3 DECEMBER 2024

 

discoverIE Group plc

 

Interim results for the six months ended 30 September 2024

 

Resilient through-cycle performance with structural efficiencies

 and record operating margin

 

discoverIE Group plc (LSE: DSCV, "discoverIE" or "the Group"), a leading international designer and manufacturer of customised electronics to industry, today announces its interim results for the six month period ended 30 September 2024 ("H1 2024/25" or "the Period").

 

	H1 2024/25	H1 2023/24	Growth %	CER(2) growth %
Revenue	£211.1m	£222.0m	-5%	-4%
Underlying operating profit(1)	£29.1m	£28.6m	+2%	+4%
Underlying operating margin(1)	13.8%	12.9%	+0.9ppt	+1.0ppt
Underlying profit before tax(1)	£23.8m	£25.1m	-5%
Underlying EPS(1)	18.4p	19.2p	-4%
Reported profit before tax	£15.8m	£16.0m	-1%
Reported fully diluted EPS	12.2p	11.7p	+4%
Interim dividend per share	3.90p	3.75p	+4%

Highlights

 

·      Revenue down 4% CER, reflecting industry de-stocking and lead-time normalisation

o  Organic sales⁽³⁾ 10% lower (S&C division -5%, M&C -12%)

o  Organic orders up 1% (+8% CER), led by S&C division +20% (M&C -11%)

 

·      Underlying operating profit up 4% CER from flexible operating structure and efficiencies

o  Record underlying operating margin of 13.8%, up 1.0ppt at CER, ahead of FY 2024/25 target

o  Underlying EPS reduced 4% due to higher interest rates

 

·      Excellent free cash flow⁽⁴⁾ up 46% to £45m for last 12 months

o  Conversion rate of 126%, capacity for c.£70m of further acquisitions in the second half 

 

·      Further good progress towards other key targets

o  Well on track to achieve 15% underlying operating margin target in FY2027/28  

o  ROCE⁽⁵⁾ of 15.2%, slightly ahead of target and last year

o  Carbon emissions reduced by c.50% in absolute terms since CY 2021⁽⁶⁾

  

·      Record design wins (up 33% over 2 years) with significant further opportunities

 

·      One bolt-on acquisition completed during the Period for an EBIT multiple of 6x

o  Period-end gearing⁽⁷⁾ of 1.45x, below the lower end of target range (1.5x to 2.0x)

 

·      Growth drivers remain strong with the Group well positioned             

o  Period end order book of £163m provides good forward visibility

o  High growth security market added as a fifth target market⁽⁸⁾

o  Strong pipeline of acquisition opportunities

o  Group will benefit from reducing interest rates 

 

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

 

 

Nick Jefferies, Group Chief Executive, commented:

 

"discoverIE delivered a resilient first half performance with a 4% increase in underlying operating profit, growth in operating margins to 13.8%, ahead of our near-term target, and excellent cashflow. This was in an environment of supply chain lead times returning to normal and widespread customer inventory reductions resulting in sales that were 4% lower.

 

Our flexible operating model allows us to control costs in response to lower production volumes, which along with ongoing efficiency initiatives and accretive acquisitions, has more than offset lower sales. This is a great strength of the business that has delivered improved underlying operating profits and margins in each of the last ten years (in-line in the covid year).

 

Orders increased by 5% sequentially, with a book to bill ratio of around 1.0. In the S&C division, orders grew by 20% organically as design wins converted into new orders whilst in the M&C division, orders were 11% lower as industrial destocking continued to work through.

 

Third quarter trading to date is in-line with our expectations with orders run rate ahead of sales and ahead of the second quarter.

 

We remain focused on generating above-market growth through the cycle and our design win pipeline remains strong. This, along with our acquisition opportunities, is our engine for growth and we remain on track to deliver full year underlying earnings in line with the Board's expectations."

 

 

Analyst and investor presentation:

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

 

 

Enquiries:

 

discoverIE Group plc                                                                                       01483 544 500

Nick Jefferies                Group Chief Executive

Simon Gibbins              Group Finance Director

Lili Huang                      Head of Investor Relations

 

Burson 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 and disposal related costs (amortisation of acquired intangible assets of £7.8m and acquisition and disposal expenses of £0.2m) totalling £8.0m. Equivalent underlying adjustments within the H1 2023/24 underlying results totalled £9.1m. 'Underlying EBITDA' also excludes non-cash share-based payments cost, and IAS19 pension cost in line with the Group's banking covenant. For further information, see note 7 of the attached condensed consolidated interim financial statements.

