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Strix Group PLC   -  KETL   

Interim Results

Released 07:00 18-Sep-2019

RNS Number : 6836M
Strix Group PLC
18 September 2019
 

18 September 2019

Strix Group Plc

("Strix" or the "Group")

Interim results for the 6 months ended 30 June 2019

'Another resilient trading performance'

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 2019.

FINANCIAL SUMMARY

 

Adjusted results1

 

H1 2019

H1 2018

Change

 

£m

£m

%3

Revenue

43.9

42.9

+2.5%

Gross profit

16.7

16.3

+2.5%

EBITDA2

14.9

14.8

+0.7%

Operating profit

12.2

11.9

+2.1%

Profit before tax

11.5

11.0

+4.6%

Profit after tax

10.9

10.6

+2.6%

Net debt

33.4

37.9

+11.9%4

Net cash generated from operating activities

10.9

15.2

-28.4%5

Basic earnings per share

5.7p

5.6p

+2.6% 

Diluted earnings per share

5.4p

5.3p

+1.8%

Interim dividend per share

2.6p

2.3p

+13.0% 

1.        Adjusted results exclude exceptional items, which include share based payment transactions. Adjusted results are non-GAAP metrics used by management and are not an IFRS disclosure. A table which shows both Adjusted and Reported results is included in the Chief Financial Officer's review.

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

4.        Movement partially driven by cash outflows in relation to the HaloSource acquisition and the new manufacturing facility.

5.        Movement partially driven by working capital movements and exceptional costs relating to the HaloSource acquisition.

FINANCIAL Highlights

·    

Adjusted profit before tax increased by 4.6% to £11.5m (H1 2018: £11.0m), driven by lower interest charges being incurred as a result of an improved leverage ratio and a lower average outstanding facility balance

·    

Net cash generated from operating activities decreased to £10.9m (H1 2018: £15.2m), driven by working capital movements and exceptional costs relating to the HaloSource acquisition

·    

Net debt in line with expectations at £33.4m (H1 2018: £37.9m)

·    

Interim dividend increased by 13% to 2.6p (H1 2018: 2.3p) per share to be paid on 25 October 2019

·    

Group average selling price was strong at c. 3% above H1, 2018 due to positive geographical and product mix, supported by a price increase implemented in Q4, 2018, primarily to cover an increase in the cost of hybrid plastics

Full YEAR Outlook

·    

A solid performance and profitability remains in line with full year market expectations

·    

Kettle control volumes were flat during H1 and anticipated to grow c.3% for the full year due to the commercial contracts and incremental specifications secured during year to date

·    

Average selling price for the full year is anticipated to be c.2% down on prior year (0% excluding ancillary products such as, China healthy eating kettles, milk frother and cerves, etc.), better than CAGR, driven by increased sales into China and the Less Regulated markets

·    

Aqua Optima is expected to recover from the slow start to the year with further expansion of trade brands sales into Europe and the launch of new products into the China domestic market

·    

New factory on track with the land secured and contractor engaged on a fixed priced contract in line with project plan

·    

The Board remains committed to delivering a 10% increase in the full year dividend to 7.7p (2018: 7.0p)

·    

Cash generation remains healthy with prudent capital allocations on four core priorities; progressive dividend, new factory construction, strategic acquisition, focused capital expenditures, with Net debt to EBITDA ratio modestly increased to 1.0 - 1.1x at year end

 

STRATEGIC HIGHLIGHTS

·    

Global market share maintained within each segment despite macro-economic headwinds

·    

Acquisition of specific assets from HaloSource Corporation successfully completed on 7 March 2019, adding significant R&D capabilities to the Water Category and providing additional adjacent technologies

·    

50-year land use rights secured for £1.7m in Zengcheng District of Guangzhou, China in order to build the new manufacturing facility, which will be fully operational by August 2021

·    

Appointment of a Chief Commercial Officer to expedite commercialisation of new products and technologies to support the next phase of the Group's growth

·    

Commercial agreement secured for the recently acquired Astrea product to be launched globally under the Philips brand. The product was launched at the IFA exhibition in Germany in September 2019

·    

Continued focus on both safety and intellectual property actions resulting in ten internet brands being removed from sale and three unsafe competitor kettles being recalled within Europe

·    

New single serve coffee system was launched in the US market in collaboration with Mr. Coffee, a major household name in the US, opening further opportunities within the US beverage sector

 

OPERATIONAL HIGHLIGHTS

·    

More than one million "Perfect Prep" units have now been sold, highlighting the success of this innovative product which uses Strix's technology

·    

U9 series continues to show strong growth with almost five million controls sold

·    

Continuous focus on automation with the Evolve mk4 water filter line becoming fully automated in H2 2019 and the U90 series line consistently achieving 80%+ efficiency

·    

Intertek has awarded the Group's Isle of Man facility a 'Benchmark' score for all ISO categories, the highest standard available within the scoring system which very few audited companies achieve

 

 

Mark Bartlett, Chief Executive Officer of Strix Group plc, said:

"Strix has achieved another solid performance despite continued challenges presented by the macro-economic environment. In particular, maintenance of the Group's market share in the Regulated and Less Regulated markets, combined with modest growth in China, demonstrates the strength and resilience of our core business model.

"We have maintained our margins due to continued focus on operational enhancements and cost improvements in our core products whilst remaining on track with key strategic projects. These include the construction of the new facility in China and the integration of the assets acquired from HaloSource in March 2019. We have made further progress toward our strategic objectives and continue to invest in the growth of our business, funded by our existing resources.

"With the acquisition of HaloSource, we have strengthened the Water Category which includes Aqua Optima, Astrea, and HaloPure. This provides us with the right blend of products to deliver success in this growing category and, together with our investment in R&D capabilities, we have the right ingredients to create and commercialise exciting new innovative products within the Water Category. These include working closely with AquaShield to develop a Philips co-branded Astrea one filtration bottle; the launch of the Zwilling Water Dispenser in April 2019 into the hot water appliance market; discussions with a major Asian mother & baby brand to bring new and innovative products to the market; and a collaboration with Mr Coffee to launch a new single serve coffee appliance in the North American market during September 2019 using our patented Hot Cup Technology.

"The Board is confident with the future outlook and profitability remains in line with full year market expectations. As a Board, we have committed to increase the full year dividend by 10% to 7.7p per share, an indication of our confidence in achieving the Group's business objectives for 2019." 

