Strix Group Plc A solid year of trading during 2018

Strix Group Plc (LON: KETL), the global leader in the design, manufacture and supply of kettle safety controls and other complementary water temperature management components, has today announced its audited results for the year ended 31 December 2018.

2018 in summary

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.        Revenue – constant currency basis, which is defined as 2018 revenue restated at the exchange rates prevailing in 2017, 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.        Figures are calculated from the full numbers as presented in the consolidated financial statements.

Financial highlights

· Solid performance during 2018 including a 7.9% growth in sales volumes and 2.7% in net sales, rising to 4.5% on a constant currency basis, in line with expectations.

· Careful cost management has allowed us to report a gross profit margin of 41.5% (2017: 40.7%).

· Net debt reduced to £27.5m, a 40.1% reduction since December 2017 (£45.9m).

· OCF / EBITDA cash conversion ratio of 89.4% (2017: 88.0%).

· Proposed final dividend of 4.7p, with total dividends of 7.0p for the full year.

Operational highlights

· 2.7m U9 series products sold to date following the successful launch in 2017.

· A further eight successful Intellectual Property protection initiatives undertaken, the highest number of cases concluded in any one year.

· Further growth in Aqua Optima has led to a volume share of c.25% of the UK market for own-brand and trade-brand combined.

· Continued focus on manufacturing and production quality led to an 11% improvement in ppm.

Strategic highlights

· Maintained market share of c.38% of the global kettle controls market despite geo-political events.

· Appointment of a Chief Commercial Officer from 1 April 2019 and further strengthening of the R&D and senior management teams.

· After the period end, completed acquisition of specified assets from HaloSource Corporation for consideration of US$1.33m in March 2019 to expand the water filtration division.

· Investment agreement signed with the local government for the relocation of our manufacturing operation in China to support future growth.

Mark Bartlett, CEO of Strix Group Plc, commented:

“We are pleased to report a solid year of trading for Strix in 2018. We continued to make encouraging progress with our strategic priorities which enabled us to maintain our global market share of around 38% amidst a challenging geo-political climate.

Aqua Optima has continued to show strong growth and we secured a market share within the UK of 25%. We also launched the Aqua Optima Water Filter Recycling Initiative, which allows consumers of Aqua Optima filtration systems to recycle their products from home or at hundreds of TerraCycle collecting locations across the UK.

We saw positive progress on the U9 series of controls and since its launch in 2017 we have sold nearly 3 million units. With this in mind, we have entered 2019 with the most diversified product portfolio Strix has had to date, providing access to all global markets.

Intellectual property protection remains a key focus of the business to ensure defence of our technology and products in order to maintain the value of our brand. In 2018, we concluded the highest number of cases in any one year and we continue to monitor the market for copyists and ensure that consumers, our customers and our brand are protected.

We have continued to focus on manufacturing and production quality which has led to an 11% improvement in ppm, and we are continuing to invest in automation to further improve production efficiency and quality.

The Board are delighted to announce a proposed final dividend of 4.7p, equating to a total dividend of 7.0p per share for 2018. We look forward to the year ahead and remain confident about our full year outlook for 2019.”

Chairman’s statement

Introduction

It is my pleasure to report another year of solid performance, particularly in light of challenging global market conditions. The Group has continued to innovate, as well as continuing to develop and manufacture safe, reliable and high quality products for which it is renowned across the world.

The Group has delivered another year of growth and profitability as a result of its global presence and stable business model, despite the effects of Brexit, US/China trade tensions and other geo-political factors. In addition, net debt since IPO has decreased to £27.5m (2017: £45.9m) due to strong cash generation. We also took business and Intellectual Property actions in 2018 to maintain our position as the global leader in our core markets, whilst positioning Strix for continued growth into the future.

In September 2018, we sadly experienced the death of Edwin (Eddie) Davies CBE, who joined Strix in 1984 and later became the majority owner and Chairman of Strix. Much of what the Group has achieved today was built upon the contributions made by Eddie during his time at Strix and many of our colleagues have fond memories of working with Eddie during his time here.

Market performance

The Group has once again demonstrated growth in our key metrics despite a very turbulent year in the global economic market. Although the impact of currency rates caused by Brexit and other global challenges has softened our reported growth in net sales, underlying volume growth has been consistent with our expectations.

Our share of the global kettle safety control market has been maintained at c.38%. This is the effect of growth in the Less Regulated market and no change in the regulated market, offset by a slight softening of share in China.

Financial performance

Revenue for the year reached £93.8m, a 2.7% growth on 2017 (4.5% growth on a constant currency basis) and I am pleased to report a growth in reported gross profit to £38.9m (2017: £37.2m). Our gross profit margin increased 0.8% to 41.5%, as a result of the continued focus on efficiency, process improvement, and cost management. Adjusted EBITDA was £36.4m, an increase of 3.5% on 2017. Cash generation remains strong, with £35.0m net cash generated from operating activities, compared with £33.8m in 2017.

