Half-year Report of Volex plc

14 November 2019

VOLEX plc

Half year results for the 26 weeks ended 29 September 2019

'Acquisitions on track, margin expansion and cash generation ahead of plan'

Volex plc ('Volex'), the global provider of Complex Assemblies, today announces its interim results for the 26 weeks to 29 September 2019 ('H1 FY2020').

Financial Summary	26 weeks to 29 September 2019	26 weeks to 30 September 2018	% Change
Revenue	$195.7m	$182.4m	7.3
Underlying* operating profit**	$15.9m	$9.9m	61.7
Statutory operating profit	$10.4m	$5.7m	82.5
Underlying* profit before tax	$15.3m	$9.0m	70.0
Statutory profit before tax	$9.7m	$4.9m	98.0
Basic earnings per share	5.3c	2.7c	96.3
Underlying diluted earnings per share	8.5c	5.8c	46.6
Interim dividend per share	1.0p	-	-
Net cash (before IFRS 16 Leases adjustment)***	$7.9m	$24.9m	(68.3)

* Before adjusting items (non-recurring items and amortisation of acquired intangibles) and share-based payments

** The Group has adopted the cumulative catch-up approach to the adoption of IFRS 16 ('Leases'). The impact during H1 FY2020 is a $0.4 million increase to operating profit and $0.2 million increase in finance costs.

*** Net cash is presented before the $7.2 million lease liability recognised on adoption of IFRS 16 Leases.

 

Operational highlights

·     In July, we acquired Servatron, a US-based manufacturer of printed circuit board assemblies, box builds and complete sub-assembly solutions. The acquisition of Servatron in the North American market, as with that of Silcotec in the European market, allows us to continue to move up the value curve by offering more complex integrated manufacturing solutions to existing Volex customers

·     We have identified further opportunities to restructure our operations to improve efficiencies and further reduce costs across our global factory footprint

·     We have delivered further supply-chain improvements, including a major step towards vertically integrating our Power Cords business through the purchase in June of a Chinese cable manufacturing business, Ta Hsing

·     We are in the process of significantly expanding the manufacturing capacity in our Batam factory to allow for the production of high-speed data cables outside of China for the first time

·    We have been successful in winning two new global customers in our Power Cords division which will contribute to revenue in the second half

Financial highlights

·     Underlying gross margins have improved significantly from 18.7% for H1 FY2019 to 23.1% for H1 FY2020 across our Power Cords and Complex Assemblies divisions as a result of rigorous cost control and profit analysis across individual product lines to ensure that margins are at acceptable levels. A beneficial change in the product mix has led to a higher proportion of higher-margin Complex Assemblies activity during the period

·     Overall revenue has increased by 7.3% to $195.7 million as we reposition the business through targeted acquisitions and continue to reduce exposure to low-margin legacy customers

·     Operating cash flow (before movements in working capital) has shown significant improvement, up by 108% to $17.5 million, due to the combined impact of the acquisitions and improved margins

 

Nat Rothschild, Executive Chairman, said:

"I am delighted to announce that Volex plc will recommence the payment of a dividend, starting with an interim dividend of one pence per share. This is the first dividend we have paid since 2013 and it has been made possible due to the significant re-positioning seen across our business during that period. We are now cash generative, creating healthy profits across our two business divisions, and in acquisitive growth mode.

We have a clear strategy to grow this business and increase shareholder value. We understand where we have the capability and expertise to be competitive in our chosen markets. For the first time, the higher-margin Complex Assemblies business made up the majority of our revenue in the first half of FY2020, in accordance with our strategy of repositioning Volex towards higher-margin value-added business. We are well known as a high-volume manufacturer of power cords but it is our Complex Assemblies business that now leads the way in terms of profit generation.

We continue to invest through acquisitions of complementary capabilities and, alongside our customers, in new programmes for data centres and electric vehicles. The businesses that we acquired in the prior year are now embedded within our organisation and operating successfully within the Group. We made another two acquisitions in the first half of this year. Servatron, a US-based integrated solutions manufacturer, expands our capability set and provides additional routes to service customer demand. Ta Hsing, a Chinese manufacturer of cable products, provides us with additional control over our power product supply chain while also reducing our costs.

