Strix Group (LON:KETL) has provided its interim results for the six months ended 30 June 2023.
Financial Summary1
| H1 2023 | H1 2022 | Change (23 – 22) | |
| £m | £m | %4 | |
| Revenue | 65.2 | 50.7 | +28.6% |
| Gross profit | 23.9 | 19.5 | +22.6% |
| EBITDA2 | 15.6 | 15.9 | -1.9% |
| Operating profit | 11.8 | 12.9 | -8.5% |
| Profit before tax | 6.8 | 11.6 | -41.4% |
| Profit after tax | 5.7 | 11.6 | -50.9% |
| Net debt3 | 93.1 | 61.3 | +51.9% |
| Net cash generated from operating activities | 13.1 | 9.9 | +32.3% |
| Basic earnings per share (pence) | 2.6 | 5.6 | -53.6% |
| Diluted earnings per share (pence) | 2.6 | 5.5 | -52.7% |
| Interim dividend per share (pence) | 0.9 | 2.75 | -67.3% |
1. Adjusted results exclude adjusting items, which include share-based payment transactions, COVID-19 related costs, and 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. Net debt excludes the impact of IFRS 16 lease liabilities, pension liabilities, deferred tax liabilities and earn-out provisions on satisfaction of performance conditions and providing post-combination services.
4. Figures are calculated from the full numbers as presented in the consolidated financial statements.
Financial Highlights
| • • | The Group reported revenue of £65.2m, an increase of 28.6% versus the same period in prior year mainly as a result of the first time inclusion of Billi revenues of £21.5m which helped to fully offset a reduction in organic sales, particularly in kettle controls.Adjusted EBITDA was £15.6m, a decrease of 1.9% versus the same period in prior year. |
| • | Adjusted PAT was £5.7m, a decrease of 50.9% versus the same period in prior year (£11.9m) mainly attributable to interest and finance fee costs due to an increase in the net debt to fund the Billi acquisition and a higher interest rates environment. |
| • | Net debt increased to £93.1m (FY 2022: £87.4m) due to the strategic acquisition of Billi. This represents a net debt/adjusted EBITDA ratio (calculated on a trailing twelve-month basis) of 2.66x. |
| • • | Basic earnings per share and adjusted diluted earnings per share were 2.6p (2022: 5.6p) and 2.6p (2021: 5.5p) respectively. Given the increase in net debt due to the strategic acquisition of Billi, and with the high interest rates environment, the Board continues to take precautions to balance the capital allocation priorities and as a result the Board is declaring an interim dividend of 0.9p per share (HY 2022: 2.75p). |
Strategic Highlights
| • • | Transformational acquisition of Billi which has a successful history of growth, with double digit revenue CAGR over the past five years and is highly cash generative, delivering historic cash conversion of c.88%.Group Strategic Business Objectives (“SBO’s”) to be delivered by the end of FY 2026.New divisional reporting structure to better position the Group in delivering on its New SBO’s:· Group revenue from £107m to £206m and Group gross profit from £42m to £80m by end of 2026.· Kettle controls – profitably grow Control revenue from £68m to £88m by 2026, delivering a gross profit in excess of 40% through the introduction of innovative new products focused on sustainability, safety and convenience.· Billi – leverage the new product development and expand the geographical distribution in both residential and commercial markets to deliver £58m of revenue with a gross profit in excess of 45% by 2026.· Consumer Goods – Grow consumer goods business beyond market growth through innovation, world class sourcing and commercial excellence, delivering revenue of £60m and gross profit in excess of 30%. |
Operational Highlights
| • • • • • • • | Acquisition of Billi continues to be successfully integrated in line with plan to achieve the identified operational benefits, as the business opens up new sales channels for Strix.Direct labour efficiency improved by 3.5% in H1 2023 against H1 2022 and indirect labour efficiency improved by 11% via various lean approaches.Quality performance of customer returns improved by 19% and product built on the automation lines remained at zero return.Surveillance audits to ISO 9001:2015, ISO 14001:2015, & ISO 45001:2018 have been passed with outstanding rating for all the areas.Added a new line in the Vicenza, Italy facility to deliver an anti-bacterial filter, replacing a third party sourced product and completing 100% in-sourcing of all water filter products in the range.Pipeline of new product launches through 2023 including an integrated tap in Billi, the digital water filter kettle and Aurora coffee appliance.Perfect Pour jug has been awarded the Highly Commended accolade in the Sustainability category by Housewares Magazine. |
Mark Bartlett, Chief Executive Officer of Strix Group plc, said:
“The continued macro headwinds have resulted in a reduction in demand in kettle controls in the key export regulated markets of UK and Germany during H1 and a slower than anticipated recovery. Whilst recent order rates are tracking in a positive direction, we now anticipate the path to a return of normalised growth to take longer and for there to be a decrease in the short term revenues within this category. The Group’s second half of the year is always stronger than the first and weighted to Q4 driven by the replenishment of stock and normal seasonal uplift, the performance required in Q4 to achieve the full year outcome is lower than in 2022 and 2021.