Dividend policy

The Board is proposing a final dividend of 4.7p per share following the 2.3p interim dividend paid in October 2018. This will bring the full year dividend to 7.0p, as projected at the time of admission to trading on AIM. The final dividend will be paid on 3 June 2019 to shareholders on the register at 10 May 2019 and the shares will trade ex-dividend from 9 May 2019. 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.

Annual General Meeting

The Group will host its Annual General Meeting on 23 May 2019 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

The Group has made further progress on its strategic plans during the year, whilst maintaining its market leading share of c.38% of the global kettle controls market. Sales volumes increased by 7.9% which demonstrates the continued demand for our products across the world.

Positive financial performance

The Group has delivered another year of revenue growth and a reduction in net debt ahead of market expectations. The Group’s cash flow performance remains strong, with increasing cash generated from operating activities of 3.4% which both supports our dividend policy and provides us with the financial resources to undertake strategic projects to drive future growth and profitability.

Our financial performance remains positive with revenue increasing by 2.7% (4.5% on a constant currency basis) and reported gross profit by 4.7%, which delivered an improved gross profit margin of 41.5% (2017: 40.7%). Adjusted EBITDA increased by 3.5% and adjusted profit before tax by 3.2%.

Reported metrics (including exceptional costs) were lower primarily due to the share-based payment charges of £4.9m incurred for a full year compared to 2017 where the charges were £2.0m as they were pro-rated from the date of IPO.

Global market share maintained

The Group continues to hold a strong global market share of c.38% with all segments showing a relatively stable position. It is estimated that the global market grew c.7% to c.196m appliances with global penetration of c.37% allowing for continued growth. The overall Regulated market volume growth was estimated at c.4% to c.53m appliances. The key driver behind Regulated market growth was North America, which posted growth in excess of 10%, and the UK market which experienced a strong Q4 performance in preparation for disruption expected due to Brexit. Strix maintained its market share at c.61% in the Regulated market.

In the Less Regulated market, growth in 2018 is estimated to have been c.10% to c.97m appliances compared to a CAGR of only 7% since 2014. The key geographies where growth was experienced were South East Asia and Africa, which both experienced growth in excess of 15%. Strix’s share increased to c.20% during 2018, and in 2019 Strix will launch a new lower cost control to further increase market penetration.

In China, following the c.6% decline experienced in 2017 this market is estimated to have recovered in 2018 and grown by c.5% to 46m appliances. The Chinese domestic market continues to see an increase in higher priced electronic multi-cooker appliances to which Strix has responded by initiating a number of successful IP actions. In 2018, Strix’s share reduced slightly as a result of reduced share at one of China’s leading brands. Sales initiatives have been undertaken in H2 2018 including a new lower cost range which has seen specifications regained. As a result of these initiatives, Strix sales in the China market are expected to recover in 2019.

HaloSource acquisition

The acquisition of the Astrea product from HaloSource in March 2019 will provide us with access to world-class R&D knowledge and skills within the water filtration sector. This advanced technology is the result of several years of dedicated R&D work and we are excited by the prospect of delivering this technology to market to deliver safe drinking water to consumers across the globe. We have also acquired office space in Seattle which will support our growth aspirations in the USA which, together with China, is a key market for this technology.

The acquisition of certain assets of HaloSource’s HaloPure division will also complement our existing Aqua Optima product range and assist us in expanding the distribution of water filtration products into China, which represents a large market to support further growth in the Aqua Optima brand outside of the UK. We believe that operational synergies will be achieved in China, particularly through effective utilisation of the new manufacturing facility which is scheduled to complete in the summer of 2021.

This is anticipated to result in a net profit and loss investment of approximately £2.0m for 2019, with the acquisition expected to be earnings enhancing in the financial year to 31 December 2021. Further guidance will be provided after a suitable period of ownership by the Group.

Aqua Optima

Aqua Optima continued its progress from the strong H1 results delivered to the market in September. For the full year, revenues grew from £7.4m to £9.3m, an increase of 25.9% on 2017 driven by 30.6% volume growth. Aqua Optima’s overall UK market share (including trade-brand products) is now c.25%, which is in line with management expectations. Further product launches are due to occur in 2019, particularly in China, which together with the complementary technology acquired in the HaloSource and Astrea acquisition will position Aqua Optima to take advantage of future growth both in the UK and in new markets.

