ULTP Ultimate Products Plc

9 April 2024

Ultimate Products plc

("Ultimate Products", the "Company" or the "Group")

INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 JANUARY 2024

Trading in line with market expectations*

Ultimate Products, the owner of a number of leading homeware brands including Salter (the UK's oldest houseware brand, est.1760) and Beldray (est.1872), announces its interim results for the six months ended 31 January 2024.

Financial highlights

·    Total revenue down 4% to £84.2m (H1 2023: £87.6m)

o  Supermarket ordering held back by well documented overstocking issues (which are now easing), strong prior year comparatives bolstered by the exceptionally strong demand for energy efficient air fryers in H1 2023, and some modest revenue deferrals (£1.3m) at the end of the period due to the recent disruption to global supply chains

·    Gross profit rose 3% to £22.4m (H1 2023: £21.6m), with gross margin increasing to 26.6% (H1 2023: 24.7%), driven by sales mix and the fall in global shipping rates

·    Adjusted EBITDA** stable at £11.3m (H1 2023: £11.2m)

·    Statutory profit before tax up 2% to £9.5m (H1 2023: £9.3m), as lower net debt reduced finance expenses

·    Adjusted profit before tax** up 2% to £9.6m (H1 2023: £9.4m)

·    Statutory EPS down 3% to 8.2p (H1 2023: 8.4p), with Adjusted EPS** down 3% to 8.3p (H1 2023: 8.6p) due to the impact of higher UK corporate tax rate (25% from 19%)

·    Interim dividend per share up 1% to 2.45p (H1 2023: 2.43p)

·    Improved net bank debt/adjusted EBITDA** ratio of 0.4x (31 July 2023: 0.7x), below the 1.0x target set out in the Group's new capital allocation framework

·    Strong cash generation from operating activities of £14.4m (H1 2023: £12.8m), representing a 128% operating cash conversion

·    The Group continues to trade in line with market expectations for FY24*

* Consensus market expectations for the financial year ending 31 July 2024 are revenues of £166.7m, adjusted EBITDA of £21.5m and adjusted EPS of 15.6p

**Adjusted measures are before share-based payment expenses and non-recurring items

Operational highlights

·      Continued to drive productivity through focus on continuous improvement, including the automation of hundreds of tasks across the business

·      Opening of the Group's new European showroom in Paris, ideally located for hosting both existing and prospective customers across the region

·      Rebranding of the iconic Salter label, elevating its already strong identity and consumer recognition

·      Renaming of the Group from UP Global Sourcing Holdings plc to Ultimate Products plc, to better reflect the Group's purpose and core activities

·      Appointment of Andrew Gossage as Chief Executive Officer, taking over from Simon Showman, the Group's founder, who will remain on the Board as Chief Commercial Officer

New Capital Allocation Framework

·      Maintain net bank debt/adjusted EBITDA ratio at around 1.0x;

·      Continue to return around 50% of post-tax profits to shareholders through dividends; and

·      As announced separately today, regulatory and shareholder approval is being sought to commence a share buy-back of up to 10% of the Group's issued share capital

Current trading and outlook

The Group continues to trade in line with market expectations for FY24.

Commenting on the results, Andrew Gossage, Chief Executive of Ultimate Products, said:

"This has been another period of resilient performance for Ultimate Products. Macro conditions remain challenging, but our strategy of providing beautiful products at mass-market prices to UK and European households is continuing to stand us in good stead. We are now seeing the gradual resumption of normal ordering patterns from our customers after the overstocking issues that were brought about by the pandemic, and we have a range of initiatives underway to improve operational efficiencies and deepen our customer relationships. As a result, we continue to trade in line with market expectations."

For more information, please contact:

Ultimate Products +44 (0) 161 627 1400

Andrew Gossage, CEO

Chris Dent, CFO

Shore Capital +44 (0) 20 7408 4090

Mark Percy

Malachy McEntyre

David Coaten
Iain Sexton

Isobel Jones

Cavendish Capital Markets Limited + 44 (0)20 7220 0500

Carl Holmes (Corporate Finance)

Matt Goode (Corporate Finance)

Abigail Kelly (Corporate Finance)

Charlie Combe (ECM)

Powerscourt +44 (0) 207 250 1446

Rob Greening

Sam Austrums

Oliver Banks

Notes to Editors

Ultimate Products is the owner of a number of leading homeware brands including Salter (the UK's oldest houseware brand, established in 1760) and Beldray (a laundry, floor care, heating and cooling brand that was established in 1872). According to its market research, nearly 80% of UK households own at least one of the Group's products.

