Hello, and welcome to the Victoria PLC interim results call. Throughout the call, all participants will be in listen-only mode, and afterward, there will be a question and answer session. Today, I'm pleased to present Geoff Wilding, Chairman. Please go ahead with your meeting.
Morning, everybody. This is Geoff Wilding here. Very, very pleasing set of results, obviously, for the first half. The operational management have done a brilliant job of managing some fairly trying circumstances at times with both inflation and raw material supply chain issues. They've managed to overcome those very successfully and produce an outstanding set of results. I'll hand over to Mike Scott, Finance Director, to initially take you through the numbers.
Good morning, everyone. As Geoff said, very delighted to present these results to you. It's been a while so far, and I certainly expect and hope to continue a fantastic year, a fantastic half year so far. The group delivered revenue GBP 489 million, as you can see. I'm on slide two, just on the highlights of the presentation, which, hopefully, everyone has. Which, compared to prior year GBP 305 million, I think everyone will agree, is just a fantastic performance and a fantastic uplift. As you can see on that slide, and I'll come back to it in a bit more detail, of that, half of that uplift is organic, is pure organic, and half of that was due to the effect of acquisitions that we've made more recently. Really unprecedented and an incredibly strong set of results.
Not to forget, notwithstanding COVID last year, we also had a very strong set of results last year. This is building on and consolidating on what was already a strong year last year. In terms of EBITDA and margin, overall, and I will come back to it, overall, you'll look at the EBITDA margin and you'll say, "Well, that looks consistent. Slightly up year on year." As always, there's a story within that around acquisitions. The acquisitions we make are generally lower margin businesses. Not because we're trying to buy turnarounds or anything like that, but because we drive our own margins to an optimal position and we tend to buy businesses then that come in lower than that, and then we obviously deliver synergies to increase them. Whenever we make acquisitions, they tend to dilute the margin initially before we deliver the synergies.
That certainly had an effect here. Alongside that, we've had organic margin improvement as well as revenue growth, and I'll come back to that. In terms of cash flow, consistent with over 80% conversion of EBITDA to operating cash flow. Consistent strong cash flow. Of course, as always, we reinvest a lot of the cash that we generate alongside the cash that we have on balance sheet to continue our growth. I'll come back to that. That leads to a net debt position of just over GBP 500 million and leverage, which is obviously a material increase on the prior year, but that's because we've invested and we bought a number of businesses since then. We bought five businesses. Well, since last half year, we bought seven businesses, but since the year end, we bought five businesses.
The leverage is absolutely consistent at 3.3, in line with our financial policy. Just over the page onto slide three. This just gives you a bit more breakdown of the key KPIs, the underlying KPIs on the income statements. I won't go through this in detail because I think more importantly, we can go to the next couple of slides, which gets into a bit more detail on the revenue growth and the margin performance. I'm now on slide four. Revenue growth, as I said, 30% like-for-like growth, versus 60% total growth year-over-year for the period. You can see the breakdown by division there. We're now reporting a fourth division, which is in North America. That is because everyone will remember we acquired a business called Cali Bamboo in June this year, which is based in San Diego in California.
That doesn't have a like-for-like growth figure. You can see from the rest, incredibly strong performance. I don't want to preempt what Philippe will come onto to talk about what we've actually done operationally and commercially in those divisions. Nevertheless, you can see the strong figures there, and in particular in the UK and Europe soft flooring division, which is, as everyone knows, primarily a UK business. Although it also includes our European artificial grass business, and all of that has performed incredibly strongly, as you can see, really driven by the investments that we've made over the last few years in our manufacturing, in our logistics, in our ongoing evolution of our brands and our ranges to deliver very clearly outperforming the market, and we're delighted.
Clearly not to underplay, it's hard when you're comparing to figures like 48% like-for-like growth, but clearly ceramic tiles in Australia have also performed incredibly strongly. Not to forget that Australia this year has been through COVID lockdowns, unlike much of Europe. In the period they were in lockdowns, and in fact, the area where our business is based in the state of Victoria, in and around Melbourne, has experienced, I think, specifically the longest lockdown of any city. Notwithstanding all of that, Australia has performed fantastically well. Just going on to slide five to look at the margins. It's always a bit hard to decipher this, and I appreciate that and apologize for what it is.
