Preliminary Group Results FY2021

Overview

Our FY2021 performance underlines the progress that Volex has made in recent years. In what was undoubtedly one of the most challenging years for manufacturing in recent memory, the business delivered a great result with strong improvements to both underlying operating margin and revenue. This demonstrates the benefits we have secured from broadening the customer base, expanding the manufacturing footprint and the relentless focus on driving optimisation and efficiency in processes.

Demand for power cords for the consumer electricals market was strong and we were able to take advantage of the efficiencies and capacity we have delivered in this area. A notable highlight during FY2021 was the acceleration in our electric vehicle business. This is a demanding area that showcases our expertise and engineering capability. It was a mixed year for our medical customers with strong demand for portable patient monitoring devices and respiratory care appliances offsetting a slowdown in the deployment of larger therapeutic and diagnostic machines. Our Complex Industrial Technology customers saw variability in demand as companies delayed investment decisions while waiting for a better understanding of the economic impact of the pandemic. Data centre products grew strongly, helped by the rapid uptake of cloud services and streaming as work and leisure trends changed.

Amongst a number of important investment projects in the year, the most significant were the site relocation in Suzhou, China and the facility expansion in Batam, Indonesia. Both of these projects were delivered on time and on budget despite the challenging circumstances. Relocating our production site in Suzhou presented us with the opportunity to create a manufacturing centre of excellence in East China, where we will locate a number of our engineering and manufacturing specialists. Batam has proven to be one of our most profitable and versatile manufacturing sites. Doubling our factory footprint there provides a platform for growth.

We completed the acquisition of DE-KA, the leading producer of power cords for the European consumer electricals market, in February 2021. This is an exceptionally well run business with industry-leading margins and an impressive blue-chip customer list. We have a strong acquisition funnel with opportunities at various stages of qualification. Acquisitions are a crucial part of our strategy and a significant focus.

The success of our operations is down to the talent and hard work of our workforce, which now numbers over 6,300 individuals across 21 different countries. We have continued to invest in developing talent within the organisation and supporting the growth and development of our colleagues at all levels. We have put a significant emphasis on improving our performance management approach to support the achievement of our strategic objectives and this is evident in the progress we have achieved this year.

The impact of Covid-19

It has been an incredibly challenging year for our employees, our customers and our suppliers. Creating and maintaining a safe environment for our colleagues has been the foremost priority throughout the year. We rolled out a set of stringent health and safety requirements across all our manufacturing sites to reduce the risk of the spread of infection at our locations. As a result of these measures we did not experience any significant downtime at our sites in FY2021.

The pandemic has seen changes in the operation of global supply chains. There was an excellent response from our procurement teams who have done an outstanding job securing the components required for customer projects. Changes in supply and demand and the availability of air freight, much of which was carried on passenger aircraft, has had an impact on the sea freight lanes that transport our Asian output to Europe and North America. This has resulted in higher shipping costs and longer transit times. We have worked closely with our customers to manage these impacts.

Covid-19 has had an impact on the cost of some of our raw materials. In the first half of FY2021, the price of copper dropped as there was uncertainty about global requirements. As demand improved in the second half of the year, copper prices increased. Our contracts with our power cord customers, where copper is a significant percentage of the bill of materials, allow us to pass these costs through to the customer, although there can be a short delay to allow the pricing changes to be implemented.

Acquisitions

DE-KA is the sixth acquisition we have completed in the last three years and also the largest. It achieved revenues of $60.9 million for the year to 4 April 2021 and has contributed revenues of $9.2 million in the six weeks since it became part of the Group. We identified DE-KA as a target on the strength of their reputation in Europe as a leading power cord manufacturer with a significant share of the domestic appliance market. At the time of the initial approach, the owners had not considered selling. Our track record on previous transactions and our approach to integration, where we ensure we retain the entrepreneurial elements that have made the target a success, convinced them to join the Group.

Having completed the acquisition, we are actively pursuing revenue synergies by leveraging strong customer relationships on both sides to drive additional sales. We have also conducted an initial analysis of their supply contracts to identify combined procurement savings. The manufacturing engineers at DE-KA have a significant knowledge of the end-to-end power cord production process, allowing us to share best practice across the Group.

The successful acquisition and integration of quality businesses is a major part of our strategy. Our typical acquisition target is a well performing business in a sector where we have a deep understanding. We are attracted to businesses with excellent customer lists and good capabilities that drive long-term customer relationships. Targets that require significant integration or restructuring effort are only feasible where we can identify the right management resources to lead this activity. We want to maximise the value we can create from every acquisition and we only take forward opportunities that meet the strict value criteria that we tailor for each transaction based on the specific characteristics of the target.

To select the right opportunities, we identify potential acquisitions through a variety of methods, seeking out businesses that are not on the market as well as those already in an active process. All of these opportunities are qualified and discussed by an investment committee before we progress to negotiation. In an environment where Covid-19 has impacted profitability at potential targets, both positively and negatively, valuation can be complex, and we have taken a prudent approach in this regard. We only proceed to due diligence where we have an alignment in the commercial terms.

