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Edited Transcript of FAN.L earnings conference call or presentation 9-Oct-19 8:30am GMT

Full Year 2019 Volution Group PLC Earnings Call

CRAWLEY Oct 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Volution Group PLC earnings conference call or presentation Wednesday, October 9, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andy O'Brien

Volution Group plc - CFO & Director

* Ronnie George

Volution Group plc - CEO & Executive Director

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Conference Call Participants

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* Christen David Hjorth

Numis Securities Limited, Research Division - Analyst

* Clyde Lewis

Peel Hunt LLP, Research Division - Analyst

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Presentation

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Operator [1]

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You are now live.

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Ronnie George, Volution Group plc - CEO & Executive Director [2]

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Thank you. Excellent. Okay. Well, good morning, and welcome to Volution 2019 results presentation. A couple of things I'd like to do to kick off. So using this deck in front of you, Page 1, things that we'd like to talk about today.

But first off, a change from some of the prior presentations. Welcome to Andy O'Brien. So Andy started as the CFO at the beginning of this financial year, delighted that Andy's alongside me today. And so together, we'll share this presentation.

So slightly different format to what we've done previously. I mean, first off, should, of course, quote the prelim headline. The strong results for the year: revenue growth, 14.6%; earnings per share growth of 10.3%, our fifth year since listing in 2014. And what I would like to do today is just talk a little bit about what we're calling our refreshed strategy. I'll talk about the results in headline, but hand over to Andy to go through that in more detail. As is sort of pretty standard, I'll talk about the operating areas and how we've done in the prior year. And of course, I know already, I've caught up with some of you outside the room, we'll talk about sort of the outlook statement and how we're seeing sort of current trading and how we view the year ahead.

I'd like to take you to Page 4 in the deck here. And so just a reminder, really, our investment case, why invest in Volution? Market leadership. I mean, we are now 15 market-leading brands, operating locally in 10 countries. We believe we've got a track record for growth, 14% 5-year revenue CAGR growth.

Diversification, I guess, is hugely topical at the moment with all of the wider U.K. backdrop of 51.6% of our revenue is not derived from the U.K. market. That's a significant change from where we were when we listed in 2014.

And a strong consistent development in our financial performance: 10% adjusted operating profit, 5-year CAGR; and 10% operating cash flow, 5-year CAGR. And of course, what that says is that the cash follows the earnings very reliably.

And what's important for us is innovation. We believe we're a huge innovator in the space. We're bringing a lot of new product innovation to the market each year, and that helps underpin our organic growth. And indeed, some of the synergies and the improvements that we make with acquisitions.

And on the right-hand side of this slide, we shouldn't forget the structural drivers in our space. Growing focus on indoor air quality, that trend is only going one way. It's only going to further underpin our space.

And also the regulatory tailwinds, so there's awful lot of publicity at the moment around carbon emissions and carbon reduction, and what we do is help reduce carbon emissions in buildings, so on the new build space and pretty much every market that we operate in, these regulatory tailwinds. In actual fact, I had a call with the media earlier on today, and they said it looks like you've got a 30-year tailwind. And that, when you think about it, is towards net carbon 0 emissions. Why not? So we're really pleased about the sort of structural growth in our market, and we'll talk a little bit more about that as we go along.

As I said, refreshed strategy, not a major change. We believe that our strategy is clear and precise and not necessarily easy to execute, but we don't want to make huge changes to it. But I think it's about emphasis. And so on the next few slides, just to sort of remind you, we want to grow organically. We want to grow through adding on nice, discrete acquisitions. And we also are working on improving the economic proposition of our Torin-Sifan OEM division. But what we've now decided, and I think it's an important sort of message to get across both externally and internally, is that the Torin piece becomes just normal organic growth. Last year, 4.8% organic growth. So our organic growth includes Torin-Sifan.

And on the right-hand side of Page 6, our M&A growth, we'll talk a little bit more in a couple of slides about the performance of acquisitions made to date. But we're introducing now what we call operational excellence. And that's not to suggest that we're only now focusing on operational excellence within the business, but it's got a, if you like, reinvigorated and refreshed focus, and I'll talk in more detail in a moment about what sort of things we believe we can do and what that results in.

But organic growth on Page 7, it will continue to grow through a focused sales strategy for each of our market sectors; focus on those opportunities arising from the favorable regulatory environment; continue to develop new products, we bring in an awful lot of new products to market every year; and our cross-selling opportunities become far greater as we increase our market and market coverage through acquisition.

And so since we've listed, we talked about a 3% to 5% organic growth range. We're at the lower end of the range. But nevertheless, it's been 3.2% organic growth over the 5 years since we listed and was 3.5% last year.

On the following page, talking about acquisition growth, again, I talk about wanting to grow the business 15% each year, 3% to 5% organic, 10% to 12% inorganic. And in actual fact, we're right in the middle of that range, 11.3% in organic revenue growth in the 5 years since we listed, completely funded from our own cash generation.

So the slide below, we did this in FY '17, I think it's a really good slide to have a look at, a little bit more detail. We've made 15 acquisitions over 7 years. And they're listed there, if you like, in the regions, so Nordics, Central Europe, U.K. and Australasia. And important takeaways from this slide is how acquisitions, how we integrate and improve businesses over time. So on the left-hand side, the weighted average of the acquisitions that we've made were at 8.1x the EBITDA at the point that we made the acquisition. The return on the invested capital in the first full year post making that acquisition, we're 13%.

And before I talk about where we've ended up, what do we do and why are we acquiring. We're acquiring access to market. We are now -- we have a leading position in Australasia. And what do we think we can bring to those positions? In every case, we expand gross margins. We improve the cost of the products that are sold. Quite often, that's internalizing production of third-party supply products and making them ourselves. But even where there are examples of companies that we acquire producing their own products, I don't think there's an example yet where we can't improve the gross margins of the products that they manufacture. We bring an awful lot of scale to this space, bring a lot of innovation experience and a supply chain that I believe in what we do is one of the most comprehensive and one that we can sort of leverage into these areas.

