Volex plc - Half year results to 5 October 2014

13 November 2014

VOLEX plc

Half year results for the period ended 5 October 2014

'Strong revenue growth across both divisions with margins increasing'

Volex plc ('Volex'), the global provider of power and data cabling solutions, today announces its preliminary results for the half year to 5 October 2014 ('H1 2015').

Financial Summary	Half year to 5 October 2014	Half year to 29 September 2013	% change
Revenue	$220.9m	$196.5m	12.4%
Underlying* operating profit / (loss)	$3.5m	$1.6m	125.4%
Statutory operating profit / (loss)	($4.1m)	($2.6m)	(53.0%)
Underlying* profit / (loss) before tax	$1.8m	$0.1m	nm
Statutory profit / (loss) before tax	($5.8m)	($4.1m)	(40.9%)
Basic earnings / (loss) per share**	(8.6c)	(6.9c)	(24.6%)
Underlying diluted earnings / (loss) per share**	1.0c	0.0c	nm
Cash generated by / (used by) operations	$3.0m	($13.6m)	nm
Net debt	$5.6m	$41.4m	nm

* Before non-recurring items and share-based payments credit

** Restated for impact of equity issue

Financial highlights

·     Strong sales growth in both divisions and across all regions with improved gross margins

·     Underlying operating profit more than doubled with operating margin increasing by 80bps to 1.6%

·     Underlying diluted EPS of 1.0c versus breakeven last year

·     Significant improvement in cash generated from operation with a $3.0m inflow in current period versus $13.6m outflow in prior period

·     Significant reduction in net debt since year end reflecting the successful placing and open offer in July 2014 which generated net proceeds of $27.9m

·     Stronger balance sheet with increased financial flexibility

·     On track to be cash flow neutral in current financial year

 

Operational highlights

·     Volex Transformation Plan is making good progress; two divisional structure fully embedded across the Group

·     Strong increase in business wins reflecting much improved customer engagement; continued growth in sales pipeline

·     Power Division revenues increased by 14.7% to $147.2m

·     Data Division revenues increased by 8.0% to $73.7m

·     Continuous improvement in our people and supply-chain investment driving further profitable growth

Karen Slatford, Chairman, said:

"We are starting to see the benefits from the Volex Transformation Plan. Our focus on working more closely with our customers has delivered strong growth in sales and improved margins in the first half.  

We have made important investments in people and infrastructure and continue to remain focused on delivering the procurement benefits within our plan that are expected to feature more strongly in the second half and beyond.

With the Group's well invested, global manufacturing footprint, high quality customer base and our commitment to continuous improvement, the Board has confidence that the company will deliver further sustainable growth in both sales and profitability."

The Company will be presenting its half year results at 09.30am on 13 November 2014 at the offices of Investec Bank PLC, 2 Gresham Street, London EC2V 7QP. 

For further information please contact:

Volex plc

Karen Slatford, Chairman                                                                                  +44 20 3370 8830

Christoph Eisenhardt, Group Chief Executive Officer                           +44 20 3370 8830

Nick Parker, Group Chief Financial Officer                                                +44 20 3370 8830

Tulchan

Christian Cowley / James Macey White                                                      +44 20 7353 4200

 

RESULTS FOR THE HALF YEAR ENDED 5 OCTOBER 2014

Introduction

The Board is pleased to report its results for the half year to 5 October 2014.  These results clearly demonstrate that the Volex Transformation Plan ('VTP'), announced in November 2013, is working, having delivered an improved revenue performance ahead of that originally anticipated.

The Group has seen strong growth in revenues in both divisions and across all regions with a year on year revenue increase of 12.4%. Underlying operating profits are up 125.4% with operating margins more than doubling to 1.6%. 

This performance was driven principally by increased allocations with existing customers as well as several new customer wins.

Following the refinancing which completed in July, the Group has a stronger balance sheet and greater financial flexibility to improve its business. As a result, the executive team has been able to make investments in people and infrastructure to deliver sustainable growth going forward.

Overall, good progress against all strategic goals is being delivered with the overall objective of delivering sustainable profitability and cash generation.