 

2)     Growth rates at constant exchange rates ("CER"). In calculating CER for the Period, the average Sterling rate of exchange strengthened 2% against the Euro compared with the average rates for last year, 2% against the US Dollar and 2% on average against the three Nordic currencies, resulting in an additional 1% sales reduction for the first Period.

 

3)     Organic growth for the Group compared with last year is calculated at CER and is shown excluding the first 12 months of acquisitions post completion (Silvertel in August 2023, 2J Antennas Group ("2J") in September 2023, Shape, DTI and IKN in Q4 2023/24 and Hivolt in August 2024) and excluding the disposal of the Santon solar business unit announced last year. 

 

4)     Free cash flow is cash flow available for the payment of dividends and investment in acquisitions. Free cash flow conversion is free cash flow divided by underlying profit after tax. See definitions in note 7 of the attached interim financial statements.   

 

5)     ROCE is defined as annualised H1 2024/25 underlying operating profit including the annualisation of acquisitions, as a percentage of net assets excluding net debt, deferred consideration related to disposed businesses and legacy defined benefit pension asset/(liability).

 

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

 

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

 

8)     Target markets are medical, electrification of transportation, renewable energy, security and industrial automation & connectivity.

 

9)     Unless stated, growth rates refer to the comparable prior year period. Sequential growth compares to the immediately preceding period e.g. H1 2024/25 would be compared to H2 2023/24 on an organic basis.

 

10)   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, high quality customer relationships.

 

With a focus on key markets driven by structural growth, increasing electronic content and sustainability, namely medical, electrification of transportation, renewable energy, security 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 in order to reach net zero. With its key markets aligned with a sustainable future, the Group has been awarded an ESG "AA" rating by MSCI and is Regional (Europe) Top Rated by Sustainalytics. 

 

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

 

discoverIE is listed on the Main Market of the London Stock Exchange and is a member of the FTSE 250, classified within the Electrical Components and Equipment subsector.

 

 

 

Strategic, Operational and Financial Review

 

Good Progress towards our Targets

 

The Group designs and manufactures essential, customised, high value-add, technically complex electronic products, enabling our customers to create better equipment. Despite industry destocking and strong prior year comparators, we made further good progress this Period towards our near and medium-term goals of increasing operating margins and generating consistently strong cash flow.  

 

The Group delivered underlying operating profit growth of 4% at CER with the operating margin increasing by 1.0ppt at CER to 13.8%, ahead of our 13.5% target for this financial year and well on track for our FY2027/28 target of 15%.

 

Underlying operating profit growth was achieved with operational efficiencies, strong gross margins and tight control of operating expenses, more than offsetting the 4% reduction in sales at CER. Higher annualised interest costs have, as expected, reduced underlying EPS by 4% with this impact set to unwind as rates decrease.

 

Free cash flow for the last 12 months increased by 46% to £44.6m, with a conversion rate of 126% being well ahead of our target of 85% driven by a strong working capital performance.   

 

Organic sales reduced by 10%, reflecting industry destocking and the normalisation of supply chains. Asia was the most resilient territory, increasing by 5% while the UK reduced by 4% and  Nordics reduced 8%. North America reduced by 19% following growth of 35% last year, and the rest of Europe reduced by 12%.

 

Orders increased by 8% CER in the Period and by 5% sequentially. Organically orders increased by 1% with Asia up 15% and the UK up 8% partially offset by Europe reducing 2% and North America reducing by 9%. The book-to-bill ratio for the Period increased to 0.98 from 0.89 last financial year (H1 24: 0.87; H2 24: 0.91). With strong growth in design wins (up 8% this Period and up 33% on two years ago), the Group is well positioned to accelerate growth once market conditions improve.  

 

The Group order book at 30 September 2024 was £163m, representing c.4.5 months of first half sales (consistent with pre-covid levels) and providing good visibility for the second half of the year. The order book has reduced from higher levels in the prior period when orders included earlier stocking-up amid constrained supply chains.

