Strix Group Plc (KETL.L) Earnings Call Transcript & Summary

Welcome to the 2023 results presentation. So Clare said we're going to run through the presentation relatively quickly, try to get in just over half an hour to make sure we've got enough time for some questions at the end. I'd like to start, first of all, by introducing Clare. Clare joined the company just over 8 weeks ago. Actually, if you saw the RNS this morning, [indiscernible] as the CFO on the Board as of today. So very much a new startup. But in that period of time in the 8 weeks has certainly got stuck into the business, has been talking to a lot of our stakeholders as well as you'll hear as she starts to go through the numbers a little bit later on. So welcome to Clare. Let's start with just a few highlights, if I may. First of all, just looking at 2023 as a whole, yet another challenging year without any doubt at all. Most of our business is in what we call the small domestic appliance market, and that was showing negative year-on-year growth or shortfall, I should say, perhaps. And given that backdrop, we have spent a lot of time listening to our stakeholders, and we have initiated a rebasing of the business to really make sure we build a strong foundation for the medium term, to make sure we can really get the growth that we believe this company can achieve and also to make sure we've got all the right people in the right places to achieve that. Despite all those macroeconomic challenges that we face, the group has remained unchanged. The fundamentals of the businesses are the same. Kettle Controls is still that same profitable business. We've added Billi, which is again another very profitable business as well. We hold a very strong and stable market share. We're very cash generative with exceptional margins. And I'm sure you'll see much more of that from Clare as she goes through the financials shortly. During the year, we did get some good revenue growth, primarily the full year inclusion of Billi, but we also saw a little bit of growth from the Kettle markets, driven by a recovery in the less regulated markets, and I'll cover that when we move into the divisional section a little bit later on. At the year-end, our debt ratio was at 2.19x. And we, as a Board, remain very highly focused on maximizing cash generation to support that debt reduction. Again, that will be covered in a little bit more detail shortly as we go through the financials. As part of that ongoing commitment, there will be a temporary pause in the final and the interim dividend payments in 2024, and we intend to resume to a sustainable dividend payout of 30% of adjusted PAT in 2025, where debt levels will below that 2x. That pause is not only going to accelerate the deleveraging profile, but it will also provide some flexibility to selectively invest in new technologies that are there to support our longer-term growth initiatives, some of which will be discussed later in the divisional updates. As I say, since Clare had been on board, she's been working very closely with our banking syndicates and has gained the support to provide a normalization of the net debt leverage covenant to 2.75x for the full duration of the facility, a major achievement. A headroom was seen as an issue by our stakeholders at our last set of results, and this change clearly provides a good level of headroom and should provide additional confidence for the future. And finally, as highlights, we have seen some management changes within Strix over the years. We continue to strengthen the management team. At a senior level, in addition to Clare, we also have Rachel Pallett join. She has provided a lot of experience and takes the lead in both the Kettle Controls and the Billi parts of the business. She already has had significant impact on the business, particularly with the integration of Billi and refocusing on the strategy of the Kettle division. Again, more to follow as we move into those divisional updates after Clare has run through the financials. So with that, I will move over or pass over to Clare.