Update on Volex Transformation Plan ('VTP')

We are now twelve months into the implementation of the Volex Transformation Plan. We are pleased with the progress we have made to date with the key achievements including: 

·     Established structure with two divisions and four sales regions

·     Initiated process of improving capabilities within sales and operations teams

·     Introduced localisation and design-to-cost initiatives within the supply chain 

·     Established group wide customer relationship management ('CRM')

·     Strong increase in business wins and sales pipeline

·     Refinanced the company to provide long term financial stability

·     Returned to revenue growth with margins improving

The Group has an extensive and detailed plan focused on delivering continuous improvement across all operations.   One of the key areas of the plan going forward will be the harmonisation of the group wide IT architecture.  Following the implementation of the new CRM system, it was clear that the Group would benefit from the harmonisation of the existing multiple IT systems and applications.  Under the plan these various systems will be consolidated to provide more timely management information. 

As we continue to implement the VTP, it will lead to further growth while ensuring that Volex is cost competitive and meets its customers' needs.

Trading performance

Power Division

$'000	Half year ended		Year ended
	29 September 2013	5 October 2014	30 March 2014
Revenue	128,290	147,173	265,384
Underlying gross profit	17,863	20,010	34,453
Underlying gross margin	13.9%	13.6%	13.0%
Operating costs	(13,937)	(14,325)	(27,195)
Underlying operating profit	3,926	5,685	7,258
Underlying operating margin	3.1%	3.9%	2.7%

 

Volex designs and manufactures power cords, duck heads and related products that are sold to the manufacturers of a broad range of devices and appliances across all industrial sectors.

 

Within the Power Division, revenue for H1 FY2015 was $147.2m, up 14.7% on the prior period, reflecting the positive impact of the VTP programme.  As previously communicated, one of the central aspects of the VTP was to increase customer focus through a reorganisation of our sales and engineering functions.  With the sales team now restructured on a regional basis and with additional staff supporting the sales activities, the benefits of the enhanced customer focus are clear. 

 

This growth has principally been driven through the existing customer base with the top five customers in aggregate showing growth of 24.2% compared to the prior period.  In addition, several prestigious and fast growing new accounts have been won including the previously announced new business win with Xiaomi, one of China's leading mobile internet companies.

 

Through the VTP's design-to-cost methodology and use of localised materials sourcing, the division has stabilised its underlying gross margin to 13.6% in the period (versus 12.1% in H2 FY14).  The Group expects to see further benefits from both these elements of the VTP as they are embedded throughout the division.

 

Operating costs have increased marginally in the period (reflecting the investment in the sales force) resulting in an underlying divisional operating profit of $5.7m, a 44.8% increase on the prior period and a 70.6% increase on H2 FY2014.

   

Data Division

$'000	Half year ended		Year ended
	29 September 2013	5 October 2014	30 March 2014
Revenue	68,246	73,701	134,793
Underlying gross profit	15,827	18,013	32,026
Underlying gross margin	23.2%	24.4%	23.8%
Operating costs	(10,138)	(10,300)	(19,376)
Underlying operating profit	5,689	7,713	12,650
Underlying operating margin	8.3%	10.5%	9.4%

 

Volex designs and manufactures a broad range of cables and connectors (ranging from high speed copper cables to complex customised optical cable assemblies) that transfer data. Volex products are used in a broad range of areas including data networking equipment, data centres, mobile computing devices, medical equipment, vehicle telematics and alternative energy generation.

 

Revenue for H1 FY2015 was $73.7m, up 8.0% on the prior period.  This revenue increase was despite the prior period benefitting from the European and North American roll out of 4G which concluded in H1 FY2014.  This growth was driven through increased engagement with the existing customer base, with the revenue generated from the division's top five customers in aggregate growing by 7.9%, plus certain one-off projects such as the previously announced project supporting Cielo in the run up to the Brazil World Cup, generating revenues in excess of $1m.

 

The increase in underlying divisional gross margin to 24.4% (H1 FY2014: 23.2%; H2 FY2014 24.3%) reflects the greater Volex content included within our product offerings as customers increasingly demand customised and engineered solutions.  This has been most noticeable in the datacoms environment where we have seen strong demand for our active copper cables, reflecting the need to transmit data at ever faster rates over ever longer distances.  Furthermore the high margin healthcare environment has seen continued growth in the period with revenues up 5.7%.   

