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STRIX GROUP PLC

Strix Group Plc A solid first half 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 today announced its unaudited interim results for the six months ended 30 June 2018.

FINANCIAL HIGHLIGHTS

· A solid first half performance and trading in line with full year market expectations

· Revenues of £42.9m (H1 2017: £42.2m), increase of 1.5%

· Gross profit margin increased to 37.9% (H1 2017: 37.2%)

· Adjusted EBITDA (1) of £14.8m (H1 2017: £14.2m), increase of 4.3%

· Adjusted EBITDA (1) margin of 34.5% (H1 2017: 33.6%)

· Adjusted PBT (1) of £11.0m (H1 2017: £11.2m), decrease of 1.9% due to net finance costs of £0.9m (H1 2017: £nil)

· Adjusted diluted EPS (1) of 5.3p, with adjusted PAT (1) of £10.6m (H1 2017: £11.0m), decrease of 3.5% due to timing of tax accrual vs prior year

· Decrease in net debt to £37.9m (2017: £45.9m), improvement of 17.4%

· Net cash generated from operating activities £15.2m (H1 2017: £15.4m), decrease of 0.9% due to working capital movements

· Interim dividend of 2.3p per share to be paid on 26 October 2018

OPERATIONAL HIGHLIGHTS

· Global market share maintained at c.38% by volume

· Successful launch of U9 with >1.1m controls produced

· Production efficiency increased by 6% due to continued automation and 16% increase in quality ppm

· Settlement of an infringement claim for 19 electronic appliances in China to defend IP

· Aqua Optima sales up by c.88% in H1, with record market share of c.20% achieved

1 Adjusted results exclude exceptional items, including share-based payments. Adjusted results are non-GAAP metrics used by management and are not an IFRS disclosure.

The comparative results are presented on the same basis as set out in the Group’s 2017 Annual Report, and cover a period when a different capital structure was in place and the Company was not listed on AIM.

Mark Bartlett, Strix Group Plc Chief Executive Officer, said:

“We are pleased to report a solid six months of trading for Strix in 2018. We have made positive progress with our strategic priorities, continued to invest in the growth of our business and maintained our global market share.

The global market has remained positive with an overall volume growth of c.6%. The North American market has been particularly strong, growing at >20%. As anticipated the China domestic market also experienced a positive recovery with volume growth of c.6%.

We have continued to invest in our facilities, through innovation, additional automation and lean manufacturing processes, resulting in a further 6% increase in efficiency.

Product development remains a core focus of the Group with positive progress on the U9 series of controls. We have secured a number of collaborations with key brands within the hot water and coffee on demand categories using our mature, patented heating technology to fulfil key consumer insights identified from independent research.

Aqua Optima continued to show strong growth with revenues up c.88% versus prior year securing a record share within the UK of >20% and increased distribution with the Aqua Optima brand now available in an additional 2,500 outlets.

We continue to build on our extensive customer relationships across the value chain whilst further developing our key technologies and seek to identify further incremental opportunities, both organic and inorganic, to drive shareholder value.

With trading in line with full year expectations, we look forward to the rest of 2018 with optimism and are delighted to announce an interim dividend of 2.3p per share.”

 

CHIEF EXECUTIVE’S REVIEW

The first 6 months of 2018 have seen a solid performance of the core business across all segments resulting in a 7.6% volume growth for the Group against prior year.

The Company’s revenues were £42.9m (H1 2017: £42.2m) an increase of 1.5% on prior year and adjusted EBITDA was £14.8m (H1 2017: £14.2m) up 4.3% on prior year. Adjusted profit before tax was £11.0m, down 1.9% (H1 2017: £11.2m) due to there being no interest in H1 2017 following the Group reorganisation in August 2017 (H1 2018: £0.9m of net finance costs). Net debt was further reduced to £37.9m.

