Victoria : 2022 Preliminary Results Announcement

Commercial in confidence

For Immediate Release

19 July 2022

Victoria PLC

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

Preliminary Results

for the year ended 2 April 2022

and

Q1 FY2023 Trading Update

Record FY2022 Revenues and Operating Profits

Victoria PLC (LSE: VCP) the international designers, manufacturers and distributors of innovative floorcoverings, is pleased to announce its preliminary results for the year ended 2 April 2022.

FY2022 Financial and Operational highlights
	Year ended	Year ended	Change on
Continuing operations	2 April 2022	3 April 2021	prior year
Revenue	£1,019.8m	£662.3m	+54.0%
Underlying EBITDA1	£162.8m	£127.4m	+27.8%
Underlying operating profit1	£107.9m	£79.8m	+35.2%
Operating profit	£53.6m	£45.9m	+16.8%
Underlying profit before tax1	£73.8m	£50.1m	+47.3%
Net profit / (loss) after tax	(£12.4m)	£2.8m	-
Underlying free cash flow2	£34.2m	£38.8m	-
Net debt3	£406.6m	£345.7m	-
Net debt / EBITDA4	2.66x	3.10x	-
Earnings / (loss) per share:
- Basic	(10.61p)	2.30p	-
- Diluted adjusted1	40.21p	28.66p	+40.3%

• FY2022 was the ninth consecutive record year for Victoria in terms of revenue and underlying operating profit, despite challenging operational conditions due to supply chain constraints and significant inflationary pressures.
• Five value-adding acquisitions completed during the year - one in the UK & Europe Soft Flooring division, three in the UK & Europe Ceramic Tiles division, and one in the US forming a new North America division.
• Strong trading continued, achieving record annual revenue of £1,020 million, including like- for-like organic growth of +19.2%.
• Underlying EBITDA grew by +27.8% over the prior year to £162.8 million.

Commercial in confidence

• Notwithstanding the significant increase in EBITDA on an absolute basis, the underlying EBITDA margin % was 16.0% due to two key mathematical factors:
• 1. acquisition mix effect of c. -190bps - our acquisition targets generally had significantly lower margins than the incumbent group on acquisition; and
  2. cost inflation pass-through effect of c. -180bps - unprecedented cost inflation during the year was, to the extent not mitigated by operational measures, passed onto customers but without any mark-up, thereby protecting absolute profits but not % margins.

After accounting for these factors, the residual organic movement in margin was c. +50bps.

• Strong cash generation with £34.2 million of underlying free cash flow, which equated to a 32% conversion from underlying operating profit. The group increased capex following Covid-19 related reductions in the prior year, and also increased investment into raw materials as a precautionary measure to protect our production schedules in the face of possible supply chain disruption. The resulting uplift in inventory is expected to unwind in the future. B
• Successful £150 million incremental issue of preferred equity to Koch Equity Development, with beneficial changes in terms including a 100bps reduction in coupon.
• Year-endnet leverage was 2.66x, with the Group's senior debt consisting entirely of fixed rate, covenant-lite bonds falling due in August 2026 and March 2028.
• A resilient balance sheet, with cash and undrawn credit lines at the year-end, even after adjusting for the post year-end acquisition of Balta, in excess of £200 million.

Q1 FY2023 Trading Update

Overall revenue and earnings during the first quarter of Victoria's financial year were in line with the Board's original budget expectations. The value of the geographic diversity that the Group has carefully built over the last nine years is again to the fore as outperformance in some markets supports softer demand elsewhere.

Whilst the Board remains very mindful of the economic headwinds in the world and is taking numerous actions to mitigate their impact, with Victoria's track record of resilience and strong management, it is confident that the business is well positioned to meet these challenges and capitalise upon them.

Geoff Wilding, Executive Chairman of Victoria PLC commented:

"Victoria continues to be in an enviable operational position thanks to the achievements of our

management team, who have successfully managed a year that has seen the highest inflation in a generation alongside massive disruption to global supply chains. This year they remain laser-focussed on integration of recent acquisitions and execution of detailed

Commercial in confidence

synergy plans that will drive higher productivity, lower costs, and better customer service. I remain confident Victoria will continue to create wealth for shareholders."

1. Underlying performance is stated before exceptional and non-underlying items. In addition, underlying profit before tax and adjusted EPS are stated before non-underlying items within finance costs.
2. Underlying free cash flow represents cash flow after interest, tax and replacement capital expenditure, but before investment in growth, financing activities and exceptional items.
3. Net debt shown before right-of-use lease liabilities, preferred equity, bond issue premia and the deduction of prepaid finance costs.
4. Leverage shown consistent with the measure used by our lending banks

For more information contact:
Victoria PLC	[phone]
Geoff Wilding, Executive Chairman
Philippe Hamers, Group Chief Executive
Michael Scott, Group Finance Director
Singer Capital Markets (Nominated Adviser and Joint Broker)	[phone]
Rick Thompson, Phil Davies, Alex Bond
Berenberg (Joint Broker)	[phone]
Ben Wright, Richard Bootle
Peel Hunt (Joint Broker)	[phone]
Adrian Trimmings, Andrew Clark
Buchanan Communications (Financial PR)	[phone]
Charles Ryland, Chris Lane, Jack Devoy

Chairman and CEO's Review

INTRODUCTION

FY2022 has not been without its challenges. However, we are pleased to report that, thanks to the remarkable efforts of our management team, Victoria has again produced record operating profits and operating cash generation. As set out in previous Annual Reports, the historical progression of some KPIs has been summarised in the table below:

