Stelrad Group PLC (SRAD) Earnings Call Transcript & Summary

Good morning. I'm Trevor Harvey, the Group CEO of Stelrad. And here with me today is Leigh Wilcox, Group CFO. The agenda is as shown on the slide. After a brief overview of our results, we'll have a detailed review of Stelrad's financial performance from Leigh, followed by a business review where I'll go into more detail about our progress, priorities and position in the current market environment. Following the summary and outlook, I'll then move on to a Q&A session. Next slide. I'd like to begin with a brief overview of Stelrad and our performance in the first half. Slide 4. For those of you who are new to Stelrad and those of you who need reminding, we are Europe's leading manufacturer through our market-leading brands of Stelrad, Henrad, Hudevad, Termo Teknik and DL Radiators. These brands are all united by our highly agile operating platform, which facilitates cost leadership. Our industry-leading customer service underpins our market leadership with a 24% market share of steel panel radiators across the territories we operate in. As you'll see, the majority of our revenues are derived from the U.K. and Ireland, along with Mainland Europe and a smaller segment in Turkey. We have now been listed for 5 years and sit in the climate control subsector of the FTSE All-Share Index. Our list aligns with the long-term thinking and strategic positioning of Stelrad to our shareholders' interests, positioning us to build sustainable value throughout market cycles. It has obviously been a challenging period in our end markets. However, I remain immensely proud of the work the team has done and continues to do in continuously improving Stelrad. As this presentation will show you, we are more competitive, more efficient and more agile than ever. Now turning to the matter at hand. I'll quickly run through the overview of the half year. Next slide. As I said, despite challenging market conditions, we've delivered further progress in the half. At our full year results, I outlined a number of actions that we have taken to further optimize our cost base and embed commercial excellence throughout our business, namely the exit of a loss-making contract with a European customer. These actions are beginning to bear fruit, driving an adjusted operating profit growth of 4.9% and a 1.8 percentage points increase in our operating profit margin to 13.5% and taking our KPI of contribution per radiator to over GBP 24. I think it is important to emphasize from the start that this is not a sustainable level of contribution per radiator and primarily reflects the reduced volumes in lower-margin territories and sectors in the period. We need to carefully balance product mix at Stelrad. These lower margin areas of our business drive throughput and the operational leverage at our sites, facilitating our cost leadership. Therefore, we expect this to begin to move towards our sustainable medium-term target of over GBP 21 as we drive further volume growth through our sites. Our cost leadership hand in hand with our leading customer service and product availability underpins and drives our market leadership, which we reinforced further in the period with the latest data published in May for 2025, showing that we continue to be either the market leader or one of the top 3 in the majority of our top 10 territories. Next slide, financial review. And with that, I'd now like to hand you over to Leigh for a more detailed review of the group's financial performance.

