7 JUNE 2023

 

discoverIE Group plc

 

Preliminary results for the year ended 31 March 2023

 

Strong growth in sales & earnings; medium-term operating margin

target raised to 15%   

 

discoverIE Group plc (LSE: DSCV, "discoverIE" or the "Group"), a leading international designer and manufacturer of customised electronics to industry, today announces its results for the year ended 31 March 2023 ("FY 2022/23" or the "year").

 

	FY 2022/23	FY 2021/22	Growth %	CER(2) growth %
Revenue	£448.9m	£379.2m	+18%	+15%
Underlying operating profit(1)	£51.8m	£41.4m	+25%	+20%
Underlying operating margin(1)	11.5%	10.9%	+0.6ppts	+0.5ppts
Underlying profit before tax(1)	£46.3m	£37.6m	+23%
Underlying EPS(1)	35.2p	29.4p	+20%
Reported profit before tax	£29.1m	£17.1m	+70%
Reported fully diluted EPS (continuing business)	21.7p	10.1p	+115%
Full year dividend per share	11.45p	10.80p	+6%

 

Highlights

 

·      Strong financial performance driven by sales growth with operating efficiencies

o  Group sales up 18%, with organic⁽³⁾ sales up 10%, (divisional growth M&C: +11%; S&C: +8%)

o  Organic gross margins robust despite inflation headwinds

o  Underlying operating profit increased by 25%

o  Underlying EPS increased by 20%

 

·      Further progress made towards key targets

o  Underlying operating margin increased by 0.6ppts to 11.5%.

o  Sales into UN SDG-aligned target markets⁽⁴⁾ increased by 1ppt to 77%

o  ROCE⁽⁵⁾ increased by 1.2ppts to 15.9%

o  Free cash flow⁽⁶⁾ up 51% to £33.0m with a conversion of 95% of underlying earnings

 

·      Operating margin target raised to 15% over the medium term

o  Remaining on track to reach 13.5% by FY25

 

·      Two earnings-accretive acquisitions completed for £23m

o  Magnasphere and CDT; integrations underway and progressing as planned

 

·      Excellent progress on ESG initiatives

o  Absolute carbon emissions reduced by 35% since CY 2021 (v new 65% target by CY 2025)⁽⁷⁾

o  SBTi aligned net zero carbon emissions commitment by 2030⁽⁸⁾ announced in Nov 22

                               

·      Group well positioned for further growth   

o  Strong order book of £223m and design wins up 11% to £273m

o  Strong pipeline of acquisition opportunities in development

o  Year-end gearing⁽⁹⁾ of 0.7x, significant funding headroom available

 

Nick Jefferies, Group Chief Executive, commented:

 

"The Group has made further good progress towards our medium-term goals, with excellent sales growth and significant operational efficiencies resulting in 20% growth in underlying earnings per share.

 

We continue to focus on generating organic growth in high momentum, sustainable markets, enhanced by earnings-accretive acquisitions whilst reducing our carbon footprint. Our carbon emissions have reduced by 35% in absolute terms since CY 2021 and in November 2022 we announced our target to reach net zero by 2030.

 

The new financial year has started well with continued organic sales growth over last year. The order book remains at a higher than expected level, in line with last year, providing good visibility of demand. As previously guided, the order book has been normalising from the record level in September 2022 and, as expected, this trend is continuing in the new financial year as global supply chain lead times return to normal.

 

discoverIE is well positioned in a changing world. Our products are designed-in and essential in customers' applications whilst amounting to only a small proportion of their overall spend, providing us with revenue visibility and stable margins. Additionally, our broad international footprint enables us to respond quickly to regional production movements.

 

The discoverIE business model has proven to be very resilient through difficult market conditions. With a strong pipeline of acquisition opportunities and a robust balance sheet, the Group is well positioned to make further good progress."

 

 

Analyst and investor presentation:

A results briefing for analysts and investors will be held today at 9.30am (BST) 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.

 

A webcast for US based analyst investors will be hosted at 3.30pm BST; for dial-in details, please contact  nicola.smith@peelhunt.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)   'Underlying operating profit', 'Underlying operating margin", 'Underlying EBITDA', 'Underlying profit before tax', 'Underlying EPS', 'Underlying operating cash flow' and 'Free cash flow' 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 £15.8m and acquisition & disposal expenses of £1.4m) totalling £17.2m. Equivalent underlying adjustments within the FY 2021/22 underlying results totalled £20.5m. For further information, see note 5 of the attached consolidated financial statements.

 

(2)   Growth rates at constant exchange rates ("CER"). For the year ended 31 March 2023, the average sterling rate of exchange weakened 2% against the Euro and 12% against the US Dollar compared with the average rates for last year, whilst strengthening 2% on average against the three Nordic currencies.

 

(3)   Organic growth for the Group compared with last year is calculated at constant exchange rates ("CER") and is shown excluding the first 12 months of acquisitions post completion (CPI in May 2021, Antenova in August 2021, Beacon in September 2021, CDT in June 2022 and Magnasphere in January 2023).

 

(4)   Target markets are renewable energy, medical, transportation, and industrial & connectivity.

                 

(5)   ROCE is defined as underlying operating profit from continuing operations 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).

 

(6)   Free cash flow is cash flow before dividends, acquisitions and equity fund-raising.          

 

(7)   Original target was to reduce scope 1 & 2 carbon emissions intensity in CY 2019 by 50% on a like-for-like basis by CY 2025. Achieved target three years early. New target introduced this year for an absolute carbon emissions reduction of 65% by CY 2025 since CY 2021. 

