Stelrad Group PLC (SRAD.L) Earnings Call Transcript & Summary

Good morning. I am Trevor Harvey, the Group CEO of Stelrad. And here with me today is Lee 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, followed by a business review. Following the summary and outlook, we'll then move into a Q&A session. I'd like to begin with a brief overview of our performance in the first half. During the period, we delivered a resilient financial performance against a backdrop of ongoing economic uncertainty suppressing volumes in the group's key markets. I think it is important to emphasize here that I've been in this industry for over 30 years. We are operating in one of the most sustained downturns in volumes in recent economic history. The fact that Stelrad has continued to consistently deliver such strong results and operational progress throughout this cycle reinforces my confidence in our team, our capabilities and our future prospects. Crucially, despite this environment, we have maintained our market leadership position with an addressable market share, excluding Russia, of 25.4%. This is a new market share metric, reflecting the growth of the Russian market, and I will go into more detail on our market share position later in this presentation. We have also continued to enhance the flexibility of our operational capabilities, improving our already industry-leading on-time and full delivery rate to above 99%. I have said this before, but this is critical to our competitive position. If you cannot ship the rate as in time, you lose customers. And once you lose a customer, they are a lot harder to get back than they would have been to keep. Leigh will run through the financials shortly. But in terms of highlights for me, we have achieved this commercial progress whilst continuing to actively manage our cost base and optimize our product mix, delivering adjusted operating profit growth of 1.1% despite a 4.6% revenue decline, keeping our key KPI of contribution per radiator at over GBP 20, allowing us to once again increase our dividend by 2%. You will also note that we have recognized a noncash impairment in our Radiators SpA division. Leigh will go into more detail on this in his section. And finally, to be clear from the outset, we are well placed to achieve full year expectations of further adjusted operating profit growth, which remain unchanged. And with that, I'd now like to hand you over to Leigh for a more detailed review of the group's financial performance.