“Given the increase in net debt due to the strategic acquisition of Billi, and with the high interest rates environment, the Board continues to take precautions to balance the capital allocation priorities. To be prudent, the Board has decided to prioritise the reduction of debt with a clear plan to net debt / EBITDA to below 1.5x over the medium term.
“Despite the short term headwinds, Strix is also announcing Strategic Business Objectives which will deliver group revenue of £206m and gross profit of £80m by the end of FY 2026 reflecting the attractiveness of the underlying markets that it operates within.”
CEO’s report:
Financial performance
The Group reported revenue of £65.2m, an increase of 28.6% versus the same period in prior year mainly as a result of the first time inclusion of Billi revenues which helped to fully offset a reduction in organic sales, particularly with the kettle controls category.
Adjusted gross profit increased by 22.6% to £23.9m (H1 2022: £19.5m), in line with increased revenues as described above. This increase is mainly attributable to the Billi inclusion of £10.0m, and also slightly from the water category, however partially offset by a decrease in adjusted gross profits for kettle controls of £4.3m (28.6% decrease) and marginally by appliances category.
Adjusted gross profit margin in H1 2023 was 36.7% (H1 2022: 38.4%), showing a margin dilution of 1.7% compared to same period last year. This dilution is mainly due to the under-absorption of fixed manufacturing overhead costs as production volume has reduced to align to the softening of sales volume. Costs optimisation evaluation and measures are in place to ensure skilled labour is maintained for medium term recovery, while streamlining non-critical spending to adopt a balanced approach to manage this softening in the H1 period. This decline was partially offset by the addition of Billi which made a positive contribution to margins, decreases in commodity prices, and a positive impact from the LAICA sub-group consumer goods.
Adjusted profit before tax was £6.8m (H1 2022: £11.6m), a decrease of £4.8m (41.4% decrease) compared to the same period last year. This is attributable mainly to interest and finance fee costs which had an adverse variance in the current H1 period of £3.7m compared to the same period last year due to an increase in the net debt to fund the Billi acquisition and a higher interest rates environment.
Adjusted profit after tax was £5.7m (H1 2022: £11.6m), a £5.9m adverse variance compared to the same period last year. Tax expense for the current period was £1.1m, primarily relating to the tax liability from Billi of £0.8m recognised in the Group being the first year of acquisition. The balance of £0.3m relates to tax expense in the organic business.
As anticipated, the Group’s net debt increased to £93.1m (FY 2022: £87.4m). This represents a net debt/adjusted EBITDA ratio (calculated on a trailing twelve-month basis) of 2.66x which complies with the Company’s debt covenant threshold of 2.75 times.
Given the increase in net debt due to the strategic acquisition of Billi, and with the high interest rates environment, the Board continues to take precautions to balance the capital allocation priorities. To be prudent, the Board has decided to prioritise the reduction of debt for the rest of the current year with a clear plan to reduce net debt / EBITDA to below 1.5x over the medium term. The Board is therefore declaring an interim dividend in FY 2023 of 0.9p per share (HY 2022: 2.75p).