Ultimate Products sells to over 300 retailers across 38 countries, and specialises in five product categories: Small Domestic Appliances; Housewares; Laundry; Audio; and Heating and Cooling. Other brands include Progress (cookware and bakeware), Kleeneze (laundry and floorcare), Petra (small domestic appliances) and Intempo (audio).

The Group's products are sold to a broad cross-section of both large national and international multi-channel retailers as well as smaller national retail chains, incorporating discount retailers, supermarkets, general retailers and online retailers.

Founded in 1997, Ultimate Products employs over 370 staff, a significant number of whom have joined via the Group's graduate development scheme, and is headquartered in Oldham, Greater Manchester, where it has design, sales, marketing, buying, quality assurance, support functions and warehouse facilities across two sites. Manor Mill, the Group's head office, includes a spectacular 20,000 sq ft showroom that showcases each of its brands. In addition, the Group has an office and showroom in Guangzhou, China and in Paris, France.

Please note that Ultimate Products is not the owner of Russell Hobbs. The Group currently has licence agreements in place granting it an exclusive licence to use the "Russell Hobbs" trademark for cookware and laundry (NB this does not include Russell Hobbs electrical appliances).

For further information, please visit www.upplc.com.   

BUSINESS REVIEW

We are pleased to present the Interim Report for the six months ended 31 January 2024, a period in which, against an uncertain and highly challenging macro-economic environment, we have continued to invest in our strategic plans.

Our position in the supply chain makes our business complex; we work with over 600 factories and retailers, and deliver over 3,000 types of product to our end consumers. While the level of service that we offer means our business model cannot be simple, we consistently and seamlessly navigate the intricacies of our model to guarantee an unbeatable level of service for our retail partners. Our unrivalled execution, combined with our beautiful, more sustainable products, make us a strategic partner of choice to many of the UK and Europe's leading retailers.

Our complex and diverse operations increase the robustness of our business model. Dealing with a large number of factories across many countries, and continuing to seek to reduce our exposure to suppliers in China, both offer further security, which in turn provide safeguards in the face of supply chain volatility and quality control issues. Consciously choosing to deal with a wide range of different customers also protects us from the impact of fluctuating demand levels caused by overstocking and the cyclical decisions of retailers (e.g. turning towards 'own label'). The breadth of our offering avoids any overreliance on any given product line, allowing us to maintain flexibility and an ability to adapt to an ever-changing landscape. In short, our complexity is a significant barrier to entry, increases the resilience of the business and allows us to avoid overreliance on any given supplier, customer or product.

Whilst we cannot make our business simple, we can strive to make our business simpler. There is a balance to be struck between complexity (which affords us resilience) and a focus on simplicity. Indeed, simplicity enables us to become more focused on the areas where we excel, and which have proven long-term growth potential.

In terms of our routes to market, we concentrate on retailer partnerships with supermarkets, discounters, and online platforms. Using our proven strategy of 'land and expand', we build long-term strategic relationships with our retail customers, including those serving the sizeable European market (population: c.477 million), within which our penetration is much lower than in the UK (population: c.67 million), where we currently sell £1.72 of product per capita. The financial effects of reproducing that level of penetration in Europe would be transformational for our business, and this was the reasoning behind two major decisions in the first half of the year.

To capitalise on the potential that Europe offers, in September 2023 we relocated our European showroom to Paris, which has opened up opportunities with both French and pan-European retailers. Our new European showroom is based at the Homexpo Paris showroom complex, where the anchor tenant is JJA, one of France's largest home furnishing suppliers. The initial results have been very encouraging, with sales in France growing by 128% (£3.4m) year-on-year. 

The second decision we took was the transition by Simon Showman from his role as CEO to the role of Chief Commercial Officer. Simon, as the founder of the business, has built a host of incredibly strong relationships with our retail partners in the UK and in Europe and, in his new role, will oversee the Group's commercial functions including sales, buying and product development. As we build these long-term relationships internationally, it is important that we do so at a strategic level and Simon's wealth of experience and knowledge will continue to aid our growth in the UK and across Europe.

