STELRAD GROUP PLC (SRAD) Q2 2026 Earnings Call Transcript

Good morning, I'm 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 from Lee, followed by a business review, where I'll go into more detail about our progress, priorities and positioning in the current modern environment. Following the summary and outlook, I'll then move on to a Q&A session. session. Next slide. I'd like to begin with a brief overview of Stellrad and our performance in the first half. Slide four. For those of you who are new to Stellrad and those of you who need reminding, we are Europe's leading rater manufacturer operating through our market-leading brands of Stellrad, Henrad, Hudavad, Thermotechnic and DL Raters. These brands are all united by our highly agile operating platform which facilitates cost leadership. Our industry-leading customer service underpins our market leadership with a 24% market share of steel panel raters across the territories we operate in. As you will see, the majority of our revenues are derived from the UK and Ireland along with mainland Europe in a smaller segment in Turkey. We have now been listed for five years and sit in the climate-controlled sub-sector of the FTSE All-Share Index. Our listing aligns with the long-term thinking and strategic positioning of Stellrad to our shareholders' interests, positioning us to build sustainable value throughout market cycles. It has obviously been a challenging period in our end markets, However, I remain immensely proud of the work the team has done and continues to do in continuously improving Stellarad. As this presentation will show you, we are more competitive, more efficient and more agile than ever. Now, turn to the matter at hand. I'll quickly run through the overview of the half year. Next slide. As I said, despite challenging market conditions, we've delivered further progress than the whole. At our full-year results, I outlined a number of actions that we had taken to further optimise our cost base and embed commercial excellence throughout our business, namely the exit of a loss-making contract with a European customer. These actions are beginning to bear fruit driving an adjusted operating profit growth of 4.9% and a 1.8 percentage points increase in our operating profit margin to 13.5% and taking our KPI of contribution per rater to over £24 I think it is important to emphasise from the start that this is not a sustainable level of contribution per rater and primarily reflects the reduced volumes in lower margin territories and sectors in the period. We need to carefully balance product mix at Stellrad. These lower margin areas of our business drive throughput and the operational leverage at our sites, facilitating our cost leadership. Therefore, we expect this to begin to move towards our sustainable medium-term target with over £21 as we drive further volume growth through our sites. Our cost leadership, hand-in-hand with our leading customer service and product availability, underpins and drives our market leadership, which we reinforced further in the period, with the latest BRG data published in May for 2025 showing that we continue to be either the market leader are one of the top three in the majority of our top 10 territories.

Next slide, financial review.

And with that, I'd now like to hand you out to Lee for a more detailed review of the group's financial performance.