Thanks, Trevor. Good morning, all. I'll now run through the group's financial performance for the period. We start the financial review with our highlights page with the headline message being that we continue to demonstrate strong margin management and balance sheet control. We cover the specific details of the various measures later in the presentation, but we can see from the colors on this slide, we really made good progress despite an ongoing subdued market backdrop. We now look through some of the group level KPIs before moving later on to segment level performance. Revenue was reduced by 9.1% or GBP 12.5 million year-on-year. Revenue has been impacted by continued reduction in market demand during the period, but is also reduced due to commercial initiatives, namely the exit from a loss-making contract at the end of 2025 and the decision to reduce low-margin sales in Turkey. The combined impact of the commercial initiatives accounts for circa GBP 9 million of the revenue drop, but these have had a beneficial impact on profitability and margins. Overall, sales volume was down by 14.6% in the period. Group revenues have, however, benefited from a positive sales mix underpinned by the commercial initiatives undertaken, but also from reduced volumes in lower-margin countries and market sectors. We will examine the market trends in more detail in the segmental section. Supported by successful delivery of our commercial and operational initiatives, including our 2025 Turkey restructuring, the group has delivered adjusted operating profit growth of GBP 0.8 million or 4.9% with adjusted operating profit margin, net profit increasing to GBP 16.7 million with a 1.8 percentage point increase in margin. The absence of loss-making volume, strong overall country mix and efficiency improvements in our low-cost manufacturing facility have all combined to enhance profitability and offset market weakness. Adjusted operating profit is stated before exceptional items of GBP 1 million, with redundancy costs incurred in the period to right size operations in response to its subdued demand. Adjusted earnings per share has increased by 16% in the period, supported by the increase in operating profit and also lower interest rates, interest costs, which have in part fallen due to lower debt levels, but also due to rate reductions secured during our 2025 refinancing. And the final chart shows proposed 2026 dividend -- interim dividend of GBP 3.19 per share, representing a 5% increase. We previously increased 2025 final dividend by 5% and the continuation of this increase reflects the Board's confidence in our cash generation potential and balance sheet strength. A detailed income statement, which highlights the movement in interest and tax is included in the appendices. We continue now with our KPIs. On this slide, we examine the volume and premium panel mix trends in more detail. In respect to volumes, we can see the 14.6% reduction, of which 9.3% is directly related to the loss-making contract and the decision to reduce Turkish volumes. The remaining volume reduction is due to ongoing challenges in the U.K., where RMI and new build activity is still weak and also lower levels of activity in France. There has been more stability in other markets with volume in the Netherlands, Poland, Denmark and Sweden all up year-on-year and volumes of Belgium and Germany, excluding the exited contracts, stable year-on-year. The group's premium panel mix as a percentage of steel panel radiators increased by 0.1 percentage points in the period to 6.2% despite a subdued market environment. The group continues to promote the sale of the premium panel products into all of its markets, recognizing the additional margin these products generate, and we expect further progress in premium panel volumes as markets recover. Supported by mix, price management and proactive cost initiatives, contribution per radiator grew by 19.6% to GBP 24.32 in the period. Our contribution margin has benefited from commercial and cost initiatives undertaken in '25, but also due to subdued volumes in some lower-margin territories and market sectors. We expect contribution per radiator to move towards our sustainable medium-term target of GBP 21 in the future, reflecting our intention to grow volume in select territories. Now we turn to revenue by operating segment. Despite a 6.6% decline in sales volumes, U.K. and Ireland revenue only fell by 4%, with inflationary selling price increases and sector mix helping to partially offset the volume decline. Within Europe, sales volume declined by 14.4%, with the exited loss-making contract responsible for 70% of the volume reduction. European revenues have benefited from a weaker euro and sales mix benefits with the average selling prices increasing due to reduced sales of lower-margin French market and to the loss-making contract. Additionally, high-margin territories such as Netherlands, Poland, Denmark and Sweden are all up year-on-year in addition to Belgium and Germany being broadly flat year-on-year. Sales volumes in Turkey were down by 62% with the reduction down to the commercial decision to reduce sales of Turkey in the period. Now we examine segmental adjusted operating profit in detail. In U.K. and Ireland, profit reduced by GBP 0.9 million or 6.3%, driven largely by the revenue reduction of 4%. Contribution per radiator has improved year-on-year, benefiting from good margin management, but the impact of adverse volumes on a stable fixed cost base has reduced the operating profit comparatively. Adjusted operating profit in Europe has increased by GBP 2.7 million in the period, with the margin in the sector improving by 5.1 percentage points to 10.8% -- the results in Europe have been significantly impacted by the exit from the loss-making contract at the end of 2025 and subdued volumes in the lower-margin French market, which was in part due to overstocking by customers at the end of 2025. Additionally, positive volume trends have seen some profitable markets such as Netherlands and Poland being beneficial. We are pleased with the progress in Europe in the period with the profitability of this segment remains an ongoing focus. Total international operating profit decreased by GBP 0.5 million with the decrease driven by volume reductions in commercial strategy. Now we turn to the group's cash flow statement and leverage position. Cash flow and leverage at the half year were in line with expectations. Consistent with previous years, we've seen a seasonal investment in working capital, which will unwind in the second half. On an LTM basis, cash flows are strong with operating cash flow conversion at 102%. We have made an underlying investment in inventories with local stocks being added in Turkey to further enhance the flexibility of our business model. And although CapEx is in line with 2025 at the half year, we do expect a modest increase in the full year CapEx year-on-year due to the one-off IT costs we outlined at the full year results. The increase in cash payments is linked to profitability and an increase in dividends received in Turkey and interest payments have benefited from interest rate reductions and a lower debt position. Aided by strong free cash flow on an LTM basis, leverage based on net debt for lease liabilities has fallen to 1.29x EBITDA, which is a strong improvement in prior year, and we expect a further reduction in the second half. Now we turn to some other key financial areas. For taxation, the effective tax rate remained consistent year-on-year. For dividends, as mentioned in the overview, we reiterate our intention to increase the interim dividend by 5%, in line with our progressive dividend policy. Return on capital employed has increased by 2.1 percentage points to 29%, with the year-end measure expected to exceed 30% due to the timing of working capital movements. This measure benefited from increased operating profit and lower fixed asset values year-on-year. And finally, the group credit facilities, the new loan is operating effectively and providing the group with a margin benefit. And at the end of the period, we had generous headroom on both facility and cash. I'll now provide some technical guidance for use in analyst modeling. Steel prices are expected to rise slightly in half 2, albeit from a historically low level. We currently expect other key input prices to remain stable. We are mindful of current global events and their potential impact on pricing. Capital expenditure and working capital investment are expected to continue to be in line with previous guidance. And finally, leverage based on net debt before lease liabilities is expected to fall further in half 2 as the working capital reduces. Thank you. I'll now hand you back to Trevor for this review.

