Strix Group Plc (LON:KETL) have today published preliminary results for the twelve months ended 31 December 2022.
Financial Summary1
| 2022 | 2021 | Change (22 – 21) | |
| £m | £m | %4 | |
| Revenue | 106.9 | 119.4 | -10.5% |
| Gross profit | 41.5 | 47.4 | -12.4% |
| EBITDA2 | 32.1 | 40.5 | -20.7% |
| Operating profit | 25.9 | 33.7 | -23.1% |
| Profit before tax | 22.2 | 32.2 | -31.1% |
| Profit after tax | 23.0 | 31.4 | -26.8% |
| Net debt3 | 87.4 | 51.2 | +70.7% |
| Net cash generated from operating activities | 23.4 | 22.3 | +4.9% |
| Basic earnings per share (pence) | 10.9 | 15.2 | -28.3% |
| Diluted earnings per share (pence) | 10.8 | 14.9 | -27.5% |
| Total dividend per share (pence) | 6.00 | 8.35 | -28.1% |
| 1. Adjusted results exclude exceptional items, which include share based payment transactions, COVID-19 related costs, other reorganisation and strategic project costs. Adjusted results are non-GAAP metrics used by management and are not an IFRS disclosure. |
| 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. |
| 4. Figures are calculated from the full numbers as presented in the consolidated financial statements. |
Financial Highlights
| · | The Group reported revenue of £106.9m, a decrease of 10.5% versus the same period in prior year driven predominantly by a reduction in Kettle Controls due to market environment. |
| · | Adjusted EBITDA was £32.1m, a decrease of 20.7% versus the same period in prior year driven by a reduction in revenue. |
| · | Adjusted PAT was £23.0m which was in line with previous guidance given at the trading update on 30 November 2022 (2021: £31.4m), representing a 26.8% decrease compared to the same period last year driven by a reduced EBITDA and an increase in SONIA through the year coupled with higher net debt post the acquisition of Billi. |
| · | Net debt increased to £87.4m (FY 2021: £51.2m).This represents a net debt/adjusted EBITDA ratio (calculated on a trailing twelve-month basis) of 2.2x. |
| · | Adjusted basic earnings per share and adjusted diluted earnings per share were 10.9p (2021: 15.2p) and 10.8p (2021: 14.9p) respectively. |
| · | As capital allocation decisions prioritise debt reduction, the Board is proposing a final dividend of 3.25p per share (2021: 5.60p) which would represent a total dividend of 6.00p per share (2021: 8.35p). |
Operational Highlights
| · | Acquisition of Billi continues to be successfully integrated in line with plan to achieve the identified operational benefits, and the business has opened up new sales channels for Strix. Trading performance so far has been in line with budget. |
| · | Retained global kettle control market share by value at c. 56% (excluding Russia and other impacted territories). |
| · | Manufacturing operations in China are fully operational with efficiency improved by 6.1% in 2022 versus 2021. |
| · | Pipeline of new product launches through 2023 include an integrated tap in Billi, the Ontario desktop appliance and Aurora coffee appliance. |
| · | Updated ESG and Sustainability report published on 28 March 2023. |
Strategic Highlights
| · | Completion of the transformational acquisition of Billi in November at a reported multiple of 3.8x EBITDA at transaction date. |
| · | The Appliance and Water categories now account for almost 50% of pro forma Group revenue. |
| · | Significant progress through the year in improving the geographic diversity of the business reducing reliance on any one territory. |
| · | The Company has access to a range of new sales channels including to professional customers such as restaurants, hotels, and commercial premises through Billi and a much improved B2C footprint. |
| · | Strong progress through the year for Aqua Optima driven by the increasing popularity of the Aurora range. |
| · | New EMEA Sales Director has been appointed and Global Distributions & Logistics Director role created to provide the leadership team with additional expertise in commercialization and cost optimisation. |
Mark Bartlett, Chief Executive Officer of Strix Group plc, said:
“Following a period of uncertainty across a number of Strix’s key export markets in Q4, recent sales data in 2023 indicates some green shoots are appearing and the path to a return of growth is opening across all segments.
The successful integration of Billi will propel Strix into a new growth phase, further diversifying away from the core Kettle Controls business with strong potential for greater top line growth and improved margins going forward.
Strix continues to implement a range of strategic initiatives to minimise the impact of the continued headwinds it is facing, which includes a functional streamlining programme and a focus on the reduction of inventory in order to maximise cash generation for the Group. Strix will prioritise debt reduction and free cash flow generation with a clear plan to get net debt / EBITDA to below 2.0x during 2023 and to below 1.5x during 2024.”
CEO’s report:
Financial performance
The Group reported revenue of £106.9m, a decrease of 10.5% versus the same period in prior year driven predominantly by a reduction in Kettle Controls due to market environment.