New manufacturing facility in China

The senior management team has undertaken a project for the relocation of our manufacturing facility in China. As a consequence of this strategic review, in February 2019 we signed a contract to purchase a plot of land in the Zengcheng District of Guangzhou, China, close to our existing facility. We believe this new facility will provide the platform for us to deliver our strategy and allow us to provide profitable, sustainable growth and value to our shareholders in a cost effective way, funded from the Group’s existing borrowing facilities and free cash.

The acquisition of the plot of land is underway and is expected to take a further 2 to 3 months before this process can be completed in order to comply with local regulations. The design of the facility is being developed by our appointed design institute, with the design due to be finalised in summer 2019. Construction is expected to start at the end of 2019 and to be completed by January 2021, with the move to the new facility in summer 2021. The plot can support a maximum facility size of 34,000 m² compared to our current facility of 13,200 m².

Having completed the strategic review, the Board has concluded that the optimal strategic and financial outcome is to purchase both the land and the factory, rather than renting. As a result, based on the current design proposal and material prices, the total cash outflow for the relocation is expected to be c.£20m.

Product development

Having launched the successful U9 series of controls in 2017, our focus in the current year has been on products that will support our market share aspirations, which are to achieve market share in the Less Regulated markets of greater than 35%, maintain our Regulated market share in excess of 60% and re-build our China market share to greater than 50%.

To achieve this we have developed a new low-cost control under our sub-brand VnQ to support our market share growth in the Less Regulated market, which we estimate at c.97m appliances per year. A new electronic kettle control has also been developed to grow our share in multi-cookers in the China market. In addition, we have also developed the Aqua Optima Chiller which is primarily aimed at Regulated markets.

To support our growth aspirations we are working on a number of products within the emerging ‘Hot water on demand’ category. This includes opportunities in coffee machines as well as innovative themes on water dispensing and kettle appliances utilising our Duality and Instant Flow technologies.

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.

Automation and product efficiency

Lean and continuous improvement initiatives have continued to be a key focus for Strix and as a result we have secured a further 11% reduction to our quality ppm (parts per million) rate, achieving another record low level for the Group. During 2018, 508 million parts were manufactured at our factory in Ramsey by a team of only 37 people. The ISO certifications for our Isle of Man sites were also renewed recently based on the work performed in 2018, where we achieved the highest possible ranking of ‘Benchmark’.

We have continued to invest in production automation with further automated lines being specified and installed during 2018, with investment planned for 2019 to automate an additional 3 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 relocation of our manufacturing facilities in China will assist us in maximising the economic benefit of our investment in automation.

Defence of intellectual property

We remain focused on promoting safety awareness and undertaking associated actions to protect the markets in which we operate from unsafe and poor quality products. Actions have been undertaken in 2018 including product recalls, IP enforcement raids, unfair competition claims, patent infringement claims and copyright claims in countries including China, the Netherlands, the United Kingdom, Germany and France. This has resulted in the cessation of sale of these products, agreements to fit Strix controls and connectors in the future, and a number of undisclosed sums being paid to Strix as part of the agreed settlements. We expect to continue this activity in 2019 as we continue to defend our intellectual property rights.

Senior management team

We have also appointed a Chief Commercial Officer who will start at Strix on 1 April 2019. This appointment will further strengthen the senior management team and this addition will bring significant experience of commercialising and marketing new products as we embark on this next phase of growth, particularly with our water filtration and temperature management products.

Trading and Outlook

The Board continues to work with the executive and management teams to deliver on our strategy to create value for our shareholders. The Group’s performance in 2018, in spite of turbulent economic events, demonstrates the strength of the core business model which underpins Strix.

In 2019 we will continue to focus on our strategic objectives. A number of key strategic projects are being undertaken in 2019, including the relocation of our manufacturing facilities in China and the recent acquisition of HaloSource’s HaloPure division and its Astrea product. We believe that these key strategic projects will position us for longer-term growth and will be funded from existing resources. The HaloSource acquisition which was completed on 7 March 2019 will provide us with key technology and research and development skills in the water filtration market. We will use this to support growth in Aqua Optima and this also provides us with an important foothold in the key USA market, where we see significant potential for future growth both in kettle safety controls and water filtration.

The supply of key commodities have been secured into 2019 through the continuation of our forward-buying policies or by negotiation of fixed price contracts. This reduces our exposure to commodity price fluctuations and provides us with certainty on the price of key commodities.

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. Whilst there are a number of headwinds which could make 2019 challenging including continued US/China trade tensions and the impact of Brexit, the Board believe they have taken appropriate preparatory steps to mitigate the risk presented by these challenges and as such, we remain confident about the Group’s future outlook.

We will continue to maintain our market-leading share of kettle safety controls, and to grow our revenue streams in Aqua Optima and Other Technologies to diversify 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. As a consequence, we remain confident about our full year outlook for 2019.

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