Okay, well, good morning, and welcome to those in the room. Great. It's great to see you in person. It's been a couple of years since we've been able to present our results in person, so that's a real joy. Today, I'm Ronnie George, I'm the Chief Executive of Volution. Alongside me, Andy O'Brien. Andy's been the Chief Financial Officer now for nearly three years. Supporting us in the audience today, Paul Hollingworth, our chairman. What we'd like to do today is take you through our results. Overview, I'll start with that, the financial review. With Andy, business review and strategy, I'll come back on, and summary and outlook. Of course, I think some interesting opportunity around the Q&A.
First off, it's really relatively straightforward, we believe our early and decisive action on supply chain management, and also around pricing, has delivered a strong revenue and profit growth in the first half of the year. In summary, 13.6% revenue growth. That's a split of about just under 8% organic growth on a constant currency basis, and then the balance made up from acquisitions. A strong 15% operating profit growth, a small margin expansion. What I'll do is I'll leave Andy to go into more detail so that we don't duplicate each other. But look, the headline is, and we'll come into it in more detail, but that early and decisive action around the supply chain has helped us really support and underpin our strong revenue growth.
Of course, pricing, increasingly topical with the inflation risks. We think that we were proactive throughout with pricing, and that's delivered this strong set of results in the first half of the year. Essential to our story now is what we call our 3 Ps, the product, planet, and people element of what we're doing here in Volution. I just remind you, our purpose is to provide healthy air sustainably. It's to provide healthy air inside buildings in the most sustainable way. There's some really important, if you like, initiatives that we're driving. The product initiative is around us targeting 70% of our sales to be in what we call low carbon products by the end of 2025.
As you can see there, in the first half of this year, we've delivered 65.1% of our revenue is from what we call low carbon products. That's not a surprise to us. These products are great seeing greater regulatory underpinning, and our low carbon revenue streams are effectively growing faster than our non-low carbon revenue streams. It's really helped, and that participation now is up to 65%, and we're in really good shape to hit our 70% target by the end of 2025. If we go next to planet, we primarily provide ventilation solutions that are injection molded, they're from plastic parts, and we're hugely aware of the fact that we've been using in history quite a bit of virgin plastic. Our approach to this is that we want to go down increasingly the recycled route.
There's two reasons for it. These are plastics that alternatively could end up in landfill, and there's also a compelling argument from a cost perspective. The progress in the first half of the year was in numerical terms, disappointing. It was 58% versus a prior year half of 59.7%. We've got a huge, you know, a huge task on our hands to get to 90% participation by the end of 2025. But what we could see internally is for, like, the initiatives that we were driving and the way in which we're able to greatly apply recycled materials to our production capability. Although the numbers are quite low, we know that the behavior and the breakthroughs in terms of the application of these recycled materials in our production, we've made significant steps forward.
In actual fact, if I look at the February, and indeed, the January and indeed the early indications for the February number, is that we're seeing quite a big upswing. The summary there is that we didn't make the progress numerically as we would expect. We see that accelerating in the second half of the year. The underpinning initiatives that will ultimately drive that 90% of our plastic production from a recycled content is going really well. To follow our third P, on people, if we believe the target has to be zero reportable accidents. You know, and in actual fact, in the first half of the year, we had disappointing progress.
We had six reportable accidents, all very minor, but nevertheless reportable in the first half of the year, and an increase in our accident frequency rate up to 0.22 per 100,000 hours worked. That was disappointing. What I am really pleased about is on the first of March, we appointed a new Group Head of HR. It's a newly created role. The growth in terms of the group absolutely warrants that additional support, and we're delighted that Michelle Dettman joined us on the first of March. What I'll do next is hand over to Andy to take you through the financial review, and then I'll come back with a bit more operational detail later.
Thanks, Ronnie. Good morning, everybody. I'll try and remember to press the clicker in the right direction as I move as well. Look. Well, actually, before I move, the first slide, just out of interest, we thought we'd add in some pictures to break up the presentation. What we've done is try to demonstrate some of our facilities. This one you see here is our recently acquired facility in North Macedonia with ERI, which I'll come onto a little bit later when I think about cash flow and CapEx. We're going through an exciting expansion plan as part of that, the journey with that business as well. Here you see, you know, a view of that production facility. Right, first slide here, just the financial highlights.
A little bit of repetition from some of the numbers that you saw on Ronnie's opening summary slide there, but also presented over a five-year view, which I think is particularly interesting because it does give you a sense on compound growth over the last five years. Revenue 11% compound since 2018. Operating profit, 15%. I think, you know, the margin is perhaps the thing that we would pull out most prominently. Obviously, this period compared to prior period, the story all about supply chain action, pricing management to maintain and gently increase margins. Of course, if you look back over the last two, three, four years, we've been on the operational excellence journey and program that we talked about in 2018, 2019.
I think the, you know, the uptick from 18.5 at the entry point of that graph there through to 21.3 pretty much speaks for itself in terms of how we've delivered and gone through that period and that journey. Earnings per share up 15.8% in the period, so slightly ahead of the 15% operating profit growth. That's due to a little bit of a reduction in our effective tax rate, primarily due to business mix. Cash flow, I'll come onto it a little bit later in terms of putting some color around the constituents of the cash flow performance in this half.
