Strix Group Another year of solid trading performance

Kettle

Strix Group Plc (LON:KETL), the global leader in the design, manufacture and supply of kettle safety controls and other complementary water products used in temperature control, steam management and water filtration, has today provided its audited results for the year ended 31 December 2019 which are in line with the market expectations.

Financial Highlights

Adjusted results1  
20192018Change
£m£m5%
Revenue96.993.83.30%
Revenue – constant currency basis295.493.81.80%
EBITDA336.936.41.50%
Gross profit39.638.91.80%
Operating profit               31.530.92.20%
Operating profit – excluding the acquisition of HaloSource33.430.98.30%
Profit before tax30.229.23.40%
Profit after tax28.928.32.10%
Total comprehensive income28.828.31.70%
Net debt426.327.54.10%
Basic earnings per share15.2p14.9p2.10%
Total dividend per share7.7p7.0p10.00%
  1. Adjusted results exclude exceptional items, which include share based payment transactions and other reorganisation and strategic project costs. Adjusted results are non-GAAP metrics used by management and are not an IFRS disclosure. A table which shows both Adjusted and Reported results is included in the Chief Financial Officer’s review.
  2. Revenue – constant currency basis, which is defined as 2019 revenue restated at the exchange rates prevailing in 2018, is a non-GAAP metric used by management and is not an IFRS disclosure.
  3. EBITDA, which is defined as earnings before finance costs, tax, depreciation and amortisation, is a non-GAAP metric used by management and is not an IFRS disclosure.
  4. Net debt excludes the impact of IFRS 16 lease liabilities. This standard was adopted from 1 January 2019.
  5. Figures are calculated from the full numbers as presented in the consolidated financial statements.

Financial highlights

  • Solid performance during 2019 including a 3.3% growth in revenue driven by maintaining market value share in the regulated and less regulated markets at c.73% (2018: c.73%) and c.34% (2018: c.34%) respectively and growth in the Chinese domestic market at c.49% (2018: c.45%).
  • Adjusted gross profit margin excluding the effect of HaloSource increased to 42.3% (2018: 41.5%).
  • Adjusted profit before tax increased by 9.9% to £32.1m (2018: £29.2m) and adjusted EBITDA increased 5.5% to £38.3m (2018: 36.4m), excluding the newly acquired HaloSource business.
  • Adjusted total comprehensive losses from the HaloSource acquisition were in line with expectations at £2.0m resulting in a 1.7% increase in Group adjusted total comprehensive income.
  • Despite the capital investments made, net debt (excluding the impact of IFRS 16 lease liabilities) reduced to £26.3m, a 4.1% improvement since 31 December 2018 (£27.5m).
  • The Group has available liquidity, consisting of cash and undrawn facilities, of £22.7m.
  • The Group has improved its net debt (excluding the impact of IFRS 16 lease liabilities) to adjusted EBITDA ratio to 0.7x (2018: 0.8x).
  • Proposed final dividend of 5.1p, resulting in total dividends of 7.7p for the full year (2018: 7.0p).

Operational highlights

  • Production efficiency of core kettle products improved by 5% to 98% through the continued introduction of automation and lean initiatives.
  • The U9 series continues to show strong growth with over 15 million controls sold. The new U90 automation line achieved 80% labour and 85% machine efficiency, in line with original projections.
  • Intertek has awarded the Group’s Isle of Man facility a ‘Benchmark’ score for all ISO categories, the highest standard available within the scoring system which very few audited companies achieve.
  • Focus on continuous improvement, automation and refinement of existing processes has delivered a 29% improvement in customer quality ppm (parts per million).