New divisional reporting structure
To better position the Group in delivering on its new Strategic Business Objectives, Strix has established a new divisional reporting structure to capitalise on attractive growth opportunities in its end markets during this next phase of growth.
Three divisions have been identified from a product perspective, namely: kettle controls, premium filtration systems (primarily Billi products), and consumer goods (made up of water products and appliances).
Kettle control category
The kettle controls revenue decreased by 17.2% to £28.9m (H1 2022: £34.8m).
In line with international government sanctions, Strix’s key global brands remain exited from Russia (a significant market) and Strix also stopped trading directly with Russian brands. It is worth noting that excluding the affected regions, Strix’s market share in Kettle Controls remained at c. 56%.
The kettle market has experienced continued macro headwinds which have resulted in a reduction in demand in the key export regulated markets of UK and Germany during H1 and a slower than anticipated recovery.
Whilst recent order rates are tracking in a positive direction, evident from an increase in sales in Q2, this remains in smaller quantities than expected as customers continue to manage their cash balances prudently in key regulated export markets. Strix now anticipates the path to a return of normalised growth to take longer and for there to be a decrease in the short term revenues within this category.
Strix has also continued to focus product development on opportunities and design improvements in a sustainable way to reduce the overall manufactured product footprint that will further strengthen Strix’s position and support its market share aspirations.
Overview of strategic rationale of the acquisition of Billi
Billi has a successful history of growth, with double digit revenue CAGR over the past five years and is highly cash generative, delivering cash conversion of c.88%.
The acquisition materially changes the earnings profile of the Group. It adds well developed and premium products in the high growth and strategically important hot tap market and increases Strix’s position and portfolio of water dispenser systems. The Board expects Strix’s existing technology, resource and expertise can be used to further enhance Billi’s new product development roadmap.
Efficiencies were identified across Billi’s product lifecycle and will be enhanced utilising Strix’s Chinese operation to improve procurement, insourcing of certain key parts, and consolidation of the marketing group.
There are also opportunities for further organic growth. These include residential sales, new product development particularly in sparkling, internationalising Billi’s revenue stream through Strix’s global footprint, cross selling Strix products into commercial applications and growing aftermarket sales.
Progress since completion of Billi
The acquisition of Billi continues to be successfully integrated in line with plan to achieve the identified operational benefits, as the business opened up new sales channels for Strix.
New flagship OmniOne product (offering boiling, chilled and sparkling water for commercial and residential applications) was successfully launched in Q2. This will be a major opportunity for all markets and an order has already been secured and fulfilled from one of Australia’s largest listed companies.
Strong progress has been made at Billi UK to exit the Transitional Services Agreement (“TSA”) on time on 31 August 2023. Australian TSA with Culligan exited on time and without incident on 31 May 2023. Good progress has also been made with new sites identified as Strix procures smaller storage locations in New South Wales, Western Australia and South Australia and the New Showroom in London (Farringdon) has been opened. The head office in Wolverhampton has already been established and Strix continues to integrate Strix and Billi employees during Q4.
Distributors in Singapore, Hong Kong and China have been re-signed and new distributors in the UAE and Qatar have been secured.
Consumer goods division
Overall, the consumer goods division reported a decline in revenue of 6.3% to £14.9m in H1 2023 (H1 2022: £15.9m), driven primarily by softening of the appliances category market, however partially offset by improved water category revenues.
Despite a decline in appliance sales, Strix’s Aqua Optima brand showed resilience as the Group continues to explore opportunities through geographical expansion, with continued expansion across Europe and North America, Strix/LAICA cross selling, and new innovative product launches.