For further enquiries, please contact:

Strix Group Plc

Mark Bartlett, CEO

Raudres Wong, CFO

 

+44 (0) 1624 829 829

Zeus Capital Limited (Nominated Adviser and Joint Broker)

Nick Cowles / Jamie Peel / Jordan Warburton (Corporate Finance)

 

+44 (0) 20 3829 5000

Canaccord Genuity Limited (Joint Broker)

+44 (0) 20 7523 8000

Bobbie Hilliam / Angelos Vlatakis

 

 

 

IFC Advisory Limited (Financial PR and IR)

Graham Herring / Tim Metcalfe / Heather Armstrong

+44 (0) 20 3934 6630

 

Investor and Analyst Meeting

A briefing for investors and analysts will be held at 09:30hrs on 18 September 2019 at the offices of Canaccord Genuity, 88 Wood Street, London, EC2V 7QR. Strix Group Plc's interim results for 2019 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 Isle of Man 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 six months of 2019 have seen a solid performance for the Group.

The Group's revenues increased by 2.5% to £43.9m (H1 2018: £42.9m) with a constant currency increase of c.1%. Adjusted EBITDA was £14.9m (H1 2018: £14.8m), an increase of 0.7% on H1 2018. Adjusted profit before tax was £11.5m, growing by 4.6% (H1 2018: £11.0m) as a result of lower interest charges due to the Group having a lower average net debt position. After taking into account the increased dividend to shareholders, the HaloSource acquisition and the investment in the new China manufacturing facility, the Board is comfortable with the net debt position at the end of the period of £33.4m (H1 2018 £37.9m). The total average selling price increased by c.3% vs. H1 2018, driven by a positive change in sales mix and a price increase implemented in Q4 2018 to offset the increased cost of hybrid plastics used within legacy products. During H1 2019, the global kettle market growth softened to c.2% as a result of various geo-political issues. The Less Regulated sector remains the fastest growing sub-sector within the market, which Strix is actively targeting through the U9 series.

Given the Group's H1 2019 performance and the Board's confidence in the continued strength of cash generation, the Board has declared an interim dividend of 2.6p, an increase of 13.0% on H1 2018, payable on 25 October 2019 to shareholders on the register as at 27 September 2019.

Export kettle control sales

Export kettle control sales are defined as kettle controls which are ultimately sold in a market outside of China. Market growth has slowed in line with weaker global economic growth and issues such as Brexit and USA / China trade tensions have had a disruptive impact on supply chains.

For the Regulated market, management estimate H1 2019 market growth as coming in slightly under the 2014 to 2018 CAGR estimate of c.3%, with North America remaining the fastest growing region. Japan's market performance recovered in H1, Western Europe and UK had a strong start to H1 before softening towards the end of the period. The Group maintained its consolidated volume share of c.61% of this segment and continues to focus on incremental opportunities for H2 2019. Strix continues to undertake both safety and intellectual property actions across the market with three unsafe competitor kettles recalled across the EU and intellectual property actions taken against ten internet brands resulting in the removal from sale during H1 2019 in the United Kingdom, France, Germany and Italy.

The Less Regulated sector continues to deliver high growth rates driven by sales of the U9 series electronic control. The Group estimates that in H1 2019 the market growth being a couple of percentage points lower than the 2014 to 2018 CAGR estimate of c.8%. Whilst the Commonwealth of Independent States market was contracting, this was offset by stronger growth in Africa and South America. Strix's market volume share is c.20% with the U9 series beginning to gain positive traction in this target market.

China Domestic sales

The China market for electric kettles has contracted by c.5% due to the slowing Chinese economy and substitution at the higher end of kettles with healthy eating appliances. However, China remains the largest single country kettle market of just under 50 million of which Strix has a c.46% share. With the launch of the new U68 electronic control, Strix's sales into healthy eating appliances doubled in H1 2019 and we expect continued positive momentum in H2 2019. Following the recent commercial agreements based on both intellectual property actions and a focus on key brands, it is anticipated there will be a modest improvement in market share during H2 2019.

 

 

New Product Development (NPD)

Following the successful launch of the U9 Series during 2017, Strix has successfully produced over 7 million controls. The Group continues 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. The U6 series control for electronic kettles was launched in Q4 2018 and Strix has subsequently shipped over 0.5 million sets, which has been supported by IP actions.

The Group's patented heater technology continues to achieve strong sales with the market leading "perfect prep" baby milk preparation machine which has started to ship for use in a multi-temperature water dispenser launched in the China market during H1 2019. H2 2019 will also see the launch of a new product into the coffee sector of the US market in collaboration with Mr. Coffee, a major household name in the US.

The Group will continue to focus its highly skilled engineering resource towards enhancing our core technologies and innovating into new commercial markets. The addition of former HaloSource staff and products within the Water Category will drive further product innovation, synergies and commercialisation in the category.

Operations

Following the ISO surveillance audit, the Group's Isle of Man facility achieved the highest rating from Intertek - 'Benchmark' for all categories. The Board is proud to be one of the few audited companies to achieve this standard which highlights our focus on operational excellence and covers management, internal audits, corrective action, continuous improvement, operational control and resources.

Strix continues to develop its automation lines in China with the production of the Evolve mk4 water filter, from mould shop to finished goods packaging, which became fully automated in H2 2019. Further to this, the Group is also consistently achieving efficiencies in excess of 80% for the recently introduced U90 series line, with head count below budget.

Commodity prices for key materials (silver, copper and hybrid plastics) have been secured for the full year at or below budget pricing, in line with the Group's purchasing policy and appropriate stocks have been secured to prevent any potential logistics disruption resulting from Brexit.

Following the purchase of the 50-year land use rights for £1.7m, the Group has signed a fixed price contract for the construction of the new manufacturing facility in the Zengcheng District of Guangzhou, China which is on track to become fully operational by August 2021 and is in line with budget.

Water Category

Aqua Optima branded products have achieved a stable share in its key UK market despite challenging market conditions, which have driven an overall market decline of c.7% as a result of consumer confidence issues linked to Brexit and price rises. Aqua Optima remains well placed to capture future growth when market sentiment improves as a result of its current market share and new European business launches in the trade brand segment during H2 2019. Trade brands are increasing their share of the point of use category, and as a result of this new business, Aqua Optima has become the market leading trade brand provider in the UK with its differentiated brand proposition. Investment in trade brands continues with renewed agreements with parkrun and Terracycle, supporting Aqua Optima's goal of 'better for you, better for the environment' message. Aqua Optima launched into the China market through OEM appliance partners in H1 2019, with further launches planned in H2 2019 through e-commerce channels.

Performance of the assets acquired from HaloSource in the period since March 2019 has been in line with the Group's expectations. The Astrea product (which is now part of Strix) has received significant interest from a number of parties with discussions ongoing with a leading global brand and a leading North American home shopping network. Astrea technologies will now launch into Europe and APAC geographies in Q1 2020 in a co-brand execution with Philips targeting the expanding mobile hydration market. Strix continues to seek further opportunities to enter into agreements which management believes will drive future profitability.

Dividend Policy

The Board remains committed to its dividend policy, which is to increase the dividend in line with future underlying earnings from a base of 7.7p for the 2019 financial year. The Group has consistently achieved strong cash conversion which will underpin this dividend alongside continued investment in the Group's asset base to deliver future profitable growth and support expansion into new areas which are aligned to the core competencies of the Group.