Good morning, all. We start the review with our financial snapshot. Revenue declined by 4.6% in the period, led by a 4.8% reduction in sales volumes with ongoing macroeconomic uncertainty continuing to suppress both RMI and new radiator activity. There have been some favorable year-on-year trend in core European geographies, but this has been offset by a weak U.K. market performance. Despite the decline in revenue, adjusted operating profit has increased by GBP 0.2 million to GBP 15.9 million, and adjusted operating profit margin has increased by 0.7 percentage points to 11.7%. Return on capital employed has improved slightly by 0.5 percentage points to 26.9%. For dividends, we have proposed to increase the interim dividend by 2% from prior year, which again reflects balance sheet strength and confidence in the group's future growth prospects and cash generation potential. Operating cash flow conversion is favorable year-on-year despite investments made in working capital through our U.K. price realignment and a seasonal stock build ahead of the DIY heating season. We expect this measure to improve further in the second half and recover strongly in the medium term as acknowledged in our medium-term targets. Supported by an improvement in profitability and operating cash flow control, we have seen a small improvement in our leverage ratio. Following on from this overview, we'll now explore our performance in more detail, starting with Slide 7. On this slide, we had our recent trends in revenue, adjusted operating profit, adjusted earnings per share and dividend per share at group level. In the subsequent slides, we will examine revenue and adjusted operating profit in more detail at a segmental level. Revenue year-on-year reduced by 4.6%. The decline in revenue was due to a 4.8% decrease in sales volume during the year and the impact of the average euro rate devaluing against GBP, partially offset by selling price benefits. Selling prices continue to benefit from positive U.K. radiator size trend in addition to segmental mix benefit due to the European markets where selling prices are higher, being more buoyant than the U.K. market. Despite the revenue reduction, the group delivered a resilient performance with adjusted operating profit growing by GBP 0.2 million or 1.1% to GBP 15.9 million with a 0.7 percentage points increase in margin. The key elements offsetting the adverse volume impact include favorable material prices with steel prices lower year-on-year, an increase in the average size of radiator store in the U.K. and structural currency benefits. All of the positive factors are underpinned by strong ongoing margin management that has helped to ensure that price movements are controlled successfully. The structural currency benefits arise from the way the group is structured Turkish operations with again a factor of the year-to-date devaluation of the Turkish lira against the euro, which will further benefit the cost base of our Turkish operations in the future. Adjusted earnings per share moved in line with profits. And the fourth chart shows the proposed '25 dividend of 3.04p, representing a 2% increase. This chart shows how we have maintained and actually increased dividend despite the earnings reductions in 2022. A detailed income statement, which highlights the movement in interest and tax is included in the appendices. On Slide 8, we examine the volume and premium panel mix trends in more detail. With respect to volumes, we can see the 4.8% reduction year-on-year with high interest rates and inflation continuing to suppress both RMI and new build activity. Positively, the group has achieved year-on-year volume increases in Belgium, Poland, France and Germany, supported by market trends and our sustainable competitive advantages. These favorable trends were offset by weaker market performance in U.K., Italy, Sweden and the Baltics. The group's premium panel penetration percentage was slightly below prior year at 5.7% with a subdued market environment holding back further improvement. The group continues to promote the sale of premium panel products into all of its markets, recognizing the additional margin these products generate and has made tangible progress in its U.K. strategy in the first half. We expect further progress in premium panel volumes as the markets recover. Supported by ongoing operational control and margin management, despite the challenging market environment, contribution per radiator were remained in excess of GBP 20 with the year-on-year variance mainly due to country mix. Our contribution margin of 34% provides the group with very strong operating leverage that will drive profitability improvements as the markets recover. This slide shows how revenue is developed by operating segment. Despite a 9.6% decline in sales volumes, U.K. and Ireland revenue only fell by 5.8%. For the third successive year, the segment has benefited from an increase in average radiator size in terms of heat output for each radiator sold, which has partly helped to offset the volume decline and a drop in premium panel penetration percentage, which has been impacted by low U.K. consumer confidence. Within Europe, sales volume declined by 3.8% with a volume improvement in Belgium, France, Germany and Poland, offset by adverse volumes in Sweden, Italy and the Baltics. Euro revenue in GBP terms has been adversely impacted by 1% due to a year-on-year strengthening of the average GBP versus euro exchange rate. And additionally, European revenues were negatively impacted by adverse country and customer mix. Sales in Turkey were strong, supported by market recovery, albeit low average selling prices. This slide shows how the changes to reduce operating profit have impacted segmental profitability. In U.K. and Ireland, profit reduced by GBP 0.1 million with the impact of the volume decline, largely offset by increased radius size, favorable selling and material prices and structural currency benefits. Operating profit in Europe has fallen by GBP 0.1 million with a net volume decline compensated by favorable material prices and structural currency benefits. As noted in the full year, the performance of Radiators SpA within the European segment has been impacted by the weakness of German and French markets since acquisition, which has led to a noncash impairment we recognized in the period. The group continues to focus on improving the margin of the Radiators SpA sales with the exit from a significant