Thanks, Leigh. I'll now run through our progress and priorities for the second half. You will have seen this slide before, but it is an important one for us and sums up our position, prospects and opportunities. Stelrad has clear, consistent strategic objectives of growing our market share, improving our product mix, optimizing our routes to market and positioning effectively for decarbonization. As I alluded to earlier, our objectives are interconnected and in combination with our competitive advantages, underpin the group's sustainable future growth. Progress against each must be carefully balanced to ensure we maintain our competitive cost advantage and market leadership, which is underpinned by the operating leverage within our manufacturing sites and positions us to maximize on the opportunities presented by a market recovery. This market leadership point is critical. It not only positions us for that recovery, but also positions us to drive the adoption of higher-margin value-added products, both through increasing premiumization and through higher heat output and hybrid radiators as the drive to decarbonize home heating systems continues. Taken together, the group's market opportunity, structural growth drivers and competitive advantages translate into a set of ambitious and sustainable medium-term targets, which balance the position of the business for a market recovery with the ability to deliver clear stakeholder value in the meantime. The latest BRG data shows that we have reinforced our position as the clear leader of the steel paneling market with a combined 2025 share of 24%, retaining a 3.9 percentage points lead over our nearest competitor. As I said, our market leadership is key to unlocking our future growth. It positions us to both take advantage of a market recovery and replacement cycle and to drive adoption of premium and higher heat output radiators. Our operational excellence underpins this with a low-cost manufacturing base, significant production capacity and critically the best on-time and full delivery rate in the industry. All of these factors carefully balanced alongside each other, give us an incredibly agile and resilient operating platform, which has allowed us to navigate the market landscape over the last few years. That minor share reduction in 2025 you saw on the last slide was driven by the specific market mix across the countries that we serve. And I would note our position in the U.K. and Ireland as a contributor here. What I would say is that we see specific opportunities in Europe, in particular, to target market share growth underpinned by the highly agile platform that we've built. If you look at the chart here, it shows that there is a significant portion of the market that we can grow our exposure to. The European opportunity is something that we've actively been addressing for some time, as is shown on this slide. The latest data shows us consistently growing market share in select European geographies as we reinforce and grow our market leadership positions. It also shows several markets, some of which are large, where we feel there is an opportunity to grow our market share further. This is important for one key reason. Market leadership underpinned by our competitive advantages makes us the supplier of choice for our customers regardless of the volume environment, but particularly in the market recovery scenario. This will be the key volume driver for Stelrad. We have made significant progress in both protecting and improving our product mix over the last few years, reflecting both the progress that we have made in our premiumization and decarbonization strategic initiatives. In terms of premiumization, while we continue to see the volumes being impacted by reduced RMI spend, the penetration of premium panel volumes remained solid during the period with a further increase in total proportion of premium panel sales increasing by 0.1% to 6.2%. For us, this is very encouraging. We have worked hard to protect our premium panel mix and drive volumes against the backdrop of further volume declines. And our strategic actions here have helped to protect this category throughout the current market cycle. We continue to see long-term structural tailwinds from the decarbonization of commercial and residential property stock, which will serve both -- as both the demand and margin driver for us as we further expand our sales of high output, hybrid and electric sales in our key markets. This trend has continued. And in the Netherlands, Belgium, the U.K. and Germany, we've seen volumes grow by 58% over the last 2 years. As you saw earlier, we are the market leader in 3 of these countries with our market leadership, again, helping us to drive the adoption of these systems. We set out ambitious medium-term targets and goals for sustainable growth a little under 2 years ago, and we continue to make pleasing progress against them. But it is equally important to be clear that the strategic actions and progress we have made have been accentuated by the volume environment, where suppressed volumes in lower-margin territories have had a significant skew on our product mix and contribution. The real test of these targets, which will be a nice problem to have, will be our ability to maintain them sustainably in a higher volume environment as lower-margin market segments recover and we drive operational leverage through our manufacturing sites, which will naturally result in a change in market mix. I'll now talk through the outlook for the second half and beyond. As you've seen and heard throughout this presentation, we're happy with the progress that we made in the last 6 months with several of the long-term conscious strategic actions that we took in 2025 beginning to bear fruit. We've reinforced our market leadership while strengthening all of those critical competitive advantages that underpin it, providing a strong platform for targeted market share gains and position us well to deliver long-term growth, building sustainable shareholder value throughout the cycle. While we are mindful of continued cost inflation and end market weakness, we are positioned well to continue to deliver in the current environment and continue to trade in line with expectations with our confidence reflected in the 5% increase in the interim dividend. Many thanks. Any questions?

