a significant share, but we're also gaining share as we go. So that's the major highlight there in terms of public RMI, but our private RMI is also growing significantly. We look at search terms in Google, and we looked at some of the news that was happening in October, November last year on ventilation and problems and health risks and so forth. And you could see a correlation to searching for certain products, and we can correlate that to some increased demand for certain products. Do I believe that's only going to happen in this half and that it won't repeat next time round? I doubt it. And of course, the other interesting dilemma at the moment is everybody's being told to turn the heating down. The government's actually running a campaign on national TV telling you to do so. But those of you who know the physics here, if you like, air holds more water at colder temperatures than it does at hotter temperatures. You get more condensation in your house when you turn the heating down. So it shouldn't be a surprise to us that we're seeing more ventilation demand in RMI. Maybe what is a little bit counterintuitive, and I know we sat here in the room this time last year talking about residential new build being weaker, and we said that it would come back, and it came back very strong in the second half of our FY22, but it's also performing well at the moment. There's no doubt some storm clouds on the horizon, so we know that reservation rates are lower, but we also have a huge regulatory tailwind and part F and part L of the building regulations last year moved us away from exhaust ventilation into more system type ventilation for the future. That's happening without doubt with every house builder and that's a really important tailwind for us and we're extremely well placed with, in my opinion, the most comprehensive product portfolio in this market. So residential, great performance. Commercial is, for us, quite niche in the UK. We're not claiming to be the leader in the commercial space. We have a number of niches. I break them out into three component parts, if you like. Our RMI perform very weakly, and it's because in the first half of our last financial year, what we had is a situation where If you remember back, we were coming out of COVID, we were opening restaurants and small commercial properties and so forth, and there was a strong demand. It was a very strong period for us in terms of commercial RMI, and that hasn't repeated for obvious reasons. have some gaps in our portfolio when it comes to sort of commercial heat recovery and also in the education sector that we're working on. Andy's already talked to you about an increased focus on innovation and we have a whole raft of new products coming out into the marketplace in the second half of the year. We have actually performed very well in fan coils for commercial buildings. There's a number of commercial buildings that are going on at the moment that we've been involved in, and that continues to perform very well, and our outlook there continues to be confident. So I think the level of underperformance in our UK commercial in the first half of the year is potentially exceptional to that extent, and we have some innovation and some new opportunities to gain share in the second half of the year. Export. A lot of our exports go to Ireland. It is an export market. And we had one particular customer that was working on some destocking that happened on the 31st of December. We've seen our export trade more sensibly more recently. It is quite a small constituent part of the UK, but nevertheless, it declined. We're actually more optimistic about what's happening there. And that destocking, of course, generally only happens once. And our OEM, it's disappointing when you look at the 0.7% revenue decline, but in actual fact, inside, we're particularly pleased about the growth in our EC3 motorised impeller. We had very significant growth in that motorised impeller, and we've seen a further decline in what we would call old technology products. And of course, over time, those old technology products can only decline for so long. So overall, UK performance was a 5.3% constant currency organic growth. As Andy's already talked about, really good pricing discipline. We have market-leading brands, particularly in the residential space, and we improved our operating profit margin by 130 basis points in the half. Continental Europe. So interesting dynamic here, because in actual fact, in the Nordics, we had revenue of just 0.4% growth. So an important area for us, one of the first acquisitions, or was the first acquisition that I did in Volution back in October 2012. The Nordic situation is more challenging, has been around the new build space. Again, we quote in our half-year update that Volution's sort of complexion is around 70% RMI and about 30% new build. New build is definitely more challenging in some of the markets for obvious reasons relative to interest and mortgage rates. And we think we've had an element of RMI destocking with some of our distributors across the Nordic markets, well publicised. Some of these are listed groups and they talk about maybe a little bit of a consolidation or destocking that's been taking place. But nevertheless, the fundamentals with our Nordic business are very strong. We're very pleased about the proposition and we're also continuing to hold our operating profit margins as we go. What I'd like to do is talk about the only other area, if you like, of weakness in the first half of the year, and that was in Germany. We've