Edited Transcript of FAN.L earnings conference call or presentation 16-Mar-20 9:30am GMT

Already talked about growth through a disciplined and value-adding acquisition strategy. Ventair integrating very well, but it’s been a quieter period for us. And as expected really in terms of new acquisitions, the market remains attractive and fragmented in the medium to long term, but certainly at this moment in time, unlikely to add anything meaningful to the group in the short- and the near-term future.

And then strategic pillars, Operational Excellence, we announced this with our FY ’19 results and a focus on improving our adjusted operating margin up to 20% in the short to medium term. We made really good progress with our Operational Excellence initiatives, and they’re embedded and underway across all of the business, and I’ll come back and talk about that a little bit more later on.

One meaningful change that we’ve made to our reporting is to organize ourselves across 3 geographic segments. So I’m on Page 4 now. And the U.K., Continental Europe and Australasia, the U.K. still being 54% of the group’s revenue, but still a nice balance there between U.K., Continental Europe and Australasia. And Andy will talk a little bit later on about the individual operating margins in each of those areas and how they developed during the first half of the year. So look, that’s a quick summary from me.

I’m going to hand over to Andy now to take you through the financial review. And then I’ll come back in a short while and just give more of an operational update on the first half.

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Andy O’Brien, Volution Group plc – CFO & Executive Director [3]

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Thank you, Ronnie. Good morning, everybody. So I’m now on Slide 6, the financial KPIs. Just before I dive into the numbers per se, it might also be worth pointing people to Slide 20 in the appendix. So this is our first period of reporting under IFRS 16.

Now in terms of our main profit metrics of operating profit and, indeed, profit before tax, the impact of adoption is pretty negligible. So operating profit increases by GBP 0.2 million as a result of adoption, but then you have an additional interest cost of GBP 300,000, meaning profit before tax is actually GBP 100,000 lower. But essentially, profitability measures are pretty much unchanged. But it does, of course, as you know, have a fairly fundamental impact on how we look at net debt, how we look at leverage and how we look at cash conversion.

And so on this slide and, indeed, in the numbers that Ronnie has already shared with you on the highlights, where we talk about profit measures, these are new IFRS 16 numbers. But where we talk about net debt, leverage and cash conversion, to the 93% that Ronnie referenced earlier, we’re clearly doing those on an old basis like-for-like, so you can see the true measure of performance. So as I said, you need to get more detail on that. Slide 20 bridges those 2 sets of numbers.

So just quickly calling out on this Slide 6, the revenue, I think Ronnie has already given you, 5% constant currency growth. And in due course, we’ll come on to market-by-market and a bit more breakdown within our market segments.

Adjusted operating profit margin, so we improved from 17.6% in the first half of ’19 to 18.3% in the first half of 2020. So a north — a 70 basis points improvement, which obviously is pleasing. What we’ve also done there, you’ll see these — the hash red bar to the right-hand side, where we’ve said like-for-like margin excluding Ventair. So there — in H1 of 2019, of course, that was pre the acquisition of Ventair when we delivered 17.6%. So if we look at that same basket of businesses for half 1 of 2020, that would actually be 18.9%. So the 70 basis points becomes, if you like, 130 basis points like-for-like. And as Ronnie said, in a couple of slides’ time, I’ll give you a bit more color region-by-region, how that evolved.

Good growth in earnings per share. Cash flow particularly pleasing, as Ronnie has already alluded to. And the consequence of that cash flow being that our net debt on a IAS 17, old world basis, drops from 74.6% to 60.5%, with leverage now down at 1.3x.

If you now turn the page to Slide 7, so most of these numbers in the table here are just a different representation of the numbers on the previous slide. We have also — we always give you, of course, both reported and constant currency for revenue. But we also thought it was useful just to show how that plays through to operating profit as well. So what you’ll see on the second line there is the adjusted operating profit improvement of 7.6% is actually just over 9% on a constant currency basis.

Reported profit growth is higher again. So you see reported operating profit growth of 24.4%. And as you see in the next slide, that’s essentially because of no exceptional items in this half versus spend predominantly around the final bid of the Reading project in H1 of ’19.

Cash conversion leverage, we’ve talked on the previous slide, but yes, particular highlights being the 93% like-for-like cash conversion and net debt down at GBP 60.5 million at the half. And interim dividend per share of 1.71p. Dividend per share growing ever so slightly above earnings per share, a 6.9% growth there.