Strategic highlights

  • Maintained global market value share of the kettle controls market at c.54%.
  • Acquisition of specific assets from HaloSource Corporation successfully completed on 7 March 2019, adding significant R&D capabilities and commercial opportunities to the Water Category.
  • Construction contract for the new factory within Zengcheng district, China, signed on the 2 September 2019 for £13.9m. Total factory project is on target to be fully operational by August 2021 and remains on budget at the previously guided £20m.
  • Appointment of Richard Sells as a Non-Executive Director effective 18 March 2020. Richard brings a wealth of commercial experience to the Board which will support the Group’s growth ambitions.
  • Continued focus on both safety and intellectual property actions resulting in seventeen kettles being removed from online sale and nine unsafe competitor kettles being recalled globally.

Mark Bartlett, CEO of Strix Group, commented:

“Following on from our successful results in 2018, we are pleased to report another year of solid trading performance in 2019. We continue to focus on our strategic priorities which has enabled us to retain our c.54% global market value share amidst a challenging geo-political climate.

“During the year, we have continued to execute on our organic and inorganic strategy for growth through the acquisition of HaloSource in March 2019 and the construction of a new factory in China, where we have signed a £13.9m construction contract and commenced construction.

“We remain committed to consumer safety where we continue to initiate regulatory enforcement actions to remove unsafe and poor quality products from the market. Defence of intellectual property remains a core function of our business which is important in achieving the Group’s growth potential.

“We have maintained our focus on manufacturing and production quality which has led to a 29% improvement in customer quality parts per million. The Group continues to invest in automation and lean initiatives which will further enhance production efficiency and quality.

“The Group’s high ROCE and high proportion of cash in advance payment terms limit the risk of non-payment and working capital fluctuations. This along with a robust balance sheet provide the Board with continued confidence in the Group’s future growth prospects.

“The Board are delighted to announce a proposed final dividend of 5.1p, resulting in a total dividend of 7.7p per share for 2019.

“We have been extremely proud of the response of our leaders to the unprecedented situation as a result of COVID-19, with minimal impact to date. The Group’s manufacturing operations in China have recovered with a c.100% production capacity and operational supply chain which is sufficient to meet customer demand. The Group will continue to focus on a prudent allocation of capital and be vigilant about the broader implications of COVID-19 which will include daily monitoring of consumer and brand demand. As a result, the Group is working on several strategic initiatives, including new products and efficiency measures, to minimise the impact to full year forecasts.”

Chairman’s statement

Introduction

I am pleased to announce that through the Group’s stable business model and global presence, it has achieved another year of growth and profitability, despite the effects of continuing geo-political events. In addition, as a result of strong cash generation, and following capital investments made, the Group has improved its net debt position to £26.3m (2018: £27.5m). This excludes the impact of IFRS 16 lease liabilities which was adopted for the first time from 1 January 2019.

The Group continues to execute its strategy for growth through its investment in research and development, automation, the construction of a new factory in China and through the strategic acquisition of HaloSource in March 2019. The Board are pleased with the integration and development of the acquired assets from HaloSource which have performed in line with expectation.

The Group promotes a culture of innovation which along with the manufacture of safe, reliable and high-quality products continues to make Strix renowned within the industry.

Kettle control market performance

I am pleased to report that the global kettle control market displayed value growth of c.3% inclusive of Chinese multi-cooker appliances. This is pleasing when compared to the c.2% average annual value growth experienced since 2016.

In conjunction with the growth in the global market, Strix maintained its value share in both the Regulated and Less Regulated markets at c.73% and c.34% respectively, while the Group’s value share in the China domestic market increased to c.49%.

Financial performance

Revenue for the year reached £96.9m, a 3.3% growth on 2018 (1.8% growth on a constant currency basis) and I am pleased to report a 2.1% growth in adjusted profit after tax to £28.9m (2018: £28.3m). The Group presented a 1.8% increase in adjusted gross profit to £39.6m (2018: £38.9m) primarily as a result of the newly acquired HaloSource business which contributed an adjusted gross loss of £1.1m. Adjusted EBITDA increased 1.5% to £36.9m (2018: £36.4m).