Understandably, I think as messaged, cash generation lower than normal for us, and that's absolutely around the deliberate and strategic investment that we made in inventory and working capital to deliver customer service and to maintain and offset the supply chain challenges over the last sort of six to 12 months. I guess, you know, the result even of that working capital investment and the sort of GBP 24 million that we spent in the period on acquisitions, so both ERI and some contingent consideration payout for our business in Australia. With that, with the working capital investment, we still ended the period with leverage at 1.2x, so lower than we were 12 months ago, and I think, you know, still very strong and healthy balance sheet position.
Putting a little bit more color on the revenue, and Ronnie will take you through the market sector piece later, I won't dive down into that. If we look at it from a group perspective, you know, currency has been against us in the first half of the year due to the strengthening of our currencies against the sterling. You know, GBP 4.4 million impact in the year, 3.3% roughly of revenue impact from the currency movements. Looking at the way the rates have gone since then, we would again expect an adverse movement in half two. Broadly speaking, similar level if you were to use today's rates and roll them forward for the rest of the year. Organic growth 7.9%.
We've, which we mentioned before. There is clearly this period a strong price component here as well as volume. We always talk about an organic growth target of 3%-5% in normal pricing conditions. If we were to break down and analyze that 7.9%, we would, roughly speaking, see about half of it coming from price and half of it coming from volume. A little bit more in the U.K. is price than volume. Outside the U.K., it's a little bit more volume than price. Inorganic growth then 8.5%, that's from the acquisitions made during the period. ClimaRad, December last year, so only one month in H1 2021 versus full participation this year. Of course, the more recent acquisition of ERI. Operating margin.
Here we want to show how the group margin then splits down region by region. Overall for the group, 20 basis points improvement versus the similar period from last year. Europe and Australasia both edging slightly ahead of where they were last year, so up 10 basis points each. You do see, of course, the reduction in the U.K. margin relative to H1 2021. Possibly, though, I'd just draw your attention to, of course, the two main things here. The U.K. is where we've suffered the most prominent cost inflation and cost impacts, and therefore had to respond with price.
While you know, we believe we acted decisively and speedily, of course, I guess the continuing nature of that cost increase over the last 12 months, and therefore the need to go a few times on price means that there has been a bit of a lagging effect in the U.K. I would also point out that if you look at last year, yes, we were 21.5% in the first half. We were then 19.5% roughly in the second half of last year, because the cost impact started to hit us as we went through 2021.
Yes, it's back on a year-on-year basis, but if you look at it sequentially compared to where we were in H2 of last year, a gentle recovery in the U.K., and we think that's well set going into the second half of the year. Breaking down the movements here now on net debt and cash flow. You know, as we said, the main story to draw out here is the investment in working capital in the period. GBP 16.5 million—apologies for those of you next to the coffee machine. GBP 16.5 million worsening in working capital. A bit of that, so about GBP 3 million of that is related to receivables, which is nothing other than the revenue growth of the business.
The main story here being our investment in inventory over the last 10-12 months, which we think has absolutely allowed us to deliver really good customer service, to manage the vagaries in the supply chain, and does set us up well for the second half of the year. Capital expenditure GBP 3.6 million, slightly ahead of normal. Normally, you know, you'd think of us as a GBP 5-5.5 million per year capital investment spend, slightly ahead of that this year. A bit of that is the ERI investment I mentioned earlier. A bit of it is also some exciting machinery investments that we've done, particularly in the U.K. plants as well.
The result of all of this in the period, as I say, as I mentioned earlier, still leaves us with, you know, leverage at 1.2x at the end of the period, and in a good strong balance sheet position. With that, I'll pass back to Ronnie.
Thank you. Brilliant. Thanks very much, Andy. Just as Andy talked about earlier, we tried to liven up the presentation with some illustrations. This is a picture of our injection molding facility or an element of our facility in Reading, which carries our injection molding. This is, obviously, the area where we are utilizing an increased volume of recycled plastics. We've actually added some additional equipment in the half to our injection molding capability. I'd like to just take you through the business a little bit more operational detail. First of all, the sort of operating segments that we talk about. We've said this over time, the U.K. now is less than half of the group's revenue. It's 46.7%.
If you think about our strategy playing out over time, the opportunity for M&A growth or acquisition growth is by definition, primarily outside of the U.K. We would expect over time, the U.K. participation in the group's revenue to fall, but that it continues to grow well organically. Of course, it grew well organically in the first half of the year. Of course, the rest of the group grew more quickly because the acquisitions were outside of the U.K. I'm gonna skip a couple of pages now. This one here I think is just a very interesting slide to give an indication of where the geographic revenue splits out. Indeed, for the U.K., we give quite a bit of color about the individual market sectors.
I'd like to just get into the three regional elements of detail now. In the U.K., 46.7% of revenue, 5.8% constant currency revenue growth. Let's get into some of the detail. In residential refurbishment, we have had, and it's an interesting dynamic because our year-end was July. In actual fact, the first half of this year is playing against the comp, first half of FY 2021, that was actually equally very strong. I noticed that some companies are reporting now, if you report a full year 2022 versus 2021, then you had an element of the COVID impact. We're delighted with our 9.3% residential refurbishment growth, because if you recall last year, we had strong refurbishment growth in the first half.