We have cross-selling. We're selling new products into these new geographies. That helps us grow the businesses more quickly. One of the frustrations for me is quite typically what happens is the fastest growth in any acquisition is the immediate period after acquiring it. The problem with that, of course, is it's not organic growth. So we get a huge growth in the first year that's not organic because we don't count it as organic until we've had 12 months' worth of revenue.

We saw that. We're seeing that right now in Australia, where the growth is effectively around double digit. You can see that from the numbers in the second half of last year. But of course, it won't count towards our organic growth, but it's definitely fueled and assisted by what we bring.

And so what does that end up? The multiple of all of those acquisitions that we've made are today at 5x. However, in Australasia, Simx is the first year. But in the Nordics, first acquisition that I made back in 2012, Fresh, we've done several since, the implied multiple of earnings at the end of the last financial year was less than half of what we paid. The return on the invested capital there is 29%. And even in the U.K., where we've had 1 or 2 disappointments in respect of acquisitions made, we're still returning 14% on the invested capital. And whilst the multiple hasn't come down to the same rate as in other areas, it's still come down from 7.9 to 6.5x.

In Australasia, the return on invested capital is the same as the first year because it is the first year, it's 11%, 11%. But the multiple has already come down because we've improved the business from the point at which we acquired it.

I think it's a really important slide. I know that you've asked for this in the past, and we've been a little bit more circumspect, but we wanted to sort of consolidate Australasia. It was our largest acquisition in New Zealand, circa GBP 40 million in March 2018. And at the end of this financial year, I fully expect us to continue this slide. And of course, we'll be adding in the Australian acquisition as we'll have 1 year of trading in FY '20. So that's the second pillar in the strategy. So the first 2 are unchanged as it were.

And then operational excellence and why operational excellence. I'm pleased to say that our Reading facility was complete in the second half of the last financial year. I know a number of you have been out to see us. And certainly, we're opening that up now for site visits. What I would say about our Reading facility is it's one of its kind. There is not another facility in Europe producing as many residential domestic fans under one roof that we do there. We will leverage the opportunity that, that affords both in terms of improving margins, but also the capacity headroom.

And so what we're targeting in the business now is a return to a 20% operating margin in the medium term. And there's a whole raft of things that we can do. It's not just the leverage from Reading and the optimization that's at play there. But it is all the things that we have been doing to date, but we expect to do better in the future. Placing additional emphasis on value engineering of products to achieve lower costs and improve ease of manufacture, awful lot of work going on in the background at the moment, improving our domestic residential fan platform. That leads to 2 things, launching some new products, but also reducing the cost of the products that we currently produce.

We've been rolling out ERP systems over the last few years. That had been a drag in 1 or 2 areas, but now we're in a position where we can reap the benefits of the investments that we've made. Improving manufacturing efficiency, we've got a whole raft of internal initiatives and optimizing on the supply chain and sourcing benefits. So we believe, although we're talking very much as an ambition, as a target, something that we're striving towards the 20% operating margin target in the medium term is eminently focusable and achievable.

So that was my sort of introduction, really, the change in the 3 strategic pillars, the introduction of operational excellence. I'll come back in a moment, talk about the year that we've just had, some of the revenue changes in the different markets. But like to just hand over to Andy now to take you through the numbers for last year.

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Andy O'Brien, Volution Group plc - CFO & Director [3]

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Thanks, Ronnie. Good morning, everybody, and thanks again for coming today. As Ronnie mentioned at the start, I'm now 2 months in post, so I think that still qualifies me to be the new boy in the room. In those 2 months, I've met a number of you here, so it's good to see you again, but those I'm meeting for the first time today, good to meet you and look forward to working with you in the near future.

So look, the next couple of slides, it's really just going to pull together some of the themes and the numbers and the performance that Ronnie's already touched upon in the strategic pillar conversation. The layout for the first 2 that we're going to talk about, we're showing both, obviously, a focus on the FY '19 performance, but we're also showing it in a context of performance in the 5 years since IPO because I think we think one of the important messages is, of course, how we performed in the year that we're just talking about now, but also looking at the consistency of performance of the business over that duration.

So I guess, starting with the first on revenue. So Ronnie's already talked about our 2 pillars of organic growth and acquisitions and inorganic growth. And I think that you heard the 3.5% on organic, so a slight pickup from the previous year. So that's gone up 1% compared to FY '18. The good performance from our new acquisitions as well. So you put those 2 together, and that gave us that constant currency basis of 15.7% revenue growth for the year.

And yes, look at the nice trend over the 5 years since listing. Clearly, revenue is only good if it flows through to operating profits, and the good news is it largely does, although we will acknowledge and hence the conversation around the third pillar, which I'll come on to that we do have a focus on the slight margin restoration, so we recognize that whilst our margins 18% or just under 18% are very good, obviously, they have been tailing off ever so slightly. They've been tailing off for well-trailed and well-discussed reasons, partly the dilutive effect of acquisitions. So I guess, back to Ronnie's earlier slide, when we buy an asset, we're buying something which is of typically a slightly lower quality, operating at a lower return. We then introduce measures and performance and improvement and, as that slide showed, a good track record of driving that performance up. So there's a naturally dilutive effect at the point of acquisition. If we're honest, there's also been a couple of slides that are shooting ourselves in the foot around Reading and the issue we talked about earlier in the year around Torin-Sifan

and those are both well and truly behind us.

And I think the thing I would also draw attention to on the third bar, which is the profit margin, you can see the year-by-year margins. But what we've also then done is we've separated, both for FY '18 and FY '19, the performance half-by-half. So if you follow that piece through, what you see is that first half of FY '18 financial year, we were running at 18.5%. As we got into Reading, that suffered a little bit. So H2 of FY '18, we dropped down to 17.5%. First half of the year that's just closed, we held and slightly tickled that back up to 17.6%. And I guess, the encouragement for us, which supports the message that those issues are behind and supports the message that we're now getting on to the, how do we drive margins forward, is the recovery from 17.6% to 18.1% in half 2.