The dividend policy of the Company 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 execution of opportunities referred above.

Future strategy

Strix will continue to develop a culture of achievement within the Group, with a strategy focused on driving shareholder value and employee engagement. As part of this strategy, the Group will further broaden its senior management and engineering teams through strategic recruitment whilst further developing existing resources with training and development programmes aligned to Strix's wider growth objectives.

The Group will also continue to increase its focus on new product development and core technologies to enhance the product portfolio within the Small Domestic Appliance ("SDA") market. In particular, Strix will develop and launch both disruptive and innovative products to provide consumer and environmental benefits within the hot water on demand category to enhance functionality and value, as well as a range of filtration technologies to differentiate our existing portfolio and expand our addressable markets. In line with this strategy, the Group recently secured a number of collaborations with national and global brands in both the water dispense and water filtration categories, leveraging on its extensive relationships with brands and retailers worldwide.

In addition to the organic growth initiatives, the Board will continue to target appropriate acquisitions within the SDA sector, funded from existing resources. Focus will be on companies or technologies that support the Group's core competencies with particular attention to water filtration, heating technologies and the hot water on demand / coffee categories.

Within Operations, the Group 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. Progress on the new manufacturing facility in China remains on track with the signing of a fixed price construction contract in line with budget. The facility is expected to be fully operational by August 2021 and will provide additional capacity to realise the Group's growth potential. The additional capacity will enable more efficient process flows as well as the ability to in-source additional products and further increase automation.

 

Outlook

The core kettle control market remains solid, despite the geo-political events which continue to overshadow global trade, including trade tensions between the US and China, and the pending impact of Brexit. Average selling prices have remained stable following the price increase in Q4 2018 and a positive sales mix. Exposure to the direct risks of Brexit remain limited given the majority of the Company's transactions are made between the Isle of Man and China, although the Board believes that consumer confidence, as a result of the continued uncertainty, may impact overall sales in this region until clarity on the status is secured.

The Group continues to work toward its key strategic projects which it believes will deliver long-term growth, with particular focus on growing the NPD Category and the Water Category. The recent addition of a Chief Commercial Officer, coupled with the implementation of category management will ensure increased focus on the commercialisation of new products that provide true consumer benefit. In addition, management will continue to invest further in automation to mitigate the risk of rising wage costs, particularly in China.

Commodity prices have been secured in line with our purchasing policy, out to mid-2020 which reduces exposure to commodity price fluctuations and provides price certainty for key commodities, which form a significant part of the Group's material costs.

The Board is confident with the future outlook despite the current macro-economic headwinds and profitability remains in line with full year market expectations.

The Group total average selling price is anticipated to close at c. 2% (0% excluding ancillary products such as, China healthy eating kettles, milk frother and cerves, etc.) below prior year due to product mix with increased sales to both the China and Less Regulated markets.

Mark Bartlett

Chief Executive

18 September 2019

 

 

Financial Review

 

 

Adjusted results1

 

Reported results

 

 

H1 2019      £m

H1 2018      £m

Change

%2

 

H1 2019      £m

H1 2018      £m

Change

%2

 

 

 

Revenue

 

43.9

42.9

+2.5%

 

43.9

42.9

+2.5%

Gross profit

 

16.7

16.3

+2.5%

 

16.7

16.3

Distribution costs

 

(2.6)

(2.8)

+7.5%

 

(2.6)

(2.8)

Administrative costs

 

(2.3)

(1.7)

-30.8%

 

(6.2)

(4.1)

Operating profit

 

12.2

11.9

+2.1%

 

8.1

9.6

EBITDA3

 

14.9

14.8

+0.7%

 

10.9

12.4

Profit before tax

 

11.5

11.0

+4.6%

 

7.5

8.6

Profit after tax

 

10.9

10.6

+2.6%

 

6.9

8.3

Net cash generated from operating activities

 

10.9

15.2

-28.4%

 

10.9

15.2

-28.4%

 

 

 

 

 

 

 

 

 

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.

3.        EBITDA, which is defined as earnings before finance costs, tax, depreciation and amortisation, is a non-GAAP metric used by management and is not an IFRS disclosure.

 

Financial performance

Revenue grew 2.5% to £43.9m (H1 2018: £42.9m) with a constant currency increase of c.1%. Reported gross profit increased by 2.5% to £16.7m (H1 2018: £16.3m) as a result of solid trading results across the Group. Control volume in the period was flat against the prior year, but revenue was higher due to product mix changes. In addition, foreign exchange rate movements have increased the Sterling value of the Group's US Dollar revenue, partly offset by an increase in US Dollar costs, causing the gross profit margin to maintain around 38%.

The Group generated an adjusted EBITDA of £14.9m, an increase of 0.7% (H1 2018: £14.8m) and reported EBITDA of £10.9m (H1 2018: £12.4m). Lower reported EBITDA was due primarily to an increase of £0.7m in share-based payment charges and an additional £0.9m of strategic project costs relating to the HaloSource acquisition versus H1 2018. The adjusted EBITDA margin has decreased from prior year to 33.9% (H1 2018: 34.5%), whilst reported EBITDA margin has decreased to 24.7% (H1 2018: 28.9%).

Combined depreciation and amortisation at £2.7m (H1 2018: £2.9m) was slightly lower, as a £0.6m increase in right-of-use asset depreciation following the adoption of IFRS 16 on 1 January 2019 was offset by a £0.5m reduction in amortisation of capitalised development costs. Excluding the impact of exceptional costs, adjusted operating profit increased by 2.1% to £12.2m (H1 2018: £11.9m). Reported operating profit decreased by 14.8% to £8.1m (H1 2018: £9.6m), primarily due to the £1.6m increase in exceptional costs.

Adjusted profit before tax was £11.5m (H1 2018: £11.0m), an increase of 4.6% due to lower interest charges being incurred as a result of an improved leverage ratio and a lower outstanding facility balance versus the prior period. Reported profit before tax was £7.5m (H1 2018: £8.6m). 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 £10.9m, an increase of 2.6% on the prior period (H1 2018: £10.5m). A higher income tax expense has been incurred in the current period following the basis of taxation change in China from 1 January 2019 announced in the 2018 Annual Report. Reported profit after tax, including an increase of £1.6m in exceptional costs, was £6.9m (H1 2018: £8.3m).

Costs

Cost of sales increased by 2.5% to £27.3m (H1 2018: £26.6m), offsetting the positive impact of foreign exchange on revenues. Distribution costs decreased by a further 7.5% to £2.6m (H1 2018: £2.8m) due to lower depreciation and carriage costs.

Administration costs (excluding exceptional costs) were £2.3m in H1 2019 against £1.7m in H1 2018. The increase resulted primarily from staffing costs following the increase in headcount due to the HaloSource acquisition and further strategic appointments to support the growth aspirations of the Group.