This is a strong overlay on an equally strong performance. I know there's quite a lot of discussion around the market about what's happening to refurbishment and has the refurbishment bubble burst. From our perspective, a couple of things that are really interesting that are happening here at the moment. We believe that since the dreadful COVID-19 pandemic, there's a much greater awareness around air quality, and consumers are thinking about ventilation at home in a different way. There's also this will, I suspect, accelerate in the years ahead, a greater consideration around insulating your property because you want to reduce your heating bills. What that ultimately drives for us is increased volume of demand for refurbishing of ventilation.
I always use the analogy of insulating your property is almost akin to putting a plastic bag over your head, and if you tie it tightly, then air quality and ventilation becomes really important. That's what we're seeing here, and particularly in social housing, in public housing RMI. It's a sector that, in our opinion, has underperformed and had started to show some signs of recovery prior to the COVID-19 pandemic, but then accessibility or access to properties was curtailed. Clearly, if you're a social housing landlord through that COVID-19 period at its peak, you were ultra cautious about letting contractors into people's homes. We've seen strong demand in public housing RMI in the first half of the year, and some really interesting trends around applying decentralized heat recovery into that market.
Really pleased with the 9.3% organic growth in the period. Residential new build was disappointing, it declined. Again, the structural underpinning in residential new build is very exciting. It's underpinned by regulations. We've had an update to Part F and Part L more recently, which will increase the unit value of ventilation in new properties in future. We saw the decline in the first half of the year absolutely attributable to delays in construction, to delays with house builders just struggling with the wider availability of materials. We have increased confidence around what we're seeing on activity for the second half of the year. In commercial, we had growth of 7.5%.
That's underpinned by good refurbishment demand, and certainly what I would say is people thinking about the post-COVID period in hospitality and so forth and how ventilation should be in good order. We're also seeing London projects for fan coil efficient fan coil ventilation being quite strong, and our order book certainly has been building. In the education sector, it's been a little bit more disappointing. Overall, 7.5% organic growth in the first half. In export also a strong growth in export. These markets for us are primarily into the Irish market, where we had a strong recovery in house building, and we're one of the leaders in providing mechanical ventilation with heat recovery for the Irish market. Finally, in OEM, we manufacture a motorized impeller that goes inside ventilation devices.
We talk about it in the statement. We've made some additional investment in our Torin-Sifan facility to increase our assembly capability, and we're pleased about the direction of travel for OEM. These are energy-efficient motorized impellers that typically go inside ventilation devices, and mainly ones that are what we call system ventilation, which is, again, nicely underpinned by the regulations. I think, as Andy's already said, despite having margins that were lower than the prior year, we felt that we exited the half in good shape with our price recovery versus the inflation. Certainly that trend that Andy talked about in half one versus half two of 2021 was evident, and we're confident about where we're positioned to go forward from here. Going into Continental Europe, 34.7% constant currency organic...
Sorry, constant currency growth, clearly underpinned by some substantial acquisitions. Nevertheless, still 8.2% organic growth at constant currency. It was, you know, a strong half. We had a 10 basis point improvement in the margin. Also I think what should be considered there in the margin improvement is that the acquisition of Energy Recovery Industries was at a lower participating margin than the 25.8% that we delivered. If you actually look at the underlying organic margin, you saw a greater improvement. Just taking it a piece at a time, in the Nordics, we are again experiencing ongoing good demand for refurbishment, and that's on the back of an equally strong first half of last year.
We're a market leader for residential ventilation refurbishment in Sweden and some of the close by geographies, and strong in the trade and DIY market, and pleased about the performance that we had in the first half of the year. In Central Europe, if we break them out into detail, without doubt, our decentralized heat recovery product range in Germany was the outperformance. We're a leader providing decentralized heat recovery ventilation into primarily residential buildings. That's split equally between new build and refurbishment. There's a theme here. We're seeing heat recovery and refurbishment become more prominent. Of course, if you look at the Volution exposure overall, we're greater exposed to the refurbishment market than we are in new build, and that's obvious, isn't it? We have more homes to refurbish than we have new ones to build.
It's pleasing for us to report strong growth in areas where we have decentralized heat recovery. In ClimaRad in the Netherlands, we experienced some project delays. We're confident that those delays were associated mainly to do with COVID-related type lockdowns. If you think about Europe and how it fared with COVID, the Netherlands certainly had more local lockdowns and more punitive measures than maybe other areas of Europe. Then finally, in terms of our sort of Central Europe activities, Energy Recovery Industries, you know, very pleased about the acquisition. It came into the group, I think we completed in September. We announced the transaction in July. Andy's given some color there around the CapEx and the investment that we're making in the equipment. We're very pleased to have that operation inside the group.
These are heat recovery cells that go inside heat recovery products that again are hugely underpinned by regulatory drivers. Really good early performance with Energy Recovery Industries so far. Just moving on to Australasia. 13.8% was all an organic constant currency growth. I know some of the concerns that were maybe levied at the strong growth that we demonstrated in Australasia in FY 2021 was how sustainable would this be. Certainly in Australia we're growing more quickly. We're still a relatively small player in a significant market, you know, a market of over 30 million people. In that regard, this is very much for us a land grab. We are focused on gaining share. We've had a new account acquisition in retail that's panning out really well for us.
