5 DECEMBER 2023

 

discoverIE Group plc

 

Interim results for the six months ended 30 September 2023

 

Strong operating profit growth and progress towards margin targets

 

 

discoverIE Group plc (LSE: DSCV, "discoverIE" or "the Group"), a leading international designer and manufacturer of customised electronics to industry, today announces its interim results for the six month period ended 30 September 2023 ("H1 2023/24" or "the Period").

 

	H1 2023/24	H1 2022/23	Growth %	CER(3) growth %
Revenue(1)	£222.0m	£222.6m	0%	+4%
Underlying operating profit(2)	£28.6m	£25.6m	+12%	+17%
Underlying operating margin(1,2)	12.9%	11.5%	+1.4ppts	+1.4ppts
Underlying profit before tax(2)	£25.1m	£23.5m	+7%
Underlying EPS(2)	19.2p	17.8p	+8%
Reported profit before tax	£16.0m	£14.8m	+8%
Reported fully diluted EPS	11.7p	10.9p	+7%
Interim dividend per share	3.75p	3.55p	+6%

 

Highlights

 

·      Sales growth with operating efficiencies driving strong first half results   

o  Group sales up 4% CER on strong comparators (+23% CER last year)

o  Organic⁽⁴⁾ sales up 1% (M&C: +2%; S&C: +1%)

o  Gross margins robust and significant operational efficiencies

o  Underlying operating profit up 17% CER

o  Underlying EPS up 8%

 

·      Further good progress towards key targets

o  Underlying operating margin increased by 1.4ppts to 12.9%

o  Operating cash flow for the last 12 months up 36% with a 91% conversion rate⁽⁵⁾  

o  ROCE⁽⁶⁾ of 15.1%, in line with target

o  Carbon emissions reduced by c.45% in absolute terms since CY 2021⁽⁷⁾

  

·      Supply chain, order book and lead times normalised

o  Period end order book of £203m, c.5 months of sales, provides good forward visibility

 

·      Excellent acquisition returns of 19.2% EBIT ROI⁽⁸⁾ demonstrate value creation

 

·      Two high-margin acquisitions completed for £65m

o  2J and Silvertel integrations underway and progressing as planned

o  Period-end gearing⁽⁹⁾ of 1.6x at lower end of target range 1.5x to 2.0x

 

·      Group well positioned for further growth   

o  Record bank of design wins (up 23% to £190m ELV⁽¹⁰⁾), with significant further opportunities

o  Strong acquisition pipeline

o  On track to deliver full year underlying earnings in line with the Board's expectations

 

 

 

 

Nick Jefferies, Group Chief Executive, commented:

 

"discoverIE performed well in the first half. Our operational focus and sustained strong sales levels, which follows two years of growth at over 20% per year, delivered significant efficiencies with underlying operating profit increasing by 17% at constant exchange rates. We are making excellent progress towards our margin targets with a 1.4ppts increase in underlying operating margin, reflecting the leverage in our technology clusters, that is enabling efficiencies and creating value from acquisitions.

 

As expected, the order book ended the Period at c.5 months of sales, almost back to historic norms and the book-to-bill ratio is improving indicating that the supply chain inventory correction in our markets is largely complete. Since the period end orders have continued to strengthen being ahead of sales and growing organically over last year.

 

The returns generated from our acquisitions exceed, increasingly over time, our cost of capital and demonstrate the value creation of long-term compounding organic growth with integration efficiencies. Over two-thirds of the Group's operating profit growth over the last 12 years was generated from the organic growth of our businesses since their acquisition and integration. We are well positioned to continue this proven approach and remain a consolidator in a fragmented market for customised industrial electronics.

 

Additionally, our capital light model is highly cash generative; over the last 12 months, operating cash flow increased by 36% to £50m, a 91% conversion rate supporting further self-funding of acquisitions.

 

We are focused on generating organic growth in sustainable markets, enhanced by earnings accretive acquisitions, and to this end our design wins and our acquisition pipeline are stronger than ever.

 

The Group is well positioned to continue making good progress and remains on track to deliver full year underlying earnings in line with the Board's expectations."

 

 

Analyst and investor presentation:

A results briefing for sell side analysts and investors will be held today at 9.30am (UK time) at the offices of Peel Hunt. If you would like to join in person or via the live webinar, please contact Buchanan at discoverie@buchanan.uk.com.

 

 

Enquiries:

 

discoverIE Group plc                                                                                       01483 544 500

Nick Jefferies                Group Chief Executive

Simon Gibbins              Group Finance Director

Lili Huang                      Head of Investor Relations

 

Buchanan                                                                                                         020 7466 5000

Chris Lane, Toto Berger, Jack Devoy

discoverIE@buchanan.uk.com

 

Notes:

 

(1)     Revenue for H1 2022/23 and the related underlying operating margin have been restated to include £2.9m of one-off increase in semiconductor costs at nil margin passed through to customers. £5m of similar costs passed through to customers were included in revenue for FY 2022/23. See note 2 of the attached condensed consolidated interim financial statements.

 

(2)   'Underlying Operating Profit', 'Underlying Operating Margin", 'Underlying EBITDA', 'Underlying Profit before Tax' and 'Underlying EPS' are non-IFRS financial measures used by the Directors to assess the underlying performance of the Group. These measures exclude acquisition-related costs (amortisation of acquired intangible assets of £7.7m and acquisition expenses of £1.4m) totalling £9.1m. Equivalent underlying adjustments within the H1 2022/23 underlying results totalled £8.7m. For further information, see note 7 of the attached condensed consolidated interim financial statements.

 

(3)   Growth rates at constant exchange rates ("CER"). The average Sterling rate of exchange weakened 2% against the Euro compared with the average rate for the same period last year whilst strengthening 9% on average against the three Nordic currencies and 3% against the US Dollar.

 

(4)   Organic growth for the Group compared with last year is calculated at CER and is shown excluding the first 12 months of acquisitions post completion (CDT in June 2022, Magnasphere in January 2023, Silvertel in August 2023 and 2J in September 2023).

 

(5)   Operating cash flow is cash flow from operations including investment in working capital and capital expenditure.

 

(6)   ROCE is defined as annualised H1 2023/24 underlying operating profit including the annualisation of acquisitions, as a percentage of net assets excluding net debt, deferred consideration related to discontinued operations and legacy defined benefit pension asset/(liability).