Adjusted profit after tax was £23.0m (2021: £31.4m), representing a 26.8% decrease compared to the same period last year driven by a reduced EBITDA and an increase in SONIA through the year coupled with higher net debt post the successful acquisition of Billi.
Adjusted operating profit margins were diluted by 4.0% to 24.2% (FY 2021: 28.2%) compared to last year. The main reasons for the dilution in margin are attributable to lower kettle controls sales in the regulated markets that command higher margins, partially offset by a price increase implemented in the second quarter of 2022 across all kettle controls. In addition, the water and the appliances categories showed margin improvements as appliances that were launched in 2021 had a better sales mix, supported further by Billi’s contributions post completion.
The Group’s net debt increased to £87.4m (FY 2021: £51.2m).This represents a net debt/adjusted EBITDA ratio (calculated on a trailing twelve-month basis) of 2.2x.
Strix is focused on its highly cash generative operating model and the management team will prioritise on the integration and the unlocking of anticipated revenue and cost synergies following the acquisition of Billi. 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 get net debt / EBITDA to below 2.0x during 2023 and to below 1.5x during 2024.
As capital allocation decisions prioritised debt reduction, the Board decided after reviewing the level of net debt to propose a final dividend of 3.25p per share (2021: 5.60p) which would represent a total dividend of 6.00p per share (2021: 8.35p).
Kettle control category
Overall, the kettle control category reported a decrease in revenue of 19.9% to £68.2m in 2022.
The key characteristic in 2022 was a continual and unprecedented worsening of the macro backdrop in Q4, but in Q1 signs of green shoots are returning.
Overall market softened by c.18% in 2022, with volume and value reductions experienced in all sectors. Key negative drivers included the cost of living crisis in Regulated markets, COVID shutdowns in China and the Ukraine/Russia crisis impacting Less Regulated markets.
In line with western government sanctions, Strix’s key global brands withdrew from Russia (a significant market for them) and Strix also stopped trading directly with Russian brands. It is worth noting that excluding the effected regions, Strix’s market share in Kettle Controls remained at c. 56%.
The Kettle Safety Controls category remains a resilient business and there is evidence of green shoots returning in Q1 2023.
These include:-
| · Estimated Kettle Sales through major online retailer channel shows January and February 2023 grew by 17% versus the same period last year; |
| · After reduced usage at Strix’s top five OEMs in H2 2022, the Group is now seeing a recovery in Q1 2023 which is particularly reassuring as this has historically been a quieter trading period; and |
| · Signs of a pipeline refill are returning. Historical data shows a small increase in consumer demand can have an outsized effect on the demand for Strix’s components. |
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.
Examples include the Series Z controls development which is maturing, with the objective to drive cost and customer benefits and the roll out of new electronic kettle features & designs with a focus on design trends, consumer energy saving and OEM cost benefits.
Appliance category
Overall, the appliance category reported growth in revenue of 12.8% to £14.5m in 2022.
Strix’s Aqua Optima brand recorded 87% growth in appliances, driven through geographical expansion, successful Aqua Optima expansion across Europe and North America, Strix/LAICA cross selling, and new innovative product launches.
The Billi acquisition helps diversify positioning with a premium category offering through new channels as well as giving cross-selling opportunities to drive additional growth.
Other notable achievements included:-
| · | Aurora (Strix’s Instant Flow Heater technology, delivering auto-dispensed hot, boiled, and chilled filtered water at the touch of a button) won housewares award: Sustainable Product of the Year 2022; |
| · | Successful launch of the world’s fastest sterilizer-dryer with a leading USA Baby Care brand; and |
| · | 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. |
Key growth initiatives for the category will be Ontario (market leading beverage station range covering hot, chilled, sparkling and coffee products), geographic expansion, optimising product mix and vertical integration.
Water category
Overall, the water category reported a growth in revenue of 12.8% to £24.1m in 2022.
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 us from 3rd party risk, whilst allowing a new level of flexibility to offer our customers.
Integration of Billi into the portfolio will enhance the total water solution offering for Strix and unlocks new opportunities in the ‘professional’ market.
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 products as a way to open doors into large retailers for other categories.
Transformational acquisition of Billi
Billi is a leading brand in Australia for the supply of premium instant boiling, chilled and sparking filtered water systems. A clear #2 player in the space within Australia, New Zealand and UK. With 30+ year history, Billi is renowned for its premium and innovative products. Billi has a successful history of growth, with double digit revenue CAGR over the past 5 years, attractive margins and is highly cash generative, delivering cash conversion of >70%.
Acquisition of Billi was for £38.9m cash and completed on 30 November following regulatory approval in Australia, New Zealand and the UK. Billi was acquired from Culligan following its merger with Waterlogic; the divestment was a condition of that merger. The acquisition multiple was 3.8x EBITDA reflecting the unique circumstances that Culligan found itself in and the progress Strix had made with the competition regulator in Australia, New Zealand and the UK . As reported in the press, there were other bidders at significantly higher valuations than Strix even at the very end of the process. The transaction was funded through a £13.0m equity raise and debt refinance consisting of an extension of the current RCF and a new acquisition facility.
