Preliminary Results (1121G)

TIDMVCP

RNS Number : 1121G

Victoria PLC

26 June 2012

International manufacturer & distributor of carpets & floorcoverings, supplying the mid to high end residential and contract markets in the UK and overseas.

Date: Tuesday 26 June 2012 Embargoed: 7.00am

VICTORIA PLC

("Victoria" or the "Company")

2012 PRELIMINARY RESULTS STATEMENT

"Victoria has remained focused on trading whilst also investing for future growth"

 
 Year ended   Year ended 
   31 March      2 April 
       2012         2011 
 
 
 Revenue                                  GBP77.13m    GBP70.50m     +9.4% 
 Operating profit (pre-exceptionals)*      GBP2.58m     GBP2.42m     +6.8% 
 Pre-tax profit (pre-exceptionals)*        GBP2.21m     GBP1.92m    +14.7% 
 Pre-tax profit                            GBP1.55m     GBP1.92m    -19.6% 
 Earnings per share 
 -Basic                                      15.64p       17.41p    -10.2% 
  -Basic adjusted earnings                   23.71p       18.35p    +29.2% 
  per share (see note 
  2) 
 Dividend 
  -Final                                      7.00p        6.00p    +16.7% 
  -Total dividend for                        10.50p        9.00p    +16.7% 
  the year

* Exceptional items detailed in note 3

Key points

0 Australia sales up by 1.5% in local currency - impacted by weakening market and consumer sentiment.

0 UK sales (excluding Ireland) increased by 15.4%:

o Strong growth in sales to the John Lewis Partnership - new programme of carpet ranges introduced in April 2011.

o Further strengthening of Victoria's business in the insurance replacement market.

0 Group investment programme underway :

o UK rolling out an extensive luxury vinyl products programme - aim to become a major player within three years.

o Australia launch major product initiative with INVISTA(R) under the STAINMASTER(R) with EverSoft(TM) brand.

0 Strategic initiatives in place to build on market position and earnings.

0 Proposed move from the Main Market to the AIM Market of the London Stock Exchange.

"Victoria has an excellent brand and we are determined to remain a leading quality flooring supplier in both Australasia and the United Kingdom. Plans have now been put in place and investments are being made to ensure we achieve these goals."

"We expect the consumer environment to remain challenging, but we have already demonstrated that we can achieve good progress in these conditions. Our strong customer relationships, on-going actions to reduce costs and improve working capital utilisation will provide us with a strong platform for medium term growth."

Alan Bullock, Group Managing Director

"As the new financial year progresses, the benefits of the investment in the new products, together with the cost reductions and targeted improvements in working capital, should see stronger sales and profit growth in the second half of 2013 and in the following year."

Katherine Innes Ker, Chairman

 
 Enquiries: 
 Victoria PLC                    Seymour Pierce 
                                  (Broker to the 
                                  Company) 
 Alan Bullock, Group Managing    Corporate Finance 
  Director: Mobile: +44 (0) 
  7785 325701 
 Ian Davies, Group Finance       Jonathan Wright 
  Director: Mobile: +44 (0)       or Tom Sheldon 
  7770 638791 
 Today: +44 (0) 20 7107 8000     Corporate Broking 
  (until 12.30) 
 Office: +44 (0) 1562 749300     Richard Redmayne 
  (Thereafter)                    or Jacqui Briscoe 
 Ticker: VCP.L Premium Listing   Tel: +44 (0) 20 
                                  7107 8000 
 www.victoriaplc.com

VICTORIA PLC

("Victoria" or the "Company")

2012 PRELIMINARY RESULTS

STATEMENT BY THE CHAIRMAN, KATHERINE INNES KER

Introduction

The year ended 31 March 2012 was one of significant challenge for Victoria and I am pleased to report that the business has responded well. The UK economy slipped back into recession in the latter part of 2011 as there continued to be a severe squeeze on real household incomes. The Australian economy softened in mid-2011 and turned down sharply in the first quarter of 2012. Despite these difficult trading conditions, the Company returned a positive performance.

In response to the worsening economic outlook, the Board has overseen cost reductions and is targeting working capital improvements in both the UK and Australia in the new financial period. At the same time, investments in new products in the UK and Australia have been made and these products have been launched since the 2012 year end. Further detail is given in the Group Managing Director's Business Review. As a result, 2013 will be a year of investment with the benefits expected to be seen in the second half of the year.

Financial Results

Group revenue in the period under review increased by 9.4% from GBP70.50m to GBP77.13m and, in constant currency terms, was ahead of the prior year by 4.6%.

Revenue in Australia advanced by 1.5% in local currency after seeing a significant slowdown in the final quarter of the financial year, whilst revenue in the UK was ahead by 9.4%.

Operating profit before exceptional items increased by 6.8 %, from GBP2.42m to GBP2.58m, with profit before tax and exceptional items increasing by 14.7% from GBP1.92m to GBP2.21m.