We make acquisitions, and then that has an effect on the margin, so you sort of have to cut through that and see what's going on alongside that, as it were. The margins, you can see there by division 18%, 20.5%, 13.3%, 6.6%. They are what they are. More importantly, how much of the movement for each of those is organic? What is the organic movement and what is the acquisition mix effect? What we've done here, and there are some charts later on to show you this, I've shown the key figures here in terms of the like-for-like. The like-for-like margin variance is the organic movement. You can see we've had increases in both, well, in all three divisions. I'm not including North America because it's new. In particular in the U.K. and European businesses.
Australia less so, but as I said, Australia has been through a significant lockdown in the period. Frankly, holding on to, and in fact slightly increasing their margin versus last year has been absolutely fantastic. Almost 200 basis points improvement in the margins versus last year in both of the U.K. and Europe divisions, which again is just really strong. Again, U.K. and Europe, soft flooring leveraging past investments that we have made. The infrastructure that we have in manufacturing logistics is really, really coming to the forefront now in terms of delivering the margin improvement as well as the growth. In ceramic tiles, there's an ongoing story, and I'll let Philippe talk to that in a minute. In particular, a lot of investment now in Italy, where we see a lot of opportunity.
As everyone knows, we bought a couple of businesses in Italy earlier this year in April. If you go over the page to slide six, let's just give you a visual representation of that. Okay, not the most exciting bridge, I'll give you that. You can see that the acquisition mix effect just overall for the group has been to dilute the margin by 1.2%, because we bought businesses with low margins, and we've seen organic improvement of 130 basis points, 1.3%. This equivalent chart for each division is further down in the operational highlights section that Philip will talk to. On to slide seven. This is the same slide that I present at every reporting period to just go through the non-underlying items, because I, again, appreciate that investors quite rightly want to know what's going on here. Things outside of the underlying numbers that we present.
I won't go through every single number, but I'll go through the key ones. The ones we highlight in blue are the ones that are cash items. The other ones are non-cash items. We have three categories of non-underlying item. We have items that we define as exceptional items, which are by definition one-off. For example, if we make an acquisition and we have to pay some legal fees and due diligence related fees in relation to making that acquisition, those costs are included in the top there in that GBP 4.4 that you can see, because we won't make that acquisition again. Obviously, if we stop making acquisitions, then those costs will completely disappear. It is effectively an investment. It's not from an accounting perspective, but it's effectively a cost of growth, a one-off cost of growing the business.
We've obviously been very active, as everyone knows, in this period. There's a lot of opportunity, there still is, and hence that number is larger than last year, but I think that's to be expected. In terms of reorg, there is the GBP 1.2 million. Last year, you people will remember we had some COVID-related reorg costs in there, some costs to modify our processes to make them COVID safe. There were no such additional costs this year, so that GBP 1.2 million is entirely in the half year. So that GBP 1.2 million is entirely synergy project related. A big chunk of that again in Italy, which again, I won't preempt what Philippe was going to say about that. Also we did finish the project around closing another carpet factory in the U.K. and merging that into our Dewsbury factory up in Yorkshire, which again will drive further cost savings and margin improvement.
A lot of those costs in that GBP 1.2 are one-off costs. They're things, mainly redundancy costs. Negative goodwill reversal, a bit of an odd one. We made an acquisition in the prior financial year of Hanover, a flooring distributor in the U.K. There was a completion account adjustment which happened after the year-end, which was then a purchase price adjustment based on the completion accounts, and that was paid after the year-end. There was negative goodwill on that acquisition prior year, and so effectively that payment reverses the negative goodwill. A bit of an odd one. In terms of other operational items, these are things that are not exceptional. They're not technically one-off, but they're non-cash and we treat them as non-underlying. The big one here as always is the amortization of acquired intangibles.
When we buy businesses, we have to recognize intangible assets such as the brands and the customer relationships. We have to value them and put them on the balance sheet and then amortize them. It will eventually amortize to zero. That doesn't mean we don't have any brands and customer relationships. It's accounting and we choose to show that separately for that reason, because we never have to replace them with cash. The one to note here, which is different to previous years, I'd like to just briefly talk about is the 4.7 at the bottom of that middle list, the unwind of fair value uplift to opening inventory and acquisitions. Apologies, it's a mouthful. When we buy businesses, we have to fair value the entire opening balance sheet.