Cash generation remains strong, with £34.4m net cash generated from operating activities, compared with £35.0m in 2018.

Impact of COVID-19

The board is closely monitoring the development of COVID-19 and has put in place a number of preventative measures within the Guangzhou manufacturing facility. In order to provide a safe and healthy working environment for our employees, the Group has made medical supplies such as face masks, thermometers and sterilisers readily available. We have also used our newly acquired HaloSource product within the sterilisation zone at the factory entrance to enhance our preventative measures. Globally, the Group is adhering to the latest travel advice provided by the World Health Organisation.

The impact on Strix has thus far been limited with our Guangzhou manufacturing now operating at 96% resource levels, having only been closed for one extra week in line with government imposed policy to extend the mandatory Chinese New Year holiday. All of our top 20 largest OEM customers have resumed production and are continuing to increase capacity.

We expect the kettle control market to be resilient but we are closely following the effect on global consumer demand.

Dividend policy

The Board is proposing a final dividend of 5.1p per share following the 2.6p interim dividend paid in October 2019. This will bring the full year dividend to 7.7p, as indicated within the interim results announcement. The final dividend will be paid on 3 June 2020 to shareholders on the register at 11 May 2020 and the shares will trade ex-dividend from 7 May 2020. The Board has previously communicated its dividend policy, which is to increase the dividend in line with future underlying earnings, from a base of 7.7p for the 2019 financial year.

Board composition

I am delighted that, as of 18 March 2020, Richard Sells is appointed as a Non-Executive Director. Richard brings a wealth of advisory, operational and board experience developed over 30 years’ working across multinational corporations, public companies, entrepreneur-led SME enterprises and private-equity backed businesses.

Annual General Meeting

The Group will host its Annual General Meeting on 23 May 2020 at 09:00 at our registered office at Forrest House on the Isle of Man, to which I welcome all of our shareholders.

Gary Lamb

Chairman

Chief Executive Officer’s statement

Introduction

Strix has continued to deliver on its strategic plans during 2019 which has strengthened the Group’s position across its three product categories; kettle controls, water, and appliances. The Group has maintained its market leading c.54% value share of the global kettle controls market whilst acquiring certain assets from HaloSource in March. In addition construction of a new manufacturing facility in China has commenced and remains on target to be fully operational by August 2021.

Financial performance

The Group has delivered another solid performance driven by a 3.3% increase in revenue (1.8% on a constant currency basis) and a reduction in net debt ahead of market expectations. Excluding the newly acquired HaloSource business, adjusted profit before tax increased by 9.9% to £32.1m and adjusted EBITDA increased by 5.5% to £38.3m. The HaloSource business contributed an adjusted total comprehensive loss of £2.0m, which is in line with the Group’s expectations at the time of acquisition.

The Group continues to demonstrate strong cash generation which has supported the payment of an increased dividend for 2019, a £1.0m reduction in the balance of the Group’s revolving credit facility, and an increase of £8.9m in cash used in investing activities. This reflects the Group’s commitment to undertake strategic projects that will drive future growth and profitability.

Kettle control category

Strix continues to hold a strong value share of the global kettle control market at c.54%, posting growth in the China Market segment and holding a stable position in the Regulated and Less Regulated segments. It is estimated that the value of the global kettle control market grew c.3% to c.£160m in 2019. It exhibits continued growth potential as global penetration of electric kettles increased to c.38% of households.

The overall value of the Regulated kettle control market was estimated to grow by c.2% to c.£70m. The key driver behind Regulated market growth was recovering performance in European (excluding UK) markets and ongoing growth in North America where both markets posted growth of more than 5%. Sector performance was held back by poor UK performance adversely impacted by market uncertainty resulting from Brexit. Strix maintained its value share at c.73% in the Regulated market.