So you put all those together, and that's the shape and the trajectory of the margin and as I say, Ronnie's already introduced that third pillar. And over time, we're going to add more and more color and complexity around the ideas and the initiatives that we're going to bring to bear in the operational excellence space.

Flipping to Slide 13 then. So adjusted EPS for the year of 16p versus 14.5p, so a 10.3% growth in the year. And again, you see the 5-year trajectory there, which is one that we're naturally very proud of.

Cash flow-wise, and I'll come on to a little bit more detail around the cash flow for the year in a subsequent slide, but we pride ourselves in being very cash generative. We're quite CapEx light. All of our acquisitions over the time have been self-funded. And one of the measures we look at quite closely is what we call cash conversion, and the cash conversion for this year was at 85%, still very strong, slightly down on where we were in the previous year, which is 90%. And the principal reason for that is probably a slight increase in our stock levels, some of which is deliberate around Brexit and some planning we've done for that in predominantly Belgium and the U.K. Some of it is areas that, again, under the operational excellence initiative, we're going to be focusing on once Brexit's behind us, how do we get inventory to the right place.

And net debt for the year, so down slightly, so down GBP 2.6 million, I'll come on to the detail in subsequent slides. But essentially, it's the operating cash generation, minus the tax, minus the dividend. And then, of course, in the year, we spent about GBP 11 million on the acquisition of Ventair plus a small portion of contingent consideration for the Pamon acquisition that we just did in the previous year in Finland.

So then if you jump to Slide 14. So I promise I'm not going to go line for line down through the table here. But I guess, previous couple of slides, obviously, we've been focusing on predominantly our adjusted measures. So here, you'll also see the reported measures. And actually, if you look at the reported profit before tax, you see a pretty staggering increase there of 38% in year. Clearly, a big piece of that, which again, I'll show in a subsequent slide, is the impact in FY '18 of the exceptional costs around Reading, which there was a little bit of that in the first half of this year, that's now behind us. So again, that exceptional cost number, substantially reduced in FY '19. Dividend per share, so that's gone up to 4.9p, so a 10.4% increase, so EBITDA's slightly above the rate of EPS growth.

Just going down below the line there, finance costs, slightly higher in the year and that's because of the debt, the average debt level because of the acquisitions that were made at the end of FY '18. So our adjusted finance costs increased by just under GBP 1 million to GBP 2.2 million.

In terms of tax, our adjusted effective tax rate for the year was 20.7% versus 19.6% in the year previous. It's essentially a function of our mix, and particularly, the increased activity in Australasia. I guess, going forward, we're guiding to a rate of around 20% in the medium term. So we've got the lower rate in the U.K. starting to kick in with a bit of benefit from in FY '20, but more in FY '21, offset by the mix with overseas profits as well. So that's a quick walk through the financial highlights there.

Jump on to the next Slide 15. I think I've already trailed the key points here, but this is our reconciliation and walk from adjusted to reported profits. And like I said, the main piece I'd draw people's attention to is the substantial reduction in exceptional operating costs, from GBP 6.4 million in FY '18 to GBP 1.8 million in FY '19. And that's further broken down, lower down there, where you see the cost of essentially the Reading project, which was GBP 5 million in the prior year, GBP 1.3 million in this year. And essentially, that GBP 1.3 million was spent in half 1, so that project is now well and truly complete and behind us.

If you jump to the next slide, just to look at the balance sheet. So I think at a summarized level on the balance sheet, the main item that I've already alluded to is the increase in inventory. So our inventories went up by just under GBP 6 million in the year. Now, clearly, with a 15% activity growth, it's not surprising inventory goes up, but it's got a little -- it's gone up a little bit more than we'd have expected it to. And as I said earlier, part of it, we would definitely say is deliberate planning that will unwind, hopefully. And part of it was -- is areas that we just need to apply a little bit more focus to around the operational excellence space.

It's not shown on the slide here, but just when you sort of dive into the bigger detail that's available in the prelims, you will see that there is some sort of presentational changes that are a consequence of our adoption of IFRS 9 and more so IFRS 15. I guess, just to briefly highlight the impact it's had on us. So IFRS 9, essentially no change at all. IFRS 15, the main impact is a presentational one, where the rebates that we pay to our customers, we previously described those as trade payables. And we've now had to describe them as refund liability, so you'll see that when you go into more detail on the balance sheet.

IFRS 16, for us, we'll be applying in the new financial year just started. We're trying to evaluate what the impact is likely to be. Again, it's essentially a balance sheet one, so we think it's of the range of sort of GBP 18 million to GBP 21 million, GBP 22 million on both sides of the balance sheet in terms of the right-of-use asset and the matching liability. From an underlying earnings perspective, the impact is not going to be big. We think it's going to be of the order of GBP 300,000, give or take a little bit. So that's the balance sheet.

Then if you just jump to Slide 17 in terms of cash flow. So I think -- like I said, I think we do pride ourselves on the strongly cash-generative nature of the business, the 85% cash conversion I mentioned for FY '19. So that translates to the adjusted operating cash flow of GBP 37 million. We've then used that, deployed some of that in the year, income tax payments of GBP 9 million; dividends, as I mentioned, with the slight increase in our dividend relative to EPS, so that's just over GBP 9 million as well; and then you see the GBP 11 million at the bottom of the page, spend on acquisitions, predominantly Ventair with a small amount of contingent consideration for Pamon.

So with that, back to Ronnie.

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

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Excellent. Thank you very much. Page 19, so just a reminder, really. The 15.7% revenue growth; 3.5% organic growth. And over the coming pages, I'll talk a little bit more detail. But one of the things that we said that we would do, we'd aim to double the size of the business every 5 years. And we've sort of achieved that at the revenue line. And of course, with a little bit of operating margin dilution, we haven't quite doubled the earnings as it were. So that's bringing sharply back into focus the operational excellence and the value that, that will bring.

