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About Volex plc

Volex plc (AIM:VLX) is a global leader in integrated manufacturing for performance-critical applications and a designer and manufacturer of power products. We serve a diverse range of markets and customers, with particular expertise in cable assemblies, higher-level assemblies, data centre power and connectivity, electric vehicles, medical applications, consumer electricals and complex industrial technology. We are headquartered in the UK and operate from 18 manufacturing locations with a global workforce of over 6,400 employees across 21 countries. Our products are sold through our own locally based sales teams and through authorised distributor partners to Original Equipment Manufacturers ('OEMs') and Electronic Manufacturing Services ('EMS') companies worldwide.

All of the products and services that we offer are integral to the increasingly complex digital world in which we live, providing power and connectivity from the most common household items to the most complex medical equipment. For more information, please visit www.volex.com

Definitions

The Group presents some significant items separately to provide clarity on the underlying performance of the business. This includes significant one-off costs and income such as acquisition related costs, the non-cash amortisation of intangible assets acquired as part of business combinations, and share-based payments. Further detail on adjusting items is provided in Note 3.

Underlying operating profit is operating profit before adjusting items and share-based payments. Underlying free cash flow is net cash flow before financing activities excluding cash flows associated with the acquisitions of businesses and cash utilised in respect of adjusting items. Net debt (before lease liabilities) represents cash and cash equivalents, less bank loans and debt issue costs, but excluding lease liabilities.

Forward looking statements

This announcement contains certain forward-looking statements which have been made by the Directors in good faith using information available up until the date they approved the announcement. Forward-looking statements should be regarded with caution as by their nature such statements involve risk and uncertainties relating to events and circumstances that may occur in the future. Actual results may differ from those expressed in such statements, depending on the outcome of these uncertain future events.

RESULTS FOR THE 26 WEEKS ENDED 3 OCTOBER 2021

Group overview

Volex is a global leader in integrated manufacturing for performance-critical applications and a designer and manufacturer of power products. We serve a diverse range of markets and customers, with particular expertise in cable assemblies, higher-level assemblies, data centre power and connectivity, electric vehicles and consumer electricals.

Although some of our customers have been affected by extended component lead times, we continue to experience robust demand across all markets. Our diverse customer base and niche positions in high-mix, low-volume manufacturing reduces our reliance on any particular individual component.

We have seen extended lead times and increased costs for some raw materials. We are able to pass through component cost increases to our customers, being an established practice for our organisation. We are working closely with our customers to manage lead times and meet their expectations. Indeed, we believe that our customer relationships have strengthened due to our support in navigating the current supply chain complexities.

We continue to invest in our existing operations to support high growth areas of the business and to further optimise our manufacturing processes.

During the period, we have once again demonstrated our ability to identify attractive acquisition opportunities that align with our strategy and complement our existing offering. These acquisitions provide us with the capability to manufacture complete electro-mechanical and electronic sub-assemblies, and advanced niche printed circuit board (PCB) assembly products, to provide additional value for our customers.

We continue to have an exciting pipeline of potential acquisitions as part of our strategy for growth. We have strict criteria and set methodology to identify businesses that can enhance our capabilities, broaden customer relationships and access attractive markets consistent with our operating model.

We have announced an interim dividend of 1.2 pence per share which will be paid on 14 December 2021 to those shareholders on the register on 19 November 2021. The Ex-dividend date will be 18 November 2021.

Trading performance overview

The half year to 3 October 2021 has seen the Group continue to grow, with revenues and underlying operating profit well ahead of last year, despite multiple market-related challenges such as supply chain disruption, commodity inflation and the US dollar remaining weak against the Renminbi. This provides us with confidence in our business model and our ability to continue to manage future headwinds.

           * Before adjusting items and share-based payment charges

Revenue for the first half of the year increased by 44.5% compared to H1 FY2021, including the impact of the acquisition of DE-KA. Customer demand has been strong across our markets throughout the period.

The demand from Electric Vehicles customers was particularly strong with revenues more than trebling year-on-year.

Consumer Electricals demand was positive with revenue growing 74% from H1 FY2021 aided by higher copper prices and the acquisition of DE-KA.

There has been a strong return of demand in the period within the Medical sector for assemblies used in large medical devices, with major customers reporting increased order books.

The demand from Complex Industrial Technologies customers also held up well, although overall revenue is slightly lower than the first half of FY2021. Last year, there was increased demand from some data centre customers as they sought to reduce the potential impact of Covid-19 related disruption on their supply of high-speed cables. The demand for these cables has normalised.