loss-making contract in the end of '25 and renewed opportunity to focus business efforts on the product ranges, which are unique to the Radiators SpA. We will cover the impairment and opportunity in more detail later on. Turkey and international operating profit decreased by GBP 0.2 million with the favorable volumes arising in lower-margin countries. Central costs have reduced in the year due to one-off consulting costs related to the appraisal of premium panel strategies in 2024. Moving to cash flow statement and the group leverage position. The first half has seen an investment in working capital. This is partly seasonal with the build of inventory before the DIY heating season, also due to the working capital impact of a proactive U.K. price realignment exercise that was undertaken at the end of 2024 as previously outlined in our full year '24 results. Capital expenditure payments are ahead of prior year, but this is a factor of timing, and there is no change to our full year guidance. There's been an increase in tax payments with the group's U.K. business becoming cash tax paying in the period after fully utilizing historic tax losses. Interest payments benefited partly from the timing of payments, but also due to lower interest rates, especially the lower Euribor rates. Leverage based on net debt before lease liabilities is 1.48x EBITDA, which is a marginal improvement in the prior year, and we expect leverage to drop further in half 2. This slide gives further background on the noncash exceptional items that have been recognized in the income statement during the period. The exceptional items related to the Radiators SpA business and specifically related to the impairment of goodwill of GBP 2.6 million and the impairment of customer relationships of GBP 1.4 million; impairment of property fund and equipment GBP 5.7 million and provision gets into the GBP 2.3 million. The Radiators SpA business, we've been exposed to declining market volumes of France and Germany since its acquisition in July 22, resulting in deteriorating operating margins despite active fixed cost management. Since the acquisition, the business has also been impacted by significant loan margin and luckily loss-making contract for the supplier to steel panel radiators, which contributed to suppress European operating margins. Negotiation during the period to reset the price of this contract have been unsuccessful and the group's focus on commercial discipline, decisive action is being taken to terminate all under this contract effective at the end of 2025. Whilst the exit from this loss-making contract will negatively impact the future revenue of volumes, it will result in improved contribution and the opportunity to reduce fixed costs. The exit from the contract present an increased opportunity to focus attention on the electrical and design of product ranges, which are unique in this division and with the key strategic rationale for acquiring the business. The refocused business will be underpinned by a rationalized point of portfolio that will provide greater operational efficiency. This slide focuses on other key financial areas. Taxation, the effective tax rate increased year-on-year to 33%, primarily due to noncash deferred tax movements in Turkey due to the relationship between inflation and currency devaluation. We expect the rate to reduce in half 2 to circa 31%. As noted previously, tax payments have increased as the U.K. tax losses has been fully utilized. The dividends, as mentioned in the overview, we reiterate that our intent is to increase interim dividend by 2% in line with our progressive dividend policy. Return on capital employed has increased by 0.5 percentage points to 26.9%. The measures benefited from the impairment recognized, which offset the investment in working capital and the higher GBP value of euro assets due to weakening of the pound at the end of June. And finally, the group credit facilities, we highlight our 2 facilities, we took GBP 100 million will remain in place until November 2026. The group with generous headroom on both facilities and available cash. Our relationship with our banking partners remains strong, and we're currently engaged in discussion of the renewal of our facilities in the second half 2025. I will now provide some tentative guidance for you to analyst modeling. We expect the market environment to show some improvement in the second half of '25, further benefit of lower steel prices is expected to be realized in half 2, but the key input prices are expected to remain stable. Capital expenditure and working capital investment expectations remain unchanged. Leverage base and net debt for these liabilities is expected to fall in the second half of the year, after seasonal increase in half fore seeable. And the group tax rate is expected to be around 31%. There's still noncash, deferred tax movements in Turkey possible due to the relationship between inflation and currency devaluation. My final slide, recapping the progress to date made against the medium-term targets we announced in the 2024 Capital Markets event. Market share is stable to date, excluding Russia, where we choose not to participate, though it is important to note that a weak U.K. market, where we are a market leader and diluted our progress elsewhere. Contribution per radiator has made strong progress to about GBP 21 without significant assistance from premiumization, which will provide future further upside. Operating profit margins have increased by 9.5% in 2023 to 11.7% of the year despite market volume declining further since the target reset, which is pleasing progress. Operating cash flow conversion is well set to improve post period investment in working capital during 2024 and 2025. Group capital employed is now well invested and profitability growth in line with our medium-term targets will provide significant improvement in our return on capital employed percentage. As we noted at our capital markets event, the enhancement of the operating profit margin in our medium-term target is due to the impact of management actions did not depend on market recovery. Since 2019, due to challenging macroeconomic conditions, steel panel radiator market volumes have fallen by 12% and 25%. Market recovery and enhanced contribution radiator levels will provide additional profit upside beyond that given by our strategic drivers. Thank you. Now I'll hand you back over to Trevor, who will give the business review.