Net debt increased in the year from GBP6.21m to GBP7.75m, reflecting investment in future growth initiatives. As stated in the pre-closing trading update, borrowings are forecast to rise in the first half of the new financial year, as the Group invests in stocks and point of sales materials to launch new range initiatives in both the UK and Australia, but should fall again as the year progresses. The Group continues to be well invested throughout its operations and, with modest capital expenditure plans, is expected to remain cash generative. Net gearing remains relatively low at 16.1%.

Earnings & Dividends

Basic adjusted earnings per share have risen by 29.2%, from 18.35p to 23.71p per share, and the Board are pleased to declare a final dividend of 7.00p per share, up from 6.00p last year. This, with the interim dividend of 3.50p already paid, will bring the total dividend for the year to 10.50p, an increase of 16.7% over the prior year.

The proposed dividend, which is subject to shareholder approval at the Annual General Meeting to be held on 31 August 2012, will be paid on 6 September 2012 to all members on the Register at the close of business on 10 August 2012. The shares will be marked as ex-dividend on 8 August 2012.

Board Changes

There have been a number of changes to the Board during the year; my predecessor Chairman, Nikki Beckett, and Non-executive Director, Peter Jensen, resigned on 5 March 2012. At a General Meeting on 6 March 2012, Alexander Anton, Sir Bryan Nicholson, Geoff Wilding and I were elected as Non-executive Directors, and I was appointed Chairman. On behalf of the Board and the employees at Victoria, I thank Nikki Beckett and Peter Jensen for their valuable service to the Company.

As announced in April, Ian Davies our Group Finance Director, will be standing down from the Board and leaving the business on 8 August 2012, having completed the FY12 financial reporting. We thank him for the positive contribution he has made to the Company over the last five years and, although we are sorry to see Ian leave the Company, we accept that his move is part of his continuing career progression.

Employees

With several years now of extremely challenging market conditions, the Directors would like to express their personal thanks to all employees in the Group for their loyal and dedicated support of the Company. Victoria has an excellent reputation for delivering consistently high levels of service to our customers and the quality of our employees is recognised as fundamental to this.

Proposed move to AIM

In response to requests from a large proportion of our shareholders, we intend to put a resolution to shareholders proposing that the listing of the ordinary shares be moved from the Official List to the AIM Market of The London Stock Exchange. This will confer certain tax advantages to private shareholders and should reduce the cost of any future transactions by the Company. Full details of this proposed resolution and the differences between AIM and the Official List will be contained in a Circular to be sent to shareholders in due course.

Outlook

The economic outlook in all of the markets in which we operate remains uncertain, affecting consumer confidence, and we anticipate that we are unlikely to see any significant recovery in market conditions in the current financial year.

To position the Group for future growth, we are investing heavily in the first half of the financial year in new products in both the UK and Australia; the benefit of the additional sales from these new initiatives is not expected to be seen until the second half of the financial year. We are also incurring the cost of "right sizing" the spinning mills in Australia, whilst improving working capital utilisation and making further cost reductions.

As the year progresses, the benefits of the investment in the new products, together with the improvements in working capital and the cost reductions, should result in stronger sales and profit growth in the second half of the current financial year and into the following year.

Katherine Innes Ker

Chairman

25 June 2012

VICTORIA PLC

("Victoria" or the "Company")

2012 PRELIMINARY RESULTS

BUSINESS REVIEW BY ALAN BULLOCK, GROUP MANAGING DIRECTOR

Introduction

I believe that we have had a reasonably successful year remaining focused on trading, whilst also investing in new initiatives aimed at strengthening the Company's brand to deliver future growth and increased shareholder value.

The economies and the retail climate in both the UK and the Republic of Ireland continue to be challenging and present us with one of the toughest trading periods seen in many years. A combination of low economic growth and higher taxes has reduced consumers' disposable income, whilst higher raw material and other overhead costs put pressure on our margins. In Australia, the economy, has become 'two-paced', with the mining sector still performing relatively well, whereas in the wider general economy consumers save more and their weak sentiment towards both the national and global economies has led to a more cautious spending approach than we have seen in recent years.

Despite the tough environment posed by the market conditions, the Group increased revenue in the year by 4.6% in constant currency terms and reported profit before tax and exceptional items increased by 14.7% from GBP1.92m to GBP2.21m. There were, however, non-recurring exceptional costs of GBP0.66m associated with the closure of the Group's Irish entity; the recent General Meeting and the formal sales process incurred during the year, which reduced the pre-tax profit (post exceptional costs) to GBP1.55m, compared to GBP1.92m in the prior year.

United Kingdom Operations (including Republic of Ireland)

The economic backdrop in the UK and the Republic of Ireland has been well reported upon in the media. We have certainly seen little improvement in either the economy or retail trading environment during the year and with a housing market, upon which the flooring industry relies for solid growth, remaining stagnant outside the London area, trading conditions have remained tough.