Thank you, Mark. Thank you. And can I say how good it is to be talking to you today. On a personal level, it's great to be back in the presentational hot seat, albeit as Mark says, [indiscernible] formally took role this morning. But on some level, I guess that means these numbers are probably not officially mine to present, but I'm quite happy, obviously, to sit here and talk you through them. Before we get into any of the detail of divisional margins and movements in net debt, I think the most useful thing would be to take us through the high-level financial highlights of the year just gone. And as you can see here, and as Mark has mentioned, 2023 has been a year of strong revenue growth. We've recorded an increase of 35.2% to GBP 144.6 million. The reason for this is our latest acquisition, Billi, which has brought in a full year's trading versus only 1 month in 2022. Obviously, from a group perspective, this has driven a large increase in revenues of around GBP 39 million. However, it is worth noting that this also reflects the double-digit organic growth within Billi itself at constant currency. The growth hasn't only been Billi. Following on from a very tough 2022, we are pleased to report that we have seen the beginnings of growth coming back into the Kettle Controls market, which has recorded a 2.7% increase in revenues, particularly as trading in the less regulated than China markets has recovered strongly. Tough conditions in our Consumer Goods division have led to a reduction in trading, 8.7% down, particularly in the APAC region, although this has been partially offset by the expansion of both our online presence and sales of our lower price point water filtration brand, Aqua Optima. Looking at gross margin. Again, we see a strong performance with an 80 basis points increase to 39.6%. I'm not going to say any more on this now, so there is a more detailed divisional slide to come. Adjusted EBITDA has increased significantly, up by 23.1% to GBP 39.5 million, that you see in the top right-hand corner. And as you can see there, although we have seen some reduction in EBIT margins with Billi coming on board, the group has continued to secure consistently high profitability with an EBITDA margin north of 25%. And that's really down to 2 main things. It's due to both the quality of the products that we sell, and it's also due to our positioning in key markets. Despite the increase in trading profits at EBITDA level, adjusted PAT has reduced year-on-year by 12.7% down to GBP 20.1 million. There is a little bit of tax movement in there due to the greater proportion of Billi profits that are largely taxed at 30% over in Australia. However, really the biggest impact has been on the interest side, where the overall increase in average gross debt and the higher interest rate environment has led to additional interest costs of GBP 6.3 million in the year. On the net debt side, we're pleased to report a small decrease of GBP 3.7 million, equating to a net debt leverage of 2.19x that Mark mentioned just now. I will speak more on the various movements that go into that change in a couple of slides' time and also provide a little bit more context around the covenant normalization that we've secured. Operating cash flow conversion has been put on hit the first time in that bottom right-hand corner. And really, that's the exactly how cash generative the group is. Not only do we secure gross and EBIT margins that many businesses, frankly, will give their [indiscernible] for, but we then go on and consistently convert that EBITDA into cash at high ratios. Now in 2023, this was a particularly sterling effort. I'm not going to say that 106% is going to be sustainable at every year-end. You run out of things to convert. But it is worth noting that even over the 2 years preceding that, average conversion has remained very strong at over 85%. So those are the highlights. Let's turn on to the next slide, and I can take you through the gross margin in a bit more detail. As mentioned, overall gross margin remains very strong, recording an 80 basis points increase in the year to 39.6%. The main reason for this increase is right in the middle of the page, and it is the first full year inclusion of Billi. Billi and therefore, the PFS division operates at the highest gross margin in the group, reporting 45.8% in 2023. Offsetting that increase, the Kettle Controls division has seen a small reduction in gross margin of 190 basis points to 39%, with the main reason being the quicker recovery in trading of the lower margin, less regulated China markets versus the higher-margin regulated business. Although recovery continues to be slower than originally anticipated, we are seeing recent incoming regulated order rates tracking in a positive direction, evident from higher sales in the last quarter of 2023 and a continued slow recovery in quarter 1 of 2024. We expect margins to start to stabilize as this recovery continues, although this will be offset to some extent as we continue to push out into some lower cost areas of Kettle Controls in order to increase our accessible market, and Mark will touch on that later. In Consumer Goods, we've seen a decline in gross margins of 250 basis points. There are 2 main reasons for this. One is reduced volumes that has led to a lower manufacturing overhead recovery, coupled with a product mix shift with a higher 2023 weighting towards lower-margin online and Aqua Optima ranges. So back to the income statement. If we turn on to the next slide, we can see what's happening on the balance sheet side. And to understand that and also more importantly, where the business is from a net debt point of view, we've included the net debt bridge. Now there's a lot of information on this slide, far more than I would normally choose to put on the slide, but it is important as cash generation and gross debt reduction is a key priority of the group at the moment. We have to get the strength back into our balance sheet, ultimately to provide a secure foundation to the group, to reduce interest costs, to allow us to continue to invest for growth in the future and to improve our access to funding that is fit for purpose for our medium-term aspirations. And so I do want to spend a few minutes now taking you through what has driven that GBP 3.7 million reduction in net debt that we talked about on the financial highlights slide. The first thing to note is those very noticeable yellow columns, which show just how well we are generating operating cash inflows with GBP 36.6 million coming into the business as a result of trading and a not insignificant additional GBP 2.3 million of cash inflow as a result of strong working capital management. It is those 2 yellow columns that are