Thanks, Trevor. Good morning, all. I'll now run through the group's financial performance for the period. We start the financial review with our highlights page, with the headline message being that we continue to demonstrate strong margin management and balance sheet control. We cover the specific details of the various measures later in the presentation, but we can see from the colours displayed on this slide that we have made good progress despite an ongoing subdued market backdrop. We now look through some of the group-level KPIs before moving later on to segmental-level performance. Revenue is reduced by 9.1% or 12.5 million year-on-year. Revenue has been impacted by a continued reduction in market demand during the period, but it is also reduced due to commercial initiatives namely the exit from a loss-making contract at the end of 2025 and the decision to reduce low margin sales in turkey the combined impact of the commercial initiatives account for circa 9 million the revenue dropped but these have had a beneficial impact on profitability and margins overall sales volume was down by 14.6 present in the period. Group revenues have, however, benefited from a positive sale of mix, underpinned by the commercial initiatives undertaken, but also from reduced volumes in lower margin countries and market sectors. We will examine the market trends in more detail in this segmental section. Supported by successful delivery of our commercial and operational initiatives, including our 2025 Turkey Restructuring, the group has delivered a adjusted operating profit growth of 0.8 million or 4.9%, with adjusted operating profit increasing to 16.7 million, with a 1.8 percentage points increase in margin. The absence of loss-making volume, strong overall country mix, and efficiency improvement in our low-cost manufacturing facility have all combined to enhance profitability and offset market weakness. Adjusted operating profit is stated before exceptional items of £1 million, with redundancy costs incurred in the period to right-side operations in response to the subdued demand. Adjustment per share has increased by 16% in the period, supported by the increase in operating profit and also lower interest rates, interest costs, which have in part fallen due to lower debt levels, but also due to rate reductions secured during the 2025 refinancing. And the final chart shows the proposed 2026 interim dividend of 3.19% per share, representing a 5% increase. We previously increased 2025 final dividend by 5%, and the continuation of this increase reflects the board's confidence in our cash-generational potential and balance sheet strength. A detailed income statement, which highlights the movement in interest and tax, is included in the appendices. we continue now with our kpis on this slide we examine the volume and premium panel mix trends in more detail in respect to volumes we see the 14.6 percent reduction of which 9.3 percent is directly related to loss making contract and the decision to reduce turkey's volumes the remaining volume reduction is due to ongoing challenges in the uk where rmi and renewable activity is still weak, and also lower levels of activity in France. There has been more stability in other markets, with volume in the Netherlands, Poland, Denmark and Sweden all up year-on-year, and volume to Belgium and Germany, excluding the exited Stable year-on-year? The group's premium panel mix has a percentage of steel panel radiators increased by 0.1% percentage points in the period to 6.2%, despite a subdued market environment. The Group continues to promote the sale of the premium panel products into all of its markets, recognising the additional margin these products generate, and we expect further progress in premium panel volumes as markets recover. Supported by MIX, Price Management and Proactive Cost Initiatives, contribution by Radiator grew by 19.6% to £24.32 in the period. Our contribution margin has benefits from commercial and cost initiatives undertaken in 2025, but also due to subdued volumes in some lower margin territories and market sectors. We expect contribution per radiator to move toward our sustainable medium term target £21 in the future, reflecting our intention to grow volume in select territories. Now we turn to revenue by operating segment. Despite a 6.6% decline in sales volumes, UK and Ireland revenue only fell by 4%. With inflationary selling price increases and sector mix helping to partially offset the volume decline. Within Europe, sales volume declined by 14.4%, with the exit loss-making contract responsible for 70% for the volume reduction. European revenues have benefited from a weaker euro and sales mix benefits, with the average centre prices increasing due to reduced sales to the lower margin French market and to the loss-making contract. Additionally, high-margined territories treated Netherlands, Poland, Denmark and Sweden are all over year-on-year, in addition to Belgium and Germany being broadly flat year-on-year. Sales for England and Turkey were down by 62%, with a reduction down to the commercial decision to reduce sales to Turkey in the period. Now we examine segmental logistics offering for off in detail. In UK and Ireland, profit reduced by 0.9 million, or 6.3%, driven largely by the revenue reduction of 4%. Contribution per radiator had improved year-on-year, benefited from good margin management, but the impact of adverse volumes on a stable fixed cost base has reduced the operating profit comparatively. Adjusted operating profit in Europe has increased by 2.7 million in the period, with the margins in the sector improving by 5.1 percentage point to 10.8%. The results in Europe have been significantly impacted by the exit from the loss of making contract at the end of 2025 and subdue volumes in the lower margin French market, which was in part due to overstocking my customers at the end of 2025. Additionally, positive volume trends have seen some profitable markets such as Netherlands and Poland being beneficial. We are pleased with the progress in Europe in the period, but the profitability of this segment remains an ongoing focus. Turkey's national operating profit decreased by 0.5 million, with a decrease driven by volume reductions linked to commercial strategy. Now we turn to the group's cash flow statement and leverage position.

Cash flows and leverage at the half year are in line with expectations.

Consisting with previous years, we have seen a seasonal investment of work and capital, which will unwind in the second half. On an LTM basis, cash flows are strong, with operating cash flow conversion at 102%. We have made an underlying investment in eminatories with local stocks being added in Turkey to further enhance the flexibility of our business model and although capex is in line with 2025 and a half year we do expect a modest increase in full year capex year on year due to the one-off IT costs we outline of the full year results the increase in tax payments is linked to profitability and an increase in dividends received in Turkey and interest payments have benefited from interest rate reductions and a lower debt position. Aided by strong free cash flow on an LTM basis, leverage based on net debt for relief liabilities has fallen to 1.29 pound EBITDA, which is a strong agreement prior year, and we expect a further reduction in the second half. Now we turn to some other key financial areas. For tap station, the effective taps rate may consist in year-on-year. For dividends, as mentioned in the overview, we reiterate our intention to increase the interim dividend by 5% in line with our progressive dividend policy. Return of capital employed has increased by 2.1 percentage points to 29%, with the year-end measure expected to exceed 30% due to the timing of work capital movements. This measure has benefited from increased operating profit and lower fixed asset values year-on-year. And finally, for group credit facilities, the new loan is operating effectively in providing the group with a margin benefit and at the end of the period we had generous headroom on both facility and cash and now provide some technical guidance for use in analyst modeling still prices are expected to rise slightly in half two albeit from a historically low level we currently expect other key input prices to remain stable we are mindful of current global events and their potential impact on pricing. Capital expenditure and work capital investment respects to continue to be in line with previous guidance and finally leverage with our net debt before lease liabilities is expected to fall further in half too as the working capital reduces. Thank you. I'll now hand you back to Trevor for the business review.

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

Thank you very much, sir. Ladies and gentlemen, if you'd like to ask an audio question, please press star 1 on your double keypad But let's just make sure your line is not muted to allow you to reach equipment. So that is star one for questions. Our first question this morning is coming from Ainsley Laban from Investec. Please go ahead. Your line is open.

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

Thanks. Shall I answer that, Lee?

Do you want to go for the first one? I can pick up the second.