Other notable achievements included:-
| · Aqua Optima Aurora Hot and Cold Water Dispenser has been granted the Highly Commended award in the Best Smart Innovation – Small Domestic Appliances category at the prestigious Innovative Electrical Retailing (IER) Awards. |
| · Perfect Pour jug has been awarded the Highly Commended accolade in the Sustainability category by Housewares Magazine. This prestigious recognition is a testament to our dedication to promoting sustainable living and reducing single-use plastic waste. |
| · Successful launch of Strix innovations under the LAICA brand with the launch of the Dual Flo range. This newly launched product utilises superior, energy efficient technology and is believed to be the only combined kettle and one cup hot water dispenser.· On boarded three new online market place launches as the Group continues to expand its online presence which has seen the number of marketplace shipments across the Group double in H1 2023.· LAICA Water Filter Variable Temperature Kettle and Ultrasonic Humidifier all successfully launched. |
Overall, the water category reported a growth in revenue of 2.3% to £10.5m in H1 2023 (H1 2022: £10.3m).
Both Aqua Optima & LAICA water brands have seen growth year on year due to initial geographical expansion via Amazon sales outperforming the private label business.
Strix now manufactures the majority of its filters in house in two locations freeing the Group from 3rd party risk, whilst allowing a new level of flexibility to offer our customers.
Key growth initiatives for the category will be geographic expansion (cross selling existing LAICA & Aqua Optima products into new territories), coffee filtration expertise and using private label water supply as a way to open doors into large retailers for other categories.
Strategic Business Objectives (SBOs)
Alongside the interim results, Strix is announcing Strategic Business Objectives (“SBO’s”) to be delivered by the end of FY 2026.
In summary:-
· Group revenue from £107m to £206m and Group gross profit from £42m to £80m by end of FY 2026.
· Kettle controls – profitably grow Control revenue from £68m to £88m by 2026, delivering a gross profit in excess of 40% through the introduction of innovative new products focused on sustainability, safety and convenience.
· Billi – leverage the new product development and expand the geographical distribution in both residential and commercial markets to deliver £58m of revenue with a gross profit in excess of 45% by 2026.
· Consumer Goods – grow consumer goods business beyond market growth through innovation, world class sourcing and commercial excellence, delivering revenue of £60m and gross profit in excess of 30%.
· Geographical Expansion – Become a true global presence with a market leading position in our chosen fields of SDA, Water Filtration and multi-functional hot tap solutions – EMEA, APAC, NAM & LATAM.
· Talent and Skills – Right People, Right place, Right Skills, motivated and engaged to deliver strategic objectives.
· Technology – Develop the leading, innovative technology in the fields of water heating, safety control systems and water treatment of drinking water to support the business growth.
The Strix management will host a capital markets day after the interim results analyst presentation to provide more context.
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 remains committed to consumer safety and continues to prompt regulatory enforcement authorities to remove unsafe and poor quality products from its major markets. Nine such actions were undertaken in 2021 resulting in product recalls and withdrawal of kettles from Bulgaria. Defence of intellectual property and regulatory enforcement remain core activities of its business and there have now been 66 in total since 2017 until the end of 2021, with 4 further regulatory and 3 intellectual property actions conducted in 2022.
Sustainability
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.
One of the most challenging and differentiating goals was to achieve Scope 1&2 net zero by 2023. Key elements have been put in place with long term renewable power contracts for all key facilities and head office along with investment in solar capacity. Indeed, Strix now expects its own renewable sources to generate around 10% of the Group’s total energy requirements. As a consequence, the Group started 2023 in-line with its net zero agenda. This is increasingly important as its customers look to assess their own emissions footprint, of which Strix forms part of their Scope 3 inventory. Strix’s position as a leader in low emissions therefore offers a potential commercial advantage over its competition. Efforts are being expanded into analysing its own Scope 3 inventory in 2023 to fully embrace its extended emissions chain. This leads to additional constructive conversation with suppliers and customers including re-assessment of operational and supply chain practices. The Group’s sustainability agenda is sympathetic to changing consumer trends and hence is key for driving the roadmap and pace of new product development.
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 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 & 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 reflected in improved facilities offered by the new Chinese facility, whilst the West has seen changes in the working week, which has also increased holiday entitlement, and the introduction of two charity days a year.
Strix’s sustainability agenda for 2023 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.