 

(8)   Net zero carbon emissions by 2030 defined as Net Zero Scope 1 & 2 emissions as defined by SBTi along with a commitment to achieve Net Zero Scope 3 emissions by 2040.

 

(9)   Gearing ratio is defined as net debt divided by underlying EBITDA (including lease payments; annualised for acquisitions).

 

(10) Unless stated, growth rates refer to the comparable period last year.

 

(11) 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 "A" rating by MSCI and is Regional (Europe) Top Rated by Sustainalytics. 

 

The Group employs c.4,700 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 and Operational Review

 

A year of further strong progress

 

The Group designs and manufactures niche, customised, innovative electronics. We have made considerable progress this year towards our medium-term goals of becoming a higher operating margin group, supplying UN SDG-aligned target markets internationally, and generating consistently strong cash flow. Our low gearing leaves good headroom for further earnings-accretive acquisitions and to take advantage of new opportunities as they arise.  

 

The Group delivered organic sales growth of 10%, underlying operating profit growth of 25% and underlying EPS growth of 20%. This continued the Group's good progress of previous years that has seen compound annualised growth ("CAGR") since FY 2017/18 of 10% in organic sales, 32% in underlying operating profit and 25% in underlying EPS.

 

Group sales increased by 18% overall in the year, driven by organic growth of 12% in our target markets (which now account for 77% of Group sales). Organic sales growth in the year was widespread across businesses and countries, with the UK increasing by 11%, Germany by 23%, the Nordic region by 12%, other European countries by 11% and the US by 20%. Following several years of strong growth, China reduced by 11% with Asia reducing by 6% overall. Expansion of production capacity commenced during the year in India, Germany and the UK, all of which are expected to be operational in FY 2023/24. Production in California and Arizona is in the process of being transferred to Mexico.

 

The underlying operating margin of 11.5% increased by 0.6ppts year-on-year and we are on track to achieving 13.5% by FY 2024/25. discoverIE has further demonstrated the strength of its business over the last three years, through what have been volatile and at times extremely challenging market conditions, with the decentralised model operating effectively at a local level, whilst benefiting commercially from the shared capability of divisional clusters and the wider Group. Reflecting the scope of the opportunity and our continued ambition to build a higher quality business, we are raising our underlying operating margin target to 15% over a period of around five years.

 

The Group continues to manage supply chain and inflationary headwinds effectively with gross margins in the year being robust and slightly ahead of last year on an organic basis.

 

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 32 manufacturing sites and operations around the world, able to support a diverse base of international and global customers and respond quickly to production requirements and movements.

 

-     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 a broad customer base (the Group's largest customer is c.5% of Group sales), the Group has grown strongly and consistently over the last decade whilst proving resilient through downturns, most recently experienced with the pandemic. We expect this to continue to be the case in a changing world.

A Strong Financial Performance

 

Group sales for the year increased by 18% to £448.9m (+15% CER), with underlying operating profit, which excludes acquisition costs, increasing by 25% to £51.8m (+20% CER). Underlying profit before tax increased by 23% to £46.3m, with underlying earnings per share for the year increasing by 20% to 35.2p (FY 2021/22: 29.4p).

 

After underlying adjustments for acquisition costs, profit before tax for the year on a reported basis increased by 70% to £29.1m (FY 2021/22: £17.1m) with fully diluted earnings per share increasing by 115% to 21.7p (FY 2021/22: 10.1p).

 

Strong free cash flow of £33.0m, up 51% on last year, represented 95% of underlying earnings and ahead of the Group's 85% target despite strong organic sales growth requiring investment in working capital. Net debt at 31 March 2023 was £42.7m (31 March 2022: £30.2m) with a gearing ratio of 0.7x, well below our target range of 1.5x to 2.0x, and leaves considerable headroom for further earnings-accretive acquisitions.

 

 

Increased Dividend

 

The Board is recommending a 6% (0.45 pence) increase in the final dividend per share to 7.9 pence per share, giving a full year dividend per share of 11.45 pence, and representing an underlying earnings cover of 3.1 times (FY 2021/22: 2.7 times).

 

The Board aims to maintain a progressive dividend policy along with a long-term dividend cover of over three times on an underlying basis. With continued growth of the Group, this is expected to enable funding of both sustainable dividend growth and a higher level of investment in acquisitions from internally generated resources.

 

The final dividend is payable on 1 August 2023 to shareholders registered on 23 June 2023.

 

 

Board of Directors

 

Bruce Thompson became Chair of the Group on 1 November 2022, with Malcolm Diamond retiring from the Board. We extend our sincere thanks to Malcolm for his guidance and support in leading the Group into the FTSE250 index and wish him a very happy retirement. 

 

Bruce has been a Non-Executive Director of the Group since February 2018, and the Group's Senior Independent Director since March 2019. Tracey Graham, a member of the Board since November 2015 and Chair of the Remuneration Committee, succeeds Bruce as Senior Independent Director from the same date.

 

Celia Baxter has been appointed as a Non-Executive Director with effect from 1 June 2023. Celia has many years of executive and board experience in listed companies including 13 years as Group HR Director at Bunzl plc giving her a good understanding of decentralised, acquisitive, international industrial businesses. Currently Celia is Non-Executive Director and Chair of the Remuneration Committee at DS Smith plc and Dowlais plc, following 10 years in that position at Senior plc. We are delighted to welcome Celia to the Board.