 

(7)   CY 2025 target is to reduce scope 1 & 2 carbon emissions by 65% on an absolute basis (base year CY 2021).               

               

(8)   EBIT ROI for acquisitions is the total annualised H1 2023/24 underlying operating profit for each business owned for greater than two years divided by total cost of those acquisitions including acquisition expenses, earn outs (as accrued) and integration costs.         

 

(9)   Gearing ratio is defined as net debt divided by underlying EBITDA (excluding IFRS 16; annualised for acquisitions).

 

(10)         ELV is estimated lifetime value

 

(11) Unless stated, growth rates refer to the comparable prior year period.

 

(12) The information contained within this announcement is deemed by the Group to constitute inside information as stipulated under the Market Abuse Regulation, Article 7 of EU Regulation 596/2014. Upon the publication of this announcement via Regulatory Information Service, this inside information is now considered to be in the public domain.

 

 

Notes to Editors:

 

About discoverIE Group plc

 

discoverIE Group plc is an international group of businesses that design and manufacture innovative electronic components for industrial applications.

 

The Group provides application-specific components to original equipment manufacturers ("OEMs") internationally through its two divisions, Magnetics & Controls, and Sensing & Connectivity. By designing components that meet customers' unique requirements, which are then manufactured and supplied throughout the life of their production, a high level of repeating revenue is generated with long-term customer relationships.

 

With a focus on sustainable key markets driven by structural growth and increasing electronic content, namely renewable energy, medical, electrification of transportation and industrial automation & connectivity, the Group aims to achieve organic growth that is well ahead of GDP and to supplement that with complementary acquisitions. The Group is committed to reducing the impact of its operations on the environment with an SBTi aligned plan to reach net zero. With its key markets aligned with a sustainable future, the Group has been awarded an ESG "AA" rating by MSCI and is Regional (Europe) Top Rated by Sustainalytics. 

 

The Group employs c.4,500 people across 20 countries with its principal operating units located in Continental Europe, the UK, China, Sri Lanka, India and North America.

 

discoverIE is listed on the Main Market of the London Stock Exchange and is a member of the FTSE250, classified within the Electrical Components and Equipment subsector.

 

 

Strategic, Operational and Financial Review

 

Good progress towards our targets

 

The Group designs and manufactures niche, customised, innovative electronics. We have made good progress this Period towards our near and medium-term goals of increasing operating margins, supplying UN SDG-aligned target markets internationally, and generating consistently strong cash flow.  

 

The Group delivered sales growth of 4% at CER, underlying operating profit growth of 17% at CER and underlying EPS growth of 8%. This continued the good progress of the previous four years which saw compound annualised growth in the ongoing Group of 10% in organic sales, 32% in underlying operating profit and 25% in underlying EPS.

 

Despite economic headwinds, organic sales growth was very strong in North America, up by 35%, driven by organic growth in key target market customers, easing of semiconductor supply chains and localisation of production by some customers; good organic growth was also achieved in a number of key territories with the UK increasing by 6%, Nordics by 5%, and Eastern Europe by 5%. In total, these regions accounted for 61% of Group revenues. These were largely offset by reductions in Asia (mainly China and India) which was down by 23% particularly as customers' production localisation continued, resulting in Group organic sales growth of 1%.

 

Robust gross margins and tight operating cost management led to an underlying operating margin of 12.9%, up 1.4ppts year-on-year and another significant step towards achieving our Group targets of 13.5% by FY 2024/25, and 15% in the medium-term.

 

During the Period, expansion of the Group's production capacity in Germany and Thailand was completed and we continued with the building of a new facility in India which is expected to be operational in the next financial year.

 

Following constraints last year, supply chains have now returned to normal. Accordingly, the Group order book, which peaked a year ago at £257m (c.7 months of sales), has normalised as expected, converting into sales during the second half of last year and the first half this year. The order book at 30 September 2023 was £203m, representing c.5 months of sales. Other than a couple of businesses with specific reasons for longer order books, the Group's order books are back to normal levels with Group orders returning to sequential growth in the second quarter of 2%.

 

The quarterly book-to-bill ratio improved sequentially in the first half with a Period exit rate close to 1:1 indicating that customer inventory corrections are largely complete. With strong growth in design wins (up 23% this Period), the Group is well positioned to accelerate growth as end market demand conditions strengthen. 

 

 

Positioned well in a changing world

 

The Group is well positioned in an environment of rapidly changing global conditions, with a business model that is both resilient and flexible.

 

-     Essential products: the Group's products are designed-in and essential for customers' applications whilst amounting to a small proportion of their overall system cost, thereby driving resilient gross margins.

 

-     Broad footprint: a decentralised model with 34 manufacturing sites and operations around the world, able to support customers locally and with the decarbonisation of their supply chains. 

 

-     Efficient supply chains: our manufacturing uses a low proportion of bought-in components, the majority being manufactured in-house from raw materials and base components, reducing our exposure to external supply chain disruptions.

 

 

-     Low energy intensity operations: the large majority of the Group's energy exposure is electricity and with operations mainly being manual or semi-automated, energy costs represent less than 1% of Group revenues, limiting the Group's exposure to energy price rises and operational disruptions. 

 

With a capital light business model, a differentiated product portfolio, a strong balance sheet and low customer concentration (the Group's largest customer is c.7% of Group sales), the Group has grown strongly and consistently over the last decade whilst proving resilient through economic downturns, most recently experienced with the pandemic. We expect this to continue to be the case in a changing world.

 

 

Continued Financial Progress

 

Group sales for the first half increased by 4% at CER to £222.0m notwithstanding strong comparators (+23% CER growth in the prior period and 20% CER the year before that). Combined with significant operating efficiencies, first half underlying operating profit increased by 17% CER to £28.6m. Conversely interest rate rises over the last 12 months increased finance costs by £1.4m to £3.5m resulting in underlying profit before tax growth of 7% (up to £25.1m) with underlying earnings per share up 8% to 19.2p (H1 2022/23: 17.8p).

 

After underlying adjustments for the inclusion of acquisition-related costs, profit before tax for the Period on a reported basis increased by 8% to £16.0m (H1 2022/23: £14.8m) with fully diluted earnings per share increasing by 7% to 11.7p (H1 2022/23: 10.9p).