Dividend policy
Given the increase in net debt due to the strategic acquisition of Billi, and with the high interest rates environment, the Board continues to take precautions to balance the capital allocation priorities. To be prudent, the Board has decided to prioritise the reduction of debt for the rest of the current year.
Therefore, the Board is declaring an interim dividend in FY 2023 of 0.9p per share (HY 2022: 2.75p).
The interim dividend will be paid on 29 December 2023 to shareholders on the register on 17 November 2023 and the shares will trade ex-dividend from 16 November 2023.
Going forward the Group will implement a payout ratio of 30% of adjusted profit after tax which will enable sustainable returns to be delivered to our shareholders. Over the medium term, Strix has a clear plan to reduce net debt / EBITDA to below 1.5x and will then have the ability to return excess capital to shareholders subject to their future requirements and the prevailing macro environment.
Financial Position
Strix is focused on its highly cash generative operating model and the management team will prioritise integration and unlocking anticipated revenue and cost synergies following the acquisition of Billi.
Over the past few years, Strix has made significant investments in acquisitions, a new factory and working capital. A primary driver of the increased adjusting items (formerly exceptional items) is due to the number of acquisitions and one-off costs relating to capital expenditures.
There will be no further M&A activity or investment into new factory builds, with significantly reduced capex and working capital over the medium term. Capital allocation decisions will prioritise debt reduction and free cash flow generation with a clear plan to net debt / EBITDA to below 1.5x over the medium term.
Outlook
In light of the continued macro headwinds which have resulted in a reduction in demand in kettle controls in the key export regulated markets of UK and Germany during H1 and a slower than anticipated recovery, the Group now anticipates Q3 adjusted profit after tax of £6.5m and for the full year to be in excess of £21m.
Whilst recent order rates are tracking in a positive direction, evident from an increase in sales in Q2 this remains in smaller quantities than expected as customers continue to manage their cash balances prudently in key regulated export markets. Strix now anticipates the path to a return of normalised growth to take longer and for there to be a decrease in the short term revenues within this category.
The Group’s second half of the year is always stronger than the first and weighted to Q4 driven by the replenishment of stock and normal seasonal uplift, the performance required in Q4 to achieve the full year outcome is lower than in 2022 and 2021.
Despite the short term headwinds, Strix is also announcing Strategic Business Objectives which in summary will deliver group revenue of £206m and gross profit of £80m by the end of FY 2026 reflecting the attractiveness of the underlying markets that it operates within.
Alongside this, Strix continues to implement a range of strategic initiatives to minimise the impact of the headwinds it is facing, which includes an internal streamlining programme and a focus on the reduction of inventory in order to maximise cash generation for the Group.
Also, the successful integration of Billi will propel Strix into a new growth phase, further diversifying into these new areas whilst continuing to focus on the core Kettle Controls business with strong potential for greater top line growth and improved margins going forward.
Chief Financial Officer’s Review
| Adjusted results1 | Reported results | ||||||
| H1 2023 | H1 2022 | Change (23 – 22) | H1 2023 | H1 2022 | Change (23 – 22) | ||
| £m | £m | %4 | £m | £m | %4 | ||
| Revenue | 65.2 | 50.7 | +28.6% | 65.2 | 50.7 | +28.6% | |
| Gross profit | 23.9 | 19.5 | +22.6% | 23.9 | 19.0 | +25.8% | |
| EBITDA2 | 15.6 | 15.9 | -1.9% | 13.7 | 12.2 | +12.3% | |
| Operating profit | 11.8 | 12.9 | -8.5% | 9.9 | 9.1 | +8.8% | |
| Profit before tax | 6.8 | 11.6 | -41.4% | 4.9 | 7.9 | -38.0% | |
| Profit after tax | 5.7 | 11.6 | -50.9% | 3.8 | 7.8 | -51.3% | |
| Net debt3 | 93.1 | 61.3 | +51.9% | 93.1 | 61.3 | +51.9% | |
| Net cash generated from operating activities | 13.1 | 9.9 | +32.3% | 13.1 | 9.9 | +32.3% | |
| Basic earnings per share (pence) | 2.6 | 5.6 | -53.6% | 1.8 | 3.8 | -52.6% | |
| Diluted earnings per share (pence) | 2.6 | 5.5 | -52.7% | 1.7 | 3.7 | -54.1% | |
| Interim dividend per share (pence) | 0.9 | 2.75 | -67.3% | 0.9 | 2.75 | -67.3% | |
1. Adjusted results exclude adjusted items, which include share-based payment transactions, COVID-19 related costs, and 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. Net debt excludes the impact of IFRS 16 lease liabilities, pension liabilities, deferred tax liabilities and earn-out provisions on satisfaction of performance conditions and providing post-combination services.