The Group awarded a number of share options as part of the admission to trading on AIM to incentivise and reward a number of employees, and further grants have been made to the senior management team to ensure their objectives are aligned to those of the Group and its shareholders. The total share-based payment charge incurred in H1 2019 was £3.1m (H1 2018: £2.4m). Exceptional costs increased by £1.7m in the period compared to H1 2018, which included £0.9m of costs in relation to the HaloSource acquisition.

 

 

Cash flow

Net cash generated from operating activities was £10.9m (H1 2018: £15.2m), due to working capital movements and the decrease in reported operating profit.

Total investing outflows were £6.7m (H1 2018: £3.4m), including the £1.0m acquisition of HaloSource and £1.7m for the purchase of the right-of-use land asset. Capital expenditure (including the £1.7m land usage right) increased from £2.6m in H1 2018 to £4.6m in H1 2019.

Balance Sheet

Non-current assets increased to £24.3m (2018: £15.9m) due to right-of-use asset additions caused by the adoption of IFRS 16 on 1 January 2019 of £4.2m, a £1.7m increase due to the purchase of the land usage rights in the Zengcheng District of Guangzhou, and a further £0.7m associated with intangibles and goodwill acquired as a result of the HaloSource acquisition. A further £1.5m increase occurred in capital equipment under construction as a result of the continued investment in automation.

Current assets were unchanged at £31.3m (2018: £31.3m). Inventories held at the end of the period increased to £11.0m (2018: £10.5m) due to some buffer stock being built to mitigate the potential impact of supply chain issues due to Brexit. Trade and other receivables increased to £11.7m (2018: £7.3m) due to an increase in prepayments to suppliers to secure fixed material prices and higher trade debtors due to higher June sales.

Current liabilities increased to £22.0m (2018: £18.4m) owing to an increase of £1.3m in future lease liabilities due to the adoption of IFRS 16 and higher trade creditors. Non-current future lease liabilities of £3.1m were also created as a consequence of the transition to IFRS 16, which had a balance of zero in the 31 December 2018 consolidated balance sheet.

Net debt

Net debt has increased since 31 December 2018 to £33.4m (2018: £27.5m) as a result of the land right-of-use acquisition, the HaloSource acquisition and the dividend paid to shareholders of £8.9m in H1 2019. The Group continues to have in place a revolving credit facility of £51.0m (2018: £53.0m) of which £42.0m (2018: £41.0m) has been drawn down on the facility as at 30 June 2019. The net debt to adjusted EBITDA ratio was 0.9x (2018: 0.8x).

 

Dividend

The Board is pleased to declare an interim dividend of 2.6p (H1 2018: 2.3p) per ordinary share. This interim dividend will be paid on 25 October 2019 to shareholders on the Register at the close of business on 27 September 2019. The ordinary shares will become ex-dividend on 26 September 2019. We remain committed to paying a total dividend which will equate to 7.7p per share for the full financial year. Whilst the consolidated accounts show a deficit, significant reserves exist on the balance sheet of the dividend paying entity, Strix Group Plc.

 

 

Raudres Wong

Chief Financial Officer

18 September 2019

 

 

Condensed INTERIM consolidated statement of comprehensive income

for the period ended 30 June 2019 (unaudited)

 

 

Note

(unaudited)

Period

ended

30 June

 2019

£000s

(unaudited)

Period

ended

30 June

 2018

£000s

Revenue

7

43,930

42,868

Cost of sales - before exceptional items

 

(27,188)

(26,600)

Cost of sales - exceptional items

 

(65)

-

Cost of sales

 

(27,253)

(26,600)

Gross profit

 

16,677

16,268

Distribution costs

 

(2,565)

(2,775)

Administrative expenses - before exceptional items

 

(2,251)

(1,721)

Administrative expenses - exceptional items

6

(3,989)

(2,393)

Administrative expenses

 

(6,240)

(4,114)

Other operating income

 

266

175

Operating profit

 

8,138

9,554

Analysed as:

 

 

 

Adjusted EBITDA1

 

14,909

14,802

Amortisation

8

(688)

(1,220)

Depreciation

9

(1,401)

(1,635)

Right-of-use asset depreciation

9

(628)

-    

Exceptional items

6

(4,054)

(2,393)

Operating profit

 

8,138

9,554

Finance costs

5

(677)

(930)

Finance income

 

11

7

Profit before taxation

 

7,472

8,631

Income tax expense

 

(607)

(378)

Profit and total comprehensive income for the period

 

6,865

8,253

 

 

 

 

Earnings per share (pence)

 

 

 

Basic

6

3.6

4.3

Diluted

6

3.4

4.1

 

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 2019 (unaudited)

 

 

 

 

Note

(unaudited)

30 June

2019

£000s

(audited)

31 December

2018

£000s

Non-current assets

 

 

 

Intangible assets

8

5,968

4,804

Property, plant and equipment

9

18,344

11,093

Total non-current assets

 

24,312

15,897

Current assets

 

 

 

Inventories

10

11,039

10,518

Trade and other receivables

13

11,663

7,254

Cash and cash equivalents

 

8,592

13,521

Total current assets

 

31,294

31,293

Total assets

 

55,606

47,190

Equity and liabilities

 

 

 

Equity

 

 

 

Share capital

 

1,900

1,900

Share-based payment reserve

 

9,957

6,904

Deficit

 

(23,515)

(21,180)

Total deficit

 

(11,658)

(12,376)

Current liabilities

 

 

 

Trade and other payables

14

18,873

16,824

Future lease liabilities

18

1,333

-

Current income tax liabilities

14

1,824

1,575

Total current liabilities

 

22,030

18,399

Non-current liabilities

 

 

 

Future lease liabilities

18

3,087

-

Borrowings

15

42,000

41,000

Post-employment benefits

 

147

167

Total non-current liabilities

 

45,234

41,167

Total liabilities

 

67,264

59,566

Total equity and liabilities

 

55,606

47,190

 

 

 

 

Condensed INTERIM consolidated statement of changes in equity

as at 30 June 2019 (unaudited)

 

(unaudited)

Share

capital

£000s

Share-based payment reserve £000s

 

Deficit

£000s

Total

deficit

£000s

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 17)

-

-

(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)

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

Balance at 1 January 2019

1,900

6,904

(21,180)

(12,376)

Profit for the period

-

-

6,865

6,865

Total comprehensive income for the period

-

-

6,865

6,865

Transactions with owners recognised directly in equity:

 

 

 

 

Dividends paid (note 17)

-

-

(8,930)

(8,930)

Share-based payment transactions

-

3,053

-

3,053

Total transactions with owners recognised directly in equity

-

3,053

(8,930)

(5,877)

Transition to IFRS 16 (note 2)

