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STRIX GROUP PLC

Strix Group Plc ‘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 today announced its unaudited interim results for the six months ended 30 June 2019.

  1. Adjusted results exclude exceptional items, which include share based payment transactions. 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. Movement partially driven by cash outflows in relation to the HaloSource acquisition and the new manufacturing facility.
  5. Movement partially driven by working capital movements and exceptional costs relating to the HaloSource acquisition.

FINANCIAL HIGHLIGHTS

· Adjusted profit before tax increased by 4.6% to £11.5m (H1 2018: £11.0m), driven by lower interest charges being incurred as a result of an improved leverage ratio and a lower average outstanding facility balance

· Net cash generated from operating activities decreased to £10.9m (H1 2018: £15.2m), driven by working capital movements and exceptional costs relating to the HaloSource acquisition

· Net debt in line with expectations at £33.4m (H1 2018: £37.9m)

· Interim dividend increased by 13% to 2.6p (H1 2018: 2.3p) per share to be paid on 25 October 2019

· Group average selling price was strong at c. 3% above H1, 2018 due to positive geographical and product mix, supported by a price increase implemented in Q4, 2018, primarily to cover an increase in the cost of hybrid plastics

FULL YEAR OUTLOOK

· A solid performance and profitability remains in line with full year market expectations

· Kettle control volumes were flat during H1 and anticipated to grow c.3% for the full year due to the commercial contracts and incremental specifications secured during year to date

· Average selling price for the full year is anticipated to be c.2% down on prior year (0% excluding ancillary products such as, China healthy eating kettles, milk frother and cerves, etc.), better than CAGR, driven by increased sales into China and the Less Regulated markets

· Aqua Optima is expected to recover from the slow start to the year with further expansion of trade brands sales into Europe and the launch of new products into the China domestic market

· New factory on track with the land secured and contractor engaged on a fixed priced contract in line with project plan

· The Board remains committed to delivering a 10% increase in the full year dividend to 7.7p (2018: 7.0p)

· Cash generation remains healthy with prudent capital allocations on four core priorities; progressive dividend, new factory construction, strategic acquisition, focused capital expenditures, with Net debt to EBITDA ratio modestly increased to 1.0 – 1.1x at year end

STRATEGIC HIGHLIGHTS

· Global market share maintained within each segment despite macro-economic headwinds

· Acquisition of specific assets from HaloSource Corporation successfully completed on 7 March 2019, adding significant R&D capabilities to the Water Category and providing additional adjacent technologies

· 50-year land use rights secured for £1.7m in Zengcheng District of Guangzhou, China in order to build the new manufacturing facility, which will be fully operational by August 2021

· Appointment of a Chief Commercial Officer to expedite commercialisation of new products and technologies to support the next phase of the Group’s growth

· Commercial agreement secured for the recently acquired Astrea product to be launched globally under the Philips brand. The product was launched at the IFA exhibition in Germany in September 2019

· Continued focus on both safety and intellectual property actions resulting in ten internet brands being removed from sale and three unsafe competitor kettles being recalled within Europe

· New single serve coffee system was launched in the US market in collaboration with Mr. Coffee, a major household name in the US, opening further opportunities within the US beverage sector

OPERATIONAL HIGHLIGHTS

· More than one million “Perfect Prep” units have now been sold, highlighting the success of this innovative product which uses Strix’s technology

· U9 series continues to show strong growth with almost five million controls sold

· Continuous focus on automation with the Evolve mk4 water filter line becoming fully automated in H2 2019 and the U90 series line consistently achieving 80%+ efficiency

· 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

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

“Strix has achieved another solid performance despite continued challenges presented by the macro-economic environment. In particular, maintenance of the Group’s market share in the Regulated and Less Regulated markets, combined with modest growth in China, demonstrates the strength and resilience of our core business model.

“We have maintained our margins due to continued focus on operational enhancements and cost improvements in our core products whilst remaining on track with key strategic projects. These include the construction of the new facility in China and the integration of the assets acquired from HaloSource in March 2019. We have made further progress toward our strategic objectives and continue to invest in the growth of our business, funded by our existing resources.

