Victoria eyes further buys as it lifts margins
Carpet group Victoria has decided against paying a dividend, preferring to hang on to its cash as it looks for more acquisitions.
Geoff Wilding, Victoria executive chairman describes the results for the year to 28 March:
‘In the run-up to the Sydney Olympics in 2000 the British Men’s Rowing Eight tested every proposal, every change, every decision against one simple criterion: “Will it make the boat go faster?” The outcome was a gold medal. At Victoria we quite like that level of focus (and the result!) and Victoria’s management are encouraged to test every operational change, every capex proposal, every decision they make against the equally simple criteria: “Will it help us make more money?”
‘We won’t always get it right but this benchmark helps us avoid fuzzy, value-destroying thinking and ensures we never forget why we are in business.
‘So I am pleased to advise shareholders that Victoria’s financial position continues to improve with underlying pre-tax earnings for FY15 of £7.46m The group will however record an after-tax loss of £4.52m due primarily to the accounting impact of the contract for differences following the payment of the £2.92 per share special dividend in July 2014. The charge for the contract for differences was flagged in the half-year report and had no impact on cash or the group’s underlying earnings. Other key numbers are: group revenues grew by 79.7% (84.1% in constant currency terms) from £71.39m to £128.30m; group EBITDA before exceptional items increased from £5.14m to £11.88m; group operating profit before exceptional items and intangible amortisation increased from £2.65m to £8.88m; after exceptional items, the group recorded a loss after tax of £4.52m, compared with £1.61m profit after tax in the prior year and net debt as at year end was £36.28m (2014: £1.48m). Debt to EBITDA for covenant purposes was less than two times at year end.
‘I do not intend to review the last 12 months in particular detail. What we do is simple: we purchase raw materials, skilled people make it into carpet, and then we sell it and distribute it. There is nothing complicated in our business or our financial structure but we do focus on maximising the group’s return on capital employed.
‘Operational management – all of whom are shareholders - are committed to growing earnings and carefully managing their working capital to optimise free cash-flow. I feel truly privileged to be working with such a talented and motivated team. It makes my job extraordinarily simple. I do my best to keep out of their way and let them get on with working their magic. This approach seems to be working with the group delivering record underlying profits.
‘Their excellent work has generated capital we have been able to usefully deploy by acquiring two superb businesses during FY15: Abingdon Flooring group and the Whitestone Weavers group. Both these acquisitions have been materially earnings-enhancing and value-creating for shareholders.
‘Yet that is not the whole story. By focussing on acquiring only the best businesses, Victoria has also gained the services of some of the most talented managers in the sector. This is important. Although it is a core part of our operating philosophy for Victoria’s businesses to continue operating autonomously, the managers do work together and by doing so their collective skills – and those of their staff – are developing operational synergies: ways to grow earnings, while providing enhanced products and services to customers. This, we believe, will continue to ensure Victoria experiences above-average sector performance.
‘The group obtained £10m unsecured long term capital from the Business Growth Fund during the year. Since the year-end we have also successfully arranged new banking facilities, which replaced the pre-existing bank debt. Given our intention to continue to grow the group through acquisitions, these new multi-currency revolving facilities, provided by Victoria’s existing group bankers, Barclays and HSBC, provide substantial headroom for future growth. This is helpful as over the last couple of years I have visited literally dozens of flooring manufacturers and know there is a lot of opportunity to continue to grow Victoria.
‘While one always wishes more had been accomplished, I am pleased with progress to date. Yet the opportunity in front of us remains large with further potential to grow earnings in the UK and abroad via carefully scrutinised acquisitions and organically via a committed sales focus. This is what we intend to deliver for shareholders in FY16.
‘One of the fabulous things about carpet manufacturers – and the thing that motivated legendary investor, Warren Buffet, to buy US carpet maker, Shaw Industries – is the cash they can generate. The equipment is relatively cheap to buy and lasts a long time. The time between manufacturing a roll of carpet and being paid for it is relatively short. Raw materials can also be bought on attractive payment terms. These characteristics are evidenced by Victoria’s operational cash-flow exceeding its EBITDA for each of the last two years.
‘So, in the medium term, we expect Victoria to be capable of paying an attractive dividend. However in the short term, as mentioned earlier in this statement, it is the board’s view that we will create the most wealth for shareholders by deploying the free cash-flow generated by the existing businesses within the Group towards acquiring other high quality flooring manufacturers. Therefore we have resolved not to pay a final dividend for FY15.
‘Finally, I would like to express my genuine appreciation for the support, advice and commitment of finance director Terry Danks, who retires at the end of July. Terry first joined Victoria Carpets (the manufacturing subsidiary) as chief accountant in 1985. His first responsibility was to replace the quill pens and abacuses in use at Victoria with an IT-based accounting and operating system and has led the inevitable continual changes ever since. Terry’s enthusiastic embrace of the change in direction at Victoria following the board changes in October 2012 has made my job immeasurably easier. He already had plans in place to retire at the time of my appointment but allowed me to change his mind and agreed to stay for 12 months, which I managed to drag out to nearly three years. I’m sorry to see him go and wish him a long and enjoyable retirement.’