The core of our strategic retail partnerships is the innovative products that we supply to our customers. We focus on providing beautiful and more sustainable products at mass market prices that appeal to households across our key markets. Our retail partners can earn an equivalent 'own label' margin, whilst being able to take advantage of our ability to simplify the buying process through our world-class sourcing and logistical capabilities.

Over the past ten years, we have simplified and evolved our business to become the Home of Brands. Looking back to FY13, our business had revenues of £48.5m, EBITDA of £1.5m, and an EBITDA margin of just 3%. At that point, our owned brands made up just 20% of our business. The other 80% was comprised of clearance stock and licensed brands. This largely non-branded approach impacted our ability to generate repeat orders.

In contrast, our FY23 revenues were £166.3m, EBITDA was £20.2m, and our EBITDA margin hit 12%. 80% of our revenue came from the brands we own, and 60% came from our two principal brands, Salter (our scales and kitchen brand) and Beldray (our laundry and floorcare brand). Between them, these two British heritage brands have over 400 years of history and incredible consumer recognition. Since hiring Tracy Carroll - our first Brand Director - last year, we have refined the development of our portfolio of brands in a more strategic manner, leading to further simplification. This includes focusing our brand product development on core categories, employing a more brand-led approach to design, and concentrating our efforts on building brand equity, which we use to drive sales volumes.

Over the past year, Tracy's expertise has led to a more disciplined approach to our brand management, which can be seen in the rebranding of the Salter label during the year. Salter, the UK's oldest houseware brand (est.1760), has a substantial amount of brand equity, built up from consistently positive consumer perception and experience. To protect this valuable brand equity, we must take every opportunity to reinforce the brand's values; there are no hiding places, and every touch point is an opportunity to strengthen the brand perception. The recent rebrand gave us an opportunity to recognise the importance of consistency across these touch points, achievable by setting clear brand guidelines. Through a simplified style guide, and the streamlining of internal processes, we have retained Salter's clear brand identity and used this simplification to strengthen its existing brand equity.

One of the benefits of concentrating growth in international and online sales is the extension of product life, as current product lines can be sold to new consumers through different channels. This means that we can tighten our product development process to bring a refined number of higher-quality and more innovative products to market. It is the strength and focus of our brand and product development that will ensure consumers continue to buy our beautiful products, at a price point that is affordable to the mass-market.

Initially, it is our appealing price point that makes our products attractive to our retail partners, allowing them to earn a margin that is equivalent to their own label. However, what generates repeat orders is our unrivalled execution, which builds trust and respect. Key to our execution is making what we do as simple as possible. Our ability to grow sales is directly linked to consistently providing the best service to our retail partners. We have, therefore, been relentless in developing our systems and, in recent years, have established a strong company focus on operational simplification.

Our ability to do this is in no small part the result of the energy and ability of our teams. We take pride in being a talent led business that offers continuous improvement to its colleagues through a multitude of opportunities across all areas of the organisation. Our graduate scheme aims to bring the best and brightest talent into the business and provide them with an industry-leading training programme, which is collegial and intellectually stimulating. Our workforce is unafraid to challenge the status quo, and the way in which things are done. This mindset is encouraged, as it allows us to nurture a culture of continuous improvement.

This mindset can be summarised as "do less, do it better". At the most rudimentary level, doing less may mean challenging ourselves as to whether individual tasks are necessary, but really it encapsulates a laser-focused approach to all that we do. 'Do it better' can encompass a range of solutions, which includes process change, robotic automation and AI. Over the past year, we have automated hundreds of low-skill, low-reward tasks, ultimately increasing the ability of our workforce to focus on higher value activities. By solving issues with automation, we are able to increase productivity and improve accuracy. This results in enhanced operating margins, an even better customer experience, and a more engaged workforce.

Performance

*Adjusted measures are before share-based payment expense and non-recurring items.

During the period, unaudited Group revenues decreased 4% to £84.2m (H1 2023: £87.6m), with supermarket ordering held back by well documented overstocking issues (which are now easing), strong prior year comparatives bolstered by the exceptionally strong demand for energy efficient air fryers in H1 2023, and some modest revenue deferrals (£1.3m) at the end of the period due to the recent disruption to global supply chains.