 

Free cash flow of £30.5m was generated over the last 12 months, being 26% higher than the prior 12 month period and representing 85% of underlying earnings, in line with the Group's conversion target. Net debt at 30 September 2023 increased to £111.3m (30 September 2022: £45.2m) with a gearing ratio of 1.6x following the acquisitions of Magnasphere in the second half last year and 2J and Silvertel this half, for a combined investment of £83m. This gearing is towards the lower end of our target range of 1.5x to 2.0x.

 

 

Increased Dividend

 

The Board is pleased to declare an increase in the interim dividend of 6% to 3.75p per share (H1 2022/23: 3.55p per share). Since 2010, the annual dividend per share has more than doubled.

 

The Board believes in maintaining a progressive dividend policy along with a long-term dividend cover of over three times earnings on an underlying basis (FY 2022/23: dividend cover of 3.1x). This approach, along with the continued development of the Group, will enable funding of both dividend growth and a higher level of investment in acquisitions from internally generated resources.

 

The interim dividend is payable on 24 January 2024 to shareholders registered on 15 December 2023. Alongside the interim dividend, the Company is starting a Dividend Re-Investment Programme ("DRIP"), details of which are available from the Company's Registrars, Equiniti. The final date for DRIP elections for the interim dividend will be 3 January 2024.

 

 

Sustainability and Social Responsibility

 

The Group creates innovative electronics that help customers produce new technologies for a sustainable world. Our focus on sustainability forms the core of our target markets where, through focused initiatives, we aim to grow our revenues organically ahead of the wider industrial market. These trends are reported in our key strategic indicators as target market sales. Additionally, the Group has reduced focus on market areas that are inconsistent with a long-term sustainability agenda.

 

Our target markets are aligned to the UN Sustainable Development Goals with our target of generating around 85% of new design wins from these markets. We achieved 89% during the Period, while sales from target markets were 76% of Group sales. We also aim to increase the proportion of the Group's operations covered by ISO 14001, the international standard for environmental management to 80% by CY 2025. Please refer to the Group's Impact Report which is available on the Group's website and illustrates how we are helping to meet the global sustainability agenda.

 

The Group was awarded the MSCI ESG "A" Rating in April 2022, which was subsequently upgraded to "AA" rating in July 2023, being in the top 16% of all companies surveyed; the Group is also rated by Morningstar Sustainalytics as one of the Regional (Europe) Top Rated companies in 2023, a recognition given to companies that have achieved the highest scores in ESG risk management.

 

During the Period, a number of initiatives were undertaken to improve our sustainability and diversity including:

 

 

Environmental

 

-     Further progress made on net zero targets including: more solar panel installations under consideration at sites in Sri Lanka, China, India and Mexico; opened the Group's first carbon-neutral facility in Germany in September 2023;

-     Four more sites achieved ISO 14001 Environmental Management Systems accreditation, bringing the total number of sites to 34, or 61% of Group facilities;

-     Energy audit programme continued; on track to meet our CY 2025 target of 80% of Group sites completing energy audits since 2018;

-     Established a new carbon reporting system to help streamline data collection, consolidation and reporting on greenhouse gases, particularly Scope 3 emissions;

-     Continued education and mapping of Scope 3 emissions through Group-wide emission awareness and reporting webinars.

Social

 

-     Two more sites in Europe achieved ISO 45001 Occupational Health & Safety Management Systems accreditation;

-     Initiated a learning & development platform that enables operating businesses to manage people development and skill gaps consistently;

-     Established an industrial placement scheme for engineering undergraduates with the University of Surrey.

Governance

 

-     Enhanced ESG accountability by establishing three-year ESG objectives and KPIs for each operating business;

-     MSCI ESG rating upgraded to AA from A;

-     Launched Business Ethics Policy and Sustainability Policy;

-     Completed Carbon Disclosure Project ("CDP") full disclosure for the first time;

-     Increased transparency by reporting on Sustainable Finance Disclosure Regulation Principal Adverse Impact (PAI) indicators;

-     Preparation for IFRS Sustainability Reporting underway with dedicated resources in place.

 

A Proven Growth Strategy

 

The Group has been built through a focus on organic growth together with operational efficiency, alongside 23 carefully selected and well-integrated acquisitions over the past 12 years to create a focused, growth-oriented, higher margin design and manufacturing business. We have a well-developed approach to acquisitions and capital allocation and see significant scope for further expansion with a strong pipeline of opportunities in development.

 

The Group's strategy comprises four elements:

 

1.         Grow sales well ahead of GDP over the economic cycle by focusing on the structural growth       markets that form our sustainable target markets;

 

2.         Improve operating margins by moving up the value chain into higher margin products;

 

3.         Acquire businesses with attractive growth prospects and strong operating margins;

 

4.         Further internationalise the business by expanding operations in North America and Asia.

 

These elements are underpinned by core objectives of generating strong cash flows from a capital-light business model and delivering long-term sustainable returns while progressing towards net zero carbon emissions and reducing our impact on the environment.

 

 

Focused on UN SDG-Aligned Target Markets

 

Our four target markets of industrial automation & connectivity, medical, renewable energy, and the electrification of transportation accounted for 76% of first half sales. Long-term growth in these target markets is being driven by increasing electronic content and by global megatrends such as the accelerating need for industrial automation and connectivity, an ageing affluent population, renewable sources of energy and the electrification of transport.

 

Our focus on these markets is driving the Group's organic revenue growth well ahead of GDP over the economic cycle, gives resilience in softer market conditions and creates acquisition opportunities.

 

During the Period, target market sales were 1% lower and included a return to growth in renewable energy offset by a slowing due to de-stocking by some specific industrial automation customers. Other target markets remained in growth. Since 2017, sales into the Group's target markets have grown organically by 82% cumulatively, compared with 27% in the other markets. This reflects the sustained compounding organic growth and less cyclical nature of these markets.

 

 

Continued progress on Key Strategic and Performance Indicators

 

Since 2014, the Group's strategic progress and its financial performance have been measured through key strategic indicators ("KSIs") and key performance indicators ("KPIs"). The KSI targets have been raised six times, most recently in June 2023, as the Group has developed into a pure designer and manufacturer of highly engineered components with higher operating margins.

