Victoria Regulatory News (VCP)

30 July 2015

Victoria PLC

('Victoria', the 'Company', or the 'Group')

Preliminary Results

for the year ended 28 March 2015, Board Change and Notice of AGM

Victoria PLC (AIM: VCP), a manufacturer, supplier and distributor of design-led carpets and other floorcoverings, is pleased to announce its preliminary results for the year ended 28 March 2015.

Financial and Operational Highlights

· Underlying pre-tax earnings has increased 251.9% to £7.46m (2014: £2.12m).

· Successful integration of the acquired businesses in the year - Abingdon Flooring group and Whitestone Weavers group. Both acquisitions have been materially earnings-enhancing and value-creating.

· Exceptional items include a non-cash charge of £7.55m relating to the Contract for Differences. The special dividend of £2.92 per share in July 2014 permitted the termination of the Contract for Differences between the Company and Camden Holdings Limited, with the resulting obligation being settled in shares in the Company rather than cash in July 2014 as described in the Half-year report.

· UK sales were up 181.1% with annualised like for like increase of 1.5%; operating margin improvement from 6.1% to 6.6% due to improved manufacturing efficiencies and continued focus on reducing the overhead cost base.

· Australia faced considerable economic headwinds from a slowdown in mining and fall in commodity prices. Despite these factors, Australia sales and operating profit remained flat even after A$0.84m of additional occupancy costs from the sale and leaseback initiatives in late FY14.

· The Group obtained £10m unsecured long term capital from the Business Growth Fund during the year. Post year end, the Company restructured its existing facilities and entered into a new multi-currency revolving facility with Barclays and HSBC; which provides substantial headroom for future growth.

· Free cash flow to be deployed towards acquisitions of other high quality flooring manufacturers so the Board has decided that no dividend will be payable for FY15.

· Appointment of Whitman Howard as joint broker to assist with communications with the investor community.

· The outlook for the UK segment remains positive with scope for further operational synergies in the year ahead. The UK market is showing signs of growth, aided by a recovery in the residential housing market.

· In Australia, building construction and house renovations has picked up significantly and together with continued strength in house prices in the major markets of New South Wales and Victoria States should provide a strong lead into FY16.

Geoff Wilding, Chairman of Victoria PLC commented:

"During 2015 Victoria's financial position continued to improve. Our three recent acquisitions - Westex, Abingdon and Whitestone - have been materially earnings-enhancing and value-creating for shareholders. Operational synergies are already being achieved across the businesses and we expect the acquisitions to deliver additional operational efficiency improvements in future years.

"Our focus is on maximising the Group's return on capital employed. Operational management - all of whom are shareholders - are committed to carefully managing working capital to optimise free cash-flow while growing earnings, through providing enhanced products and services to customers. We believe this combined approach should ensure Victoria experiences above-average sector performance in the years ahead.

"There are good opportunities to continue to grow earnings in the UK and abroad via further carefully scrutinised, high quality acquisitions and organically via a committed sales focus and operational synergies. This is what we intend to deliver for shareholders in FY16.

"Finally, I would like to express my genuine appreciation for the support, advice and commitment of Finance Director and Company Secretary, Terry Danks, who retires at the end of July. I'm sorry to see him go and wish him a long and enjoyable retirement."

- Ends -

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Chairman's Statement

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 (as shown in the Operating and Financial Review). 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

· 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.

To assist our communication with shareholders and the wider investor community, I'm pleased to announce the appointment of Whitman Howard as joint broker to Victoria.

In summary, 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.

Dividend

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.

Terry Danks Retirement

Finally, I would like to express my genuine appreciation for the support, advice and commitment of Finance Director and Company Secretary, 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. He was appointed the Finance Director of Victoria Carpets in 1989 and his subsequent involvement in the acquisitions of Westwood Yarns (1989), Munster Carpets (2002) & Navan Carpets (2003) has proven to be useful as Victoria PLC embarked upon its acquisition strategy in 2013.

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. During this period he was appointed to the PLC board and has materially contributed to the growth in the value of Victoria PLC. I'm sorry to see him go and wish him a long and enjoyable retirement.