 

 

 

Continued Progress with Sustainability and Social Responsibility

 

The Group provides innovative electronics that help customers create new technologies for a sustainable world. Applications which use our products help to, for example, produce clean power, reduce power consumption and increase efficiency, such as wind turbines for renewable energy, control units for rail systems and wireless and fibre optic communications. This focus on sustainability forms the core of our target markets which are aligned with the UN Sustainable Development Goals and where, through focused initiatives, we aim to grow our revenues organically. These trends are reported in our key strategic indicators as target market sales. Additionally, the Group has reduced its focus on markets that are inconsistent with a long-term sustainability agenda.

 

77% of Group sales this year were from our target markets and we expect this share to continue to increase, subject to the impact of new acquisitions. We also aim to increase the proportion of the Group's operations covered by ISO 14001, the international standard for environmental management, from 61% in CY 2021 to 80% by CY 2025. The Group's Impact Report, which is available on the Group's website, illustrates how we are helping to meet the global sustainability agenda.

 

Following the award of MSCI ESG "A" Rating in April 2022, the Group has been 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 year a number of initiatives were undertaken to further improve our sustainability, social responsibility and diversity including:

 

i) Environmental

 

-     Announced an SBTi aligned plan to achieve net zero for Scope 1 & 2 carbon emissions by 2030 and for Scope 3 by 2040;

 

-     Further adoption of zero emissions electricity sources resulted in carbon emissions reducing on a like-for-like intensity basis by 66% since CY 2019 and on an absolute basis by 35% since CY 2021;

 

-     Accelerated Sri Lanka solar panel installation project, with the remaining phases now complete and fully operational, reducing Scope 1 & 2 Group emissions by 15%;

 

-     Completed installation of solar panels at the manufacturing facility in Thailand and the systems are now fully operational;

 

-     The number of sites that completed an energy audit increased from 53% to 63%;

 

-     The percentage of electric vehicles in the Company fleet increased from 26% to 33%;

 

-     Two more sites completed ISO 14001 certification with more than half of the Group's sites now ISO 14001 certified.

 

ii) Social

 

-     Six more sites achieved ISO 45001 certification, including the Group's two largest sites by headcount, meaning that 48% of Group workforce now works in operations with ISO 45001 certification;

 

-     Health & safety representatives increased by 79% to 229, giving a representative to employee ratio of 1:21 vs target of 1:50;

 

-     Completed 16,250 hours of health & safety training (CY 2021: 5,500);

 

-     The percentage of Group revenue covered by ISO 9001 increased from 87% to 92%;

 

-     Provided assistance and cost of living support to employees at our Sri Lanka site during the political crisis;

iii) Governance

-     Established Sustainability Committee of the Board, effective 1 April 2022;

 

-     Introduced ESG related objectives and targets into bonus schemes for executive management and operating businesses;

 

-     Updated the Board Diversity Policy in June 2022 and issued a Sustainability Policy in May 2023;

 

-     Adopted a new Sustainability Policy setting out the Group's sustainability commitments;

 

-     Completed a detailed scenario analysis, and quantified the potential financial impact, of climate change as required by TCFD reporting;

 

-     Disclosed environmental data through Carbon Disclosure Project for the first time, improving data transparency and benchmarking progress against global standards.

 

 

A Proven Growth Strategy

 

The Group designs and manufactures niche and customised electronic components, operating internationally and focusing on structurally growing markets that are driven by increasing electronic content and where there is an essential need for our products. With our target markets and global customer base, the business is expanding internationally (40% of Group sales now being beyond Europe) as we build a geographically diverse electronics group.

 

The Group has been built through a focus on organic growth together with operational efficiency, alongside 21 carefully selected and 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 number 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 renewable energy, medical, electrification of transportation, and industrial automation & connectivity account for 77% of Group sales. These markets are expected to drive the Group's organic revenue growth well ahead of GDP over the economic cycle and create acquisition opportunities. These markets deliver above average revenue growth and resilience: over the last six years, target market sales for the Group grew organically by 12% CAGR whilst non-target markets grew by 5% CAGR; target markets were more resilient during FY 2020/21 (the Covid year) declining by only 3% compared with a 9% decline in non-target markets.   

 

Growth in our target markets is being driven by increasing electronic content and by global mega trends such as the accelerating need for renewable sources of energy, an ageing affluent population, vehicle electrification and industrial automation, artificial intelligence and connectivity.

 

By focusing on four target growth markets and having a low customer concentration, the Group has consistently delivered above market growth despite occasional slower periods in certain sectors, such as recently lower demand in wind energy markets.

 

During this year, target market sales grew organically by 12%, comprising slower renewable energy demand (-6%) against strong prior year demand, being offset by growth of 15% in the other target markets. Non-target markets, which accounted for 23% of Group revenues, grew by only 3% organically.

 

 

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 five times, most recently in November 2021 as the Group has developed into a pure designer and manufacturer of highly engineered components with higher operating margins. Together with additional earnings and margin enhancing acquisitions, we expect to make further progress towards achieving our 13.5% margin target and remain on track to achieve this by FY25. Additionally, we are announcing a new, increased medium term underlying operating margin target of 15%, where medium term is defined as around five years.

 

For tracking purposes, the KSIs and KPIs in the tables below remain as reported at the time rather than adjusted for disposals. This year's growth relative to last year is discussed below.