Within Complex Assemblies we continue to deliver solutions to customers who value our engineering expertise. We use our knowledge in this area to ensure we deliver to the highest quality standards with economical pricing in defensible niche markets such as medical, instrumentation and advanced data centre applications.

Certain customer segments play to the strengths in our Power Cords division. We work best with customers who value high-quality products at a competitive price point. We are highly skilled at developing solutions that balance aesthetics and reliability, which positions us well to work with premium brands. We are working hard to develop new customer relationships as well as deliver innovation and efficiency to our existing customers.

Outlook

Looking forward, we are taking the opportunity to selectively invest in increasing capacity in our key facilities and leverage our global footprint. We are continuing to vertically integrate our power cord manufacturing capability and optimise our supply chain and production capacity to reflect economic trends.

Volex has again delivered a solid first-half performance with growth in trading profit and margins. Despite macroeconomic headwinds, our business is proving resilient. There are further significant opportunities for each of our business units to improve both sales and margin performance through rigorous execution of the strategy, in both the short and longer term. The Board remains confident of delivering its full-year expectations and in the Company's ability to drive shareholder value."

 

 

Contact details

 

Volex plc                                                                                                                     +44 7909 995 887

Nat Rothschild, Executive Chairman

Daren Morris, Chief Financial Officer and Company Secretary

 

N+1 Singer - Nominated Adviser & Joint Broker                                               +44 20 7496 3000

Shaun Dobson

 

Whitman Howard - Joint Broker                                                                          +44 20 7659 1234

Hugh Rich

Nick Lovering

 

 

 

RESULTS FOR THE 26 WEEKS ENDED 29 September 2019

Overview

The Board is pleased to report the results for the half year to 29 September 2019, which has seen the Group continue to grow and deliver improved margins.

 

$'000	26 weeks ended 29 September 2019 Total	26 weeks ended 30 September 2018 Total
Revenue	195,706	182,427
Cost of Sales	(150,429)	(148,404)
Underlying gross profit*	45,277	34,023
Underlying gross margin	23.1%	18.7%
Operating costs	(29,331)	(24,138)
Underlying operating profit*	15,946	9,885
Underlying operating margin	8.1%	5.4%

                   * Before adjusting items and share-based payment charges

Profitability in H1 FY2020 has seen a significant improvement in comparison to H1 FY2019. There are several reasons behind this. The Complex Assemblies business delivers higher margins because it is manufacturing products that require more intensive processing and development. Revenues from Complex Assemblies as a proportion of the combined Group have increased significantly since the comparative period as four of the five recent acquisitions sit within this division.

Margins have also improved due to lower input costs. This has come from a combination of negotiated price reductions from suppliers, lower commodity costs, including for copper, and favourable foreign exchange rates. This has been achieved without the need to add significant additional overhead or central costs.

Revenue has reduced slightly in our Power Cords division as we carefully manage the optimum customer and product mix to improve profitability. In Power Cords we have been very selective in which customer opportunities to pursue to help deliver consistent margins and to retain our commitment to high levels of quality and customer service. We continue to deliberately reduce our exposure to one major legacy customer which is the main reason for the decline in revenue. Our Complex Assemblies division is growing significantly as we see the benefit of our sales strategy bearing fruit and the acquisitions that have taken place over the last 18 months perform well.

One of our strategic objectives for the year is to continue the integration of the businesses we acquired in the last financial year as well as identify further acquisition targets. During the first half of FY2020 we have delivered successfully on both fronts. Our increased profitability in Complex Assemblies includes the contribution of the three businesses we acquired in FY2019: MC Electronics, Silcotec Europe and GTK. Each of these businesses is trading strongly and is operating effectively within the Group.

We acquired Servatron in July 2019 and Ta Hsing in June 2019. Servatron is a strategic addition to our Complex Assemblies division. It brings some strong customer relationships as well as technical capabilities that we did not possess within the Group. It also brings cross-selling opportunities as we introduce the Servatron skill set to our broader customer base. Ta Hsing produces wire and cable products and is a key supplier of our Power Cords division. Our acquisition of this business provides us with an opportunity to vertically integrate an important part of our supply chain.

