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Strix Group deliver ‘Another resilient trading performance’

Strix Group plc (LON:KETL), the AIM listed global leader in the design, manufacture and supply of kettle safety controls and other complementary water temperature management components, has provided its unaudited interim results for the six months ended 30th June 2020.

FINANCIAL SUMMARY

 Adjusted results1
 H1 2020H1 2019Change
 £m£m%3
Revenue34.743.9-21.0%
Gross profit13.816.7-17.6%
EBITDA213.614.9-8.6%
Operating profit10.612.2-12.5%
Profit before tax10.111.5-12.5%
Profit after tax9.810.9-9.6%
Net debt⁴36.933.4+10.5%
Net cash generated from operating activities8.310.9-23.8%
Basic earnings per share4.9p5.7p-14.0%
Diluted earnings per share4.9p5.4p-9.3%
Interim dividend per share2.6p2.6p0%

1.       Adjusted results exclude exceptional items, which include share based payment transactions, 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.        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.

3.        Figures are calculated from the full numbers as presented in the consolidated financial statements.

4.        Adjusted net debt excludes lease liabilities recognised in accordance with IFRS 16.

FINANCIAL HIGHLIGHTS

·    Gross profit margin increased to 39.7% (H1 2019: 37.9%) due to cost efficiency measures in excess of £3m delivered during H1

·    Adjusted net debt in line with expectations at £36.9m following additional drawdown in 2020 (H1 2019: £33.4m), 1.08x EBITDA calculated on a trailing twelve month basis

·    Net cash generated from operating activities decreased to £8.3m (H1 2019: £10.9m) due to reduction of sales in H1

·    Refinancing of existing revolving credit facility, increasing headroom to £23.1m, negotiated with favourable terms in line with our previous facility

·    Interim dividend payment of 2.6p (H1 2019: 2.6p) per share to be paid on 30 October 2020 reflecting Board’s confidence in current trading

·    Adjusted profit after tax decreased by only 9.6% versus a top line decrease of 21% following stringent cost efficiency measures in H1

FULL YEAR OUTLOOK

·    Another solid performance with profitability remaining flat versus prior year, supported by record sales in Q3 based on replenishment of pipe-line stock and the normal seasonal uplift

·    Aqua Optima business showing full year forecasted double digit growth ahead of 2019, with sales in the UK, Europe, Far East and Latin America all contributing to strong performance

·    14 new products ready to be launched by the end of 2020

·    New Factory progressing well in Guangzhou, remaining on target to be fully operational by August 2021

·    The Board remains committed to delivering a full year dividend of 7.7p in line with 2019

STRATEGIC HIGHLIGHTS

·    Acquisition of Laica S.p.A, an Italian company focussed on water purification and the sale of small household appliances for personal health and wellness. The Acquisition is subject to approval from the Council of Ministers in Italy

·    Global market share stable despite global pandemic and imposed lockdowns

·    Continued focus on both safety and intellectual property actions resulting in a further kettle being withdrawn from sale and an additional website takedown

·  Strengthened senior management team to support our strategic initiatives with particular emphasis on people development and commercialisation of new products

·    Successfully launched established Halopure technology into sterilisation applications within both Farming (livestock drinking systems) and Dentistry markets to further diversify category

OPERATIONAL HIGHLIGHTS

·    Continued investment in automation with a further 3 lines becoming fully automated in H1 2020 on budget and ahead of schedule

·    New U90 automation line achieved 85% mass production efficiency (in line with original projections)

·    Received “Best Co-operation Award” at the annual Supor Supplier Conference 

·    Maintained “Benchmark” status following latest ISO audits

Mark Bartlett, Chief Executive Officer of Strix Group plc, said:

“The first half of 2020 has been an extraordinary period with substantial economic challenges inflicted by the COVID-19 pandemic. I am immensely appreciative of the efforts of our people during these uncertain times, who have continued to work diligently to support not only our customers, but also our local Communities and Governments.

“Strix has delivered a solid trading performance in H1 given the continued headwinds faced as a result of the global pandemic. Our performance shows the resilience of our business model, which benefits from geographical and product diversification, and is strengthened further by our prudent control of our balance sheet. Whilst Kettle control volumes were dampened during H1 in line with scenario planning, anticipated record sales in Q3 are expected to contribute to the full year forecasted performance.

