About Volex plc

Volex plc (AIM:VLX) is a leading integrated manufacturing specialist. The Group designs and manufactures products that ensure a critical connection never fails and are used in everything from defibrillators and ventilators through to data networking equipment and vehicle telematics. Headquartered in the United Kingdom, Volex serves the needs of its blue-chip customer base from its manufacturing sites located across nine countries and three continents, employing over 6,000 people. Volex's products are sold through its own global sales force and through distributors to Original Equipment Manufacturers ('OEMs') and Electronic Manufacturing Services companies.  For more information please visit www.volex.com

RESULTS FOR THE 26 WEEKS ENDED 4 OCTOBER 2020

Group overview

Volex occupies a unique niche through our capability in integrated manufacturing services. Having 14 factories located in key manufacturing hubs and a size and scale that only a very small number of competitors can match, Volex is set to benefit from an accelerating trend towards supply chain consolidation.

In a world becoming more global and interconnected, our customers demand larger global suppliers to support them as they consolidate their fragmented supplier bases. We have seen this trend particularly in the medical technology sector and on the Power side of Volex's business. Customers demand scale, reputation, quality and a global presence, all of which Volex can provide.

The Covid-19 pandemic and the implementation of import tariffs by the US government have shown how important it is to be able to offer multiple manufacturing locations to our customers and our diversification has proven to be a key strength over the past six months.

Our ability to identify acquisitions in a highly fragmented market is also a key part of our success. These acquisitions enable us to acquire competencies such as the capability to manufacture complete sub-systems, electro-mechanical as well as electronic sub-assemblies, and advanced niche PCB assembly products, in order to become more valuable to our customers.

The ongoing benefits of moving up the value chain and deepening integration with our customers is a key element of our strategy, and as a result of our strong balance sheet and the prioritisation of free cash flow over revenue, we retain a high degree of strategic flexibility, allowing us to continue to look for value-enhancing acquisitions while remaining committed to a progressive dividend policy.

Today we announced the acquisition of DEKA, a world-class Power Products manufacturer. This positions us as a global market leader in the Power Products industry. Combining DEKA's strong position in Europe with our significant scale in North America and Asia will unlock customer opportunities and allow us to identify substantial supply chain synergies.

As announced today, Daren Morris, who initially joined the business in June 2014 as a Non-Executive Director before becoming Chief Financial Officer in September 2014, has left the Board with immediate effect and will be leaving the business. Jon Boaden, who joined the business in April 2019 as Deputy Chief Financial Officer, has been promoted to the role of CFO having played a key role in the significant growth and development of the Group's business since joining over 18 months ago. Separately Sir Peter Westmacott, a senior British diplomat, has agreed to join the Board as an Independent Non-Executive Director and member of the Company's Nominations Committee. His substantial record, acknowledged by successive Prime Ministers, of policy and business delivery, will be a key asset to Volex.

We are also pleased to have signed a new $70 million multi-currency revolving credit facility with a $30 million accordion feature to replace our current $30 million credit facility. The new facility has a three-year term with the option of a one-year extension. It is provided by three relationship banks and was oversubscribed.

Finally, we will also pay an interim dividend of 1.1 pence per share on 15 December 2020 to those shareholders on the register as at 20 November 2020. We are delivering strong and consistent cash flows and this supports our intention to maintain a sustainable and progressive dividend policy as we move forward.

Covid-19

The challenges posed by Covid-19 first became apparent when we re-opened our Chinese facilities following an extended lunar new year closure in February 2020. We put in place precautionary best practice measures to protect our employees in these sites, and as we realised that the pandemic was spreading rapidly across the globe, we rapidly rolled out these 'best practices' across all our locations. Our factory teams globally have performed exceptionally by implementing and maintaining these measures, all of which remain in place.

However, no prevention activity can guarantee that we will not see any disruption at our key locations and, while we believe that we are taking appropriate steps to mitigate the risk posed by Covid-19, we continue to monitor infection rates among our workforce and the subsequent impact on our operational activities closely.

More broadly, we also remain acutely aware of the impact that future government-imposed restrictions designed to control the spread of the virus could have on our business, our customers and our partners in various geographies. 

Trading performance overview

The half year to 4 October 2020 has seen the Group continue to grow and deliver improved margins.

           * Before adjusting items and share-based payment charges

Revenue for the first half of the year is up by 3.5% on the comparable period in FY2020. We have seen some variations in customer demand due to the pandemic.