driving our 106% EBITDA conversion rate we talked about before. And when you look at our working capital as a percentage of sales, and you can see that in the second bullet point on the right, you can see just how far the [indiscernible] shifted in 2023 because of the strong working capital management, with a large swing from 25.8% of sales down to 16.7%. That represents a very efficient balance sheet position. Investment-wise, we have kept capital expenditure as low as possible in the year with the GBP 8 million you're seeing there reflecting a more or less maintenance level of spend but we have had to pay out the final LAICA earnout amount of GBP 7.5 million as well. It's difficult to argue this is a bad thing as it reflects the successful achievement of certain pre-acquisition targets, but it has taken additional money out of the group and reduced our ability to decrease net debt in the year. As we spoke about before, interest cash outflows have increased substantially to GBP 7.6 million, again, making it very clear why the [indiscernible] has to be on reducing our gross debt position. What you don't see on that bridge, because it has a 0 net debt impact, but it is worth understanding, so I put a specific bullet point in the financing section, is the significant level of repayments that the group are making back to our banking syndicate each year in relation to the Billi acquisition loan. We are paying GBP 3.5 million a quarter, GBP 14 million a year to amortize that loan down to 0 by October 2025. This is a real reflection of just how much cash the business is able to operate that it has been able to meet that amortization profile and that we are forecasting to continue to be able to do so. Billi look forward to the end of 2022 and despite the macro challenges, the group will have effectively paid for that acquisition in just 3 years. And one of the reasons we can do that and can get the group back to a position of balance sheet strength relates to an ultimate dark blue column, dividends. For the first time since IPO, the group reduced the level of its interim dividend to 0.9p per share in order to prioritize debt reduction, which brings us neatly on to our capital allocation framework. And if we go on to the next slide, I can take you through. I don't want to spend a lot of time on this as it mostly already been covered by Mark and me on other slides, but we've chosen to put this in here really just to pull together all the key messages all in one place. As a group, we are prioritizing net debt reduction. But what does that tangibly mean? Well, in terms of targets, it means the 2 things you see in that first green circle. One, we have a clear plan to reduce our net debt leverage ratio to around 1.5x by the end of 2025. And just as importantly, two, we have set a clear ongoing leverage appetite between 1 to 2x after that, and we'll make future capital allocation decisions within that range. It is also what's led to the decision to temporarily pause the dividend payment in calendar year 2024 with a planned return to a sustainable payout ratio of 30% of adjusted profit after tax in 2025. This decision has been made 100% to allow the group to accelerate its deleveraging for all the good reasons we spoke about before. We are going to continue to invest in some organic growth drivers in the short term, and you can see that in the third circle, and Mark will talk about some of these in a few slides' time. But we are going to manage this very carefully, and we do not expect to return to anywhere near the level of CapEx that we've seen in recent years for the Chinese factory and the acquisitions of LAICA and Billi. Turning to the acquisitions. These 2 still remain a key part of the group's medium-term strategy. But as that last circle says, this is something that is currently on hold until we have returned to a position of balance sheet strength. If we turn to the next page, I'll take us through just a few things on the banking side. The first thing to note is that we continue to operate within our existing covenant at 31st of December 2023, and we are forecasting to continue to do so for the remainder of the facility term. However, notwithstanding this, over the last 6 weeks, I've been working proactively with our banking syndicate to enhance both the flexibility and the security of funds within the existing agreement. I spent a lot of time with each of our banking partners, I suspect they are fed up with me, to further develop those relationships, both in the short term and also with an eye on our more medium-term requirements. As Mark said at the beginning of this presentation, one of the key changes coming out of that process today is the normalization of the net debt coverage leverage -- covenant leverage to 2.75x for the duration of the facility. And this really does illustrate our banking partners' ongoing confidence and support that they were able to approve this change on the 22nd of March 2024. Banking and treasury management will continue to be key priorities for the group in the coming years. And so to help support our proactive approach to this important priority, I'm also pleased to report that we have recruited an experienced Group Head of Treasury, who will be joining the business in August 2024. And on that good news, I would just like to turn over to my last slide before handing back to Mark. This is our normal technical guidance slide. And here, we presented those key metrics that we shared with you in previous years. There is a lot of detail in the words on this slide. The main bits I will pull out are: adjusting items are expected to be broadly in line with 2023, and it's worth noting a sizable chunk of that now relates to share-based payments of GBP 1.3 million and amortization of acquired intangibles of a similar amount as well as some additional spend relating to anticipated divisional restructuring costs. Effective tax rate is expected to remain around the 12.5%, which I think is what most analysts have already got in their models. It was a bit lower in 2023 because of some nonrecurring deductible integration costs in Billi. CapEx, you can see we forecast to allow this to increase a bit from pure maintenance spend relating to some certain short-term investments for growth, which Mark will touch on in more detail in a few slides' time. Interest is expected to reduce a little as the average gross debt declines and also reflects some stabilization in interest rates. And whereas around 1.5x is the target for the end of 2025, with all our cash generation and debt reduction efforts, we are looking to get below 2x by the end of 2024. And that's everything from me. So I'll hand back to Mark, who's going to take you through the divisions in more detail.