 “We have managed our margins with continued focus on operational enhancements and cost improvements in our core business whilst remaining on track with key strategic projects. These include the construction of our new facility in China, integration of assets acquired from HaloSource in 2019, maintained focus on new product development and the acquisition of Laica S.p.A on 22nd September 2020. Our latest acquisition will enhance our geographical coverage and product portfolio significantly.

 “Given the Board’s confidence in the future outlook and with profitability remaining on track to achieve a flat performance year on year, an interim dividend of 2.6p will be paid on 30 October in line with our 2019 interim dividend.

CHIEF EXECUTIVE’S REVIEW

In the first six months of 2020 we have delivered a solid trading performance given the unprecedented trading environment. This is a tribute to our colleagues around the globe, who have demonstrated their dedication and adaptability to unparalleled change in their daily working environment arising from the COVID-19 pandemic.

The Group reported revenue of £34.7m, a decline of 21.0% versus the same period in prior year (H1 2019: £43.9m) in line with our COVID-19 scenario planning expectations.

Adjusted EBITDA was £13.6m (H1 2019: £14.9m), a decrease of just 8.6% on H1 2019 as a result of lower sales, partially offset by reduced variable overheads. The Group’s core focus at the height of the crisis was the conservation of its ongoing cash flow, resulting in the identification of in excess of £3.0m cost efficiency measures. Implemented initiatives, some of which were temporary, have enabled us to maintain our high cash generation. Given our positive trading position and strong balance sheet we have been able to continue with our capital allocation model, allowing us to progress with strategic capex investment and acquisitions.

Adjusted profit after tax fell by 9.6% to £9.8m (H1 2019: £10.9m) the biggest contributor to this was low sales in Q1 as a direct result of global lockdowns and reduced production.

The Group’s adjusted net debt position has increased by 10.5% to £36.9m (H1 2019: £33.4m), which is approximately £6 million lower than budgeted for this financial year as a result of the cash conservation and efficiency measures. Following completion of the new £60.0m revolving credit facility, total committed debt at 30th June amounted to £49.0m, giving combined cash and facility headroom of c.£23.1m delivering enhanced liquidity levels.

Given the Group’s H1 2020 performance, a strong Q3 order book and the Board’s confidence in the continued strength of cash generation, the Board has declared an interim dividend of 2.6p, payable on 30th October 2020 to shareholders on the register as at 9th October 2020.

The Group has experienced a marked recovery with a solid performance in June through August and a strong order book for September which underpins its confidence for adjusted profit after tax for the full year to be in line with the previous financial year assuming no significant increase in further lockdown restrictions being imposed or unforeseen macroeconomic shocks.

Kettle control volume sales

The COVID-19 pandemic disrupted both supply and demand in the Global Kettle market during H1. The pandemic’s initial impact was supply side with disruptions affecting China based factories, where more than 90% of kettles are manufactured, as a result of the mandatory local lockdowns and an extended Chinese New Year period. Key factories were back in operation by early March showing increased demand from the China domestic market but the pandemic ultimately caused an overall volume drop in market demand of c.20% in 2020 Q1 versus 2019 Q1. Export volume demand in the West dampened through to mid-May due to lockdowns, with demand actively picking up as lockdowns were eased and supply chains replenished.

We have experienced a strong recovery moving into Q3 in line with our scenario planning. Q3 sales from kettle controls are expected to increase by 26% year on year to a record figure of approximately £24m.

The China domestic market was the first to be hit by COVID-19 but also the first to come out of lockdown. The China market’s online presence resulted in an uptick in online sales during the pandemic through major platforms such as JD.com and Alibaba. In store recovery, where products are more prominent, was slower, resulting in a reduction in H1 volume demand of 10% year on year with Q3 sales remaining slightly depressed.

The fundamental effect of the pandemic on the Regulated market led to supply side disruption in Q1. Lockdowns in mid-March contributed to a year on year volume drop of c.25% underperforming the overall market. In spite of over eight weeks of lockdowns, 2020 Q2 resulted in slight growth versus 2019 Q2, driven predominantly by the replenishment of the supply chain and the accelerated shift to ecommerce sales. Online sales grew in excess of 50% during the lockdowns and are continuing to show strong growth through to Q3. Overall in H1, the Regulated market performed slightly better than the overall market, down c.10% volume year on year, with the company maintaining its value share of the sector and continuing to trade strongly into Q3 as per our original scenario planning.

