Victoria, Balta Group, & UK Soft Flooring

Former Purchasing Director at Balta Group

Why is this interview interesting?

  • UK carpets are a commodity, price competitive, and all manufacturers can replicate products easily
  • Majority of UK yarn is sourced from Turkey and in short supply
  • Balta UK (now Victoria) makes their own yarns so less at risk
  • Victoria gets scaled Turkish woven manufacturing assets; could also move tufted manufacturing to Turkey in long-run
  • Balta deal seems cheap on the surface but requires operational improvements

Victoria PLC

Why is this company interesting?

Victoria PLC is a UK-listed flooring manufacturing roll-up that is owned and operated by Geoff Wilding who took control as Chairman in 2012. The company owns soft and hard flooring manufacturing businesses that distribute products to the largest European and UK retailers.

The flooring industry is resilient with a stable replacement market and the top two players in Europe only account for ~15% of industry volume. Flooring manufacturers are typically highly cash generative due to attractive working capital profile, long-life fixed assets that have relatively low technological risk, and a stable end market.

Since 2014, Victoria has made over 20 acquisitions that are integrated into the group’s operations. Victoria uses debt and preferred equity from Koch to finance acquisitions that cost ~5-7x EBITDA.

Nearly 40% of the shares outstanding are held by management and two longer-term shareholders in Koch Investments and Spruce House Partnership. Geoff Wilding still owns nearly 20% of the business.

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Executive Bio

Jan Krona

Former Purchasing Director at Balta Group

Jan has nearly 50 years experience in the flooring industry and has deep knowledge of the soft flooring procurement, manufacturing, and distribution processes. He enjoyed 16 years at Balta where he was responsible for sourcing all the yarns for the group across Europe. He has also worked closely with many of the largest European soft flooring companies to consult on improving procurement costs and strategies.Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Can you describe the core raw materials that go into standard soft flooring?

For volume, you would use a cheaper raw material called polypropylene or PP, which is the biggest usage of carpets. Then you have polyesters or PET which is recycled, and nylon or polyamide 6 or 66, which has more strength but is also so expensive nobody wants it. There is also wool but that only represents 5% of their turnover because wool is expensive. Polypropylene, nylon and polyester are filament yarns, whereas wool is a spun yarn, where you take the raw fiber, wash it, parallel spin the fibers into a yarn, twist and fixate it. All yarns use jute which only come from India and Bangladesh for carpets. It's the same as wool which is a natural fiber, so can only be spun. Natural fiber is not extruded but put together with a twist and long fiber is better than short and makes a stronger yarn. These are the materials used in carpet production.

Can you break down the average cost per square meter for each of those raw materials when procuring these products?

Wool is the most expensive, in theory, because it comes from sheep. PA66 and PA6 nylon are the second most expensive, but are the best fibers or yarns. Polyesters or PET is in between that and then polypropylene. If you want to make a cheap but nice carpet, there are many ways to do it. You could use polypropylene, PP, which is an extruded filament put together into one yarn and manufactured further down the line.

When buying one square meter, would there 50% be PP or 50% be wool, for example? What is the rough mix?

PP is the biggest consumption in the UK because they like wall-to-wall carpets and change them often, so they don't want to pay a high price for a good quality carpet. Polypropylene in the UK would be 75%, then wool, because there are still some wool spinners, such as Laxtons, in the UK. Wool would probably be the next one, not in square meters but in value. After that comes nylon or PA, which has just gone up 150% in several months, which is completely crazy, but it's take it or leave it from what I understand in the market. I don't buy nylon but talk to many people and the official second quarter price has risen €1,000 per ton.

Is that due to supply side energy pressures from the war or Covid?

It has to do with oil prices which are very sensitive to that, but the nylon situation is out of control. Nylon fiber has gone up 85% and the way they calculate the yarn, it could go up by 189%, since December 2020. That doesn't affect the UK market too much because residential carpets are mostly made of polypropylene. You have got the contract market which is nylon up to today, and maybe wool, because you can also make Axminster carpets and things like that.

We should talk about yarns, because you have to understand how it works.

I have to tell you where it comes from because the price is out of control. In the old days, Victoria, BALTA and the Dutch people would have their own extrusion, but most of them have stopped extruding their own yarn after the Turkish carpet market started selling yarns outside. Before it was, extrude for your own use, but now it's the opposite. The Turks found out they could earn money from it, so they extruded much more than they needed and sold it. Because of that, all polypropylene prices are now guided by Turkish prices. Each week, there is new figure related to the raw materials going into the polypropylene and that is called ChemOrbis. That figure guides the carpet market for PP. Not what you would buy in Europe or in Saudi.

Since the end of last year, that has gone up 10%, and since December 2020, 28%. They undercut the market and have an overcapacity they cannot fill, so they make polypropylene on that basis. Turkish prices are extremely volatile, the last figure of $1,849 per ton was for 18th March, whereas in December 2020 it was $1,443 per ton. We have also seen $2,103 during that period, so nobody wanted to buy any more.

What can Victoria and BALTA do to manage that cost increase?

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Victoria, Balta Group, & UK Soft Flooring(March 17, 2022)

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