 

Operating costs have increased marginally in the period, reflecting investment in field application engineering as part of the VTP.  As previously communicated, product development and engineering capabilities are key to competitiveness in the Data Division. 

 

As a result of the increased revenue and gross margin, underlying divisional operating profit for the period was $7.7m, up 35.6% on the prior period and 10.8% higher than H2 FY2014.

Non-recurring items and share-based payments

Non-recurring items of $8.0m have been incurred in the period of which $5.8m relates to a non-cash impairment of product development costs (and provision for associated costs) following a review of the Volex product portfolio across both divisions.  As part of this review, the Board and the new Divisional Management teams assessed all of the development projects and concluded that for two specific projects, Active Optical Cables ('AOC') and Internal Power Adaptors, resources were better allocated elsewhere.  As a consequence, the patents and capitalised development costs associated with AOC have been impaired.     

A further $2.0m has been incurred as part of the VTP restructuring programme, down from $5.8m in the prior year.

Off-setting the non-recurring charge is a $0.5m credit for share-based payments arising from the lapse of two share option issues following their failure to meet targets. 

Tax

The Group incurred a tax charge of $1.0m (H1 FY2014: $0.1m). The underlying tax charge was $1.0m (H1 FY2014: $0.1m), representing an underlying effective tax rate of 58% (H1 FY2014: 89%), consistent with our expectation of the underlying ETR for the full year.

The high level of underlying ETR in the current period reflects certain territories in which we operate being required to recognise a minimum level of taxable profit regardless of overall Group performance.  With profits recognised in these territories, the losses in other territories do not generate an associated deferred tax asset.  Management expects this underlying tax rate to reduce in future periods as the Group performance continues to improve. 

The improvement in ETR in this period is as a result of improved overall Group performance and stable recognition of deferred tax assets. 

Half year position and cash flows

Balance sheet and refinancing

Net assets as at H1 FY2015 are $57.4m, up $20.7m from the prior year end.  This increase has been driven by the refinancing completed in July 2014 which has given the Group the financial flexibility to complete the VTP and thereby generate future shareholder returns.

Under the refinancing, 24,067,171 new shares were issued at £0.75 per share.  After issue costs, $27.9m of net cash proceeds were raised. 

$25.1m of this cash was used to refinance the Group's senior credit facility with the banking syndicate agreeing to amend and extend the existing facility to a $45m facility expiring in June 2017.

Net debt at H1 FY2015 of $5.6m is $26.6m lower than at year end.  This is principally due to the net proceeds from the share issue in July 2014.

Cash flows

The underlying business generated $3.8m from operating activities (H1 FY2014: cash outflow of $12.0m), however, off-setting this was $3.9m (H1 FY2014: $3.1m) of non-recurring cash spend.  This $3.9m included $1.4m of retention bonuses paid in respect of the prior financial year and $2.0m of restructuring spend under the VTP.

$2.1m of capital expenditure was incurred on tooling and machinery throughout the Group, down $1.8m on the prior period, reflecting the tighter controls surrounding capital expenditure programmes.

The Group is on track to be cash flow neutral for the full year.

Outlook

We are starting to see the benefits from the Volex Transformation Plan. Our focus on working more closely with our customers has delivered strong growth in sales and improved margins in the first half.  

We have made important investments in people and infrastructure and continue to remain focused on delivering the procurement benefits within our plan that are expected to feature more strongly in the second half and beyond.

With the Group's well invested, global manufacturing footprint, high quality customer base and our commitment to continuous improvement, the Board has confidence that the company will deliver further sustainable growth in both sales and profitability.

Risks and uncertainties

Risks to Volex are anticipated and regularly assessed and internal controls are enhanced where necessary to ensure that such risks are appropriately mitigated. The principal risks and uncertainties facing the Group in the second half of the year remain those detailed in the FY2014 Annual Report and Accounts on pages 19 to 22, a copy of which is available on the website at www.volex.com.

The principal risks and uncertainties are summarised as:

·     Customer concentration;

·     Increased competition;

·     Staff retention;

·     Customer requirements;

·     Manufacturing footprint;

·     Supplier base;

·     Rising commodity prices;

·     Exchange rate fluctuations;

·     Breach of financial covenants;

·     Technology advancement; and

·     Non-compliance with legislation and regulation.