Overview of strategic rationale
The acquisition materially changes the earnings profile of the Group, accelerating growth plans for the Water & Appliance categories and supporting the medium-term ambition.
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
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.
The trading performance so far has been in line with budget.
Very positive progress has been made at Billi UK with elements of the TSA already removed:-
| · | Head office established in Wolverhampton with all staff now transferred; |
| · | Showroom in London (Farringdon) due to be signed imminently; |
| · | Stock to be moved into Strix storage locations during March / April; |
| · | All HR functions now managed by Strix HR team; and |
| · | Agreed to move forward with Microsoft Dynamics for their ERP system with target completion in July. |
Solid order book for Q1:-
| · | New Zealand secured their largest ever contract to a hospital in the North of the island; |
| · | UK and Australia secured February revenue budget with encouraging 3 month & 12 month pipeline; and |
| · | ROW also secured February revenues. |
NPD on track for launch in Q2. This will be a major opportunity for all markets, particularly within the residential sector.
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.
Barriers to entry and defence of intellectual property
Strix constantly assesses the risks posed by competitive threats and sees the real benefits of market disruption 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 and technologies.
The Group actively monitors the markets in which its 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 is 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
As capital allocation decisions prioritised debt reduction, the Board decided after reviewing the level of the net debt to propose a final dividend of 3.25p per share (2021: 5.60p) which would represent a total dividend of 6.00p per share (2021: 8.35p).
The final dividend will be paid on 11 August 2023 to shareholders on the register at 30 June 2023 and the shares will trade ex-dividend from 29 June 2023.
Operations review
The factory within Zengcheng district in Guangzhou, China, continues to be fully operational with efficiency improved by 6.1% in 2022 versus 2021.
A new EMEA Sales Director was appointed and a new Global Distributions & Logistics Director role created to provide the leadership team with additional expertise in commercialisation and cost optimisation.
An updated ESG and Sustainability report will be published on 29 March 2023.
Strix continues to implement a range of strategic initiatives to minimise the impact of the headwinds it is facing, which includes a functional streamlining programme and a focus on the reduction of inventory in order to maximise cash generation for the Group.
Financial Position
Strix is focused on its highly cash generative operating model and the management team will prioritise the integration and unlocking the anticipated revenue and cost synergies following the acquisition of Billi.
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 get net debt / EBITDA to below 2.0x during 2023 and to below 1.5x during 2024.
Over the past few years, Strix has made significant investments in acquisitions, a new factory and working capital. A primary driver of the increased exceptional costs is due to the number of acquisitions and one-off costs relating to capital expenditures.
HaloSource was acquired in 2019 and contributed to the exceptional costs through the associated transaction fees. LAICA was acquired in 2020 and included an earn out clause which caused exceptional costs in outer years, along with the transaction fees in 2020. The new factory in China was completed in 2021, adding to exceptional costs from large scale capital expenditure. Most recently, Billi was acquired and its transaction fees contributed to the 2022 total. As these one-off costs are not recurring, we expect cash conversion to materially improve in coming years.
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 £27.6m (FY 2021: £18.0m), an increase on £9.6m. The main driver behind this is an increase in net working capital of c.£5.9m (including tax liabilities) recognised as part of the acquisition of Billi. The rest of the increase relates to slightly higher inventory levels from prior year as the Group looks to fuel anticipated increase in demand in the new year, evident from green shoots returning in Q1 2023. Decreases in trade and other payables were due to lower procurement activities, partially offset by decreases in trade and other receivables which were largely due to collection of VAT receivables from the Chinese government relating to the construction and completion of the new factory in China.
Outlook
Following a period of uncertainty across a number of Strix’s key export markets in Q4, recent sales data in 2023 indicates that some green shoots are appearing and the path to a return of growth is opening across all segments:-
| · | It is anticipated that the Chinese economy will rebound in 2023, given the change in COVID policy; |
| · | Estimated Kettle Sales through a major online retailer channel shows January 2023 grew by 17% versus the same period last year; |
| · | After usage at Strix’s top five OEMs in H2 2022, the Group is now seeing a recovery in Q1 2023 which is reassuring as this has historically been a quieter trading period; |
| · | Signs of a pipeline refill are returning, as a small increase in consumer demand can have an outsized effect on the demand for Strix’s components; and |
| · | The Group has delivered consumer goods business growth, despite the underlying market softening and positive contracts secured in Q1 2023. |
Strix continues to implement a range of strategic initiatives to minimise the impact of the headwinds it is facing, which includes a functional streamlining programme and a focus on the reduction of inventory in order to maximise cash generation for the Group.
The successful integration of Billi will propel Strix into a new growth phase, further diversifying away from the core Kettle Controls business with strong potential for greater top line growth and improved margins going forward.