In our Integrated Manufacturing Services ("IMS") division, demand for data centre products has been strong with an increase in sales of nearly 50% over the prior period. Sales into medical end-markets have shown variability depending on the application. Our largest customer in this segment has seen increased demand, but a number of smaller customers in the imaging and oncology-related markets have seen significant delays in orders and installations due to difficulty in accessing hospitals stemming from restrictions in relation to the Covid-19 pandemic.

Demand for our high-speed data centre products has been excellent, with sales up by 57%. This reflects strong underlying demand drivers as the move to remote working has increased global reliance on cloud computing. In addition, data centre customers have looked to reduce their supply chain exposure by building inventory. The pandemic disrupted sales to a number of our medical and industrial technology customers during the period, but we are starting to see an improvement in demand from these customers. Overall, the strength in the data centre product sales has helped to offset weakness in medical and industrial, and margins have improved.

Demand for Power Products ("Power") started slowly as a number of our customers responded to the challenges of operating under pandemic conditions. Sales volumes improved during the period with all our Power sites at high levels of utilisation at the end of the first half, and a strong performance from the sale of our new products for the electric vehicles market.

Profitability in H1 FY2021 has shown a significant improvement in comparison to H1 FY2020. Margins in both divisions have increased as a result of a change in mix towards higher-margin products and customers.  

Margins have also improved due to lower input costs. This has come from a combination of lower copper prices, beneficial foreign exchange rates and price reductions negotiated with suppliers. The favourable position on copper and foreign exchange rates may not continue in the second half as we see a weakening of the US dollar and an increase in the price of copper and other commodities. Travel costs were significantly lower than usual in the first half of the year and we expect this to continue for the remainder of the year.

Integrated Manufacturing Services

Customers trust Volex to deliver connectivity solutions in a variety of performance-critical applications including medical devices, data centres and advanced industrial technology. With a customer-centric approach and experienced production engineers who ensure we maintain rigorous quality standards, Volex is a manufacturing partner for some of the biggest names in technology.

Revenue for H1 FY2021 was $114.7 million, up 9.7% on the prior period. This includes six months of revenue from Servatron, a business we acquired in July 2019, rather than the two months of Servatron revenue in the comparative period.

We are very proud of our capabilities in the medical devices supply chain. We were involved in a number of projects to accelerate the manufacture and delivery of devices specifically intended to support patients being treated for the effects of Covid-19. At the same time, demand for the critical data connectivity products we manufacture for large diagnostic imaging and radiological and surgical treatment devices was materially lower. This reflects the fact that many hospitals have postponed  scheduled installations and maintenance while the facilities focus on dealing with the pandemic and have suspended non-critical procedures. We believe that the underlying demand for installations, maintenance and upgrades remains, but the timing of a recovery will be dependent on our customers being able to return to having normalised access to medical facilities.

There has been an improvement to both underlying gross margin and underlying operating margin. This has been achieved through an improvement in product mix and savings in production costs. The strength of the US dollar, which is the primary sales currency, versus many emerging market currencies where we operate has also helped margins during the period.

We continue to focus on quality which delivers benefits to our bottom line. Much of the improvement is delivered through re-engineering our processes as well as investing in equipment to deliver exceptional consistency and high throughput.

Power Products

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

Revenues in the first half were marginally lower in comparison to the same period in the previous year. Although all Volex Power Products sites were open and fully operational during the period, in the first quarter some customers experienced disruption to production which reduced demand for both consumer electronics and electric vehicle products.

Our high-quality and well-engineered products have been well received by customers for electric vehicle applications. Revenue from our automotive customers is up 78% year-on-year and this segment now represents over 15% of our sales for Power Products in the first half of the year. We believe that there is significant further opportunity for growth in this area.

As many countries saw a shift to homeworking, we saw strong sales into the consumer electronics segment once our customers resumed normal operations in late April and May. This trend continued throughout the period. With demand strong in this area, we maximised our production to support our customers. This resulted in high levels of utilisation across all Power Products sites in the second quarter of FY2021.

Underlying gross margins have improved from 20.2% to 22.7%. Last year we acquired Ta Hsing, a cable extrusion business. We have made excellent progress integrating this capability into our Power Products division, reducing input costs and improving margins. We also continue to roll out targeted automation. This is focused on the areas where it gives us the best return and is compatible with our requirements to maintain a flexible manufacturing approach. Most sales are in US dollars, but a proportion of the cost base is in the local currency relevant to the production location. The strength of the dollar has helped improve margins, as have lower costs for certain raw materials.