 

 

Key Strategic Indicators

		FY14	FY18	FY19	FY20	FY22(1)	FY23	Target
	1. Increase underlying operating margin	3.4%	6.3%	7.0%	8.0%	10.9%	11.5%	15%
	2. Build sales beyond Europe(2)	5%	19%	21%	27%	40%	40%	45%
	3. Increase target market sales(2)		62%	66%	68%	76%	77%	85%
	4.1 Carbon emissions reduction (like-for-like)(3)				6%	33%	66%	50%
	4.2 Carbon emissions reduction (absolute)						35%	65%

 

(1)   FY 2021/22 shown as performance over the pre-Covid year FY 2019/20 as this reflects the actual ongoing development of the business.

(2)      As a percentage of Group revenue.

(3)      Original target for CY 2025 was a like-for-like reduction of 50% since CY 2019. This target has now been upgraded to an absolute carbon emissions reduction of 65% by CY 2025 from CY 2021.  

 

The Group made further significant progress with its KSIs during the year:

 

-   Underlying operating margin was 11.5% (H1: 11.5%, H2: 11.6%), an increase of 0.6ppts on last year (FY 2021/22: 10.9%) The Group benefited from strong organic sales growth during the year with operating leverage through efficiency gains and robust gross margins, and remains on track to achieve 13.5% in FY 2024/25. This target has now been raised to 15% in the medium term.   

 

-     Sales beyond Europe for the year remained at 40% of Group revenue with strong organic growth in the US of 20% being offset by a 6% organic reduction in Asian demand. This is expected to increase next year, reflecting a full year's results of US-based Magnasphere (acquired in January 2023).

 

-     Target market sales for the year increased by 1ppt to 77% of Group revenue (FY 2021/22: 76%). The target is 85%, which includes the effect of incoming acquisitions which tend to have a lower proportion at the outset.

 

-     In November 2022, we upgraded our carbon emissions target for CY 2025 from a reduction of 50% compared with a base in CY 2019 (on a like-for-like intensity basis) to an absolute reduction of 65% from a base in CY 2021. This is on the path to achieving net zero by CY 2030 for Scope 1 & 2 (SBTi aligned) and by CY 2040 for Scope 3. For CY 2022, carbon emissions had reduced by 35% on an absolute basis since 2021, and by 66% on a like-for-like intensity basis since CY 2019.      

 

Key Performance Indicators

 

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

 

(1)  FY 2021/22 shown as growth over the pre-Covid year FY 2019/20 as this reflects the actual 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 5 of the attached summary financial statements.

 

The Group also made further significant progress towards its KPIs during the year.

 

-     Organic sales increased by 10% this year of which approximately 5% was related to volume and mix effects, 4% to price and 1% to a one-off increase in semiconductor pass-through costs. Since FY 2017/18, organic sales have grown by c.10% per annum on average, illustrating the strong through-cycle organic growth of the business.

 

-     Underlying EPS increased by 20% from 29.4p last year to 35.2p this year and by 25% CAGR since FY2017/18, excluding the Covid year.  

 

-     The proposed final 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 year.

 

-    ROCE for the year was 15.9%, 1.2ppts higher than last year (FY 2021/22: 14.7%). The increase follows strong growth in profitability during the year and the delivery of operational efficiencies.    

 

-    Underlying operating cash flow for the year increased by 47% to £48.6m with operating profit conversion into cash of 94% and free cash conversion of 95%, both ahead of our 85% targets despite strong organic sales growth. Over the last ten years, both Underlying Operating cash conversion and free cash conversion have been consistently well over 90% reflecting the tight management of working capital and expenditure through the economic cycle.

 

Divisional Results

The divisional results for the Group for the year ended 31 March 2023 are set out and reviewed below.

 

	FY 2022/23			FY 2021/22			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	280.8	38.4	13.7%	234.7	29.8	12.7%	20%	16%	11%
S&C	168.1	25.6	15.2%	144.5	23.3	16.1%	16%	14%	8%
Unallocated		(12.2)			(11.7)
Total	448.9	51.8	11.5%	379.2	41.4	10.9%	18%	15%	10%

 

(1)   Underlying operating profit excludes acquisition-related costs

 

 

Magnetics & Controls Division ("M&C")

 

The M&C division designs, manufactures and supplies highly differentiated magnetic and power components, embedded computing and interface controls, all for industrial applications through eight businesses operating across 17 countries. Most products are manufactured in-house at one of the division's 20 manufacturing facilities, with its principal ones being in China, India, Mexico, Poland, Sri Lanka and Thailand. Geographically, 6% of sales are in the UK by destination, 51% in the rest of Europe, 21% in North America and 22% in Asia.

 

Our largest facility in Sri Lanka accounts for around 6% of Group sales. Despite the well-publicised economic issues in the country, the facility continued to operate at expected output levels throughout the year with the Group providing support to local employees in the form of allowances for the higher cost of living, transportation and commuting support and, for a short period, family food parcel support. Economic issues have now eased following the IMF support package. Construction has also commenced in Kerala, India, of a new larger production facility which will supersede our existing plant there next year. US production in California has now largely been moved to Mexico; production in Arizona will also move to Mexico in the new financial year. Capacity has also been expanded in the UK to support future growth with a new facility in Newark.

 

Orders remained at a high level albeit 9% CER lower year-on-year at £263.9m versus a very strong prior year comparator, with a book-to-bill ratio of 0.96:1 (being orders divided by sales). This, together with a strong order book at the outset of this year, resulted in sales growing by 11% organically, with good levels of organic growth across all regions except China. Sales in the UK grew organically by 22%, with Europe growing by 19% and North America by 21%, whilst Asia reduced by 12% due to a 25% organic reduction in China as a result of renewable wind energy demand slowdown, supply chain bottlenecks and customer production movements. Sales in India grew by 2% for the year, with a very strong first half being offset by a slower second half. 2% of organic growth was as a result of one-off increase in semiconductor costs passed through to customers that have been categorised for reporting purposes as sales (H1: £2.9m; H2: £2.1m).

