Strix Group Plc (LON:KETL) has announced its preliminary results for the twelve months ended 31 December 2023
Financial Summary
| Adjusted results1 | Reported results | |||||
| FY 2023 | FY 2022 | Change (23 – 22) | FY 2023 | FY 2022 | Change (23 – 22) | |
| £m | £m | £m | £m | |||
| Revenue | 144.6 | 106.9 | +35.2% | 144.6 | 106.9 | +35.2% |
| Gross profit | 57.2 | 41.5 | +37.7% | 57.1 | 40.7 | +40.4% |
| Gross margin | 39.6% | 38.8% | +80 bps | 39.5% | 38.0% | +150 bps |
| EBITDA margin | 27.3% | 30% | -270bps | 25.3% | 24.5% | +80bps |
| Operating profit | 32.1 | 25.9 | +24.3% | 27.9 | 19.9 | +40.2% |
| Operating margin | 22.2% | 24.2% | -200bps | 19.3% | 18.6% | +70bps |
| Profit before tax | 21.9 | 22.2 | -1.1% | 17.7 | 16.1 | +10.3% |
| Profit after tax | 20.1 | 23.0 | -12.7% | 16.2 | 16.9 | -4.1% |
| Net debt2 | 83.7 | 87.4 | -4.3% | 83.7 | 87.4 | -4.3% |
| Operating cash conversion3 | – | – | – | 106% | 94% | +1,200 bps |
| Basic earnings per share (pence) | 9.2 | 10.9 | -15.7% | 7.4 | 8.0 | -7.4% |
| Diluted earnings per share (pence) | 9.1 | 10.8 | -16.2% | 7.3 | 7.9 | -7.7% |
| Total dividend per share (pence) | – | – | – | 0.9 | 6.0 | -85.0% |
1. Adjusted results exclude adjusting items (see note 6 of the financial statements)
2. Net debt excludes accrued interest, ROU lease liabilities and is net of loan arrangement fees, as defined in our banking facility agreement
3. Cash generated from operations as a percentage of EBITDA
Highlights
| § | A rebasing of the core business is being undertaken in 2024 to build strong foundations for medium-term growth opportunities as the market continues to recover. |
| § | Despite the macro challenges, the fundamentals of the Group that were seen so positively by the capital markets post listing remain unchanged. Its core business is a resilient one and maintains its dominant market position, with stable market share by value. |
| § | Strix has demonstrated good revenue growth, largely driven by Billi, continues to be highly profitable and is strongly cash generative. |
| § | The Board remains focused on maximising cash generation to support debt reduction which will result in a temporary pause in the final and interim dividend payments in calendar year 2024, with a planned return to a sustainable dividend pay-out ratio of 30% of adjusted PAT in 2025. |
| § | This pause will enable the Company to accelerate its deleveraging profile to ensure that it will be in a stronger financial position. It will also provide the flexibility to enable the business to selectively invest in new technologies to support longer term growth initiatives. |
| § | Strix has been proactively working with its banking syndicate who have provided a normalisation of the net debt leverage covenant to 2.75x for the duration of the facility. |
| § | Senior management changes. The recent recruitment of Clare Foster (CFO) and Rachel Pallett (CCO of Kettle Controls & PFS (Billi)) who both bring extensive skills and experience to the Group. |
Mark Bartlett, Chief Executive Officer, said:
“Strix is a resilient and highly cash generative business with the opportunity to expand its addressable market across all divisions.
The recent strategic acquisition of Billi has delivered double-digit revenue and profit growth on a constant currency basis over the period which is anticipated to continue, helped by a staged expansion into key European markets.
The Group plans to return to its sustainable dividend pay-out ratio policy in 2025 reflecting the Board’s confidence in the medium-term prospects.”
CEO’s report:
Executive summary
Strix’s investment proposition which was seen so positively by the equity capital markets since its IPO remains fundamentally unchanged. Its core business is a resilient one and maintains its dominant market position, with stable market share by value.
During 2024, a rebasing of the core business is being undertaken to provide a strong platform for medium-term growth opportunities as the market continues to recover.