Channel

During FY22, it became clear that many retailers were overstocked due to the rapid changes in aggregate demand that occurred during COVID-19. The various lockdowns caused by the global pandemic resulted in a shift in consumption from services to goods, leading to spikes in demand. Retailers restocked based on this information. However, when the lockdowns finally ended, consumers shifted large parts of their spending back to experiences and leisure, rather than physical goods. Holidays were chosen over home hot tubs, restaurants over egg chairs, and days out rather than board games at home. This rapid change in consumer behaviour and demand led to significant overstocks across retailers, which precipitated a reduction in ordering as supermarkets and discounters focused on reducing inventory levels.

Discounters cleared through their overstocks during FY23, and returned to normal patterns of ordering during FY24, as can be seen from the £24.7m of sales to discounters in H1 2024, representing a 17% increase on the prior year. On the other hand, supermarkets (especially those serving European markets) have been slightly behind in terms of clearing their overstocks. Our sales to European supermarkets fell 38% (£4.7m) in the period, as a number of German supermarkets reduced their forward orders. UK supermarket sales fell just 5% (£0.7m), and this was primarily the result of a fall in demand for air fryers, rather than overstocking issues.

Sales of air fryers, which primarily took place via supermarkets and online channels, fell by 38% (£4.6m) during the period. We were delighted that energy-efficient air fryers were so sought after by UK consumers during the height of the cost-of-living crisis, and this was reflected in their exceptionally strong sales performance in the comparative period. While air fryer sales could not continue at such high levels, and demand is down from peak, we note that sales do remain at a significantly higher level than their pre-FY23 average (H1 2022 sales were just £2.3m), suggesting that air fryers are now firmly embedded in everyday consumer behaviour. That we were able to service the exceptional and unprecedented demand for air fryers in FY23 is testament to the Group's agility and sourcing capabilities. And, as always, we maintain a diversified product portfolio across numerous different brands and categories, which means that we are not overly reliant on any one product type or consumer trend, and are well-placed to take advantage of similar trends in the future.

Territory

Sales in the UK were down 7% (£4.4m). The peak in air fryer sales was mainly a UK phenomenon, and the fall in overall UK sales is primarily due to the fall in air fryer sales through our online and supermarket channels.

International sales, which continue to be a strategically important growth area for the Group, were up 4%. This rise is especially pleasing given the backdrop of overstocks at German supermarkets, where sales fell by 62% (£7.1m). Excluding German supermarkets, other international sales were up 62% (£8.1m), driven by new customers in France following the opening of our European showroom in Paris, and through growth with international discounters. 

Product

Small Domestic Appliances (SDA) include air fryers. It is no surprise, therefore, that this category was down by 10% (£3.5m). Historically, our most popular products among German supermarkets have been Salter and Russell Hobbs branded cookware. The overstocking issues at these supermarkets impacted demand for these products, which led to the 19% (£5.1m) fall in overall Houseware sales. A separate effect of the overstocking issues can be seen in the growth of our small Clearance division, which saw sales increase 127% (£3.3m). As retailers and wholesalers have dealt with their overstock issues, there has been opportunities to purchase and resell clearance packages. As overstock issues resolve, the opportunities for this division will recede.

Brand

Salter, as our scales and kitchen brand, fell back 9% (£3.1m) as a result of the fall in air fryers. As noted previously, Russell Hobbs branded cookware was the most popular product sold into German supermarkets, meaning that their overstocking issues led to a 45% fall (£4.8m) in sales of the Russell Hobbs brand. The level of Own label and other sales increased by 46% (£3.8m) due to the level of Clearance sales that were made during the period.

Operating Margins

Gross margin increased to 26.6% (H1 2023: 24.7%) as we continue to benefit from the drop in freight rates which helped to increase GM to 26.8% in H2 2023. The increase in gross margin means that gross profit rose 3% to £22.4m (H1 2023: £21.6m).