Thanks, Leigh. I'll now run through what's driving our confidence in Stelrad's future growth prospects. As we outlined at our Capital Markets event in November, we operate in a fundamentally attractive market with a significant installed base. This base provides an attractive opportunity and provide an underlying replacement cycle, a recovery in which will be a key driver for future volume growth. We then have 2 key structural growth drivers of increasing premiumization and the drive for decarbonization, which will improve our product mix and margin and enable above-market growth. Our ability to capitalize on both the market recovery and these mix drivers is underpinned by our competitive position and advantages and is, therefore, critical for us as a management team to focus on these to ensure that our business is well placed to take advantage of this recovery. We have the most flexible manufacturing base in the industry alongside best-in-class customer service and product availability. Because of these, we have deep long-term customer relationships, which have helped us to grow and consolidate our market position over the last few years. We have 4 clear consistent strategic objectives, which continue to provide focus and direction. Growing market share, improving product mix, optimizing routes to market and positioning effectively for decarbonization. Taken together, the group's market opportunity, structural growth drivers and competitive advantages, underpinned by robust strategy, translate into a set of ambitious medium-term targets, which deliver clear stakeholder value. These medium-term targets exclude the benefits of an underlying market recovery for which Stelrad is very well positioned. As I said, our market position is key to unlocking our future growth. It positions us to take -- to both take advantage of our market recovery and replacement cycle and to drive adoption of premium and higher heat output radiators. We remain the supplier of choice for customers. Our operational excellence underpins this with a lower cost manufacturing base, significant production capacity and critically the best on-time full delivery rate in the industry. This is what drives our position as the market leader. With a 25.4% market share, excluding Russia, I am conscious that this diverges from the market share data we have previously disclosed. For transparency overall market share data in this slide. As you can see from the first chart, across the whole market, the top 5 manufacturers market share has fallen by a net 3%. This is primarily a result of market mix across the companies we serve with smaller Russian domestic manufacturers benefiting from growth in the Russian market, which is included in BRG's European data. I would also note that our nearest competitor exited the Russian market led on us, and we expect this to be reflected in 2025's market share data. This, coupled with 1 of our core territories of the U.K. and Ireland making a lower contribution to the European overall market as a result of lower volumes, has resulted in a headline decline in our total market share to 19.9%. The strength of our market position comes primarily from our core European territories where we remain the market leader despite the depressed volume environment. We've both grown and maintained our market share across the U.K., Netherlands, France and Germany, key territories for a recovery in the volume environment. The strength of our market position in the U.K., in particular, positions us well to drive the adoption of premium panel and designer radiators in this territory. Alongside, ensuring we are the supplier of choice in order to capitalize on a market recovery. There are 2 significant structural growth drivers of increasing premiumization on the drive for decarbonization that will support future demand for higher-specification, margin-accretive products. As the market leader, we are in prime position to drive the adoption of these products and our focused strategies for each to drive a book market growth that I will cover in the next 2 slides. To capitalize on the opportunities presented by increasing premiumization in the U.K. market, we are leveraging Stelrad's traditional trade strengths with key initiatives to maximize the benefits of our brand positions to ensure that installers and merchant staff are supported in upselling to higher value products, and through installer oriented marketing activities to remove any perceived barriers to recommending design radiators to homeowners. Also we've seen a short-term impact from ongoing economic uncertainty in the U.K. on the penetration of premium panel radiators, we have made tangible progress on our strategy to drive the adoption of design radiators. The refreshed stelrad.com website has now been launched, optimizing the consumer journey and broadening our routes to market for designer radiators where there is a greater level of direct consumer input. We have also launched our 48-hour design radiator service to enhance customer service levels for these products and to remove long lead time perceptions. We remain confident in the opportunity underpinned by the initiatives undertaken to improve the penetration of premium products in the U.K. as market conditions and consumer confidence improves. We continue to see long-term structural tailwinds from the decarbonization of commercial and residential property stock with the average radiator size increasing by 2.5% during the period. Additionally, sales of dedicated higher output vertical K3 and 900 radiators continue to grow strongly. We continue to further expand our high heat output and hybrid heat emitter portfolios alongside leveraging our brand strength and channel access to drive electrical radiator sales in our core markets. The Radiators SpA business plays a significant role and position the group well for the longer-term opportunity that decarbonization brings. The business has a strong management team, clear strategic focus, strong product capability, and we are now well positioned to drive profitability from a more focused Radiators SpA business. In summary, we are excited by the prospects for increasing premiumization and the long-term structural tailwinds from decarbonization and the potential for these trends to drive demand for higher specification, margin-accretive products. As the clear market leader, we have a wide range of initiatives underway across the business that will continue to position Stelrad favorably to benefit from these long-term drivers. Moreover, we expect the benefits of our strategic initiatives to become increasingly visible and our key metrics as end market conditions improve. Alongside helping our customers to reduce their emissions footprint, we continue to make good progress against our own ASG priorities, publishing environmental product declarations, reinforcing our supplier audit process, achieving 0 avoidable waste to landfill and submitting our first communication on progress report. I will now run through our outlook for the full year and beyond. We are well placed to achieve the Board's expectations of further profit growth for full year '25, which remain unchanged. The Board expects a modest level of market volume improvement in the second half of the year augmented by the strength of our market position, sustainable competitive advantages, operational excellence alongside continued commercial and cost discipline. Importantly, everything we have outlined today from the group's resilient performance and operational progress to its strong strategic positioning, all serve to reinforce my confidence in the group's prospects of long-term growth and our ability to continue building sustainable shareholder value. And with that, we will turn to any questions.