Despite this, the Group has seen revenue from its UK and Irish operations increase by 9.4%. We are pleased with this performance, which is clearly a much better achievement than that seen from most of our competitors in the sector. This would indicate that we are still gaining market share. If the detrimental effects of the sales decline we have seen in the Republic of Ireland are removed, the growth in UK sales would have been 15.4% in the year.

Victoria saw strong growth in its sales to the John Lewis Partnership, where a completely new programme of carpet ranges was introduced in April 2011. We also saw a further strengthening of our business through the insurance replacement market, which we entered for the first time in June 2010. Export sales were significantly up on the prior year, with several impressive contracts won during the year in the hospitality sector for well-known European hotels, including the Hotel Bristol in Paris.

In September 2011, Victoria announced that it was to enter the Luxury Vinyl Tile ("LVT") market and acquired certain of the assets of a distributor, C & H Distribution Ltd in order to gain some immediate market traction in this new area of flooring for the Group.

In late Autumn, Victoria created a new division called Victoria(TM)Luxury Flooring and recruited both a managing director and marketing manager to build and develop this new venture for the Group. With their combined LVT experience of over 40 years, I am pleased to report that in the short time frame of less than six months, Victoria has created a significant and impressive programme of LVT products, which is now being rolled out into the UK market. Details of the full product offer can be found on the Victoria(TM)Luxury Flooring's web-site www.victorialuxuryflooring.com.

The first part of the roll-out programme on LVT is through our existing residential sales force to carefully selected independent retailers who will form an exclusive authorised dealer network. The point of sale units, marketing tools and products are being very well received by our retailers and we are confident that the products will sell well in the market.

The second part of the roll out programme is focused on the contract market where both existing and some newly recruited contract sales specialists will target end user customers both directly and through the Architect/Designer community.

The upfront investment in both stock and point-of-sale display materials has in part been borne in the financial year under review but will also impact profitability and borrowings in the first half of the new financial year before sales build to anticipated levels. The Board is enthusiastic about the opportunity LVT presents and we intend to become a major player in this market sector in the UK within a three year time frame.

Carpets, of course, will remain an integral part of the Group's offering and we do not intend to lose any focus or commitment in this area. Early in the new financial year, Victoria launched a major new range of twist pile carpets in a wool blend; this new carpet collection, called 'Options 288', represents a significant investment and will form the backbone of our improved UK carpet offer. Thirty six colour ways in two widths and four pile weights will make 'Options 288' one of the most comprehensive twist pile carpet ranges available in the UK market today.

During the past financial year, the Company has also been investing in our e-commerce activities, as we recognise that the business has to be able to offer its customers both an e-commerce platform through which they can attract consumers into their retail shops via a brochure website and to be able to sell on-line through a transactional website to a wider customer base.

Multi-channel selling is likely to become more and more important and Victoria's investment in this area is seen to be key in developing even stronger associations with our core customer base.

Victoria's latest transactional website went live in May 2012 and details of this portal and the products offered can be found at www.beautifulflooringdirect.com.

After over seven years of seeking a change of use and planning consent on the Group's redundant sports ground in Worcestershire, the Company advised shareholders on 1 March 2012, that planning consent had been granted and, with the change of use, the Board was looking to sell the ground, seeking offers in excess of GBP1m. Discussions on the disposal of the site are on-going and we will update shareholders in due course when a transaction is agreed.

Australian Operations

The Australian economy, which was showing signs of softening in 2011, turned down sharply in the second half of the financial year, with a consequent adverse effect on full year results. There had been a general softness in retailing, real estate activity and construction prior to November 2011 but this deteriorated rapidly after that date. Australia's two speed economy became more pronounced as sectors outside the mining industry struggled with weakening conditions, stubbornly cautious consumers, and uncertainty surrounding the global economic outlook.

Growth in revenue and profit achieved during H1 was reversed in H2 as trading conditions deteriorated. Pressure on margins and volumes was intensified by an ever increasing volume of carpet imports made more attractive by a strong Australian Dollar. Many retailers have described the market conditions as the toughest they have experienced in twenty years or more. Despite this, revenue was up 9.2% in the first half of the year and closed the full year with sales totalling A$71.84m, up a modest 1.5% on the previous year (A$70.80m). Pre-tax profit for the full year was A$4.43m, down 17.4% on the previous year's A$5.37m, with the second half's pre-tax profit of A$1.50m being 45.6% down on the corresponding period last year.

Within a depressed and intensely competitive market, there has been a continuance of the trend away from wool and wool blend carpets and a strengthening of the market share of synthetic pile carpets. Wool fibre costs, which peaked in late 2011 after almost doubling over the previous eighteen months, have since eased slightly but wool remains at a competitive disadvantage to synthetic fibres. As a consequence, our spinning mills have been impacted by reduced demand. Shorter working weeks have been required for much of the second half, and this lower capacity utilisation is one of the major reasons for a diminished level of gross profit during the second half of the year.