Administrative expenses rose 7% to £11.1m (H1 2023: £10.4m). Although we have seen relatively low levels of inflationary pressure on our cost of sales, and hence on revenues, we have seen cost pressure in our operating costs. Our wage bill, which makes up 70% of our other administrative expenses, rose by 5% in the period, as we increased salaries for our people to ensure that employee remuneration remains attractive enough to recruit and retain talent, a measure that both drives productivity within the business and mitigates the effects of the cost-of-living crisis. This is consistent with our intention to always do the right thing and to invest in our people. Our focus on increasing productivity means that our current head count of FTE 361 is below the average for the first half of the year (FTE 389; H1 2023: FTE 392).

We continue to invest in the long-term growth of the business, increasing our spend on marketing by £0.1m to £0.7m, and through the successful opening of our Paris showroom, which had a one-off cost of around £0.1m.

The combination of resilient revenues, improved gross margin, and slightly higher overheads has led to a stable adjusted EBITDA at £11.3m (H1 2023: £11.2m), with our EBITDA margin increasing from 12.8% to 13.4%.

Seasonality

The Group has historically had a seasonal weighting towards H1, with retail demand being higher in the peak Christmas trading period. However, over the past few years, this pattern has become less pronounced, with sales growth weighted towards the less seasonal online channels and sales to supermarkets being focused more on ranges than seasonal promotions. As a result, it is anticipated that the operating profits for the second half of the year to 31 July 2024 will be only marginally lower than for the six months ended 31 January 2024.

Adjusted & statutory profit

Depreciation and amortisation decreased marginally by 6% to £1.1m (H1 2023: £1.1m). The finance charge has decreased by 16% to £0.6m (H1 2023: £0.7m) as the result of lower average net debt across the period. Around £0.2m of the charge relates to fixed debt related costs and imputed interest charges on capitalised lease liabilities. As a result, adjusted profit before tax increased 2% to £9.6m (H1 2023: £9.4m).

The tax charge for the period increased by 20% as we saw the impact of a full period of the increased UK corporation tax rate to 25% from 19%. The tax rate at 25% was in line with the UK statutory rate. The impact of the change in tax rates led to a 2% decrease in statutory profit after tax to £7.1m (H1 2023: £7.3m).

Earnings per share

Although we have not issued any new shares within the year, the number of shares held in our Employee Benefit Trust has reduced following the successful vesting of employee share options schemes. This has resulted in the weighted average number of shares increasing 0.2% to 86,426,737 (31 January 2023: 86,234,633).

As a result, both adjusted profit after tax and adjusted earnings per share decreased by 3%.

Financing and cash flow

The Group generated cash from operating activities of £14.4m (H1 2023: £12.8m), being a 128% operating cash conversion. This meant that at the period end the Group had a net bank debt/adjusted EBITDA ratio of 0.4x (31 July 2023: 0.7x), which represents net bank debt of £8.0m (31 July 2022: £14.8m). The Group makes use of term loans for longer term funding, such as acquisitions, whereas our invoice discounting and import loan facilities are designed to fund our working capital, and automatically increase in relation to our levels of trading. During FY21 the Group increased its level of borrowings to complete the transformational acquisition of Salter. The acquisition debt of £15m has now largely been repaid, and the Group intends to repay the remaining element of the Term Loan, with remaining debt facilities being in place for the purpose of funding working capital. 

Capital Allocation Policy

It is the Board's intention to maintain the net bank debt/adjusted EBITDA ratio at around 1.0x, with the debt being used to fund the Group's working capital. The Board believes that this level of leverage is an efficient use of the Group's balance sheet and allows for further returns of capital to shareholders. It is the Board's intention to continue to invest in the business for growth, whilst returning around 50% of post-tax profits to shareholders through dividends, and to supplement this with share buybacks pursuant to a policy of maintaining net bank debt at a 1.0x adjusted EBITDA ratio.

In line with this policy, an interim dividend of 2.45 pence per share (H1 2023: 2.43 pence per share) was approved by the Board on 8 April 2024 and will be paid on 28 June 2024 to shareholders on record as at 31 May 2024 (ex-dividend date being 30 May 2024).

Furthermore, the Board announces that it intends to seek regulatory and shareholder approval to commence a share buy-back of up to 10% of its issued share capital. Although the exact timing and magnitude of the share buy-backs will be at the discretion of the Board, and will be, in part, dictated by the working capital and capital expenditure needs of the business, it is the current intention that the Group would initially purchase around £1m of shares per quarter.

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position