The business is growing very nicely. We've been building up the infrastructure and the team there. I've always said that in the Australian market, we effectively have a market-leading product portfolio, but we don't have a market-leading revenue position. We're delivering strong growth. I'm really pleased about what's happening. In New Zealand, New Zealand suffered quite a bit of lockdown from COVID around October, November, December last year, as we were in the U.K., for example, were feeling a little bit more relaxed, if that's the right expression, or there was a relaxation in terms of the restrictions. There were absolutely some very tight restrictions in New Zealand. Of course, in New Zealand, we've been benefiting over the last couple of years from the Healthy Homes Act.
We are coming up against some strong sort of comparator period numbers in New Zealand, but nevertheless, we still delivered organic growth on the back of that. It's a quick run-through the different areas. I think in summary, you know, we're delighted about the performance. We've... Thank you. Yeah, go for it. In summary, we've delivered, you know, a strong performance in the first half of the year with small margin expansion in our areas outside of the U.K., but a high level of confidence around what we're doing in the U.K. If I just take you through what that means.
The early and decisive action on the supply chain has worked, and we're in a position today where our service is the best that I can remember for the last two and a half years. If you have to go back to pre-COVID interruption to be delivering this level of service. We are seeing some competitor strain around service and of course for us that's an opportunity. I've always believed that our approach to our local markets is relatively straightforward. Don't overcomplicate it. We have to do it really well, and our service offer has to be the best, and that's what we aspire to, and I think we're delivering on that promise. The good customer service throughout the period has resulted in greater inventory, but that we believe is the right way around.
I've talked about ERI, and it's going really well, and we're excited about the potential there. We are close to bumping our head against the capacity ceiling, so this investment is imperative. As Andy probably already talked about, you know, we're confident about our outlook and therefore, the interim dividend is at 2.3 pence per share so far. Coming on to outlook, you know, without doubt, what's happening in Ukraine at the moment is horrific and devastating for us all. Notwithstanding that sort of macroeconomic and geopolitical backdrop, we're actually in good shape. We've got good levels of inventory. We've got good control of our business. The things that are within our control, I'm confident we can build upon in the second half of the year.
Really with that in mind, I'm confident, both of us are confident about the direction of travel, the trajectory. Believe it or not, we would actually look at inflation and say we'd seen some, you know, quite clear signs of slowing. Quite what happens next relative to the sort of dislocation that we're seeing at the moment is unknown. We're confident about our ability through our pricing power to stay ahead of the curve. That's a quick run-through our results, the next section is to open it up to the floor for questions. Thank you. Okay, we'll bring you a mic, Charlie. Thank you.
Yes. It's Charlie Campbell at Liberum. I've got two, please, if I can. The first question is to try and just work through kind of the U.K. price rises in the U.K. And work out whether that changes customer behavior in any way. A big part of U.K. RMI has been about upselling. As price rises go up, do people then downsell a bit? I'm just wondering how that all works out. The second question on the inventory, I understand that inventory's gone up quite a lot from July to January.
When looking forward, do you sort of imagine that it comes down or you keep it high because problems might be ongoing for a bit, but it sort of comes down as a percentage of sales? How should we think of that going forward as we're modeling that out?
If I take the second one, Charlie, and then Ronnie will probably best talk about the customer behavior piece on the first one. I mean, I think we, you know, we did signal for the last X number of months that we thought inventory investment was the right thing to do because of the vagary of the supply chain and to be able to deliver the customer service. And we think that's, you know, borne fruit in these results here. The inventory that we now sit on or the inventory that we had at of January 31st, going into half two is a very healthy set of stocks across the group. We do not feel the need to keep on increasing it.
There are probably some areas around the edges where we could say to a particular business or you've maybe got a little bit too much of this or a little bit too much of that. Directionally speaking, we're happy with where it is. We're gonna keep it at these sorts of levels. What that should translate into is a normal cash conversion going forward because working capital is where we want it to be. I think it would be a little bit rash to start bringing it back down again sharply because there's still so much uncertainty. We're happy where it is, but we're not continuing to add to it. It's just normal course going forward.
We can. We're in control of that process, so as we get confidence, we can ease off in terms of the stock levels. Pricing. In absolute terms, if we think about particularly in RMI, the actual quantum of price is very small. In my view, it doesn't affect the behavior. If you're a consumer and you're looking at refurbishment, and we're pushing upselling. You know, I always say ventilation doesn't have to be noisy and it doesn't have to be ugly. But there is a small premium to pay for that, and we promote premium upselling products into the marketplace. But still in an installation, a typical bathroom installation, the contractor cost, the installation cost would still probably be 70% of the cost. So, you know, our.
We're not seeing at this stage our price delivery changing behavior. I don't think it will do. I'm not concerned about that. I'm delighted with how we've demonstrated the pricing power. In some respects it was needs must. If you think about the inflation that we're facing, and we've had to go on the front foot with pricing, and of course, I think it's given us a renewed level of confidence about the pricing power that our brands have. In absolute terms, you know, on some of these products, it can be GBP 1, GBP 2, or GBP 3 difference. I'm not sure that it. Clearly, you can't do that forever, otherwise we would just keep going. It's not affecting behavior.