What we now do, which is consistent, and we've looked at this carefully, and consistent with effectively the industry in an accounting sense, is we fair value everything, including the inventory. What that means is the stock that we're buying, the stock that those businesses have in their opening balance sheets, we uplift them. For example, if a company had stock of GBP 6 million and it was going to sell that inventory for GBP 10 million, normally you'd leave it on the balance sheet as GBP 6 million, that's the cost. Now in our opening balance sheet, we have to put it in as GBP 10 million. What does that mean? That means when we sell that stock for GBP 10 million, we won't make any profit on it from an accounting perspective. Of course, in reality, it was bought for GBP 6 million and they make a profit of GBP 4 million.
In terms of our consolidated accounts, we have to put it on in the opening balance sheet at GBP 10. Because that doesn't represent the normal state of things, because in reality, that stock was bought for GBP 6 and the business itself that we've acquired is still making a profit on it. It's not making any profit all of a sudden just on that particular stock, and future stock that it buys, it buys again at GBP 6 and sells at GBP 10. We see that as not representative of the underlying performance of the business. We take that difference and show it separately as non-underlying. That's what that is. Then we have some non-underlying finance items, and the big one there, the only one that I will talk about, is in relation to the preferred equity.
As everyone knows, we have some preferred equity outstanding, GBP 75 million issued to Koch Equity Development. It has some both accrual of preferred dividend, which is not cash paid, but also other fair value adjustments associated with, for example, the warrants that attach to those and also other embedded derivatives, such as our right to prepay if we wanted to, which have to be valued on the balance sheet and then fair value adjusted. That's what that GBP 10 million represents. Just flipping over and finishing off on cash flow and net debt. I'm on slide 8. Same format as always, just showing you in our presentation, showing you our cash flow performance. You can see there that the operating cash flow, i.e., EBITDA with the movements in working capital and non-cash items stripped out is, well, GBP 61 million, consistent conversion from previous years.
In fact, the GBP 14 million of underlying movement working capital swing was actually pretty exceptional. We stocked up in the year in certain areas and raw materials to help allay supply constraints as very well publicized in the world generally, or to help us manage raw material pricing. We've managed that very well. Again, Philippe can talk further to that, but I think it's been essential, really, in this period to our ongoing service proposition. We've done that very deliberately. That will unwind in the future, but it's another side effect of COVID, I guess. We've absorbed more into working capital than usual. Below that line, you can see our interest paid, obviously primarily on our bonds, on our notes.
Tax paid in the period, and then replacement CapEx, which was a little bit higher than past years because last year we did spend less than normal, bringing us down to free cash flow of GBP 18 million. Then finally over the page, I bridged that 18 million into the net debt. You can see there's a bridge here, opening net debt at the year end at March. The free cash flow of GBP 18 million we just spoke about. We invested a lot in acquisitions, as you can see there. All of the acquisition-related expenditure, including fees and so on for advisors, GBP 178 million. We had a few other exceptional cash items, the redundancy costs and so on, and there's some timing differences, which is why it doesn't match that number.
Then some expansionary CapEx projects in relation to the investments that I was talking about, the organic projects I was talking about earlier, bringing us to GBP 519 million at the year-end. Finally, on page 10, this just shows you the net debt position. The key thing here is that, and the 519 and the component parts of that, and then other liabilities on the balance sheet around, for example, IFRS 16 in particular, just to reconcile. The key thing here is our leverage at the period end was 3.3. That is despite having made significant investments as we showed. We are able to do so and have done so in a consistent way with our financial policy to maintain our leverage in a stable position as we thought we'd do.
Finally, as everyone can see, we still have an abundance of cash to invest, and including undrawn lines, that was in excess of GBP 280 million at the half year date. We still have plenty of money to invest in growth, and there are plenty of opportunities out there. That's me done. I'll pass over to Philippe to talk through some more of the operational highlights. Thank you.
Thank you, Mike. As you have heard, a very solid overall like-for-like performance across the geographies and the categories. The first category geography is U.K. and Europe soft flooring with a like-for-like growth of 48.4%, an underlying EBITA margin of 18% or GBP 38.6 million, which is 190 basis points up on last year. Now we'll present you some highlights of the four categories in soft flooring. First of all, you have the carpet and logistics, then the underlay and the artificial turf. But maybe prior to that, I just want to point out some of the main drivers of the positive result. First of all, the inflationary pressure in the COGS was addressed very quickly with price increases with very little time lapse. As Mike had already pointed out, there was the anticipated buildup of the inventory, which we had to do because of the disrupted supply chain.