 

 

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 resilient, flexible and innovative.

 

-  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 both resilient gross margins and long-term repeating revenues.

 

-  Broad footprint: a decentralised model with 37 manufacturing sites and operations around the world, able to support customers locally and with the decarbonisation of their supply chains. 

 

-  Efficient supply chains: our manufacturing uses a low proportion of bought-in components, the majority being manufactured in-house from raw materials and base components, reducing the Group's 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. Additionally with the installation of solar panels at some of our sites as part of our project to reduce carbon emissions, this percentage is reducing.  

 

With a capital light business model, a differentiated product portfolio, a strong balance sheet, high quality customers and low customer concentration (the Group's largest customer is c.8% of Group sales), the Group has grown strongly and consistently over the last decade whilst proving resilient through economic downturns. We expect this to continue to be the case.

 

 

Further Operational Efficiencies deliver Margin Progress and Strong Cashflow.

 

The first half saw further significant benefits derived from operational efficiencies, tight control of operating expenses and continuing robust gross margins, which more than offset the reduction in sales. While Group sales for the first half reduced by 4% CER to £211.1m, underlying operating profit increased by 4% CER to £29.1m, with operating margins increasing by 1.0ppt at CER to 13.8%. Last year's rapid rise in interest rates drove an increase in finance costs for the Period of £1.8m to £5.3m, which resulted in underlying profit before tax reducing by 5% to £23.8m, with underlying earnings per share reducing by 4% to 18.4p (H1 2023/24: 19.2p). Conversely, the Group will benefit as interest rates reduce.

 

After adjustments for the inclusion of acquisition and disposal-related costs of £8.0m, profit before tax for the Period on a reported basis was £15.8m (H1 2023/24: £16.0m) with fully diluted earnings per share increasing by 4% to 12.2p (H1 2023/24: 11.7p).

 

Free cash flow of £44.6m was generated over the last 12 months, being 46% higher than the prior 12 month period and representing 126% of underlying earnings, well ahead of the Group's 85% conversion target. Net debt (excluding IFRS16) at 30 September 2024 reduced by £5.3m to £98.7m (31 March 2024: £104.0m) with gearing reducing to 1.45x (31 March 2024: 1.5x). This gearing is below the lower end of our target range of 1.5x to 2.0x and, together with expected cash flow in the second half, would provide acquisition funding of c.£70m for the rest of the year while keeping the Group within its target gearing range.

 

 

Increased Dividend

 

The Board is declaring a 4% increase in the interim dividend to 3.9p per share (H1 2023/24: 3.75p per share). The interim dividend is payable on 24 January 2025 to shareholders registered on 13 December 2024.

 

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

 

The Company operates a Dividend Re-Investment Programme ("DRIP"), details of which are available from the Company's Registrar, Equiniti. The final date for DRIP elections for the interim dividend will be 3 January 2025.

 

 

A Proven Growth Strategy

 

The Group has been built through a focus on organic growth and enhanced operational efficiency, alongside 27 carefully selected and well-integrated acquisitions over the past 13 years to create a focused, growth-oriented, higher margin design and manufacturing business. We have a well-developed approach to capital allocation and see significant scope for further expansion with a strong pipeline of investment opportunities in development. The Group operates in a c.$30bn fragmented market with many smaller players presenting an exciting consolidation opportunity.

 

The Group's strategy comprises four elements:

 

1.   Grow sales well ahead of GDP over the economic cycle by focusing on high quality growth target markets for design opportunities.

 

 

2.   Generate efficiencies and improve operating margins through clustering of businesses to achieve operational and production efficiencies, moving up the value chain into higher margin products with increased product innovation and differentiation and value based pricing.

 

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

 

4.   Reduce our impact on the environment by achieving net-zero carbon emissions.

 

These elements are underpinned by core objectives of generating strong cash flows and long-term sustainable returns from a capital-light business model.

 

 

A fifth Target Market added this year

 

At our Capital Markets Day in September 2024, the Group announced the addition of the security market as a fifth target market. Along with our other four target markets (industrial automation & connectivity, medical, renewable energy, and the electrification of transportation), security is another fragmented market underpinned by a number of structural growth drivers.