Group adjusting items and share-based payments

Adjusting items and share-based payments totalled $6.5 million in the period (H1 FY2020: $5.6 million). These costs are made up of $2.3 million (H1 FY2020: $2.8 million) of amortisation of acquisition-related intangible assets, $4.0 million (H1 FY2020: $2.6 million) of share-based payments expense and $0.2 million (H1 FY2020: $0.2 million) of acquisition costs related to the acquisition of DEKA. Share-based payments include awards made to incentivise senior management as well as awards granted to the management teams within acquired companies.

Group taxation

The Group incurred a tax credit of $1.1 million (H1 FY2020: tax charge of $2.0 million), representing an effective tax rate of -7.4% (H1 FY2020: 20.1%). The underlying tax charge of $nil (H1 FY2020: $2.4 million) represents an ETR of 0.2% (H1 FY2020: 15.7%).

An underlying deferred tax credit of $2.9 million (H1 FY2020: charge of $1.2 million) arose due to an increase in the deferred tax asset recognised on trading losses and short-term timing differences due to the utilisation based on future forecast taxable profits in certain regions. As at the reporting date the Group has recognised deferred tax assets of $12.2 million (H1 FY2020: $ 3.4 million, FY2020: $9.0m). Of this deferred tax asset $6.5 million (H1 FY2020: $2.4 million, FY2020: $4.5 million) is in relation to tax losses and $5.7 million (H1 FY2020: $1.0 million, FY2020: $4.5 million) in relation to short term timing differences.

Group net debt and cash flows

We are pleased to have signed a new $100 million multi-currency revolving credit facility to replace our current $30 million credit facility. The new facility has a three-year term with the option of a one-year extension. The facility consists of a $70m committed facility with a $30m accordion feature and is effective from 12 November 2020. It is provided by three relationship banks and was oversubscribed.

The new facility has a more relaxed net debt to EBITDA covenant as compared to the existing credit facility which will give the Group more flexibility to undertake future acquisitions. This facility provides additional headroom and further scope to make value-accretive investments to grow our business.

Our business is cash generative with excellent cash conversion. Coming into the period, levels of inventory were lower than usual as a result of the pandemic. During the first half of the year, inventory has increased, replenishing finished goods in our customer hub locations. This has offset an element of the cash generated by our underlying business operations.

Net funds (before lease liabilities) was unchanged from the year end standing at $32.0 million ($32.1 million at 5 April 2020). The Group generated a free cash flow after capital expenditure and tax, but before the cost of acquisitions, of $8.0 million. This included a cash operating inflow of $23.5 million and an adverse working capital movement of $11.0 million, as well as capital expenditure of $2.6 million and tax paid of $1.8 million. The adverse working capital movement is due to very low inventory levels at the end of FY2020 when customers had consumed Power Products stock while the production sites were closed for an extended Lunar New Year holiday due to the pandemic. In the first half of FY2021 inventory levels have returned to normal, causing an adverse working capital movement. Accounts receivable and accounts payable also increased as invoicing and supply chain activity returned to normal levels following the sites closures. The Group had lease liabilities of $11.7 million. This produces a statutory net funds position of $20.3 million.

Risks and uncertainties

Risks to Volex are anticipated and regularly assessed and internal controls are enhanced where necessary to ensure that such risks are appropriately mitigated. There are a number of potential risks that could have a material impact on the Group's financial performance. The principal risks and uncertainties include competitive threats, legal and regulatory issues, dependency on key suppliers or customers, movements in commodity prices or exchange rates, and quality issues. These risks and the relevant risk-mitigation activities are set out in the FY2020 Annual Report and Accounts on pages 30 to 34, a copy of which is available on the website at www.volex.com.

Outlook

We remain closely focused on ensuring our employees' welfare and are planning for a range of possible outcomes in relation to the ongoing Covid-19 pandemic.

Having delivered a robust performance in the first half of the year, coupled with a strong forward order-book, the Board remains confident in delivering on full-year expectations, absent any material disruptions to our business that may be caused by Covid-19.

The longer-term prospects for our business remain strong and we continue to invest in increasing capacity in our key facilities to meet customer demand and to implement vertical integration to improve our competitiveness and profitability.

Nat Rothschild                                                  Jon Boaden

Group Executive Chairman                                 Group Chief Financial Officer

12 November 2020                                           12 November 2020

Unaudited consolidated income statement                                                  

For the 26 weeks ended 4 October 2020 (26 weeks ended 29 September 2019)

Unaudited consolidated statement of comprehensive income

For the 26 weeks ended 4 October 2020 (26 weeks ended 29 September 2019)

Unaudited consolidated statement of financial position                                          

Unaudited Consolidated Statement of Changes in Equity

For the 26 weeks ended 4 October 2020 (26 weeks ended 29 September 2019)