Great. Thank you very much, Clare. So with that, let's take a little bit of a deeper dive into some of the divisions within the business and getting an overview of the market that we're in, first of all, primarily what we call the small domestic appliance market. So on the chart here, you can see 3 different graphs. One on the left there shows the global small kitchen appliances, which was actually in decline during 2023. I think that really does highlight the tough backdrop we've been operating in with the core categories. This is particularly true in the regulated market for kettles, where we have more than 70% market share and sales are strongly influenced by the economies in both the U.K. and Germany. The middle graph shows China export data, which you can see was very weak across all regions during the first half of 2023. However, we did start to see some more positive indications in the second half, suggesting brands are gaining some confidence in terms of both the Q4 sellout in 2023, but the 2024 sell-in with some stock now being pushed into the pipeline, particularly for the second half of the year. The graph on the right-hand side there, that shows the U.K. expectations for one of our key markets, U.K. electricals. Here, we are expecting some modest growth after a difficult period, aligning with some of the stock build activities in the previous graph and our commercial plans and growth expectations for the year across our divisions. However, this data is also somewhat skewed specifically by some high-growth appliances such as air fryer, which you can see in just about all of the retail outlets at the moment. So with that, let's just move on to the Kettles segment in particular. We've had lots of discussions on this in the past. The regulated market is the core market for Strix, which accounts for more than 60% of our sales and certainly delivers the highest margin. As you can see from the top left-hand graph, after 8 quarters of negative growth versus prior year, it finally did turn positive in the second half of 2023. However, this has not been the typical or the historical rebound or bullet that we've discussed before, more of a steady quarter-on-quarter improvement. As we have rebased the business, we have clearly taken a more conservative view of the recovery period within this key segment of our business, and that's reflected in the analyst notes that you've seen on the market already. Bottom left-hand corner shows a slightly different story. That's the less regulated market, which shows a much more positive profile and it's much more in line with our historic norms in terms of the recovery period during the second half of the year again. This did drive some revenue growth for Strix in 2023, where we actually saw double-digit growth and some share gain, albeit at the lower margins. And on the right-hand side, anybody who's been through these presentations probably recognize this graph, this is really trying to show you the improvements between the market year-on-year. In 2023, you can still see we are significantly off the highs of 2021. That's primarily in the regulated markets, which is around 20% below 2021 figures. We still expect this to recover and global household penetration of Kettles is still well below 50%, and there remains plenty of growth opportunities in places like India, U.S.A. and China, just to name just a few. If we can move on to the next slide. As you can see, net sales for kettles have been in decline since 2021 due to those various headwinds. We've had the pandemic, Brexit, conflicts in the Ukraine, now the cost of living crisis, the list does go on. However, Strix did outperform the market with a modest growth in value terms driving -- sorry, driven primarily by the strong recovery in that less regulated market. So what's next for the kettle market? What are we doing in these times? Three main areas really. First of all, we are working on the new series of controls called the Series Z controls, well-patented controls, currently with customers undergoing some quite extensive testing. This is a control that is physically smaller by about 30%, obviously, lower cost, has a much better sustainability footprint. And perhaps one of the most important things, actually, it's very difficult to manufacture. This needs to be done on an automated line to get the cost benefits. And not only do you get benefits from the control itself, the OEMs will actually get benefits from the appliance being physically a slightly smaller footprint for things like the element and so on. So actually, it's a win all round and is being well received in the presentations we've made so far. We're also doing a bit of a technology showcase. We're just about to go back out to China in 2 weeks' time for the Canton Fair, and we'll be showing some of the new adjacent applications for this control. Because it's physically smaller, because it's actually got very high specification, there are new ideas that we can go into, things like blenders, for instance, for travel kettles, which actually are becoming increasingly popular, believe it or not. But any appliance that requires that cordless connector, there is an opportunity for us to actually go and talk to those customers in those markets. There's also a new control we're bringing out in the second half of this year, a low-cost control, and that is to increase or increase the addressable market, both in the less regulated market, but also in China. It also has the impact of actually being able to protect our regulated markets as well, giving you a completely different control. Again, we will launch that in the Canton Fair in 2 weeks' time, and you can expect to start seeing that on the market at the back end of this year as well. So quite a lot going on inside the kettle market itself. So let's move on to Billi. Clearly, Billi had a lot of communication when we acquired it in 2022. I think the best way to describe this is, as stated, it really was the deal of a lifetime, although I think it's fair to say, unfortunately made at the worst time you could possibly pick with the economy in a very fragile state. But I think it is worth just reminding ourselves of the strategic benefits of Billi. First of all, the product range, I mean, it really is a natural fit and an extension to our current product portfolio, moving us into different technologies into offices and homes, certainly gives us lots of room for expansion in the future. The financials of the business are extremely positive with very high margins, strong cash generation and is supportive of our group's growth ambitions. I know when we were looking for acquisitions, I was challenged to find a business as good as the Kettle business, which I thought was impossible. Actually, the margins in Billi this year have actually surpassed that of the Kettles and cash flow is very similar as well. So a fantastic acquisition that was made. Our own patented technology within Strix also has a number of synergies, and it allow us to further differentiate the Billi products, making it more cost effective, more sustainable, providing some protection through additional patents and most importantly, perhaps more diversified from the competition as we move forward. There's also a very significant opportunity for geographical expansion, firstly, into Europe and eventually into the U.S.A. market through both new and some existing partners that we have already secured in the U.K. And then you have Strix expertise in manufacturing and procurement, which will certainly allow further cost efficiencies to be realized as we continue to work with the Billi teams over in Australia. So let's take a quick look at the progress within Billi. I think the simplest thing to say it's delivered exactly what it said it would, double-digit growth on both top and bottom line in what has been a difficult year for most businesses. We've extracted ourselves from all the various TSAs with the new facilities opened in the U.K. and Australia. And I think it's worth mentioning, particularly in the U.K., I mean, that was completely embedded inside Waterlogic at the time. So we now have a new head office. We have a new showroom in London. We have 2 new warehouses across the U.K. as well, which are more cost effective and certainly will provide better facilities for the future of the business. We've had successful launches of new products in Australia, the Omni-One, the Luxgarde products, all now going to be expanded globally during the course of this year. And we've integrated parts of the Billi group into our own Strix Group, particularly in the functions of finance, human resources, compliance and approvals, engineering and in the operations. So what's next with Billi? There is certainly a lot of trends that support growth in this market. People want to move away from the use of plastic bottles. They want to move towards convenience and flexibility, all of which comes with the Billi systems. There's also lots of concerns about the quality of drinking water in different parts of the world and the move away from sugary drinks and towards healthy filtered and sparkling water from the tap. And there is no question that Billi has significant profitable growth potential, and we're going to continue to execute on initiatives to maximize the opportunities. And just as an example, some of the things that we'll be doing: the global launch of the multifunction tap, which is compatible