 

For tracking purposes, the KSIs and KPIs in the tables below remain as reported at the time rather than adjusted for disposals. Targets are for the medium-term unless stated, with medium-term defined as being around five years. This year's performance relative to last year is discussed below.

 

 

 

 

 

 

 

 

 

Key Strategic Indicators

		FY14	FY18	FY19	FY20	FY22	FY23	H1 24	Targets
	1. Increase underlying operating margin	3.4%	6.3%	7.0%	8.0%	10.9%	11.5%	12.9%	15%(1)
	2. Build sales beyond Europe(2)	5%	19%	21%	27%	40%	40%	42%	45%
	3. Increase target market sales(2)		62%	66%	68%	76%	77%	76%	85%
	4. Carbon emissions Scope 1 & 2   reduction(3)						35%	c.45%	65%

 

(1)      Also a target for FY2024/25 of 13.5%.

(2)      As a percentage of Group revenue.

(3)      Carbon emissions are measured on a calendar year basis. Target is for absolute carbon emissions reduction by CY 2025 from CY 2021 with net zero by CY 2030. 

 

The Group made further excellent progress with its KSIs during the Period:

 

-   Underlying operating margin was 12.9%, an increase of 1.4ppts on the first half last year (H1 2022/23: 11.5%) and 1.4ppts higher than last year in total (FY 2022/23: 11.5%). The Group benefited in the Period from robust gross margins, operational efficiencies and tight cost control augmented by higher margin acquisitions. The Group remains on track to achieve its targets of 13.5% in FY 2024/25 and 15% in the medium-term. 

 

-     Sales beyond Europe for the Period increased by 2ppts to 42% of Group revenue compared with FY 2022/23, with strong organic sales in the US partly offset by reduced demand in Asia. The target for FY 2024/25 is 45%.

 

-     Target market sales in the Period reduced by 1ppt to 76% of Group revenue compared with FY 2022/23 as a result of lower sales in industrial automation, acquisitions which had lower target market sales at the outset and a recovery in some non-target market areas (aerospace & defence sector, some non-UN SDG aligned industrial markets and distributor re-stocking). Design wins, which are the bedrock of future sales, were up 23% year-on-year with 89% in target markets, ahead of our 85% target. 

 

-     Carbon emissions reduced further during the Period and are now an estimated 45% lower on an absolute basis than in CY 2021, excellent progress towards our reduction targets of 65% by CY 2025 and net zero by 2030.

 

 

Key Performance Indicators

 

	FY14	FY18	FY19	FY20	FY22(1)	FY23	H1 24	Targets
1. Sales growth
CER	17%	11%	14%	8%	27%	15%	4%	Well ahead of GDP
Organic	3%	11%	10%	5%	14%	10%	1%
2. Underlying EPS growth	20%	16%	22%	11%	20%	20%	8%	>10%
3. Dividend growth	10%	6%	6%	6%(2)	6%	6%	6%	Progressive
4. ROCE(3)	15.2%	13.7%	15.4%	16.0%	14.7%	15.9%	15.1%	>15%
5. Operating profit conversion(3)	100%	85%	93%	106%	101%	94%	91%	>85% of underlying operating profit
6. Free cash conversion(3)			94%	104%	102%	95%	85%	>85% of underlying earnings

 

(1)  FY 2021/22 shown as growth over the pre-Covid period FY 2019/20 as this reflects the ongoing growth of the business. FY 2013/14 to FY 2019/20 are for total operations before disposals as reported at the time.

(2)  6% increase in the H1 2019/20 interim dividend; a final dividend was not proposed for FY 2019/20 due to Covid.

(3)  Defined in note 7 of the attached condensed consolidated interim financial statements.

 

 

The Group also made further good progress with its KPIs during the Period, especially given the economic backdrop.

 

-     Organic sales increased by 1% this Period. Growth rates have reduced due to normalising markets, although we retain our focus on achieving 10% organic growth through cycle. Since FY 2017/18, organic sales have grown by 9% per annum on average, illustrating the strong through-cycle organic growth of the business.

 

-     Underlying EPS increased by 8%. Excluding increased finance costs and at CER, underlying operating profit increased by 17%, only 3ppts lower growth than last year during much stronger economic conditions, due to our operational efficiencies with robust gross margins, tight control of operating costs, and contributions from acquisitions.  

 

-     The interim dividend is being increased by 6%, continuing our progressive policy whilst providing for a higher proportion of investment in acquisitions from internally generated resources. This progressive policy has seen a more than doubling of the dividend per share since 2010, whilst dividend cover on an underlying basis increased to 3.1x for the last financial year.

 

-    ROCE for the Period was 15.1% and whilst 0.8ppts lower than last year (FY 2022/23: 15.9%), was in-line with our 15% target and in-line with 12 months ago (H1 2022/23: 15.2%). The reduction follows the acquisitions of Silvertel in August 2023 and 2J in September 2023 which, as with most acquisitions, are initially dilutive to ROCE. Silvertel is expected to be accretive this year and 2J accretive from next financial year.       

 

-    Operating cash flow and free cash flow for the last 12 months were 36% and 26% higher respectively than the comparable 12 month period with operating cash conversion of 91%, ahead of our 85% target and with free cash conversion of 85% being in line with our target. Over the last ten years, both operating cash conversion and free cash conversion have been consistently strong, averaging well over 90%, reflecting tight management of working capital and expenditure through the economic cycle.

 

 

 

Divisional Results

 

The divisional results for the Group for the six months ended 30 September 2023 are set out and reviewed below.

 

	H1 2023/24			H1 2022/23			Reported revenue growth	CER revenue growth	Organic revenue Growth
	Revenue £m	Underlying operating profit(1) £m	Margin	Revenue £m	Underlying operating profit(1) £m	Margin
M&C	134.4	19.9	14.8%	131.5	17.1	13.0%	-2%	2%	2%
S&C	87.6	15.2	17.4%	82.2	13.4	16.3%	5%	7%	1%
Unallocated		(6.5)			(6.0)
Total (CER)	222.0	28.6	12.9%	213.7	24.5	11.5%	1%	4%	1%
Pass-thru cost				2.9	-
FX				6.0	1.1
Total	222.0	28.6	12.9%	222.6	25.6	11.5%	0%

 

(1)   Underlying operating profit excludes acquisition-related costs

(2)   Revenue for H1 2022/23 and the related underlying operating margin restated to include £2.9m of one-off increase in semiconductor costs at nil margin passed through to customers. £5m of similar costs passed through to customers were included in revenue for FY 2022/23.