Slide 8 is a fairly small slide, not too much on it. But just really, I guess, to call out 2 things there. So number one, as I’ve already just mentioned, nothing under the exceptional operating cost line in this period, GBP 1.2 million last year, which was predominantly the Reading factory relocation cost and a very small amount of acquisition expenditure. The GBP 900,000 net loss on financial instruments at fair value, a very long-winded way of saying that the revaluation effect of our forward dollar contract. So as you know, we typically have a policy of trying to hedge 9 to 12 months out on our expected U.S. dollar spend for our GBP-denominated businesses. So that’s the revaluation effect of those contracts.

If I can ask you now to jump to Slide 9. So as you had just seen a couple of weeks ago and as Ronnie mentioned in the earlier slide, we’ve recently adopted a new segmentation of the business, looking at it in 3, if you like, divisions or 3 geographies of United Kingdom, Continental Europe and Australasia. And so here, we’re focusing in on the operating margin piece and, I guess, how we are performing and delivering towards the operational excellence strategic pillar. And the — we give you 3 bars here. So the black bar is each geography and, indeed at the top, the group overall for H1 of ’19. The gray is the reported H1 ’20. And to my earlier point about the impact of the Ventair acquisition, so this is then relevant both for the Australasia block and for the group overall.

We’ve also given you what H1 2020 organic would be. So if you like, like-for-like with H1 ’19. So encouraged about pleasing growth across all of the geographies — I mean the U.K., 150 basis points, I’ll come on to shortly. Obviously, there’s a meaningful contribution there from performance improvement and efficiency in Reading. But I think fair to call out that all of our geographies have improved operating margin. So it’s not just the Reading gain, value engineering. We’ve talked about procurement benefits, we’ve talked about — and really then in the Australasia piece, it’s all for us about how do we improve and drive benefits through our acquisitions in the early years and then sustain those benefits. I’m going to also give you a little bit of color on that slide about the things that are already in progress, which we are going to be going after to deliver further towards that margin target as the rest of this year unfolds and as we go into FY ’21.

The next slide, Slide 10. So just giving a little bit more breakdown and color around the cash flow performance, the cash conversion and, consequently, what that implies for the net debt. And the result of everything is that they leverage down at 1.3x at the half year on an old world basis. There is a good performance, once it pleased us on working capital. So we’re starting to see inventory reducing, which we talked to you a little bit about when we spoke back in October. And so inventory is down about GBP 1.5 million compared to was — where it was at the end of July. Fixed asset expenditures, slightly down on the comparable period last year by GBP 1 million.

A small tax refund in the U.K. So you’ll see, on the tax paid line, it’s lower than the previous year. And then, I guess, the only thing I would say, right down the bottom, there is — when we look at it on a net debt basis, obviously, the — we hold our debt in a combination of sterling, euro and SEK, and therefore, the movement in exchange rates does have an impact there on as well. So that’s called out towards the bottom of the chart.

So that’s the financial highlights. And with that, I’ll hand back to Ronnie.

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Ronnie George, Volution Group plc – CEO & Executive Director [4]

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Excellent. Okay. Thank you, Andy. So really sort of important to emphasize the strong cash generation in the first half of the year, particularly pleasing inventory reduction, a lot of work going on there as part of our operational excellence program and how it isn’t just about improving margin, but of course, operational excellence for us is great sort of inventory management and control.

So I’m moving now to Page 13. What I’d like to do over the next few pages is just give a bit of a roundup on the operational performance in the first half of the year. And so if we just start with Page 13, I’ll try not to repeat some of the things that Andy has already said around the operating margin. But U.K. revenue, GBP 64.5 million, we had a 3% decline on a constant currency basis, but it’s very much 2 different stories in here. What we would say is that our U.K. Residential business is performing, we would say, at least in line in terms of New Build and probably ahead of the wider market.

In U.K. Residential RMI, Construction Products Association view, for example, is that the RMI market was, in the second half of the calendar year last year, in decline. We’re very pleased about the progress that we’re making with our RMI offer, both in Private and in Public RMI, a significant upgrade to the products that we’re bringing to market, enhancing the mix, particularly in Private RMI, our sort of so-called upselling. Those of you that were with us in Reading last year would have seen some of that in the foyer in the reception area where we showed you the great new products that we’re launching. And they are getting really good traction across all aspects of the market.

It’s very much the same in Public RMI. We had a 4.5% growth in Public RMI. That now marks 3 consecutive halves of Public RMI growth. When we listed in 2014, unfortunately, we had a period for the first 4 financial years where our Public RMI revenues declined. But we’re growing very well in that space. And the dynamics, we believe, medium to long term is still very attractive for both the market and indeed the offer that we bring. New Build Residential ventilation I’ve talked about, this is structurally underpinned by regulations. There is no doubt that the second half calendar year leading up to the general election was a little bit less certain in regard to the U.K. economy and U.K. house building. And we still believe in the medium- to long-term dynamics of Residential New Build. It is a regulatory underpinned space.