with all of the Billi products that have been launched previously; introduction of Luxgarde and the Omni-One, 2 of the new products to move into the export markets. New product development is really leveraging on Strix' technology, but targeting that global residential market. Expansion into Europe. And I'm going to have to apologize in advance, but I always say this, it's an untapped market for Billi. And it really is. There's very few Billi systems out there, and some of our competitors have done a great job marketing there. So we are certainly going to look to expedite our move into Europe and further expansion into Southeast Asia and in the Middle East through established distribution channels, all things that we are currently working on within our strategy for Billi. So moving on to the next section into Consumer Goods. Last year, we saw an overall decline in revenues, and we have taken actions to build a solid base moving forward. Some number of things that we've implemented. First of all, a rationalization of the applied products, removing those that were less -- were in less profitable segments or required extensive approvals. We've also had a very strong rationalization of the online channel, some of which were competing against each other in its previous form. Now we're focusing on those that are going to give us the most profitable routes to market and effectively withdrawn from those that are damaging the retail price points. We also saw a number of retail customers really struggle with the economy over the last 12 months, some of our biggest customers even exiting from the market. So things that we've had to overcome during the course of last year. However, there was also a number of positives. LAICA itself performed extremely well. Again, another good acquisition, and we saw an EBITDA growth of 21% versus prior year. Aqua Optima brand also saw nearly 20% growth, which is primarily driven by the Aurora range, including the new launch of the Aurora Coffee System in the U.S.A. We actually moved production of the antibacterial filters into our LAICA factory. They were previously being sourced from China. So that's a major move, actually bringing the production closer to the end user for that product line. And we secured a number of significant retail contracts at the back end of the year, particularly in the U.K. and Europe that will provide more than half of the anticipated improvements during 2024. To further strengthen the division and provide the strong foundations required for growth, we have started the divisional restructure, making sure we have a very clear strategy focused on sustainable profit growth with the right resources and technology in place to execute them. So if I move on to the next slide, really sort of looking at that sort of restructuring. So we are refocusing and doubling our efforts now on our core profitable categories, particularly water filtration and the vacuum sealing and food preservation areas to drive sustainable profit growth. We are working to drive significant operational efficiency with a much more robust marketing strategy, really getting to understand our customers and understand the best routes to market for our products. Some good examples of what we're doing with the road map, for instance, water filtration. We are going to expand into that lucrative growing coffee machine filter market. We have some very strong private label contracts today, but there's plenty of other opportunities for us to go after, and we'll be using our vacuum manufacturing base to support that. Same with the vacuum sealers, very popular in Europe, less so in the U.K., I must say, became very strong during the pandemic where people are trying to preserve food for longer. We have a whole new range of products coming out with smaller footprints, rechargeable handheld type devices that will certainly allow us to expand into that category. Moving forward, we are also expanding into adjacent subcategories with a focus on leveraging on our OEM capabilities, our filtration expertise and the distribution in the health and wellness space. So coming off divisions, let us move into another section, which always seems to fall into the back of the section, but actually is a very important part for us, and that is ESG. I mean this really is at the heart of our organization. We have an embedded culture of continuous improvement, constantly looking at different ways to do things to improve them, making them better and faster. Some of the decisions being taken are actually quite challenging. We have seen a significant change in our supply chain as a result in the conflict in Ukraine. It has actually resulted in us moving some of our manufacturing facilities because costs in Europe have just become too high, particularly the formation of metal due to the increase in electricity costs. Within our product development, sustainability has always been a key focus. All of our products are looking to reduce energy, improve the quality or safety of drinking water, provide increased convenience or flexibility to our consumers. And it's the people inside the company that are really driving that every day, challenging the status quo. Even around the office where I sit here, you see all sorts of things. I have a beehive set outside me here, so I'm actually quite right and taking my window in the summer months. Flower garden, all of these are suggestions from our employees, and it's great to see that level of engagement from all across the world actually in our various offices. In 2023, we achieved net zero Scope 1 and 2 in line with our target, excluding Billi. However, Billi themselves have made a great effort during the course of the last year, and they will actually be net zero within the first year of acquisition, making the group fully net zero in 2024. And actually, nearly 10% of our group's power is now from our own solar panels. So quite an achievement, and we actually reduced our wastewater by over 11% during the course of last year. There's a lot of work on the ESG side. We actually did put a new report on the website last Wednesday. So you can see all of the various targets we've put in place, the KPIs we've got. And now our focus really is moving on to Scope 3 with that same drive and commitment that we showed in Scope 1 and 2. So if I can move on to Slide 22 before I lose my voice. So just a quick summary. Let's just review our strategic business objectives. And our goal really is to develop leading innovative technology in the field of water heating, safety control systems and drinking water treatment. If I look at the Kettles, first of all, to profitably grow that revenue. The addition of the low-cost control to increase our addressable market in China and less regulated and to protect our margins in the regulated market, of course, but also to introduce this innovative new range of controls with Series Z, absolutely a revolutionary control that is going to open up adjacent markets and provide probably the lowest cost base control within the market itself. And of course, continue with our lean initiatives to drive costs down through operational efficiencies and continuous improvement, something we've been doing certainly over the last decade with very good success. For Billi, we want to leverage on that Strix technology and the new product opportunities. It's first of all, expanding that geographical footprint in both residential and commercial markets and then looking further afield in places like the U.S.A. as well. And for Consumer Goods, following the restructure, we need to build on the success of LAICA as the center of excellence for this division, grow our market share through geographic expansion, innovative products and our established expertise in manufacturing and procurement. Now clearly, to succeed, we've got to have the right people in the right places with the right skills, motivated and engaged to deliver our strategic objectives. And I am very confident we have built these foundations within the Strix Group. And then finally, just as a sort of summary slide and as a reminder, a rebase and a divisional restructure to build strong foundation for medium-term profitable growth, well underway within Strix. Strong foundations that are unchanged. The core businesses have not changed. They're very profitable. They're very cash generative, and we have very, very good and stable market share. And on top of this, we have new acquisitions of LAICA and Billi, which all provide exceptional incremental opportunities. We expect to see a recovery in the regulated market. At this point in time, we are taking a very conservative view, but it will happen. There is only 50% of the population or less than 50% of the population that currently have a kettle in their home. So certainly, there is still growth potential in those markets. We have a very strong focus on the growth opportunities within Billi. Clearly, this is a very good segment for us, plenty of room for expansion into Europe and with the new product development expansion into the residential segment, significantly increasing our addressable market. And there is a very clear focus from the Board down on deleveraging and prudent strategic investment focused on profitable growth opportunities to make sure we support an accelerated growth profile for the medium term. So with that, I will finally keep quite, overrun just a tiny bit, and open up to Hannah to ask questions.