The Board remains focused on maximising cash generation to support debt reduction which will result in a temporary pause in dividend payments in calendar year 2024. A planned return to a sustainable dividend pay-out ratio of 30% of adjusted PAT will take place in 2025.
This pause will enable the Company to accelerate its deleveraging profile and provide the financial flexibility to enable the business to make measured strategic investments into new products, technologies and manufacturing capabilities to support an accelerated growth profile in the medium-term.
Financial performance
The Group has seen strong growth with revenues increasing by 35.2% year on year to £144.6m (FY 2022 £106.9m), mainly as a result of the full year inclusion of Billi revenues of £41.3m (FY 2022, 1 month revenue of £2.7m).
The Group’s adjusted EBITDA margin remains strong at 27.3% (2022: 30.0%) reflecting the robust underlying profitability of the Group despite the macro challenges.
Despite the significant increase in net finance costs, the Group’s adjusted profit before tax shows only a slight year on year decrease of £0.3m to £21.9m (2022: £22.2m).
Adjusted profit after tax for the full year was £20.6m on a constant currency basis and £20.1m on a reported basis.
Cash generation was strong (operating cash conversion was 106%) and year-end net debt was reduced by £3.7m to £83.7m.
Kettle Controls division
Kettle Controls revenue increased to £70.1m (2022: £68.2m).
Whilst the macroeconomic and geopolitical environment that Strix and its peers operate in remains challenging, revenue growth in Kettle Controls outpaced the market, growing at 2.7% by value. The recovery in regulated markets started in H2 of 2023 (albeit slower than originally anticipated) recording quarter on quarter growth against the prior year.
Key initiatives going forward include:-
| § | New patent protected Series Z controls range undergoing customer testing, preparations for volume manufacture underway; |
| § | ‘Technology Showcase’ to demonstrate how Series Z controls enable new applications and growth opportunities beyond traditional kettles; and |
| § | A new range of low-cost controls tailored to the domestic China and less regulated market requirements which increases the target addressable market. |
Premium Filtration Systems division (“PFS”) (Billi)
The recent strategic acquisition of Billi delivered double-digit revenue and profit growth on a constant currency basis over the period. Strix anticipates that this trajectory will continue given the expanded target addressable market that Billi provides.
The new Billi UK head office in Wolverhampton, a new UK warehousing, distribution and refurbishment facility in Thurrock and the flagship Billi showroom and event space in London are now open. The right-sizing of Australian storage and distribution facilities in New South Wales, Western Australia and South Australia is now complete. First installations of the new OmniOne unit, offering boiling, chilled and sparkling water for commercial and residential applications, and introduction of the new Luxgarde UVC purification system for defense against waterborne bacteria and pathogens, are underway.
Key initiatives going forward include:-
| § | Global launch of new Multi-Function Tap, compatible with the full range of Billi under-counter modules; |
| § | Introduction of the new Omni-One under-counter unit to export markets (commercial and residential applications); |
| § | New product development programme targeting the residential market via selected channel partners; |
| § | European expansion via strategic sales and service partners, with technical and commercial support from Billi UK; and |
| § | Business development in South-East Asia and the Middle East through established distribution channels. |
Consumer Goods division
Overall, the Consumer Goods division reported an 8.7% decrease in revenue to £32.3m in 2023 (2022: £35.4m), driven primarily by a softening of the appliances category market, however this was partially offset by improved water category revenues.
In 2023, Aqua Optima secured a distribution agreement with a leading UK retail outlet. It was also agreed they would be a strategic brand partner for a European private label deal within the water category for distribution into France and expansion into Turkey. Aurora coffee also launched in North America.
Key initiatives going forward include:-
| § | Drive OEM business; two major contracts secured which will deliver c. 40% of 2024 growth; and |
| § | New product development focus on bolstering core profitable categories, including launches across filtration & vacuum sealer categories. |
A divisional restructuring at the start of 2024 has streamlined and re-focused the Consumer Goods division to drive ongoing profitable growth.