During the period we recognised some costs associated with the relocation of one of our Chinese factories. We had reached the end of our lease for the manufacturing site and this provided us with an opportunity to rationalise our requirements and move into a building that better fits our future needs. This will result in some restructuring and transfer costs which have been recognised as an operating expense.

Volex plc will start paying a dividend in FY2020. This will commence with an interim dividend of 1.0 pence per share. The dividend will be paid on 5 February 2020 to those shareholders on the register as at 10 January 2020. The divisions are delivering strong and consistent cash flows and this supports our intention to maintain a sustainable and progressive dividend policy as we move forward.

 

Trading performance

Complex Assemblies Division

$'000	26 weeks ended 29 September 2019	26 weeks ended 30 September 2018	52 weeks ended 31 March 2019
Revenue	104,613	78,192	173,219
Underlying gross profit	26,917	15,224	37,141
Underlying gross margin	25.7%	19.5%	21.4%
Operating costs	(15,196)	(9,976)	(23,668)
Underlying operating profit	11,721	5,248	13,473
Underlying operating margin	11.2%	6.7%	7.8%

 

Volex designs and manufactures a broad range of cables and connectors that transfer electrical, electronic, radio-frequency and optical data. Volex products are used in a variety of applications including data networking equipment, data centres, wireless base stations and cell site installations, mobile computing devices, medical equipment, factory automation, vehicle telematics, agricultural equipment and alternative energy generation.

Revenue for H1 FY2020 was $104.6 million, up 33.8% on the prior period. This includes two months of Servatron revenue in H1 FY2020 and a full period of the three FY2019 acquisitions.

There has been an improvement to both underlying gross margin and underlying operating margin. This has been achieved through an improvement in product mix, and savings in production costs. The strength of the US dollar, which is the primary sales currency, has also helped margins.

The acquisitions in FY2019 delivered blue-chip customers, processes and excellent people to our organisation. There are areas of the market where we deliver products that exceed our customers' rigorous quality standards in applications where accuracy and reliability are critical. Our performance in the healthcare and data centre segments continues to be particularly strong. As we move forward, we are looking at how to leverage the experience we have in these segments to adjacent markets such as aerospace and defence.

Our high-speed data cables offer a market-leading solution in the demanding data centre space. Production of these cables was predominantly in China, and a significant volume of the sales are in the US. As a result of the trade tariffs introduced in 2018 on certain goods imported from China to the US, we have made a decision to move a proportion of production of these cables to our factory in Indonesia. This facility will ramp up to production volumes of these products in H2 FY2020. This demonstrates the value of our global manufacturing capability.

Servatron was acquired at the end of July, and the results above include two months of revenue which is $6.3 million. The acquisition introduces new capabilities to the Group in respect of printed circuit board assemblies, higher levels of system integration and complementary test technology. As already mentioned, there are significant cross-selling opportunities, and the ability to respond to the frequent requests we receive from our customers to deliver more complex assemblies.

The process of integrating and embedding the acquisitions into our global business has provided a platform to share best practice and drive consistency across the Group. This will benefit customer satisfaction and retention as well as providing an opportunity to further enhance margins.

 

Power Cords Division

$'000	26 weeks ended 29 September 2019	26 weeks ended 30 September 2018	52 weeks ended 31 March 2019
Revenue	91,093	104,235	198,885
Underlying gross profit	18,360	18,799	36,377
Underlying gross margin	20.2%	18.0%	18.3%
Operating costs	(11,213)	(10,735)	(23,148)
Underlying operating profit	7,147	8,064	13,229
Underlying operating margin	7.8%	7.7%	6.7%

 

Volex designs and manufactures power cords that are sold to the manufacturers of a broad range of electrical and electronic devices and appliances. Volex products are used in home entertainment and home computing devices, domestic and personal healthcare appliances, power tools and electric vehicles. Many of our customers are global household names operating in premium segments of the consumer market.

Revenues in the Power Cords segment have fallen in comparison to the first half of the previous financial year. The reduction was expected and is largely due to our decision to reduce our business with a significant consumer electronics customer. There will be further decline from this customer in the second half of the year, which will be partially offset by growth from programmes with new customers. We are also evaluating acquisition opportunities in the power space which is highly fragmented and ripe for consolidation.

