Good afternoon, ladies and gentlemen, and welcome to the Victoria PLC half-year results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. They can be submitted at any time via the Q&A tab that's just situated on the right-hand corner of your screen. Please just simply type in your questions and press Send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it is appropriate to do so, and these will be available via your Investor Meet Company dashboard.
Before we begin, I would like to submit the following poll, which will appear on your screens now. I would now like to hand you over to Executive Chairman, Geoff Wilding. Good afternoon, sir.
Good afternoon, and thank you very much to everybody for joining the call. I think, before I hand over to Brian, to take you through the numbers, there's just a quick introduction I'd like to give about the macroeconomic environment. Clearly, there's very little we can do about that, and that's driving consumer demand for product, obviously, not just ours, but more generally. However, the thing that gives us confidence in the future is demand always recovers, and it recovers sharply.
And the reason for that is when consumers are feeling less confident about the future, have less disposable income, or housing transactions are lower, that doesn't mean that, as I've said in the statement to the shareholders yesterday, that doesn't mean that the stain on the carpet goes away and the ceramic tile that's cracked in the bathroom magically repairs. And so the moment consumers start to feel confident about the future, they start investing again in their own homes. And the result of that, of course, is that the top line grows very, very quickly. So therefore, I think the focus should be on the improvement in the underlying, in the EBITDA margin, which has gone up from H1 last year of 13% to 14.9%.
The two interesting things about that is, firstly, on lower revenue, normally there's an operational gearing effect that should see EBITDA margins go down. The fact that they have gone up, and gone up by nearly 200 basis points, is an indication of the amount of cost that has been taken out of the business, and also the production and productivity improvements that we've achieved on the factories. What this means, of course, is that when revenue recovers, and it will, or demand recovers, then that EBITDA margin will go up even higher and, a lot more of the profit drops through to the earnings, sorry, the a lot more of the revenue drops through to the bottom line.
The second thing about that is the EBITDA margin hit 14.9% while we were still undertaking the restructuring projects, which really and only completed in any substantial form at the end of September. So we're expecting over the months and years ahead for that EBITDA margin to continue to grow as the full effects of the reorganization of the business goes, becomes realized. So with that, I'll just hand over to Brian, and he can take you through the numbers.
Thanks, Geoff. While there's some executive summary slides on this presentation, I will skip through to the detail. So I'll quickly run through the financial highlights and then hand over to Philippe, who will go through more detail on the, on each of the divisions. As Geoff has said, this has been a challenging period for the industry and Victoria, but despite declines in revenue and volumes across all of the businesses, despite declines in revenue and volumes, all of the businesses have increased or maintained their growth in EBITDA margins. On a constant currency basis, underlying revenue at GBP 643 million is 14% behind H1 last year and 4% ahead of H2 last year. This is driven by volume declines of 14% versus half one last year and 7% versus H2.
Demand in the ceramics business has continued to be particularly hard hit, with a significant impact to absolute gross profit and EBITDA, and Philippe will talk more about the market and the actions being taken by management in that division. On a constant currency basis, underlying EBITDA of GBP 95.8 million is 0.5% behind H1 last year, but 0.7% ahead of H2 last year. EBITDA margins were up 190 basis points year-on-year. The focus of the first half of the year has been to complete the reorganization of Balta into Victoria, and to manage the cost base of the business in line with the continuing solid demand for our products.
We are particularly pleased with the EBITDA performance of the Flooring division, which has delivered an absolute improvement in gross profit and EBITDA, as well as improved margins, mainly as a result of the restructuring the group undertook in FY 2023. Moving on to the next slide, this is a list of our exceptional and non-underlying items. It's probably worth spending a few minutes here just going through them. Just to remind you, these items are either irregular, and therefore, including them in the assessment of the business's performance would lead to a distortion of trends or a technical adjustment, which ensure the group's financial statements are in compliance with IFRS, but do not reflect the underlying performance of the business in the period or therefore, both of those items.