sort of reminded ourselves that we've had three and a half years of exceptionally strong growth in Germany. I think last year organic growth in Germany was about 19% or something. So it's been very strong. It's not necessarily a surprise to us at the moment that we're coming up against strong comps and it's performed a little bit weaker. But decentralised heat recovery in refurbishment, particularly in refurbishment as we go forward, is a huge opportunity. And I've already given you some examples about how we're taking those products and getting traction in other markets. So let's focus on the highlights. What went well, KlimaRad in the Netherlands, a business we acquired in December 20 in decentralised heat recovery, strong product, sorry, strong project pipeline performed very well in the first half of the year. That project pipeline of orders that we have gives us a high degree of confidence going forwards. And the proposition there in terms of the payback with decentralised heat recovery with heating costs being significantly higher is really quite compelling. And again, in ERI, in energy recovery industries, in actual fact, we're capacity constrained. We've got to increase our capacity more quickly. And he's already alluded to the capex that we have and will continue to spend in that area to grow the output. And so the 24%, it's not a shabby margin, is it, to be at 24%, but nevertheless, the 180 basis points decline is predominantly around the mix there. with ERI not being at the higher end of the range, growing more quickly than some other areas that are weaker. And then finally, on Australasia, 15% of the group delighted to have these two positions in New Zealand and Australia. We've grown fantastically well in New Zealand and then latterly in Australia since we acquired these companies to grow at 4.5% versus some really strong comps. I mean, have a look at the growth that we delivered in half one 2022. We're excited about the market more locally. Again, there's a nervousness around the new build space in terms of housing starts and completions, but we are predominantly an RMI business. And what we're seeing in New Zealand, for example, is a greater awareness around regulations and how indoor air quality is linked to health. And so we see the long-term dynamics in Australasia are still very attractive. I've gone through these areas quite quickly, and I'd just like to summarise and then come back to Q&A. But we've grown at 6.3% organic growth in what is undoubtedly a challenging time. We read all the same statements that you do. So we're delighted about growing so well. We have maybe, rightly or wrongly, a conservative long-term 3% to 5% organic growth target. We're at 6.3%. Our margins have been maintained. This is really important to us. We work tirelessly throughout the company. Our leadership team are absolutely aligned and understand how important this is. And I've always played on the basis that it's not unreasonable to ask for price increases of our customers if we're providing them with market-leading solutions, good availability, great service. And I have absolutely no doubt that our service levels have been second to none in this marketplace. And that's helping us indeed gain share. Recycled plastics content is important. Particular accolades to our UK team where most or a lot of our plastic injection molding and extrusion takes place. Fantastic efforts and I can see how inspired these teams are to drive this number forward. And there's further work to do to get to 90%. 90% is a huge stretch for us. And right now, with two and a half years to go, I'm not sure how we get there. but I didn't know how we'd get to 76% two years ago, so I'm sure we'll work it out. Heat recovery ventilation at 32%, it's up from 30%. It's a really important part, but it's not the only solution that we have around low carbon. And as Andy's already said, just to reinforce that, strong cash generation, 88% operating cash conversion. It was lower last year, it was for a good reason. We're confident that we've got our working capital and our cash management under absolute explicit control. significant headroom for acquisitions i know people have been saying they haven't done anything for 18 months it doesn't matter it's absolutely the middle and center of our strategy and sometimes these things take a little bit longer to cultivate but who knows what comes next so strong performance underpinned by structural growth drivers in terms of outlook We are mindful of the cautious sentiment in some of our segments, but we do have a supportive residential RMI environment, particularly in the UK. We believe inflationary pressures are easy. Certainly from a material perspective, we think we've got that under really good control. There are still labour inflation challenges and a little bit around infrastructure, which is less significant for us. But if you talk about building rentals and so forth, I think that's an area of slightly higher inflation. But on the material side, We think we're in really good shape and we've got excellent levels of customer service. We are agile. I saw that in UK social housing and the strength of demand that we had in the last half and the way in which we were able to respond to it in a way that I believe some of our competitors weren't. Well-developed M&A pipeline, strong balance sheet. So we think we're well-placed to make further progress in the period ahead. That's the formal update. So we'd be delighted to hand over to the room for Q&A. And I'll try and go here with Charlie. Okay, thank you.