 

Long-term growth in these target markets is being driven by increasing electronic content and by global megatrends such as the accelerating need for industrial automation and connectivity, increasing security concerns, an ageing affluent population, renewable sources of energy and the electrification of transport. In total, the five target markets accounted for around 80% of first half sales.

 

The Group's focus on these markets has been driving the Group's through-cycle organic revenue growth well ahead of GDP, and creates acquisition opportunities. Between 2017 and 2024, sales into the Group's target markets grew organically by 80% cumulatively, compared with around 19% in the other markets. This reflects the sustained compounding organic growth of these markets.

 

 

Continued progress on Key Strategic Indicators

 

For more than 10 years, the Group's strategic progress and its financial performance have been measured through key strategic indicators ("KSIs") and key performance indicators. These are reviewed periodically, and targets have been raised six times previously, most recently in June 2023 when the current 15% underlying operating margin target was set. From this year, targets have been simplified into seven KSIs which will be the key business drivers for the next stage of our development. Two previously monitored KSIs have now been largely achieved. Sales beyond Europe (target 45%) are now at 43% having risen from 5% in FY 2013/14. Target market sales (target 85%) are at 80% having risen from c.40% in FY2013/14 when first set, and will likely remain around that level as new acquisitions are typically below this level when acquired so have a short term offsetting effect against existing businesses. Dividend growth was also previously included as a KPI and while it's not one of the simplified seven KSIs, a progressive dividend policy remains.   

 

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

 

 

 

 

 

 

 

 

 

 

 

Key Strategic Indicators

	FY14	FY18	FY19	FY20	FY21	FY22	FY23	H124	H125	Target
1. Increased underlying operating margin	3.4%	6.3%	7.0%	8.0%	10.2%	10.9%	11.5%	12.9%	13.8%	15%(2)
2. Sales growth
CER	17%	11%	14%	8%	-1%	28%	15%	4%	-4%	Well ahead of GDP thru cycle
Organic	3%	11%	10%	5%	-4%	18%	10%	1%	-10%
3. Underlying EPS growth	20%	16%	22%	11%	-8%	31%	20%	8%	-4%	>10%
4. Operating profit conversion(3)	100%	85%	93%	106%	128%	80%	94%	91%(4)	115%(4)	>85% of underlying operating profit
5. Free cash conversion(3)	107%	78%	94%	104%	136%	77%	95%	85%(4)	126%(4)	>85% of underlying earnings
6. ROCE(3)	15.2%	13.7%	15.4%	16.0%	14.5%	14.7%	15.9%	15.1%	15.2%	>15%
7. Carbon emissions Scope 1 & 2           reduction(5)							35%	47%	c.50%	65%

 

(1)  FY 2013/14 to FY 2019/20 are for total operations before disposals as reported at the time.

(2)  13.5% target by FY 2024/25 and 15% by FY 2027/28

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

(4)  Last 12 months (LTM)

(5)  Carbon emissions are measured on a calendar year basis (e.g. CY 2022 shown as FY 2022/23). Target is for absolute carbon emissions reduction of 65% by CY 2025 from CY 2021 with net zero by CY 2030. 

 

 

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

 

-  Underlying operating margin was 13.8%, an increase of 0.9ppts on the first half last year (H1 2023/24: 12.9%) and 0.7ppts higher than the last financial year (FY 2023/24: 13.1%) taking growth in underlying operating margin to 10.4ppts since FY14. The Group benefited in the Period from operational efficiencies, tight cost control and robust gross margins augmented by higher margin acquisitions. The Group has exceeded its target of 13.5% six months early and is well on track to achieve its 15% target in FY 2027/28.   

 

-  Sales reduced by 10% organically this Period due to industry destocking and against strong prior year comparators. We retain our focus on achieving strong through-cycle organic growth which is supported by our pipeline of design wins. Since FY 2017/18, sales have grown by 6% organically per annum on average.

 

-  Excellent operational efficiencies, robust gross margins, tight control of operating costs, and contributions from acquisitions resulted in underlying operating profit for the Period increasing by 4% CER. Despite this, underlying EPS reduced by 4% due to higher finance costs following last year's increase in interest rates. In total, the Group has grown its underlying EPS by 19% CAGR in the last 10 years.  

