Annual Report and Accounts 2017 & Notice of AGM

27 June 2017

 

Volex plc

Publication and posting of Annual Report and Accounts 2017 & Notification of Annual General Meeting

 

Volex plc (the "Company"), the global provider of power and data cabling solutions, announces that it has posted to shareholders its Annual Report and Accounts 2017 (the "Annual Report") and the Notice of Annual General Meeting, which is to be held at Meeting Room 2, The Novotel Reading Centre, 25b Friar Street, Reading, RG1 1DP on 25 July 2017 at 2.00 p.m. (the "AGM"), together with a Form of Proxy for use in connection with the AGM.

 

A copy of the Annual Report and Form of Proxy is available on the Company's website, www.volex.com and will shortly be submitted to the UK Listing Authority's National Storage Mechanism and will then be available at www.hemscott.com/nsm.do.

 

In compliance with the Disclosure and Transparency Rules (DTR) 6.3.5, the following information is extracted from the Annual Report and should be read in conjunction with the Company's Preliminary Announcement issued on 8 June 2017, both of which can be viewed at www.volex.com. Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service.

 

This material is not a substitute for reading the Annual Report in full and page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the Annual Report.

 

Statement of the Directors' responsibilities

 

The following statement is repeated here solely for the purpose of complying with DTR 6.3.5. This statement relates to, and is extracted from, page 52 of the Annual Report. Responsibility is for the full Annual Report not the extracted information presented in this announcement or the Preliminary Results Announcement.

 

The Directors of Volex plc (the 'Company') are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and parent Company financial statements in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union. In preparing these financial statements, the Directors have also elected to comply with IFRSs, issued by the International Accounting Standards Board ('IASB').  Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Company and Group for that period.  In preparing these financial statements, the Directors are required to:

 

·    Select suitable accounting policies and then apply them consistently;

·    Make judgements and accounting estimates that are reasonable and prudent;

·    State whether applicable IFRSs as adopted by the European Union and IFRSs issued by IASB have been followed, subject to any material departures disclosed and explained in the financial statements; and

·    Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors' remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 

The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Each of the Directors, whose names and functions are listed on page 26 confirm that, to the best of their knowledge:

·    The Group and Company financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group;

·    The Strategic Report, on pages 4 to 26, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces; and

·    The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's performance, business model and strategy.

 

Principal Risks

A description of the principal risks that the Company faces is extracted from pages 21 to 23 of the Annual Report.

The table below summarises the Group's principal risks and how they are managed centrally. The Board considers these the most significant risks that could materially affect the Group's financial condition, performance, strategies and prospects. The risks listed do not comprise all risks faced by the Group and are not set out in any order of priority. Additional risks not presently known to management, or currently deemed to be less material, may also have an adverse effect on the business.