 

Responsibility statement

We confirm that to the best of our knowledge

·     the condensed set of financial statements has been prepared in accordance with IAS34 'Interim Financial Reporting' as adopted by the EU.

·     the interim management report includes a fair review of the information required by DTR 4.2.7R:

o  an indication of important events that have occurred during the first six months of the financial year, and their impact on the condensed set of financial statements, and

o  a description of the principal risks and uncertainties for the remaining six months of the year.

·     the interim management report includes a fair review of the information required by DTR 4.2.8R:

o  related parties transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group in that period, and

o  any changes in the related parties transactions described in the Annual Report 2014 that could have a material effect on the financial position or performance of the Group in the current period.

Christoph Eisenhardt                                                                                          Nick Parker

Group Chief Executive Officer                                                                        Group Chief Financial Officer

13 November 2014                                                                                               13 November 2014

 

Unaudited consolidated income statement                                        

For the half year ended 5 October 2014 (half year ended 29 September 2013)

 

		Half year ended 5 October 2014			Half year ended 29 September 2013
		Before non-recurring items and share-based payments	Non-recurring items and share-based payments	Total	Before non-recurring items and share-based payments	Non- recurring items and share-based payments	Total
	Notes	$'000	$'000	$'000	$'000	$'000	$'000
Revenue	2	220,874	-	220,874	196,536	-	196,536
Cost of sales		(182,851)	-	(182,851)	(162,847)	(451)	(163,298)
Gross profit		38,023	-	38,023	33,689	(451)	33,238
Operating expenses		(34,512)	(7,564)	(42,076)	(32,131)	(3,756)	(35,887)
Operating profit/(loss)	2	3,511	(7,564)	(4,053)	1,558	(4,207)	(2,649)
Finance income		18	-	18	53	-	53
Finance costs		(1,755)	-	(1,755)	(1,513)	-	(1,513)
Profit/(loss) on ordinary activities before taxation		1,774	(7,564)	(5,790)	98	(4,207)	(4,109)
Taxation	5	(1,026)	72	(954)	(88)	(1)	(89)
Profit/(loss) for the period attributable to the owners of the parent		748	(7,492)	(6,744)	10	(4,208)	(4,198)
Earnings/(loss) per share (cents)
Basic	6	1.0		(8.6)	0.0		(6.9)
Diluted	6	1.0		(8.6)	0.0		(6.9)

 

					Year ended 30 March 2014
					Before non-recurring items and share-based payments	Non- recurring items and share based payments	Total
	Notes				$'000	$'000	$'000
Revenue	2				400,177	-	400,177
Cost of sales					(333,698)	(457)	(334,155)
Gross profit					66,479	(457)	66,022
Operating expenses					(61,947)	(8,897)	(70,844)
Operating profit/(loss)	2				4,532	(9,354)	(4,822)
Finance income					100	-	100
Finance costs					(3,392)	552	(2,840)
Profit/(loss) on ordinary activities before taxation					1,240	(8,802)	(7,562)
Taxation	5				(6,613)	-	(6,613)
Profit/(loss) for the period attributable to the owners of the parent					(5,373)	(8,802)	(14,175)
Earnings/(loss) per share (cents)
Basic	6				(8.6)		(22.6)
Diluted	6				(8.6)		(22.6)

 

 

 

 

 

Unaudited consolidated statement of comprehensive income  

For the half year ended 5 October 2014 (half year ended 29 September 2013)

 

	Half year to  5 October 2014	Half year to  29 September 2013	(Audited) Year to  30 March 2014
	$'000	$'000	$'000
Profit/(loss) for the period	(6,744)	(4,198)	(14,175)
Items that will not be reclassified subsequently to profit or loss:
Actuarial gain/(loss) on defined benefit pension schemes	(874)	(209)	268
Tax relating to items that will not be reclassified	-	-	-
	(874)	(209)	268
Items that may be reclassified subsequently to profit or loss:
Gain/(loss) on hedge of net investment taken to equity	(55)	1,378	1,855
Cash flow hedges:
Gain/(loss) arising during the period	343	(327)	(554)
Exchange gain/(loss) on translation of foreign operations	400	(3,541)	(4,478)
Tax relating to items that may be reclassified	-	-	-
	688	(2,490)	(3,177)
Other comprehensive income/(loss) for the period	(186)	(2,699)	(2,909)
Total comprehensive income/(loss) for the period	(6,930)	(6,897)	(17,084)