The Less Regulated market, whilst still posting a year on year volume reduction of over 10% during Q1, was the strongest performing market sector. As the pandemic took hold, Q2 performance weakened by c.20% in 2020 versus Q2 2019, resulting in H1 being c.15% down year on year. South Africa, a strong market for Strix’s immersed controls, was particularly impacted in H1 resulting in a drop in immersed sales offsetting some of the share gains made by the newer, low cost range of underfloor controls.

Water Category

Despite the external pressures imposed by the global pandemic, the water category has continued to develop its product base and progressed towards our category growth aspirations. During H1, revenue grew by c.2% with a further acceleration of growth into Q3.

Whilst traditional High Street business has suffered, our multi-channel approach has seen the Aqua Optima business grow year on year, with sales in the UK, Europe, Far East and Latin America all contributing to a strong performance.

Appliance sales have been at the forefront of this success; The Lumi Chiller has featured in popular UK publications and subsequently delivered record ‘sales out’ figures across our retail partners. The Mark IV Evolve+ filter has been rolled out across our distribution base and shows increased market compatibility in the UK & EU, delivering increased sales versus its Mark II predecessor.

The business is well placed for further growth in the 2nd half of the year with increased revenue forecasted in the ‘trade brand’ segment as key new listings gain momentum.  We will also build on the success of Lumi with the launch of the Aurora beverage station under Aqua Optima brand in Q4.  Aurora is a great example of Strix’s mission to bring solutions to consumer needs combining our patented “true boil” technology & water filtration expertise. Aurora will offer chilled, filtered, variable temperature and “boiled water on demand”. 

Performance of the assets acquired from HaloSource in the period has been in line with the Group’s expectations. The astrea product has received significant interest from multiple parties with ongoing discussions with a leading global brand and a prominent North American home shopping network. Extending the life and performance of the astrea ONE filter for the US market, and a new plastic astrea ONE bottle (set to launch in H2), gives greater access to a younger and more price sensitive consumer. The Group continues to explore new distribution channels, and is currently in the final stages of commercialising a ‘survival bottle’ to open up the fishing & hunting retailer market. The Group continues to seek further opportunities to enter into agreements which will drive future profitability.

The recent acquisition of Laica, subject to approval from the Council of Ministers in Italy, will further enhance the Groups position within the water filtration market and accelerate the roadmap of new products for this growth category.

Appliances

The Group has continued to work on growing its appliances category with selected brand partners. In the Hot Water on Demand category, the new Aurora Instant Flow Heater/Chiller appliance is now undergoing development trials at the OEM, and tooling for the Duality project is underway with a US Brand signed-up to launch. In the Baby Care category, incremental projects are in the design phase with a leading baby care brand in both Asia and North America providing a more global reach in this growth market segment.

H1 has seen the acceleration of Global Brand partnerships on new innovative project launches. Within 2020 there are already over 10 agreements in place within the appliances and baby care categories for exciting new launches across all regions.

New Product Development (NPD)

New product development remains a fundamental driver in the Group’s core business strategy, with specific focus on the identification of cross category opportunities. Throughout 2020, the Group continues to make significant headway with our product development roadmap remaining on target to be ready to launch 14 new products by the year end, in line with our original objectives.

The Group has re-focused its commercialisation strategy in 2020, optimising cross category synergies within both our higher value small domestic appliance and water categories.

Our patented Instant Flow Heater (IFH) technology is gaining positive demand and will see significant new launches in the coming 12 months across multiple brands globally with key launches in EMEA, Asia and North America. Additionally, our Lumi water chiller has also seen accelerated success with sales volume increases in excess of 1,200%.

Filter development has seen further opportunities with three new products being launched to the Group’s non wavering safety and quality standards. In 2020, the Group has started to introduce the Aqua Optima brand to North America with plans for a comprehensive filter, pitcher and appliance range, positioned to take advantage of the growing “Value Chic” segment in the US.

Following the successful launch of the U9 Series during 2017, the Group has successfully produced over seven million controls. The Group continues to develop this series with new variants launched to target the smaller size and split switch kettle appliances to further enhance the portfolio of “best in class” controls. The U6 series control for electronic kettles has subsequently shipped over 0.5 million sets since its launch, which has been supported by targeted IP actions.

The Group will continue to focus its highly skilled engineering resource towards enhancing our core technologies and innovating into new commercial markets.