 

 

Magnetics & Controls Division ("M&C")

 

The M&C division designs, manufactures and supplies highly differentiated magnetic and power components, embedded computing and interface controls, for industrial applications. The division comprises one cluster and six further businesses operating across 17 countries. The large majority of the products are manufactured in-house at one of the division's 21 manufacturing facilities, with its principal sites being in China, India, Mexico, Poland, Sri Lanka, Thailand and the UK. Geographically, 5% of sales by destination are in the UK, 50% in the rest of Europe, 26% in North America and 19% in Asia. Capacity of our facility in Thailand has been expanded and construction of a new larger production facility has continued in Kerala, India. This will supersede our existing plant and become operational in the next financial year.

 

With supply chains back to normal during the Period following constraints last year, the divisional order book normalised as expected with orders reducing by 14% CER to £120.0m (H1 2022/23: £144.8m) for a book-to-bill ratio of 0.89:1 (H1 2022/23: 1.06:1) against strong prior year comparators. The book-to-bill has improved through the Period, from 0.86:1 in the first quarter to 0.93:1 in the second quarter, Sales grew by 2% organically, driven by strong growth in North America of 35% and the Nordics up 12%. Conversely Asia reduced by 24% primarily due to reductions in China, and the rest of Europe reduced by 5%, mainly due to a slow-down in Germany.  

 

Including the impact of translation from a stronger Sterling on average, reported divisional revenue reduced by 2% to £134.4m (H1 2022/23: £136.5m reported and £131.5m at CER). Underlying operating profit of £19.9m was £2.8m (+16%) higher than last year at CER and £1.9m (+11%) higher on a reported basis (H1 2022/23: £18.0m). The underlying operating margin of 14.8% was 1.8ppts higher than last year at CER and 1.6% higher on a reported basis (H1 2022/23: 13.2%), reflecting the positive effect of organic growth robust gross margins and strong operating efficiencies.

 

 

 

Sensing & Connectivity Division ("S&C")

 

The S&C division designs, manufactures and supplies highly differentiated sensing and connectivity components for industrial applications and comprises three clusters and four further businesses operating across nine countries. The majority of the products are manufactured in-house at one of the division's 13 manufacturing facilities, with its principal ones being in Hungary, the Netherlands, Norway, Slovakia, the UK and the US. Geographically, 21% of sales by destination are in the UK by destination, 42% in the rest of Europe, 23% in North America and 14% in Asia. This Period has seen the opening of a new, purpose built, larger facility in Germany.

 

As with the M&C division, supply conditions returned to normal during the Period, with the divisional order book normalising as expected with orders reducing by 19% CER to £73.9m (H1 2022/23: £92.1m) for a book-to-bill ratio of 0.84:1 (H1 2022/23: 1.11:1) against strong prior year comparators. The book-to-bill improved through the Period, from 0.80:1 in the first quarter to 0.89:1 in the second quarter, Sales increased by 1% organically, with 35% organic growth in North America and 9% in the UK, offset by a 6% reduction in the rest of Europe and a 19% reduction in Asia, principally in China.   

 

Combined with a 6% sales increase from acquisitions, overall sales increased by 7% CER. Including the impact of translation from a stronger Sterling on average, reported divisional revenue increased by 5% to £87.6m (H1 2022/23: £83.2m reported and £82.2m at CER).

 

Underlying operating profit of £15.2m was £1.8m (+13%) higher than last year at CER and £1.6m (+12%) higher on a reported basis (H1 2022/23: £13.6m). The underlying operating margin of 17.4% was 1.1ppts higher than last year (H1 2022/23: 16.3%), which, as with the M&C division, reflects the positive effect of sales growth, robust gross margins and strong operating efficiencies.

 

 

Design Wins Driving Future Recurring Revenues

 

Project design wins are a measure of new business creation. By working with customers at an early stage in their project design cycle, opportunities are identified for our products to be specified into their designs, leading to future recurring revenue streams.

 

The Group has a strong bank of design wins built up over many years, creating the basis for the Group's strong organic growth through the cycle. During the Period, new design wins were registered with an estimated lifetime value of £190m, an increase of 23% over last year and with 89% being in our target markets. This large increase in design wins reflects both the expected increase in customer project design activity at this stage in the cycle, catch-up from designs that were paused during last year's supply chain bottlenecks and increased focus and implementation by Group engineers.

 

Additionally, new project design activity remains at a very high level, being broad-based across all target markets along with a smaller proportion in other market areas with similar high quality recurring revenue characteristics such as Space and Aeronautics. The total pipeline of ongoing projects continues to be strong.

 

 

Acquisitions

 

The market is highly fragmented with many opportunities to acquire and consolidate. Currently, from approximately 400 businesses being tracked, the Group's pipeline consists of 250 identified targets of which 45 are in active outreach phase and 15 in live deal negotiation.

 

The businesses we acquire are typically led by entrepreneurs who wish to remain with the business for a period following acquisition. We encourage this as it helps retain a dynamic, decentralised and entrepreneurial culture.

 

We acquire high-quality businesses that are successful with good long-term growth prospects, paying a price that reflects this quality whilst generating good returns for shareholders. We invest in these businesses for growth and operational performance development. According to the circumstances, we add value in some or all of the following areas:

         

Strategy and operations:          

-     Creating a long-term strategy for growth with operational leverage for the business;

-     Grouping businesses into clusters under one operational leadership team;

-     Generating operational efficiencies;

-     Internationalising sales channels;

-     Accelerating organic growth by expanding the customer base, including cross-selling and focusing sales development onto target market areas;

-     Developing the product range.

 

People:

-     Investing in management capability;

-     Enabling peer networking and collaboration;

-     Succession planning and management transition.

 

Sustainability:

-     Implementing energy audits;

-     Creating carbon emission reduction  plans;

-     Achieving ISO standards accreditation;

-     Inclusion in the Group's SBTi net zero carbon emission reduction program;

-     Supporting operating companies with their customers emission reduction plans.