But the next few pages are the regional areas. So U.K., Page 20. Good organic growth in the U.K., 3.3%. We were pleased with that. And the export -- I'll start in reverse. The export declined, but we knew it would decline. We didn't fully take the credit for the exceptional growth in the year before because we talked about a one-off spares order that we knew wouldn't repeat in the following year, so we were very cautious around export and not getting carried away. But nevertheless, that decline was materially the nonrepeating export order to Japan and the spares order.

But if you look at the rest of it, so the 3.3% organic growth is in spite of the fact that our export declined. And of course, the export wasn't really the U.K. market, so the underlying growth in the U.K. is, of course, greater than the 3.3%. U.K. Residential Systems, and we've introduced the word Systems there, these are system ventilation equipment going into only new applications. This doesn't include any refurbishment products that can still find their way into the new build market. The revenue is much smaller and we actually have that under RMI. But organic growth of 8.6% in the year was slightly slower. It was slower in the second half of the year than the first half, but the order intake throughout the year has still been hugely positive.

And back to what I said earlier, regulations are underpinning this space. Heat recovery is becoming much more mainstay in new build dwellings. And it will only continue to grow in the months and years ahead. A detail now, but Part F and Part L have gone out for consultation in the U.K. and the direction of travel is to be much more punitive, particularly around indoor air quality. And of course, I think you know this; that outdoor air quality is getting an awful lot of press time at the moment. It was on the front page of some of the national newspapers a few weeks back. And of course, your indoor air quality can be better than your outdoor air quality if you have a heat recovery system that filters the air.

So the drivers in this space are not just about carbon reduction, but they're also about air quality. Getting into quite a bit of detail here, don't want to concern you, but if you've got poor ventilation in areas such as maybe bedrooms, which typically under regulations aren't ventilated, then you've got all sort of issues around VOCs. And there's been -- if you have a look, it's on the government website, there's been quite a good study recently, 100 new build dwellings that were surveyed between, I think, 2015, 2017. But because regulations don't prescribe ventilation in the bedrooms and if the dwelling isn't ventilated properly, you get a buildup of VOCs in the areas that aren't ventilated.

Now that means for us, we solve these problems. And these problems, I think, are only starting to become well-known now, and of course, it's because dwellings are much more airtight. We filled up the dwellings 10, 15 years ago. Insulation companies did extremely well off the back of the insulation drive, but the next element of drive and growth is in ventilating these buildings more adequately. So it's not just our new build systems in the U.K., but it's anywhere where you're building new dwellings and this awareness around indoor air quality.

So new build, a little bit about the outlook, I think new build sector in the U.K. is okay. We're still reasonably positive about the year ahead and we're continuing to bring new products to market in this space. Our market share is significant. And our outlook, I would say, remains broadly similar to the year that we've just had.

I think the one area that is weaker is U.K. commercial. We've alluded to that in the prelims statement. There's quite a bit of detail there about U.K. commercial and U.K. commercial is really, for us, what I would say, U.K., London, new build commercial, I think, is probably the right answer.

Our RMI in Commercial is okay. Our schools and education, Commercial is also okay. So it's about 40% of our revenue that's focused on London commercial new build, which is a little bit less certain, but that was the case in the second half of the last year. So there's no great surprise to us now. And unlike some others that maybe have announced more recently, we don't see, from our perspective, the markets materially different in their behavior now to how we performed last year.

And in actual fact, on U.K. residential RMI, we're really positive. We don't think the market is great in terms of RMI activity, but we know that the service drag that we had at the beginning of last year has gone. We did have a 3.1% organic growth. Curiously, our public RMI growth was greater than our private last year. And that's a lot of effort that's gone in over the last 3 or 4 years, new product introductions, refocusing of the sales teams across 2 brands, both Vent-Axia and Airtech in the U.K., and we're positive about public RMI going forwards. We think that it should grow for us over time, and we could spend a lot of time talking about the state of public housing dwellings in the U.K. and indoor air quality and mold and condensation problems. And again, that's what we fix, so public RMI, really good.

And private RMI, dare I say, I think U.K. consumer is actually starting to understand now that ventilation doesn't have to be ugly and noisy, and it can actually be quiet, energy efficient. There is a small premium to pay, but actually, relative to the value that it brings, it's not a big premium. And so our upsell in private RMI is getting a lot of traction.

We launched this product here, the PureAir fan. It's actually a product that we launched earlier in the Nordics. It's got odor-sensing as well. So it's got odor sensing as well as humidity sensing. It's a high-end offer, and we had very strong sales when we launched it in July. It's listed in a whole raft of new places.

And so we're really positive about the upselling that we bring to RMI. It doesn't necessarily have to be unit volume growth. We can't dictate how many refurbishments take place in the U.K., but we can help influence the value that we get for each one of those that take place. So at a time when people are probably quite -- well, quite pessimistic about RMI, we're actually reasonably positive, and it comes back to what we're doing.

Last bullet on the slide was export, and I've already talked about that. So a good year for the U.K. in spite of all of the well-discussed and well-known challenges.

In the Nordics, again, I think the Nordics, as a market, particularly Sweden, and to be clear that it is Sweden, I think has been soft for about 18 months. So we're predicting that the next 6 to 12 months will be broadly similar. We don't see any huge recovery in Sweden around new build. It is really around new build, Stockholm apartment new builds and so forth. We're predominantly RMI rather than new build. We have got some really good new initiatives on the product side, but we think the Nordics will continue to be difficult in Sweden. But indeed, we've got a much wider, more attractive portfolio.

The acquisition in Finland, Oy Pamon, went really well last year, and you've seen that we had to pay out an additional GBP 600,000 of contingent consideration for achieving some of the targets for growth that we set. So we're really excited about our position in Finland, our heat recovery offer and how we can extend that across the different markets that we access.