-

-

(270)

(270)

Other transactions recognised directly in equity

-

-

(270)

(270)

Balance at 30 June 2019

1,900

9,957

(23,515)

(11,658)

 

 

 

 

 

 

                   

 

 

 

 

Condensed INTERIM consolidated cash flow statement

for the PERIOD ended 30 June 2019 (unaudited)

 

                                                                                                                                                 Note

(unaudited)

Period

ended

30 June

 2019

£000s

(unaudited)

Period

ended

30 June

2018

£000s

Cash flows from operating activities

 

 

Cash generated from operations                                                                      19a

11,272

15,490

Tax paid

(359)

(253)

Net cash generated from operating activities

10,913

15,237

 

 

 

Cash flows from investing activities

 

 

Purchase of property, plant and equipment                                                   9

(4,646)

(2,588)

Capitalised development costs                                                                         8

(900)

(852)

Purchase of HaloSource Inc assets                                                                   12

(953)

-

Purchase of intangibles                                                                                      8

(253)

(12)

Proceeds on sale of property, plant and equipment

2

1

Finance income                                                                                                   

11

7

Net cash used in investing activities

(6,738)

(3,444)

 

 

 

Cash flows from financing activities

 

 

New borrowings/(Repayment of borrowings)                                                 19b

1,000

(8,000)

Finance costs paid                                                                                               5

(556)

(299)

Principal elements of lease payments                                                           

(600)

-

Dividends paid                                                                                                     17

(8,930)

(3,610)

Net cash used in financing activities

(9,086)

(11,909)

 

 

 

Net decrease in cash and cash equivalents

(4,911)

(116)

Cash and cash equivalents at the beginning of the period

13,521

10,111

Effects of foreign exchange on cash and cash equivalents

(18)

94

Cash and cash equivalents at the end of the period

8,592

10,089

 

 

 

 

 

Notes to the condensed INTERIM cONSOLIDATED financial statements

for the PERIOD ended 30 June 2019 (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.

The principal activities of Strix Group Plc and its subsidiaries (together 'the Group') are 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.

These condensed interim consolidated financial statements ('interim financial statements') were approved for issue on 18 September 2019. The interim report will be available 18 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 2018. 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 2018.

The preparation of Group financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3.

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 2018, which is available at www.strixplc.com.

New and amended standards adopted by the Group

A number of new or amended standards became applicable for the current reporting period, and the Group made an adjustment to retained earnings as a result of adopting IFRS 16 'Leases'. The impact of the adoption of the leasing standard and the new accounting policies are disclosed below in this note. Other amendments to IFRSs effective for the financial period ended 30 June 2019 have not had a material impact on the Group.

 

 

Adoption of IFRS 16 'Leases'

This section explains the impact of the adoption of IFRS 16 'Leases' on the Group's financial statements. The Group has adopted IFRS 16 retrospectively from 1 January 2019, and has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.

Adjustments recognised on adoption of IFRS 16

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 'Leases'. These liabilities were measured at the present value of the future lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 2.7%.

The following table reconciles the difference between the operating lease commitments disclosure in the 2018 Annual Report and the future lease liability recognition on 1 January 2019:

Operating lease commitments as disclosed at 31 December 2018

3,922

Discounted using the lessee's incremental borrowing rate

(270)

Other adjustments at date of acquisition

(19)

Lease liability recognised as at 1 January 2019

3,633

 

 

 

 

The Group has no leases which were previously classified as finance leases under IAS 17 'Leases'.

The right-of-use assets for property leases were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to those leases recognised in the balance sheet at 31 December 2018. Other right-of-use assets for one lease were measured on a retrospective basis as if the new rules had always been applied. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

The recognised right-of-use assets all relate to building leases. The change in accounting policy affected the following items on the condensed interim consolidated balance sheet on 1 January 2019:

Property, plant and equipment (right-of-use assets)

3,363

Future lease liabilities

(3,633)

Retained earnings

270

Impact on earnings per share

Adjusted EBITDA increased as a result of the change in accounting policy. Basic Earnings per share was unchanged for the six months to 30 June 2019 as a result of the adoption of IFRS 16 as the impact is not significant to one decimal place.

Practical expedients applied

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

·      the use of a single discount rate to a portfolio of leases with reasonably similar characteristics

·      the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases

·      the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application, and

·      the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

     

 

 

Business combinations

Subsidiaries are fully consolidated from the date on which control is transferred to the Group, and are deconsolidated from the date that control ceases.

The acquisition method of accounting is used to account for business combination by the Group, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the:

·     

fair values of the assets transferred

·     

liabilities incurred to the former owners of the acquired business

·     

equity interests issued by the Group

·     

fair value of any asset or liability resulting from a contingent consideration arrangement; and

·     

fair value of any pre-existing equity interest in the acquired business

 

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest's proportionate share of the acquired entity's net identifiable assets.

Acquisition-related costs are expensed as incurred. The excess of the:

·     

consideration transferred,

·     

amount of any non-controlling interest in the acquired entity, and

·     

acquisition-date fair value of any previous equity interest in the acquired entity

 

over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognised directly in profit or loss as a bargain purchase.

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 the Company's admission to AIM which occurred during 2017 which included the distributions made to the former shareholders funded in part by a revolving credit facility (see note 15). In assessing the Group's going concern status, the Directors have made additional enquiries as to the appropriateness of continuing to adopt the going concern basis. In making this assessment they have considered:

·     

the strong historic trading performance of the Group;

·     

the current and past profitability of the Group;

·     

budgets and cash flow forecasts for the period to December 2021;

·     

the current financial position of the Group, including its cash and cash equivalents balances of £8.6m (2018: £13.5m);

·     

the availability of further funding should this be required (including the headroom of £9.0m (2018: £12.0m) on the revolving credit facility and the access to the AIM market afforded by the admission to AIM);

·     

the current and past ability of the Group to meet its debt covenants;

·     

the low liquidity risk the Group is exposed to; and

·     

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. The key entities in the Group have traded profitably for a long period of time. As a result, the Directors continue to adopt the going concern basis of accounting in preparing the interim financial statements and there are no material uncertainties about the Group's ability to continue as a going concern.

As a Company the dividend-paying entity, Strix Group Plc, has significant reserves from which to make distributions to shareholders, although the retained reserves of the Group show a deficit.

 

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

At the date of approval of the interim financial statements, there are no new standards and interpretations which are relevant to the Group which were in issue but not yet effective.

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, finance income, 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 2018, 45.7% (2017: 46.3%) of the Group's revenue and 36.6% (2017: 40.9%) of the Group's profit after tax accumulated in H1.

Foreign currency translation

Functional and presentational currency

Items included in the financial information of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The functional currency of the Company, and most entities within the Group, is Sterling. This is also the Group's presentational currency. The functional currency of the following subsidiaries are currencies other than Sterling: Strix Hong Kong, which is the Hong Kong dollar; Strix USA, which is the United States Dollar; and HaloSource Shanghai, which is the Chinese Renminbi.