	Underlying	Underlying	Diluted	Underlying		EBITDA by geography1
	EBITDA per	EBITDA	adjusted	operating
	share1,2	margin1	EPS2	cash flow
				per share2,3
Year	£	%	Pence	£	UK	Australia	Europe	North America4
FY15	0.27	12.5%	10.47	0.30	79.5%	20.5%	-	-
FY16	0.39	12.6%	16.32	0.40	79.3%	20.7%	-	-
FY17	0.50	13.8%	24.42	0.48	75.1%	23.6%	1.3%	-
FY18	0.64	15.2%	30.61	0.64	48.3%	22.0%	29.7%	-
FY19	0.78	16.8%	35.25	0.86	25.8%	9.7%	64.5%	-

Commercial in confidence

FY20	0.86	17.3%	28.42	0.78	26.9%	7.5%	65.6%	-
FY21	0.87	16.9%	30.21	0.77	33.6%	13.0%	53.4%	-
FY22	1.04	14.1%	40.21	0.96	42.1%	10.0%	43.9%	3.9%

The KPIs in the table above are alternative performance measures used by management along with other figures to measure performance. Full financial commentary is provided in the Financial Review below.

This review focuses on the underlying operating results of the business, which delivered underlying EBITDA of £162.8 million (FY21: £127.4m) and underlying EBIT of £107.9 million (FY21: £79.8m). The Financial Review covers non-underlying items in detail, following which IFRS reported operating profit was £53.6 million (FY21: £45.9m), and furthermore covers items in the income statement below operating profit (financial items and tax).

One of the objectives of this review, along with the Financial Review, is to help our shareholders better understand the business and be able to reach an informed view of the value of the company, its future prospects, and its financial resilience. We also hope that investors will better appreciate some of Victoria's unique characteristics that the Board believes makes it an attractive investment.

To achieve these objectives requires data to be shared in a way that communicates information and this will include both IFRS-compliant and non-IFRS, performance measures. Shareholders are of course free to accept or discard any of this data, but we want to ensure that you have access to similar information used by Victoria's board and management in making decisions.

1. In this review, underlying EBITDA in FY20, FY21 and FY22 is stated before the impact of IFRS 16 for consistency of comparison with earlier years.
2. FY15 adjusted for 5-for-1 share split; FY16 and FY20 figures for continuing operations.
3. Number of shares based on basic, weighted-average calculation consistent with basic EPS.
4. Victoria's North American business, Cali, was acquired on 23 June 2021 and therefore contributed 9 months of trading in
   FY2022. On an annualised basis, the contribution is c. 5% of Group EBITDA.

FY2022 OPERATIONAL REVIEW

Overview

Anyone hoping for an easier year in FY2022 following the previous two challenging years was disappointed. However, the work achieved by our operational management during FY2020 and FY2021 - improving our market position, sustainably improving productivity, and taking advantage of some weaker competition - ensured the business prospered, in spite of the wider operating environment.

Before commenting specifically on each of the different operating divisions, there were several Group-wide items in FY2022 that we think are worth highlighting.

Inflation

We are not macro-economists and therefore express no opinion on whether the inflation we have experienced over the last 18 months is "transitory", "enduring", or "systemic". What we are doing is managing the business to ensure our return on equity remains acceptable for equity investors, taking into account the effects of inflation. Management reacted with alacrity to protect the business and we would like to draw shareholders' attention to some of Victoria's qualities that underpin our business model:

Commercial in confidence

• Victoria has a long-proven ability to increase prices and successfully did so up to four times across each product area during FY2022 to protect earnings.
• Management is laser-focussed on delivering a number of carefully planned synergy projects that will increase operating margins, mitigating some inflationary pressures.
• The Group's industry-leading operating margins provide room for manoeuvre against struggling competitors.
• We actively hedge or otherwise manage key input costs to provide management with time to adapt our business and prices to higher input costs so that margins are protected.

Notwithstanding the above, Victoria is fortunate to have an operational management team who have personal experience of running a business in a high inflationary environment (it is one of the few advantages of age) and who recognises that high inflation is an invidious force whose effects are far more wide-ranging than the simple margin impact described in the preceding paragraph. These less obvious factors, which include the level of investment required in tangible assets, must also be successfully negotiated by management in order for wealth to continue to be built.

For example, whilst margins are protected through price increases, the consequential increase of purchases and sales in nominal Sterling (or Euros or Dollars) generates a one-off reduction in free cash flow and results in a proportionally greater amount of cash absorbed in receivables and inventories (partially offset by an increase in creditors). Options to address this include additional price increases to ensure an adequate investment return on the increased working capital, negotiating better payment terms from suppliers, improving inventory turn to offset the capital being absorbed, as well as faster debtor collection.

Furthermore, if inflation endures for an extended period, the money invested in fixed assets (plant and machinery) will also increase over time, absorbing cash. When the time comes - and it always does - to replace those assets, the purchase price of the new machinery is dramatically higher due to inflation and the amount put aside by depreciating the old equipment is inadequate. This impact is exacerbated by the fact that fixed assets are depreciated at their historical cost, which means the tax shelter legitimately generated is also insufficient.

The risk, if these often-overlooked effects aren't addressed, is that the business may barely generate sufficient cash to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for the acquisition of new businesses.

However, Victoria benefits from having a much higher return on tangible assets (consistently in excess of 25%) than many of its competitors. Furthermore, and because we have only acquired high quality businesses, much of our historical investment is tied to intangible assets. In contrast with tangible assets, during periods of inflation, intangible assets (goodwill, brands, customer relationships) that genuinely generate income are wonderful. The income they generate continues to increase (in nominal EUR/GBP/USD/AUD) and yet none of this cash is required to maintain the assets - almost all of it is available for investment purposes.

Demand