Has the upturn in Kettle Controls continued to the end of March 2024?

So I'm always a little bit cautious with questions like this from previous years. So after the Chinese New Year, we've had about 5 weeks of trading so far. And actually, it's been very positive. It has been very good. I remember sitting here a year ago saying almost the same thing, although we'd only had 4 weeks of trading, I think, at that point in time, it's a different timing of Chinese New Year, and then it sort of withered away at the beginning of May. So we are being more cautious about our forecast. The truth is, yes, there is actually some optimism year-to-date in terms of what's happened. OEMs have relatively good visibility, certainly better than we've seen in the past. And there are some indications that brands are starting to actually get a bit more confidence and start to refill the pipeline across the world. The hesitancy a little bit for us is that 2 of our key markets are Germany and the U.K. What we really need to see is interest rates come down, people have a bit more cash and the housing market to improve. And then certainly, we'll start to see an improvement. And I'm sure we'll see that recovery, albeit right now, we're taking a slightly more prudent view in our forecast.

Perhaps for you, Clare, who instigated the debt covenant renegotiation? Was it you or your bankers?

It's a good question. It's a good question. The joy of proactivity is that it was us being proactive [indiscernible]. So no, absolutely, it was a conversation that was instigated by myself and Mark's help as well in order to have that discussion with them. It was a challenging process, but one that was well worth going through. And to get that reset and that normalization throughout the rest of the term, it's a good win for the business. And absolutely -- so absolutely down to us on those.

And a follow-up question, what fee did the banks charge for relaxing that leverage covenant, if you're comfortable?

Not generally something you perhaps would disclose in detail, but it was a very nominal fee [indiscernible].

That sufficed thank you. Back to Kettle Controls, has anything changed in the dynamics of this business, i.e., a roll-off of any patents or a new competitor, which makes you believe that they won't recover to pre-COVID sales and profitability?

The simple answer is no. There is absolutely no fundamental shift or change in the marketplace. We're still dealing with the same competitors. There's no significant new technologies come out. I think the most significant shift is some of the things that we're doing ourselves in bringing out the new range of controls. But certainly, there's nothing to suggest that we would not see a recovery to the normal levels at some point in time.

And perhaps leading on from that, can you explain the difference between the regulated and unregulated Kettle Controls business?

So in terms of the definitions, I mean, they're relatively straightforward. So a regulated market, as it suggests, is a country that has very, very strong regulatory management, if you like, against things like health and safety and electrical standards, but they are able and willing to enforce against those and make sure there is compliance to those. They would be places like U.K., France, Germany, Spain, Portugal, Americas, Australia, Turkey, they will fall into that regulated segment, where you can typically charge a slight premium as well because by definition, you have to have a certain level of product to be able to sell into those market and there's a certain investment to be able to do that. The less regulated are effectively everywhere else other than China. So the less regulated markets would be things like Southeast Asia, South America, where there are regulations in place, but there's not necessarily the appropriate regulatory bodies to be able to enforce that in all cases. And therefore, you do find it's slightly easier for some of those lesser products, for lack of a better word, to be able to penetrate into those markets. And then finally, you have China, we treat that separately purely because all but one of our competitors are Chinese manufacturers. And therefore, the competition is very different over in China. So we treat that as a separate entity in itself. But we still have very significant share in China as well.

We should move on to Billi. Billi is a different business from all of your others due to its requirement for aftersales service. How do you plan to build exceptional capabilities on that front?

Again, it's a very good question. So in Australia, we have a very strong team of technicians as we do actually now in the U.K. We had to do some hiring from the acquisition just to make sure we've got the right level of technicians within the business. And you're absolutely right, it's key to the success of the business. We found that. If you go back in history and look at some of those companies, it was poor service that actually limited their sales. And certainly, I think Billi can be quite proud of the fact that they are showing very high scores and things like [ TrustPilot ], for instance, in the last 24 months. So some great achievements in terms of getting that service right. As we look to expand, the most important thing for us is finding the right partners. We do have some very good partners in the U.K. But when you go into Europe, we have to have people that are going to be able to deliver that same level of service. So we're not looking for 20 or 30 different partners. We're looking at 2 or 3 large partners that really do have the capabilities and are willing to invest into that area. We've been very successful in some parts of the world with that already, and we will follow that model going forward. But it does take time to find and train the right partners before you release into the market. The last thing we want to do is to release and then have issues within that market from bad reports of service and so on. So it is something that is absolutely key to the success going forward, and it's something that we are definitely going to prioritize.

Is there any seasonality in Billi's revenues? Did the new head office warehouse and showroom temporarily disrupt sales during '23?