Transactions and balances

Foreign currency balances are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the condensed interim consolidated statement of comprehensive income within cost of sales.

Group companies

The results and financial position of Strix Hong Kong, Strix USA and HaloSource Shanghai are translated into the presentation currency as follows:

·     

assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet, or historic rates for certain line items;

·     

income and expenses for each condensed interim consolidated statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and

·     

all resulting exchange differences are recognised in the condensed interim consolidated statement of comprehensive income.

 

Leases

This note discloses the new accounting policy for leases that has been applied from 1 January 2019 as a result of the adoption of IFRS 16.

The leasing activities of the Group and how these are accounted for

The Group leases office space, workshops, warehouses and factory space. Rental contracts are typically made for periods of 3 - 10 years, but may have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Until the 2018 financial year, leases of property, plant and equipment (including buildings) were classified as operating leases. Payments made under operating leases (net of any lease incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.

From 1 January 2019, leases are recognised as a right-of-use assets and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability, finance costs and foreign exchange (where the lease is denominated in a foreign currency). The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight line basis.

Measurement of future lease liabilities

Assets and liabilities arising from a lease are initially measured on a present value basis. Future lease liabilities include the net present value of the following lease payments:

·     

fixed payments (including in-substance fixed payments), less any lease incentives receivable

·     

variable lease payments that are based on an index or a rate

·     

amounts expected to be payable by the lessee under residual value guarantees

·     

the exercise price of a purchase option if the lessee is reasonably certain to exercise that options, and

·     

the payment of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

 

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

Measurement of right-of-use assets

Right-of-use assets are measured at cost comprising the following:

·     

the amount of the initial measurement of lease liability

·     

any lease payments made at or before the commencement date less any lease incentives received

·     

any initial direct costs, and

·     

restoration costs

 

Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise primarily IT equipment.

Extension and termination options

Extension and termination options are included in a number of property leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts.

3. Critical accounting judgements and estimates

The preparation of these interim financial statements under IFRS 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 2018.

The key judgements and estimates relevant to the application of IFRS 16 and the business combination under IFRS 3 which took place in the period are disclosed in note 2 and note 12 respectively.

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 Original Equipment Manufacturers ('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. Whilst under IFRS 8 there is only one segment, the information used to prepare the condensed interim consolidated financial statements is disaggregated into three product families, being 'Kettle controls', 'Water Category' and 'Other'. 'Other' relates to new technology products and other appliances which do not fit into 'Kettle controls' or 'Water Category'. An analysis of revenue by product family is provided in note 7. 'Water Category' includes the activities of 'Aqua Optima' plus the specified assets acquired from HaloSource in the period as disclosed in note 12.

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. finance costs

 

Period

ended

30 June

 2019

£000s

Period

ended

30 June

2018

£000s

Letter of credit charges

26

31

Pension scheme interest

-

1

Future lease liability interest

44

-

Borrowing costs

607

898

Total finance costs

677

930

Further information about the Group's borrowings is provided in note 15.

 

 

6. Earnings per share

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

 

Period

ended

30 June

2019

Period

ended

30 June

2018

Earnings (£000s)

 

 

Earnings for the purpose of basic and diluted earnings per share

6,865

8,253

Number of shares (000s)

 

 

Weighted average number of shares for the purposes of basic earnings per share

190,000

190,000

Weighted average dilutive effect of conditional share awards

10,679

9,170

Weighted average number of shares for the purposes of diluted earnings per share

200,679

199,170

Earnings per ordinary share (pence)

 

 

Basic earnings per ordinary share

3.6

4.3

Diluted earnings per ordinary share

3.4

4.1

Adjusted earnings per ordinary share (pence) 1

 

 

Basic adjusted earnings per ordinary share

5.7

5.6

Diluted adjusted earnings per ordinary share

5.4

5.3

 

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

 

Period

ended

30 June

2019

£000s

Period

ended

30 June

2018

£000s

Profit for the year

6,865

8,253

Add back:

 

 

Share-based payments

3,053

2,393

Strategic projects

936

-

Reorganisation costs

65

-

Adjusted earnings 1

10,919

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. £910k of the £936k of 'Strategic projects' relate to the acquisition of HaloSource in H1 2019 (H1 2018: nil).

 

 

7. REVENUE

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

 

Period

ended

30 June

 2019

£000s

Period

ended

30 June

2018

£000s

Kettle controls

38,408

37,525

Water Category*

4,964

5,060

Other*

558

283

Total revenue

43,930

42,868

* The Group has reclassified a certain product line totalling £1.3m previously reported under 'Other' as part of 'Water Category' when compared to the revenue disaggregation table reported at H1 2018. This reclassification has been applied to the period ended 30 June 2018 in the table above in order to follow a change to the internal reporting of this product line and match the disclosure in the 2018 Annual Report.

8. Intangible assets

 

2019

 

Development costs

Software

Intellectual Property

Goodwill

Total

 

£000s

£000s

£000s

£000s

£000s

At 1 January

 

 

 

 

 

Cost

12,886

579

-

-

13,465

Accumulated amortisation and impairment

(8,324)

(337)

-

-

(8,661)

Net book value

4,562

242

-

-

4,804

 

 

 

 

 

 

Period ended 30 June

 

 

 

 

 

Additions

900

240

-

-

1,140

HaloSource acquisition

-

-

316

384

700

Amortisation charges

(585)

(103)

-

-

(688)

Exchange differences

-

-

12

-

12

Closing net book value

4,877

379

328

384

5,968

 

 

 

 

 

 

At 30 June

 

 

 

 

 

Cost

10,957

1,262

328

384

12,931

Accumulated amortisation and impairment

(6,080)

(883)

-

-

(6,963)

Net book value

4,877

379

328

384

5,968

All amortisation charges have been treated as an expense, and charged to cost of sales (£633,000) and administrative expenses (£55,000) in the condensed interim consolidated statement of comprehensive income.

There were no reversals of prior year impairments during the year. During the period, £2,828,000 of development cost assets with a net book value of zero were derecognised in line with the de-recognition policy and £443,000 of software assets with a net book value of zero were transferred in.

 

2018

 

Development costs

Software

Total

 

 

£000s

£000s

£000s

 

At 1 January

 

 

 

 

Cost

12,716

511

13,227

 

Accumulated amortisation and impairment

(7,877)

(171)

(8,048)

 

Net book value

4,839

340

5,179

 

 

 

 

 

 

Period ended 30 June

 

 

 

 

Additions

852

12

864

 

Amortisation charges

(1,142)

(78)

(1,220)

 

Closing net book value

4,549

274

4,823

 

 

 

 

 

 

At 30 June

 

 

 

 

Cost

13,568

523

14,091

 

Accumulated amortisation and impairment

(9,019)

(249)

(9,268)

 

Net book value

4,549

274

4,823

 

 

All amortisation charges have been treated as an expense, and charged to cost of sales in the comparative condensed interim consolidated statement of comprehensive income.