There are only two of these which relate to cash, the top two, which are highlighted in orange, and that comes to GBP 8 million, which we've expended in the year. The rest are non-cash items. The cash items are the acquisition and disposal-related costs, and this is a small amount that we paid as fees to advisors, where we have been monitoring the market for potential transactions. The reorganization costs, this is in relation to the integration of acquisitions into our business. The cost this year mainly relates to the reorganization of Balta, and there have also been some of the costs in Turkey, where we've rationalized the operations there in line with the continuing lower demand.
On the non-cash items, the acquisition-related performance plans, these are the earn-out payments that we make on businesses which require using that mechanism. IFRS requires us to charge these to the income statement when the payments are earned, rather than adjusting goodwill, and as these payments are irregular, we believe that they should not be included in underlying performance. Amortization of acquired intangibles, again, we require IFRS to value such items at acquisition, and we're excluding them for underlying performance to avoid any potential double counting. An adjustment of the prior year for the unwind of the fair value uplift to acquisition opening inventory, and this is where, under IFRS, we have a fair value inventory to close the value which we which we sell at the post-acquisition.
This results in some of the profit, which we realize in the sale of that inventory post-completion not being recognized, and clearly, this distorts the trends in relation to the acquisition as margin growth in the following year could come about a period as a result of an accounting adjustment. We therefore exclude the accounting adjustment from underlying performance. Depreciation of fair value uplift to acquisition property. Property, again, is required to be fair valued in acquisition, and we treat the depreciation of this fair value uplift as non-underlying, as it does not represent the underlying performance of the business. The higher amount this year is as a result of the value upwards of the Balta properties which we acquired last year. The next item to discuss is hyperinflation.
We had to start to account for hyperinflation last year in our Turkish operations as a result of the Turkish economy being in a hyperinflationary mode, and that's defined as where inflation over the course of three years is in excess of 100%. The accounting requires us to reindex all of the income statement and balance sheet items to a more up-to-date rate to generate a notional purchasing power. The reindexation results in a net gain to EBITDA of GBP 18.5 million this year, which we believe does not reflect the underlying performance of those businesses. You will also see that we've excluded the monetary loss of GBP 4.1 million for finance costs.
The remaining items in the table relate to the preferred shares that we have, and these, again, are all non-cash items. Moving on to cash generation on the next slide. We generated from operating cash flow before interest, tax, and exceptional items, just under GBP 50 million for the period, compared with just under GBP 40 million in the prior period. We've seen an outflow of working capital, driven by the poor demand in the first half, and the businesses are taking actions to release cash from inventory in the second half of the year, when we expect to see an improvement in working capital.
Other items to note on this slide are in interest paid, where the date of which our period end fell this year meant that a portion of the bond interest was not paid until the second half of the year compared to the first half of FY 2023. We expect interest payments for the full year to be in line with FY 2023. We also received a tax refund from the Spanish tax authorities, which resulted in a small net inflow in the income tax line. As we discussed at the year-end, capital expenditure will fall in FY 2024 to more normal levels now that the restructuring of the Balta business is substantially complete. The expansionary and synergy CapEx this year predominantly relates to the movement of Balta equipment from Belgium to the lower cost manufacturing facilities in Turkey.
Exceptional cash items is mainly the payments made from the provisions that we took in FY 2023 for the restructuring of Balta, and these costs are mainly redundancy costs. This slide is a graphical representation of the movements in net debt in the period. We ended the period with net debt of just under GBP 671 million, up from GBP 658 million, with a marginal increase coming as a result of cash outflows from restructuring the business, partly offset by the free cash flow before exceptional items and the positive FX impact of GBP 12.1 million on our euro borrowings. All of our debt is long-term, with the earliest tranche of low, low coupon, compared to current pricing bonds, not due until 2026.
Finally, from me, moving on to the next slide, we can see that the net debt of GBP 671 million results in leverage of 3.8 times. Management is committed to reducing this leverage ahead of the next round of refinancing by generating cash from operations and the sale of non-core assets. This includes the sale of surplus real estate acquired with Balta. We completed one such disposal this week with net proceeds of EUR 32 million. You'll also see on this slide that we had over GBP 91 million of cash, which is in line with the position at the year-end. This, combined with undrawn facilities at the end of the period, means we have significant liquidity of over GBP 250 million sterling. I'll now hand you over to Philippe to talk more about the divisions.