Senior management changes
Further to the prior announcement, Strix is also pleased to welcome the appointment of Clare Foster as Chief Financial Officer. Clare has over 25 years of experience working in international businesses and was most recently the Group Chief Financial Officer at Trifast plc making her a valuable addition to Strix’s leadership team. She joined Strix on 1 February 2024 and following a handover period, will formally take office and join the Board on 2 April 2024 at which point Mark Kirkland will step down as Interim Chief Financial Officer. He will continue as a Non-Executive Director on the Strix Board.
In addition, Rachel Pallett has been appointed as CCO of Kettle Controls & PFS (Billi). Rachel has 30 years of international experience in the business of engineering. She has held senior executive positions at Spirax Sarco Engineering plc, where she was Director of Business Development for Steam Specialties – responsible for the design, development and commercialisation of steam systems, controls and thermal energy management solutions. Prior to Spirax, she held several leadership and technical positions at Renishaw plc, the precision metrology and healthcare technology group.
Barriers to entry and defence of intellectual property
Strix constantly assesses the risks posed by competitive threats which drives its determination to constantly evolve its innovative technologies in a sustainable way by investing in its portfolio of intellectual property to protect its new products.
The Group actively monitors the markets in which it operates for violation of its intellectual property rights. Strix has unique relationships with its brands, OEMs and retailers and provides its support across the value chain and throughout the product lifecycle, including product design and advice on specification and manufacturing solutions. These value-added services and existing strong relationships ensure brands, OEMs and retailers continue to rely on Strix’s components and support.
Strix core products are associated with the consumption of critical resources, primarily electricity and water, hence Strix’s drive for continual improvement has aligned it with a sustainability led agenda. Recent years have seen an increase in the emphasis and broadening of the scope of its sustainability agenda. This was highlighted by the adoption of a wide range of KPIs and associated targets in 2021.
The Group’s sustainability strategy and adopted KPIs are generating greater emphasis and efforts on a broad range of aspects. Employee training has been a focus with a significant increase in training hours assisted by adoption of a more structured approach, including Kallidus e-learning system and a new training management structure in China. Health and safety continues to be a top priority with the three-year average trend continuing in a positive direction. The Company values its employees and their contribution and looks to develop their wellbeing. This is reflected in improved facilities offered by the new Chinese facility, whilst the West has seen changes in the working week, increased holiday entitlement, and the introduction of two charity days a year.
Strix’s sustainability agenda for 2024 remains high on the agenda as it delivers on its Scope 1&2 targets, analyses its Scope 3 emissions and continues to focus on its other KPIs. The pace and delivery of these goals reflects the strong employee ethos and commitment to the agenda. An updated ESG report is published today and will be available on the Strix website.
Key strategic business objectives
Strix Group reconfirms its commitment to the Key strategic business objectives outlined below:-
“Developing leading, innovative technology in the fields of water heating, safety control systems and drinking water treatment.”
| § | Kettle Controls: | |
| § | Profitably grow revenue through the introduction of innovative new products focused on sustainability, safety and convenience – including a new range of controls to increase the addressable markets within the unregulated and the China domestic markets. | |
| § | Leveraging the Group’s global manufacturing footprint to drive cost efficiency and improve sustainability. | |
| § | PFS (Billi): | |
| § | Leverage new product development and expand the geographical distribution in both residential and commercial markets. | |
| § | Priority will be placed on expansion into Europe and further product development to support the residential market opportunities. | |
| § | Consumer Goods: | |
| § | Following a divisional restructure, a refreshed and robust strategy will see LAICA in Italy becoming a highly profitable centre of excellence for the Group. | |
| § | Grow market share through innovation, world class sourcing and commercial excellence. | |
| § | Focus will be on geographical expansion and rationalisation of products to maximise profitability. | |
“Right People, Right Place, Right Skills, motivated and engaged to deliver our strategic objectives.”
Outlook
A rebasing of the core business is being undertaken in 2024 to build strong foundations for medium-term growth opportunities as the market continues to recover.