We look to pass on higher component and commodity costs to our customers through contractual mechanisms and regular repricing. We have experienced increased freight and copper costs during the period. These have been passed on to customers, increasing revenue but not the absolute margins on individual products. This results in slightly lower gross margins as a percentage of revenue. There is also a small time lag in passing through such cost increases, which has an adverse impact on margins when prices are rising. This becomes a positive impact when prices are falling. There was an adverse impact on gross margin from these effects of 1.5%.

There is an adverse impact of 0.8% on gross margin from a higher mix of more simple products, including 0.4% from our acquisition of DE-KA. In addition, margins were reduced by 0.8% due to foreign exchange movements and 0.7% due to employment tax savings that were available in the prior year that did not repeat in H1 FY2022. In addition to these movements, at an operating profit level, there was a 1.2% improvement in margins from careful cost control and a 1.6% benefit following the acquisition of DE-KA.

Underlying operating costs increased by $5.2 million to $35.2 million (H1 FY2021: $30.0 million), as the business has grown, partly attributable to the acquisition of DE-KA. However, underlying operating costs as a percentage of revenue have reduced in the period from 14.8% in H1 FY2021 to 12.0% reflecting management's continued tight control over operating expenditure. The increased costs reflect the investment costs in strengthening our capabilities and capacity across the Group in addition to the impact of incremental expenditure within our sales and marketing team. We also increased our spending on research and development, focusing on areas where we believe there is a strong opportunity to deliver revenue growth in future periods. Our investment in development activities in previous years has resulted in patents which are delivering incremental sales opportunities.

This has been a dynamic period, including the integration of a new acquisition, a return of customer demand in the Medical and Complex Industrial Technology markets and challenges due to extended lead times in global supply chains. We also announced the acquisition of Irvine during the period and the acquisitions of Prodamex and TC after the period end. Volex has a diverse and resilient operating model, with a focus on agile decision making and achieving continued operational efficiencies. This has resulted in revenue growth and strong operating profits with margins in line with our long-term objectives.

Revenue by customer sector

Electric Vehicles

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

Revenue from our electric vehicle customers grew to $45.3 million (H1 FY2021: $14.6 million), a year-on-year increase of 210%. Demand in the first quarter of the year was very strong, slightly tapering in the second quarter as component shortages impacted our customers' production.

Consumer Electricals

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. Our products are used in home entertainment and home computing devices, domestic and personal healthcare appliances and power tools. Many of our customers are global household names operating in premium segments of the market.

With many consumers spending more time at home during the Covid-19 pandemic, demand for entertainment, home-office equipment and home renovation products were elevated. The consumer electricals market has remained buoyant throughout the period, with continued high levels of demand. Revenue grew to $127.4 million (H1 FY2021: $73.2 million), also benefitting from the acquisition of DE-KA at the end of the last financial year. DE-KA has traded very strongly since acquisition, beating our stretching acquisition targets. We have passed on higher copper costs to our customers which has increased revenue by approximately $8 million. We anticipate normalisation in this sector in the second half of the year.

Medical

We are very proud of our capabilities in the medical devices supply chain. We operate across multiple segments within medical markets, with our complex assemblies utilised in smaller medical devices for patient treatment and monitoring, as well as larger medical devices.

Covid-19 placed a tremendous amount of pressure on healthcare systems around the world in the prior year, resulting in changes in the profile of spend on medical technology as access to hospitals was restricted and spending focused on Covid-19 treatment. We have seen a strong return of demand for assemblies used in large, non-Covid related medical devices, such as patient imaging and robotic surgery devices. Medical revenue increased to $62.0 million (H1 FY2021: $54.0 million), reflecting this recovery during H1 FY2022. Production levels in the period were above our expectations, although we have seen some increased lead times for certain components.

We believe that the outlook for large medical equipment is positive as the impact of Covid-19 on healthcare systems continues to diminish. Governments and healthcare providers will need to prioritise investment in technologies to support screening procedures and routine operations that have been delayed. In addition, spending on screening and treatment around the world is expected to grow, as is the provision of universal healthcare in some significant markets. Volex is well positioned, with established production facilities in the major healthcare markets, to take advantage of moves to simplify and de-risk the supply chain for the production of medical devices. This supports our view that there is significant pent-up demand for medical equipment to accelerate patient screening and therapy following the deferment of treatment during the pandemic.