At the half year, total sales volume for the global kettle market remained strong with a consolidated growth of c.6% versus c.5% during H1 2017. As anticipated the China domestic market experienced a recovery back to c.6% volume growth with the regulated and less regulated markets posting a volume growth of c.3% and 8% respectively. Strix remained stable, maintaining its global market share of c.38%.

Given the Company’s H1 2018 performance and the Board’s confidence in the continued strength of cash generation, the Board has declared an interim dividend of 2.3p, payable on 26 October 2018 to shareholders on the register as at 28 September 2018.

Export kettle control sales

Export kettle control sales are defined as kettle controls which are ultimately sold in a market outside of China. Growth in the regulated markets remained significantly ahead of the estimated 2013 to 2017 CAGR of 1%, growing at 3% with North America performing very strongly with a growth rate >20%. Strix’s share continued to perform well within this market with a share in excess of 70% and market penetration now c.15%. Turkey also posted solid sales in H1 with volume up 7% versus prior year although this is expected to slow somewhat during Q3 due to the devaluation of the Lira. Sales to Turkey make up c.5% of net sales by value, therefore any impact of this will be limited. This strong performance was slightly offset with some contraction in Western Europe following strong performance in the prior year and in the UK. Strix maintained its consolidated share of c.61% of this market segment and continues to focus on incremental opportunities for H2.

Strix continued to undertake both safety and intellectual property actions with 8 internet brands being removed from sale during H1 in UK, France, Germany and Italy. As well as a compensation payment we have a commitment from the key brand to convert their appliances to Strix controls.

The less regulated market continued to post solid growth at c.8% and was in line with the 2013 to 2017 CAGR. The Far East markets (excluding China) and Russia both experienced double digit growth and Strix maintained its share of c.19% with the U9 series beginning to gain traction in this target market segment. The implementation of approval testing in Chile has been further strengthened with an increased frequency of testing of key clauses, further strengthening the barrier to entry for inferior quality competitors.

China Domestic sales

As anticipated the China market showed a recovery over 2017 posting c.6% growth versus a 6% drop in the prior year with Strix’s market share broadly static at c.48%. Strix continued to defend its intellectual property and successfully settled patent infringement cases against 19 appliances with the number one brand in multi-cooker appliances. Along with a compensation payment, this settlement secured agreement to convert the appliances within a 12 month period which will help secure volume share in this growth segment during 2019 and beyond.

New Product Development (NPD)

Following the successful launch of the U9 Series during 2017 we have successfully secured more than 70 specifications and produced 1.1m controls. We continue 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.

During H1 2018 the new, enhanced version of the baby prep was launched in the UK as “Perfect Prep, Day and Night”. This product has been well received in the market with excellent consumer ratings.

We continue to support key global brands and have secured a number of significant collaborations within the hot water on demand sector using our patented heater technology, including the deal with a US-based consumer product company announced in August. These products will expand our current footprint into both coffee and water dispensing systems providing increased consumer functionality, convenience and value.

We will continue to leverage on our core competencies to focus our highly skilled engineering resource on additional products for the water on demand segments, whilst further enhancing our core technology to expand our addressable market and increase our differentiation within the control sector.

Operations

Operations have achieved positive improvement in its key performance indicators, particularly with respect to cost and quality versus prior years. The process quality ppm (‘parts per million’) improved by 16% and outgoing quality performance was improved by more than 20% versus prior year.

A further two automated lines were set up during H1, bringing the total number of automated lines in our Guangzhou factory to six. A further three projects are being launched this year and will be delivered by the end of 2019. Efficiency has improved as a result of the increased automation and on-going “lean” projects with an improvement of 6% during H1.

The total output of kettle controls and connector sets exceeded 33.5m during H1, a 4.8% increase on prior year with a reduction of one manual production line. Commodity prices for the key materials (silver, copper and hybrid plastics) have been secured for the full year at or below budget pricing, in line with our purchasing policy.