In the Less Regulated market, Strix estimates that in 2019 the value of the kettle control market grew by c.4% to c.£59m, slightly ahead of the medium term average annual growth rate. The key drivers behind Less Regulated market growth were CIS and Central Africa which both experienced growth of over 10%, whilst South Africa and Middle East posted flat/negative growth.

In the Chinese market, Strix estimates that in 2019 the value of the kettle control market grew by c.2% to c.£31m, slightly lower than the c.3% medium term average annual growth rate. The higher priced multi-cooker appliances continue to gain value share to c.26%, and Strix’s share of this sector has grown to greater than c.35% (2018: c.18%) following successful commercial actions in the last two years.

New product development

We have continued to focus product development on opportunities within the Regulated, Less Regulated and China markets that will strengthen Strix’s position and support our market share aspirations.

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To achieve this we have expanded our range of products within the successful U9 platform, and developed a variant of the new electric kettle connector. This allows the Group to access the growing glass powerbase segment of multi-function kettles in both China and the rest of the world. In addition, we have developed variants of our P72 Adaptor, one targeted at the heavy-duty iron market and the other at lower-power milk frothers. We have also been engaging customers, primarily with products aimed at the Regulated market, to use Aqua Optima filters within their appliances, including one which will offer both boiling and chilled water. Finally we have been working on developments to extend the performance of the astrea filter.

We continue to use our strong relationships with key OEMs, brands and retailers, coupled with consumer research, to increase the focus on innovative products that will support our market share aspirations across all the product categories.

Throughout 2020, in line with our growth ambitions, we have fourteen intended new product launches. The most notable impact being within our Water category, which across the three brands, will account for half of our launches. A further two range expansions are planned within kettle controls and five products will be launched within our appliance category.

Water category

The Group’s water category has been further strengthened during 2019 through the acquisition of certain assets from HaloSource which now incorporates the Aqua Optima, astrea and HaloPure brands. The water category reported a 6.1% growth in revenue in 2019 which incorporates a 1.1% growth within the Aqua Optima brand which out-performed the 0.7% value growth in the UK filter and jug market.

The category is well placed to take advantage of its world-class R&D knowledge, which was further strengthened through the acquisition of HaloSource, to bring innovative and sustainable products to the market. The introduction of a category management team has strengthened the commercialisation of new technologies to ensure Strix obtains the greatest value out of its research & development activities.

The Aqua Optima brand is strategically positioned to take advantage of the market shift towards trade-brand filters through its product portfolio and partnership with a number of UK and global brands. The brand has concluded a number of sales and partnership initiatives in 2019 which are expected to lead to expanded distribution opportunities into new markets.

The astrea brand acquired from HaloSource in March 2019 delivers safe drinking water to consumers through certified lead reductions. During 2019, the astrea team has worked with a number of leading retailers within the USA and completed a successful collaboration with AquaShield Health Technology Company Ltd to launch a new Philips co-branded water bottle globally outside of North America during 2020. In addition to our co-branded bottle, we intend to launch a further two products under the astrea brand during 2020, the next generation astrea ONE bottle filter and a plastic astrea bottle.

The HaloPure brand also acquired from HaloSource, delivers safer water through patented bromine-based polystyrene beads that kill bacteria and viruses. During 2019, the HaloPure team has focussed on new business development related to the sterilisation industry. The brand has achieved positive testing results and strong interest from customers on the application of its products within the farming and medical sectors. The Group is currently seeking government approval for a sterilisation product license within China that will support the long term growth of this technology.

Appliance category

Strix has developed a portfolio of water, temperature and steam management technologies which have been commercialised in adjacent products and markets. The appliance category reported a 25.9% growth in revenue in 2019 and continues to be focussed on delivering product innovation within the appliance market, with a particular focus on baby care and “hot water on demand”.