Risk	Possible Impact		Risk Mitigation Activities
Strategic
Competitor Risk	With the presence of competitors that are vertically integrated, financially stronger and with ability to invest in newer technology and capabilities, the Group is highly susceptible to increased competition and price pressures.    The Group's business and future results may be adversely impacted if it is unable to compete adequately and secure new business in the markets in which it operates.		The Group intends to focus on markets and customers where we can differentiate on factors other than price including engineering know-how and quality.   During the year, various projects have been undertaken to optimise manufacturing efficiency and identify process improvements with the aim of driving cost reductions and cash generation.    In the coming year, it is planned that the joint venture Volex has entered into with Joinsoon Electronics Mfg Co Ltd will begin producing lower cost raw materials for Volex to use in its product offering, thereby becoming more cost competitive.
Customer Concentration Risk	With the Group's top ten customers accounting for 64% (2016: 68%) of total revenue, the Group is exposed to customer concentration risk where its performance, financial condition and future prospects may be significantly impacted if there is a shift in allocation on a key customer account.   The Group's largest customer accounted for 18% of total revenue, down from 26% in the previous year.		The decline in revenues with our largest customer had a significant impact on Group performance.  Whilst the concentration of business with this customer had long been highlighted a risk, the business was unable to diversify the customer base due to an uncompetitive cost structure, high staff turnover and slow response times.   During the year the above obstacles have been addressed and a new sales strategy developed.  We are optimistic that this new strategy will lead to new revenue opportunities and a further reduction in reliance on the historic customers.  We have already received firm purchase orders from a number of new premium brand customers and we hope to scale these accounts in FY2018.
Operational
Supplier Dependency Risk	The Group's delivery of the strategy is dependent on the availability and timely receipt of raw materials.  As it continues to be heavily reliant on single-source suppliers for key materials or critical components, any disruptions may impact production and the Group's ability to meet customer commitments, win future business or achieve operational results.   Disruption to key supplies may be a result of insolvency of the supplier, scarcity of materials or the suppliers' inability to meet our standards such as quality, reliability and cost reductions.  In turn, the Group's inability to drive cost reductions may also result in a lack of competitiveness.		Single-source supplier risks are identified during the year and where operationally feasible, dual sources and local multi-sourcing for key materials and critical components are being developed.   Strategic relationships with key suppliers are established to enable flexible sourcing arrangements that are balanced with appropriate levels of inventory. The Group continues to monitor financial and operational viability of key suppliers periodically.    As noted above, the joint venture agreement Volex has entered into should reduce the reliance on several Chinese raw material suppliers.
Quality Risk	Our customers specify quality, performance and reliability standards.  Should our quality systems fail, the risk of customers receiving unsafe, faulty or non-performing products is increased.  Consequently, the Group may experience delays in shipment and product rework or replacement costs.    Subsequent customer complaints, warranty claims and product recall or replacement may result in reputational damage and reduced allocation.		The Group recognizes that the quality of our products is critical.  Quality assurance processes are embedded in the entire supply chain and every stage of the manufacturing process across all sites, supporting compliance with safety and customer quality standards.   New moulds, tooling and technology are acquired as part of our quality continuous improvement programme to sustain high quality output.   The Group has developed new internal KPI's that include quality metrics and which will be reviewed by the Board.
Product Development to Combat Disruptive Technology	Power and data cable markets are impacted by disruptive technologies which include wireless data transmission, improved battery lives and new industry standards such as USB-C.   Failure to adapt could lead to the loss of key accounts.   Volex may not be leveraging advancements in technology in its business model to achieve or sustain competitive advantage.		Close communication with all key customers on their product roadmap takes place. Volex continually investigates partnerships/co-operation for technology gaps.   During the year the engineering function has been reorganized to assist in the better sharing of information and knowledge.  Now all engineering functions including R&D engineers, production engineers (responsible for the running of the lines and tooling) and "field application engineers" (engineers close to customers who are responsible for feeding back challenges faced) report up to a single head of engineering.  Under the new long term strategy there will be significant investment in the engineering function.
Key People	After several years of poor performance and a major restructuring the Group is more reliant than ever on the small number of key executives who are leading the turnaround.   Until we can establish a more sustainable business model and organisation this risk will remain and therefore the turnaround itself is at risk.		The fact that our Executive Chairman is the largest shareholder provides considerable assurance to other stakeholders that Executive management's goals are aligned with their own.  Other key managers have been given PSP awards, allowing them to participate directly in the impact of the turnaround.    The Group has recently added senior sales and operational expertise in Asia and North America.
Financial
Going Concern	The Group has a $30 million multi-currency revolving credit facility which has been renewed to June 2019.  The facility is subject to a quarterly assessment of two financial covenants, namely the leverage covenant and interest covenant.    Whilst the Group's forecasts have indicated that both covenants will be met, any unforeseen downturn may result in failure to meet the covenant test.  Consequently, this may result in an 'event of default' where immediate repayment is requested.		The Group reviews its performance against budget to ensure that funding is balanced against economic results.    The Group continues to maintain an open and transparent dialogue with the facility providers to ensure that they are well aware of the developments in the business.   During the year, a number of loans drawn under the senior credit facility have been repaid and net debt has reduced.   The Group's forecasts indicate that it will meet the covenant tests under the facility.  If performance was not in line with the forecast, the Group has a number of mitigating actions that could be implemented.
Copper Price Volatility Risk	Many of the Group's products, in particular power cords are manufactured from wire components that contain significant amounts of copper.  Wire components accounted for approximately 50% of the Group's purchases for the year.  As copper price volatility is the single largest commodity price exposure facing the Group and driven by market volatility, failure to manage the impact of copper price changes may result in erosion of profit margins and loss of competitive advantage.   Whilst copper price movements are passed on to customers, delays in passing through the costs may create short term volatility in the Group's gross margins.	Copper price movements are continuously monitored and where appropriate, are reflected in the pricing of our products.  Whilst copper prices are fixed quarterly with major suppliers based on average LME rate over the prior quarter, approx. 55% of our power cord related revenues are covered by copper clauses which provide for quarterly adjustments to our selling prices based on our material costs.   The Group maintains forward copper purchase contracts extending out twelve months and are refreshed on a rolling monthly basis.
Foreign Exchange	The Group is exposed to currency transactional risk relating to day-to-day sales and purchases with customers and suppliers.   Reported results of overseas subsidiaries are subject to translational risk which may cause volatility in earnings and the balance sheet.   The Group's financial results may be impacted by the fluctuation of the US Dollar against foreign currencies, exchange rate controls or regulatory restrictions on transfers of funds.	The group's central finance function closely monitors the exposure to key currencies such as the Chinese Renminbi, EURO and Pound Sterling. Hedging is undertaken where appropriate.   Billing currencies have been adjusted to achieve a high level of natural hedging where possible.    In order to minimise foreign exchange fluctuations in the income statement of the Group, drawdowns on the senior credit facility in currencies other than the functional currency of the drawing entity will be treated where possible as a net investment hedge.   The Group Treasury Policy Statement sets out procedures on exchange rate risk management.
Legal, Tax and Regulatory Compliance Risk	The Group is subject to diverse laws and regulations in the global markets in which it operates, particularly in certain territories where the risk is elevated due to jurisdictions with immature business practices and/or systems.   The areas include but are not limited to those related to product safety, environmental, health and safety, export controls or customs, tax laws and anti-bribery and corruption.    Non-compliance with legislation or other regulatory requirements may compromise the Group's ability to conduct business in certain jurisdictions.  They may expose the Group to potential reputational damage, financial penalties and/or suspension of business activities, any of which could have a material adverse effect.	The Group takes an uncompromising approach towards non-compliance.  The group's Code of Conduct provides a framework to general compliance and governance policies that have been established to ensure compliance with laws, regulations and standards.    The Group continually monitors developments in applicable laws and regulations in the jurisdictions in which it operates and external advice is sought where necessary.   Regular monitoring programs are in place at all sites to enable continuous improvement.   Irrespective of our own internal controls and advice provided by external consultants, we have noted in the past year that certain taxation authorities facing local funding shortfalls are becoming more aggressive in their application of tax law to the point of imposing significant penalties on minor offences and even in some cases imposing tax demands that have little basis in the local tax rules.  In these instances, we continue to engage with local independent consultants and on their advice appeal these findings to a higher office.

 

For further information please contact:

Volex plc

Daren Morris, Chief Financial Officer and Company Secretary

+44 (0)208 017 3240