Gross margins have improved from 18.0% to 20.2%. This has been achieved by identifying the correct price points for products and working on delivering efficiency. Most sales are in US dollars but a proportion of the cost base is in the local currency relevant to the production location. The strength of the dollar has helped improve margins, as have lower commodity costs, particularly in respect of copper.

Volex Power Cords products are known for their quality and solid engineering. A number of our competitors price very aggressively to secure market share, but it does not make commercial sense for Volex to compete on price in these situations because the margins are not acceptable given our quality requirements. We continue to focus on being profitable and delivering cost-effective solutions in the most efficient way. This includes our efforts to rationalise our product set. By producing fewer variants of our key products, we can reduce our costs, improving our pricing to customers and increasing our margins. An additional advantage of streamlining our offer is that we can simplify the quotation process and improve customer response times. It will take time for the benefits from this activity to come through because it will be necessary to seek relevant safety approval certificates.

The market for Power Cords is changing to accommodate consumer demands. We deploy our best-in-class engineering experience to help customers meet the challenges of safely delivering power to their new products. It is a combination of our ability to innovate as well as deliver on our commitment to quality that has helped us win new global customers during the period.

There is a culture of continual improvement across our manufacturing sites and we are investing in new technology to automate specific areas of our production. This activity is concentrated on where it will deliver the biggest benefit. As our manufacturing costs are reduced, we are able to re-engage with price-sensitive customers with a view to winning back share.

 

Group adjusting items and share-based payments

Adjusting items and share-based payments totalled $5.6 million in the period (H1 FY2019: $4.2 million).

Associated with the acquisitions, Volex has recognised certain intangible assets including customer relationships and order backlogs. As at 29 September 2019, the intangibles associated with Ta Hsing and Servatron are provisional and subject to change during the annual subsequent measurement period following each acquisition. The amortisation of these intangibles is non-cash and totals $2.8 million for the period.

During the acquisition process, we identify where there are key senior managers who have a critical role to play in the integration and successful operation of the acquired operation. Retaining these individuals is an important part of our acquisition strategy. As well as offering a competitive salary we also use share awards with strict performance criteria to retain key people and recognise exceptional performance in respect of the acquired business. This has resulted in an increase in the level of share-based payments during the period.

In H1 FY2019, the Group recognised $1.9 million of restructuring costs. In H1 FY2020, there have been no restructuring costs recognised as adjusting items. The prior period included $1.5 million associated with restructuring of the Shenzhen factory, a further $0.7 million expense relating to the closure of the facility in India and the release of a $0.3 million provision relating to an old potential claim. Where restructuring or re-configuration activity has occurred in the current period, it has been recognised as an operating expense in the relevant division. This is because the extent of the restructuring is not considered significant enough to require separate presentation.

During H1 FY2019 we incurred a total of $0.8 million of professional fees on the acquisitions of MC Electronics and Silcotec as well as certain post-acquisition retention payments. During the first half of FY2020, costs associated with the acquisitions have been less than $0.2 million.

Group taxation

The Group incurred a tax charge of $2.0 million (H1 FY2019: $1.5 million), representing an underlying effective tax rate of 15.7% (H1 FY2019: 18.1%). This is slightly higher than the estimated ETR for the full year. The decrease in ETR compared to 2019 is mainly due to the utilisation of tax losses within the Group.

Group net debt and cash flows

Net cash (before the IFRS 16 adjustment) decreased from $20.7 million at 31 March 2019 to $7.9 million at 29 September 2019. The Group generated a free cash flow after capital expenditure and tax, but before the cost of acquisitions, of $11.7 million. This included a cash operating inflow of $16.1 million and an adverse working capital movement of $1.3 million, as well as capital expenditure of $1.9 million and tax paid of $2.3 million.  Under IFRS 16 Leases, a liability is recognised for the present value of the future commitment under operating leases.  This liability totalled $7.2 million and is required to be shown within net debt.  This produces a statutory net cash position of $0.6 million.  As at 1 November 2019, net cash stood at $18.2 million.

The Servatron acquisition required $13.4 million of cash consideration and involved the assumption of $5.4 million of net debt. Ta Hsing cost $5.7 million after taking into account the cash on hand in the business.