  • The latest version of Tommee Tippee’s appliance was awarded the Mother & Baby gold award for “innovation of the year 2019”, its volumes have now exceeded one million since the original product was launched.
  • We signed a development agreement to launch two new products in 2020 with a leading Asian mother and baby brand.
  • We launched the Zwilling Water Dispenser in April 2019 which uses our patented instant flow heater “IFH” technology. This product has been developed with one of our OEM partners and is being sold under the Zwilling brand across China as a hot and warm multi-function drinking water appliance. The benefit is that it can heat water to different temperatures, for different drinks.
  • In Q3 2019, we launched the Mr. Coffee HotCup unit, designed as a pod-free single-serve brewer. The unit features Strix patented kettle-heating technology to heat water to the optimal brewing temperature and a water flow system and cone-style filtration to extract flavours.

We continue to use our strong relationships with key OEMs, brands and retailers, coupled with consumer research, to increase the focus on innovative products for the future.

Operations review

Lean and continuous improvement initiatives have continued to be a key focus for Strix and as a result we have secured a 29% reduction to our customer quality ppm (parts per million) rate which includes a 4% reduction to our kettle control customer quality ppm, achieving another record low for the Group. The Group’s culture of lean initiatives has achieved £0.2m of savings in 2019 from a total of 17 projects.

During 2019, 521 million parts were manufactured at our factory in Ramsey by a team of only 37 people. Total Quality Assurance Provider, Intertek, has awarded this facility, along with our Ronaldsway head office a ‘Benchmark’ score within all ISO categories. This represents the highest standards available within the scoring system which very few audited companies achieve. Our larger Guangzhou manufacturing facility also received exceptional results where four out of the six criteria were ‘benchmark’ and the remainder ‘mature’ which is considered a top industry ranking for this size of facility.

We have continued to invest in production automation with further automated lines being specified and installed during 2019, with investment planned for 2020 to automate an additional five lines (out of 18 in total). This will allow us to increase our production volume, quality control and reliability whilst managing to control costs, in particular rising wage costs in China. The value of our investment in automation is demonstrated through an improvement in the production efficiency of core kettle products by 5% to 98%.

The Group has made significant progress during 2019 in its plans to relocate the manufacturing operations in China to Guangzhou’s Zengcheng district. The Group has completed and received government approval for the detailed designs of the factory and has signed a construction contract with Shanghai Installation Engineering Group Co. Ltd for £13.9m. During October, Strix senior management attended the foundation stone laying ceremony with the foundation pile driving process being completed by the end of December.

The relocation of our manufacturing facilities in China will support the future growth ambitions of the business and enable the Group to maximise the economic benefit of our investment in automation. The Board is pleased to re-confirm that the construction project is on schedule to meet the August 2021 completion with costs in line with expectations.

Defence of intellectual property

We remain committed to consumer safety where we continue to initiate regulatory enforcement actions to remove unsafe and poor quality products from the market. Such actions have again been undertaken in 2019 resulting in product recalls and withdrawal of kettles from sale in Chile, Bulgaria, Sweden and Germany incorporating four European Rapid Exchange of Information (RAPEX) alerts – an all-time high. We continue to actively monitor the markets in which we operate for violation of our intellectual property rights and have again taken action to limit online sales in Europe of products that infringe our IP culminating in the taking down of seventeen electronic kettles. Defence of intellectual property and regulatory enforcement remain core activities of our business and are vital in achieving the Group’s growth potential.

Senior management team

During April 2019, we appointed Harry Kyriacou into the new role of Chief Commercial Officer. He brings a wealth of experience in commercialising and marketing new products that will support the next phase of growth within the business, particularly within the water and appliance categories. Strix has since introduced a category management team that will strengthen the commercialisation of our existing and new technologies.

Acquisition strategy

Strix is actively seeking opportunities that will add value across the Group through niche acquisitions or technologies. Acquisitions are subject to strict financial criteria and consistent with the Group’s capital allocation priorities, to further enhance the Group’s growth potential within the water and appliance categories.