 

Combined with a 5% sales increase from acquisitions, overall sales increased by 16% CER. Including the impact of translation from a weaker Sterling on average, reported divisional revenue increased by 20% to £280.8m (FY 2021/22: £234.7m). This was achieved despite ongoing supply chain headwinds, in particular semiconductor shortages which delayed sales in two businesses within the division. These headwinds eased during the second half and are now mostly resolved with availability at required levels and lead-times returned to near normal levels.

 

Underlying operating profit of £38.4m was £7.5m (+24%) higher than last year at CER and £8.6m (+29%) higher on a reported basis (FY 2021/22: £29.8m). The underlying operating margin of 13.7% was 1ppt higher than last year (FY 2021/22: 12.7%), 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 through 14 businesses operating across nine countries. The majority of the products are manufactured in-house at one of the division's 12 manufacturing facilities, with its principal ones being in Hungary, the Netherlands, Norway, Slovakia, the UK and the US. Geographically, 20% of sales are in the UK by destination, 46% in the rest of Europe, 16% in North America and 18% in Asia. Further capacity is being built in Germany.

 

As with the M&C division, orders of £173.7m remained at historically high levels despite the very strong comparators of last year (FY 2021/22: £173.1m), with a book-to-bill ratio of 1.03:1. This, together with a record order book at the outset of this year, resulted in sales growing by 8% organically, with 5% organic growth across Europe, 6% in the UK, 13% in North America and 15% growth in Asia, driven by a doubling of sales in China on the back of strong renewable solar energy demand.  

 

Combined with a 6% sales increase from acquisitions, overall sales rose by 14% CER. Including the impact of translation from a weaker Sterling on average, reported divisional revenue increased by 16% to £168.1m (FY 2021/22: £144.5m).

 

Underlying operating profit of £25.6m was £1.7m (+6%) higher than last year at CER and £2.3m (+10%) higher on a reported basis (FY 2021/22: £23.3m). The underlying operating margin of 15.2% was 0.9ppts lower than last year (FY 2021/22: 16.1%), reflecting increased investment particularly across recently acquired businesses to upscale both sales resource and back-office support.

 

 

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, in turn 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. During the year, new design wins were registered with an estimated lifetime value of £273m, an increase of 11% over last year and with 89% being in our target markets.

 

Additionally, new project design activity remains at a high level, being broad-based across all target markets and the total pipeline of ongoing projects continues to be strong.

 

 

Earnings-Accretive Acquisitions

 

The businesses we acquire are typically led by entrepreneurs who wish to remain for a period following acquisition. We encourage this as it helps retain a dynamic, decentralised and entrepreneurial culture. The market remains highly fragmented with many opportunities to acquire and consolidate.

 

We acquire businesses that are successful and profitable with good growth prospects where we invest for growth and operational performance development. According to the circumstances, we add value in some of or all of the following areas:

 

Strategy, sales and products:   

-     Developing the longer-term strategy of the business;

-     Internationalising sales channels and expanding the customer base, including via cross-selling initiatives and focusing sales development onto target market areas;

-     Increasing focus on opportunity generation;

-     Developing and expanding the product range;

-     Developing and implementing sustainability initiatives.

  

People management:

-     Investing in management capability ('scaling up');

-     Peer networking and collaboration;

-     Succession planning and management transition.

 

Investment:

-     Capital investment in manufacturing and infrastructure;

-     Improving manufacturing and infrastructure efficiency;

-     Expansion through further acquisitions.

 

Controls and support:

-     Implementing robust financial controls;

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

-     Risk management and internal audit;

-     Sustainability initiatives such as energy audits, carbon emission reductions and ISO standards accreditation.

 

The Group has acquired 21 design and manufacturing businesses over the last 12 years, with Group revenues increasing to £449m in FY 2022/23 from £10m in FY 2009/10. During the year, the Group completed two acquisitions:

 

i)          Magnasphere, a US-based designer and manufacturer of magnetic sensors and switches for industrial electronic applications, for a cash consideration of $22m (£18.1m) on a debt free, cash free basis.

 

ii)          CDT, a UK-based designer and manufacturer of customised plastic enclosures for electronic componentry for a cash consideration of £5.0m on a debt free, cash free basis.

 

Acquisition spend was lower this year than previous years, reflecting the Group's disciplined pricing criteria in an environment of elevated vendor price expectations. As company valuations are becoming more realistic, we expect transaction activity to increase. The Group looks to acquire high quality businesses with long-term growth prospects and to pay a price that reflects this quality whilst generating good returns for shareholders.

 

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 17 businesses acquired since 2011 and owned for at least two years delivered a return on investment ("EBIT ROI") of 21.4% this year, an increase of 3ppts over last year.

 

 

Summary and Outlook

 

The Group has made further good progress towards our medium-term goals, with excellent sales growth and significant operational efficiencies resulting in 20% growth in underlying earnings per share.

 

We continue to focus on generating organic growth in high momentum, sustainable markets, enhanced by earnings accretive acquisitions whilst reducing our carbon footprint. Our carbon emissions have reduced by 35% in absolute terms since CY 2021 and in November 2022 we announced our target to reach net zero by 2030.