Thank you, Brian, and good afternoon. In the division, the first division, and for the largest division, is the UK and Europe Soft Flooring division, with a very solid performance, with an operating margin of 360 basis points versus the first half-year of last year. In the soft flooring, the full focus was on the Balta integration. In the meantime, all broadloom activity in Belgium has been stopped. We were still making there about 14 million square meters, and all the production has been integrated in the Wales and the Yorkshire plants in the UK, with little to no CapEx. There has been a couple of machine moves, but nothing else.
So excess production capacity is sourced in Turkey when needed, and we are fully launched out in the production plants in both of the factories which we are having in the UK. We've also ditched some non-profitable business, and the Balta product architecture is now redesigned towards more profit-linked program service programs. The relocation activity is also showing its first signs of improvement, and we are performing above target as we had in budget. The much enhanced productivity, the lower production cost, the lower logistics cost, and the improved customer service has contributed to the recovery of the Balta numbers. An important observation that I want to make at this stage is that the medium and high-end UK service-driven brands are outselling the cheaper volume and price-driven brands.
The second leg of the soft flooring is in the Balta rug production, so we've done quite a bit of right sizing there as well. The Balta rug production footprint continues to be refocused toward the two existing Turkish plants, where we're making the rugs and where we're making the yarn. The Avelgem plant is one of the Belgian plants, has been closed and has been sold in the meantime, and the production capacity has been completely dismantled and has been added in the Turkish setup.
Most of the yarn production activity has also been stopped in Belgium, because we used to make that, or we have made that decision because the price of the energy was far too high, and then we've decided to move the yarn production to the Turkish plant. Balta now employs 700 FTEs less than in April 2022. Maybe one short word about logistics activity, which is the third leg of the soft flooring. So this is Alliance, this is our soft flooring and LVT distribution hub. So we have four DCs in the UK. We have one in Hemel Hempstead, in Hartlepool, in Wales, and in Worcester. Actually, I am in Worcester now, in the warehouse in Worcester.
What you see behind me here is some of the 24,000 rolls which we're holding on stock, and from this distribution warehouse, we are sending about 22,000 order lines per week. And this is the service, so we've improved the service. We are at about 85% service level now on next day delivery, and 95% within three days. Then the second largest division is the UK and Europe ceramic tiles. We've seen a much softer demand after last year's massive cost inflation due to the energy and the labor. The absolute EBITDA fell about GBP 12 million versus the half year 2021, but relative EBITDA increased with 110 basis points. The revenue was down from GBP 254 million to GBP 185 million.
If you look at the market, then, the year-to-date market volume is down about 30% in Spain and 19% in Italy. The full focus on margin, and so we've been giving up some market share because the full focus remained on the margin. The exercises which we conducted in that division were focused on, trying to reduce the costs through some of the value engineering we've done in reformulating the tiles, in terms of clay and thickness of the tiles. There was also some continued fine-tuning, in the hedging policy, which we've done.
We've continued to leverage the U.S. distribution and try to take advantage of competitors by selling more in the U.S. DIY, because we have this service outlets in the U.S., and we've continued the right-sizing operation and reduce the cost, mainly in Spain and Turkey. So, the current demand softness is being used to refocus the quality and SKU allocation across the geographical plant network to optimize the cost of manufacturing. So we have manufacturing outlets in Spain and Italy and in Turkey, and rather than looking at silos, so we're taking more a horizontal look in our approach and try to allocate sizes to accounts across geographies.
The Italian plants have been more focused on volume through sales in the US and in the European DIY, whereas the focus in Spain has always been more led towards margin protection, with an impact, of course, on the demand. Across all brands, exercises have been conducted to focus on working capital through stringent product development and related SKU product architecture. Across the plants, but mainly in Turkey, so some of the older lines have been mothballed as part of the restructuring process, which we have conducted. Third geography is Australia. We can be extremely short about Australia. Very steady business we've had there, with almost the same revenue and with the continuous good, solid EBITDA of 12.8%, so which has not changed versus last year.
