Interim Results

RNS Number : 1839B

Strix Group PLC

19 September 2018

 

19 September 2018

This announcement contains inside information

Strix Group Plc

("Strix" or the "Company")

Interim results for the 6 months ended 30 June 2018

Strix (AIM: KETL), the AIM listed global leader in the design, manufacture and supply of kettle safety controls and other complementary water temperature management components, is pleased to announce its unaudited interim results for the six months ended 30 June 2018.

FINANCIAL Highlights

·     A solid first half performance and trading in line with full year market expectations ·     Revenues of £42.9m (H1 2017: £42.2m), increase of 1.5% ·     Gross profit margin increased to 37.9% (H1 2017: 37.2%)

·     Adjusted EBITDA (1) of £14.8m (H1 2017: £14.2m), increase of 4.3% ·     Adjusted EBITDA (1) margin of 34.5% (H1 2017: 33.6%) ·     Adjusted PBT (1) of £11.0m (H1 2017: £11.2m), decrease of 1.9% due to net finance costs of £0.9m (H1 2017: £nil) ·     Adjusted diluted EPS (1) of 5.3p, with adjusted PAT (1) of £10.6m (H1 2017: £11.0m), decrease of 3.5% due to timing of tax accrual vs prior year

·     Decrease in net debt to £37.9m (2017: £45.9m), improvement of 17.4%

·     Net cash generated from operating activities £15.2m (H1 2017: £15.4m), decrease of 0.9% due to working capital movements

·     Interim dividend of 2.3p per share to be paid on 26 October 2018

OPERATIONAL HIGHLIGHTS

·	Global market share maintained at c.38% by volume
·	Successful launch of U9 with >1.1m controls produced
·	Production efficiency increased by 6% due to continued automation and 16% increase in quality ppm
·	Settlement of an infringement claim for 19 electronic appliances in China to defend IP
·	Aqua Optima sales up by c.88% in H1, with record market share of c.20% achieved

1    Adjusted results exclude exceptional items, including share-based payments. Adjusted results are non-GAAP metrics used by management and are not an IFRS disclosure.

      The comparative results are presented on the same basis as set out in the Group's 2017 Annual Report, and cover a period when a different capital structure was in place and the Company was not listed on AIM.

 

Mark Bartlett, Chief Executive Officer, said:

"We are pleased to report a solid six months of trading for Strix in 2018. We have made positive progress with our strategic priorities, continued to invest in the growth of our business and maintained our global market share.

The global market has remained positive with an overall volume growth of c.6%. The North American market has been particularly strong, growing at >20%. As anticipated the China domestic market also experienced a positive recovery with volume growth of c.6%.

We have continued to invest in our facilities, through innovation, additional automation and lean manufacturing processes, resulting in a further 6% increase in efficiency.

Product development remains a core focus of the Group with positive progress on the U9 series of controls. We have secured a number of collaborations with key brands within the hot water and coffee on demand categories using our mature, patented heating technology to fulfil key consumer insights identified from independent research.

Aqua Optima continued to show strong growth with revenues up c.88% versus prior year securing a record share within the UK of >20% and increased distribution with the Aqua Optima brand now available in an additional 2,500 outlets.

We continue to build on our extensive customer relationships across the value chain whilst further developing our key technologies and seek to identify further incremental opportunities, both organic and inorganic, to drive shareholder value.  

With trading in line with full year expectations, we look forward to the rest of 2018 with optimism and are delighted to announce an interim dividend of 2.3p per share." 

For further enquiries, please contact:

Strix Group Plc Mark Bartlett (CEO) Raudres Wong (CFO)	01624 829 829
Zeus Capital Limited (Nominated Advisor) Nick Cowles / Jamie Peel / Jordan Warburton (Corporate Finance) Dominic King (Corporate Broking)	020 3829 5000
IFC Advisory Limited (Financial PR & IR) Graham Herring / Tim Metcalfe / Heather Armstrong	020 3934 6630

Investor and Analyst Meeting

A briefing for investors and analysts will be held at 09:30hrs on 19 September 2018 at 85 Gresham Street, London, EC2V 7NQ. Strix Group Plc's interim results for 2018 are available at www.strixplc.com.

About Strix Group Plc

Isle of Man based Strix, is a global leader in the design, manufacture and supply of kettle safety controls and other components and devices involving water heating and temperature control, steam management and water filtration.

Strix's core product range comprises a variety of safety controls for small domestic appliances, primarily kettles. Kettle safety controls require precision engineering and intricate knowledge of material properties in order to repeatedly function correctly. Strix has built up market leading capability and know-how in this field since being founded in 1982.

Strix is listed on the Alternative Investment Market of the London Stock Exchange (AIM: KETL). 

Cautionary Statement

Certain statements included or incorporated by reference within this announcement may constitute "forward-looking statements" in respect of the Group's operations, performance, prospects and/or financial condition. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words and words of similar meaning as "anticipates", "aims", "due", "could", "may", "will", "should", "expects", "believes", "intends", "plans", "potential", "targets", "goal" or "estimates". By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions and actual results or events may differ materially from those expressed or implied by those statements. Accordingly, no assurance can be given that any particular expectation will be met and reliance should not be placed on any forward-looking statement. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. No responsibility or obligation is accepted to update or revise any forward-looking statement resulting from new information, future events or otherwise. Nothing in this announcement should be construed as a profit forecast. This announcement does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase any shares or other securities in the Company, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares or other securities of the Company. Past performance cannot be relied upon as a guide to future performance and persons needing advice should consult an independent financial adviser. Statements in this announcement reflect the knowledge and information available at the time of its preparation. Liability arising from anything in this announcement shall be governed by Manx law. Nothing in this announcement shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.

 

Chief Executive's Review

The first 6 months of 2018 have seen a solid performance of the core business across all segments resulting in a 7.6% volume growth for the Group against prior year.