4. Figures are calculated from the full numbers as presented in the consolidated financial statements.
Financial performance
Revenues in the first half increased by 28.6% to £65.2m (H1 2022: £50.7m), mainly as a result of the first time inclusion of Billi revenues of £21.5m, which helped to fully offset a reduction in organic sales, particularly of kettle controls.
The kettle controls revenue decreased by 17.2% to £28.9m (H1 2022: £34.8m), with the cost of living crisis and the Russia/Ukraine conflict being the key negative drivers in regulated markets. In line with international government sanctions, our key global brands remain exited from Russia (a significant market) and Strix also stopped trading directly with Russian brands. Despite the decrease in revenues however, recent incoming order rates are tracking in a positive direction, evident from a surge in sales in Q2.
The Group’s consumer goods division continues to show resilience particularly in the water category with noticeable growth in European and North American territories as a result of continued online market place launches.
Adjusted gross profit increased by 22.6% to £23.9m (H1 2022: £19.5m), mainly attributable to the Billi inclusion of £10.0m, but was partially offset by a decrease in adjusted gross profits for kettle controls of £4.3m (28.6% decrease) and slightly by appliances category. Reported gross profits increased by 25.8% to £23.9m (H1 2022: £19.0m).
Adjusted gross profit margin in H1 2023 was 36.7% (H1 2022: 38.4%), showing a margin dilution of 1.7% compared to same period last year. This dilution is mainly due to under absorption of fixed manufacturing costs on a per unit of volume basis, as a result of a lower kettle controls production volume. Costs optimisation evaluation and measures are in place to ensure skilled labour are maintained for medium term recovery, while streamlining non-critical spending to adopt a balanced approach to manage this softened in the current H1 period. This decline was partially offset by addition of Billi group which made a positive contribution to margins, decreases in commodity prices, and a positive impact from the LAICA sub-group consumer goods.
Adjusted EBITDA is defined as profit before depreciation, amortisation, finance costs, finance income, taxation, and adjusting items including share based payments. Adjusted EBITDA was £15.6m (H1 2022: £15.9m), showing a small decrease of 1.9% compared to the same period last year. The Billi acquisition provides significant income growth in H1 2023 (£21.5m net sales, £5.2m adjusted EBITDA), however the underlying Strix organic business shows significant decrease to H1 2023 (£6.9m net sales decrease, £5.5m adjusted EBITDA decrease), with kettle controls revenues being the main driver, showing a £6.0m decrease vs H1 2022.
Adjusted EBITDA margin in H1 2023 was 23.9% (H1 2022: 31.4%), representing a margin dilution of 7.4%, which is largely due to lower kettle controls volume. Billi had a positive impact of £5.2m adjusted EBITDA with a strong margin of 24.0% which is in line with IM targets. Distribution and administration costs in the organic business decreased marginally by £0.1m (circa 2.0%). These overheads are discussed in detail in the Costs section below.
Adjusted operating profits decreased by 8.5% to £11.8m (H1 2022: £12.9m), a decrease of £1.1m. Depreciation and amortisation costs are deducted from adjusted EBITDA to arrive at the adjusted operating profits. These have remained relatively constant for the organic business compared the same period last year. The decrease in adjusted operating profits was mainly due to Billi contributing £0.5m of depreciation and amortisation costs in the current period. The remainder of the decrease in adjusted EBITDA is mainly due to lower sales volumes in the organic business and reduction in adjusted gross profits as explained above.