“With the acquisition of HaloSource, we have strengthened the Water Category which includes Aqua Optima, Astrea, and HaloPure. This provides us with the right blend of products to deliver success in this growing category and, together with our investment in R&D capabilities, we have the right ingredients to create and commercialise exciting new innovative products within the Water Category. These include working closely with AquaShield to develop a Philips co-branded Astrea one filtration bottle; the launch of the Zwilling Water Dispenser in April 2019 into the hot water appliance market; discussions with a major Asian mother & baby brand to bring new and innovative products to the market; and a collaboration with Mr Coffee to launch a new single serve coffee appliance in the North American market during September 2019 using our patented Hot Cup Technology.

“The Board is confident with the future outlook and profitability remains in line with full year market expectations. As a Board, we have committed to increase the full year dividend by 10% to 7.7p per share, an indication of our confidence in achieving the Group’s business objectives for 2019.”

STRIX GROUP CHIEF EXECUTIVE’S REVIEW

The first six months of 2019 have seen a solid performance for the Group.

The Group’s revenues increased by 2.5% to £43.9m (H1 2018: £42.9m) with a constant currency increase of c.1%. Adjusted EBITDA was £14.9m (H1 2018: £14.8m), an increase of 0.7% on H1 2018. Adjusted profit before tax was £11.5m, growing by 4.6% (H1 2018: £11.0m) as a result of lower interest charges due to the Group having a lower average net debt position. After taking into account the increased dividend to shareholders, the HaloSource acquisition and the investment in the new China manufacturing facility, the Board is comfortable with the net debt position at the end of the period of £33.4m (H1 2018 £37.9m). The total average selling price increased by c.3% vs. H1 2018, driven by a positive change in sales mix and a price increase implemented in Q4 2018 to offset the increased cost of hybrid plastics used within legacy products. During H1 2019, the global kettle market growth softened to c.2% as a result of various geo-political issues. The Less Regulated sector remains the fastest growing sub-sector within the market, which Strix is actively targeting through the U9 series.

Given the Group’s H1 2019 performance and the Board’s confidence in the continued strength of cash generation, the Board has declared an interim dividend of 2.6p, an increase of 13.0% on H1 2018, payable on 25 October 2019 to shareholders on the register as at 27 September 2019.

Export kettle control sales

Export kettle control sales are defined as kettle controls which are ultimately sold in a market outside of China. Market growth has slowed in line with weaker global economic growth and issues such as Brexit and USA / China trade tensions have had a disruptive impact on supply chains.

For the Regulated market, management estimate H1 2019 market growth as coming in slightly under the 2014 to 2018 CAGR estimate of c.3%, with North America remaining the fastest growing region. Japan’s market performance recovered in H1, Western Europe and UK had a strong start to H1 before softening towards the end of the period. The Group maintained its consolidated volume share of c.61% of this segment and continues to focus on incremental opportunities for H2 2019. Strix continues to undertake both safety and intellectual property actions across the market with three unsafe competitor kettles recalled across the EU and intellectual property actions taken against ten internet brands resulting in the removal from sale during H1 2019 in the United Kingdom, France, Germany and Italy.

The Less Regulated sector continues to deliver high growth rates driven by sales of the U9 series electronic control. The Group estimates that in H1 2019 the market growth being a couple of percentage points lower than the 2014 to 2018 CAGR estimate of c.8%. Whilst the Commonwealth of Independent States market was contracting, this was offset by stronger growth in Africa and South America. Strix’s market volume share is c.20% with the U9 series beginning to gain positive traction in this target market.

China Domestic sales

The China market for electric kettles has contracted by c.5% due to the slowing Chinese economy and substitution at the higher end of kettles with healthy eating appliances. However, China remains the largest single country kettle market of just under 50 million of which Strix has a c.46% share. With the launch of the new U68 electronic control, Strix’s sales into healthy eating appliances doubled in H1 2019 and we expect continued positive momentum in H2 2019. Following the recent commercial agreements based on both intellectual property actions and a focus on key brands, it is anticipated there will be a modest improvement in market share during H2 2019.

New Product Development (NPD)

Following the successful launch of the U9 Series during 2017, Strix has successfully produced over 7 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 was launched in Q4 2018 and Strix has subsequently shipped over 0.5 million sets, which has been supported by IP actions.