The Company's revenues were £42.9m (H1 2017: £42.2m) an increase of 1.5% on prior year and adjusted EBITDA was £14.8m (H1 2017: £14.2m) up 4.3% on prior year. Adjusted profit before tax was £11.0m, down 1.9% (H1 2017: £11.2m) due to there being no interest in H1 2017 following the Group reorganisation in August 2017 (H1 2018: £0.9m of net finance costs). Net debt was further reduced to £37.9m.

At the half year, total sales volume for the global kettle market remained strong with a consolidated growth of c.6% versus c.5% during H1 2017. As anticipated the China domestic market experienced a recovery back to c.6% volume growth with the regulated and less regulated markets posting a volume growth of c.3% and 8% respectively. Strix remained stable, maintaining its global market share of c.38%.

Given the Company's H1 2018 performance and the Board's confidence in the continued strength of cash generation, the Board has declared an interim dividend of 2.3p, payable on 26 October 2018 to shareholders on the register as at 28 September 2018.

Export kettle control sales

Export kettle control sales are defined as kettle controls which are ultimately sold in a market outside of China. Growth in the regulated markets remained significantly ahead of the estimated 2013 to 2017 CAGR of 1%, growing at 3% with North America performing very strongly with a growth rate >20%. Strix's share continued to perform well within this market with a share in excess of 70% and market penetration now c.15%. Turkey also posted solid sales in H1 with volume up 7% versus prior year although this is expected to slow somewhat during Q3 due to the devaluation of the Lira. Sales to Turkey make up c.5% of net sales by value, therefore any impact of this will be limited. This strong performance was slightly offset with some contraction in Western Europe following strong performance in the prior year and in the UK. Strix maintained its consolidated share of c.61% of this market segment and continues to focus on incremental opportunities for H2.

Strix continued to undertake both safety and intellectual property actions with 8 internet brands being removed from sale during H1 in UK, France, Germany and Italy. As well as a compensation payment we have a commitment from the key brand to convert their appliances to Strix controls.

The less regulated market continued to post solid growth at c.8% and was in line with the 2013 to 2017 CAGR. The Far East markets (excluding China) and Russia both experienced double digit growth and Strix maintained its share of c.19% with the U9 series beginning to gain traction in this target market segment. The implementation of approval testing in Chile has been further strengthened with an increased frequency of testing of key clauses, further strengthening the barrier to entry for inferior quality competitors.

China Domestic sales

As anticipated the China market showed a recovery over 2017 posting c.6% growth versus a 6% drop in the prior year with Strix's market share broadly static at c.48%. Strix continued to defend its intellectual property and successfully settled patent infringement cases against 19 appliances with the number one brand in multi-cooker appliances. Along with a compensation payment, this settlement secured agreement to convert the appliances within a 12 month period which will help secure volume share in this growth segment during 2019 and beyond.

New Product Development (NPD)

Following the successful launch of the U9 Series during 2017 we have successfully secured more than 70 specifications and produced 1.1m controls. We continue to develop this series with new variants launched to target the smaller size and split switch kettle appliances to further enhance the portfolio of "best in class" controls.

During H1 2018 the new, enhanced version of the baby prep was launched in the UK as "Perfect Prep, Day and Night". This product has been well received in the market with excellent consumer ratings.  

We continue to support key global brands and have secured a number of significant collaborations within the hot water on demand sector using our patented heater technology, including the deal with a US-based consumer product company announced in August. These products will expand our current footprint into both coffee and water dispensing systems providing increased consumer functionality, convenience and value.

We will continue to leverage on our core competencies to focus our highly skilled engineering resource on additional products for the water on demand segments, whilst further enhancing our core technology to expand our addressable market and increase our differentiation within the control sector. 

Operations

Operations have achieved positive improvement in its key performance indicators, particularly with respect to cost and quality versus prior years. The process quality ppm ('parts per million') improved by 16% and outgoing quality performance was improved by more than 20% versus prior year.

A further two automated lines were set up during H1, bringing the total number of automated lines in our Guangzhou factory to six. A further three projects are being launched this year and will be delivered by the end of 2019. Efficiency has improved as a result of the increased automation and on-going "lean" projects with an improvement of 6% during H1.

The total output of kettle controls and connector sets exceeded 33.5m during H1, a 4.8% increase on prior year with a reduction of one manual production line. Commodity prices for the key materials (silver, copper and hybrid plastics) have been secured for the full year at or below budget pricing, in line with our purchasing policy.

Aqua Optima

Aqua Optima experienced a strong performance during H1 with revenues up by c.88% on prior year. Strong sales of trade brand product to both UK and Central Europe combined with the continued growth in existing UK distribution for Aqua Optima has resulted in a record high market share of c.20% within a UK market of c.£63m, with the Aqua Optima brand now available in more than 2,500 additional outlets during 2018.

Investment in PR and social media, together with an exclusive partnership with "parkrun" has enhanced consumer engagement with targeted campaigns increasing followers to more than 2,500 individuals. The increase of incremental trade brand business has allowed Aqua Optima to create a clear "good, better, best" category hierarchy, repositioning the Evolve brand with respect to its competitors whilst retaining competitive advantage.

We continue to work with our partner in China, a major small domestic appliance ('SDA') OEM, to launch a range of Aqua Optima filter products in Q4 2018.

Dividend Policy

Following the successful IPO of Strix Group in August 2017, the Board feel it is an opportune time to provide investors with further guidance regarding the dividend policy going forward. The Company has consistently achieved strong cash conversion and remains committed to paying a total dividend of 7.0p for the current financial year and a total dividend of 7.7p for the financial year ending 31 December 2019. Following this the Company intends to implement a progressive dividend policy to increase future dividends (from a base of 7.7p in 2019) in line with future growth in underlying earnings.