[Operator Instructions] We'll now take our first question from Aynsley Lammin of Investec.

Just 3 questions for me, if I could, please. First of all, just on the U.K., the volume decline you saw in H1. Just wondered if you could give a bit more color around that, RM&I versus new build. Is there just a lag? We've obviously seen new build benefit, the Brit companies as an example. Is that just a lag effect? Do you start to see that come later given where radiators go into the build process? And just on the kind of bigger radiator size, what's driving that? Is that regulation? And is that sustained going into the second half? First question. Second question, just obviously, flagging up better volume recovery in H2. Just wondered what you've seen July trade in? What the momentum looks like into H2? And then the third question, just on steel prices. I think you're highlighting a benefit you expect in H2 given all the good work you've done kind of with the margin improvement. Do you expect to be able to retain that at the bottom line? And just a bit more color around that steel price trend.

You pick that up, Leigh.

Okay. I think [indiscernible] going to partly answer your question there, in terms of the U.K. market. I think we obviously have 60%, 70% of our U.K. market is focused around RMI, which has been still very suppressed as we've noted, and I think many others have noted as well. I think in terms of new build, we are going to be later on in terms of the cycle going to new build, in terms of radiator to be 1 of the last things to be put into the fabric of the building. So any kind of upside in there we'd expect to have much later than, for example, the Brit guys, although I think we have seen a bit of a pleasing uptick in our elite sales, which are our primary kind of new build product in the last few weeks. In terms of the radiator size, we think that's regulation driven. And obviously, over time, we expect it to improve further with the adoption of heat pumps, although the timing of that is obviously never guaranteed. We've given initiative changes. But in the short term, even things like the regulation to turn down boiler temperatures requiring bigger emitters to cope with a lower input temperature. So that's what's driving that trend. In terms of the volume recovery and what we've seen to date, we've had quite a pleasing opening to the year in terms of the July volumes. We've shown an improvement on kind of last year, which kind of helped to underpin our kind of sentiment that we expect some modest recovery in the second half. And in terms of steel prices, finally, year-on-year, we've got some benefit from steel prices. A lot of that come in from our Turkish business. And we expect to be able to hold on to a significant part of that within in the marketplace, although we are conscious of making sure we're kind of tread the right line between kind of maximizing profitability and market share. So it's one we're hopeful of some benefit, but we kind of have a watchful eye on that.

We'll now take our next question from Sam Cullen of Peel Hunt.

I have got 3 as well, please. The first 1 is just exploring the guidance on volumes to modestly increase in the second half. Can you give any more color, I guess, in terms of how you might expect that to lift between geographies, end markets or customer? Are you expecting a newbuild recovery to offset, so the RMI demand still? Or are you expecting Europe to accelerate and the U.K. to remain depressed? That will be helpful. Second question is on the market share in the U.K., dropback this year versus -- or '24 versus '23. Can you talk a little bit about that? And then lastly, just on for Leigh, that tax rate guidance you've given for this year, would we be correct to assume that will be similar to '26 and '27.

In terms of kind of recovery of volumes, we said that's kind of modest. I think we're down 4.8% year-on-year in the second half. Some of that will be down to time, and we hope to get kind of back towards kind of in line with prior year and the full year, at least most of the way there. So I think that would be some guidance. In terms of geography, I think we'd expect some newbuild recovery just for the U.K. In Europe, in general, it's been quite stable year-on-year with some increase in our underlying kind of core markets. There's been some kind of trend in Italy and Sweden, which are more kind of just timing in terms of last year in Sweden, we have had some stock going into a merchant in Sweden, which means that's down year-on-year, and that will probably improve the situation in the second half on a compoundable basis. Market share, U.K., Trevor, is there anything you want to comment on, on that one?

Sam, it's a fine line between regaining market share and preserving your contribution period. And I think we've done a pretty decent job of walking that tight rope. I mean, our U.K. market share, I think it did fall by something like 0.5%. But I mean, we still continue to be the dominant market leader with 52.1% share, down from 52.6%.

And tax rate guidance, I think 31% we've called out for this year. I think that's probably going to be the peak and expect some improvement in '26-'27, possibly 0.5% per annum going down in each of those years.

We will now take our next question from Greg Poulton of Singer Capital Markets.

Can I just ask about -- obviously, you've had strong progress on margins in the first half, but what levers there are to pull in the second half and next year to, I guess, offset those volume reductions? I think could you also give a bit of color around Radiators SpA and how you see the rationalization of the range in that business and any costs that you could take out as a result of that? And then lastly, on the new website launch, what's the response been to that? Have you seen good traffic levels so far?

Okay. I mean, in terms -- sorry, Trevor.

I'll answer that in reverse order, Greg. It's early days for the website in the U.K. But the last 4 weeks, we've seen a 15% increase in terms of traffic to the website and a 5% increase in the purchase rate. These are very early signs, but we're very pleased with the way the website has been received by consumers in particular. In terms of further levers, we do have further levers to pull in terms of managing our costs. And in terms of the SPA cost, Leigh, can you comment on that?

Yes. In terms of that business, obviously, the impairment is going to be recognized in the period is linked to kind of that market volume story since we acquired the business. And that's going to be hampered over time by kind of a lot -- kind of low-margin loss-making contract. Now, that contract is quite significant in terms of size, revenue and volume and probably detracts from what we really want the business to focus from, which is that kind of electrical and designer product, which is a key strategic rationale behind why we bought that business. So the future for that business obviously is we're moving that loss-making contract, we've given an immediate benefit from '26 onwards. The focus and the opportunities when we're really excited about in terms of the ability to drive efficiency in operations through a more rationalized product portfolio in the future. And I think that's one way we're looking forward to working on with the management team.