In carpet then, most important was the finalization and the completion, in fact, of the relocation of the Westex plant and the showroom and the offices, to reduce-
Sorry for the-
Philippe, are you there?
-interruption. We lost the line of Philippe. We will continue shortly. Please hold the line.
Well, look, while we wait for Philippe to dial back in, I'll just talk you through the acquisitions that we made. Sorry, I was on a different one, not quite yet.
Slide 20.
Slide 20. Actually, during the period, we made two acquisitions in Italy, Santa Maria and the Colli and Vallelunga group. Both these businesses were acquired to deliver us additional capacity and manufacturing capabilities. They came with very good plant and equipment, but with spare capacity in the plant. Also, they came with some revenues and customers. Our Italian business has been growing very, very strongly over the last two years, and we are constantly in need of additional production capability, and it's much less expensive and faster to make an acquisition to deliver that capacity than it is to start and build a greenfield site or order a plant and machinery. The second acquisition that we made was Edel Group, which is an artificial grass business operating in the Netherlands and Germany.
We first bought some artificial grass businesses in the Netherlands in the beginning of 2017. They've been an astonishing success for us. They have literally doubled in size, purely organically since acquisition. There is a lot of consumer demand for artificial grass. Just to be clear, the sort of grass we're talking about here is landscaping grass. We don't do football fields or tennis courts. This is for people living in city apartments who have very small gardens and just want a grass appearance outside, or those living in areas where there are severe water restrictions and yet they still want to have green grass. The grass we produce is very high quality. It is not the cheap and cheerful stuff. It's a very, very good quality product. It's expensive but also very profitable for us.
Because of the growth, and there is a lot of demand for this product, we bought another company in the Netherlands, which is busy being integrated into our existing businesses. One of the interesting opportunities here is we currently outsource the manufacturing of several million sq m a year of artificial grass, and we will be able to insource that once the Edel Group's completely integrated into Victoria, with a consequential impact on our operating profits. The third business we acquired was Cali Bamboo, which is based in San Diego, although it covers the entire U.S. and has distribution centers. This is our first significant acquisition in the U.S. although we have been exporting to the U.S. for more than a decade. The business plan for Victoria to continue its growth in North America is to make acquisitions of distribution businesses.
Not manufacturing businesses, but distribution businesses, which we can then service with product that comes out of our factories in Europe. So we then pick up both the manufacturing and the distribution margin. Cali itself distributes primarily hard flooring. LVT is a high growth area, but they also do wood, and as the name implies, bamboo flooring. The company is growing very, very quickly. Revenues last year were $150 million. They're likely to top $200 million this year. It's a high growth business. The last acquisition that we've made is Graniser, which is a ceramic tile business in Turkey. That actually happened after the half year balance date and has yet to complete. Completion's expected either at the end of December or early January. The reason behind buying this is it was a very good business that's been around for a long time.
Produces the same sort of product categories that we manufacture in our own existing factories, and it is a very low-cost manufacturing environment in Turkey. We expect to be able to take advantage of the spare capacity that they have at Graniser to produce product at very cost-efficient prices. Those are the acquisitions that we have made. Of course, as the slide that Mike just finished off with in talking about our cash position, we're currently about 3.3x leveraged, which is consistent with our financial policy, and we have about GBP 280 million of cash and undrawn credit lines. We expect to continue to keep making acquisitions. As you can see, so far, we've added this year about GBP 35 million of EBITDA for a spend of about GBP 200 million, which is clearly less than 6x.
The point I make here is that we have remained a very conservative acquirer. We're not getting carried away and paying high multiples. We remain a very disciplined buyer of flooring businesses.
Have we got Philippe back?
I don't know. He's still with me.
Okay. No problem. I'll quickly run through very briefly the operational highlights from where I think you left off. In Soft Flooring, UK and Europe Soft Flooring, I'm back up on slide 12. Key here is, this is the division that, as everyone know, organically grew the most, an incredible amount. Notwithstanding that, we continue to look to make improvements for the future. We are still investing in our logistics platform to drive even more growth. We have signed a commitment now for a new distribution center close to Worcester, off the M5, to replace the distribution center that we're running out of Kidderminster at the moment, which will significantly increase our capacity and also make us more efficient because it is in a much better location. It will be brand new and fit for purpose, well, sorry, fit for purpose.