This policy provides the flexibility to continue to invest in the Group's growth strategy and to take advantage of investment opportunities. The Directors may consider additional distributions in the future subject to the level of debt and the opportunities referred above.

Future Strategy

We will continue to develop a culture of achievement within Strix, with a strategy focused on driving shareholder value and employee engagement. As part of our strategy we will further broaden our senior management and engineering bench strength through strategic recruitment whilst further developing our existing resources with training and development programs aligned to our growth objectives.

As part of our strategy we continue to increase our focus on new product development and core technologies to enhance our product portfolio within the SDA market. In particular, following external consumer research, we will develop and launch innovative products within both the hot water on demand segment to enhance functionality and value as well as additional electrical products for the global baby segment. In line with this strategy, we recently announced a collaboration with a global US-based firm to develop a new single-cup coffee appliance.

In addition to organic growth we will target appropriate acquisitions within the SDA sector, funded from our existing resources. We will focus on companies or technologies that support our core competencies with particular attention to water filtration, heating technologies and the hot water on demand / coffee categories.

Within Operations, we will continue to drive efficiency and process improvements with an ongoing commitment to lean manufacturing and further automation of appropriate production lines as volume dictates. We are in the early stages of assessing our options regarding relocation of our manufacturing operations in China, with the current lease expiring in 2021. Both the construction of a new facility and rental/purchase of an existing facility are under consideration. We anticipate the total cost of the relocation to be in the region of c.£15 million, but will provide the market with further guidance in due course. We expect any funding requirements to be sourced from existing resources.

For Aqua Optima, we will launch an initiative to enable filters to be recycled, continue to develop trade brand relationships and expand the product range to drive further growth in both the UK and China.      

Outlook

The core kettle control market remains solid, with the U9 series providing a comprehensive portfolio of controls to address our existing market opportunities. We will continue to evolve our core control segment with the launch of a new electronic control in H2 2018, targeting the growth of multi-cookers and a new range of controls to further increase our addressable market in the less regulated segment being launched in 2019.

Following the success of Aqua Optima in the UK we will launch in China during Q4 2018 with further product launches and initiatives set for the UK in Q1 2019 to further drive market share growth.

Key commodities have been secured for the full year of 2018 in line with our purchasing policy but there remains continued pressure on some of the hybrid plastics used within our legacy products which represents c.15% of material costs. Management are continuing to actively monitor and will look to mitigate any further increases as appropriate.

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.

The Board is confident with the future outlook and trading remains in line with full year market expectations.

Mark Bartlett

Chief Executive

19 September 2018

 

Financial Review

		Adjusted results1				Reported results
		H1 2018      £m	H1 2017      £m	Change %2		H1 2018      £m	H1 2017      £m	Change %2
Revenue		42.9	42.2	+1.5%		42.9	42.2	+1.5%
Gross profit		16.3	15.7	+3.3%		16.3	15.7	+3.5%
Distribution costs		(2.8)	(3.2)	+12.4%		(2.8)	(3.2)	+12.4%
Administrative costs		(1.7)	(1.5)	-15.5%		(4.1)	(2.4)	-69.9%
Operating profit		11.9	11.2	+6.3%		9.6	10.3	-7.1%
EBITDA		14.8	14.2	+4.3%		12.4	13.2	-6.2%
Profit before tax		11.0	11.2	-1.9%		8.6	10.3	-16.1%
Profit after tax		10.6	11.0	-3.5%		8.3	10.1	-18.1%
Net cash generated from operating activities		15.2	15.4	-0.9%		15.2	15.4	-0.9%

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.

2.        Figures are calculated from the full numbers as presented in the condensed interim consolidated financial statements.

Financial performance

The first six months' volumes increased by 7.6% to 36.8m units (H1 2017: 34.2m units) in comparison to the same period last year.

Revenue grew 1.5% to £42.9m (H1 2017: £42.2m) and reported gross profit increased by 3.5% to £16.3m (H1 2017: £15.7m) as a result of solid trading results across the Group's markets and products. Revenue growth is lower than volume growth due to a change in sales mix compared to H1 2017, including higher sales of Aqua Optima. In addition, foreign exchange rate movements have reduced the Sterling value of the Group's US Dollar revenue. This is partly offset by a reduction in US Dollar costs, demonstrated by the increase in gross profit margin from 37.2% in H1 2017 to 37.9% in H1 2018.

The Group generated an adjusted EBITDA of £14.8m, an increase of 4.3% (H1 2017: £14.2m) and reported EBITDA of £12.4m (H1 2017: £13.2m). Lower reported EBITDA was due to exceptional share-based payment charges of £2.4m (H1 2017: exceptional exit costs of £1.0m). The adjusted EBITDA margin has improved from prior year to 34.5% (H1 2017: 33.6%), whilst reported EBITDA margin has decreased to 28.9% (H1 2017: 31.3%).

Combined depreciation and amortisation at £2.9m (H1 2017: £2.9m) was unchanged. Excluding the impact of share-based payment charges, adjusted operating profit increased by 6.3% to £11.9m (H1 2017: £11.2m). Reported operating profit decreased by 7.1% to £9.6m (H1 2017: £10.3m).

Adjusted profit before tax was £11.0m (H1 2017: £11.2m), a decrease of 1.9% due to there being no interest in H1 2017 as a result of the reorganisation of the Group that took place in August 2017 (H1 2018: net finance costs £0.9m). Reported profit before tax was £8.6m (H1 2017: £10.3m). There was no corporation tax payable on the Group's non-China generated profits as the Isle of Man corporation tax rate was 0%.