Lushanthan Mahendrarajah, Berenberg. Three questions on different topics. I guess the first one really is on just Russia-Ukraine. I guess, is there any sort of export exposure to that region? I suppose also, are there any sort of COGS that come from that area and sort of any direct impact there on supply chains that might affect inventory levels? Secondly, on plastic recycling, sort of in the release, you sort of talk about ABS and HIPS, and if you could just sort of flesh out what you're doing there and perhaps what opportunities that provides. Finally on Part F and Part L, obviously we saw the update in December, I guess just around continuous ventilation, what does that actually mean for your business and the opportunities there as well?
Thank you.
No, I mean, I'll take the easy one. Russia-Ukraine, from a direct perspective, and I think we put this into the announcement, but it's probably some pages back, so when you read through it in detail. Our revenue to customers in Russia, if you take last full financial year, was very, very small, so it was about 0.2% of group revenue. Similarly, from a supply perspective, GBP 200,000 worth of spend with a supplier in Ukraine across the group. Very, very small from a direct perspective. You know, it's a dreadful situation. Obviously, the main issue is the indirect consequences rather than the direct ones. From our business and our customer base, you know, next to no impact.
I mean, just to add, it's an issue, you know, we, you know, the situation in Ukraine is very sad, but in actual fact, one of our competitors in the RMI market is actually based just outside of Kyiv and has not been producing for the last couple of weeks. Not surprisingly, we've been seeing inquiries coming from that customer base. In actual fact, you know, we certainly don't want this crisis. We'd certainly love to wind the clock back three or four weeks. Overall, actually, there's probably from a business impact, we're probably seeing more on the upside than we are on the downside risk. But it feels pretty hollow to be talking that way. The two other points that you made, Lash, if we take the first one, which was.
Plastic recycling.
Recycling. Yes. Thank you. So it gets quite technically involved and some of it, we believe, is commercially very sensitive. I'm going to give you the high-level version because I certainly don't want to let out any secrets about what we're doing. I think to get to 90% recycled content in our production, considering we sell products that are mostly visible and therefore have to be of a great appearance aesthetically and in terms of quality, how do we get to 90%? That's a bit of an art. What we are working on, we've got a really great initiative, particularly at our Reading facility, where a lot of our plastics are produced and huge operator involvement.
You know, a great anecdotal story to me the other day was when an operator was asked if he could take a product home to show his children because at the dinner table, he could talk about how he was proud to be recycling material that ordinarily would end up in landfill into this product, and this is how it looks. That's really the 3 Ps, our product, planet and people. You know, this is absolutely playing its people and product and planet all in one. This sustainability journey, I think, is driven best when we've got a bottom up, if you like, led process. We can hopefully inspire people with the vision, but ultimately the nuts and bolts of how it happens is really essential.
In the first half of the year, although we had some problems getting some of the material that we need, and we do have a partnership, for example, with AO, and we've announced that previously. You know, fridges to fans, they end up collecting your fridges and they take them back and they recycle them into a plastic content that we can utilize. We've got a number of partnerships and breakthroughs where we've now confirmed that we can use material in our process. The next step is to set up the supply chain and the flow. What we know is what proportion of our production can be from a recycled content. Now we have to set up the nuts and bolts of the supply chain to support it.
When we do the calculation about the proportion, it's significantly higher than what we delivered. Now it's just the easy bit is finding the material and sourcing it. The hard bit was applying it. That's why I can speak with some confidence, and I'm certainly seeing the numbers come through now. You know, this is an essential one for us. You know, the plastic is, it's a mixed material, isn't it? On the one hand, it's a great versatile material. On the other hand, we can't keep producing virgin plastics going to products and then put stuff into landfill. If we get to this 90%, then I think we really do solve that dilemma.
On the building regulations, Part F and Part L, and also from a wider sustainability piece now, when I see house builders talk externally about their sustainability, let's not forget, if I'm a house builder and I want to be genuinely sustainable over the long term, My product needs to be sustainable, and there isn't a better way to provide a sustainable home with good indoor air quality and low energy costs without using heat recovery. So we've got a push and a pull here. We've got building regulations that are effectively policing that we do the right thing, and then we've got sustainability, which is effectively dragging that process from the other end. The medium-term dynamics for that sector are really very strong.
We see it play out to a greater or lesser degree in some other markets. In Germany, we see it playing out really well, you know. In our business in Germany, we've been delivering sort of 10% year-on-year organic revenue growth in decentralized heat recovery. Maybe that's a sign of the potential over time. Thank you. Clyde, hi.
Hi, Clyde Lewis, Peel Hunt. I'm not quite sure exactly how many I've got, so I'll do them one at a time. Do the simple ones first. Just can you update us in terms of your acquisition pipeline? Just how things are looking, what the sellers are expecting. Has that changed at all in terms of, you know, pricing?
No. I've said this forever. I keep saying it. People go, "Well." I think a lot of the acquisitions that we're targeting, and indeed private sellers, they're not pegging their reference point to the public markets, you know. That can go both ways, you know. There is quite often, you know, if the public market multiples are much lower, then I don't expect that the private seller would necessarily be reducing their expectation. The same is true at the other end. Our pipeline is still active. You know, Andy and I have got, you know, three or four really nice, interesting opportunities that I think we can consummate over the next couple of years. The timing is, you know, it's unknown. Will it be this year? Will it be next year?