Operations

The Group remains committed to delivering high quality sustainable products in a sustainable business environment with 2020 seeing further emphasis of our actions and opportunities in this direction. Driven by our key sustainable development goals (SDG’s), the Group has evolved the existing management structure to fully integrate sustainability into the core business model. Emphasis of this progression is seen with the new China facility which will aid our SDG’s fourfold; improved efficiency levels, product flows, automation, and increased opportunities to minimise our carbon emissions footprint.

Following the ISO surveillance audit, the Group’s Isle of Man facility once again achieved the highest rating from Intertek – ‘Benchmark’ for all categories. The Board is proud to be one of the few audited companies to achieve and maintain this standard which highlights our continued focus on operational and environmental excellence and covers management, internal audits, corrective action, continuous improvement, operational control, governance and effective management of resources.

The Group continues to develop its automation lines in China with three completed production lines becoming fully automated in H1 2020 and a further two lines planned for H2 2020. The Group is also consistently achieving efficiencies in excess of 85% for the recently introduced U90 series line, with head count and cycle times below budget and a control produced every c.1.8 seconds. 

Commodity prices for key materials (silver, copper and hybrid plastics) have been periodically secured at or below budget pricing, in line with the Group’s purchasing policy and appropriate stocks have been secured to prevent any potential logistics disruption resulting from BREXIT and the pandemic during 2020.

Dividend Policy

The Board remains committed to its progressive dividend policy, which is to maintain the dividend in line with future underlying earnings from a base of 7.7p for the 2020 financial year. The Group has consistently achieved strong cash conversion which will underpin this dividend alongside continued investment in the Group’s asset base to deliver future profitable growth and support expansion into new areas which are aligned to the core competencies of the Group.

The dividend policy of the Company provides the flexibility to continue to invest in the Group’s growth strategy and to take advantage of investment opportunities.

Future strategy

The Group will continue to develop a culture of achievement within the Group, with a strategy focused on driving shareholder value and employee engagement. As part of this strategy, the Group continues to broaden its senior management, engineering and commercial teams through strategic recruitment whilst further developing existing resources with training and development programmes aligned to Strix’s wider growth objectives.

The Group will also continue to increase its focus on new product development and core technologies to enhance the product portfolio within the Small Domestic Appliance (“SDA”) & Water categories. In particular, the Group will develop and launch both disruptive and innovative products to provide consumer and environmental benefits within the hot water on demand category to enhance functionality and value, as well as a range of filtration technologies to differentiate our existing portfolio and expand our addressable markets. In line with this strategy, the Group recently secured a number of collaborations with national and global brands in both the water dispense and water filtration categories, leveraging on its extensive relationships with brands and retailers worldwide.

The Group continues to actively seek 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.

Within Operations, the Group will continue to drive efficiency and process improvements with an ongoing commitment to lean manufacturing and further automation of appropriate production lines as volume dictates. Progress on the new manufacturing facility in China remains on track, both on budget and timeframe with the facility expected to be fully operational by August 2021 and will provide additional capacity to realise the Group’s growth potential. The additional capacity will enable more efficient process flows as well as the ability to in-source additional products and further increase automation.

Outlook

Following the Group’s solid performance in H1, notwithstanding COVID-19 impacts, our commitment towards key strategic projects remains resolute and continues to assist in delivering our long-term growth aspirations.

Our internal investment strategy focuses on the enhancement of our operations, reinforcing our overall business strategy. New additions to our senior management team, bolster the investment in our people and the commercialisation of new products that provide true consumer benefit.

Dedication to improving the Group’s sustainability and productivity has seen continued investment in automation, assisting in the mitigation of future risk surrounding rising wage costs and further disruptions resulting from imposed lockdowns. 

Our core kettle market remains stable, maintaining our market leading value share despite the effects of the pandemic, ongoing trade tensions between the US and China, and the pending impact of Brexit. The acquisition of HaloSource in 2019, and our most recent acquisition of Laica S.p.A in 2020, strengthens our water category and widens our global reach.

The Group has experienced a marked recovery with a solid performance in June through August and a strong order book for September which underpins its confidence for adjusted profit after tax for the full year to be in line with the previous financial year assuming no significant increase in further lockdown restrictions being imposed or unforeseen macroeconomic shocks.

Mark Bartlett

Chief Executive

23 September 2020

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