And indeed, up till now, our order book in this financial year has still been growing. U.K. Commercial. And indeed, when you look at the statement in more detail, which no doubt we’ll have a chance to do later on, we talked about U.K. Commercial being difficult in the second half of our financial year ’19. And indeed, we expected U.K. Commercial to be tough in the first half. And indeed, it was. And again, similar story to the election uncertainty, U.K. Commercial new build in London was weaker and, indeed up until recently and indeed right as we sit today, I’ll come back to the outlook later on, our U.K. Commercial is coming across softer comps.

And indeed, when we look at the operating margin improvement, some 17.4% to 18.9% this year, a lot of that improvement has come through in all aspects of the business, both in Commercial and in Residential. So disappointed to have 11.6% decline, but wasn’t altogether a surprise.

Our Export grew well, on a constant currency basis, grew by 7.4%. And we continue to take on new accounts. So typically, these exports are to geographies where Volution doesn’t have an operating company as it were.

And then just finally, in the U.K., OEM, it feels unfortunate that we had a very mild wet winter and, therefore, our boiler spares demand was quite weak. And again, it’s detailed in the statement. But the outlook for our boiler spares for the second half of the year is actually quite strong compared to the first half, and this is to do with the commercial arrangements that we have with those boiler spares customers, where there’s a certain minimum contractual purchase they have to make on these products each year. And indeed, we can see the revenue picking up in the second half of the year versus the first half because of those commitments that are already laid down for our financial year.

So overall, just to reconfirm, operating margin up 150 basis points. Yes, it was assisted by Reading, but also a whole raft of ongoing operational improvement initiatives that we will continue to focus on in the second half of the year.

On to Page 14. Continental Europe, a small organic decline, 0.5% on a constant currency basis. And operating margins broadly flat — sorry, not broadly flat, up 90 basis points from 21.1% to 22% or 21.9% on the constant currency basis. And we’re delighted about the operating margin improvement in the first half of the year on a business that was essentially flat. And so I think that just starts to demonstrate what we’re capable of through this Operational Excellence program. But indeed, the revenue was split broadly very clearly into 2 distinct buckets.

In the Nordics, we had the project challenges that we’ve seen in Sweden and indeed in Finland. The situation in Finland is quite ironic really, because in actual fact, the organic decline in Finland was off the back of a very strong first half of the prior year in Finland. If you remember, we acquired Pamon — Oy Pamon in July 2018. So the first half of our FY ’19, in fact, was not an organic growth. And therefore, we’ve come up against some very strong comps in Finland, and we’ve had an organic decline in the first half of this year. What I’m particularly pleased about in the Nordics is that our trade and DIY, if you like, our refurbishment, our RMI business, actually held up really well. We’ve launched a considerable basket of new products in there and some upgrades, and we’re seeing some margin improvement in our DIY and trade business.

And in Central Europe, we had a constant currency organic growth of 19.3%. It was, without doubt, the star performer in the first half of the year. That was in particular in Germany. So our inVENTer brand, which is the #2 provider of what we call decentralized heat recovery, both in the renovation and in the new build market, continued the strong finish in FY ’19 from the launch of this enhanced Xenion range. We safely believe in the decentralized heat recovery market in Germany that we have the leading proposition in terms of performance and functionality. And indeed, we’re very soon to launch the wireless infrastructure that we think will ordinarily support the ongoing progress in that area in the second half of the year and beyond. So overall, just to summarize there, 80 basis points of margin improvement over the prior year, in spite of the fact that effectively, our revenue was broadly flat.

And then finally, in terms of these new geographic segments that we’re talking to you about, these new geographic areas. In Australasia, I need to talk about it in 2 parts. So first off, the organic growth. So the organic growth in New Zealand was very strong. We delivered 7.4% organic growth in the first half of the year and a substantial organic margin improvement. So what we’re showing here is a small margin decline, but in actual fact, there was a good organic margin improvement, improving by 3.1 percentage points to 19%.

Indeed, we added Ventair in Australia to the business in March of 2019, and Ventair is integrating very well. And we’re just starting to get some traction now with the new products that we’re launching. So overall, we had — what are we saying here? A 97% increase in our revenue in Australasia, but of course hugely assisted by the acquisition. But a substantial increase in our operating profit, and it becomes a more meaningful area now. And typically, we generate more of our profit because of seasonality in that region in the second half of the year. But nevertheless, Australasia is meaningful for Volution and has developed really well in the first half of the year.