Against an otherwise gloomy set of circumstances, it is pleasing to report that, the strategic move to enter the commercial market in 2010 with the introduction of carpet tiles and an extension of our broadloom ranges provided welcome sales growth during the past year. Sales in this category have grown from 9.4% to 15.0% of total sales despite a somewhat subdued commercial market.

Our Australian business continues to generate a strong operating cash flow. With tight control of working capital and modest capital expenditure in the past year, it was effectively debt free at the end of the financial year.

The value of inventories increased by A$1.63m (7.6%) to A$22.98m at year end. This is reflective of additional stock holdings required to service the commercial market and an increasing proportion of synthetic stocks which have longer raw material lead times.

Capital expenditure undertaken during the year totalled A$1.66m. The largest items being an in-line latex compounding system costing A$0.78m and a new tufting machine which cost A$0.43m, both at our Dandenong carpet factory.

In response to softer market conditions and the continuing market trend away from wool to synthetic carpets, the Australian management have implemented two major strategic actions:

0 Declining demand for woollen yarns from the two Australian spinning mills has required a significant restructuring of their operations. This pro-active measure was undertaken early in the new financial year and substantial non-recurring costs of around A$1.3m will be incurred in "right sizing" and reorganising the mills to meet reduced volume requirements in an efficient and cost effective manner.

0 To counter the threat of increasing imports of synthetic carpets and to establish a clear point of difference with our product offerings, we have successfully concluded an extended period of product development with INVISTA(R), one of the world's major nylon producers, and are currently in the process of launching a series of new solution dyed nylon ranges licensed exclusively to Victoria Carpets under the STAINMASTER(R) with EverSoft(TM) brand.

This new generation of carpets, manufactured with soft handle synthetic yarns, is supported by an extensive promotional and marketing campaign conducted jointly with STAINMASTER(R), the best known brand in the Australian carpet market. The initial response to these new ranges has been extremely positive and we are confident that they will not only reverse the loss of synthetic market share we have experienced during the past year but also help us grow our overall market share of carpet sales.

The outlook for the Australian economy is for modest overall growth of approximately 3% over the coming year but outside the mining segment there will be geographic and sectoral differences. We do not expect retail or housing activity to improve until at least the second half of the coming year but consider that the aforementioned strategic actions have positioned our Australian business extremely well for the challenges and opportunities that will present themselves in the coming year.

Canada

Pleasingly, revenue in our Canadian associate company, Colin Campbell, was up by 18.5% from C$6.43 m to C$7.62m, whilst pre-tax profit advanced to C$0.31m, compared to a small pre-tax loss of C$0.09m recorded in the previous financial year.

Whilst sales through the decorative supply showroom to designers and architects were marginally down, we saw good sales growth in rug sales and also to the contract residential market, where several notable high rise residential projects in Vancouver were carpeted.

Summary and Outlook

The past year has been a demanding time for our business and I have been proud of the adaptability and energy shown by the employees that I have the privilege of leading. I would like to express my personal thanks to my colleagues for their loyalty and hard work in the tough environment in which we operate.

Victoria has an excellent brand and we are determined to remain a leading quality flooring supplier in both Australasia and the United Kingdom. Plans have now been put in place and investments are being made to ensure we achieve these goals. The past six months and the first six months of the new financial year need to be viewed as a period of investment to position our businesses for future growth, which we believe will deliver future shareholder value.

We expect the consumer environment to remain challenging, but we have already demonstrated that we can achieve good progress in these conditions. Our strong customer relationships and the on-going actions to reduce costs and improve working capital utilisation will provide us with a strong platform for medium term growth through the core strategic growth areas the Company has embarked upon.

Through a focus on creating great value products for our customers to buy and an active management of the business, the Board believes the Group is being well positioned for the year ahead.

Alan R Bullock

Group Managing Director

25 June 2012

VICTORIA PLC

("Victoria" or the "Company")

2012 PRELIMINARY RESULTS

FINANCIAL REVIEW BY IAN DAVIES, GROUP FINANCE DIRECTOR

Group Financial Highlights

 
 
                                2012     2011         % 
                               GBP'm    GBP'm    Change 
---------------------------  -------  -------  -------- 
 Revenue                       77.13    70.50     +9.4% 
 Operating profit before 
  exceptional items             2.58     2.42     +6.8% 
 Finance Costs                (0.46)   (0.47)     -2.3% 
 Share of associate 
  result                        0.09   (0.02)   +486.4% 
 Profit before tax and 
  exceptional items             2.21     1.92    +14.7% 
 Exceptional items (see       (0.66)     ---- 
  Note 3) 
 Profit before tax              1.55     1.92    -19.6% 
 Net debt                       7.75     6.21    +24.7% 
 Earnings per share 
  -basic adjusted (pence)*     23.71    18.35    +29.2% 
 Earnings per share 
  - basic                      15.64    17.41    -10.2% 
---------------------------  -------  -------  --------

*as defined in the Earnings per share section covered later in this review

As described in detail within the Group Managing Director's Business Review, economic and market conditions remained difficult throughout the year in all of our core markets. Australasia, in particular, experienced a marked softening in the economy in H2 for the first time in recent years.