Yes. I think there was so much change when we acquired the business, particularly in the U.K. I don't think the showroom or the new head office had any marked impact. If anything, the morale of the staff improved dramatically the minute we announced what we were going to do. So what we have seen is very engaged staff throughout that whole process. And for the U.K. team to have achieved what they've achieved, I think, is quite tremendous. From a seasonality point, yes, there's a limited seasonality, but it's 1% or 2% between first half and second half. It's nothing like you see in the kettle where it's quite a marked difference. So no, it's because is primarily selling into commercial areas at the moment. Obviously, we'll expand into residential as well. What you're seeing is more around people renovating offices and those sort of movements that are driving the sales.

What are the main opportunities to grow Billi? And what proportion of revenues do you anticipate from the U.K., Europe and North America in the next 3 to 5 years?

We haven't put out specific forecast in terms of the revenue numbers, and I'd be obviously ill-advised to do that, I think, right now. But I think in terms of the growth, I mean, it's quite straightforward for us. I mean, Billi today is strong in the U.K., Australia and New Zealand, where they've all got direct sales channels, and it's an exceptional business and has done very well in those businesses. Still a lot of growth opportunity in the U.K., even in the commercial segment without doubt, both in just general growth, but also in market share gain as well. So there's an activity there. But the 2 key things for me, one is Europe. Europe is -- I've said it before, I get into trouble saying it's an untapped opportunity. And with all the taps we've got, we're definitely going to tap it as much as we can. But seriously, it is by far the biggest short-term opportunity. We can take existing products into those markets. We have a lot of very good partners in the U.K. already that also operate into Europe. So we're in discussions clearly with some of those to be able to expand that. And that's something that we're working on now. Slightly longer-term opportunity. And one of the reasons we bought Billi is there's a lot of synergies in technology between Strix' core technologies and Billi. And some of the technology we have in Strix are actually very advanced. They're well patented. Some of the [indiscernible] technology, for instance, is very valuable to us. There is an opportunity to take some of that technology, put it into a Billi type system and really start looking at the residential market in a very different way. And certainly, that is something we're working on today. The teams in Australia from Billi and the China engineering teams are working very closely together already, and that's something that we'll continue to work on. But that's a slightly sort of midterm opportunity rather than short term.

What's the gap between the #1 brand and Billi?

In terms of technology, I mean, I don't think there is a gap. I mean I think actually Billi is the premium product. And you'd have to take some so independent advice to that to be able to prove that maybe. But Billi is a water cooled system. So it's very different from most other systems on the marketplace. It's a little bit like having a mini fridge under your sink. You don't have any heat coming out of it. So you haven't got to drill holes in your cabinets or your doors just to stop that heat flow everywhere. And it's a very tiny system, very easy to plumb in. So I would -- as I said in the acquisition, I believe Billi to be actually the premium technology in the market today.

Let's move on to a few for you, Clare, I think. [indiscernible] the cash that is saved from the dividend, will that only be used to pay down debt?

Well, absolutely. That's the reason for doing it. As you saw on the slide, it's our second circle on the slide on capital allocation policy. Now absolutely, we are doing it purely to help us reduce the net debt quicker. That's something that we are absolutely prioritizing and understand the importance of getting down below that 2x as soon as we possibly can. So it is only a pause for the calendar year of 2024. And so we do sit here and say we expect to go back to paying dividends at the final dividend for 2024 as that gets paid in 2025.

Why are you paying GBP 10 million of interest costs on net debt of GBP 85 million?

Our gross net debt is more than that, unfortunately, folks, and you have to keep your -- you don't necessarily keep your cash exactly in an optimum deposit account if you need it for operational reasons. And so yes, our gross debt has run near GBP 112 million, I believe, over the course of 2022, which is why that is higher than you would expect. The other big thing that you need to be aware of is we do have to amortize our prepaid arrangement fees that go against that debt over the course of the term, and that's also added just over GBP 1 million of additional interest cost into that number you see in the income statement. So yes, it's a number of reasons that make sense.

Can you comment, please, on input cost, inflation and any ability to increase prices to customers?

Yes. That's a good question. We get asked that a lot. It really does depend on the macro environment in terms of what you can do. I mean today is still -- we're sort of talking primarily around the kettle side at the moment. Today, still more than 93% of kettles are made in China. There's a little bit in Poland, a little bit in Turkey, a little bit in Malaysia, but there's not many places that are manufacturing. And whilst we may have very high interest rates and inflation rates over here in the U.K., actually, in China, they're nothing like that. So you've got to be a little bit careful how far you can push pricing, and we are market leaders. So we do have the ability to be able to move pricing. But when there is no inflation or very low inflation in places like China, and most of our competitors are China-based competitors, then you have to be much more careful. So we tend to focus much more on the operational efficiencies, on lean activities to reduce costs and obviously redesign of control to drive cost out whilst maintaining or improving specifications. That's not to say we can't increase prices, but we do it very carefully when there is a macro environment that will allow it. So the last 4 years, we've actually put prices up 3x. But yes, we do have to watch carefully the macro environment.

Appreciating that if you had anything material to say, you would obviously have put it into the market, but there's lots of questions around your depressed share price levels, takeover risk, private equity interest. So is there anything you would like to comment on that front?