Acquisitions remain a high priority and we are actively pursuing a number of opportunities which are at different stages of qualification. We have good access to funding to allow us to complete on this strategy, with low levels of net debt at the end of the year and significant undrawn facilities. The completion of any acquisition is dependent on the business meeting our stringent requirements following appropriate due diligence and negotiations.

Revenue by customer sector

Consumer Electricals

Consumer electricals demand has been robust in the period, despite a slow start to the year due to supply chain and shipping restrictions. Revenue grew to $164.0 million (FY2020: $156.8 million). As many consumers spent more time at home during the pandemic, demand for entertainment and home- office equipment was high. Consumer electricals are well suited to the shift to online buying that has occurred over the last year.

Sales in the first two months of FY2021 were lower than expected as our customers' manufacturing sites returned to production following the closures at the end of FY2020. At this point in the year we saw strong demand for power cords to support the move to the home office, particularly printers, monitors and notebooks. As the year progressed, our customers returned to full capacity with many of them increasing order quantities in response to pent up demand. Towards the middle of the year, our customers who were involved in home entertainment, including consoles and streaming devices, and small appliances, such as coffee machines, were particularly active. These trends continued right up to the end of the year with the final quarter stronger than usual. These figures also include the contribution made from the acquisition of DE-KA for the six weeks since we completed the transaction on 18 February 2021.

Electric Vehicles

The automotive industry is experiencing a period of rapid change. The launch of new models, government incentives and stricter emissions legislation are driving growth in the sales of electric vehicles. As leaders in the development and manufacture of power cords, Volex is able to bring significant experience to the technology associated with electric vehicle charging. Our customers are looking for a robust product, designed with reliability and safety as a priority. Our skill in these areas has allowed us to broaden our customer base and expand the range of products that we sell to each customer. As sales of electric vehicles increase, we expect the sector to become more competitive. We are investing in optimising our production processes to ensure we remain one of the lowest cost producers.

Revenue from our electric vehicle customers grew to $53.1 million (FY2020: $18.1 million), a year-on-year increase of 193%. Demand in the first quarter of the year was subdued as our customers identified ways to re-open their automotive plants in a Covid- secure way. From the second quarter of the year demand began to pick up, with run-rates improving further in the second half of the year. Over this period of time, we have been increasing our capacity to support production for our electric vehicle customers with additional capacity becoming available in the first half of FY2022.

Medical

Covid-19 placed a tremendous amount of pressure on healthcare systems around the world in FY2021, resulting in changes in the profile of spend on medical technology. Overall, medical revenues were down slightly at $112.7 million (FY2020: $116.0 million), reflecting the variability in demand seen across customers in different segments of the medical market. Orders for components used in smaller medical devices for patient treatment and monitoring were strong, as were orders related to respiratory care. We took part in projects to develop ventilators at an accelerated pace and we were able to use our global supply chain expertise and flexible approach to manufacturing to support delivery in a short time frame. Our customers who build larger medical equipment, such as patient imaging and robotic surgery devices, experienced lower demand. This was due to many healthcare settings restricting access and deferring investment projects as they dealt with the pandemic.

We believe that the outlook for large medical equipment will be positive as the impact of Covid-19 on healthcare systems reduces. Governments and healthcare providers will need to prioritise investment in technologies to support screening procedures and routine operations that were delayed during the pandemic. In addition, spending on screening and treatment around the world is expected to grow, as is the provision of universal healthcare in some significant markets. Volex is well positioned, with established production facilities in the major healthcare markets, to take advantage of moves to simplify and de-risk the supply chain for the production of medical devices.

Complex Industrial Technology

Revenue for Complex Industrial Technology customers was up by 13.0% to $113.5 million (FY2020: $100.4 million). The majority of this increase was in respect of products used in data centres. Data centre customers made up 36.9% (FY2020: 30.3%) of revenue in this sector. As the world moved to remote working, relying upon cloud- based services and videoconferencing, there was an increase in the utilisation of data centres. This demand was particularly strong in the first half of the year as our customers looked to stock up on critical components to prevent any shortages caused by supply chain disruption.

Our other Complex Industrial Technology customers produce a wide range of equipment and customer solutions, including building control smart metering, laser technology, vehicle telematics, telecommunications, industrial automation and robotics. Demand held up well in FY2021 considering the challenging environment for these customers, with Covid-19 creating uncertainty over investment programmes and creating supply issues for other components that are used in their products.

Revenue by market

As our business has grown it has become more interconnected. We are seeing increasing demand from our customers to manufacture in multiple locations to reduce the risk of supply chain disruption if a particular country introduces restrictions. We are responding to this by developing versatility in our sites so we can meet a variety of customer requirements. At the same time, the way we manage the business is evolving as we introduce a regional focus to continue our drive to offer exceptional customer service. As part of these changes, we have revised the way that we analyse our customer revenue, with categorisation by customer and geographically by region. The regional allocation is based on where the customer relationship is held, reflecting the fact that we are a customer-centric organisation.