Against this backdrop, the Group has delivered growth in revenue of 9.4% to GBP77.13m and on underlying pre tax profit (before exceptional items) of 14.7% to GBP2.21m. Net debt has increased from prior year level by GBP1.54m to GBP7.75m, reflecting investment in new carpet and LVT ranges in advance of product launches early in the new financial period.

Operating profit and profit before tax ('PBT'), before exceptional items, improved by 6.8% and 14.7% respectively year on year. As a result of the GBP0.66m of non-recurring exceptional costs, PBT decreased by 19.6%.

Revenue

The Group achieved revenue growth of 9.4% to GBP77.13m (2011: GBP70.50m), in part benefitting from a 7.2% strengthening in the Australian Dollar relative to Sterling. In constant currency terms, revenue was ahead of the prior year by 4.6%.

 
 Exchange rates 
                      2012     2011   % change 
 Average rates 
 Australian 
  Dollar            1.5270   1.6460      -7.2% 
 Euro               1.1559   1.1688      -1.1% 
 Canadian Dollar    1.5870   1.5831      +0.2% 
-----------------  -------  -------  ---------

Australia represented 61.0% (2011:61.0%) and UK & Ireland 39.0% (2011: 39.0%) of Group revenue.

The movement in average exchange rates in the period benefitted Group revenue by GBP3.41m, with GBP3.40m of the benefit from the strengthening of the Australian dollar.

Gross margin

The overall gross margin for the Group was 26.4% (2011:28.2%).

Australia experienced a reduction in margin of 260bps, impacted by lower utilisation of the spinning mills due to reduced demand in wool, and increased volumes of carpet imports due to the relative strength of the Australian Dollar.

UK margin was 70bps below prior year impacted by rising wool prices. A price increase was implemented in the UK in May 2012 which should facilitate a recovery in margin, and as sales of relatively high margin LVT product start to build in the new financial year, a further positive effect on overall margin is expected

Operating profit

Group operating profit before exceptional items, increased by 6.8% to GBP2.58m (2011: GBP2.42m).

Operating profit in Australia decreased by 17.5% in local currency terms, primarily as a result of reduced margins as noted above.

The UK operation reported an operating profit before exceptional items of GBP0.31m compared to an operating loss of GBP0.28m in the prior year. The improvement in the UK operating profit is driven by the prior year Irish operating loss of GBP0.68m not recurring in the current period as a result of the restructuring measures undertaken.

Exceptional items

Exceptional costs in the period under review totalled GBP0.66m, and relate to the restructuring of the Group's Irish businesses (GBP0.37m), the costs associated with the General Meeting and formal sales process earlier this year (GBP0.29m). As reported at the half-year, our Irish brands are now marketed and traded under a distribution model and reported within the UK operation.

Finance costs

Finance costs reduced slightly to GBP0.46m (2011: GBP0.47m). The average interest rate on borrowings was marginally lower at 5.3% (2011: 5.6%).

Interest was covered 12.1 times by EBITDA before exceptional items (2011: 11.4 times) and 5.6 times by operating profit before exceptional items (2011: 5.1 times).

Profit before taxation

Group PBT and exceptional items increased by 14.7% to GBP2.21m (2011: GBP1.92m). In constant currency terms, PBT before exceptional items was 3.8% up on prior year.

Taxation

The tax charge for the year was GBP0.46m (2011: GBP0.72m), equivalent to an effective tax rate of 29.8% (2011: 37.2%).

The effective tax rate is above the UK standard rate of 26%, impacted by a 30% standard rate of tax in Australia where the majority of the Group's profit in the period was generated, and Irish restructuring costs of GBP0.37m which could not be utilised for tax purposes. These impacts are partly offset by a deferred tax credit in the period as a result of a reduction in the future UK tax rate from 26% to 24% which was substantively enacted in the period.

Earnings per share ('EPS')

Basic adjusted earnings per share were 23.71p, 29.2% above prior year (2011: 18.35p). In the year under review, adjusted earnings per share excludes the impact of the Irish restructuring and the General Meeting and formal sales process (GBP0.66m), whilst the prior year comparatives exclude the impact of a goodwill impairment charge (GBP0.07m).

Basic earnings per share were 15.64p (2011: 17.41p).

The diluted adjusted earnings per share were 21.40p (2011: 16.61p).