Across the product categories, both in carpet and in underlay, we continue to also make further investments. I spoke briefly about the closure of the Westex plant and relocation into our Dewsbury plant, which we've invested in and grown. In underlay, you can see there that we're making investments in new types of products, certain accreditations. We also invested in our laboratory also on the carpet side. We're doing more to ensure the ongoing quality as well and product evolution. We're also looking increasingly into, of course, environmentally friendly products and including on the underlay side in particular. On the next slide, this was coming back to the margin bridge that I spoke to. This is the margin bridge for this division. This is on slide 13.
You can see that we actually had a positive acquisition mix effect here, which is unusual for us. That's because the business that went into this division was the Edel Group, the artificial grass business, which Geoff mentioned, and artificial grass businesses do produce very good margins. That actually gave us a bit of a mix uplift, but then also the organic uplift of 1.9%. Just dipping over quickly onto ceramics. Here we made two acquisitions in Italy in the earlier part of this year, within the period we're discussing. Now we have four factories in Italy, sort of three broadly in and around Sassuolo, and one a little bit further out, which was Santa Maria. Across these four factories, we're now doing exactly what we've done in the U.K. and in Spain, which is optimizing our manufacturing across that platform.
It doesn't need to be the case that one factory is for one brand, clearly, and so we are optimizing that to maximize our margins. That comes with some investment. We are investing, and it's currently underway, a new production line, a new kiln in Serra, our original factory, which will be operational mid-January. We've also introduced some other new production lines in the other factories in Sassuolo, near Serra, and this is all part of the drive to maximize our margin in Italy. I think there's a lot of opportunity in Italy. We have a lot of new capacity, although that's being sold out, which is fantastic because the demand is very strong for our Italian product. In Spain, we also continue with some OpEx programs to maximize our margins there, as you can see here.
The acquisitions obviously most recently have been in Italy, so that's where a lot of activity is taking place. Sorry, bridge on the next page is the same bridge that you can see. We bought some businesses in Italy. Just to be clear, the business we bought in Italy, before we bought them, we're talking about overall an average EBITDA margin of around about 10%, so significantly dilutive initially. Obviously we pay for profits in cash, we don't pay for revenue, so that doesn't matter on the face of it's just the optics. Of course, we've improved that, and we expect to do more to continue to improve that in terms of the synergy projects that we've discussed.
Then finally, well, I say finally, but in Australia, again, the only thing to mention here is there's been a significant lockdown in Australia, in particular in the state of Victoria. The businesses there have been incredible in terms of their flexibility to, number one, ensure they can supply the states that were more open and where retail was open, and number two, focus on areas in the construction industry that were also allowed to remain open during those lockdowns, which they did fantastically well, continue to grow and maintain or improve their margins throughout that. That was a great performance by the team there. As it said in that final bullet on page 16, the lockdowns have now come to an end, so we're expecting to see continued strong contribution from that division.
The bridge on this one is not even worth really talking about, as you can see on the next page, because it is flat. Then finally, North America. This is the new division. As we said, this is the Cali Bamboo business that Geoff was talking about. Clearly, we see a lot of opportunity in leveraging that distribution platform across North America with new product categories for that business, products that we make elsewhere in the group. That brings us to the end.
Look, I'll just very quickly comment on the outlook, and then we'll hand over for questions. We still see strong demand for our product. You can see, as Mike mentioned earlier today, the like-for-like revenues are up 30% in the first half. We see continued strong demand going into the second half of the year, and the outlook's fairly good because one of the key leading indicators of flooring sales is housing transactions, because typically, 12 to 18 months after people move homes, they replace the flooring. Given the record levels of housing transactions in our key geographies, which you can see on the chart on the right-hand side, then. Sorry, this is on page 22. We are expecting strong demand to remain for the product for the foreseeable future. The company has been able to mitigate the inflation or largely mitigate inflation effects through price increases.
You can see that with the underlying lift in our operating margin, notwithstanding some pretty significant inflationary inputs into the business in the first half. We've got confidence that we can continue to manage inflation. Victoria has been, in the last nine years, we've had consistently increasing operating margins, even though there's been a very wide range of operating environments over that period of time, including the Brexit result, which suddenly increased the cost of our raw materials overnight by 20% with the decline in sterling in the U.K. We have a considerable degree of pricing resilience, and that's flowing through into increasing margins, notwithstanding the inflation. The management team have done a brilliant job of also managing supply chain constraints.