 

The new financial year has started well with continued organic sales growth over last year. The order book remains at a higher than expected level, in line with last year, providing good visibility of demand. As previously guided, the order book has been normalising from the record level in September 2022 and, as expected, this trend is continuing in the new financial year as global supply chain lead times return to normal.

  

discoverIE is well positioned in a changing world. Our products are designed-in and essential in customers' applications whilst amounting to only a small proportion of their overall spend, providing us with revenue visibility and stable margins. Additionally, our broad international footprint enables us to respond quickly to regional production movements.

 

The discoverIE business model has proven to be very resilient through difficult market conditions. With a strong pipeline of acquisition opportunities and a robust balance sheet, the Group is well positioned to make further good progress.

 

 

Nick Jefferies                                                                                                  

Group Chief Executive

7 June 2023

Group Financial Results

 

Revenue and Orders

 

Group sales of £448.9m were 10% higher than last year organically (FY 2021/22: £379.2m) of which 1ppt relates to increase in semiconductor costs passed through to customers that have been categorised for reporting purposes as sales (H1: £2.9m; H2: £2.1m) and with acquisitions (CPI, Antenova and Beacon acquired last year, plus CDT and Magnasphere acquired this year) adding 5%,  Group sales increased by 15% CER.  A weaker Sterling on average during the year, particularly compared with the US Dollar, increased sales by 3% on translation for a total growth in reported Group sales of 18%. Group sales increased by 2% from £222.6m in the first half to £226.3m in the second half.

 

Revenue (£m)	FY 2022/23	FY 2021/22	%
Reported sales	448.9	379.2	18%
FX translation impact		10.2
Underlying (CER) sales	448.9	389.4	15%
Acquisitions & disposals	(14.9)	5.7
Organic sales	434.0	395.1	10%

 

Sales this year were driven by continued healthy order levels together with a very strong order book which began to normalise as expected through the second half of the year having reached a record high of £257m at 30 September 2022. Group orders for the year were £437.5m, reducing by 9% organically against a very strong prior year comparator (last year orders grew by 36% organically and by 32% organically compared with the pre-Covid year FY 2019/20 as customers increased and extended their order books in response to strong demand and the tight global supply conditions).

 

The book-to-bill ratio for the year was 0.97:1 and, accordingly, the order book remained at a similar level to last year at £223m (31 March 2022: £224m), up 81% CER compared with two years ago.  

 

 

Group Operating Profit and Margin

 

Group underlying operating profit for the year was £51.8m, a 25% increase on last year (FY 2021/22: £41.4m), 20% higher at CER, delivering an underlying operating margin of 11.5%, 0.6ppts higher than last year (FY 2021/22: 10.9%), with 11.5% in the first half of the year (H1 2021/22: 10.3%) and 11.6% in the second half (H2 2012/22: 11.4%).  

 

Reported Group operating profit for the year (after accounting for the underlying adjustments discussed below) was £34.6m, 66% higher than last year (FY 2021/22: £20.9m), linked to higher underlying operating profits and lower spend on acquisitions and disposals during the year.  

 

 

£m	FY 2022/23			FY 2021/22
	Operating Profit	Net Finance Cost	Profit before tax	Operating profit	Net Finance cost	Profit before tax
Underlying	51.8	(5.5)	46.3	41.4	(3.8)	37.6
Underlying adjustments
Amortisation of acquired intangibles	(15.8)	-	(15.8)	(14.0)	-	(14.0)
Acquisition & disposal expenses	(1.4)	-	(1.4)	(6.5)	-	(6.5)
Reported	34.6	(5.5)	29.1	20.9	(3.8)	17.1

 

 

Underlying operating profit growth has been achieved through a combination of organic growth, efficient operational execution and acquisitions.

 

 

£m	Underlying Operating Profit
FY 2021/22	41.4
Gross profit on sales growth	12.7
Organic gross margin	3.6
Investment in operating costs	(9.2)
Organic profit growth - operations	48.5
Investment in Head Office	(0.5)
Profit from acquired companies	2.2
Foreign exchange impact	1.6
FY 2022/23	51.8

 

More than three quarters (£6.6m) of the incremental operating profits in the year at CER were generated from organic sales growth of £33.9m at CER, excluding the £5m increase in semiconductor costs passed through to customers that have been categorised for reporting purposes as sales. This resulted in a strong drop-through ratio of 19% (being organic profit growth as a percentage of organic sales growth) deriving mainly from scale and internal efficiencies. During the year, there was further investment in operating expenditure of 9% across both divisions to support future organic growth. Gross margins remained robust and ahead of last year organically, reflecting the high value-add nature of our products; this is despite ongoing inflationary supply chain headwinds. 

 

Acquisitions in the last two years - CPI, Antenova and Beacon acquired last year together with CDT and Magnasphere acquired this year - contributed £2.2m of underlying operating profit.

 

Sterling weakened during the year by 12% compared to the US Dollar and by 2% compared to the Euro whilst strengthening by 2% against the three Nordic currencies. This gave rise to an increase in underlying operating profits on translation of £1.6m.

 

 

Underlying Adjustments

 

Underlying adjustments for the year comprise the amortisation of acquired intangibles of £15.8m (FY 2021/22: £14.0m) and acquisition & disposal expenses of £1.4m (FY 2021/22: £6.5m).  