In July, the Group extended its $30 million revolving credit facility with Lloyds Bank plc and HSBC UK Bank plc for three years on improved terms. The key terms of the extension were: a 40 basis point reduction in the non-utilisation fee and a 70 basis point reduction in interest-rate margin; fewer restrictions in key operational covenants; and a $10 million uncommitted "accordion" feature to provide further capacity, up to a total RCF limit of $40 million, for potential future acquisitions to support the group's strategy.

 

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. There are a number of potential risks that could have a material impact on the Group's financial performance. The principal risks and uncertainties include competitive threats, legal and regulatory issues, dependency on key suppliers or customers, movements in commodity prices or exchange rates, and quality issues. These risks and the relevant risk-mitigation activities are set out in the FY2019 Annual Report and Accounts on pages 24 to 27, a copy of which is available on the website at www.volex.com.

 

 

 

 

Nat Rothschild                                                                                     Daren Morris

Group Executive Chairman                                                                Group Chief Financial Officer

13 November 2019                                                                             13 November 2019

 

 

Unaudited consolidated income statement                                        

For the 26 weeks ended 29 September 2019 (26 weeks ended 30 September 2018)

 

		26 weeks ended 29 September 2019			26 weeks ended 30 September 2018
		Before Adjusting items	Adjusting items and share-based payments	Total	Before Adjusting items	Adjusting items and share-based payments	Total
	Notes	$'000	$'000	$'000	$'000	$'000	$'000
Revenue	2	195,706	-	195,706	182,427	-	182,427
Cost of sales		(150,429)	-	(150,429)	(148,404)	(1,666)	(150,070)
Gross profit		45,277	-	45,277	34,023	(1,666)	32,357
Operating expenses		(29,331)	(5,559)	(34,890)	(24,138)	(2,495)	(26,633)
Operating profit/(loss)	2	15,946	(5,559)	10,387	9,885	(4,161)	5,724
Share of net loss from associates		-	-	-	(210)	-	(210)
Finance income		93	-	93	42	-	42
Finance costs		(776)	-	(776)	(703)	-	(703)
Profit/(loss) on ordinary activities before taxation		15,263	(5,559)	9,704	9,014	(4,161)	4,853
Taxation	4	(2,401)	451	(1,950)	(1,628)	88	(1,540)
Profit/(loss) for the period attributable to the owners of the parent		12,862	(5,108)	7,754	7,386	(4,073)	3,313
Earnings per share (cents)
Basic	5	8.8		5.3	6.0		2.7
Diluted	5	8.5		5.1	5.8		2.6

 

					52 weeks ended 31 March 2019
					Before Adjusting items	Adjusting Items and share-based payments	Total
	Notes				$'000	$'000	$'000
Revenue	2				372,104	-	372,104
Cost of sales					(298,586)	-	(298,586)
Gross profit					73,518	-	73,518
Operating expenses					(51,912)	(8,614)	(60,526)
Operating profit/(loss)	2				21,606	(8,614)	12,992
Share of net loss from associates					(210)	-	(210)
Finance income					129	-	129
Finance costs					(1,276)	-	(1,276)
Profit/(loss) on ordinary activities before taxation					20,249	(8,614)	11,635
Taxation	4				(2,650)	221	(2,429)
Profit/(loss) for the period attributable to the owners of the parent					17,599	(8,393)	9,206
Earnings per share (cents)
Basic	5				13.1		6.9
Diluted	5				12.7		6.7

 

 

 

Unaudited consolidated statement of comprehensive income

For the 26 weeks ended 29 September 2019 (26 weeks ended 30 September 2018)

 

	26 weeks to  29 September 2019	26 weeks to  30 September 2018	(Audited) 52 weeks to  31 March 2019
	$'000	$'000	$'000
Profit for the period	7,754	3,313	9,206
Items that will not be reclassified subsequently to profit or loss:
Actuarial (loss)/gain on defined benefit pension schemes	(488)	331	305
Tax relating to items that will not be reclassified	-	-	-
	(488)	331	305
Items that may be reclassified subsequently to profit or loss:
(Loss)/gain arising on cash flow hedges during the period	(771)	(626)	180
Exchange (loss)/gain on translation of foreign operations	(1,558)	437	579
Tax relating to items that may be reclassified	-	-	-
	(2,329)	(189)	759
Other comprehensive (loss)/income for the period	(2,817)	142	1,064
Total comprehensive income for the period	4,937	3,455	10,270