 

-  Underlying operating cash flow and free cash flow for the last 12 months were 33% and 46% higher respectively than the comparable 12 month period with respective conversion rates of 115% and 126%, well ahead of our 85% targets. Over the last ten years, both operating cash conversion and free cash conversion have been consistently strong, averaging around 100% through-cycle, reflecting low capital expenditure requirements and efficient working capital.

 

-  ROCE for the Period was 15.2%, slightly ahead of last year (H1 2023/24: 15.1%) and ahead of our 15% target. Further progress in the short term is impacted by the record number of acquisitions (six) in the last 14 months (most acquisitions are dilutive to Group ROCE at the outset before growing). We acquire businesses with long term growth prospects that we expect will generate high returns over time. For example, our acquisitions made up to FY2017/18 generated a collective ROCE of 29% last year. We expect this to continue growing and for acquisitions made more recently to grow similarly.

 

-  Carbon emissions reduced further during the Period and are now an estimated 50% lower on an absolute basis than in CY 2021, excellent progress towards our reduction targets of 65% by CY 2025 and net zero by 2030.

 

 

Divisional Results

The divisional results for the Group for the six months ended 30 September 2024 are set out and reviewed below.

 

	H1 2024/25			H1 2023/24			Reported revenue growth	CER revenue growth	Organic revenue Growth
	Revenue £m	Underlying operating profit(1) £m	Margin(2)	Revenue £m	Underlying operating profit(1) £m	Margin
M&C	125.8	18.2	14.5%	132.2	19.6	14.8%	-6%	-5%	-12%
S&C	85.3	16.8	19.7%	86.7	15.0	17.3%	-3%	-2%	-5%
Unallocated		(5.9)			(6.5)
Total (CER)	211.1	29.1	13.8%	218.9	28.1	12.8%		-4%	-10%
FX				3.1	0.5
Total	211.1	29.1	13.8%	222.0	28.6	12.9%	-5%

 

(1)   Underlying operating profit excludes acquisition and disposal-related costs

(2)   Margin refers to underlying operating margin

 

 

Magnetics & Controls Division ("M&C")

 

The M&C division designs, manufactures and supplies highly differentiated magnetic and power components, embedded computing and interface controls, for industrial applications. The division operates across 17 countries and comprises two clusters (Magnetics and Embedded Systems) and three further businesses. Almost all products are manufactured in-house at one of the division's 21 manufacturing facilities, with its principal sites being in China, India, Mexico, Poland, Sri Lanka, Thailand, the UK and the US. Geographically, 5% of sales by destination are in the UK, 44% in the rest of Europe, 27% in North America and 24% in Asia. During the Period, Noratel's move to a new Chinese facility was completed.

 

Orders reduced by 3% at CER to £114.6m and by 11% organically for a book-to-bill ratio of 0.91 (H1 2023/24: 0.89; H2 2023/24: 0.90) as customers actively reduced their stocks. The divisional order book at 30 September 2024 was £93.8m, being 4.3 months of first half sales, providing good visibility for the second half of the year.   

 

Sales reduced by 12% organically, similarly impacted by destocking in the industrial and transport sectors. The medical and renewable energy sectors were flat.  By territory, Asia grew by 16% (having reduced by 24% last year) with the UK up by 2%. Conversely, North America reduced by 28% (having increased by 35% last year), the Nordic region reduced by 13% and the rest of Europe by 19%.

 

There was a 7% contribution to sales from three acquisitions made in the last 14 months with Silvertel acquired in August 2023 plus Shape and DTI acquired in Q4 2023/24. Including these acquisitions, sales at CER reduced by 5%.

 

With the impact of translation from a stronger Sterling (on average), reported divisional revenue reduced by 6% to £125.8m (H1 2023/24: £134.4m reported and £132.2m at CER). Underlying operating profit of £18.2m was £1.4m (-7%) lower than last year at CER and £1.7m lower on a reported basis (H1 2023/24: £19.9m) reflecting the net impact of the organic sales shortfall. The underlying operating margin of 14.5% was 0.3ppts lower than last year (H1 2023/24: 14.8%), reflecting the mitigating effects of operational efficiencies and robust gross margins.