So that’s a summary of our 3 geographic areas. And what I’d like to do now is take you to Page 16, and I still like us to focus on the medium- to long-term dynamics of our sector. And indeed, I’ll come on to outlook in a moment, and I can fully appreciate why we can be distracted in the short term. But I think it’s worth reminding everybody now that on Page 16, health and wellbeing a matter that, of course, is front of mind to everybody at the moment. But I’ve been saying for some considerable time, even prior to the coronavirus threats that we’re experiencing today, that a well ventilated building, that can be both a new building and indeed a refurbished building, is a healthier building. And indeed, regulations are gently accentuating that point and supporting our space. And indeed, if I was to make a prediction over the coming years, I suspect that is going to gain further momentum for obvious reasons.

So just a quick reminder here, health and wellbeing, indoor air quality, that’s what we do. We’re leaders in our space. We provide good indoor air quality. We fix mold and condensation control. And as buildings become more airtight, greater insulated, this is a really important facet of the market.

Consumer preference, quietness, I already talked about now our RMI space, we’re seeing in pretty much every market that we trade in, consumers understanding that we bring quietness and silence to the market. We also help with reducing energy bills through efficiency. And connectivity and control is something that we can leverage and benefit from in the future.

And then just finally, driving increased regulations. A good example here is the Healthy Homes program in New Zealand. Our 7.4% organic growth in New Zealand is partly assisted by the Healthy Homes Act that was introduced in New Zealand, and we’re seeing the benefits of that and expect to continue to do so in future.

So between Andy and I there, we’ve given you an update of the first half year performance, both operationally and financially. And I’d like to take you to Page 17 now before we go over to Q&A, just to try and summarize a little bit about what’s happening — happened in the first half of the year and, indeed, how we see the outlook.

So a quick summary at the top of Page 17. Our adjusted operating profit was up 9.1% on a constant currency basis. Our adjusted operating profit margin improved by 70 basis points, including the dilution of the acquisition in Ventair, 130 basis points, as Andy has already explained to you earlier, on an organic basis.

Our cash conversion on the new standard is 99.5%. But indeed, on a like-for-like basis under IAS 17, it was still 93% and was the strongest cash generation that we’ve delivered in the first half of a financial year in both absolute terms and — sorry, in absolute terms, since we listed in 2014.

Indeed, as we sit today, and we are now 6 weeks plus into our second half of the year, it has, in fact, started in a similar fashion to the first half performance. We’ve talk about our excellent cash generation, and that’s something that we consider a byword for Volution, has been the case ever since we listed in 2014 and continues to be very important to us.

Indeed, we talk about substantial firepower and the ability to invest in future acquisitions. I think for obvious reasons, as we move into the second half of the year now, we’re much more considered around what we might do. But medium to long term, this is a very fragmented space, and we continue to see acquisitions as an important part of the strategy, although maybe for obvious reasons, we will just pause for breath in the coming weeks and months ahead. Our market fundamentals remain strong and the medium-term regulatory drivers support demand for energy-efficient ventilation solutions.

And then finally, unfortunately, this presentation couldn’t take place without mentioning coronavirus and COVID-19. The pandemic has clear potential for adverse impacts on the broader economic activity.

Our direct risks around our supply chain and, indeed, 6 weeks ago, our focus was almost exclusively on the supply chain. Our management teams have done fantastic work around that, and we don’t have any undue concerns about our supply chains. I know there’s been some sort of analyst updates over the past weeks about that. But I’d just like to reassure everybody that we see no risk as it stands today in terms of the supply chains.

And I should just explain why that’s the case. We run good buffer stocks within our business, and we also have good visibility about what’s on its way from us from China in particular. We’ve been able to mitigate any potential interruptions by using other materials and so forth. And of course, the supply chain risks now may be more around European suppliers and so forth. But as it sits today, we’re reasonably comfortable about how that sits. Of course, on to the wider outlook in respect of demand, I think it’s uncertain and, indeed, we’re keeping a close eye on that. And — but as I — as no doubt, we’ll come on to in Q&A in a moment, we remain very sort of agile and focused on adjusting the business wherever appropriate as and when necessary.