Given our plans for growth, the Board is being especially selective in deciding upon a replacement and, while this process continues, have established an interim arrangement to ensure the smooth running of the finance function.

Operating and Financial Review

Operational Review

United Kingdom

The UK operating segment achieved sales growth of 181.1% from £33.05m to £92.91m, principally through the acquisitions of the Abingdon Flooring group and Whitestone Weavers group during the period, and the first full year effect of Westex which was acquired in the fourth quarter of the prior year. Having said that, it is important to note that underlying UK performance, also improved as illustrated in the table below. This sets out reported revenue and operating profit together with the annualised revenue and operating profit to demonstrate the underlying performance had the acquired companies been part of the Group throughout the 2015 and 2014 financial periods.

On an annualised basis, operating margins have increased from 6.1% to 6.6%, which, together with a 1.5% increase in revenue, delivered a 9.3% growth in UK operating profit. This can be attributed to a combination of improved manufacturing efficiencies and an ongoing focus on reducing the overhead cost base. Further operational synergies have been achieved in the latter stages of the financial year as a result of the acquisitions, which are anticipated to deliver additional operational efficiency improvements in future years.

As a result of the above, the UK recorded a profit before tax and exceptional items of £8.28m (2014: £1.57m).

Australia

Revenues in Australia were flat due to considerable economic headwinds from the significant slowdown in mining and fall in commodity prices. The subsequent significant depreciation of the Australian Dollar against the US Dollar materially increased the cost of raw materials, placing margins under considerable pressure.

Despite these factors, the business maintained its operating profit even after bearing the A$843,000 full year impact of occupancy costs resulting from the sale and leaseback initiatives in late FY14.

The business focus on productivity improvements, cost management and stronger supplier relationships combined with sale price increases to deliver an operating profit in line with the previous year despite the challenges and implications noted above.

Further operational improvements at the Bendigo spinning mill continued to build on prior year advances.

Outlook

UK

The outlook for the Group's UK segment remains positive. As mentioned above, there is scope for further operational synergies to be realised in the year ahead.

The UK carpet market appears to be growing and in the process of recovery from the depths of the recession. The wider economic environment in Europe presents some possible threats to this, firstly through potential economic shocks and secondly through the strength of Sterling against the Euro aiding continental imports. Despite this, the UK carpet market is showing signs of growth, aided by a recovery in the residential housing market.

Australia 

Building construction and house renovations activity has picked up significantly and together with continued strength in housing prices in the major markets of New South Wales and Victoria States should provide a strong lead into FY16. The weakening Australian Dollar against key global currencies due to weaker commodity demand and prices will see an increase in raw material costs for local producers and importers alike. It is likely that regulatory efforts to cool the housing market will slow the market next year but overall the outlook for the short to medium term is positive.

Financial Review

The Group's financial performance for the year ended 28 March 2015 is summarised as follows:

Reported profit before tax and exceptional items of £6.97m is after charging £0.49m for the non-cash items listed in the table which are not considered to form part of the Group's underlying profitability. Underlying profit before tax of £7.46m is therefore presented to highlight the Group's underlying profitability in the period.

Exceptional Items

The exceptional items for the year ended 28 March 2015 are summarised below:

The Contract for Differences between the Company and Camden Holdings Limited was terminated in the year and resulted in the issue of 7,087,730 new shares on 29 July 2014 to Camden Holdings Limited. Camden Holdings Limited is owned by the Camden Trust of which Geoff Wilding, Executive Chairman, is the settlor and a discretionary beneficiary. The value of the contract on termination was £9.0m, of which £1.6m was accounted for in the prior year. The exceptional charge in the year also includes £0.15m of related professional fees. Apart from the professional fees incurred, this is a non-cash item.

Acquisition costs in the period relate to professional fees associated with the acquisitions of the Abingdon Flooring group in September 2014 and the Whitestone Weavers group in January 2015.

Deferred consideration in respect to acquisitions is measured under IFRS 3, initially at fair value discounted for the time value of money. Subsequently, deferred consideration is re-measured at each half year and year end to unwind the time value of money and for changes to the earn-out value arising from actual and forecast business performance. Such adjustments, which are non-cash items, are reflected in the income statement within administrative costs.