[Operator Instructions] Our first question this morning is coming from Aynsley Lammin. from Investec.

I think I've got 3 questions actually. Just the first question on the market share gains. And obviously, Germany and Poland look to be good opportunities there. I just wondered, is it kind of price cost leadership? Is it service? And how do you expect to kind of gain market share in those countries? Secondly, on the steel prices, just interested what's driving that, how big an issue that is for kind of the second half and how confident you are passing those prices on into the market? And then I guess, just thirdly, if volumes were to stay weak for the next 6 to 12 months, is there more -- are you confident there's a bit more you could do on the cost front, kind of commercial initiatives taking share to offset some of that?

Shall I answer that, Leigh?

Then do you want to go to the first one? I can pick up the second.

I mean in terms of our geographic diversity, we clearly see Germany and Poland as significant commercial opportunities where we are currently underrepresented. We have a very strong balance sheet. We have cost leadership, and we believe that it's right and appropriate. It's the right time for us to look at increasing our market share in those markets. But it will be a combination of leveraging our cost advantages in those markets. But I mean, these are markets which are not only attractive and large, but also have a significant premium panel element, which we find very attractive as well. So I mean, we will be investing in commercial initiatives. We will be looking to increase our market share presence in both Germany and Poland in the coming 12 months. On the steel, Leigh?

Steel prices, I think -- I mean, we called out a marginal increase in the second half. I think steel prices are still at very low levels across the geography, especially in the steel prices as we get into our Turkish factory is probably some of the lowest levels we've ever seen. I think we probably expect maybe a 5% increase in the second half. So nothing significant. And as we've talked about before, the industry and the sector is very used to steel price increases and passing those on. We have mechanisms in place to do that with our key contracts. But the market is very kind of adept in those price increases. In terms of volume weakness, it's something we're very much aligned to as a management team of the ongoing potential for this to be a more sustained subdued market environment. Obviously, we keep an eye on that, and we're not running out of ideas, and we continuously assess what we do. But it's very much a case of the tight road between having the operational capability and the flexibility and making sure we're prepared for the future recovery.

Our next question will be coming from Sam Cullen from Peel Hunt.

I've got a couple also. Just first one is coming back on the European piece. What's your view of what you think the competitive reaction is likely to be in these markets? I'm just trying to get coming off from Aynsley's question really, what is -- how much of this is going to be price led versus just investing more in the distribution base and the sales force in those markets? And then the second one is just one other thing. Should we read anything into your initial comments, Trevor, about Stelrad being in the climate control subsector. And obviously, you're clearly focused on heating and whether there are other areas of the climate we should be looking at the business over the medium term.

In terms of the competitive reaction, I think you're right to highlight the point, Sam. But I think at some stage, we need to take advantage of the agile and low-cost platform that we have built. If you've got -- if you're a genuine European market leader and you believe that you have a strategic competitive advantage, then it's inevitable that you will have to use that at some stage to continue growing your business and share, particularly in challenging times. I mean, I am expecting competitive reactions. I mean it's the realities of business these days that you've got to flex your muscles occasionally, and that's what we would like to do in the coming 12 months. And in terms of the categorization of us in the climate control subsector, I think that's a reflection of how differentiated we are to a lot of our peer group. We do see benefits and opportunities by being differentiated in this way. I mean our geographic presence is differentiated from our peer group and being included in the climate control subsector, we see as a specific advantage.

Next question will be coming from Edward Prest of Berenberg.

I have a couple on premiumization, please. Firstly, obviously, its premiumization has improved from 6.1% to 6.2%. How much of that relates to exiting Turkey -- not exiting Turkey, reducing sales in Turkey and the loss-making contract in Germany? And secondly, I know you called out at the Capital Markets Day a couple of years ago that the key would be increasing premiumization in the U.K. given the penetration is low. How has that progressed in H1? Has there been an increase in premiumization as sort of new builds has dropped off? Or is it struggling in challenging markets?

I go for that one, Trevor, if that's okay. I think in terms of -- there has not really been a significant mix shift in premiumization as a result of the commercial action. Turkey is lower. The loss-making contracts probably had a reasonable percentage of premium products. So on balance, the 2 probably net out cannot really give any impact, albeit I would call out that the premium element of the loss-making contract would have probably been lower than premium prices. So there probably has been a mix benefit there. U.K. is still an area of progress. We think we've made some good ground on putting in place the right initiatives in terms of product availability, lead time, 48-hour delivery, color coordination process, which will benefit the future of that premiumization strategy in the U.K. But a lot of premium panel products will be dependent on discretionary spend and consumer confidence. So it all goes hand in hand with what's suppressing market demand it's suppressing premium panel products. So maintaining the same percentage in the U.K., we think is a good result, having the right strategy for the future.

Thanks, Leigh.