 

Sensing & Connectivity Division ("S&C")

The S&C division designs, manufactures and supplies highly differentiated sensing and connectivity components for industrial applications. The division operates across nine countries and comprises four clusters and four further businesses. Products are manufactured in-house at one of the division's 16 manufacturing facilities, with its principal ones being in Hungary, the Netherlands, Norway, Slovakia, the UK and the US. Geographically, 21% of sales by destination are in the UK, 46% in the rest of Europe, 24% in North America and 9% in Asia.

 

This Period saw the acquisition of Hivolt, a Northern Ireland based specialist capacitor designer and manufacturer, into the division.

 

Divisional orders were particularly strong, increasing by 26% at CER and by 20% organically as earlier design wins generated new business, for a book-to-bill ratio of 1.08 improving from 0.84 in the first half last year and 0.99 in the second half. Excluding one business with particularly high orders, the remaining divisional orders increased by 13% organically, coming from most businesses, and with a book to bill ratio of 1.10. The increase in orders came from strength in transport security, data centre security, US rail transport, US wireless connectivity demand, industrial and fibre communications in Europe.  As with the destocking phase, S&C exhibits earlier cycle characteristics than M&C. Overall, the divisional order book increased by 6% since 31 March 2024 to £68.7m, representing 4.8 months of first half sales, giving good visibility for the second half.

 

Sales reduced by 5% organically, with a pick-up during the second quarter in mid-market industrial and connectivity applications along with strong demand in data security applications, offsetting softer conditions in medical applications. By region, the Nordics increased by 10%, while the rest of Europe reduced by 5%, North America was down by 3%, the UK down by 6% and Asia down by 33%, mainly related to local customer project delays.

 

Combined with a 3% sales increase from acquisitions, overall divisional sales reduced by 2% CER. Including the impact of translation from a stronger Sterling on average, reported divisional revenue reduced by 3% to £85.3m (H1 2023/24: £87.6m reported and £86.7m at CER).

 

Underlying operating profit of £16.8m was £1.8m (+12%) higher than last year at CER and £1.6m (+11%) higher on a reported basis (H1 2023/24: £15.2m). The underlying operating margin of 19.7% was 2.4ppts higher than last year at CER (H1 2023/24: 17.3%) reflecting the positive effect of operational efficiencies, robust gross margins and higher margin acquisitions.

 

 

Design Wins Driving Future Recurring Revenues

 

Our business revenue is created by engineering development with customers and as such organic growth is achieved by winning new design opportunities that lead to pull through demand. Project design wins are therefore an indicator of new business creation and are achieved by working with customers at an early stage in their project design cycle to identify opportunities. A design win is registered when our products are specified into our customers' designs.

 

The Group has a strong bank of design wins built up over many years, forming the basis for the Group's strong through-cycle organic growth. During the Period, new design wins were registered with an estimated lifetime value of £205m, an increase of 8% over last year (and up 33% on two year ago). This increase in design wins reflects both the anticipated increase in customer project design activity at this stage in the cycle, cross-business opportunities and the increased focus and implementation by Group engineers.

 

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

Acquisitions

 

The market is highly fragmented with many opportunities to acquire. Currently, the Group's pipeline consists of around 250 possible targets of which a number are in the active outreach phase and live deal negotiation at any time.

 

The Group has acquired 27 design and manufacturing businesses over the last 13 years, with the Group's continuing revenues increasing to £437m in FY 2023/24 from £10m in FY 2009/10. By taking a long-term approach to create compounding growth in acquired and integrated businesses, the Group has generated substantial value organically. As reported in the Finance section, our ROCE for each acquisition typically increases over time, broadly according to the period of ownership.

 

During the Period, the Group completed the acquisition of Hivolt Capacitors Limited ("Hivolt"), a Northern Ireland-based designer and manufacturer of custom-built capacitors for a wide range of high voltage applications for sale in the UK and internationally, mainly into the medical market. Hivolt was acquired in August 2024 into the S&C division, for an initial cash consideration of £3.3m on a debt free, cash free basis representing an EBIT multiple of 6x, together with an earn-out of up to £0.9m payable subject to Hivolt's performance up to 31 March 2025.

 

The Group's operating model is well established and has facilitated the smooth integration of this and previously acquired businesses.