Taxation

The tax charge in the year was £1.57m against a reported pre-tax loss of £2.95m, giving an effective tax rate of negative 53.2%. This is distorted by the £9.92m charge for exceptional items in the period, all of which have been treated as non-deductible for tax. The underlying effective tax rate measured against profit before tax and exceptional items of £6.97m is 22.5%.

The Group's tax rate is above the prevailing UK standard rate of 21% impacted by a number of factors including a higher standard rate of 30% in Australia and expenses that are not deductible in determining taxable profit.

 Cash Flow and Debt

The Group achieved strong operating cash flows in the period (before exceptional items), with cash generation exceeding EBITDA (before exceptional items). The cash impact of exceptional items in the year was £0.55m, resulting in operating cash flows after exceptional items of £12.09m.

Working capital was reduced by £0.86m in the period and remains a key area of focus. Inventory management is the key contributor to the working capital improvement, with underlying inventory levels reducing year on year by £1.42m after adjusting for the opening inventory balances on the acquisitions during the year.

Interest, corporation tax and capital expenditure have all increased year on year reflecting the expansion of the Group in the second half of the year with the completion of two acquisitions.

The net cash outflow from acquisitions in the period of £15.01m relates to the acquisitions of the Whitestone Weavers group and the Abingdon Flooring group and comprises the initial cash consideration and cash equivalents acquired of £14.61m and related professional fees of £0.40m.

The acquisitions were funded using facilities provided by the Company's long-standing bankers, Barclays Bank, and from a newly-signed fully-subordinated £10m 2022 unsecured loan note facility provided by the Business Growth Fund.

The Company made a special dividend payment of £2.92 per share in July 2014 resulting in a cash outflow of £20.69m.

Net debt levels increased by £34.80m during the financial year to £36.28m (2014: £1.48m).

Future funding

In April 2015 the Company entered into a new multi-currency revolving credit facility with its existing Group bankers, Barclays and HSBC, which has replaced existing facilities. The agreement also includes an Accordion facility option to further increase available credit which provides substantial headroom for future growth.

The new facility is subject to various financial covenants measured against Group results and all lending covenants have been satisfied to date.

The current facilities across the Group provide sufficient capacity in Australian Dollars, Sterling and Euros to cover all anticipated capital expenditure and working capital requirements in the year ahead.

Key performance indicators (KPI's)

The KPI's monitored by the Group Board are set out in the table below for the year ended 28 March 2015.

* Earnings before interest, tax, depreciation, amortisation and exceptional items.

Principal risks and uncertainties

The principal risks facing the business are set out as follows:

Competition

The Group companies operate in mature and highly competitive markets, resulting in pressure on pricing and margins. Management regularly review competitor activity to devise strategies to protect the Group's position as far as possible.

Global economic conditions

The operating and financial performance of the Group is influenced by economic conditions in the geographic areas it operates, particularly the UK, Eurozone, Australia and the USA. The Group remains focussed on driving operational efficiency improvements, cost reductions and ongoing product development to adapt to the current market and economic conditions.

Key input prices

Material adverse changes in certain raw material prices, in particular wool prices, could affect the Group's profitability. These prices are closely monitored and forward contracts placed to help manage shorter term volatility.

Geoffrey Wilding

Executive Chairman

Consolidated Income Statement

For the 52 weeks ended 28 March 2015

Consolidated and Company Balance Sheets

As at 28 March 2015

Consolidated Statement of Changes in Equity

For the 52 weeks ended 28 March 2015

Company Statement of Changes in Equity

For the 52 weeks ended 28 March 2015

Consolidated and Company Statements of Cash Flows

For the 52 weeks ended 28 March 2015

Notes to the Accounts

1 Segmental information

The Group is organised into two operating divisions, the sale of floorcovering products in the UK and Australia.

Geographical segment information for revenue, operating profit and a reconciliation to entity net profit is presented below.

* Prior year profit from discontinued operations relates to the Canadian operation Colin Campbell & Sons Limited, which was sold on 28 March 2014. The result is shown net of tax.

Intersegment sales between the UK and Australia were immaterial in the current and comparative periods.

Management information is reviewed on a segmental basis to profit before tax.