Aqua Optima

Aqua Optima experienced a strong performance during H1 with revenues up by c.88% on prior year. Strong sales of trade brand product to both UK and Central Europe combined with the continued growth in existing UK distribution for Aqua Optima has resulted in a record high market share of c.20% within a UK market of c.£63m, with the Aqua Optima brand now available in more than 2,500 additional outlets during 2018.

Investment in PR and social media, together with an exclusive partnership with “parkrun” has enhanced consumer engagement with targeted campaigns increasing followers to more than 2,500 individuals. The increase of incremental trade brand business has allowed Aqua Optima to create a clear “good, better, best” category hierarchy, repositioning the Evolve brand with respect to its competitors whilst retaining competitive advantage.

We continue to work with our partner in China, a major small domestic appliance (‘SDA’) OEM, to launch a range of Aqua Optima filter products in Q4 2018.

Dividend Policy

Following the successful IPO of Strix Group in August 2017, the Board feel it is an opportune time to provide investors with further guidance regarding the dividend policy going forward. The Company has consistently achieved strong cash conversion and remains committed to paying a total dividend of 7.0p for the current financial year and a total dividend of 7.7p for the financial year ending 31 December 2019. Following this the Company intends to implement a progressive dividend policy to increase future dividends (from a base of 7.7p in 2019) in line with future growth in underlying earnings.

This policy provides the flexibility to continue to invest in the Group’s growth strategy and to take advantage of investment opportunities. The Directors may consider additional distributions in the future subject to the level of debt and the opportunities referred above.

Future Strategy

We will continue to develop a culture of achievement within Strix, with a strategy focused on driving shareholder value and employee engagement. As part of our strategy we will further broaden our senior management and engineering bench strength through strategic recruitment whilst further developing our existing resources with training and development programs aligned to our growth objectives.

As part of our strategy we continue to increase our focus on new product development and core technologies to enhance our product portfolio within the SDA market. In particular, following external consumer research, we will develop and launch innovative products within both the hot water on demand segment to enhance functionality and value as well as additional electrical products for the global baby segment. In line with this strategy, we recently announced a collaboration with a global US-based firm to develop a new single-cup coffee appliance.

In addition to organic growth we will target appropriate acquisitions within the SDA sector, funded from our existing resources. We will focus on companies or technologies that support our core competencies with particular attention to water filtration, heating technologies and the hot water on demand / coffee categories.

Within Operations, we 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. We are in the early stages of assessing our options regarding relocation of our manufacturing operations in China, with the current lease expiring in 2021. Both the construction of a new facility and rental/purchase of an existing facility are under consideration. We anticipate the total cost of the relocation to be in the region of c.£15 million, but will provide the market with further guidance in due course. We expect any funding requirements to be sourced from existing resources.

For Aqua Optima, we will launch an initiative to enable filters to be recycled, continue to develop trade brand relationships and expand the product range to drive further growth in both the UK and China.

Outlook

The core kettle control market remains solid, with the U9 series providing a comprehensive portfolio of controls to address our existing market opportunities. We will continue to evolve our core control segment with the launch of a new electronic control in H2 2018, targeting the growth of multi-cookers and a new range of controls to further increase our addressable market in the less regulated segment being launched in 2019.

Following the success of Aqua Optima in the UK we will launch in China during Q4 2018 with further product launches and initiatives set for the UK in Q1 2019 to further drive market share growth.

Key commodities have been secured for the full year of 2018 in line with our purchasing policy but there remains continued pressure on some of the hybrid plastics used within our legacy products which represents c.15% of material costs. Management are continuing to actively monitor and will look to mitigate any further increases as appropriate.

As the majority of transactions are conducted between our corporate office in the Isle of Man and our OEM customers in China, any potential impact from Brexit initiatives is limited. In addition, our consumer base is geographically diverse and we remain confident that our position in the global market limits any dependency on a specific territory. We also trade in a number of different currencies and as a result our exposure in any one single currency is monitored and managed.

The Board is confident with the future outlook and trading remains in line with full year market expectations.

Mark Bartlett

Chief Executive

19 September 2018