Adjusted profit after tax was £10.6m, a decrease of 3.5% on the prior period (H1 2017: £11.0m) as a result of a higher income tax expense in the current period. In H1 2018 taxes have been accrued evenly throughout the 6 month period, whereas in 2017 a higher proportion of the tax charge was accrued at the year end. Reported profit after tax, including a reduction of £1.4m in exceptional costs, was £8.3m (H1 2017: £10.1m).

Costs

Cost of sales increased by only 0.4% to £26.6m (H1 2017: £26.5m) despite the 7.6% increase in sales volume, as a result of the Group's commitment to increase automation and reduce manufacturing costs. Distribution costs decreased by 12.4% to £2.8m (H1 2017: £3.2m) as H1 2017 included higher depreciation charges relating to customer tooling assets.

Administration costs (excluding exceptional costs) were £1.7m in H1 2018 against £1.5m in H1 2017. The increase resulted from additional costs incurred in expanding certain Group support functions following Strix's admission to trading on AIM.

The Group awarded a number of one off share options as part of the admission to trading on AIM to incentivise and reward a number of employees. The total share-based payment charge incurred in H1 2018 was £2.4m (H1 2017: nil). Exceptional costs increased by £1.4m in the period compared to H1 2017, which included £1.0m of non-recurring exit related costs.

The Group has undertaken an assessment of potential options to optimise our tax position in China and have concluded that transitioning from the current Contract Processing ('CP') license to an Import Processing ('IP') license is the optimal route to adopt. The IP license model is expected to be effective as of 1 January 2019. Under the IP model, the effective corporate income tax is estimated to be c.4% of PBT in 2019.

Cash flow

The Group achieved an OCF (defined as 'Cash generated from operations' less 'Net cash used in investing activities') to EBITDA ratio of 97.0% (H1 2017: 93.8%) which continues to illustrate the Group's strong cash generation. Net cash generated from operating activities was £15.2m (H1 2017: £15.4m), due to working capital movements.

Total cash outflows on PPE and software were £2.6m (H1 2017: £2.5m), with increased emphasis on automation and investment in new manufacturing lines continuing into 2018.

Balance Sheet

Property, plant and equipment increased to £9.9m (2017: £9.4m), primarily due to further investment in automation. Net intangible assets (comprising capitalised development costs and software) decreased in line with expectations to £4.8m (2017: £5.2m).

Current assets increased slightly to £28.0m (2017: £26.5m). Inventories held at the end of the period increased to £10.1m (2017: £9.2m) due to increased holding to secure supply of raw materials at a fixed price. Trade and other receivables increased to £7.8m (2017: £7.2m).

Current liabilities increased to £19.9m (2017: £17.3m) owing to higher trading activity and increased inventory, which had not all been paid for at the period end.

Net debt

Net debt has decreased since 31 December 2017 to £37.9m (2017: £45.9m) as a result of using surplus funds to make debt repayments, in line with expectations. The Group has in place a revolving credit facility of £55.0m (2017: £70.0m) of which £48.0m (2017: £56.0m) has been drawn down on the facility as at 30 June 2018. The net debt to adjusted EBITDA ratio was 1.1x (2017: 1.3x).

Dividend

The Board is pleased to declare an interim dividend of 2.3p per ordinary share. This interim dividend will be paid on 26 October to shareholders on the Register at the close of business on 28 September. The ordinary shares will become ex-dividend on 27 September. We remain committed to paying a total dividend which will equate to 7.0p per share for the full year. Whilst the consolidated accounts show a retained deficit, significant reserves exist on the balance sheet of the dividend paying entity, Strix Group Plc.

Raudres Wong

Chief Financial Officer

19 September 2018

 

Condensed INTERIM consolidated statement of comprehensive income

for the period ended 30 June 2018 (unaudited)

	Note	(unaudited) Period ended 30 June  2018 £000s	(unaudited) Period ended 30 June  2017 £000s
Revenue	7	42,868	42,216
Cost of sales - before exceptional items		(26,600)	(26,475)
Cost of sales - exceptional items		-	(23)
Cost of sales		(26,600)	(26,498)
Gross profit		16,268	15,718
Distribution costs		(2,775)	(3,168)
Administrative expenses - before exceptional items		(1,721)	(1,490)
Administrative expenses - exceptional items	6	(2,393)	(931)
Administrative expenses		(4,114)	(2,421)
Other operating income		175	158
Operating profit		9,554	10,287
Analysed as:
Adjusted EBITDA1		14,802	14,189
Amortisation	8	(1,220)	(1,437)
Depreciation	9	(1,635)	(1,511)
Exceptional items	6	(2,393)	(954)
Operating profit		9,554	10,287
Net finance costs	5	(923)	(1)
Profit before taxation		8,631	10,286
Income tax expense		(378)	(207)
Profit and total comprehensive income for the period		8,253	10,079
Earnings per share (pence)
Basic	6	4.3	n/a
Diluted	6	4.1	n/a

1.     Adjusted EBITDA, which is defined as profit before finance costs, tax, royalty charges, depreciation, amortisation and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure.

 

Condensed INTERIM consolidated balance sheet

as at 30 June 2018 (unaudited)

	Note	(unaudited) 30 June 2018 £000s	(audited) 31 December 2017 £000s
Non-current assets
Intangible assets	8	4,823	5,179
Property, plant and equipment	9	9,925	9,378
Total non-current assets		14,748	14,557
Current assets
Inventories	10	10,078	9,165
Trade and other receivables	11	7,799	7,195
Cash and cash equivalents		10,089	10,111
Total current assets		27,966	26,471
Total assets		42,714	41,028
Equity and liabilities
Equity
Share capital		1,900	1,900
Share-based payment reserve		4,435	2,042
Retained (deficit)/earnings		(31,763)	(36,406)
Total (deficit)/equity		(25,428)	(32,464)
Current liabilities
Trade and other payables	12	18,707	16,164
Current income tax liabilities	12	1,229	1,103
Total current liabilities		19,936	17,267
Non-current liabilities
Borrowings	13	48,000	56,000
Post-employment benefits		206	225
Total non-current liabilities		48,206	56,225
Total liabilities		68,142	73,492
Total equity and liabilities		42,714	41,028