Then last but not least, as a division, we have North America, where we have operational excellence projects driving the margin expansion. So, soft flooring alike, the demand in H1 in U.S. has been soft because lots of retailers were de-stocking at that moment, and overall footfall in the shops was down, as well as the consumer appetite online. The EBITDA percentage was good. In the first half, FY 2024, was up 500 basis points from 6% to 11%, albeit it's fair to say that in October last year, we have acquired an extra distributor in Florida called IWT. So, and then, despite of the continued West Coast shipping disruption, CALI has succeeded in balancing the inventory levels to meet the demand and maintain the service level.
CALI is the Californian distributor, which we are having, which is an online and an omni-channel distributor. Orders have been slow in half year 1, but margin have improved due to the product mix which we've conducted. We've also trying to add more product through the pipeline. In the meantime, we have 4 distribution warehouses in the East Coast, if we include the Balta warehouses, and we are realizing a revenue of about $400 million in the US. Brian, this is the overview of the divisions. I will hand back over to you now.
Thanks, Philippe. So, excuse me. There are a number of questions which have started to appear on the screen. So, I'll, we'll try and group them rather than ask, because there's quite a number of common themes that we're seeing. So in terms of redeeming the preference shares or buying back bonds, in other words, what are we going to do with the capital and the free cash flow that we've got coming into the business? What the answer needs to be, because we cannot disclose in advance exactly what the company intends to do, but the board is alive to the various opportunities we have to deploy capital, and we will allocate the free cash flow in a manner that benefits the shareholders the most. Now, clearly, there are a number of options.
We could buy back shares, we could buy back bonds, we can buy back the preference shares. The decision as to which one of those options or combination of options that we pursue will be taken in the best interest of the shareholders. The one thing that you need to bear in mind at all times is our clear statement that we intend to reduce the leverage in the business. I think there's a number of questions also about the resignation of Zachary Sternberg from the board of Victoria. What I can say is there is nothing, and we can say this categorically, there is nothing more to it than exactly what was put in the statement yesterday.
Zach runs a very large investment fund in New York, and the amount of time that he needs to devote to that as the fund has gotten larger, is, he just doesn't have time for outside board activities. However, he's a personal friend of mine, and our families holiday together. There's been no falling out. He remains a strong supporter of Victoria, and, he's continues, I mean, we'll continue to talk to him, regularly, as you would expect. Do you wanna talk about the question on the debt figure?
Yes. As I mentioned earlier on, we've got liquidity of over GBP 250 million, and that's pretty much in line with the year end. I think there's a number of questions about the draw on the RCF, and we drew GBP 20 million during the first half, which has been repaid since, since the end of the half. We used that facility for different currencies if we need to, to pay euros, we borrow out of the RCF, because it's an easier thing to do. The other thing that we have, we do have other facilities around the group. We have overdraft facilities and working capital facilities. There was no significant increase in any of the drawings, in those, over the period.
There's a question about when we expect the demand to recover. If I, if I could predict that precisely, I, it would, it would make my life a lot easier. The key drivers for spending on flooring is three things that we, we track. Firstly, is housing transactions. When somebody buys a home, one of the first things they do is replace the flooring in the house. And there's a number of reasons for that, but there's a very strong correlation between flooring sales and housing transactions, albeit with a 6-12-month delay. So somebody buys a house, moves in, 6-12 months later, replace the flooring. There is a very strong correlation between those two actions. So we track housing transactions. The second two factors are discretionary spending.
So whether consumers have adequate surplus earnings to be able to spend on flooring, that's the second thing that we track, discretionary spending. The third characteristic that is useful is consumer confidence. As consumers become more confident in their financial situation and the outlook for the world, then they are more inclined to invest in their own property. Clearly, interest rates are a key factor in all those three items that we look for. I think you will have all seen in literally the last few days, the change in sentiment or tone coming out of the central banks about the outlook for interest rates next year. So it's my expectation that as interest rates come down, housing transactions increase, consumer discretionary spending increases, and of course, consumer confidence goes up.
So I think that's those are the characteristics that you should be looking for as well to judge when demand will recover. But there's also a question about the leverage ratio that we're aiming to achieve for the refinancing, and I think which, in fact, I don't think I know, we've stated publicly that we're aiming to for 2.25 times plus or minus quarter of a turn. To be clear, that's 2.25x EBITDA, plus or minus a quarter of a turn.