 

The £1.8m increase in the amortisation charge since last year to £15.8m relates to the annualised amortisation of the intangibles for Beacon and Antenova which were acquired towards the end of the first half last year, plus the amortisation of intangibles this year's acquisitions (Magnasphere and CDT). The amortisation charge for next year for existing businesses is expected to be at a similar level.

 

Acquisition & disposal expenses of £1.4m comprise £1.8m of costs associated with the acquisitions during the year of CDT in June 2022 and Magnasphere in January 2023 and accrued contingent consideration costs relating to acquisitions of £1.5m partly offset by a £1.5m receipt from an insurance contract of CPI (acquired in May 2021) which was cashed-in during the year and a £0.4m credit relating to the disposal of Acal BFi last year.  

 

 

Financing Costs

 

Net finance costs for the year were £5.5m (FY 2021/22: £3.8m) and include a £0.6m charge for leased assets under IFRS 16 (FY 2021/22: £0.6m) and £0.6m charge for amortised upfront facility costs (FY 2021/22: £0.4m). Finance costs related to our banking facilities of £4.3m (FY 2021/22: £2.8m) reflect increased interest rates during the year from near zero at 31 March 2022 with Sterling base rates rising to 4.25% at 31 March 2023, US Dollar federal rates to 5.25% and EU rates to 3.5%.

 

Financing costs are expected to increase next year with higher base rates still forecast by the market for all three currencies plus the annualisation of last year's rate rises.

 

Underlying Tax Rate

 

The underlying effective tax rate ("ETR") for the year was 25.3%, marginally higher than last year's rate (FY 2021/22: 25.0%) due to profit mix towards higher tax territories.

 

The overall ETR was 27% (FY 2021/22: 43%). This was higher than the underlying ETR due to there being no tax relief on acquisition-related expenses (within underlying adjustments above). The overall ETR was much higher last year due to the ETR on intangibles being impacted by the planned increase in the UK corporate tax rate from 19% to 25% from 1 April 2023, resulting in a one-off increase in the deferred tax liability (a non-cash item).

 

£m	FY 2022/23		FY 2021/22
	PBT	ETR	PBT	ETR
Group underlying	46.3	25%	37.6	25%
Amortisation of acquired intangibles	(15.8)	20%	(14.0)	9%
Acquisition & disposal expenses	(1.4)	57%	(6.5)	12%
Total reported	29.1	27%	17.1	43%

 

 

Profit Before Tax and EPS

 

Underlying profit before tax for the year of £46.3m was £8.7m higher (+23%) than last year (FY 2021/22: £37.6m), with underlying EPS for the year increasing by 20% to 35.2p (FY 2021/22: 29.4p). The increase in underlying EPS was lower than the increase in underlying profit before tax due to the issuance of new equity in September 2021 increasing the number of fully diluted shares by 3% to 98.3m shares (FY 2021/22: 95.8m shares) and a marginally higher tax rate.  

                                   

£m	FY 2022/23		FY 2021/22
	PBT	EPS	PBT	EPS
Underlying	46.3	35.2p	37.6	29.4p
Underlying adjustments
Amortisation of acquired intangibles	(15.8)		(14.0)
Acquisition & disposal expenses	(1.4)		(6.5)
Reported (continuing operations)	29.1	21.7p	17.1	10.1p

 

 

After the underlying adjustments above, reported profit before tax for continuing operations was £29.1m, an increase of £12.0m (+70%) compared with last year (FY 2021/22: £17.1m). With the reported effective tax rate for the year of 27% being much lower than last year's rate of 43% (for the reasons mentioned above), the resulting reported fully diluted earnings per share for continuing operations was 21.7p, 11.6p higher than last year (FY 2021/22: 10.1p).

 

 

Last Year's Disposals

 

Last year, the Group disposed of the Acal BFi and Vertec SA distribution businesses which together were treated for accounting purposes as a discontinued operation. In accordance with IFRS 5, net profits (profit after tax or "PAT") of the discontinued operation last year was shown separately to the results of the continuing operations.

 

£m	FY 2022/23		FY 2021/22
	PAT	EPS	PAT	EPS
Continuing operations (reported)	21.3	21.7p	9.7	10.1p
Discontinued operations (reported)			15.5	16.2p
Total operations (reported)	21.3	21.7p	25.2	26.3p

 

Working Capital

 

Working capital at 31 March 2023 was £69.4m, equivalent to 15.2% of second half annualised sales at CER. This is 1.3ppts lower than at 30 September 2022 when working capital was £74.7m, equivalent to 16.5% of first half annualised sales following reductions in inventory levels which had increased in order to secure supply. This remains 1.3ppts higher than last year when working capital was £57.2m, equivalent to 13.9% of second half annualised sales linked to some elevated inventories still remaining.

 

Working capital KPIs have remained robust with debtors days of 45 (2 days lower than last year), creditor days of 80 (in line with last year) and stock turns of 3.2 (0.2 turn lower than last year but 0.2 turns higher than at 30 September 2022).   

 

ROCE for the year (return on capital employed, as defined in note 5 to the attached summary financial statements) was 15.9%, up 1.2ppts on last year driven by increased profitability and operating efficiency. This is ahead of our target to achieve a ROCE of at least 15%.