Dividends

The Board is proposing a total dividend for the year of 10.50p, representing a 16.7% increase on the prior year total dividend of 9.00p. This includes a proposed final dividend of 7.00p (2011: 6.00p). An interim dividend of 3.50p was paid in December 2011 (2011: 3.00p).

The value of the interim dividend was GBP0.24m and the value of the proposed final dividend is GBP0.49m. (Total: GBP0.73m). The value of the total dividend paid in the year ended 31 March 2012, was GBP0.66m (2011: GBP0.58m).

Capital expenditure

Capital expenditure in the year was GBP1.46m (2011: GBP0.95m). This represents 49.9% of the annual depreciation charge (2011: 33.1%). The main items of capital expenditure were an in-line latex compounding system (GBP0.51m), which will provide on-going future cost savings and enhanced quality, and a new tufting machine (GBP0.28m), which provides additional capacity. Both of these items were installed in our Australian operations.

The Group remains very well invested with 'state of the art' equipment. Capital expenditure is expected to remain relatively modest in the new financial period and is likely to remain below the normal depreciation levels.

Net assets

The Group's overall net assets value increased in the financial period by GBP0.56m to GBP40.32m (2011: GBP39.76m). The increase represents profit for the period of GBP1.09m less dividends paid of GBP0.66m, an increase of GBP0.07m due to exchange differences on overseas operations and other movements of GBP0.06m.

Acquisition of C&H Distribution

The Group acquired the brand and certain trade assets of C&H Distribution Limited, a distributor of LVT, for consideration of GBP0.40m, which was funded from the Group's existing cash resources. Inventory and other fixed assets were also acquired for GBP0.08m and GBP0.02m respectively.

Operating cash flow

 
                                             2012     2011 
                                            GBP'm    GBP'm 
----------------------------------------  -------  ------- 
 Operating profit before exceptional 
  items                                      2.58     2.42 
 Depreciation and other non-cash items       3.08     3.03 
 Foreign exchange                            0.01     0.12 
 Working capital                           (2.24)   (1.67) 
----------------------------------------  -------  ------- 
 Operating cash flow before exceptional 
  items                                      3.43     3.90 
----------------------------------------  -------  ------- 
 EBITDA*                                     5.56     5.38 
 Operating cash flow conversion % 
  (against EBITDA)                          61.7%    72.5% 
----------------------------------------  -------  -------

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

The Group generated positive operating cash flows (before exceptional items) of GBP3.43m in the period (2011: GBP3.90m). The decrease of GBP0.47m from prior year was primarily due to an increased level of working capital absorption in the period, reflecting a build-up in inventory to support the launch of new LVT and carpet ranges in the UK, and new SDN ranges in Australia.

Operating cash flow conversion percentage, as measured against EBITDA, was 61.7% (2011: 72.5%), with the lower level of conversion reflecting the investment in inventory.

Free cash flow and net debt

 
                                         2012     2011 
                                         GBPm     GBPm 
 
 Operating cash flow (before 
  exceptional items)                     3.43     3.90 
 Interest paid                         (0.48)   (0.50) 
 Corporation tax paid                  (1.41)   (0.89) 
 Capital expenditure net of 
  sales proceeds                       (1.38)   (0.89) 
------------------------------------  ------- 
 Free cash flow (before exceptional 
  items)                                 0.16     1.62 
------------------------------------  -------  ------- 
 Dividends paid                        (0.66)   (0.58) 
 Exceptional costs                     (0.66)     ---- 
 Acquisition of certain assets         (0.40)     ---- 
  of C&H Distribution 
 Other                                   0.02   (0.11) 
------------------------------------  -------  ------- 
 Movement in net debt                  (1.54)     0.93 
------------------------------------  -------  ------- 
 Opening net debt                      (6.21)   (7.14) 
 Closing net debt                      (7.75)   (6.21)

Operating cash flow less interest, tax and capital expenditure resulted in a free cash inflow of GBP0.16m (2011: GBP1.62m cash inflow). Group net debt increased by GBP1.54m to GBP7.75m (2011: GBP6.21m), whilst the average net debt during the period increased marginally to GBP8.63m (2011: GBP8.51m). The ratio of net debt to EBITDA (before exceptionals) remains at a satisfactory level of 1.39 times (2011: 1.15 times).

Hedging

The Group reviews currency exposures on a regular basis in respect to trading operations involving the export sale of goods or import of raw materials or capital equipment. The Group may manage potential currency exposures through the use of forward currency contracts where currency movements may be considered as volatile and the amounts involved significant.

The principal currency exposure of the Group is in respect to the investment in its Australian subsidiary.

Future funding

The Group's annual renewal of banking facilities was completed in September 2011 in the UK and in June 2012 in Australia. The current facilities across the Group provide sufficient capacity in Australian Dollars, Sterling and Euros to cover all anticipated capital expenditure and working capital requirements in the year ahead.