The Group’s patented heater technology continues to achieve strong sales with the market leading “perfect prep” baby milk preparation machine which has started to ship for use in a multi-temperature water dispenser launched in the China market during H1 2019. H2 2019 will also see the launch of a new product into the coffee sector of the US market in collaboration with Mr. Coffee, a major household name in the US.

The Group will continue to focus its highly skilled engineering resource towards enhancing our core technologies and innovating into new commercial markets. The addition of former HaloSource staff and products within the Water Category will drive further product innovation, synergies and commercialisation in the category.

Operations

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

Strix continues to develop its automation lines in China with the production of the Evolve mk4 water filter, from mould shop to finished goods packaging, which became fully automated in H2 2019. Further to this, the Group is also consistently achieving efficiencies in excess of 80% for the recently introduced U90 series line, with head count below budget.

Commodity prices for key materials (silver, copper and hybrid plastics) have been secured for the full year 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.

Following the purchase of the 50-year land use rights for £1.7m, the Group has signed a fixed price contract for the construction of the new manufacturing facility in the Zengcheng District of Guangzhou, China which is on track to become fully operational by August 2021 and is in line with budget.

Water Category

Aqua Optima branded products have achieved a stable share in its key UK market despite challenging market conditions, which have driven an overall market decline of c.7% as a result of consumer confidence issues linked to Brexit and price rises. Aqua Optima remains well placed to capture future growth when market sentiment improves as a result of its current market share and new European business launches in the trade brand segment during H2 2019. Trade brands are increasing their share of the point of use category, and as a result of this new business, Aqua Optima has become the market leading trade brand provider in the UK with its differentiated brand proposition. Investment in trade brands continues with renewed agreements with parkrun and Terracycle, supporting Aqua Optima’s goal of ‘better for you, better for the environment’ message. Aqua Optima launched into the China market through OEM appliance partners in H1 2019, with further launches planned in H2 2019 through e-commerce channels.

Performance of the assets acquired from HaloSource in the period since March 2019 has been in line with the Group’s expectations. The Astrea product (which is now part of Strix) has received significant interest from a number of parties with discussions ongoing with a leading global brand and a leading North American home shopping network. Astrea technologies will now launch into Europe and APAC geographies in Q1 2020 in a co-brand execution with Philips targeting the expanding mobile hydration market. Strix continues to seek further opportunities to enter into agreements which management believes will drive future profitability.

Dividend Policy

The Board remains committed to 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. 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. The Directors may consider additional distributions in the future subject to the level of debt and the execution of opportunities referred above.

Future strategy

Strix 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 will further broaden its senior management and engineering 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”) market. In particular, Strix 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.

In addition to the organic growth initiatives, the Board will continue to target appropriate acquisitions within the SDA sector, funded from existing resources. Focus will be on companies or technologies that support the Group’s core competencies with particular attention to water filtration, heating technologies and the hot water on demand / coffee 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 with the signing of a fixed price construction contract in line with budget. The facility is 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

The core kettle control market remains solid, despite the geo-political events which continue to overshadow global trade, including trade tensions between the US and China, and the pending impact of Brexit. Average selling prices have remained stable following the price increase in Q4 2018 and a positive sales mix. Exposure to the direct risks of Brexit remain limited given the majority of the Company’s transactions are made between the Isle of Man and China, although the Board believes that consumer confidence, as a result of the continued uncertainty, may impact overall sales in this region until clarity on the status is secured.

The Group continues to work toward its key strategic projects which it believes will deliver long-term growth, with particular focus on growing the NPD Category and the Water Category. The recent addition of a Chief Commercial Officer, coupled with the implementation of category management will ensure increased focus on the commercialisation of new products that provide true consumer benefit. In addition, management will continue to invest further in automation to mitigate the risk of rising wage costs, particularly in China.

Commodity prices have been secured in line with our purchasing policy, out to mid-2020 which reduces exposure to commodity price fluctuations and provides price certainty for key commodities, which form a significant part of the Group’s material costs.

The Board is confident with the future outlook despite the current macro-economic headwinds and profitability remains in line with full year market expectations.

The Group total average selling price is anticipated to close at c. 2% (0% excluding ancillary products such as, China healthy eating kettles, milk frother and cerves, etc.) below prior year due to product mix with increased sales to both the China and Less Regulated markets.

Mark Bartlett

Chief Executive

18 September 2019