 

 

 

 

 

Unaudited consolidated statement of financial position                              

As at 29 September 2019 (30 September 2018)

	Note	29 September 2019 $'000	30 September  2018 $'000	(Audited) 31 March 2019 $'000
Non-current assets
Goodwill		25,751	7,587	17,531
Other intangible assets		18,498	6,131	11,115
Property, plant and equipment		22,152	20,583	20,420
Right of use assets		5,709	-	-
Investments in associates		-	-	-
Other receivables		2,829	2,321	2,704
Deferred tax asset		3,353	4,311	4,271
		78,292	40,933	56,041
Current assets
Inventories		54,394	51,536	49,122
Trade receivables		76,587	72,106	71,307
Other receivables		7,162	6,917	8,448
Current tax assets		1,772	713	1,092
Derivative financial instruments		-	46	374
Cash and bank balances	8	17,880	24,647	20,913
		157,795	155,965	151,256
Total assets		236,087	196,898	207,297
Current liabilities
Borrowings	8	9,922	-	320
Trade payables		39,815	46,350	45,863
Other payables		35,958	30,074	30,212
Current tax liabilities		4,299	6,416	4,811
Retirement benefit obligation		989	881	975
Lease liabilities		3,568	-	-
Provisions		661	703	1,121
Derivatives financial instruments		393	476	-
		95,605	84,900	83,302
Net current assets		62,190	71,065	67,954
Non-current liabilities
Borrowing		38	-	-
Other payables		1,557	1,419	988
Non current tax liabilities		1,134	-	1,134
Deferred tax liabilities		6,529	2,568	4,447
Retirement benefit obligation		1,378	1,466	1,460
Derivative financial instruments		-	10	-
Lease liabilities		3,715	-	-
Provisions		263	343	318
		14,614	5,806	8,347
Total liabilities		110,219	90,706	91,649
Net assets		125,868	106,192	115,648
Equity attributable to owners of the parent
Share capital	6	59,566	58,111	58,792
Share premium account		46,414	42,807	44,532
Non-distributable reserve		2,455	2,455	2,455
Hedging and translation reserve		(9,720)	(8,339)	(7,391)
Own shares	7	(1,509)	(792)	(1,890)
Retained earnings		28,662	11,950	19,150
Total equity		125,868	106,192	115,648

 

Unaudited Consolidated Statement of Changes in Equity

For the 26 weeks ended 29 September 2019 (26 weeks ended 30 September 2018)

 

	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 1 April 2018	39,755	7,122	2,455	(8,150)	(867)	7,829	48,144
Profit for the period attributable to the owners of the parent	-	-	-	-	-	3,313	3,313
Other comprehensive income/ (loss) for the period	-	-	-	(189)	-	331	142
Total comprehensive income/ (loss) for the period	-	-	-	(189)	-	3,644	3,455
Shares issued	18,205	35,685	-	-	-	-	53,890
Exercise of deferred bonus shares	151	-	-	-	-	(151)	-
Own shares sold/(utilised) in the period	-	-	-	-	75	(31)	44
Reserve entry for share option charges/(credit)	-	-	-	-	-	659	659
Balance at 30 September 2018	58,111	42,807	2,455	(8,339)	(792)	11,950	106,192
Balance 31 March 2019	58,792	44,532	2,455	(7,391)	(1,890)	19,150	115,648
Profit for the period attributable to the owners of the parent	-	-	-	-	-	7,754	7,754
Other comprehensive income/ (loss) for the period	-	-	-	(2,329)	-	(488)	(2,817)
Total comprehensive income/ (loss) for the period	-	-	-	(2,329)	-	7,266	4,937
Shares issued	692	1,882	-	-	-	-	2,574
Exercise of deferred bonus shares	82	-	-	-	-	(82)	-
Own shares sold/(utilised) in the period	-	-	-	-	381	(139)	242
Reserve entry for share option charges/(credit)	-	-	-	-	-	2,467	2,467
Balance at 29 September 2019	59,566	46,414	2,455	(9,720)	(1,509)	28,662	125,868