 

Condensed INTERIM consolidated statement of changes in equity

as at 30 June 2018 (unaudited)

(unaudited)	Share capital £000s	Share-based payment reserve £000s	Other reserves £000s	Retained earnings/(deficit) £000s	Total equity/(deficit) £000s
Balance at 1 January 2017	2	-	1,793	248,499	250,294
Profit and total comprehensive income for the period	-	-	-	10,079	10,079
Balance at 30 June 2017	2	-	1,793	258,578	260,373
(unaudited)
Balance at 1 January 2018	1,900	2,042	-	(36,406)	(32,464)
Profit for the period	-	-	-	8,253	8,253
Total comprehensive income for the period	-	-	-	8,253	8,253
Transactions with owners recognised directly in equity:
Dividends paid (note 15)	-	-	-	(3,610)	(3,610)
Share-based payment transactions	-	2,393	-	-	2,393
Total transactions with owners recognised directly in equity	-	2,393	-	(3,610)	(1,217)
Balance at 30 June 2018	1,900	4,435	-	(31,763)	(25,428)

 

Condensed INTERIM consolidated cash flow statement

for the half year ended 30 June 2018 (unaudited)

Note	(unaudited) Half year ended 30 June  2018 £000s	(unaudited) Half year ended 30 June 2017 £000s
Cash flows from operating activities
Cash generated from operations                                                                      16	15,490	15,714
Tax paid	(253)	(337)
Net cash generated from operating activities	15,237	15,377
Cash flows from investing activities
Purchase of property, plant and equipment                                                   9	(2,588)	(2,312)
Capitalised development costs                                                                         8	(852)	(810)
Purchase of software                                                                                           8	(12)	(178)
Proceeds on sale of property, plant and equipment	1	1
Net cash used in investing activities	(3,451)	(3,299)
Cash flows from financing activities
Payments to former group company related parties	-	(9,342)
Repayment of borrowings                                                                                   13	(8,000)	-
Finance costs paid                                                                                               5	(299)	-
Finance income                                                                                                    5	7	1
Dividends paid                                                                                                     15	(3,610)	-
Net cash used in financing activities	(11,902)	(9,341)
Net (decrease)/increase in cash and cash equivalents	(116)	2,737
Cash and cash equivalents at the beginning of the period	10,111	10,959
Effects of foreign exchange on cash and cash equivalents	94	(149)
Cash and cash equivalents at the end of the period	10,089	13,547

 

Notes to the condensed INTERIM cONSOLIDATED financial statements

for the half year ended 30 June 2018 (unaudited)

1. General information

Strix Group Plc ("the Company") was incorporated and registered in the Isle of Man on 12 July 2017 as a company limited by shares under the Isle of Man Companies Act 2006 with the name Steam Plc and with the registered number 014963V. The Company changed its name to Strix Group Plc on 24 July 2017. The address of its registered office is Forrest House, Ronaldsway, Isle of Man, IM9 2RG.

The Company's shares were admitted to trading on AIM, a market operated by the London Stock Exchange on 8 August 2017.

These condensed interim consolidated financial statements ('interim financial statements') were approved for issue on 19 September 2018. The interim report will be available 19 September on the Group's website www.strixplc.com and from the registered office. These interim financial statements are unaudited.

2. Principle accounting policies

The Group's principle accounting policies, all of which have been applied consistently to all of the periods presented, are set out below.

Basis of preparation

The Group's annual financial statements are prepared in accordance with International Financial Reporting Standards ('IFRS') and International Financial Reporting Standards Interpretation Committee ('IFRS IC') as adopted by the European Union. These interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting". They do not include all the information required for a complete set of financial statements prepared in accordance with International Financial Reporting Standards as adopted by the European Union. However, explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual consolidated financial statements as at and for the year ended 31 December 2017. These interim financial statements should be read in conjunction with the last annual consolidated financial statements as at and for the year ended 31 December 2017.

The Group interim financial statements for the comparative period were prepared under the capital reorganisation accounting principles because the transaction under which the Company became the holding company of Sula Limited ('Sula' and the 'Sula Group') was a group reorganisation with no change in the ultimate ownership of the Sula Group. All the shareholdings in Sula were exchanged via a share-for-share transfer on 8 August 2017. The Company did not actively trade at that time.

The result of the application of the group reorganisation was to present the comparative interim period as though the Company had always owned the Sula Group.

Accounting policies

The interim financial statements have been prepared in accordance with the accounting policies set out in the Group's Annual Report and Accounts for the year ended 31 December 2017, which is available at www.strixplc.com.

The Group has adopted IFRS 15 in the period to 30 June 2018, as described in further detail below. The Group has not adopted any other accounting policies in the period to 30 June 2018. Other amendments to IFRSs effective for the financial period ended 30 June 2018 have not had a material impact on the Group.

    IFRS 9 'Financial instruments'

IFRS 9 was effective for Strix Group plc from 1 January 2018. It is applicable to financial assets and financial liabilities and covers the classification, measurement, impairment and de-recognition of financial assets and liabilities together with a new hedge accounting model. Given the nature of the Group's operations, IFRS 9 has not had a material impact.

IFRS 15 'Revenue'

IFRS 15 was effective for Strix Group Plc from 1 January 2018. IFRS 15 sets out the requirements for recognising revenue and costs from contracts with customers and includes extensive disclosure requirements. The standard requires entities to apportion revenue earned from contracts to individual promises, or performance obligations, on a relatively stand-alone selling price basis, based on a five-step model.