They got ahead of the curve earlier this year, foreseeing that there could be some supply constraints, and stocked up on raw materials, which we continue to maintain at higher than normal levels to make sure that we can continue to supply customers. That's given Victoria additional credibility with our customers because some of our competitors have not been able to meet demand, and that's helped us to continue to grow our market share, and we think that we can hang on to it going into the future. Lastly, as I mentioned earlier, we have some good, strong acquisition prospects looking ahead, and we've got the capital available on our balance sheet to take advantage of them. With that, let's hand over to questions, and I look forward to hearing from you.
Okay, then. Thank you. If you wish to ask a question, please press zero and one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero and two to cancel. There will be a brief pause while questions are being registered. The first question we've received is from Robert Chantry, Berenberg. Please go ahead. Your line is now open.
Hi. Morning, guys. Hope you're well. Three questions from me. Firstly, could you just give a bit more detail on the input cost pressures in moving parts, in terms of which regions have been most impacted? Any hedging that you're able to do, any signs of easing or further pressure, et cetera? Just some more color would be helpful. Secondly, the margin evolution. Clearly there's been some really strong like-for-like growth in the margin. Presumably that's benefited from operational gearing in the U.K. that is strongest ever level, 18%. Can you just comment a bit around what you view as sustainable on a base case level of demand in the next few years for the different divisions? Finally on CapEx, could you just comment on the base level of replacement and growth CapEx you're expecting on an ongoing basis?
We've been thinking about it broadly equal to depreciation post-IFRS 16 adjustment, sorry. Yeah, obviously it's been moving around in the last few years given COVID, et cetera. Some guidance there would be helpful. Thank you.
Yeah. Maybe on the raw material, so on the inflationary pressure. We've seen, of course, most of the inflationary pressure we've had is in the ceramic division, is the energy prices, as you know. As I've mentioned, we have a different hedging policy in Italy and in Spain. We have covered, so we make long-term contracts, and we have the possibility of fixing and de-fixing prices. In Italy, we are hedged for a period of three years. In Spain, we are more hedged for a period of one year. Whatever we cannot hedge, we try to
We try to increase our prices. Most of the price increases, there's very little of raw material cost, of input cost, of cost of goods sold, which we don't cover by price increases. It has been hefty, not only with us, the whole industry, but there's a massive tendency with the price increases upwards. This has been the fact in the last couple of months, mainly. I think we've covered most of that as we speak. In the soft flooring, this has been going on. The biggest input cost there is artificial. This is the yarn, in fact, which we're getting from Turkey, and most of that yarn, we've had increased prices there, but we've passed on most of the increases. We've just announced our fourth price increase for this year, which will be in effect from the fifteenth of December.
The price increases have been mitigated. Of course, there's all kind of different components of the cost of goods sold, which are growing, and we are expecting some inflationary pressure on some other costs, like on labor as well. We are anticipating that, and we are very protective on the margins going forward. What do we expect for the future was another part of your question. Of course, we don't have a crystal ball, but we think that the energy prices will be high for another quarter, just to get us through the winter. I think we're pretty well covered with the contract, and then we will see some relaxation of the sales prices. In the artificial turf, just like in the yarn, which we are buying from Turkey, so we can see a light deceleration of the prices, but only very recently.
We've still been at a high level, but we are covered with price increases there. In terms, second part of your question was the margin evolution. If we look at in the different categories, in the margin evolution, I think in soft flooring, where we are with over 18%. I think most of the synergy projects are done. I think with having six brands now, the three distribution centers and the two factories, everything is managed to cope. The heavy lifting is done. Of course, there's still lean programs and there's profitability increases across everywhere, which are topping that up. We think there's still some growth potential from where we are, but most of the projects are done in the soft flooring.
In terms of the hard flooring and ceramics, there is definitely room for improvement because of all the projects we have in Italy. The acquisition of the latest plant, Santa Maria, has provided us with a lot of possibility to uplift the margins, because we have this extra atomizer coming on board. We will do some more integration. Of course, we've just done a couple of investments. One was in Serra with a new kiln, then a complete new line in Ascot plant. We are starting to do overpolishing, so a lot of the outsourced qualities will still be insourced going forward. This will be at the margin uplift. This provided, of course, that we can have sufficient price increases for the raw material increases or the COGS increases, let's say, on the energy cost price. We think we have closed these gaps for now.
What part of your question am I still missing, Rob?
I think it was the CapEx. Shall I cover that?
Yeah, okay.