So that’s the summary and outlook. I’m going to hand back now to the moderator, and then we’d be delighted to answer any questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have is from Aynsley Lammin from Canaccord.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division – Analyst [2]

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I’ve got 3 questions actually. First of all, obviously, impressive margin improvement in the first half. And just kind of looking at the full year, would you expect a similar type of increase, obviously, for the second half and the full year? And then second question, you mentioned good visibility on the supply chain and stock. I mean at this point, what would you kind of estimate you’ve got? Is it 2, 3 months of stock before you could potentially see any issues there? And then lastly, just wondering if you’re seeing any kind of change in behavior from some of the house builders or local authorities in terms of demand and what they’re doing in anticipation of what might happen with COVID-19?

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Ronnie George, Volution Group plc – CEO & Executive Director [3]

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Okay. I’ll just — what we’ll do, Aynsley, is I’ll — we’ll take those 3 questions. I’ll let Andy take the margin, and I’ll come back on the other 2.

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Andy O’Brien, Volution Group plc – CFO & Executive Director [4]

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Yes. I mean Aynsley, I guess the way we’d summarize the margin, and hopefully Slide 9 helps put the color around it, is what’s happened in the first half very much gives us confidence that we’re doing the right things towards the medium-term target that we talked about a few months ago. The — as you see, the biggest jump within the U.K. and probably of the U.K. piece, approximately 2/3 of that was coming from Reading. But of course, what that then means is both the balance of the U.K. and indeed in the other 2 geographies shows that — the other things that we’ve sort of alluded to and shared with you before and again on this slide are taking effect and are delivering. So those aren’t just onetime exercises. Those are things that we’re trying to embed as disciplined and business as usual in the business. I mean the — probably the question for the next few months will be, do we have to do anything specific sort of short-term basis if, as Ronnie mentioned at the end of the outlook piece there, we do suffer or when we do start to get a sense on what the impact on demand is going to be. But that aside — and I think that’s probably a phrase that we used quite a lot, but that aside, we would expect continuation of the progression towards the target.

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Ronnie George, Volution Group plc – CEO & Executive Director [5]

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And just to add to that, I think a lot of — as we’ve really highlighted in this results update is it’s a whole plethora of initiatives that we’re driving here, value engineering initiatives in terms of product cost or indirect efficiency, et cetera, et cetera. And of course, what we had in the first half of the year in the Nordics and in U.K. Commercial was inorganic decline and a margin improvement. So I’m not saying that it — should demand be substantially weaker, of course, there is a point at which it’s difficult to overcome that. But we still think the direction of travel is positive.

And to your second point on inventory, look, I think we all understand this really well now, but the supply risk that we had from China is no longer a risk. We have good visibility in our facilities. We have 4 or 5 weeks’ stock and, indeed, we have stuff on the way. There’s been a little bit of airfreight here and there, but it really is around the edges and it’s not substantial in terms of quantum or cost. And so I’m not concerned at all about Chinese supply chain. And indeed, when we look at things a little bit more closely, where are the risks? Well, we injection mold our plastics. Our plastics consumption in overall volume terms isn’t huge. And so I don’t have any concerns about that. Indeed, the way in which we hedge some of our plastics material with our suppliers is that they effectively hold it in storage for us. They prepurchase it, hold it in storage. So good visibility on plastics, good visibility on electronics and motors. And there are some discrete European suppliers that we have under watch in terms of heat sales for our heat recovery production and some finished larger EC motors that we buy. But I believe our supply chain is in really good shape. And indeed, all the work that we’ve done over the last 6 weeks has confirmed that.

And third point on to demand and house builders. Yes, this is a fluid situation. But as of last Friday, the last trading day when we were in the office, and our order book for new build from the house builders in the U.K. has increased over the last couple of months, and we are being asked about our ability to supply. So indeed, that supply chain risk or concern was coming from the house builders to us. And so their nervousness was our availability to provide them with the product that they expect that, of course, we were able to reassure them on. Of course, what happens next, I’m not quite sure in terms of the demand. But house builders at this stage and, indeed, construction sites so far are behaving as normal. Hope that answers the question.

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Operator [6]

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The next question we have is from Adrian Kearsey from Panmure.

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Adrian Mark Kearsey, Panmure Gordon (UK) Limited, Research Division – Support Services Analyst [7]

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Through the presentation, you mentioned new products a number of times. And clearly, the portfolio sort of has evolved over time. Would you be able to perhaps sort of highlight a number of new products that have been key for the first half performance? But also, which products do you think will feature in driving the business in the coming 1, 2 or 3 years?