It's still an absolute key, you know, element of our strategy, you know, to grow inorganically. We'll keep generating cash and have that, if you like, up our sleeve. If we look at our track record, I mean, I think our track record of performance on M&A is probably the best indication of what to expect over the coming years. Still very active, still very excited, primarily outside of the U.K., partly to do with competition arrangements. Not completely offside in the U.K., but by definition, it's more in continental Europe.
Thank you. Second one, I think, Andy, you mentioned that the cost pressures in the U.K. were higher than in Europe. Could you sort of expand and help me understand the dynamics around that? That'd be helpful.
Yeah. Look, I mean, firstly, in simplest terms, like that's where we do the vast majority of our manufacturing. Now, of course, if it's then intercompany supplied, we look to have the right intercompany pricing structures so that we're taking the right decisions in those end markets. You know, if you look at the split of our production U.K. and non-U.K. versus our revenue U.K. and non-U.K., there's a lot more production activity going on in the U.K., per se. That is a key part of it to begin with. It's definitely it can depend on the product mix. If you take somewhere like, I don't know, Germany, ClimaRad et cetera, where you've got a much more premium, higher priced product, of course, you know, you get the same...
Particularly if you talk about something like freight, for example, you know, the same, the dollar impact going into that product proportionally ends up being a lot less than it does in the U.K., where we've got a much broader product range. Yes, we've got premium products in the U.K., but we've got a lot of sort of low price point products in the U.K. as well. So when you play it through on a percent impact and what do you need to do to recover, you end up having to run a little bit harder. So it's those two, you know, it's those two pieces fundamentally.
Okay.
Freight is a big one, you see, of course. If you were to say, what is the single biggest cost impact that we've had over the last 12-18 months, it would be the sea freight and the vast major.
Inbound.
Inbound sea freight from China. The majority of that is being sourced into the U.K. factories.
Okay. Perfect. Thank you. The third one I had was on, I suppose, product mix impact. I mean, Charlie touched on it a little bit, but that 7.9% organic growth that you talked about, it'd be really helpful to sort of understand, I suppose, the volume-
Yeah.
The product mix and, if you like, core pricing within that, just to get an idea of how the product mix is changing, I suppose.
If you look at our pricing and you also look at the inflationary environment, and what we've said is that we felt that we were reasonably proactive, that we were increasing prices first half of last year. We've certainly had to increase them more in the first half of this year. If we look at sort of a crude estimate of the split, I would say that you've probably got about half of our 7.9, let's call it 8% to make it easier. About half, let's call it 4% is volume growth, and about 4% is probably around price growth, and it varies. It does vary to a greater or lesser degree, depending on where you go across the group. I think that's roughly how it splits out.
Of the 4%, how would you split that product mix versus core pricing?
Oh, sorry. That's only price.
It's only price.
Yeah, yeah. Mix, we're not. That's 4%. The way we measure price internally, and it's really quite very explicit, is a SKU for a SKU.
Right. Yeah.
That's not price and mix.
I suppose just trying to sort of, yeah, unpick it. Inevitably, the product mix is gonna be in a bit of both.
The product mix will ultimately come out in the margin.
Yeah.
If you like.
Yeah.
You would argue that the upsell is in the volume maybe. If we had an individual application where the value for that application, because of the mix, went up, that would help with your organic growth, wouldn't it?
Yeah.
Yeah.
Okay. Thank you. Drop-throughs, how have they evolved? Because obviously, again, all you know, this discussion around price, cost, and I suppose what would be a useful sort of, sort of example I suppose is maybe to look at Australia where there haven't been any. Australasia, where there haven't been any deals to sort of mix the picture up a little bit. Obviously you've been winning share in Australia, which I suspect is coming at a lower margin because of probably the deals and you chase for a little bit of share there. Just, I suppose again, helping try to understand that product mix.
I'm just having a look. Our margin in Australasia, Sam, have a look at it a bit further.
Yeah.
We've been expanding our operating margin. I wouldn't expect or assume that market share gains come at a margin premium, a margin discount. That's really because of the proposition. We've got a great proposition that we're now extending into Australia. It's quite often about enticing the customer because of the proposition, not because of the price. I've been in Volution for 14 years now, but thankfully the vehicle for revenue growth in the marketplace is not price. As some of you remember, I spent 20 years in wire and cable, and it absolutely was. You know, if you wanted more share, you had lower prices. That's not our business model.
that doesn't mean that we wouldn't tactically try to use price on occasions, but no, it's. Our market share gains in Australia can come potentially at par and maybe in a premium in some areas, depending on what we launch.
And then last.
I mean, sorry, just to add in Australasia, the drop through isn't so profound on the growth because we've been investing significantly in growing our capability. You know, if I look at the business that we acquired three years ago today, substantially bigger infrastructure because we expect to continue to grow well organically in future, and we've got to service it really well. The drop through is, it's not a static situation in terms of indirect cost. We're actually probably putting more indirect cost in because of the expectation for the future.
Okay, thank you. The last one I had was on U.K. profitability. I mean, I think that's probably the biggest surprise in the numbers is that U.K. profits were down GBP 400 thousand, obviously, when top line's gone up.