There were no reversals of prior year impairments during the comparative period.

 

 

9. Property, plant and equipment

 

 

 

2019

 

 

Plant & machinery

Fixtures, fittings & equipment

Motor vehicles

Production tools

Land & Buildings

Right-of-use assets (note 18)

Assets under construction

Total

 

£000s

£000s

£000s

£000s

£000s

£000s

£000s

£000s

At 1 January

 

 

 

 

 

 

 

 

Cost

20,624

3,673

141

13,484

-

-

1,889

39,811

Accumulated depreciation

(14,695)

(2,595)

(51)

(11,377)

-

-

-

(28,718)

Net book value

1,078

90

2,107

-

-

1,889

11,093

 

 

 

 

 

 

 

 

 

Period ended 30 June

 

 

 

 

 

 

 

 

Additions

-

502

-

-

1,720

4,794

2,016

9,032

HaloSource acquisition

135

93

1

49

-

-

23

301

Transfers

409

59

-

44

-

-

(512)

-

Disposals

(9)

-

-

-

-

-

-

(9)

Depreciation charge

(532)

(365)

(12)

(492)

(6)

(622)

-

(2,029)

Exchange differences

(4)

(35)

(1)

-

-

(4)

-

(44)

Closing net book value

5,928

1,332

78

1,708

1,714

4,168

3,416

18,344

 

 

 

 

 

 

 

 

 

At 30 June

 

 

 

 

 

 

 

 

Cost

21,160

4,326

142

13,577

1,720

4,794

3,416

49,135

Accumulated depreciation

(15,232)

(2,994)

(64)

(11,869)

(6)

(626)

-

(30,791)

Net book value

1,332

78

1,708

1,714

4,168

3,416

18,344

                         

Depreciation charges are allocated to cost of sales (£1,584,000), distribution costs (£212,000), and administrative expenses (£233,000) in the condensed interim consolidated statement of comprehensive income.

 

 

 

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

 

 

 

 

 

 

 

Period 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.

10. Inventories

 

30 June

 2019

£000s

31 December

2018

£000s

Raw materials and consumables

6,514

5,993

Finished goods and goods in transit

4,525

4,525

 

11,039

10,518

The cost of inventories recognised as an expense and included in cost of sales amounted to £16,738,000 (H1 2018: £15,781,000). The charge for impaired inventories was £442,000 (H1 2018: £119,000). There were no reversals of previous write-downs.

 

 

11. PRINCIPAL SUBSIDIARY UNDERTAKINGS OF THE GROUP

A list of all subsidiary undertakings controlled by the Group, which are all included in the interim financial statements, is set out below.

Subsidiary

Nature of business

Country of incorporation

% of ordinary shares held by the Company

% of ordinary shares held by the Group

 

 

 

%

%

Sula Limited

Holding company

IOM

100

100

Strix Limited

Manufacture and sale of products

IOM

-

100

Strix Guangzhou Ltd

Manufacture and sale of products

China

-

100

Strix (U.K.) Limited

Group's sale and distribution centre

UK

-

100

Strix Hong Kong Ltd

Sale and distribution of products

Hong Kong

-

100

Strix (China) Limited

Construction of manufacturing facility       

China

-

100

HaloSource Water Purification Technology (Shanghai) Co. Ltd

Manufacturing and sales of products

China

-

100

Strix (USA), Inc

Research and development, sales, and distribution of products

USA

-

100

Acquisition of specified assets from HaloSource

On 7 March 2019, the Group completed the acquisition of specified assets from HaloSource Corporation, the details of which are disclosed in note 12. HaloSource Water Purification Technology (Shanghai) Co. Ltd was acquired by the Group as part of this transaction and is a wholly owned subsidiary of Strix (Hong Kong) Ltd.

Incorporation of Strix (USA), Inc

On 14 February 2019 Strix (USA), Inc was incorporated in the state of Washington, United States of America. Strix (USA), Inc is a wholly owned subsidiary of Strix (U.K.) Limited. The US-based assets acquired as part of the acquisition of specified assets from HaloSource were transferred into this entity.

Incorporation of Strix (China) Limited

On 20 February 2019, Strix (China) Limited was granted a business licence. Strix (China) Limited, a company incorporated in China, is a wholly owned subsidiary of Strix (Hong Kong) Ltd. Strix (China) Limited owns the land use right acquired by the Group in the Zengcheng District of Guangzhou, China in respect of the site of the new manufacturing facility.

 

 

12. ACQUISITION OF SPECIFIED ASSETS FROM HALOSOURCE

On 7 March 2019, the Group completed the acquisition of specified assets from HaloSource Corporation ("HaloSource"), following approval by HaloSource shareholders at a general meeting held on 26 February 2019. The Group entered into an asset purchase agreement with HaloSource, pursuant to which it has acquired specified assets relating to HaloSource's HaloPure division and its Astrea product, for total consideration of US$1.33 million (£1.01m) payable in cash.

The Board of Strix considered that the acquisition represented an opportunity to acquire extensively developed technology, which complemented its Water Category, at an attractive price, as well as gaining access to skilled research and development resource in the USA. Strix will continue the process of commercialising the technology and products that it has acquired, leveraging its experience of operating in the water filtration sector and bringing to market new consumer products.

The fair value of the assets and liabilities acquired were as follows:

 

 

 

£000s

Non-current assets

 

 

 

Intangible assets

 

 

316

Property, plant and equipment

 

 

301

Total non-current assets

 

 

617

Current assets

 

 

 

Inventories

 

 

251

Trade and other receivables

 

 

448

Other assets

 

 

100

Cash and cash equivalents

 

 

61

Total current assets

 

 

860

Total assets

 

 

1,477

 

 

 

 

Current liabilities

 

 

 

Trade and other payables

 

 

(847)

Total current liabilities

 

 

(847)

 

 

 

 

Net assets acquired

 

 

630

The fair value of the intangibles assets was calculated based on a discounted cash flow model, based on the expected future income the patents and brand names will generate. The discount rate applied was the Group's Weighted Average Cost of Capital, and a growth rate of 5.0% was assumed in perpetuity, based on the CAGR the Group has experienced with similar products in the same sector over the past few years.

Acquisition costs included within 'Administration expenses - exceptional items' in the condensed interim consolidated statement of comprehensive income amounted to £0.9m. This included £0.4m of bridging loans made available to HaloSource to ensure the company continued to operate during the due diligence period. These have been designated as 'separate transaction' per IFRS 3 and therefore not included as part of the purchase consideration. The bridging loans did not constitute effective settlement of a pre-existing relationship.