Complex Industrial Technology

Our Complex Industrial Technology customers produce a wide range of equipment and customer solutions, including building control, smart metering, laser technology, vehicle telematics, telecommunications, industrial automation and robotics. With a customer-centric approach and experienced production engineers who maintain rigorous quality standards, Volex is a manufacturing partner for some of the biggest technology names.

Revenue for Complex Industrial Technology customers was slightly lower at $58.1 million (H1 FY2021: $60.7 million) as the prior period included particularly strong demand for high-speed data centre products as customers built up inventory to mitigate against potential disruption in the supply chain. Despite this, there has been strong demand from customers requiring complex assemblies for industrial technology applications throughout the period.

We have successfully developed a 400Gbps product for the high speed data centre sector for which we anticipate strong demand in FY2023. In the second half of the year, we expect to see a transitional period with a reduction in demand for 100Gbps cables before the industry begins the rollout and adoption of 400Gbps cables. We have a customer qualified 400Gbps product and expect revenues to increase in FY2023.

Revenue by market

We operate a global, interconnected and integrated business. This allows us to serve blue-chip customers around the world. Customers often require manufacturing in multiple locations to reduce risk in their supply chains. We respond by developing flexibility at our sites so we can meet a variety of customer requirements within one facility. We also have a regional focus in our business to ensure that we offer exceptional customer service. We analyse our revenue geographically by region, with the regional allocation based on where the customer relationship is held. This reflects the fact that we are a customer-centric organisation.

North America

North America is our largest customer region and we work with some of the largest technology companies and global innovators. North America is 41.4% of overall revenue (H1 FY2021: 45.9%). Revenue grew by 30.5% in the period to $121.2 million (H1 FY2021: $92.9 million). This includes some of the strong growth that we experienced from electric vehicle customers.

Europe

Revenues in Europe grew by 124.7% to $100.9 million (H1 FY2021: $44.9 million) primarily due to the impact of DE-KA which was acquired in February 2021. The Group has also seen growth across its key customer markets in this region including medical, industrial and electric vehicles.

Asia

Asia revenue was $70.7 million (H1 FY2021 $64.6 million). The majority of revenue in this region is in consumer electricals. Demand in the first half remained strong.

Group adjusting items and share-based payments

Adjusting items and share-based payments totalled $6.1 million in the period (H1 FY2021: $6.5 million). These costs are made up of $5.0 million (H1 FY2021: $2.3 million) of amortisation of acquisition-related intangible assets, $2.5 million (H1 FY2021: $4.0 million) of share-based payments expense and $1.1 million (H1 FY2021: $0.2 million) of acquisition costs mainly related to the acquisitions of Irvine, Prodamex and TC. Partially offsetting these items was a gain of $2.6 million recognised on the forgiveness of Paycheck Protection Program (PPP) loans provided to parts of the Group's North America operations. 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 charge of $2.2 million (H1 FY2021: tax credit of $1.1 million), representing an effective tax rate of 11.2% (H1 FY2021: -7.4%). The underlying tax charge of $3.7 million (H1 FY2021: $nil) represents an effective tax rate of 14.7% (H1 FY2021: 0.2%). The underlying current tax charge is calculated by reference to the taxable profits in each individual entity and the local statutory tax rates. An underlying deferred tax credit of $1.4 million (H1 FY2021: tax credit of $2.9 million) arose due to an increase in the net deferred tax asset recognised.

The Group operates in a number of different tax jurisdictions and is subject to periodic tax audits by local authorities in the normal course of business on a range of tax matters in relation to corporate tax. As at 3 October 2021, the Group has net current tax liabilities of $7.6 million (FY2021: $6.7 million) which include $7.3 million (FY2021: $7.9 million) of provisions for tax uncertainties.

The carrying amount of deferred tax assets is reviewed at each reporting date and recognised to the extent that it is probable that there are sufficient taxable profits to allow all or part to be recovered. Deferred tax assets have been recognised based on future forecast taxable profits. As at the reporting date the Group has recognised deferred tax assets of $23.7 million (FY2021: $22.0 million) and deferred tax liabilities of $7.5 million (FY2021: $7.8 million).

Group net debt and cash flows

During the first half of the year, inventory has increased significantly to support the growth of the business and as a direct result of increases in lead times in the global supply chain, as well as longer shipping times between production facilities and customers. This has partially offset cash generated by our underlying business operations.