Despite the macro challenges, the fundamentals of the Group that were seen so positively by the capital markets post listing remain unchanged. The core business is a resilient one and maintains its dominant market position, with a stable kettle controls’ market share by value.
The recovery in the Kettle Controls regulated markets started in H2 of 2023 (albeit slower than originally anticipated) recording quarter on quarter growth against the prior year that has continued into Q1 of 2024.
Billi’s double-digit revenue and profit growth is expected to continue, helped by a staged expansion into key European markets.
Divisional restructuring at the start of 2024 has streamlined and re-focused the Consumer Goods division to drive ongoing profitable growth.
Whilst the Board remains focused on deleveraging, prudent strategic investment continues into new products, technologies and manufacturing capabilities to support an accelerated growth profile in the medium-term.
CFO’s report:
Financial performance
Revenue
The Group has seen strong growth with revenues increasing by 35.2% year on year to £144.6m (FY 2022 £106.9m), mainly as a result of the full year inclusion of Billi revenues of £41.3m (FY 2022, 1 month revenue of £2.7m). In our organic business, we have seen a small net reduction in sales driven by decreases in the Consumer Goods division.
Billi (which forms the major part of our Premium Filtration Systems (PFS) division) has performed ahead of expectations, securing over 10% growth against pre-acquisition trading levels at constant currency as the business continues to expand. In the UK market, sales have grown by c.13% year on year, reflecting a key part of our post-acquisition growth strategy for the business.
Following on from an extremely challenging 2022, we are pleased to report that revenues in our Kettle Controls division have increased by 2.7% to £70.1m (FY 2022: £68.2m) driven mainly by an 18% growth in the less regulated kettle market. The pace of recovery in the larger regulated kettle market continues to be slower than originally anticipated due to the ongoing effects of the cost of living crisis and the Russia/Ukraine conflict. Recent incoming order rates are now tracking in a positive direction, evident from higher sales in the last quarter of 2023 and a continued slow recovery into Q1 of 2024.
Consumer Goods revenue decreased by 8.7% to £32.3m (FY 2022: £35.4m) with challenging market conditions in the APAC region being the key driver for this decline. Despite this, we have continued to successfully expand our online presence with Amazon and have secured a number of new private label customers over the course of year, that are set to drive growth into 2024. Aqua Optima, our lower price point water filtration brand, has also seen strong growth in the year, providing the Group with an alternative access route into this key market.
Trading profit
Adjusted gross margin in FY 2023 was 80bps higher at 39.6% (FY 2022: 38.8%). The main driver of this is from our PFS division where gross margins have increased strongly to 45.8% (2022: 35.4%) as a result of the full year inclusion of Billi. With the addition of Billi, PFS now represents the highest gross margin division in the Group.
Partly offsetting this, product mix changes in Kettle Controls have led to a divisional gross margin reduction of 190bps to 39.0% (2022: 40.9%) due to faster recovery during 2023 in the lower margin less regulated and China domestic markets. Consumer Goods margin dilution of 250bps to 32.6% (2022: 35.1%) is largely down to reduced manufacturing volumes in 2023 impacting overhead recovery and the relative increase in lower margin online and Aqua Optima trading levels.
The Group’s adjusted EBITDA margin remains strong at 27.3% (2022: 30%) reflecting the robust underlying profitability of the Group despite the macro challenges.
Adjusted operating profit margins have reduced by 200bps to 22.2% (FY 2024: 24.2%) as higher overhead costs offset the gross margin uplift noted above. This increase is predominantly due to the full year inclusion of Billi. As a business, Billi carries a higher overhead base than the rest of the Group at c. 25% of revenue (Group: c. 15%). At an operating profit level and slightly ahead of our pre-acquisition expectations, Billi generated £9.0m adjusted operating profit for the Group at an adjusted operating margin of 21.8% (Group: 22.2%).
Excluding the impact of Billi, distribution costs in the organic business decreased by £1.0m largely due to a reduction in carriage costs associated with the decrease in sales in Consumer Goods. Whilst organic administration costs increased by c. 8.0% mainly due to higher staff costs reflecting salary increases and some limited headcount investment seen across the Group to support future growth.