Yes
the RMI has been good and RMI is generally a more profitable part of the business for you. Again, useful to understand. Clearly it's a cost impact, I suspect is the bulk of it. I suppose attached to that, I'm surprised also that your revenue has gone down in new build, because I think, you know, when I look at the house builders, they've built more in the last nine months, 12 months than, you know, they did previously. The, you know.
On the margin piece, Clyde, I think the key point which we touched on earlier is look at it sequentially compared to half two of 2021. Yes, versus 12 months ago, the U.K. margin is down 1.6%. Actually, if you look inside the 2021 financial year, the cost impacts had really started to come through in half two. Our half two margin in the U.K. was about 19.5%. We have rebuilt slightly from that margin now to get to the 19.9%. Would we like it to be a little bit more? Yes. Do we think there's opportunity for it to be a little bit more? Yes.
It's definitely, I think the truer comparator of where we are now and where we've gone during this period is that 19.5%-19.9% versus the 21.5% down to the 19.9%. We think it's in the right place. The period's. It's also been a very strange period with, you know, managing factory efficiencies through COVID, staff absences, supply chain interruptions. None of these things are helpful in terms of running a really tight, efficient operation. They're much better now than they were at the start of the period or indeed, you know, nine, 10, 12 months ago. We think we're absolutely on the right path in terms of U.K. margins and gently easing them back upwards.
In terms of the pound for pound profitability, the difference would be all cost?
Say again?
The pound for pound difference is clearly gonna be all cost then, and that would be input costs as much as anything.
Yeah, exactly. I mean, look, the input, as I said at the start, you know, the input costs were profoundly felt in the U.K. Add to that a bit of factory challenge and inefficiency. That is now substantially better than it was before, and it's definitely moving in the right direction.
Okay. Thank you.
I'm just trying to look for organic growth in half two. I understand your comments around residential new build, but I'm actually quite pleased with our performance, and I know some of the disruption our competitors are having, and we can see at the moment some really strong recovery. I would say December was really weak. My sense is that what happened in December is everyone had Christmas, and if you look at construction in the U.K., sites shut, you know, second week December. We had a really weak December, but we saw it come back strong in January and February.
If we look at our share, and again, we've talked about a new account win. You know, we've won a top five house builder, which is really important for us. I think residential new build, but let's see what comes through in the second half of the year. In the inflationary aspect, we were later, as Andy said. We had three U.K. price increases last year, but in actual fact, the second and third only really started to come in in the first half of this financial year. As we exit, you know, if we look at where we are December, January, relative to where we came in, it's why I have a smile on my face in terms of the trajectory. The cost came first, and we don't like to talk about the lag.
A lot of U.K. building products companies talk about the inevitable lag, and so margins come down and then come back up, and we're uncomfortable about that, but I think we did suffer some of it. The expectation will be much stronger in the second half of the year.
Thank you.
Hi. David from Jefferies. Just wondering if we could get a little bit more detail exactly how you push through price rises. Is it done on a product by product basis, or do you look at it kind of geographically or how do you think about the actual physics of doing the price increases?
I'll give you the short version.
Mm-hmm.
Because, of course, our business is made up of lots of local individual component parts. Very roughly, I would say there's two elements to what we do with prices. Projects that we're quoting long-term, and of course, our project pricing is very much for the project. There might be a gestation period or a lead time, because if we're quoting a project now, it could come later. And obviously I think everybody's had to be really mindful of how much how much the validity of the offer or the openness of the offer, because a lot of people have been caught out. Some projects, that's probably where the lag comes in. If you quote now, and then win the order later, you're at risk of the inflation.
A lot of what we sell in refurbishment is sort of sector normal, a trade list, a list price with a discounting structure. The list prices would go up from time to time, and that list price is by individual SKU. What we might have is a headline increase, but then there might be a variation on the individual SKUs. Some might go up more or less than others. That's the same U.K. and outside. You know, if you went to New Zealand, where typically our business is trade, we have a list. The list goes up, we notify, and then there's a little bit of time for that to run through into the marketplace.
Okay. Thanks. The second question, just on M&A. I think a lot of your European competitors are basically paring back to focus on HVAC markets. Are you seeing more competition for assets in Europe?
When you say competitor, you're thinking industrial groups paring back or actually?
Yeah. The likes of Aalberts, et cetera.
Okay.
You know, they're selling off non-core assets to focus on HVAC.
Yes. We're very focused on residential ventilation, and more so than the wider market. If I look at our peers, we think there's only one or two large residential peers, as it were. Competition-wise, you know, if I look at the last couple of transactions that we had, and if I look at the names that we were competing with, relatively local or not consistently the same. I don't think that's changing. Look, the space is an attractive space, isn't it? We've got wonderful regulatory underpinning. We've got a confidence around the underpinning in the market for the coming years. It's no surprise that people see the space as attractive. You know, in the 10 years I've been the CEO of Volution now, the landscape around M&A is largely the same.
Whether or not we consummate a deal generally comes back to how we perform, rather than necessarily having really stiff price competition that will knock us off course.
Okay. Thanks.
From Numis. Two from me, please. First one, just sort of going back to the price of 4%. I'm just sort of trying to get my head around the. You look at sort of merchants and other building products in the U.K. seeing sort of double-digit cost and price inflation in Q4. Just to sort of understand the Volution cost base and the moving parts there, which meant you could pass it on with a 4% price increase, is the first one. Then the second one, just in the U.K., trying to understand the split in sales between perhaps sort of bathroom extractor fans, you know, even if they sort of silent and upsold, versus whole house ventilation systems, as we stand here today. Thank you.