So in actual fact, those 2 pages are probably the areas that were more difficult for us last year or the market backdrop was more difficult. As we go into Central Europe, we grew 9.3% organic growth in Central Europe. I don't think Central Europe is growing at 9.3%, but we are, and it takes time. So a lot of detail here, but in Belgium and Netherlands, particularly in Belgium, we completely refocused the company that we acquired to go into the distribution market with our strong brands and to have that wider offer. And so what it means is when we launch new products into the space, we get that leverage very quickly. We were able to launch a product into a whole raft of different distribution points. And that's what we're doing. So we're launching this wider, what we consider, compelling product portfolio in Belgium and getting very good traction in the Netherlands and getting really good traction.

And in Germany, we're probably the #2 player in this decentralized heat recovery space, which curiously in Germany has overtaken central systems in terms of the preferred technology. We brought a new product range to market in the summer of 2018. It did really well in the second half of last year. And so our outlook in Central Europe for this year is probably broadly similar to what we saw last year. And that will absolutely be share gains, as you would expect, because we're not predicting that Belgium, Netherlands and Germany as economies will grow 9% this year.

Australasia, 8.8% organic growth, need to be a little bit careful about organic growth, it only kicked in from Marc because, of course, the anniversary of the Simx acquisition was in March '19. So it's 8.8% organic growth in the period after March.

But in New Zealand, it was difficult. We acquired New Zealand. We knew that when we were acquiring the business, we had a change of government towards a socialist government. We knew that the local market conditions are a little bit more difficult. And of course, at that point in time, if we're only buying the business for the 1- or 2-year period, we might have stopped and decided not to do it. And I knew that we've be explaining in the first 12 months more difficult market conditions in New Zealand.

However, we've been there now for -- well, for 18, 19 months. We're influencing regulations. We had a major breakthrough about 6 months ago, where regulations for refurbishment in New Zealand now include the use of ventilation equipment. We have about a 70% share of the RMI market. And so we're seeing a continuation of good growth in New Zealand in the new financial year, which is basically around regulatory underpinning. We had a colleague of mine who's worked in the group for some time who's been living in the Auckland area for the last couple of years, and basically, was hugely influential in U.K. regulations over time. So it wasn't so difficult to help influence regulations, for all the right reasons, in New Zealand. So really pleased about what's going on there.

And of course, we've acquired Ventair in Australia. So we have a #4, #5 position. It's more what we call a ceiling sweep fan company, but we're now introducing lots of new products through Ventair to the wider Australian market. Know the space really well. Know the #1 through 4 players. We know their product range, and we believe that our product range is superior, and we want to introduce all of those ranges to the Australian market. So Ventair is growing really well, but you won't see that until, what, March 2020 because it won't count as organic growth.

So really good start to the new year in Central Europe and Australasia, and of course, pollution is more than just a U.K. ventilation business.

OEM on Page 24, just moving on to our OEM division. The 4.8% organic growth last year was very pleasing. The disappointment was, of course, the margin and the operational difficulties that were in 2 parts, really, as we've explained previously: ERP system implementation; some confusion around inventory and sourcing; some spot buying and flying in of components at a premium, which impacted our margin. But the good news is the organic growth that we achieved in the EC3 motor and also the ramp-up of the use of that motor internally, which you don't see in the revenue because, of course, this is only third party. So our outlook for Torin is much, much more positive. And we have a whole raft of initiatives and improvements over the prior year, which will improve the operating margin in 2020.

So look, it's a quick summary of the revenue. We could go into an awful lot more detail, but I think that's appropriate. I'd just like to finish off before we go to Q&A just to remind you of what we've said: A change in the third strategic pillar to focus on operational excellence and planning margins. I'm always concerned here that people believe that the barriers to entry for Volution are limited and therefore, our margin isn't sustainable. We believe the best way to demonstrate sustainability in the margins is to improve them, and that's what we'll set about doing in the months ahead.

And just to recap on what we said. Last year, revenue growth was nearly 16% at constant currency; organic growth of 3.5%; delighted about the acquisition of Ventair in Australia. The ventilation market is hugely fragmented. You've seen a transaction earlier on this week. It's slightly different to us. It's more of a distribution type play rather than a manufacturer, but we still see plenty of opportunities to acquire over time. And as we've demonstrated earlier, we believe that given the opportunity to acquire and improve, we can make some really compelling returns.

And just finally and, of course, it would be remiss of me not to, not to qualify where we're at. U.K. is uncertain. The Brexit negotiations are changing by the hour. But from our perspective, we can only focus on what we can do and what we can focus on is improving operating margins through operational excellence.

So that's the content of the presentation. I know Andy and I'd be delighted to hand over to the floor for any questions.

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Questions and Answers

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Unidentified Analyst, [1]

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[Dyckhoff]. If you could just comment on the kind of underlying public RMI market and outlook you see there. Obviously, you're taking share, but are you seeing some improvement in spend then generally?

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Ronnie George, Volution Group plc - CEO & Executive Director [2]

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I don't think so. I mean, there's quite a bit now around the whole planning piece. And so I would say there's still -- attention #1 is replace cladding and make sure the building is safe from a fire integrity perspective. So I don't predict necessarily any more spending on ventilation, but I do believe that our position enables us to grab share. I don't know quite when. But I think over the next few years, there will be more spending on ventilation. There is definitely mold and condensation type problems. I mean we get to deal with fixing these and of course, there's some pretty horrific issues out there. So I think that will come back over time. But I think for this year ahead, we'd say, gaining share, upselling solutions is what we would expect to deliver.

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Unidentified Analyst, [3]

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Second one, on the margin target, you've got 20%. Is that kind of mainly cost efficiencies, upselling or have you got scope also just to push pricing higher given your...

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

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I think it's a bit of everything. I mean Andy and I have got a sort of a secret slide, if you like, in terms of how we get there and it's Reading optimization is a large element, it's value engineering, which is a large element. It is certainly a little bit of leverage as we grow. In Ventair, it would be the margin expansion as we go forwards, as we introduce new products. There's ERP optimization and efficiency that we can drive in across the U.K. and the Nordics. And in particular, I think there's further opportunity for us to go on procurement. There is the price delta versus any implied inflation that, I think, we can go out with. We certainly learned in some areas the hard way, if you like, with the service issues we had in Reading, just about how strong our position is. So it's not -- if we're looking at 200 basis points of improvement, it's -- there's 20 here and 30 there and 40, and it makes -- and in actual fact, our list comes, as you would expect, to more than 200 basis points, but I don't think for one moment, we'll necessarily get all of those delivered and over the line. Yes?