Yeah. Rob, just final bit I want to mention. You talk about operational leverage. Operational leverage, any business with overheads has operational leverage. Of course, it's a feature in any business. It's a feature in our business. We strive to manage our capacity for growth. Also that's combined with efficiency. It's all part of one big equation. It is what it is. I think we've invested in a way that I think we wouldn't have been able to even handle the capacity that we've been experiencing this period a few years ago without these investments. I don't think you can't really look at that in an isolated way and say, "Well, some of that margin improvement is operational leverage." It's all part of the same package of investment in growth and efficiency.
Just on CapEx, not including leases, and of course, having made some acquisitions now, the sort of normalized level of CapEx, to keep everything well invested, is about GBP 40 million per annum. Obviously, that was lower in previous years, but we have bought a number of businesses since then. That's the level that it's now at, broadly.
Thank you.
Thanks, Rob.
The next question is from Richard Higham, Berenberg Capital Markets. Please go ahead. Your line is open.
Good morning, all. A couple of questions from me this morning. Firstly, on the acoustics investment, just wondering what the extent of the opportunity is there, and should we expect to see any further sort of ingress into the commercial side of the equation? Also on selling prices, how should we view the selling price increases that you've put through? Are you broadly in the middle of the pack, so to speak, or have you been investing in improving the competitive position of the product offerings?
Thank you, Richard. First on acoustics. We've developed this new brand, Sonixx, in the Interfloor brand. Okay, this is a new opportunity which we are exploring. This is never going to be a massive business. It's something new, it's interesting, so we are looking more into the building materials, if there's anything we can do there, because we can see, albeit small quantities we make there, we can have a very good profitability. We are looking to develop that, to grow that, but you should not look at this as some major category which we'll be developing anytime soon. It's a nice add-on. It's a good top-up of what we are doing. In terms of selling prices, the policy and the strategy on selling prices. I think like in soft flooring, we consider ourselves to be a leader.
We are beating the pace of the price increases. We've not looked at unsatisfactory price increases. We're trying to do all, and to take all the price increases which we can. I think if somebody can do it in the market, it's us because we have an outstanding delivery service. I think a customer has no reason to complain with our service. It's an easier game to do a price increase when you're backed up with a good service. This is what we've done. We have attracted business, even at increased prices, because a lot of our competitors have let the market down. Is that an answer to your question, Richard?
Yeah, that's super. Thank you. What about on the ceramic side, if you would?
Yeah. On ceramics, there the price increases are more recent and more heavy, because of course the energy cost is a big component of the cost of goods sold of ceramics. We had to make vast increases. We first started with Italian price increases because most of the Italians are with the DIY and/or selling the cheap brand of the medium ranges. We've covered that pretty fast because the impact would have been the biggest. In the product mix, so in the higher end, and that's as well for Italy, as for Spain, we have taken a bit more modest price increases. It balances up that we should not have a big margin dilution at the current, I think we are covered with the current energy prices.
Unless we see further developments, we will have to go back to the market.
Okay. Thank you very much.
The next question is from Charles Hall, Peel Hunt. Please go ahead. Your line is now open.
Morning, everyone. Can you just provide a bit more color on how you see the demand outlook given inflationary environment in most regions, plus COVID, getting worse in Europe but probably getting better in Australia? If you can just provide a bit of thoughts on that'd be helpful.
Yeah. Our forward-looking in demand for the next quarters is solid in all categories. What we've seen in the first half year, we think we will continue to see in the second half year. Like in soft flooring U.K., we are pretty confident and this is what we are experiencing now and looking ahead. I think we are outperforming the market for the moment. I think we attract extra business. I think that the market is probably at an even pace. Something I mentioned is that in the last three years, our cut lengths have improved with 56%. That's where we really measure the market. We keep on growing in double-digit numbers on cut lengths. This is the real focus because it's margin enhancing, these cut lengths. We prefer to sell a cut rather than a roll. There's a much better margin.
We keep on attracting business. Demand soft flooring U.K. going forward, even with a slight downturn in the market, by the way, which we don't expect. I think we'll still be good in demand in ceramics and Italy as well as in Spain, so we have a very solid demand across all the geographies. The main geographies in the demand are Germany, Eastern Europe, France, and also the U.S. has been pretty solid in demand. We continue to see this solid demand. Yes, COVID, I think COVID is going to be part of our life for the next couple of years. Even when there were lockdowns in the U.K. and as demonstrated when there were lockdowns in Australia, we have had always the possibility even to improve our business and to grow.