Going concern

The consolidated financial statements have been prepared on a going concern basis. The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Group Managing Director's Business Review. The financial position of the Group is described in this financial review.

Having reviewed the Group's budgets, projections and funding requirements, and taking account of reasonably possible changes in trading performance, the Directors believe they have reasonable grounds for stating that the Group has adequate resources to continue in operational existence for the foreseeable future.

The Directors are of the view that the Group is well placed to manage its business risks despite the difficult economic and market conditions. Accordingly, the Directors continue to adopt the going concern basis in preparing the Annual Report and Accounts.

Key performance indicators (KPI's)

The Board of Victoria PLC ('Victoria' or the 'business' or 'Company') and the Divisional Management boards monitor a range of financial and non-financial performance indicators on a monthly basis so as to measure performance against expected targets. The KPI's monitored by the Group Board are set out in the table below.

 
 KPI                      Description                        Performance 
-----------------------  ---------------------------------  ------------- 
 Financial KPI's 
-----------------------  ---------------------------------  ------------- 
 Sales growth (constant   Overall sales growth               2012: +4.6% 
  currency)                achieved year on year 
                           after adjusting for 
                           the impact from currency 
                           movements (Australian 
                           Dollar and Euro) in 
                           the period. This is 
                           used to assess the 
                           underlying trading 
                           performance of the 
                           Group. 
                                                              2011: +3.3% 
                                                              2010: -6.9% 
-----------------------  ---------------------------------  ------------- 
 Operating margin         Calculated as total                2012: 3.3% 
                           operating profit* 
                           divided by revenue. 
                           This is used to assess 
                           the underlying trading 
                           performance of the 
                           Group. 
                                                              2011: 3.4% 
                                                              2010: 2.8% 
-----------------------  ---------------------------------  ------------- 
 Return on operating      ROA demonstrates the               2012: 5.6% 
  assets                   effectiveness of our 
                           managers in utilising 
                           the assets to deliver 
                           profits to provide 
                           a return to Shareholders. 
                           Calculated as operating 
                           profit* (including 
                           share of associate 
                           company) divided by 
                           the operating assets 
                           employed. 
                                                              2011: 5.2% 
                                                              2010: 3.7% 
-----------------------  ---------------------------------  ------------- 
 Earnings per share       Calculated as profit               2012: 23.7p 
  (basic adjusted)         for the period divided             2011: 18.4p 
                           by the total number                2010: 9.0p 
                           of shares in issue 
                           and adjusted for any 
                           exceptional items 
                           in the period. This 
                           is used to assess 
                           the underlying financial 
                           performance of the 
                           Group as a whole. 
-----------------------  ---------------------------------  ------------- 
 Net debt to EBITDA       Calculated as net                  2012: 1.4 
                           debt divided by EBITDA             times 
                           (earnings before interest,         2011: 1.2 
                           tax, depreciation,                 times 
                           amortisation and exceptional       2010: 1.6 
                           items). Used to assess             times 
                           the financial position 
                           of the Group and its 
                           ability to fund future 
                           growth. 
-----------------------  ---------------------------------  ------------- 
 Interest cover           Represents the number              2012: 12.1 
                           of times EBITDA* covers            times 
                           net interest payments.             2011: 11.4 
                           Used to assess the                 times 
                           financial position                 2010: 8.0 
                           of the Group and its               times 
                           ability to fund future 
                           growth. 
-----------------------  ---------------------------------  ------------- 
 Non-Financial KPI's      Description 
-----------------------  ---------------------------------  ------------- 
 Voluntary employee       Number of permanent                2012: 4.7% 
  turnover                 employee resignations 
                           as a percentage of 
                           total permanent employees. 
                           This is used to monitor 
                           our objective to be 
                           recognised as an 'employer 
                           of choice'. 
                                                              2011: 4.7% 
                                                              2010: 5.3% 
-----------------------  ---------------------------------  ------------- 
 Absenteeism              Calculated as unauthorised         2012: 4.3% 
                           leave expressed as 
                           a percentage of total 
                           available work days. 
                           Our aim is to keep 
                           this to a minimum 
                           to ensure operational 
                           effectiveness. 
                                                              2011: 4.3% 
                                                              2010: 3.1% 
-----------------------  ---------------------------------  ------------- 
 Kwh per square metre     Represents the energy              2012: 1.36 
  of carpet                consumption (in kilowatt-hours)    kWh/m2 
                           for every square metre             2011: 1.50 
                           of carpet manufactured.            kWh/m2 
                           Measured as part of                2010: 1.53 
                           the Group's objective              kWh/m2 
                           to improve energy 
                           efficiency and reduce 
                           carbon emissions. 
-----------------------  ---------------------------------  ------------- 
 Kwh per Kg of yarn       Represents the energy              2012: 5.41 
  spun                     consumption (in kilowatt-hours)    kWh/kg 
                           for every Kilogram                 2011: 5.74 
                           of yarn produced.                  kWh/kg 
                           Measured as part of                2010: 5.16 
                           the Group's objective              kWh/kg 
                           to improve energy 
                           efficiency and reduce 
                           carbon emissions. 
-----------------------  ---------------------------------  -------------

*Pre-exceptional items

Risk management

There are a number of potential risks and uncertainties which could have a material impact on the Group. The Directors continue to develop processes for identifying, understanding and evaluating the risks faced by the organisation. The Directors recognise that the management of significant risks is necessary in order that the Group achieves its objective of creating long term returns for its shareholders.