I'll start. I think frustration is the first word that comes to mind, to be honest. I mean, clearly, the business is not valued at the right place today. Understand why it's been quite difficult times. Clare and I are both on the same page. We really need to make sure we get forecasts out there that are more than realistic that we can make sure we can achieve or even beat over time. So that's what we've done. We've rebased the business. I do think that people are starting to recognize the value of Billi. When we first bought Billi, we put debt in at 2.7x on the day of acquisition that -- people were horrified by that. And it was all to do with the macroeconomics change of Prime Minister at the time. It definitely was the worst possible time to do that and worst time to negotiate additional debt. But this business has not changed. Fundamentally, it is a fantastic business. So what we need to do is to grow the value and that will sort of determine the future. But I personally believe there's still significant opportunity in this business and the current price is just a long way off where it should be.

Yes. I think the only thing I'd add to that is just to repeat the importance of getting the net debt down to where we want to get it to. I mean there is undoubtedly even with now the covenants potential issue taken away, so no one sort of worry about that, there remains a discount almost certainly for the fact that we are more highly leveraged than the market would currently like us to be. And so value creation should inevitably come from getting that position normalized.

And a follow-up then to that, Clare. When can those interest rate costs be cut materially?

How quickly can we get the gross debt down. So it is. As we go into a much lower net debt position, we will start to see that sort itself out. We obviously have to hold some operational cash. It's only really around the GBP 10 million, GBP 15 million mark. And so anything else we can do as we reduce net debt will reduce the gross debt underlying and we will get the interest costs down. The other thing we can do when we get to below 2x is go out and look at a refinance. And if I had to say when do I think that's going to happen, it's probably in 2025, where we will go out with a different stronger balance sheet behind us and have different conversations about costing and credit.

I've got a couple of questions here, actually quite a few on year-to-date sales and EBITDA versus prior year, current order book versus prior year's order book. I guess people are trying to understand the pace of recovery and at least perhaps the ratios are holding up.

Yes. That's difficult information because that's sort of future forecast and things, which I'm certainly not allowed to say. I mean I think just sort of reiterate what I said previously. I mean, trading times are always different year-on-year. You're right, right now, things are good. We've got Canton Fair coming up in 2 weeks' time. That's a very key event for the Kettle market in particular, but also Consumer Goods actually. We'll meet something like 100, 150 brands and retailers during that 5-day show as well as just about all of our OEMs. So we gather an awful lot of intelligence during that period. But yes, right now, there is definitely room for optimism. But definitely it's too early to say that that's a trend or a rebound or any of those things. Less regulated has begun a very strong rebound, which is what you'd expect regulated to start to see that rebound.

I suggest everyone looks at the equity development research report if you want to see our forecast, which should help guide you. Where do you anticipate the CapEx to return to in the current year and beyond? You mentioned that FY '23's level was at maintenance levels.

I think we're probably going to be around the level of sort of GBP 15 million, maybe a little bit higher some years as we go forward. We have to carry on investing for all the good reasons that Mark has already spoken about. And if we only do maintenance spend, then eventually, we will start to hold ourselves ransom for the medium term. And so yes, somewhere around GBP 15 million and a little bit higher on an annual basis.

We've [indiscernible] any reference to HaloSource today. What's the latest, please?

Yes. So HaloSource is an interesting business. It forms part of the PFS division. So it's reported as part of PFS, which is effectively just billing in HaloSource. So those are the 2 that fall into that. The Halo Source products in China went through a very, very tough time during the pandemic, which is why it's been a little bit quiet. And if you remember in the first year of acquiring HaloSource in China, we did 12 contracts in the first year. Actually, last year, we did around 24 contracts. So it is actually still performing. The market is slowly recovering from the pandemic. Definitely, the farming sectors in China are improving, which is where a lot of the product was moving. Overall, in the size of the division, it's relatively small, which is why it doesn't get so much of the press, if you like. But it's something that's still very active. We are still working on the technology within that. We are producing numerous systems. And we would certainly look to be probably doubling the contracts year-on-year in that part of the business.

The proposed partial closure of the [indiscernible] facility. Is this more of a [indiscernible] of part of the facility rather than partial closure so the facility can be opened up again when business improves?

No. No, it's not. This has been a really difficult decision. I mean, as a company, we've taken the whole sustainability messaging very seriously. We're looking at our costs all the time as part of the business. And so it's not unusual for us to move things around, although this one is perhaps slightly more significant than previous ones. I have to stress that this is something that's in discussion today. So it's not something that is decided. We did put an announcement out, and we are in a consultation process at the moment. I think to understand the reasons for the discussions that are going on at the moment, we used to buy, for instance, our raw material for our press and stamp parts in Germany. There was a lot of problems in Germany, first of all, with flooding, which actually stopped the supply chain for almost 6 months actually because it's very specialized material. And then we've got all the energy prices, particularly electricity, which has made those products almost unaffordable now. And actually, what's happening at the moment is we are buying product from China. We are shipping that raw material, slightly modified raw material to Ramsey , making product in Ramsey and then shipping it all the way back to China to our OEMs. So from a sustainability point of view and an amount of cash that is tied up, it just does not make sense. So we've had to make some very difficult decisions, and we're obviously in discussions at the moment. Yes, we will be keeping core technology here regardless on the Isle of Man, we will maintain our manufacturing site on the Isle of Man. But in some cases, where it makes more financial sense to do so, we will be looking to move part of that to our China facility during the course of this year.

Well, that's our hours. So listen, apologies if we haven't got around to your questions. I will send them through to management, and we will come back separately. But otherwise, please do respond to the feedback when we send it through. Thank you for listening, and thank you both to you, Mark and Clare. We look forward to catching up soon.

Thank you very much.

Thank you.