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [5]

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Well, Ronnie, what are your thoughts in terms of R&D if we're talking about, obviously, the optimization side of it? And R&D spend is obviously somewhat more of a medium to longer term, sort of, in terms of trying to drive that product speed?

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Ronnie George, Volution Group plc - CEO & Executive Director [6]

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Yes. I mean the group is much more mature now, so in terms of the R&D processes and the leadership, I mean, what's happened, and it's not something we aim for. But for example, when we acquired in Belgium and Netherlands, we had an engineering team in the Netherlands. And we didn't plan to close it, but actual fact over time, levers and so forth, that team's no longer there. So we've certainly bulked up the engineering team in the U.K. I had a group technical director been with the group for a couple of years, high pedigree, ex-Eaton, Cooper Lighting, so really high pedigree, but it's a bias between -- we've had a lot of innovation that we've brought through and new products and in actual fact, this may sound silly, but there is almost a risk that we bring too many new products to market too quickly because they each need a degree of dedication and focus to get traction.

So the engineering team can do almost 1 or the other, they can bring product to market or they can attack the cost base of the products that we've already launched. And so there's certainly more focus on that from the engineering team. And as we've launched products 3 or 4 years ago, and they get really good scale, when you go back to them, you find that because of the scale, there's a whole raft of new opportunities that weren't there previously.

Big push around electronics and building a more harmonious consistent platform of electronics. So we're launching a new wireless infrastructure to the products in Germany, which will also enable us to bring a new product to market later this year that provides Bluetooth functionality for the installer in a school. So there's read across here where we get leverage.

So no, I don't believe that in future, we'll bring any -- necessarily any fewer new products to market. But I do believe the value engineering will really help underpin the margin expansion.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [7]

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The other one I had was on your split in new res in the U.K. How much of that is apartments versus basic housing and trash tax?

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

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Certainly, the penetration of heat recovery systems in apartments is greater. And so there's definitely more of that in central systems of heat recovery in apartments. But in houses now, it's difficult to build a house without using what we call a dMEV unit, a decentralized mechanical extract ventilation unit. And so the value per dwelling is slightly smaller. But there is still a system type technology going into a house. And what we believe over time is that houses will start to move towards using heat recovery. So although we might say, let's say, half the new build estate is being built with some form of system, they're not all being built with the most highly valued system. So there's a further upsell or increase that will happen there.

I think the other one, Clyde, is that it's not all London apartments anymore. And certainly, when I talk to the sales teams, we've got about -- in the new build sales area, we've got about 22 external salespeople, and they're courting all the local consultants. And so from what they're saying now is much -- many more high-rise buildings going up in Liverpool, Manchester, Leeds, outside of London. And our revenue split is broadly similar, north and south. It's not a 75% of our revenue is predicated around inside the M25.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [9]

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I mean was the -- I mean I think it's 2025 that new houses are not allowed to have gas boilers.

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Ronnie George, Volution Group plc - CEO & Executive Director [10]

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Yes.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [11]

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Is that a step change event for you, guys?

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Ronnie George, Volution Group plc - CEO & Executive Director [12]

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I don't think it will -- I think it's probably Part F and L consultation will be probably an earlier, better, bigger step change for us. And also, this -- we're hearing consultants now start to talk about well-being. I was invited to a well-being seminar the other -- but it's about designers trying to build houses to acknowledge the issues around health and indoor air quality. And I think this is why housebuilders will recognize is housebuilders don't sell houses for being healthy at the moment, or having good indoor air quality. I think it's a missed opportunity personally, but I would say that that's a bigger driver than eliminating gas boilers. The reason, of course, you can eliminate gas boilers in new homes over time, potentially, is because they're more airtight. But people are making mistakes by building more airtight dwellings, and they're not ventilating properly.

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [13]

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Can I ask you? You touched on this in Australia and New Zealand, but just sort of market share by country I suppose. And also whether you sort of look at the U.K. business as perhaps the sort of blueprint for other jurisdictions? And then just probably linked to that, say you got the margin target but there might be this mix (inaudible), how do margins vary by sort of countries?

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Ronnie George, Volution Group plc - CEO & Executive Director [14]

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Okay. New Zealand market share, more RMI than new build, probably about 70%. We sort of talk about who else in there and there's 4 or 5 smaller competitors, but the sale is quite small in each participant. So big market share in New Zealand, which was the attraction. And I would say in Australia, it's the reverse, and it's probably 10 -- in domestic ventilation, it's probably 5% or 10% if that, but an opportunity to grow rapidly. And a little bit of detail here, but some of the biggest customers in that market are owned by our biggest customers in the U.K. If you take Edmundsons, which is one of the largest electrical wholesalers in the U.K., they own Metal Manufacturers, which is one of our largest customers in Australia, managed by the same team. And so they know what value we bring. I say, I believe that we bring more value to the distribution market in the U.K. because of our upsell and our brands. And so backing us in the U.K. works; why wouldn't it work in Australia? So it's a good analogy there about the model in the U.K. I would say that the Nordics is actually -- particularly in Sweden is an even better model for me, when we talk about RMI. The penetration of high-end solutions in the Nordic is far greater than it is in the U.K. And of course, we can say the archetypal Swedish consumer is much more discerning than a Brit. But why do you have to put up with noisy ventilation in your home? You don't. And I think U.K. is starting to see that. So I would like to think, Christen, that what we try to do is pick the best elements in each of the markets rather than a plain vanilla U.K. blueprint works everywhere else because clearly, for me, I would like the 20% upsell in the U.K. to be the 80% against Sweden. So we can use those different read across.