At both Group and subsidiary level, it categorises risk across four key areas: Financial, operational, organisational and external. For each key risk, each business reviews the likelihood of its occurrence, its potential effect on the company's performance and identifies management responsibility for the risk, control measures in place and any mitigating actions that are required.

Listed in the table below are examples of key risks being managed by the business and mitigating actions or controls:

Business risk

 
 Risk Area         Description          Potential impact        Mitigation 
----------------  -------------------  ----------------------  ------------------------- 
 
  Finance           Interest             Increased borrowing     Review of interest 
                    rates - exposure     costs                   cover 
                    to market 
                    rate 
                                         Unexpected              Use of forward 
                    Foreign exchange     impact on material      contracts 
                    - exposure           or investment           See 'Hedging' 
                    to market            cost                    above 
                    rates 
                                         Inability to 
                    Funding -            pursue capital          Debt capacity 
                    lack of available    expenditure             See 'future funding' 
                    funds                or provide              above 
                                         sufficient 
                                         working capital 
----------------  -------------------  ----------------------  ------------------------- 
 
  Operational       Customer             Failure to              Pro-active service 
                    satisfaction         retain and              and quality management; 
                    -                    grow key customers'     regular customer 
                    Insufficient         accounts                meetings; own 
                    quality or                                   fleet (UK); third 
                    'on time'                                    party service 
                    delivery                                     provider (Australia) 
                                         Inability to 
                                         produce carpet          Maintenance programme 
                    Equipment            in accordance           and reciprocal 
                    - breakdown          with production         breakdown agreements 
                    of key plant         plan 
----------------  -------------------  ----------------------  ------------------------- 
 
  Organisational    People -             Failure to              Service agreements; 
                    loss of key          retain and              regular line management 
                    staff                develop key             reviews; training 
                                         management              and development 
                                                                 plans 
                    Health & 
                    Safety -             Loss of availability    Designated health 
                    personal             of employees            & safety officers, 
                    injury to                                    health & safety 
                    employees                                    procedures, first 
                                                                 aiders on duty 
----------------  -------------------  ----------------------  ------------------------- 
 
  External          Regulations          Unexpected              Internal controls; 
                    - breach             impact on sales         on-going training; 
                    of applicable        and profit              insurance 
                    rules 
                                         Potential impact        No single entity 
                    Loss of major        on sales and            has more than 
                    customer             profitability           25% of any individual 
                                                                 region's revenue 
                                         Significant 
                    Increase             impact on costs         Monitoring of 
                    in material          and profit              raw material price; 
                    or energy                                    forward pricing 
                    costs                                        agreements; proactive 
                                         Inability to            energy efficiency 
                                         maintain sales 
                    Market -             growth                  Geographic spread 
                    major downturn                               and mix of business, 
                                                                 widen channels 
                                                                 to market; widen 
                                                                 products to market 
----------------  -------------------  ----------------------  -------------------------

This review has been prepared to provide a fair review of the business of the Group and to describe the principal risks and uncertainties it faces. In doing so, it aims to provide a balanced and comprehensive analysis of the development and performance of the business during the past financial year.

The review contains certain forward looking statements which have been made by the Directors in good faith based on the information available to them up to the time of their approving this report. As such, these statements should be treated with caution due to inherent uncertainties, including both economic and business risk factors underlying any such financial information.

In preparing this review, the Directors have sought to comply with the guidance set out in the Accounting Standards Board's Reporting Statement.

This review has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to Victoria PLC and its subsidiary undertakings when viewed as a whole.

Summary

The Group reported growth in underlying profitability in the period after discounting the impact of exceptional costs and against a backdrop of worsening economic and market conditions in our core markets during the period. This has been facilitated by the Group's on-going focus on cost control and tight working capital management. Whilst net debt increased in the current period as a result of new product launches and a number of exceptional costs, the Group remains in a strong financial position, with net gearing at a relatively low level.

This has enabled the Group to invest in these new initiatives during the financial period, with new product launches in both the UK and Australia early in the new financial period aimed at delivering future growth and enhanced quality of earnings.

Ian Davies

Group Finance Director

25 June 2012

Consolidated Income Statement