The market has learned to live with COVID regulations and has discovered new ways of doing business. I think if anything, in the new world of COVID, I'm not scared that demand will stagger.
What are you expecting in Australia post restrictions being relaxed?
Yeah. Well, for the moment, we have a very upbeat demand to Christmas, and the expectations for the second half year in Australia are very good. Already we've had a good year in spite of lockdowns and looking ahead in the next half year, so the business looks pretty buoyant. We're getting a lot of positive feedback there, from our MDs and the customers, the larger customers out there.
Excellent. Geoff, can I just ask on the acquisition pipeline, can you just give some feel as to the number of targets or the scale of them? Obviously, you've reiterated you're getting to GBP 100 million EBITDA from the acquisition.
There are companies that are under proper conversations at the moment or opportunities, there's probably half a dozen. The potential acquisitions or people that we've had conversations with is obviously much more than that. People where we're actively in discussions is half a dozen. They range in size from about GBP 10 million of EBITDA to about GBP 40 million, in terms of their size. I'm still quite confident that we will hit our target.
Perfect. That's clear. Thank you very much.
Thank you. We've received a follow-up question from Robert Chantry, Berenberg. Please go ahead. Your line is open.
Hi. It's just me again. Just had a follow-up question on the Turkish acquisition. I was wondering if you could give some more detail on, I guess, the potential integration you talked about of capacity with the Italian and kind of, I guess, the broader ceramics business in terms of efficiency. Do you see it becoming a kind of a low-cost manufacturing hub, or is it kind of just to provide extra capacity to Italy, or can you talk about how the strategic direction of that business will change once it's within your business? Thanks.
The Turkish company, Graniser, so we will continue to run it as an own brand. It brings us a few new geographies, like Israel is an important market to them, and we are not very present in the Israeli market. They work with a very large importer in the U.S., and we can take more business in the U.S. It's a customer we are not working with the other brands. This can open up some opportunities. On the sales side, 70% of what Graniser is doing is exports. If anything, we want to grow that business. We want to do the 30% domestic market, which Graniser has. We want to lower that number, and we want to increase the 70% of the export going forward. It's not a small capacity because they do 20 million sq m.
For the record, the rest of our ceramics businesses are doing about 52 million sq m, so the total will be 32 million sq m. Of course, we're looking at ways we have a cheaper production platform, but not in all the components of the cost of goods sold. Like, okay, labor is cheaper, the clay is cheaper, but the energy is not cheaper. The energy will come at a similar price like in Italy or in Spain. Still, we have the possibility. In the geographies, what we are looking at doing now as well, as you know, through our Italian companies, we do quite a bit of business in Eastern Europe and in the DIY, and there's large quantities and volumes needed there. We are looking if we can develop an Italian brand made by Graniser or something like this.
We will definitely look to integrate. Like we have done in all of the Victoria companies, all of the Victoria brands, they stand as separate brands, and the production. Behind the scenery, there's a lot of synergies which we are doing. We are even looking at some of the OEM business which we're doing in Spain and in Italy to outsource that to Turkey. Instead of buying some larger quantities from some competitors, we're looking to bring these quantities to Turkey. We are looking at this moment in time at what were the best sizes and kilns we could be using for that operation. Quite a bit of work, but let's say I consider it a usual exercise for the group. This is what we do when we buy companies. We don't integrate the brand. We've only done it with one brand in Spain.
Otherwise, we leave all the brands out there with specific service propositions, specific brands, specific qualities. This is going to happen to Graniser as well. Behind the scenes, the synergy project.
Perfect. Thanks, Philippe.
Thank you. There are no further questions at this time. I would like to hand back to you.
All right. Well, look, thank you very much to everybody who dialed in today to hear about the result. We look forward to updating you with the full result in due course and potentially some acquisitions between now and then.
Geoff, if I may.
Yes.
Geoff?
Yes.
Geoff, if I may, because I was mentioning that in my presentation, which I did unfortunately just for myself. Just the summarizing point of the presentation was, and I want to reiterate that, okay, yes, we have had another very strong performance in the half year, but I think we are in a very good position to face the challenges with the disrupted market chain or supply chain. We are confident that we will defend and protect the margins going forward. Yes, there is a good demand. We are confident that we can pass on the price increases because the service we're delivering is good. We look confident towards the next half year. Okay. That's it. Thanks, Geoff.
Okay. Thanks very much, everybody. That's great. Thank you.
Bye. Cheers.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.