Having completed a review of our contracts, a small portion of contracts, making up less than 1% of Group revenue, were re-documented and re-issued in order to continue to apply our historic accounting treatment under IFRS 15. There were no other material impacts of applying IFRS 15.

Going concern

These interim financial statements have been prepared on the going concern basis.

The Directors acknowledge that the Group is in a net liability position, as a consequence of the group reorganisation and admission to AIM which occurred during 2017, and the distribution made to the former shareholders. As a consequence, the Directors have made additional enquiries to assess the appropriateness of continuing to adopt the going concern basis. In making this assessment they have considered:

·      the strong historic trading performance of the Company and the Group;

·      budgets and cash flow forecasts for the period to December 2019;

·      the current financial position of the Group, including its cash and cash equivalents balances of £10.1m;

·      the availability of further funding should this be required (including the headroom on the revolving credit facility and the access to the AIM market afforded by the admission to AIM);

·      the low liquidity risk the Group is exposed to; and

·      the fact the Group operates within a sector that is experiencing relatively stable demand for its products.

Based on these considerations, the Directors have concluded that there is a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. As a result, the Directors continue to adopt the going concern basis of accounting in preparing the interim financial statements.

Standards, amendments and interpretations which are not effective or early adopted:

At the date of approval of the interim financial statements, the following new standards and interpretations which are relevant to the Group but have not been applied were in issue but not yet effective:

§ IFRS 16 - Leases (effective 1 January 2019)

     IFRS 16 'Leases'

IFRS 16 was published in January 2016 and will be effective for Strix Group Plc from 1 January 2019, replacing IAS 17 'Leases'. The Group does not expect to early-adopt the standard and so transition to IFRS 16 will take place on 1 January 2019. Results in the 2019 financial year will be IFRS 16 compliant, with the first Annual report published in accordance with IFRS 16 being the 31 December 2019 report.

The standard requires lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less, or the underlying asset is of low value. The Group has performed an analysis of the expected impact of IFRS 16 during the period and is in the process of determining which transition method to apply. The Group expects the following indicative impacts in FY2019 based on the current lease agreements in place (which may be subject to change):

·      Tangible assets will increase by c.£1.9m, representing the future right to use leased assets, primarily relating to land and buildings in Ronaldsway (Isle of Man) and Ramsey (Isle of Man).

·      Borrowings will increase by c.£2.1m, representing the obligation to make future lease payments - this will also have an impact on the Group's gearing ratios.

·      Depreciation will increase by c.£0.4m and net finance costs will increase by c.£0.1m, representing depreciation on the right-of-use assets and interest charges on the lease liabilities. These charges will replace existing IAS 17 lease costs, which are projected to have totalled c.£0.5m in FY2019.

Applying IFRS 16 will require the Group to make key accounting judgements, in particular around the likelihood of lease renewals. Details of existing operating lease commitments are set out in note 14.

EBITDA and adjusted EBITDA - non-GAAP performance measures

Earnings before Interest, Taxation, Depreciation and Amortisation ('EBITDA') and adjusted EBITDA are non-GAAP measures used by management to assess the operating performance of the Group. EBITDA is defined as profit before finance costs, taxation, depreciation and amortisation. Exceptional items are excluded from EBITDA to calculate adjusted EBITDA.

The Directors primarily use the adjusted EBITDA measure when making decisions about the Group's activities. As these are non-GAAP measures, EBITDA and adjusted EBITDA measures used by other entities may not be calculated in the same way and hence are not directly comparable.

Seasonality of operations

The Group's revenue and profit after tax is subject to a degree of seasonality due primarily to the occurrence of the Chinese New Year public holiday during the first half of the year ('H1'), when the Group's major customers and suppliers based in China cease operations for a period. In the financial year ended 31 December 2017, 46.3% of the Group's revenue and 40.9% of the Group's profit after tax accumulated in H1.

3. Critical accounting judgements and estimates

The preparation of these interim financial statements requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.

In preparing these interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty are the same as those that applied to the Group's Annual Report and Accounts for the year ended 31 December 2017.

4. Segmental reporting

Management has determined the operating segments based on the operating reports reviewed by the Board of Directors that are used to assess both performance and strategic decisions. Management has identified that the Board of Directors is the chief operating decision maker in accordance with the requirements of IFRS 8 'Operating segments'. The Group's activities consist of the design, manufacture and sale of thermostatic controls, cordless interfaces, and other products such as water jugs and filters, primarily to OEMs based in China. It is managed as one entity and management have consequently determined that there is only one operating segment.

Products and services

Revenue is generated by the Group on the sale of thermostatic controls, cordless interfaces, and other products such as water jugs and filters. The information used to prepare the interim financial statements is not disaggregated into distinct products and services.

Geographical

A geographical analysis of revenue from external customers has not been presented, as the OEMs to whom sales are made are primarily based in China.

 

5. Net finance costs

	Half year ended 30 June  2018 £000s	Half year ended 30 June 2017 £000s
Letter of credit charges	31	-
Pension scheme interest	1	3
Borrowing costs	898	-
Finance expense	930	3
Interest income	(7)	(2)
Net finance costs	923	1

Further information about the Group's borrowings is provided in note 13.

6. Earnings per share

The calculation of basic and diluted earnings per share is based on the following data. No earnings per share figure can be calculated for the 6 months to 30 June 2017, when a different capital structure was in place.