The acquired business contributed revenues of £273,000 and a loss of (£704,000) to the Group for the period from 7 March 2019 to 30 June 2019. The Group revenues and profit if the acquisition had occurred on 1 January 2019 has not been calculated as the supporting information is not available given the status of the acquired assets at the date of acquisition. The Directors believe the amount would be insignificant to the Group as due to a shortage of funds under the previous ownership, it is unlikely the assets would generate any significant revenues, profit or loss prior to the acquisition date.

The goodwill of £384,000, calculated as the purchase consideration of £1,014,000 less the fair value of the net assets acquired of £630,000 is attributable to the cumulative skills and knowledge of the members of staff who became employees of the Group at the date of acquisition, together with the synergies expected to be generated by the Group following the acquisition, particularly within the Water Category.

 

 

13. Trade and other receivables

 

30 June

2019

£000s

31 December 2018

£000s

Amounts falling due within one year:

 

 

Trade receivables

7,057

3,336

Trade receivables past due

197

131

Loss allowance

(10)

(26)

Trade receivables - net

7,244

3,441

Prepayments

850

987

Advance purchase of commodities

2,522

1,483

Other receivables

1,047

1,343

 

11,663

7,254

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

The amount of trade receivables past due is not material, therefore an aging analysis has not been presented (2018: same). The amount of trade receivables impaired at 30 June 2019 is equal to the loss allowance provision (2018: same).

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.

£822,000 of prepayments were capitalised in 2017 in relation to transaction costs for non-current borrowings put in place as part of the Group reorganisation and admission to trading on AIM. At 30 June 2019, £506,000 (2018: £587,000) of these transaction costs were included within prepayments.

Other receivables include government grants due of £201,000 (2018: £355,000). 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.

Movement on the Group's provision for impairment of trade receivables and the inputs and estimation technique used to calculate expected credit losses have not been disclosed on the basis the amounts are not material.

The creation and release of a provision for impaired receivables is allocated to cost of sales in the condensed interim consolidated statement of comprehensive income. For the period ended 30 June 2019, the amount allocated to cost of sales was an income of £16,000 (2018: charge of £9,000). Amounts charged to the loss allowance account are written off when there is no expectation of recovering additional cash.

14. Trade and other payables

 

30 June

2019

£000s

31 December 2018

£000s

Trade payables

7,011

4,881

Current income tax liabilities

1,824

1,575

Social security and other taxes

119

108

Other liabilities

6,174

5,737

Payments in advance from customers

828

1,961

Accrued expenses

4,741

4,137

 

20,697

18,399

 

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

15. Borrowings

 

30 June

2019

£000s

31 December 2018

£000s

Non-current bank loans

42,000

41,000

Term and debt repayment schedule

 

Currency

Interest rate

Maturity date

30 June 2019 carrying value (£000s)

Revolving credit facility

GBP

LIBOR +

1.50% - 2.50%

27 July 2022

42,000

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 the Company's admission to trading on AIM including the payment of fees, costs and expenses in relation to the process and to fund the distribution paid to former group company related parties. Additional amounts will 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 period to 30 June 2019, 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. As at 30 June 2019 the total facility available is £51,000,000 (2018: £53,000,000).

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%

 

 

16. CAPITAL Commitments

Capital commitments

 

30 June

2019

£000s

31 December

2018

£000s

Contracted for but not provided in the interim financial statements - Property, plant and equipment

2,115

1,005

 

 

See note 21 in relation to further (post Balance Sheet) capital commitment.

17. Dividends

The following amounts were recognised as distributions in the period:

 

Period ended

30 June 2019

£000s

Period ended

30 June 2018

£000s

Final 2018 dividend of 4.7p per share (H1 2018: 1.9p)

8,930

3,610

Total dividends recognised in the period

8,930

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 2.6p per share. The aggregate amount of the interim dividend expected to be paid on 26 October 2019 out of retained earnings at 30 June 2019, but not recognised as a liability at the period end, is £4,940,000. The payment of this dividend will not have any tax consequences for the Group.

18. FUTURE LEASE LIABILITIES

The table below shows the split of future leases payable between current and non-current in the condensed interim consolidated balance sheet:

 

30 June

2019

£000s

31 December 2018

£000s

Current future lease liabilities (due within 12 months)

1,333

-

Non-current future lease liabilities (due in more than 12 months)        

3,087

-

Total Future Lease Liabilities payable

4,420

-

 

 

 

The Group has adopted IFRS 16 from 1 January 2019. The rationale and impact of the transition is explained more fully in note 2 to the financial statements.
 

19. Cash flow statement notes

a) Cash generated from operations

 

Note

Period

ended

30 June

 2019

£000s

Period

ended

30 June

 2018

£000s

Cash flows from operating activities

 

 

Operating profit

8,138

9,554

Adjustments for:

 

 

Depreciation of property, plant and equipment                                          9

1,401

1,635

Depreciation of right-of-use assets                                                               9

628

-

Amortisation of intangible assets                                                                  8

688

1,220

Loss/(profit) on disposal of property, plant and equipment

6

(1)

Pension contributions made

(19)

(19)

Share based payment transactions                                                               6

3,053

2,393

Net exchange differences

13

109

 

13,908

14,891

Changes in working capital:

 

 

Increase in inventories

(269)

(981)

Increase in trade and other receivables

(4,053)

(753)

Increase in trade and other payables

1,686

2,333

Cash generated from operations

11,272

15,490

 

b) Movement in net debt

 

 

 

 

Non-cash movements

 

 

At 1 January 2019

Cash flows

Currency movements

At 30 June 2019

 

£000s

£000s

£000s

£000s

Non-current borrowings

(41,000)

(1,000)

-

(42,000)

Total liabilities from financing activities

(41,000)

(1,000)

-

(42,000)

Cash and cash equivalents

13,521

(4,911)

(18)

8,592

Net debt

(27,479)

(5,911)

(18)

(33,408)

                 

In the condensed interim consolidated cash flow statement, the cash paid in exchange for the assets and liabilities acquired at fair value as disclosed in note 12 have been adjusted to reflect the consideration paid less the cash received as a single line, 'Purchase of HaloSource Inc assets'.

 

 

20. 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.

 

Period

 ended

30 June

 2019

£000s

Period

ended

30 June

 2018

£000s

Salaries and other short-term employment benefits

885

1,105

Post-employment benefits

74

162

Share-based payment transactions

2,125

1,988

 

3,084

3,255

There are no defined benefit schemes for key management.

21. Post balance sheet events

On 2nd September 2019 Strix entered into a contract with Shanghai Installation Engineering Group Co. Ltd. to build a new factory in Zengcheng district at a cost of RMB128m (approximately £14.5m). Costs and project completion schedule are in line with previously reported business expectations.

The Group has no other post balance sheet events to disclose.


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