COVID-19

Strix has continued to closely monitor the situation with regards to COVID-19. The Group’s manufacturing operations in China resumed production on 10 February (in line with Government policy for an extended Chinese New Year holiday) and have since reached 96% resource levels. In addition, all of the Company’s 20 largest OEM customers have now resumed production. We are extremely pleased by the performance of the team through a challenging situation and with minimal disruption to our production. The welfare of all Strix’s employees remains the primary concern and pre-cautionary measures will continue for the foreseeable future in order to ensure we can continue to serve our customers.

As COVID-19 has spread globally, Strix has been closely monitoring the potential effect on demand. Strix’s products have historically had limited correlation with short term consumer confidence with kettles being seen by many as a household essential and repeat purchase. However, in the event of a fall in demand, the board believes Strix has an appropriate balance sheet and procedures in place to capitalise and continue to serve its customers in the long term.

Trading and Outlook

The Board continues to work with the Group’s management teams to deliver on our strategy to create value for our shareholders. In spite of continuing global volatility during the period driven by Brexit and USA/China trade tensions, the Group has delivered a solid performance in 2019 which demonstrates the strength of Strix’s core business model.

In 2020 we will continue to focus on our key strategic objectives which include the construction of the new factory in China, implementation of a new ‘ERP’ system and commercialisation of new products across all three categories.

Whilst there are a number of geopolitical and economic headwinds which could make 2020 challenging including Brexit, the impact of COVID-19, and the continued US/China trade tensions, the Board believe they have taken appropriate preparatory steps to mitigate the risk presented by these challenges. At present we expect that the majority of the impact will occur in H1, mainly attributable to interruptions in global supply chains. Our profitability model strategically targets the second half of 2020, and as such is expected to provide some resilience against this uncertain backdrop.

The Group’s manufacturing operations in China have recovered with a c.100% production capacity and operational supply chain which is sufficient to meet customer demand. The Board recognise that although we are entering unprecedented times, the Group’s stable, recurring and resilient business model will help support the Group through the COVID-19 pandemic. The Group will continue to focus on a prudent allocation of capital and be vigilant about the broader implications of COVID-19 which will include daily monitoring of consumer and brand demand. As a result, the Group is working on several strategic self-help initiatives, including new products and efficiencies, to minimize the impact to the full year.

We will strive to maintain our market-leading share of kettle safety controls, and to grow our revenue streams within the water and appliance categories further diversifying our revenue base. Whilst this will require continued investment in automation, infrastructure, people and facilities, we believe that the benefits of these investments will drive the creation of increased value for our shareholders.

I would like to take this opportunity to thank all our employees across the globe for their commitment and hard work during another busy year for the Group and I look forward to their support and encouragement for the year ahead.

Mark Bartlett

Chief Executive Officer

Strix Group also announced today the appointment of Richard Sells as a non-executive director of the Company with immediate effect.

Mr Sells is an experienced company director and advisor. He has over 30 years’ experience working across multinational corporations, public companies, entrepreneur-led SME enterprises and private-equity backed businesses. He was previously Chief Innovation Officer at Electrolux AB, he also ran Electrolux’s refrigeration business and was Group Managing Director for Electrolux in the UK. He served previously as Chairman of AMDEA, the Association of Manufacturers of Domestic Appliances, and was on the board of London listed Alba plc. Additionally, he has worked with a number of entrepreneur-led private companies and served as a deal advisor for a large private equity firm. Mr Sells currently serves on the Advisory Board of Evrythng, an IoT data analytics business, and is as an Associate at The Foundation, a growth consulting firm.

Gary Lamb, Non-Executive Chairman of Strix Group, commented: “We are pleased to welcome Richard to the Board of Strix. He brings with him a wealth of both advisory and board experience, coupled with extensive operational and commercial expertise. I look forward to working with him and the Group in utilising his skills as we continue to roll out our strategic plans.”

Richard Sells currently holds no ordinary shares in the Company.

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