	Half year ended 30 June 2018
Earnings (£000s)
Earnings for the purpose of basic and diluted earnings per share	8,253
Number of shares (000s)
Weighted average number of shares for the purposes of basic earnings per share	190,000
Weighted average dilutive effect of conditional share awards	9,170
Weighted average number of shares for the purposes of diluted earnings per share	199,170
Earnings per ordinary share (pence)
Basic earnings per ordinary share	4.3
Diluted earnings per ordinary share	4.1
Adjusted earnings per ordinary share (pence) 1
Basic adjusted earnings per ordinary share	5.6
Diluted adjusted earnings per ordinary share	5.3

The calculation of basic and diluted adjusted earnings per share is based on the following data:

	Half year ended 30 June 2018 £000s
Profit for the year	8,253
Add back:
Share-based payment transactions	2,393
Adjusted earnings 1	10,646

^{1. Adjusted results exclude exceptional items, including share-based payments. Adjusted results are non-GAAP metrics used by management and are not an IFRS disclosure.}

The denominators used to calculate both basic and adjusted earnings per share are the same as those shown above for both basic and diluted earnings per share.

7. REVENUE

The following table shows a disaggregation of revenue into categories by product line:

	Half year ended 30 June  2018 £000s	Half year ended 30 June 2017 £000s
Kettle controls	37,525	38,236
Aqua Optima	3,723	1,984
Other	1,620	1,996
Total revenue	42,868	42,216

8. Intangible assets

	30 June 2018			30 June 2017
	Development costs	Software	Total	Development costs	Software	Total
	£000s	£000s	£000s	£000s	£000s	£000s
At 1 January
Cost	12,716	511	13,227	13,254	220	13,474
Accumulated amortisation and impairment	(7,877)	(171)	(8,048)	(7,030)	(64)	(7,094)
Net book value	4,839	340	5,179	6,224	156	6,380
Half year ended 30 June
Additions	852	12	864	810	178	988
Amortisation charges	(1,142)	(78)	(1,220)	(1,398)	(39)	(1,437)
Closing net book value	4,549	274	4,823	5,636	295	5,931
At 30 June
Cost	13,568	523	14,091	14,063	399	14,462
Accumulated amortisation and impairment	(9,019)	(249)	(9,268)	(8,427)	(104)	(8,531)
Net book value	4,549	274	4,823	5,636	295	5,931

All amortisation charges have been treated as an expense, and charged to cost of sales in the condensed interim consolidated statement of comprehensive income. There were no reversals of prior year impairments during the year (H1 2017: same).

9. Property, plant and equipment

	30 June 2018
		Plant & machinery	Fixtures, fittings & equipment	Motor vehicles	Production tools	Assets under construction	Total
		£000s	£000s	£000s	£000s	£000s	£000s
At 1 January
Cost		19,440	5,037	104	13,678	1,668	39,927
Accumulated depreciation		(14,552)	(4,078)	(35)	(11,884)	-	(30,549)
Net book value		4,888	959	69	1,794	1,668	9,378
Half year ended 30 June
Additions		-	394	-	-	1,788	2,182
Transfers		1,184	10	-	427	(1,621)	-
Depreciation charge		(743)	(252)	(8)	(632)	-	(1,635)
Closing net book value		5,329	1,111	61	1,589	1,835	9,925
At 30 June
Cost		20,625	5,440	104	14,105	1,835	42,109
Accumulated depreciation		(15,296)	(4,329)	(43)	(12,516)	-	(32,184)
Net book value		5,329	1,111	61	1,589	1,835	9,925

Depreciation charges are allocated to cost of sales (£1,197,000), distribution costs (£361,000), and administrative expenses (£77,000) in the condensed interim consolidated statement of comprehensive income.

 

9. Property, plant and equipment (CONTINUED)

	30 June 2017
		Plant & machinery	Fixtures, fittings & equipment	Motor vehicles	Production tools	Assets under construction	Total
		£000s	£000s	£000s	£000s	£000s	£000s
At 1 January
Cost		18,056	4,209	60	14,333	1,074	37,732
Accumulated depreciation		(14,023)	(3,802)	(45)	(11,943)	-	(29,813)
Net book value		4,033	407	15	2,390	1,074	7,919
Half year ended 30 June
Additions		-	417	50	-	1,742	2,209
Transfers		951	35	(6)	373	(1,353)	-
Depreciation charge		(478)	(186)	(3)	(844)	-	(1,511)
Closing net book value		4,506	673	56	1,919	1,463	8,617
At 30 June
Cost		19,007	4,661	104	14,706	1,463	39,941
Accumulated depreciation		(14,501)	(3,988)	(48)	(12,787)	-	(31,324)
Net book value		4,506	673	56	1,919	1,463	8,617

Depreciation charges are allocated to cost of sales (£805,000), distribution costs (£653,000), and administrative expenses (£53,000) in the condensed interim consolidated statement of comprehensive income.

10. Inventories

	30 June  2018 £000s	31 December 2017 £000s
Raw materials and consumables	6,225	4,791
Finished goods and goods in transit	3,853	4,374
	10,078	9,165

The cost of inventories recognised as an expense and included in cost of sales amounted to £15,780,976 (H1 2017: £15,705,974). The charge for impaired inventories was £119,000 (H1 2017: £394,000). There were no reversals of previous write-downs.

 

11. Trade and other receivables

	30 June 2018 £000s	31 December 2017 £000s
Amounts falling due within one year:
Trade receivables not past due	4,741	3,774
Trade receivables past due	-	84
Trade receivables past due and impaired	-	-
Trade receivables - net	4,741	3,858
Prepayments	1,028	1,192
Advance purchase of commodities	1,044	1,340
Other receivables	986	805
	7,799	7,195

Trade and other receivables are all current and any fair value difference is not material.

The advance purchase of commodities relates to a payment in advance to secure the purchase of certain key commodities at an agreed price to mitigate the commodity price risk.

Other receivables includes government grants due of £174,000 (2017: £338,000). There were no unfulfilled conditions in relation to these grants at the period end, although if the Group ceases to operate or leaves the Isle of Man within 10 years from the date of the last grant payment, funds may be reclaimed.