Adjusted profit before tax was £6.8m (H1 2022: £11.6m), a decrease of £4.8m (41.4% decrease) compared to the same period last year. This is attributable mainly to interest and finance fee costs which had an adverse variance in the current H1 period of £3.7m compared to the same period last year due to an increase in the net debt to fund the Billi acquisition and a higher interest rates environment.
Adjusted profit after tax was £5.7m (H1 2022: £11.6m), a £5.9m adverse variance compared to the same period last year. Tax expense for the current period was £1.1m, primarily relating to the tax liability from Billi of £0.8m recognised in the Group being first year of acquisition. The balance £0.3m relates to tax expense in the organic business.
Costs
Costs in H1 2023 increased across the board compared to the prior year, mainly due to the inclusion of Billi in the current year, however decreased marginally in the organic business.
Cost of sales (excluding adjusting items) increased by 32.4% to £41.3m (H1 2022: £31.2m), with Billi contributing £11.5m of cost of sales. Excluding Billi’s impact the total cost of sales for the Group stands at £29.8m in H1 2023 vs £31.2m in H1 2022, falling by £1.4m (4.5% decline).
This fall on total cost of sales in the organic business was primarily driven by total material cost of sales going down from £20.2m in H1 2022 to £17.7m in H1 2023, down by 12.4%, largely in line with lower sales vs a comparative H1 2022 period in the organic business. The Group continues to take measures to reduce costs, increase efficiencies, while balancing the cost impact due to the short term decline in sales volume to ensure our operation capabilities is well prepared for a rebound.
Sales and Distributions costs increased by 11.3% to £5.0m (H1 2022: £4.5m) mainly due to the inclusion of Billi costs in the current year of £0.6m. The Group’s organic (excluding Billi) outward carriage and freight outward costs were lower by 9% or £0.1m (£1.1m in H1 2023 vs £1.2m H1 2022) in line with decrease in sales. This decrease in carriage and freight outward costs was offset by an increase in advertising and promotion costs of 9.1% or £0.1m (£1.2m in H1 2023 vs £1.1m in H1 2022). Advertising and promotion costs are spent mainly on consumer goods products, comprising of water and appliances products. Increase in advertising and promotion can be attributable to an increase in water product sales.
Administration costs (excluding adjusting items) increased by £4.6m or 173.7% to £7.3m (H1 2022: £2.7m), predominantly due to the inclusion of Billi’s admin costs of £4.5m. Excluding the impact of Billi, administration costs fell by 1.0% as part of the Group’s restructuring programme.
Adjusted items included Exceptional costs and Acquisitions purchase price allocation amortization costs from LAICA and Billi (both are non-cash and are pure accounting valuations). This will allow like-to-like comparisons of the Group’s normalised results. Exceptional costs incurred in H1 has reduced by 50% to £1.9m (H1 2022: £3.8m). They were largely due to post Billi acquisition costs relating to legal and tax due diligence, with a small portion was due to restructuring.
Cash flow
Cash flows from operating activities showed a modest improvement of £3.2m (32.3% improvement) from the same period last year. This is mainly due to the improvement in the changes of net working capital (£4.3m improvement), however partially offset by increase in tax-related cash outflows.
Movements in net working capital showed a significant decrease in cash outflows compared to the prior year. Net working capital cash flows in the current period resulted in cash inflow of £0.1m (H1 2022: £4.2m cash outflow). Excluding the impact of Billi, net working capital cash inflows in the organic business significantly improved to £1.8m cash inflows compared to £4.2m cash outflows in the same period last year. Billi’s net working capital cash outflows of £1.7m in the current period hence offset the cash inflows from the organic business, as the Group invested more in its newest subsidiary to meet forecasted customer demand in H2.
Net working capital movements are broken down as follows:
Inventory: Overall cash flows relating to inventory significantly improved to £0.1m cash outflows vs £4.2m cash outflows in the same period last year. The organic business recognised no material change in cash flows as the Group optimised inventory levels to align to H2 sales forecasts, with Billi contributing a cash outflow of £0.2m as the Group slightly increased Billi’s stock levels at period-end to match our sales planning and forecasting in H2.