Net finance costs
Net finance costs have increased significantly year on year to £10.2m (2022: £3.9m), due to an increase in the average gross debt to fund the Billi acquisition and a higher interest rate environment.
Profit before and after tax
Despite the significant increase in net finance costs, the Group’s adjusted profit before tax shows only a slight year on year decrease of £0.3m to £21.9m (2022: £22.2m). As the contribution to adjusted operating profit before tax from Billi has offset both finance cost increases and the small decrease in organic trading. Reported profit before tax was £17.7m (FY 2022: £16.1m).
Adjusted profit after tax was £20.1m (FY 2022: £23.0m), a decrease of £2.9m (12.7% decrease). The tax expense significantly increased in the current year mainly due to tax expense from Billi of £1.3m and Italy of £0.6m, as opposed to tax incentive credits granted in Italy and the release of tax provisions in 2022 totaling (£0.8m). Reported profit after tax was £16.2m (FY 2022: £16.9m).
Adjusting items
Adjusting items decreased by 36.4% to £3.9m (2022: £6.1m) due to no COVID-19 related costs and a reduction in restructuring and acquisition expenses (see note 6 in the financial statements for full details). Share based payments continue to be treated as an adjusting item and from 2023 we have also included amortisation charges (£1.3m) on intangible assets recognised on acquisition.
Cash flow
In line with previous years, the Group has maintained consistently high operating cash generation, with an operating cash conversion ratio of 106% in the year (2022: 94%).
This has been helped by strong working capital management, leading to further decreases in net working capital of £2.3m compared to cash outflows of £2.6m in the prior year. Reflecting our success in this area, working capital as a % of sales has reduced significantly to 16.7% (2022: 25.3%).
Cash outflows from investing activities significantly decreased in the current year to £14.3m (2022: £47.8m) and include the final earn-out payments in relation to the LAICA acquisition of £7.5m and a lower broadly maintenance level of capital expenditure (including product led capital development) of £8.0m. In 2022, cash outflows were higher as a result of the acquisition of Billi.
Excluding dividends, cash outflows from financing activities significantly increased in the year to £24.4m, largely reflecting higher interest costs and substantial repayments in line with the acquisition term loan of £3.5m per quarter. Quarterly payments of this loan will continue until the facility ends in October 2025.
Net debt and capital allocation
The Group’s net debt position (excluding accrued interest, ROU lease liabilities and net of loan arrangement fees, as defined in our banking facility agreement), decreased to £83.7m (FY 2022: £87.4m). As discussed above, this decrease is mainly attributable to strong operating cash generation and working capital management delivering cash inflows of £38.9m. Partially offset by maintenance level capital investments, the final earn-out payment in relation to LAICA and higher finance costs.
Total committed debt facilities at 31 December 2023 amounted to £103.7m (2022: £117.8m) and the Group held £20.1m in cash, providing accessible liquidity. Net debt equated to 2.19 times trailing twelve months’ adjusted EBITDA, in compliance with our debt covenant threshold of 2.25 times.
The Group have been proactively working with banking syndicate to enhance flexibility and security of funds within the existing agreement. As a result of that process and illustrating their ongoing confidence and support, a normalisation of the net debt leverage covenant to 2.75x for the duration of the remaining facility was agreed on 22 March 2024.
Given the increase in net debt due to the strategic acquisition of Billi, and with the high interest rates environment, the Group has reviewed its capital allocation framework to prioritise cash retention and net debt leverage reduction in the short term.
As a result of this process, a target of initially reducing net debt leverage to 1.5x has been put in place. After which, leverage appetite will remain at between 1.0x to 2.0x for the medium term.
Dividend
The Board remains focused on maximising cash generation to support debt reduction which will result in a temporary pause in the final and interim dividend payments in calendar year 2024, with a planned return to a sustainable dividend pay-out ratio of 30% of adjusted PAT in 2025.
The total dividend declared for 2023 is therefore 0.9p per share (2022: 6.00p per share), representing the interim dividend paid to shareholders in December 2023.