 

 

Cash Flow

 

Net debt at 31 March 2023 was £42.7m compared with £30.2m at 31 March 2022. The movements in net debt during the year are summarised as follows:

 

£m	FY 2022/23	FY 2021/22
Opening net debt at 1 April	(30.2)	(47.2)
Free cash flow (see table below)	33.0	21.8
Acquisition & disposals	(30.6)	(49.2)
Equity issuance (net of taxes)	(0.6)	52.6
Dividends	(10.5)	(9.4)
Foreign exchange impact	(3.8)	1.2
Net debt at 31 March	(42.7)	(30.2)

 

 

Net acquisition & disposal-related costs of £30.6m in the year comprised acquisitions of CDT in June 2022 for £5.0m and Magnasphere in January 2023 for £18.5m (both on a debt free, cash free basis) together with £6.4m on earnout payments in respect of Cursor and CPI. Additionally, there were £2.2m of expenses associated with acquisitions and disposals during the year, partially offset by a £1.5m receipt from an insurance contract which was cashed-in during the year.

 

Dividends of £10.5m paid during the year were 12% higher than paid in the previous year (FY2021/22: £9.4m) following a 6% increase in the final dividend declared last year and a 6% increase in equity following the share issuance in September 2021 at the time of the Beacon acquisition.  

 

Sterling weakened significantly during the year in particular compared to the US Dollar. Based on the closing rates at 31 March 2023 compared with the rates at 31 March 2022, Sterling fell 6% compared to the US Dollar and also reduced by 4% against the Euro. With the Group's policy being to hold net debt in currencies linked to the currency of its cash flows, net debt increased on translation, partially matching the increase in underlying EBITDA that arose, in order to protect the gearing of the Group.  

 

Underlying operating cash flow and free cash flow for the year (see definitions in note 5 to the summary financial statements) compared with last year are shown below:

 

£m	FY 2022/23	FY 2021/22
Underlying profit before tax	46.3	37.6
Net finance costs	5.5	3.8
Non-cash items	14.6	12.5
Underlying EBITDA	66.4	53.9
Lease payments	(5.8)	(5.1)
EBITDA (incl. lease payments)	60.6	48.8
Changes in working capital	(6.4)	(10.2)
Capital expenditure	(5.6)	(5.5)
Underlying operating cash flow	48.6	33.1
Finance costs	(5.0)	(3.2)
Taxation	(9.0)	(6.2)
Legacy pensions	(1.6)	(1.9)
Free cash flow	33.0	21.8

 

Underlying EBITDA of £66.4m was 23% higher than last year (FY 2021/22: £53.9m) reflecting strong organic sales growth combined with contributions from the five acquisitions made over the last two years.

 

During the year, Group working capital increased by £6.4m, supporting strong organic sales growth and to secure inventory supply where necessary. This is £3.8m below last year's increase (FY 2021/22: £10.2m).

 

Capital expenditure of £5.6m was invested during the year in line with last year (FY 2021/22: £5.5m) including capacity expansions in the UK and Germany, various new production line extensions, ERP upgrades and ESG initiatives e.g. additional solar panels in Sri Lanka - the largest Group facility - and in Thailand.  

 

£48.6m of Underlying operating cash flow was generated in the year up 47% on last year (FY 2021/22: £33.1m) representing 94% of underlying operating profit, ahead of our 85% target. Over the last nine years, the Group has consistently achieved high levels of cash conversion, averaging well in excess of 90%. 

 

Finance cash costs of £5.0m were £1.8m ahead of last year on the back of higher average interest rates, whilst corporate income tax payments of £9.0m were £2.8m ahead of last year reflecting higher profitability.

 

Free cash flow (being cash flow before dividends, acquisitions and equity) of £33.0m was generated in the year, up 51% on last year (FY 2021/22: £21.8m), being a free cash conversion of 95% of underlying earnings; again ahead of our 85% target.     

 

 

Banking Facilities

 

The Group has a £240m syndicated banking facility which now extends to June 2027 following the exercise by the Group in May 2023 of an option to extend the facility by a further year. 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 31 March 2023 of £42.7m, the Group's gearing ratio at the end of the year (being net debt divided by underlying EBITDA as annualised for acquisitions) was 0.7x. With our target gearing range being between 1.5x and 2.0x, there is plenty of funding capacity for future earnings accretive acquisitions.

Balance Sheet

 

Net assets of £303.6m at 31 March 2023 were £13.2m higher than at the end of the last financial year (31 March 2022: £290.4m). The increase primarily relates to the net profit after tax for the year of £21.3m partially offset by dividend payments this year of £10.5m. The movement in net assets is summarised below:

 

£m	FY 2022/23
Net assets at 31 March 2022	290.4
Net profit after tax	21.3
Dividend paid	(10.5)
Translation of net assets	0.7
Loss on defined benefit scheme	(0.9)
Shares issued	0.1
Share-based payments (incl tax)	2.5
Net assets at 31 March 2023	303.6

 

 

Defined Benefit Pension Scheme

 

The Group's IAS 19 pension asset, associated with its legacy defined benefit pension scheme, decreased during the year by £0.4m from £2.7m at 31 March 2022, to £2.3m at 31 March 2023. The key drivers were the increase in corporate bond yields together with an annual payment made during the year of £1.6m, partly offset by increases in future inflation expectations.

 

 

Risks and Uncertainties

 

The principal risks faced by the Group are covered in more detail in the Group's Annual Report, which will be published shortly. 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.

 

The Board reviewed the Group's principal risks and the mitigating actions and processes in place during the financial year, giving specific consideration to the impact of the Ukraine conflict and inflationary headwinds. The Board view that risks associated with the macroeconomic environment and supply chain for existing and acquired businesses has increased during the financial year with no material change to the relative importance or quantum of the Group's other principal risks.

 

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.

 

 

Simon Gibbins

Group Finance Director

7 June 2023