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Ronnie George, Volution Group plc – CEO & Executive Director [8]

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Sounds like a rather glib answer, but we probably don’t have enough time on the call to take you through all of the new products that we’re launching. And I think that’s — the example here is that Volution is made up of lots of, if you like, small moving parts, as it were. And in pretty much, in actual fact, in every market that we trade in, in the first half of the year, we’ve brought new solutions to the market. And if I had to highlight 1 or 2 in particular, and I think that was the point that you were making, I would say that the efforts that we made in Germany in the second half of ’19 and indeed in the first half of this year helped us grow faster organically and helped us expand operating margins. And what we always try to do when we bring new products along to market is not only use them as an upsell price mix opportunity, but also to expand margins, to have a very close view on the cost of those products that we’re bringing along. So the pipeline is still full. We still expect to bring new products to market in the second half of this year and beyond.

One of the things that I’ve been emphasizing under Operational Excellence is for our operating companies to make better use of the great product portfolio that we have available. What I mean by that is that we’ve launched, for example, a lot of new things in the Nordics. And I want to make sure that our operating companies delve in and maximize the use of each other’s available products for their own markets. And of course, that is intrinsically why we believe Volution generates higher margins than its near peers is that, believe it or not — and as an industrial business, our revenue isn’t necessarily one of the largest. But in our space, we are bringing scale to the ventilation space that most of our competitors aren’t. And so I think it’s really more and more of that. And I hope that is not a little bit too glib, but just lots of things going on all the time. But in themselves, they’re small, tactical plays, but when you aggregate them, they become meaningful.

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Operator [9]

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Our next question comes from Christen Hjorth from Numis.

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Christen David Hjorth, Numis Securities Limited, Research Division – Analyst [10]

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Just a few questions from me. Clearly, there’s the uncertain market and demand backdrop to something that was discussed in the presentation, but just a bit more color around that, really. I mean first of all, we saw quite significant volume falls. I mean how has the industry traditionally reacted in terms of price and things like that? Has it held up reasonably well? And with regards to Volution specifically, I mean, how should we think about drop-throughs from revenue to EBIT on volume declines?

And then secondly, clearly, the balance sheet isn’t overly stretched or anything like that. But could you just touch on sort of the level of headroom you have currently, whether you’ve spoken to the banks and the general message that you’re getting from them?

And the third one brought on a slightly more positive note, the growth in Central Europe was clearly spectacular in the percentage terms. And you’ve run through the new product development, et cetera. But just a bit more color as how you managed to drive such significant growth with the new product over there and whether that has implications in other markets as well?

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Ronnie George, Volution Group plc – CEO & Executive Director [11]

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Okay, great. So we’ll do — I think we’ll do — I’ll do 1 and 3, and Andy can do 2. So look, I don’t like to draw parallels. But now with 2008-’09 and the global financial crisis, I think that they are, for obvious reasons, slightly different. But nevertheless, the impact in 2008-’09 in the U.K. was that we had a material decline in volume. Peak-to-trough decline of 11% was what we saw. But we did not — and I’ve been reminding people in the business of the experiences that we had back then. But what we did see, we had a sort of perfect storm. We had revenue decline and we had inflationary impacts on input costs because the pound weakened considerably against the dollar. So in actual fact, 2008-’09, and it comes back to very strong U.K. brands, we had a revenue decline at the same time that we were increasing prices to mitigate the inflationary impact that we had. And we haven’t talked about it here, but we are hedged for our sterling-dollar for all of the next financial year. Andy and I took the view more recently that if we could secure next year at this year’s rate, it would be a sensible place to be. And indeed, if you look at the pound-dollar this morning, I think when I looked, it was 1.23, but we’re actually hedged at rate. For next year, that’s probably the same. So we don’t have the inflationary pressure that we had previously. But nevertheless, we will still behave as if we had that inflationary pressure in the market. I don’t have any concerns about pricing. I don’t believe even if we do see a volume impact that our pricing will come under pressure, indeed, it didn’t previously. And I think if anything, our shares in some of the markets that we trade in are probably stronger now, our brands are stronger. So I don’t have a concern per se about pricing.

And I think in terms of operating leverage, Christen, one of the things that people often talk about with us is that they’re disappointed when things are going well, they don’t see more operating leverage on the way up. I guess this is one of those times when we would point to having quite disproportionately lower indirect costs than factory costs versus some of those other building products plays that you’ll know very well. And [LD] is considerably smaller, and in many respects, is focused quite a bit on innovation and development. Our maintenance CapEx is quite small. And indeed, in the short term, we’ll take all necessary steps to mitigate sort of profit impact. So I’m not saying that we take this lightly, but we do feel in a relatively strong position versus some of our peers. I’ll hand over to Andy.