 

Investment:

-     Capital investment in manufacturing and infrastructure;

-     Improving manufacturing and infrastructure efficiency;

-     Internationalising operations;

-     Expansion through further acquisitions;

-     Upgrading systems such as IT.

 

Controls and support:

-     Implementing robust financial controls;

-     Finance and related support, such as treasury, banking, legal, tax and insurance;

-     Risk management and internal audit.

 

The Group has acquired 23 design and manufacturing businesses over the last 12 years, with the Group's continuing revenues increasing to £449m in FY 2022/23 from £10m in FY 2009/10. By taking a long-term approach to create compounding organic growth in acquired and integrated businesses, the Group has generated substantial value organically. Over this period, more than two thirds of the Group's earnings growth has been delivered from the organic growth and integration of these acquisitions with the balance being from immediate deal accretion. During this Period, the Group completed two high margin acquisitions:

 

i)          Silvertel, a UK-based designer and manufacturer of differentiated, high performance Power-over-Ethernet ("PoE") modules and complementary products for global industrial electronic connectivity markets, which sells into more than 70 countries. Silvertel was acquired for an initial cash consideration of £21.4m on a debt free, cash free basis, together with an earn-out of up to £23m payable subject to Silvertel's performance over the next four years.

 

ii)          2J Antennas Group ("2J"), a Slovakian-based designer and manufacturer of high performance antennas for industrial electronic connectivity applications for a cash consideration of ?50.8m (£43.6m) on a debt free, cash free basis. 2J, which has subsidiaries in the US and UK and sells into more than 50 countries, will form a new technology cluster with the Group's existing antenna business, Antenova, creating a leading platform in the growing, high performance, industrial wireless connectivity market.

 

The Group's operating model is well established and has facilitated the smooth integration of acquired businesses. Through a combination of investment in efficiency and leveraging of the broader Group's commercial infrastructure, the businesses acquired since 2011 and owned for at least two years delivered a return on investment ("EBIT ROI") of 19.2% this Period, well above our target of 15%.

Group Financial Results

 

Revenue and Orders

 

Group sales of £222.0m were 1% higher organically than last year (H1 2022/23: £219.7m) and with acquisitions (CDT and Magnasphere acquired last year, together with Silvertel and 2J this Period) adding 3% to revenue, Group sales increased by 4% at CER. Revenue for H1 2022/23 has been restated to include £2.9m of one-off increase in semiconductor costs at nil margin passed through to customers, which reduced reported sales growth by 1%. A stronger Sterling on average during the Period, particularly compared with Nordic currencies and the US Dollar, reduced sales by 3% on translation resulting in reported sales being at the same level as last year. 

 

Revenue (£m)	H1 2023/24	H1 2022/23	%
Organic sales	216.7	213.7	+1%
Acquisitions	5.3
Sales at CER	222.0	213.7	+4%
Nil margin pass thru costs		2.9
FX translation		6.0
Reported sales	222.0	222.6	0%

 

As mentioned above, the Group order book continued to normalise during the first half as supply chains returned to normal, ending the Period at £203m (c.5 months of sales) compared with £257m last year (c.7 months of sales) at the height of supply constraints.

 

Orders for the Period were £193.9m, 16% lower at CER than last year (H1 2022/23: £236.9m). The extent of normalisation reduced across the Period with a book to bill ratio of 0.84:1 in the first quarter improving to 0.91:1 in the second quarter for a first half ratio of 0.87:1 with orders in the second quarter increased by 2% sequentially.

 

 

Group Operating Profit and Margin

 

Group underlying operating profit for the Period was £28.6m, a 12% increase on last year (H1 2022/23: £25.6m), and 17% higher at CER, delivering an underlying operating margin of 12.9%, 1.4ppts higher than last year (H1 2022/23: 11.5%) and 1.4ppts higher at CER. We remain well on track to reach our targets of 13.5% in FY 2024/25 and 15% in the medium term.

 

Group reported operating profit for the Period (including acquisition-related costs discussed below) was £19.5m, 15% higher than last year (H1 2022/23: £16.9m). 

 

£m	H1 2023/24			H1 2022/23
	Operating profit	Finance Cost	Profit before tax	Operating profit	Finance cost	Profit before tax
Underlying	28.6	(3.5)	25.1	25.6	(2.1)	23.5
Underlying adjustments
Acquisition expenses	(1.4)	-	(1.4)	(0.9)	-	(0.9)
Amortisation of acquired intangibles	(7.7)	-	(7.7)	(7.8)	-	(7.8)
Reported	19.5	(3.5)	16.0	16.9	(2.1)	14.8

 

 

 

Underlying operating profit growth has been achieved through a combination of strong operating efficiencies and acquisitions as shown below:

 

£m	Underlying Operating Profit
H1 2022/23	25.6
Gross profit on organic sales growth	1.2
Organic gross margin	4.4
Organic investment in opex	(2.3)
Organic profit growth - operations	3.3
Head Office investment	(0.5)
Profit from acquired companies	1.3
Foreign exchange impact	(1.1)
H1 2023/24	28.6

 

Over three quarters (£3.3m) of the incremental profits in the Period were generated from organic operating performance driven by robust gross margins with operational efficiencies and tight management of operating costs amidst a high inflation environment. The remaining incremental profits were delivered by the three acquisitions made in the last 12 months (namely Magnasphere, Silvertel and 2J) partly offset by increased investment at Head Office, mainly into enlarging our M&A team. 

 

Sterling has been stronger this Period versus 12 months ago, compared with the US dollar (-3%) and Nordic currencies (-9%), partly offset by further weakness compared to the Euro (+2%). This gave rise to a reduction in underlying operating profits on translation of £1.1m for the Period.

 

 

Underlying Adjustments

 

Underlying adjustments for the Period comprise acquisition expenses of £1.4m (H1 2022/23: £0.9m), and the amortisation of acquired intangibles of £7.7m (H1 2022/23: £7.8m).

 

Acquisition expenses of £1.4m are the costs associated with the acquisitions during the Period of Silvertel in August 2023 and 2J in September 2023 together with movements in accrued contingent consideration cost relating to the acquisitions of Limitor, Phoenix and CPI. While the amortisation charge for the Period is broadly in line with last year, the acquisitions of Silvertel and 2J will increase the expected charge for the full year to approximately £17m.