 

Unaudited consolidated statement of financial position                              

As at 5 October 2014 (29 September 2013)

 

	Note	5 October  2014 $'000	29 September  2013 $'000	(Audited) 30 March 2014 $'000
Non-current assets
Goodwill		3,080	3,114	3,210
Other intangible assets		1,356	4,684	5,445
Property, plant and equipment		36,733	40,371	38,732
Other receivables		739	635	795
Deferred tax asset		467	4,816	488
		42,375	53,620	48,670
Current assets
Inventories		46,190	42,976	39,987
Trade receivables		75,391	77,922	67,044
Other receivables		10,040	10,087	11,138
Current tax assets		568	851	480
Cash and bank balances	9	23,572	11,847	13,675
		155,761	143,683	132,324
Total assets		198,136	197,303	180,994
Current liabilities
Borrowings	9	6,371	5,047	-
Trade payables		66,448	62,228	57,220
Other payables		28,130	27,263	22,184
Current tax liabilities		5,212	4,842	5,793
Retirement benefit obligation		669	621	659
Provisions		3,293	4,650	3,966
Derivative financial instruments		693	787	1,020
		110,816	105,438	90,842
Net current assets		44,945	38,245	41,482
Non-current liabilities
Borrowings	9	22,799	48,226	45,895
Other payables		244	639	243
Deferred tax liabilities		1,968	1,900	1,995
Retirement benefit obligation		3,026	3,206	2,575
Provisions		1,900	2,338	2,719
		29,937	56,309	53,427
Total liabilities		140,753	161,747	144,269
Net assets		57,383	35,556	36,725
Equity attributable to owners of the parent
Share capital		39,755	28,344	29,662
Share premium account		7,122	2,586	7,122
Non-distributable reserve		2,455	-	2,455
Hedging and translation reserve		(9,042)	(9,043)	(9,730)
Own shares		(858)	(4,945)	(1,103)
Retained earnings		17,951	18,614	8,319
Total equity		57,383	35,556	36,725

 

Unaudited Consolidated Statement of Changes in Equity

For the half year ended 5 October 2014 (half year ended 29 September 2013)

 

	Share capital	Share premium account	Non-distributable reserves	Hedging and translation reserve	Own shares	Retained earnings/ (losses)	Total equity
	$'000	$'000	$'000	$'000	$'000	$'000	$'000
Balance at 31 March 2013	28,180	2,586	-	(6,553)	(4,945)	26,378	45,646
Profit for the period attributable to the owners of the parent	-	-	-	-	-	(4,198)	(4,198)
Other comprehensive income/ (loss) for the period	-	-	-	(2,490)	-	(209)	(2,699)
Total comprehensive income/ (loss) for the period	-	-	-	(2,490)	-	(4,407)	(6,897)
Issue of share capital	164	-	-	-	-	(164)	-
Dividends	-	-	-	-	-	(1,723)	(1,723)
Reserve entry for share option charges / (credit)	-	-	-	-	-	(1,470)	(1,470)
Balance at 29 September 2013	28,344	2,586	-	(9,043)	(4,945)	18,614	35,556
Balance at 30 March 2014	29,662	7,122	2,455	(9,730)	(1,103)	8,319	36,725
Profit for the period attributable to the owners of the parent	-	-	-	-	-	(6,744)	(6,744)
Other comprehensive income/ (loss) for the period	-	-	-	688	-	(874)	(186)
Total comprehensive income/ (loss) for the period	-	-	-	688	-	(7,618)	(6,930)
Issue of share capital	10,093	-	-	-	-	17,813	27,906
Own shares utilised in the period	-	-	-	-	227	(87)	140
Exercise of Non-Executive Long Term Incentive Scheme	-	-	-	-	18	(69)	(51)
Reserve entry for share option charges/(credit)	-	-	-	-	-	(407)	(407)
Balance at 5 October 2014	39,755	7,122	2,455	(9,042)	(858)	17,951	57,383