It's a 4% average across the entire group. Of course, what we've said is in some areas, you know, for example, in the U.K., we had an acceleration through the half. I think it's fair to say that in the refurbishment activities in our RMI, it was easier because of the pricing, the pricing question that David asked me. It's easier to implement pricing in RMI off of a list price than it is to deliver in projects that could be more medium-term. Of course, some of the actions that we've taken and have delivered may not have yet manifested in the price improvement that you're seeing. Our 4%, of course, is on a period last year where our margins were still very strong.
You know, what I'm saying is that we've been able to maintain our margins by applying price on a prior year that had price, whereas I think some others maybe didn't act across the board early enough on price, so they've had to do more later. The other question you asked about was the mix, and that's why on that geographic slide that we show, we break into this RMI new build and so forth, and it's. As a crude assumption, residential new build is mainly system ventilation, and RMI is a mixture of extractor fans, what we would call intermittent or unitary, but also a whole raft of other solutions as well.
Not to try and give a technical lesson now in ventilation, but it's been proven through the physics that to continuously ventilate in an existing building, a refurbishment is more energy efficient than intermittent extract. You basically want to have an air infiltration rate that is below the natural leakage of the building, and that's why you're seeing an increase in system ventilation in refurbishment. That's a great trend for us because it improves the unit value. You talked specifically about the U.K. there, but if you go to somewhere like Germany, then the solution is only decentralized continuous run ventilation.
Maybe just one more while I've got the mic. Should we think about a sort of ceiling to EBIT margins? Is there more to go for?
We've said we won't set a new target. We set ourselves a target to be at the 20% or more level. Of course, I think management's ambition is to keep driving things as best we can. To set a new target, I mean, David talked about the competition there, and I would say that, you know, I think we're leading the market as it stands. That doesn't mean to say we couldn't deliver more, but we're not coming out with a new target.
Excellent. Thank you.
Thank you. Okay, we might have some questions on.
Yes, we've had a couple come through on the webcast. Our first question is from Florence O'Donoghue from Davy. What will be the level of the increase of ERI's capacity increase relative to its historical level?
All right. It's a really good question, Florence. Of course, the historical level, it's a difficult one because it's clearly been growing. It's not organic growth in our numbers for the first 5 months of the year, but it's growing very strong at the moment. I would say that our ambition in terms of the additional capacity that we're putting in place is to have a headroom and uplift potential of another 50% from where we are now. Of course, that's even greater than where we were historically, because the business is already growing close to its existing capacity.
We think the investment that we're making that we'll complete by the middle of next year will give us the ability to grow up to 50% revenue in the coming years without any further investment.
We have another one from Florence. The statement refers to a move to a more functional management structure in the U.K. What has this meant?
Yes. About 13, 14 months ago, we had a U.K. managing director who had full responsibility for selling and operations, and that individual left us in March 2021, and we made some management changes that we announced at the time. The U.K., Andy talked about it earlier, the U.K. operations are intrinsically really important to our organic growth in other areas of the group. The products that we sell in New Zealand or in Belgium or the Netherlands or in a number of other geographies are manufactured in the U.K.
I took the decision that I wanted to have close control and an arrangement with the operations to support the rest of the organic growth in the group, but then allow our U.K. team to very much focus on growing the U.K. market opportunity and not to necessarily be distracted by that. That's the functional approach that we have in place.
This question has been covered in part already, but perhaps you could provide us with a little more detail from a question from Fergus Garnade from RBS. To what extent will spiraling energy costs impact margins already impacted by inflation in the U.K., in the medium long term, and how are you mitigating these?
I mean, from our perspective, we're a very low consumer of energy. If you go to our facilities, you'll see that it is a very, very light industrial process. So we're not a big consumer of energy, and therefore from that perspective, we're less exposed than other much more sort of heavy industrial companies. We did also, fortuitously, as it transpires, lock in our energy contract in the U.K., which is the main consumer, back in May of last year for a three-year period. So we do have a fixed pricing arrangement right now. I guess the bigger impact is what does it. Again, it is that secondary piece that we touched on earlier.
What does that do to, you know, what does the energy cost do to perhaps our own suppliers who then may look to pass some of it through? What does it do to customers? What does it do to the market in general? Again, I guess a bit similar to the answer I gave in terms of the direct impact to us is relatively modest.
Thank you. We have no more further questions on the webcast, so I'd like to hand it back to the management team for any closing remarks.
Thank you. Well, thank you very much for the questions. Not surprisingly, very focused around, you know, supply chain and inflation. I think ultimately, probably the best answer that we could have given to that is the 20 basis points expansion to our margin in the first half of the year. Indeed, the fact that one of the questions was about how much further can we go, and of course, hoping to be a conservative management team that can at least meet or surpass expectations. You know, we're confident about our position.
There is a high degree of uncertainty for obvious reasons, but I think what we've demonstrated, not just over the last six months, but over the last 18 months with a difficult COVID period, is that we think we've got really good strong control over the organization. Andy and I are smiling about our results because things are in good shape. Thanks very much for your attention, and great to see you all in person. Thank you.