There, there's a question there on the disposal of the property. So just to clarify, we disposed of a surplus property that we have in Belgium. This property became surplus as a result of the reorganization. We closed the transaction this week, and it was EUR 32 million that we've received as a result. I think, there are other properties in the Belgian portfolio that we would look to, to manage as well. This was all foreseen as part of the acquisition, and I think we've already stated to the market that the cost of the reorganization of Belgium will be dealt with through the rationalization of the real estate in Belgium.
There's been a couple of requests for me to say what we expect the cash balance to be at the end of the year, and also what we expect free cash flow. We're not putting a forecast into the market for that. Again, I'll reiterate what we've said in the past: We expect our capital expenditure to revert back to a normal level. FY 2023 was abnormal in terms of the amount of growth projects that we undertook there, and also the significant spend that we had on synergy projects with moving part of the Balta operations out of Belgium and into Turkey. So we're looking at probably GBP 60-65 million, that kind of range, for CapEx this year.
The interest expense will be pretty much in line with last year. You can work the tax rate, the tax cash out from the rates in the P&L. We expect to see improvement in working capital in the second half. So, that's the only kind of guidance that we're giving people at the moment in relation to what we expect to see at the end of the year.
There it is. There's a couple of questions asking about a potential margin loan that I may have secured against Victoria shares. So for the avoidance of doubt, the facility... Well, that was put in place six years ago, was a two-year facility, so it's long since expired, and I have not renewed it. And during the period that the facility was in place with J.P. Morgan, I never drew the loan, a single pound, euro, whatever. I never, I never borrowed against the shares whatsoever, which is why I allowed the facility to lapse after the initial two-year period, because I never used it. So to be clear, there is absolutely no borrowings secured against my shares.
Okay. Looking to see if there's anything we haven't answered. There is a question on there around the volatility of our statutory number, which I will provide a more detailed explanation on the written response rather than go through that now. There are a couple of big items, particularly around the fact that we had negative goodwill last year with Balta, which is quite a large credit, which makes the fluctuation year-over-year quite pronounced. But that is one of the reasons why we take these items out of our income statement, is because it causes such fluctuations; it actually then becomes very meaningless to explain the true underlying performance of the business.
Somebody's asked whether or not we would consider doing a capital raise to pay down debt. The short answer is I don't, I don't believe that's necessary, certainly at anything like the current share price. We have very strong expectations of strong cash flow and increasing approved earnings in the near term, and the result of that will be that leverage will come down naturally and both in terms of the leverage ratio and also the absolute number of debt and sorry, the absolute total of debt. So as a result of that, I don't see any reason at this point to do a capital raise.
There are a couple of questions in relation to the FY 2024 audit. So we are working with Grant Thornton through the audit planning and also through some work already this year in relation to the 2024 audit. We continue to work with them, and if there's anything that comes out of any work in relation to the audit, then we will clearly update the market on that. But as of the moment, there's nothing, and we expect to work through the whole process with them.
Someone's asked again about the replacement director for Zachary Sternberg. So we have been in discussions for 2-3 months looking at potential candidates for... Not as a replacement, but just to address some of the governance concerns that people have, because there are a large number of, sorry, as a percentage of our board, there are some very significant shareholders, and I know that it would reassure some people that we had an increased number of independent directors on the board. So we are looking at and conducting a search to find some suitable people with both industry experience and also capital market experience that they can bring to bear to help guide the company in the years ahead. And we'll expect to make some announcements on that in due course.
So, there is a question about: Have we seen an improvement or worsening of general demand over the last few months? It's an interesting question, firstly, because different markets are exhibiting different characteristics. As you can see from what Philip took you through with the operations earlier, the U.S., our revenues are up, our margins are up. The European market where, which is primarily, primarily ceramic tile business, we see revenues and demand down. The U.K., we are seeing recovery in demand. But the interesting thing, if you look at the revenue numbers or the demand for the last 18 months, so you look at H1 last year, H2 last year, H1 this year, there was a big drop-off between H1 last year and H2.