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

i think steel prices are still very low levels across the geography especially in the steel prices we get into our turkish factory um it's probably some of the lowest levels we've ever seen i think we probably expect maybe a five percent increase in the second half so so nothing significant and as we've talked about before and the industry in the sector is very used to steel price increases and the passing levels on we have mechanisms in place to do that with our key contracts but yeah the market's very kind of adept in dealing with those price increases in terms of volume weakness and it's something we're very much allied to as a management team of the ongoing potential for this to be a more sustained subdued market environment. Obviously, we keep an eye on that. We've not run out of idea and we continuously assess what we do. For us, it's very much a case of the tightrope between having the operational capability and the flexibility and making sure we're fit for purpose for the future recovery.

All right, Clare. Thank you very much.

Thanks, Andrew.

Thanks, sir. Our next question will be coming from Sam Cullen from Peelhunt. Please go ahead.

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

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

Thank you, sir. Next question will be coming from Edward Crest of Beringberg. Please go ahead. Your line is open, sir.

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

I'll go for that one, Trevor, if that's OK. I think in terms of there has not really been a significant mix shift in premiumisation as a result of the commercial action. Turkey is lower. The lost maiden contract probably had a reasonable percentage of premium partner products so on balance the two probably net out to not really give it any impact. Albeit I would call out that the premium element of the lost maiden contract would have probably been lower than premium prices so there probably has been a mixed benefit there. UK is still an area of progress we think we've made some good ground on putting in place the right initiatives in terms of product availability, lead time, 48 hour delivery, a colour coordination process which will benefit the future of that premiumisation strategy in the UK but a lot of premium panel products will be dependent on discretionary spending and consumer confidence so it all goes hand in hand with you know what's suppressing market demand it's suppressing premium panel products so to maintain the same percentage in the uk we think is a good result having the right

strategy for the future well thanks me okay did i miss the second question there i probably got carried away with the first one oh no so no you've got no you've got both it was it was a couple in relation to premiumization yeah okay thank you cool thank you and we have a question over the phone toby torrington from equity development please go ahead yeah thanks uh uh morning all um a few questions from from me please uh well done on the margin performance uh pretty exceptional that i think that's the record gross margin since uh since listing uh actually i can't mark obviously on uh it's settling back um at some point in the near term you know rest of the year It looks as though some of the contributing factors for that gross margin contribution per radiator performance are still going to be around. The loss-making contract's dropped out. France is still subdued. I'm not too sure what you're going to be doing in Turkey in the second half. But should we expect sort of similar gross margin contribution per rad for the full year?

Is that fair? i think you you're right to note that there is some natural underlying progress in contribution per radiator and what we've done so that's not to be kind of uh dismissed and i think that's correct and and the note of caution in contribution per radiator coming back to our targets is probably one where we look through a the time period is more difficult to call we look through that probably in a more of a medium term so i do think there will be some ongoing benefit in the second half from ongoing margins but now trevor and i just very keen to call out that we do have the ambition to progress opportunities elsewhere and we do expect markets to come back and

and with that there will be normalization at some point in the future yeah european markets uh excel off making contract looks reasonably good for you um relative um were volumes flat there and a bit of the price inflation ex ex france i'm talking about i think you called out four markets in particular being a bit sort of firmer relative are they sort of flat volume markets and a bit of price inflation i think there's a significant volume benefit in some of those key markets we call that netherland poland and they're all double digit growth year and year for for us obviously um

that's probably part market stability and part of our you know strategy of growing and growing volume in those markets and you'd have sustainable advantages so that's good progress in those two and then we've highlighted Denmark and Sweden has given ongoing benefits in terms of volume but yeah I think in terms of Europe more broadly on a like-for-like basis it's shown a higher degree of stability with the exception of which you mentioned on France being a bit of an outlier yeah okay interesting just while we're on on Europe could you just remind us what the loss making turnover that's going to be dropping out over the last year in in the second half

please you call that five in the first half I think yeah I think it's probably going to be broad and consistent you know we we run that contract at the end of 2025 so it's going to be a full year impact and maybe a slight tail off towards the end of the year but I'd imagine doubling 5 million not going to take you too far off okay all right and finally from me on working capital noting that you're saying that net debt is going to be lower at the year end fairly chunky inventory investment for well understood reasons I think in the in the first half do you think you'll get back to working capital neutral for the year or

is that a bit too ambitious do you think I think there may be a small investment I think the end last year finished very strong and december is already always a short sales month so december is abnormally low so that so that does kind of there is a natural skew in terms of at the half year versus the final year so i think we'll get much closer to the to the prior year and if not all the way okay great very clear thanks very much well done thank you very much your questions Mr. Toby.

As we have no further audio questions this time, then I'd like to turn the call over to you for webcast questions. Thank you.

Thank you, George. So we have one question from James Tetley from Equity Development. Contribution per radiator is very strong in the period. Is this a short-term spike or could this be expected to remain above the 21 pound target rental volumes meaningfully recover?

I think we've probably covered that one largely for the question from Toby. So I think there is probably some embedded benefits in there that may last for a shorter period. But without growth initiatives and market recovery, that would be what brings that down over the time.

Thank you, Lee.

And as there appear to be no further questions, Trevor, I'd like to hand back to you for closing remarks. can just thank everyone for the time today it's greatly appreciated by Lee and myself and we look forward to seeing you again in the near future thanks everyone