 

Financing Costs

 

Net finance costs for the Period were £3.5m (H1 2022/23: £2.1m) and include a £0.3m charge for leased assets under IFRS 16 (H1 2022/23: £0.4m) and £0.4m charge for amortised upfront facility costs (H1 2022/23: £0.4m). Finance costs related to our banking facilities were £2.8m (H1 2022/23: £1.3m) and have more than doubled following the rise in interest rates across the Period for Sterling, US Dollars and Euros, the Group's principal borrowing currencies. From September 2022 to September 2023, the Sterling base rate increased from 2.25% to 5.25%, the US Dollar Federal rate from 3.25% to 5.5% and the ECB lending rate from 1.25% to 4.5%. Together with the debt funded acquisitions of Silvertel and 2J towards the end of the Period, net finance costs for the current year are expected to be approximately £9m at current interest rates, annualising to approximately £11m next year. Looking forward, a 1ppt increase/reduction in interest rates would increase/reduce finance costs by approximately £1.1m.    

 

 

 

Underlying Tax Rate

 

The underlying effective tax rate ("ETR") in the first half was 25%, lower than last year's rate (H1 2022/23: 26%) and broadly in line with last year's rate for the full year (FY 2022/23: 25.3%).

 

The overall ETR was 28% (H1 2022/23: 28%). This was higher than the underlying ETR due to there being no tax relief on acquisition expenses (within underlying adjustments above).

 

£m	H1 2023/24		H1 2022/23
	PBT	ETR	PBT	ETR
Group underlying	25.1	25%	23.5	26%
Acquisition expenses	(1.4)	0%	(0.9)	0%
Amortisation of acquired intangibles	(7.7)	23%	(7.8)	24%
Total reported	16.0	28%	14.8	28%

 

 

Profit Before Tax and EPS

 

Underlying profit before tax for the Period of £25.1m was £1.6m higher (+7%) than last year (H1 2022/23: £23.5m), with underlying EPS for the Period increasing by 8% to 19.2p (H1 2022/23: 17.8p).

 

£m	H1 2023/24		H1 2022/23
	PBT	EPS	PBT	EPS
Underlying	25.1	19.2p	23.5	17.8p
Underlying adjustments
Acquisition expenses	(1.4)		(0.9)
Amortisation of acquired intangibles	(7.7)		(7.8)
Reported	16.0	11.7p	14.8	10.9p

 

 

After the underlying adjustments above, reported profit before tax for continuing operations was £16.0m, an increase of £1.2m (+8%) compared with last year (H1 2022/23: £14.8m) while reported fully diluted earnings per share was 11.7p, 7% higher than last year (H1 2022/23: 10.9p).

 

 

Working Capital and Asset Returns Ratios

 

Working capital at 30 September 2023 was £89.3m, equivalent to 18.8% of first half annualised sales at CER with an additional £8.2m of working capital from acquisitions during the last 12 months offset by £2.8m from foreign exchange translation. This is 2.3ppt higher than last year when working capital was £74.7m or 16.5% of first half annualised sales. Inventory levels have been normalising, remaining slightly elevated due to continuing supply chain buffers and are expected to further reduce in the second half.

 

Working capital KPIs have remained robust during the Period with debtor days of 49 (in line with last year), creditor days of 74 (4 days lower than last year) and stock turns of 2.8 (0.2 turn lower than last year).  

 

ROCE for the Period of 15.1% was ahead of our 15% target and broadly in line with 12 months ago (H1 2022/23: 15.2%). Return on Tangible Capital Employed (ROTCE) for the Period, which excludes intangible and non-operational assets, was 42.5% an increase of 0.5ppts from last year (H1 2022/23: 42.0%) and illustrates the strong returns generated by the Group's operational assets.   

 

 

 

Cash Flow

 

Net debt at 30 September 2023, excluding leases, was £111.3m, compared with £42.7m at 31 March 2023 and £45.2m at 30 September 2022, with the increase in the Period of £68.6m mainly related to the acquisitions of Silvertel on 30 August 2023 and 2J on 12 September 2023.

 

£m	H1 2023/24	H1 2022/23		Last 12 Months
Opening net debt	(42.7)	(30.2)		(45.2)
Free cash flow (see table below)	8.1	10.6		30.5
Acquisitions	(67.5)	(13.2)		(84.9)
Equity issuance (net of taxes)	(0.2)	(0.6)		(0.2)
Dividends	(7.6)	(7.1)		(11.0)
Foreign exchange impact	(1.4)	(4.7)		(0.5)
Net debt at 30 Sept	(111.3)	(45.2)		(111.3)

 

 

Acquisition costs of £67.5m in the Period comprised £21.4m for the acquisition of Silvertel, £43.6m for the acquisition of 2J (both on a debt free, cash free basis) and £2.5m of associated expenses.

 

Last year's final dividend of £7.6m, which was paid in July 2023, was an increase of 6% over the prior year. 

 

The cash impact from FX translation was relatively low in the Period, compared to last year which saw Sterling significantly weaken in particular compared to the US Dollar. The Group's policy is to hold net debt in currencies aligned to the currency of its cash flows in order to protect the gearing of the Group. 

 

£m	H1 2023/24	H1 2022/23		Last 12 Months
Underlying Profit before tax	25.1	23.5		47.9
Net finance costs	3.5	2.1		6.9
Non-cash items	7.5	6.9		15.2
Underlying EBITDA	36.1	32.5		70.0
IFRS 16 - lease payments	(3.1)	(2.8)		(6.1)
EBITDA (pre IFRS 16)	33.0	29.7		63.9
Changes in working capital	(12.3)	(10.3)		(8.4)
Capital expenditure	(2.7)	(2.6)		(5.7)
Operating cash flow	18.0	16.8		49.8
Finance costs	(3.7)	(2.0)		(6.7)
Taxation	(5.2)	(3.2)		(11.0)
Legacy pension	(1.0)	(1.0)		(1.6)
Free cash flow	8.1	10.6		30.5

 

 

Underlying EBITDA (pre IFRS 16 lease payments) of £33.0m was 11% higher than last year (H1 2022/23: £29.7m) reflecting operating efficiency combined with contributions from the three acquisitions made since the first half of last year.