Net debt (before lease liabilities) increased from the year end to $21.8 million ($7.2 million at 4 April 2021) largely due to the inventory increase described above. The Group generated underlying free cash flow after capital expenditure and tax, but before the cost of acquisitions, of $3.0 million. This included an operating cash inflow of $30.0 million and an adverse working capital movement of $18.7 million, as well as capital expenditure of $4.9 million and tax paid of $3.0 million. The adverse working capital movement is due to the significant growth in the business along with extended shipping times for sea freight and increased lead times on components leading to an increase in inventory levels. Compared with H1 FY2021 there were an extra 6 days of inventory held by the business at the end of the period. Inventory levels are expected to normalise, but this may not occur in the second half of the year. Accounts receivable and accounts payable balances also increased as a result of the growth in the business. The Group also had lease liabilities of $18.3 million ($20.0 million at 4 April 2021). This produces a statutory net debt position of $40.1 million.

When the Irvine, Prodamex and TC acquisitions are completed, net debt is expected to increase by approximately $35 million.

Acquisition strategy

The successful acquisition and integration of quality businesses is a significant part of our strategy. Our typical acquisition target is a well performing business in a sector where we already have deep understanding and experience. We are attracted to businesses with excellent customer lists and good capabilities which drive long-term customer relationships. Our acquisition pipeline is focused on businesses which have additional value-add capabilities and access to existing or adjacent markets. The geographic location of the target is also a strategic consideration, including low-cost markets in which our current customers operate.

Targets that require significant integration or restructuring effort are only considered where we can identify the management resources to lead this activity. We look to optimise the value created from each acquisition, and only progress opportunities that meet strict value criteria which are tailored to each transaction based on the specific characteristics of the target. Our aim is to grow the Group's run-rate revenue by approximately ten percent each year by acquiring attractive, cash generative businesses.

To select the right opportunities, we identify potential acquisitions through a variety of methods, seeking out businesses that are not on the market as well as those already in an active process. All these opportunities are qualified and approved by an investment committee before we progress to negotiation. We only proceed to due diligence where there is alignment on the commercial terms.

Having completed six acquisitions in three years from investment of some $140 million, we have a well-developed approach and a significant track record in execution. With the announcement of three further acquisitions, Irvine, Prodamex and TC, since the beginning of the year, we have again demonstrated our proven ability to identify quality businesses in attractive markets.

We have a growing acquisition pipeline containing highly attractive targets that we are actively pursuing, all of which fit within the core competency of our senior operations team. In a buoyant M&A market, discipline in negotiations is critical and we qualify every acquisition extensively using our deep industry knowledge to find the best opportunities. We firmly believe that our strength in this area will be a significant value driver.

Investing in our business

Over the past eighteen months we have invested significantly in our business with a factory extension in Batam, Indonesia and a facility relocation in Suzhou, China completed in FY2021.

During the period we have increased our research and development activities in Suzhou and recruited additional specialists to drive our product development programmes. We have also begun to expand our capabilities through investment in vertical integration, which will accelerate through the second half of the year. Our investment programmes are focused on high-growth markets, with the successful development of a 400Gbps product for our high-speed data centre customers a prime example. There are further investment opportunities within our operations that will deliver good cash returns.

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 FY2021 Annual Report and Accounts on pages 36 to 40, a copy of which is available on the website at www.volex.com.

Outlook

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 consensus market expectations, absent any material disruptions to our business from the extended lead times that are impacting on global supply chains.

The acquisition of Irvine completed on 29 October 2021 and the acquisitions of Prodamex and TC are expected to complete in quarter three of FY2022. We have a growing pipeline of acquisition opportunities and a track record of identifying and integrating businesses that support our strategic objectives.

The longer-term prospects for our business are excellent and we continue to invest in increasing capacity and strengthening our capabilities in our key facilities to meet customer demand with a particular focus on growth areas.

Nat Rothschild                                                  Jon Boaden

Group Executive Chairman                                 Group Chief Financial Officer

11 November 2021                                           11 November 2021

Unaudited consolidated income statement                                                  

For the 26 weeks ended 3 October 2021 (26 weeks ended 4 October 2020)

Unaudited consolidated statement of comprehensive income

For the 26 weeks ended 3 October 2021 (26 weeks ended 4 October 2020)

Unaudited consolidated statement of financial position                                          

Unaudited Consolidated Statement of Changes in Equity

For the 26 weeks ended 3 October 2021 (26 weeks ended 4 October 2020)