North America

North America is our largest customer segment and we work with some of the largest technology companies and global innovators. North America makes up 45.8% of overall revenue (FY2020: 46.2%). Revenue grew by 19.5% to $203.1 million (FY2020: $169.9 million). This includes some of the strong growth that we experienced with our electric vehicle customers.

Europe

Revenues in Europe grew by 19.1% to $106.5 million (FY2020: $89.5 million). with higher sales of data centre products and respiratory care medical devices. Europe also benefited from increased demand in electric vehicles as well as $9.2 million of revenue from DE-KA.

Asia

Asia revenues were $133.7 million (FY2020 $132.0 million). The majority of sales in this region are in consumer electricals. Demand in the first half of the year was impacted by our customers who closed their factories for short periods due to Covid-19. Demand recovered in the second half of the year.

Operating costs

Underlying operating costs increased by $2.0 million to $61.0 million (FY2020: $59.0 million). The increase reflects an investment in strengthening our team to support growth opportunities, with new appointments in sales and marketing roles. We were able to make savings in travel costs of over $1m. It is likely that travel will remain at low levels in FY2022. As part of the expansion of our facility in Batam and the relocation of our facility in Suzhou, we incurred some certification and start-up costs. There will be further costs of a similar nature in FY2022 as we expand the capabilities and capacity of these sites. We also increased our spending on research and development, focussed on areas where we have a strong opportunity to deliver revenue growth in future periods. Our investment in development activities in previous years has resulted in a small number of patents which are now responsible for incremental sales opportunities.

We were able to achieve this result without making use of the UK Government funded Coronavirus Job Retention Scheme. Although we have seen reductions in demand at some of our sites, particularly those with predominantly medical customers, we have avoided making any redundancies as a result of Covid-19. We have developed and trained a skilled workforce in our factories and it was important for us to retain key people even where order volumes have slowed. This gives us the ability to respond rapidly to customer requirements as demand returns.

Operating margins

Underlying operating margins increased to 9.7% from 8.1% the previous year. There were a number of factors that supported the improvement. We continue to focus on efficiency and optimising production at our sites. There were significant movements in foreign exchange rates and commodity prices during the year as markets reacted to changing assumptions around the impact of Covid-19 and the effect on demand. Robust controls over operating expenditure and temporary employment tax reductions in Asia have also improved operating margins.

Investing in our business

Our manufacturing site in Batam, Indonesia is one of the most versatile in the Group and it is an important element of our presence in Asia. With ongoing tariffs for goods manufactured in China entering the US, Batam offers an extremely competitive manufacturing location. In addition to the impact of tariffs, many of our customers are asking for their products to be produced in multiple locations to enhance the security and continuity of their supply chain. In FY2020 we created additional capacity in Batam to produce high-speed data centre cables for US customers. With revenues continuing to grow, we completed the construction of a factory extension in FY2021, delivering significant additional capacity. This will give us further flexibility and allow us to meet increased customer demand and maintain our cost competitiveness.

We also relocated our operations in Suzhou, China to a new facility in FY2021. As the Suzhou site had developed, the existing building was no longer meeting our needs. Local enterprise incentives were available to fund the move and provide a very competitive lease on the new building. Our team at Suzhou contains a number of specialist roles that support our operations in the rest of the Group, including engineers, product design experts and procurement specialists. The new building creates a better environment suited to collaboration and cross-functional working. In FY2022 we plan to increase our research and development activities at this site, recruiting additional specialists to drive our product development programmes.

Delivering our strategy

Our approach continues to be the development of the right products and capabilities to be the manufacturing partner of choice for our customers. We have to demonstrate that we are delivering value and providing exceptional quality and excellent customer service. To meet these high standards, we keep our manufacturing facilities under review, identifying ways to improve processes which will increase efficiency and improve quality. This can involve looking at the configuration of a production line or introducing new equipment. Where it makes sense, we pursue vertical integration, giving us greater control over the supply chain and increasing margins. As well as the major projects in Batam and Suzhou, we have introduced new equipment and processes into our other factories to improve our cycle times.

Delivering excellent customer service takes great people. We have successfully brought new people into the organisation in addition to creating development opportunities for our existing employees. We have rolled out a global performance management framework to ensure our managers have meaningful objectives and receive regular feedback. Effective communication is important and we use a variety of channels to drive employee engagement. We also introduced a site excellence award this year as a way of recognising exceptional performance and teamwork at our sites.

As well as delivering a significant acquisition with the completion of the purchase of DE-KA, we have been working on opportunities within our acquisition pipeline. This activity can involve assessing businesses that are going through a sales process, or building relationships with organisations that show strategic alignment but are not ready for sale at this time.

Sustainability

Carrying out our business in a sustainable way is important to us. It is also important to our customers, employees, the communities we operate in and our shareholders. When designing our new buildings in Suzhou and Batam, we took environmental issues into consideration to deliver energy efficient working spaces. This year we have introduced sustainability as a specific area of focus for one of our Board Committees, ensuring that the topic gets appropriate attention. We are putting in place new systems to capture data across our sites so we can identify and prioritise areas of improvement and set targets for each location to manage our environmental impact.