12. Trade and other payables

	30 June 2018 £000s	31 December 2017 £000s
Trade payables	6,779	5,026
Current income tax liabilities	1,229	1,103
Social security and other taxes	60	191
Other liabilities	7,022	6,717
Accrued expenses	4,846	4,230
	19,936	17,267

The fair value of financial liabilities approximates their carrying value due to short maturities.

 

13. Borrowings

	30 June 2018 £000s	31 December 2017 £000s
Non-current bank loans	48,000	56,000

Term and debt repayment schedule

	Currency	Interest rate	Maturity date	30 June 2018 carrying value (£000s)
Revolving credit facility	GBP	LIBOR + 1.50% - 2.50%	27 July 2022	48,000

On 27 July 2017, the Company entered into an agreement with The Royal Bank of Scotland Plc (as agent), and the Royal Bank of Scotland International Limited and HSBC Bank Plc (as original lenders) in respect of a revolving credit facility of £70,000,000.

The proceeds of the first drawdown of £60,774,000 were used to (among other things) repay previously existing banking facilities prior to the group reorganisation and admission to trading on AIM, to pay fees, costs and expenses in relation to the process and to fund the distribution paid to former group company related parties. Additional amounts may be drawn under the agreement for financing working capital and for general corporate purposes of the Group.

All amounts become immediately repayable and undrawn amounts cease to be available for drawdown in the event of a third party gaining control of the Company. The Company and its subsidiaries, Strix Limited and Sula Limited, have entered into the agreement as guarantors, guaranteeing the obligations of the borrowers under the agreement.

The agreement contains representations and warranties which are usual for an agreement of this nature. The agreement also provides for the payment of a commitment fee, agency fee and arrangement fee, contains certain undertakings, guarantees and covenants (including financial covenants) and provides for certain events of default. During the half year to 30 June 2018, the Group has not breached any of the financial covenants contained within the agreement.

On 30 June 2018, the total facility available reduced by £5,000,000, and will continue to reduce by a further £2,000,000 every 6 months thereafter. The Group voluntarily cancelled £10,000,000 of the facility on 19 June 2018.

Interest applied to the loan is calculated as the sum of the margin and LIBOR (or EURIBOR for any loan denominated in Euros). The margin is a calculated based on the Group's leverage as follows:

Leverage	Annualised margin %
Greater than or equal to 2.0x	2.5%
Less than 2.0x but greater than or equal to 1.5x	2.2%
Less than 1.5x but greater than or equal to 1.0x	2.0%
Less than 1.0x	1.5%

The Group's only other interest-bearing borrowing is a finance lease liability which is not considered material for separate disclosure.

 

14. Commitments

(a) Capital commitments

	30 June 2018 £000s	31 December 2017 £000s
Contracted for but not provided in the interim financial statements - Property, plant and equipment	2,161	1,010

(b) Operating lease commitments

The Group leases various offices, warehouses and factories under non-cancellable operating lease agreements. The lease terms are between 1 and 10 years and have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are generally renegotiated at the prevailing market rate.

Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows:

	30 June 2018 £000s	31 December 2017 £000s
Within 1 year	832	1,037
Later than 1 year and less than 5 years	1,651	1,870
After 5 years	922	1,031
	3,405	3,938

15. Dividends

The following amounts were recognised as distributions in the period:

	Half year ended 30 June 2018 £000s	Half year ended 30 June 2017 £000s
Final 2017 dividend of 1.9p per share (H1 2017: nil)	3,610	-
Total dividends recognised in the half year	3,610	-

In addition to the above dividend, since the end of the period the Directors have approved the payment of an interim dividend of 2.3p per share. The aggregate amount of the interim dividend expected to be paid on 26 October 2018 out of retained earnings at 30 June 2018, but not recognised as a liability at the period end, is £4,370,000. The payment of this dividend will not have any tax consequences for the Group.

 

16. Cash flow statement notes

a) Cash generated from operations

Note	Half year ended 30 June  2018 £000s	Half year ended 30 June  2017 £000s
Cash flows from operating activities
Operating profit	9,554	10,287
Adjustments for:
Depreciation of property, plant and equipment                                          9	1,635	1,511
Amortisation of intangible assets                                                                  8	1,220	1,437
Profit on disposal of property, plant and equipment	(1)	(2)
Pension contributions made	(19)	(19)
Movement in derivative financial instruments	-	(42)
Share based payment transactions	2,393	-
Net exchange differences	109	99
	14,891	13,271
Changes in working capital:
Increase in inventories	(981)	(607)
(Increase)/decrease in trade and other receivables	(753)	338
Increase in trade and other payables	2,333	2,712
Cash generated from operations	15,490	15,714

b) Movement in net debt

						Non-cash movements
	At 1 January 2018			Cash flows		Currency movements	At 30 June 2018
	£000s			£000s		£000s	£000s
Non-current borrowings	(56,000)			8,000		-	(48,000)
Total liabilities from financing activities	(56,000)			8,000		-	(48,000)
Cash and cash equivalents	10,111			(116)		94	10,089
Net debt	(45,889)			7,884		94	(37,911)

 

17. RELATED PARTY TRANSACTIONS

Key management compensation

The following table details the aggregate compensation paid in respect of key management, which includes the Directors and the members of the Trading Board, representing members of the senior management team from all key departments of the Group, from the date of admission to trading on AIM. Prior to admission to trading on AIM, key management was considered to be the Executive Committee, including the Directors.

	Half year ended 30 June  2018 £000s	Half year ended 30 June  2017 £000s
Salaries and other short-term employment benefits	1,105	903
Post-employment benefits	162	73
Share-based payment transactions	1,988	-
	3,255	976

There are no defined benefit schemes for key management.

18. Post balance sheet events

Liquidation of Strix Far East Limited

On 21 August 2018, Strix Far East Limited was liquidated. This transaction had no material impact on the interim financial statements.

 

END

 

 

IR LPMLTMBIBBAP