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Andy O’Brien, Volution Group plc – CFO & Executive Director [12]

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Yes and lastly, Christen, on the sort of balance sheet headroom facilities, et cetera, points. So as you see in a net — sort of all of our facilities are based on old world IAS 17 basis of debt. So our net debt is standing at GBP 60 million. Our facilities are GBP 120 million. Plus then there is a further GBP 30 million accordion facility, which we could use in severe emergency. So with the strong cash generation in the first half, we do have, what we believe, very substantial headroom versus those facilities. And I guess as Ronnie said, in the short to medium term, we will carry on being quite frugal and then probably just ratchet up the frugality when it comes to CapEx, when it comes to any areas of discretionary spend. And we’ll keep sort of doubling down on trying to bring through inventory and working capital benefits as well. So that’s how we see it from a headroom perspective.

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Ronnie George, Volution Group plc – CEO & Executive Director [13]

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And to your point on Central Europe, the growth was going very well at the end of ’19. We’ve brought together — look, if you go to the inVENTer website and have a look at Xenion, it’s actually better in the German language version, because that’s what services the local market. But this comes back to the dynamics I talked about earlier on, on Page 16 is that this is a regulator under space. And in Germany, the regulations around refurbishment are more impinging and more supportive for our products. And what we managed to do is to bring along, in the last couple of years, a really compelling solution sold through our agents. So it really is a good example of great products, very strong routes to market, excellent control around the projects, good visibility and growing geographically pretty much in every region in Germany. And indeed, we’re in the process of launching those products elsewhere in Europe. It won’t have the same profound effect, and that’s partly to do with the fact that, for example, in the U.K., the regulations around RMI are not so supportive. But nevertheless, directionally, over time, in the coming years, regulations will become more impinging around refurbishment. And we’ve not talked about it very much recently, but of course, up until a couple of months ago, the big focus was on carbon reduction and climate change. And notwithstanding the current short-term difficulties and distractions, that agenda hasn’t gone away. It’s just been maybe deemphasized for obvious reasons in the short term, but medium term, it still exists.

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Operator [14]

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We have another question and that is from Clyde Lewis from Peel Hunt.

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Clyde Lewis, Peel Hunt LLP, Research Division – Analyst [15]

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Two, if I may, please. One on sort of just, I suppose, sort of stocks that might be in the merchants’ chain. I mean some of our other companies have been talking about sort of, obviously, sort of wet weather impacting some of their volumes, for instance. But do you think that’s an issue for your sales into the merchant chain for, I suppose, the coming sort of 3, 4 months at all?

And the second one I had was on the commercial market in Continental Europe, and obviously, the softness you saw in the Nordics. Can you maybe just update us as to where that sort of has got to? And what the sort of pipeline looks like going forward? And maybe a similar sort of question in the U.K. as well in terms of that Commercial pipeline.

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Ronnie George, Volution Group plc – CEO & Executive Director [16]

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So interesting one on the stocks. I know we talked about it in the past that, look, in the global financial crisis, ’08-’09, what happened is, from our perspective, our customers, our stock is completely destocked and never really restocked the other side. I don’t believe that the supply chain — and we’ve probably — we didn’t use this as sort of a, if I use the word excuse, but a reason for our maybe slightly softer revenues in the first half of the year. We didn’t really blame the wetter conditions. And in many respects, we’re sort of late fix, second fix, the building is dry and it’s going inside.

So I don’t see our stockists having any more or less stock than normal. And so I don’t think that’s a risk per se. I think the greater risk is demand rather than destocking of the supply chain. In many respects now, we’re so back-to-back and, indeed, not to go back to it in too much detail, but it was why when we had our Reading difficulties 2 years ago, the supply chain couldn’t really buffer us, because it was relying on us to give 1-, 2-, 3-day delivery service for a whole basket of products. So I don’t see supply chain or stockists with too much stock being an issue.

Nordics and project business, if we look at the Nordics in Finland, I would say, right now, our revenue in Finland is more like where it was the second half of last year. And indeed, our order book, and I stress, it’s an order book to be called off. Our order book in Sweden, for example, on projects is stronger in the second half of this year. And if that comes to pass as revenue would actually be better than the prior year. So in actual fact, the Nordic situation, all things being equal, looks okay. And in the U.K., again, our second half ’19 was about the same as our first half ’20. Our first half ’20 was slightly softer. But we are actually coming up against some quite soft comps for us in Commercial new build, which is where we have the weakness. All right? Thank you.

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Operator [17]

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(Operator Instructions) The next question comes from Charlie Campbell from Liberum.