Sorry, H1 last year and H1 this year, but the drop-off between H2 last year and H1 of this year is negligible. And what that suggests to me is the demand fell off significantly, as you would expect, with much higher interest rates and higher energy prices for people to have to cope with. But demand seems to have stabilized at current levels, and there are signs of recovery in some markets. I don't want to get too excited about it too soon, as I said in the letter to the shareholders yesterday, you know, one swallow doesn't make a summer, but there are some encouraging signs. And inevitably, as I said, unless people want to get back to walking around on mud or bare concrete, there will inevitably always be demand will return, and it's just a case of when.
Sorry.
Okay. So there's a question on, on working capital. The slowdown in demands in the first half, we saw an increase in our inventory. There are, as Philip said, there are actions in place, for us to, to look to, to release the, the, the inventory that we have on the balance sheet and realize, and realize cash for that. So that is, in all of our objectives for the second half of this year, to do that and to make sure that the inventory that we have is now more in line with, what we're seeing in the current demand of the market.
Sorry about that. There's a question about why we think the share price has fallen. I could be facetious and say, because there was more sellers than buyers. But look, there's been two events that I think haven't been helpful. Firstly, the delay in the accounts and the order qualification has clearly not been helpful. But neither of those things have anything, have any underlying impact on the, on the actual business, but it certainly impacts investor confidence. And we, we, we have done everything that we possibly can to ensure that that never happens again. As you'll appreciate, the board and I own over 50% of the company, and we are very, very focused on ensuring that the share price recovers. But having said that, I think that was the first factor, was the...
And then secondly, there has been, you know, the macro environment's challenging out there, and I think interest rates have stayed higher for longer than most people anticipated. And I think that's damaged investor confidence. That's not particularly a Victoria thing. That is more anything to do with home improvements or discretionary consumer spending. There's a question around, why do we not give EBITDA guidance? Well, in actual fact, the market consensus numbers for the year is GBP 187 million. And when I refer to market consensus guidance, that is the average of the forecast by the three analysts that cover Victoria.
The company itself doesn't make a habit of putting out, specific numbers in the market, but there is a regulatory obligation that if we think that number's materially too high or too low, we need to inform the market. The fact that we haven't said anything about it means that we are comfortable with the number, plus or minus a reasonable margin. So, as I say, I'll just repeat, the average number, the average consensus forecast is, GBP 187 million EBITDA for the FY 2024.
Okay. So I think the rest of the questions on here are around specifics, which happy to respond. Things like the movements in leases, which I'm happy to respond to, but in writing rather than take up time on this call. So I think, Jake, I think we're done with questions.
Perfect. Brian, Geoff, Philippe, thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And of course, we will be able to give you back all of the questions that were submitted today just for you to review, to then add any additional responses, of course, where it's appropriate to do so. But Geoff, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that'd be great.
Again, I just come back to the fact that the company cannot clearly control the macroeconomic environment, although we're clearly closer to an improvement every day that goes by. So I think the focus needs to be on the fact that the company has materially increased operating margins in H1, and we expect to see further increases, because Philip described earlier, some of these restructuring projects were still underway during H1. So the full effect wasn't seen, so we can expect to see further improvements in margin going forward. And then the second comment is that it's circa 40% of our revenue is gross profit. So as revenue recovers, and I think the analysts have got us at that GBP 187 million of operating profit that they're forecasting for this year.
The average revenue number is GBP 1.3 billion at quarter, give or take. And for every extra GBP 100 million of revenue, GBP 40 million, rough figures, drops to the bottom line, assuming it's a 40% drop-through on GP. And the impact of that, you know, GBP 100 million sounds like a big, big number, but in actual fact, it's only an 8% improvement on where we are. Or a little bit less than 8% improvement on where we are. Last year, people may remember we turned over GBP 1.5 billion, so the improvement could be very significant when the demand returns. It will most definitely return as the macro environment improves. Philippe hasn't suddenly forgotten how to make or sell carpet.
It's just difficult macro conditions at the present time, causing pressure on the topline. So with that, we'll bring the call to an end.
Perfect, Jeff, and thank you once again for updating investors this afternoon. Could I please ask investors not to close this session, as you'll now be automatically redirected, for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Victoria PLC, we would like to thank you for attending today's presentation, and good afternoon to you all.