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Andy O'Brien, Volution Group plc - CFO & Director [15]

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And then, I guess, to your margin question, Christen, and, Ronnie, jumping in, you described it. I think it's not so much a geographical distinction, but it's back to that earlier M&A slide around timing of acquisitions, length of time in the stable and the ability to bring all these things into those businesses. That's a more pertinent distinction between. If we look at what margins our different businesses deliver, that's a much more pertinent one than a geographical one.

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

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Yes. Yes, I'd say that the 46% gross margin, generally speaking, plus/minus 5%. The product categories should be generating that margin in all -- in each jurisdiction. Yes, we've got some outliers with particularly strong margins, particularly in some of the new innovations and stuff that we're bringing through.

And look, we absolutely believe the margins are sustainable. And one of the reasons I would say this is that we don't have -- I'm just thinking that those that have been to Reading more recently, I think it's a real eye-opener when they see the diversity and the unit volume, the breadth of the range is huge. The depth isn't necessarily that huge. And that's great because the focus on price is really difficult. And if you've got a very narrow suite of products stacked very high, everybody knows what that item costs. When you've got thousands of them, it's very difficult to keep track of. And I think our range is pretty much unbeatable in the markets where we have a big share a strong share.

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [17]

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And Germany and Benelux, I mean, that sort of share, I mean, how are you sort of situated competitively?

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Ronnie George, Volution Group plc - CEO & Executive Director [18]

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Yes. I mean, Germany, we have a big share in a niche. We need to be clear on that. I mean the German market has been a frustration for me in terms of we would like to be so much bigger through acquisition, and we've been unsuccessful to date. But certainly, in the acquisition that we made in 2014, we have probably a 30% share of what we call decentralized heat recovery. And again, the German market understands the value of refurbishing the existing stock. The issue about carbon reduction over time is you can't just deal with it on the new build. You have to deal with the refurbishment. U.K. government's failed to deal with that over time. I mean, there is no RMI support for the U.K., but there is in Germany. And in Germany, if you refurbish your dwelling and you make it airtight, you would only, in my view, fit, decentralize the recovery. So we've got a really good structural driver there, and we have a big share, and I believe we're the leading innovator in that space. And that's demonstrated now by the sort of revenue growth that we're delivering.

Belgium, we've got -- it's more of a new build. So it's more of a system market in new build, and we've done really well there. We've got a new development underway. It's probably about a year before we get it to market to further consolidate our position in Belgium.

But in Netherlands, we're quite small. The Netherlands is quite a well-developed market around what we call demand control ventilation; similar in Belgium. And again, some new products that we bring out to try and capture a bigger share in that space.

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Unidentified Analyst, [19]

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For me, if I can. I'm just wondering, just thinking about Reading, there's some exceptionals, obviously, in the '19 year. But just wondering what the hit from the Reading disruption might have been to the sort of like the ongoing P&L, if you like? Just thinking about the operation, obviously, as that starts running kind of fully again?

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

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Good question. And we -- it was significant. We're not giving full disclosure on the impact, but it goes a long way to helping us. There's about 20% operating margin target. So I think in that regard, it gives us confidence that as we are now seeing the improvements, and indeed, there's further to go at, that it underpins it. And I think it was in 2 parts. One is, if you like, the revenue drag that it had in the first half of the year, but also the operational impact. We were less efficient than we were. We were targeting to get back to the efficiency levels at least at which we were previously. But I think the major benefit comes as we scale up because, of course, there is an element of fixed costs and the overhead and the molding equipment and so forth.

I mean, I did a calculation the other day just in molding, where I think with the existing equipment that we've installed and we've updated and upgraded some of the machines more recently, but versus where we're running today, I think we've got 40% capacity headroom on our mold shop before we need to make any further investment. So I'm not giving you an exact answer in terms of the financial impact, but it was substantial. And it is a tailwind for us as we go forwards.

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Unidentified Analyst, [21]

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And then just, I think, you've said this, but just to be really clear. You essentially were going through the U.K. businesses but that things broadly sort of similar to the second half. Would you care to say that quite as explicitly as that, that actually, second half is -- or sorry, the financial year has started in line with the second half of last year?

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

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I think if I was more explicit, I would say, that RMI is probably stronger. I would say that new build is probably about the same. I think Commercial is probably about the same. Yes. So in actual fact, I'm saying that RMI is slightly better. Commercial, might be slightly weaker, but it's only 2 months. But I think RMI is probably slightly stronger, but it's only 2 months. And indeed, our outlook is -- I mean, it's very, very difficult because -- and we're qualifying the -- we don't know what will happen after the 31st of October. But we know the levers that we're pulling on and we know the sorts of initiatives that we're running and the success that we're having with that. So I would say, against the backdrop that is no different to what we're seeing today, we would expect to do well again this year.

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Unidentified Analyst, [23]

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Do you continue to plan rolling outside of the U.K.? So your continued focus is...

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Ronnie George, Volution Group plc - CEO & Executive Director [24]

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In terms of M&A or just…

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Unidentified Analyst, [25]

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Yes.

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Ronnie George, Volution Group plc - CEO & Executive Director [26]

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Yes. I think that we'd be delighted to do other things in the U.K. because of the scale that we've got. I think it's probably a little bit more difficult because of competition positions in certain areas. So yes, I think M&A, I mean, I'm mindful of the fact that I thought that we flagged that we would acquire in New Zealand one day, but it did come as a big shock, I'm afraid. But our jurisdictions are, it could be in Australasia. We're building up a position there. And I think there are things that we might want to add on, but primarily Continental Europe. And indeed, what I talked about is going a little bit further east. I think that some of the Poland, Czech, Hungary, Romania, some of those places, we'd be delighted to have a more structural position. And it's because I think the organic growth and the upsell potential in buildings will be stronger there than maybe some of the more developed areas of Europe.

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Unidentified Analyst, [27]

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I'm interested in the Australasia. I mean, just as a general equity fund manager, I recall that business that you bought in that area, did tend to spend rather too much time in terms of management traveling to and from. So it kind of came like a kick in the face at some point in the future?