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Charlie Campbell, Liberum Capital Limited, Research Division – Housebuilding Analyst [18]

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(inaudible) just had a couple of questions remaining. The 20% margin target, so that was at the sort of group level, and you’ve now given us some more granularity around sort of geographies. Just wondering how that 20% sort of fits by those geographies. And I suppose the obvious way of thinking about it is that Continental Europe is already quite high and maybe doesn’t get much higher, Australasia picks up because of new acquisitions improving. And then maybe there’s some scope in U.K. But just maybe flesh that out a bit more. And then the second question was on the U.K. I’m just wondering if you had heard any updates around the consultation around Part L and Part F, so it could have a material difference. I’m just wondering kind of how that is progressing.

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Andy O’Brien, Volution Group plc – CFO & Executive Director [19]

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Okay. I don’t mind taking the first one, Charlie. So look, I think actually at the risk of being seen to be lazy, I think the way you summed it is pretty much perfect. I mean I certainly wouldn’t try and say there is nothing more we can do in Europe, because absolutely, we want to keep doing this everywhere. And I guess particularly as Ronnie said around the introduction of new products and using that as a margin expansion opportunity and a pricing opportunity is something that plays everywhere. So I certainly wouldn’t want you to think 22% is topped out and nowhere to go. But a virtue of where it is now, obviously, the scope for further increases as much as it is in the other 2 geographies. Australasia will — what we — by — I guess, by — I mean, the 2 businesses, as you know, are quite different businesses, but very deliberately by trying to point to what’s happened organically versus the dilution effect of Ventair. What we’re trying to do there is to help confirm that — very much the bring-on-board and adopt and grow and improve acquisitions is still much in our DNA and what we’re looking to do.

So Simx is a year and a bit further down the line of that journey than Ventair is, but we see meaningful opportunity to obviously go after that in Ventair in the coming years. And then in the U.K., yes, definitely more of the same. There’s definitely more to still go out there. Probably the upselling pieces, it’s doing okay, but it’s not as far advanced or as sophisticated as it is in Europe. So that will be the good scope there. One of the things that we mentioned on Slide 9 as sort of additional go-forward levers is around using our — the ERP work that’s happened over the last couple of years. And I guess, as you combine that with scale and legal entity rationalization work, can we use that to leverage some back-office synergies. And that’s probably more of a U.K. play than is anywhere else. So look, a long way of saying that I think you summed it up correctly.

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Ronnie George, Volution Group plc – CEO & Executive Director [20]

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And it’s an interesting one internally, of course, because we’re very clear — although it’s a publicly stated ambition to get 20% operating margin, and that was sort of an exit rate, just reminding everybody at the end of 2021. And of course, the operating companies know where they’re at. So we have conversations about we’re already ahead of it. But of course, we’re looking for improvements across all 3 areas, as Andy already talked about. So that’s certainly under normal trading conditions what we would expect to do. Part F, Part L consultations, they are continuing. And they — the view at the moment is that mechanical ventilation with heat recovery or indeed mechanical ventilation is the order of play for the future. What we expect is you’ve still got house builders building on earlier iterations of the regulations. And I think we all know that this is when we break ground and the regulations that persist at the time. So we are confident that Part F and Part L will further support the use of heat recovery in the coming years. And that ordinarily, if we build the same or more units, then our residential ventilation system growth would be above that because of the increasing penetration of the technology. And so it talks a lot about air infiltration rates and increasing them, making the building more airtight and, of course, starting to talk about now wellbeing and health considerations. And that’s now outside of any increase and heightened awareness because of obvious reasons more recently.

Okay. I’m not sure if we’ve got any more questions. I might just try and summarize things. But have we — operator, have we got any other questions to be answered?

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Operator [21]

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We have no further questions at this moment.

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Ronnie George, Volution Group plc – CEO & Executive Director [22]

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Okay. Perfect. Okay. Well, look, it’s just I — for Andy and I to say, thank you very much for your time on the call this morning. I think not to overdo it, but very, very good cash generation in the first half of the year. The problems that we saw in terms of the organic revenue were not a surprise to us in terms of U.K. Commercial and the Nordics. And also just to remind you that our refurbishment, our RMI activities have always proven to be hugely resilient in more difficult times. And so notwithstanding the sort of wider market risks to demand. And we’re actually very positive about the sort of self-help and the things that we can do internally. And indeed, all credits to the senior management team and to our employees who have embraced the Operational Excellence program really well. And we’ll continue to focus on that hard, irrespective of what might happen in the coming months. So look, thanks very much, everyone. No doubt, we’ll catch up with some of you in the next few days. Thanks again.

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Operator [23]

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Ladies and gentlemen, this concludes today’s call. Thank you all for joining. You may now disconnect your lines.