 

During the Period, the Group invested £12.3m in working capital, an increase of £2.0m on last year; as with the second half last year, this should reduce as supply chain conditions continue to normalise. With working capital released during the second half last year of £3.9m, a net £8.4m was invested in working capital over the last 12 months. 

 

Capital expenditure of £2.7m was invested during the Period, similar to last year (H1 2022/23: £2.6m) including various new production line extensions, ERP upgrades and ESG initiatives. Capital expenditure levels are expected to increase in the second half to around £8m for the full year as we continue to invest in additional capacity and roll out our ESG initiatives. 

£18.0m of operating cash was generated in the first half up 7% on last year (H1 2022/23: £16.8m). Together with £31.8m generated in the second half of last year, a total of £49.8m of operating cash was generated over the last 12 months representing 91% of underlying operating profit, ahead of our 85% target. This was 36% higher than the comparable 12 month period (12 months ended 30 Sep 2022: £36.6m). Over the last 10 years, the Group has consistently achieved high levels of operating cash conversion, averaging well in excess of 90%. 

 

Finance cash costs of £3.7m were £1.7m higher than last year following interest rate rises throughout the Period, while corporate income tax payments of £5.2m were £2.0m ahead of last year reflecting higher profitability this Period and loss utilisation last year. A further £8m of tax payments is expected during the second half.

 

Free cash flow (being cash flow before dividends, acquisitions and equity fund raises) of £8.1m was generated in the first half, £2.5m lower than last year (H1 2022/23: £10.6m) due to the higher finance and tax costs. Together with £22.4m generated in the second half last year, a total of £30.5m of free cash flow was generated over the last 12 months being a free cash conversion of 85% of underlying earnings, in line with our target. Free cash flow was 26% higher than the comparable 12 month period (12 months ended 30 Sep 2022: £24.3m).

 

 

Banking Facilities

 

The Group has a £240m syndicated banking facility which extends to June 2027. In addition, the Group has an £80m accordion facility which it can use to extend the total facility up to £320m. The syndicated facility is available both for acquisitions and for working capital purposes, and comprises seven lending banks.

 

With net debt at 30 September 2023 of £111.3m, the Group's gearing ratio at the end of the Period (being net debt divided by underlying EBITDA as annualised for acquisitions) was 1.6x compared with a target gearing range of between 1.5x and 2.0x.

 

Balance Sheet

Net assets of £305.8m at 30 September 2023 were £2.2m higher than at the end of the last financial year (31 March 2023: £303.6m). The increase primarily relates to the net profit after tax for the Period of £11.5m partially offset by last year's final dividend of £7.6m paid during this Period. The movement in net assets is summarised below:

 

£m	H1 202/24
Net assets at 31 March 2023	303.6
Net profit after tax	11.5
Dividend paid	(7.6)
Currency net assets - translation impact	(1.6)
Loss on defined benefit scheme	(0.9)
Share based payments (inc tax)	0.8
Net assets at 30 September 2023	305.8

 

 

Defined Benefit Pension Scheme

 

The Group's IAS 19 pension asset, associated with its legacy defined benefit pension scheme, decreased over the Period by £1.6m from £2.3m at 31 March 2023, to £0.7m at 30 September 2023 (30 September 2022: £4.3m). The key driver was the reduction in the value of fund assets partly offset by increases in corporate bond yields used for discounting purposes.

 

 

 

Risks and Uncertainties

 

The principal risks faced by the Group are set out on pages 87 to 96 of the Group's Annual Report for year ended 31 March 2023, a copy of which is available on the Group's website: www.discoverieplc.com. These risks comprise: the economic environment, particularly linked to the geopolitical issues arising from the ongoing Ukraine conflict; inflationary headwinds and rising interest rates; the performance of acquired companies; climate-related risks; loss of major customers or suppliers; technological changes; major business disruption; cyber security; loss of key personnel; inventory obsolescence; product liability; liquidity and debt covenants; exposure to adverse foreign currency movements; and non-compliance with legal and regulatory requirements.

 

During the Period, the Board has continued to review the Group's existing and emerging risks and the mitigating actions and processes in place. Following this review, the Board believes there has been no material change to the relative importance or quantum of the Group's principal risks for the remaining six months of the current financial year.

 

The risk assessment and review are an ongoing process, and the Board will continue to monitor risks and the mitigating actions in place. The Group's risk management processes cover identification, impact assessment, likely occurrence and mitigation actions where practicable. Some level of risk, however, will always be present. The Group is well positioned to manage such risks and uncertainties, if they arise, given its strong balance sheet, committed banking facility of £240m and the adaptability we have as an organisation.

 

Summary and Outlook

discoverIE performed well in the first half. Our operational focus and sustained high sales levels, which follows two years each with 20+% CER growth, delivered significant efficiencies with underlying operating profit increasing by 17% at constant exchange rates. We are making excellent progress towards our margin targets with a 1.4ppts increase in underlying operating margin, reflecting the leverage in our technology clusters, that is enabling efficiencies and creating value from acquisitions.

 

As expected, the order book ended the Period at c.5 months of sales, almost back to historic norms and the book-to-bill ratio is improving indicating that the supply chain inventory correction is largely complete. Since the period end orders have continued to strengthen being ahead of sales and growing organically over last year.

 

The returns generated from our acquisitions increasingly exceed over time our cost of capital and demonstrate the value creation of long-term compounding organic growth with integration efficiencies. Over two-thirds of the Group's operating profit growth over the last 12 years was generated from the organic growth of our businesses since their acquisition and integration. We are well positioned to continue this proven approach and remain a consolidator in a fragmented market for customised industrial electronics.

 

Additionally, our capital light model is highly cash generative; over the last 12 months, operating cash flow increased by 36% to £50m, a 91% conversion rate supporting further self-funding of acquisitions.

 

We are focused on generating organic growth in sustainable markets, enhanced by earnings accretive acquisitions, and to this end our design wins and our acquisition pipeline are stronger than ever.

 

The Group is well positioned to continue making good progress and remains on track to deliver full year underlying earnings in line with the Board's expectations.

 

 

 

Nick Jefferies                                                               Simon Gibbins

Group Chief Executive                                                 Group Finance Director

 

5 December 2023