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Ronnie George, Volution Group plc - CEO & Executive Director [28]

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Yes, okay. Yes. So I'm very mindful of that. It does take 24 hours to get there, and my record is 17 hours second leg. So I understand that pretty well. I think what I'm blessed with is some really strong local management. So in New Zealand, we acquired a business that we've been dealing with as a group for 30 years. And indeed, personally, I've been dealing with the Managing Director of that business for 9 years. So the trick is hanging on to them going forwards. But we value what they do. They're certainly involved in the management incentives that we think will do well for them over time. Also, a chap called Lee Nurse, some of you will know Lee from earlier discussions at IPO. But Lee is in New Zealand and Lee is, without doubt, the most knowledgeable product expert in residential ventilation bar none. And he happens to work for us and he's in New Zealand rolling out products in Australia, having a lot of fun.

So I think we've got a strong team. We've got some really good metrics that we keep an eye on. We've got strong brands. It's not so much a project business. I think if it was a project business with the vagaries of are we winning projects or not, we've got that strong brand.

I mean, if you search for Manrose on Google, it comes up as leading in the U.K. and in New Zealand. So I think its brands, strong management, great product portfolio, good local team. We've done some cross-fertilization. We've actually had 1 or 2 people from New Zealand coming over to help in the U.K. They run an exceptionally strong distribution network from Auckland. And of course, with the problems that we had in Reading, we said, why not use some of that expertise? So we've had some people, one in particular, working in the U.K. for the last 5 or 6 months, helping us optimize Reading.

I don't intend to spend more than 1 trip every 6 to 9 months. They'll come here about the same frequency. So we're planning for it not to be a distraction, but it's a good question. I understand why you ask it.

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Unidentified Analyst, [29]

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Given the sort of medium-term or normal-year target for cash conversion, 85%, it's a bit lower historically. The new financial year, maybe you get to come back from the inventory. Are you expecting that to be a bit higher or...

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Andy O'Brien, Volution Group plc - CFO & Director [30]

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Yes, I mean, we would expect to start with 9. An 85% is a tiny bit down. And as you say, inventory is the main piece. It's really applying the disciplines there. CapEx, we're very, very diligent in reviewing. We're CapEx-light and whenever we get a CapEx request, we investigate it thoroughly, pay back and validity and we'll carry on doing that. So yes, I would say, 90-plus would be where we would see it coming through.

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Ronnie George, Volution Group plc - CEO & Executive Director [31]

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Definitely. I think as part of operational excellence, we said earlier, inventory management. It's not just the cash that we want to. It's just we're tying up too much space in our factories, and we need more headroom to grow, so big, big focus on inventory improvement this year. And to qualify that, I don't think we manage our inventory poorly. It's just that we know we're leaving some money on the table.

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Unidentified Analyst, [32]

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Can you just explain to us the competitive advantages of the Volution brands in the U.K. and also the entry barriers? Is distribution or relationships with the new distributors a big entry barrier?

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Ronnie George, Volution Group plc - CEO & Executive Director [33]

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I don't think I've used this slide, but I will do now. On Slide -- it's actually not numbered, is it? It's the second slide here. It looks like that with these icons. So I think this is true everywhere. So this is just a residential building, and we tried to show the solutions that we provide. So barriers to entry, what are they? And I would say that the brands are absolutely a huge barrier to entry and, of course, the other way round. In Germany, we've got a great product portfolio, but we can't grow organically well in the wider German market, unless we're there. That's the thing. Even with our great product portfolio. So if you reverse that and say if you haven't got a great product portfolio and you're trying to get into one of Volution markets, and Volution can't do it the other way round, that, I think, just confirms how strong brands are.

Relationships with distributors, they're really important. We're very careful that we have a preferred route to market through distribution, particularly in the U.K. Our distributor customers know that. I believe that some of our competition have a more confused strategy where you might argue they're running with the hares and the hounds. And I think we're very pure, very clear about that. And so if you take all of our senior leaders, they value and recognize that.

We're also the most innovative. So we bring more innovation to the space. So we're the horse to back, as it were. And then when you come back to service, and we learned here. It was a bitter experience in 2018 financial year when we couldn't provide the service to the market that we've been used to. And so that's made certainly me as the CEO of the group even more conscious of how we can differentiate on service and maybe even better than we are now. We think we're very good. I think there's more that we can do.

So it's basically a whole raft of smaller things to build up the strong brands, the relationship, the product portfolio, the service, the innovation. And they're all probably equally weighted. And they build up to a competitive barrier to entry.

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Unidentified Analyst, [34]

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Yes. And how many brands, how many compete with Edmundson, deal within your space?

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Ronnie George, Volution Group plc - CEO & Executive Director [35]

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So that's a good question. So Edmundsons would deal with the RMI brands in particular, so Vent-Axia and National Ventilation; and Manrose would be the distribution brands in our U.K. Some of our other brands are a little bit more -- slightly different route to market, so Breathing Buildings tends to specify and supply direct to contractors, and that's why it wouldn't go through a distributor. And of course, if you're Edmundsons, they would say, we know the brands that we're dealing with and we know what they stand for.

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Unidentified Analyst, [36]

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Sure, okay. And final question, sort of the geographical criteria for your acquisitions. Is there a reason why you're avoiding the States? Is that a loaded decision?

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Ronnie George, Volution Group plc - CEO & Executive Director [37]

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Just 2 or 3 reasons, really. One is, I think, Europe is nearer. And back to the point that was made earlier, and you might say, well, of course, the States is closer than Australasia, but there were some compelling reasons for being there, the relationships and the strength of the brands and the product set is closer to what we do in Europe. North America is different, and of course, for obvious reasons, the energy efficiency drive isn't quite there. So heat recovery penetration and so forth is much smaller. And we believe there's still an awful lot that we can do in Europe first.

Okay. Great. I think that's all the questions. Well, look, thanks again for coming along. Just great to see you all. Thank you. Thanks very much.

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Andy O'Brien, Volution Group plc - CFO & Director [38]

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Thank you.