Stelrad Group H1 Earnings Call Highlights

Key Points

• Profitability improved despite weaker demand: First-half revenue fell 9.1% and volumes declined 14.6%, but adjusted operating profit rose 4.9% to £16.7 million, lifting the margin to 13.5%. Gains came from exiting loss-making business, favorable product and geographic mix, and cost efficiencies.
• Europe offset weakness in the UK and Turkey: European adjusted operating profit increased £2.7 million, while UK and Turkey results declined amid subdued construction and renovation markets and sharply reduced Turkish volumes. Stelrad plans to target market-share gains in Germany and Poland.
• Cash generation and shareholder returns remained strong: Operating cash conversion was 102%, net debt fell to 1.29 times EBITDA, adjusted EPS rose 16%, and the interim dividend increased 5% to 3.19 pence per share. Management said trading remained in line with expectations, while anticipating roughly 5% steel-price inflation in the second half.

Stelrad Group LON: SRAD reported higher first-half adjusted operating profit and margin despite lower revenue and sales volumes, as the European radiator manufacturer benefited from commercial actions, product mix and cost initiatives in a subdued end-market environment.

Group Chief Executive Trevor Harvey said the company had made further progress despite challenging conditions in its core markets. The company operates brands including Stelrad, Henrad, Hudevad, Termo Teknik and DL Radiators, and said it held a 24% share of the steel panel radiator market across its operating territories, according to BRG data published in May.

Revenue declined 9.1%, or £12.5 million, year over year. Group Chief Financial Officer Leigh Wilcox said the decline reflected lower market demand as well as commercial decisions to exit a loss-making European customer contract and reduce low-margin sales in Turkey. Those initiatives accounted for about £9 million of the revenue reduction, he said.

Sales volumes fell 14.6%, including a 9.3% reduction tied directly to the exited contract and the lower Turkey volumes. The balance of the decline reflected weak repair, maintenance and improvement activity and new-build demand in the UK, along with reduced activity in France.

Profitability improves as mix shifts

Adjusted operating profit rose 4.9%, or £0.8 million, to £16.7 million. The adjusted operating profit margin increased 1.8 percentage points to 13.5%.

Wilcox attributed the improvement to the removal of loss-making volume, a favorable country and sales mix, and efficiency gains at the group’s low-cost manufacturing facilities. Adjusted operating profit excluded £1 million of exceptional items, primarily redundancy costs incurred to right-size operations amid subdued demand.

Contribution per radiator increased 19.6% to £24.32. Harvey cautioned that this was not expected to be a sustainable level, as it partly reflected lower volumes in lower-margin countries and market segments. Stelrad’s medium-term target is contribution per radiator above £21, and management expects the metric to move toward that level as it pursues volume growth in selected markets.

The premium panel product mix increased by 0.1 percentage points to 6.2% of steel panel radiator sales. Wilcox said the commercial actions in Turkey and Europe had not caused a significant overall shift in premiumization, although the exited contract had some premium product content.

In the UK, management said premium panel penetration was maintained despite weak consumer confidence and reduced discretionary spending. Wilcox said initiatives around product availability, lead times, 48-hour delivery and color coordination were intended to support the longer-term premiumization strategy.

Europe offsets weaker UK and Turkey results

UK and Ireland revenue fell 4%, while volume declined 6.6%. Inflationary selling-price increases and sector mix partly offset the volume decline. However, adjusted operating profit in the region fell £0.9 million, or 6.3%, as lower volumes weighed on a largely stable fixed-cost base.

In Europe, volume declined 14.4%, with the exited loss-making contract accounting for 70% of the reduction. European adjusted operating profit increased £2.7 million, while the segment’s margin rose 5.1 percentage points to 10.8%.

Management said European revenue benefited from sales mix and a weaker euro, with average selling prices increasing due to reduced sales in France and the contract exit. Volumes increased year over year in the Netherlands, Poland, Denmark and Sweden, while Belgium and Germany were broadly stable excluding the exited contract.

Turkey and international operating profit declined by £0.5 million, driven by the strategic reduction in Turkey sales volumes. Turkey volumes fell 62% during the period.

Harvey said Germany and Poland represented significant commercial opportunities where Stelrad was underrepresented. The company plans to invest in commercial initiatives to build share in both markets over the coming 12 months, using its cost position and service capabilities. He said management expected competitive reactions as it sought to expand.

Cash flow, dividend and outlook

Stelrad reported last-12-month operating cash conversion of 102%. Net debt, including lease liabilities, declined to 1.29 times EBITDA, and Wilcox said the company expected a further reduction in the second half as seasonal working-capital investment unwinds.

The company has added local inventory in Turkey to increase operational flexibility. Capital expenditure was in line with the prior year at the half-year point, though management expects a modest full-year increase because of one-off IT costs.

Adjusted earnings per share rose 16%, supported by higher operating profit and lower interest costs. Stelrad proposed an interim dividend of 3.19 pence per share, up 5%, following a 5% increase in the prior final dividend. Return on capital employed rose 2.1 percentage points to 29%, with management expecting the year-end measure to exceed 30% due to working-capital timing.

• Steel prices are expected to rise modestly in the second half from historically low levels.
• Wilcox said management expected roughly a 5% increase in steel prices during the second half.
• Other key input prices are currently expected to remain stable, although the company noted potential effects from global events.
• Management said Stelrad continued to trade in line with expectations.

Harvey said the group remained mindful of continuing cost inflation and weak end markets, but believed its low-cost manufacturing base, production capacity and delivery performance positioned it to pursue targeted market-share gains and benefit when markets recover. He also pointed to growth in higher heat-output, hybrid and electric radiator volumes, which increased 58% over the past two years across the Netherlands, Belgium, the UK and Germany.

About Stelrad Group (LON:SRAD)

Stelrad is a leading specialist manufacturer and distributor of steel panel radiators in the UK, Europe and Turkey, selling an extensive range of standard and premium steel panel radiators, low surface temperature radiators, towel warmers, decorative steel tubular radiators and other steel “column” radiators.

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