Debtors: The Group recognised cash outflows in current period from debtors of £0.8m (H1 2022: £2.7m cash outflows), with the organic business contributing £1.6m cash inflows compared to £2.7m outflows in the same period last year. Billi’s recognised £2.4m cash outflows as the Group invests further in expanding Billi’s customer base in its first year of operations post-acquisition.
Creditors: Cash flows improved significantly from creditors to £1.0m cash inflows in the currently period vs £2.7m cash outflows in the same period last year, with Billi contributing £0.9m cash inflows as their creditor books were aligned to the Group working capital improvement plans as mentioned above. The organic business’s creditor cash inflows of £0.2m in the current period compared well to £2.7m cash outflows from the same period last year, again in line with the Group’s working capital management reduction plans.
Tax-related cash outflows were at £1.3m mainly due to Billi tax payments made in Australia and New Zealand.
Cash outflows for investing activities increased in the current period (H1 2023: £12.9m) compared to the same period last year (H1 2022: £6.4m) mainly due to LAICA-related earn-out costs which were settled at the beginning of the current year, and an increase in capital expenditures due to the further investments in capitalised development costs. This was partially offset by cash inflows received from the vendor shareholders of Billi as consideration refunded as a result of net debt and working capital adjustments on opening balances at acquisition.
Cash outflows for financing activities increased by £3.4m compared to the same period prior year. It is largely due to finance costs paid significantly increased due to an increase in the net debt to fund the Billi acquisition in a higher interest rate environment.
Balance Sheet
Property, plant and equipment decreased to £46.3m (FY 2022: £47.4m), mainly due to depreciation charges of £2.6m (H1 2022: £2.0m). This was partially offset by net additions of £1.5m towards plant and machinery and production tooling for continued improvement of automation and production efficiencies, and an increase of fixtures, fittings, equipment (including computer hardware) to support Billi operations.
Intangible assets slightly increased to £74.0m (FY 2022: £73.4m) reflecting a net increase of £0.6m. Notable net additions to intangible assets were relating to capitalised development costs from new product development projects of circa £2.4m, and computer software and other intangible asset additions of circa £0.5m. The total amortisation charges were £1.2m (H1 2022: £1.1m), and foreign currency movements of £1.0m were recognised on translation of intangible assets denominated in foreign currencies.
Net working capital, which includes inventories, trade and other receivables, and trade and other payables (including tax liabilities, but excluding short-term portions of long-term liabilities), increased to £28.5m (FY 2022: £27.6m), an increase on £0.9m. This was mainly due to Billi’s net working capital increase of £1.6m as the Group invests further in expanding Billi’s working capital in its first year of operations post-acquisition. Excluding Billi, net working capital decreased by £0.7m as the Group continues to prudently manage working capital demands as discussed in the cash flow section above.
Non-current liabilities (including short-term portions) decreased to £130.6m (FY 2022: £141.6m), a decrease of £11.3m, which is mainly driven by reductions of LAICA-related earn-outs paid at the beginning of the current year, and repayments made in the current year towards the term loan of the Billi-acquisition-related revolving credit facility.
Net debt
The Group’s net debt position as at 30 June 2023 increased to £93.1m (FY 2022: £87.4m).
Total committed debt facilities at 30 June 2023 amounted to £115.5m (excluding loan arrangement fees which are included in borrowings), giving a liquidity pool of £21.4m. Net debt equated to 2.66 times trailing twelve months’ EBITDA as at 30 June 2023, which complies with our debt covenant threshold of 2.75 times.
Dividend
Given the increase in net debt due to the strategic acquisition of Billi, and with the high interest rates environment, the Board continues to take precautions to balance the capital allocation priorities. To be prudent, the Board has decided to prioritise the reduction of debt for the rest of the current year.
Therefore, the Board is declaring an interim dividend in FY 2023 of 0.9p per share (HY 2022: 2.75p).