 

 

Sustainability and Social Responsibility

 

The Group creates innovative electronics that help improve the world and people's lives. This commitment is reflected in our focus on markets that are aligned with UN Sustainable Development Goals. More information on how we work with customers and suppliers to support the global sustainability goals is available on our website www.discoverIEplc.com.

 

In September 2024, MSCI reaffirmed the Group's ESG "AA" rating, placing us in the top 17% of all companies surveyed. The Group was also rated by Morningstar Sustainalytics as one of the Regional (Europe) Top Rated companies in 2023, with a Low Risk rating, which is a recognition given to companies that have achieved the highest scores in ESG risk management. In 2024, the Group's ESG rating further improved from Low Risk to Negligible Risk, which placed the Group in the top 1.5% of over 16,000 companies evaluated globally.

 

Last year, the Group conducted detailed scenario analysis and financial modelling for climate-related risks and opportunities, and published the process and findings in its TCFD report. This can be found in the Group's 2024 Annual Report and Accounts and on its corporate website. In early 2024, the Group conducted an interim reassessment to incorporate newly acquired businesses, which confirmed that there had been no material change in the Group's climate-related risk profile.

 

During the Period, the Group continued its progress across a range of ESG related areas, including the following:

 

-  On track to achieve our target of net zero Scope 1 & 2 carbon emissions by 2030 and the intermediate target of a 65% reduction by CY2025, with CY2024 Scope 1 & 2 emissions expected to be c. 55% lower than the CY2021 baseline.

 

-  Plans have been developed for the installation of solar panels at one of our sites in China which should be completed by the end of the financial year. This continues the Group's progress in developing self-generation capacity which, as well as lowering carbon emissions, provides an element of security for the Group's energy supply.

 

-  Reflecting the importance that we place on health & safety, the Group has adopted a revised Group Health & Safety Policy, as well as more stringent metrics to capture and record incidents occurring, as well as improved near miss reporting. While the policy continues to emphasise the importance of local accountability for health & safety matters within each of our businesses, we continue to demand higher standards in this crucial area. 

 

-  A further site achieved the occupational health & safety ISO 45001 accreditation, further extending the proportion of our global workforce covered by this standard.

 

-  The Group has rolled out a broader and increased level of cyber security awareness training. We are also in the process of developing a formal governance framework for the use of artificial intelligence, addressing both the significant opportunities that this brings to the Group as well as the risks it poses.

 

-  An industrial placement scheme has been launched in partnership with the University of Surrey, with the first group of engineering students having started training in September 2024.

 

-  In addition to local training that individual businesses already conduct, the Group has introduced an additional online learning and development platform, with the plan being to roll this out more extensively across the Group in the second half.

 

-  A detailed review has been conducted of the requirements of the EU's Corporate Sustainability Reporting Directive (CSRD) (no reporting requirement this year). Preparatory work has commenced and the Group seeks to use this exercise as an opportunity to enhance its stakeholder engagement activities. 

 

 

Group Financial Results

 

Revenue and Orders

 

Group sales of £211.1m were 4% lower than last year at CER and 5% lower reported (H1 2023/24: £222.0m). Six acquisitions in the last 14 months (Silvertel, 2J, Shape, IKN and DTI last financial year) plus Hivolt this Period, added 8% to revenue while the disposal of the Santon solar business announced last year reduced sales by 2%. Organic sales reduced by 10% following a period of customer destocking.   

 

Revenue (£m)	H1 2024/25	H1 2023/24	%
Organic sales	189.6	209.8	-10%
Acquisitions	17.5
Disposals	4.0	9.1
Sales at CER	211.1	218.9	-4%
FX translation		3.1
Reported sales	211.1	222.0	-5%

 

Orders for the Period were £206.6m, 8% higher at CER than last year (H1 2023/24: £193.9m). The extent of customer destocking reduced in the Period with a book to bill ratio of 0.98 compared with 0.87 in the first half last year, and 0.91 in the second half, with orders in the Period increasing by 1% organically and 5% sequentially.

 

The Group order book continued to normalise during the first half as customer destocking continued, ending the Period at £163m (c.4.5 months of first half sales, consistent with pre-covid levels).

 

 

Group Operating Profit and Margin

 

Group underlying operating profit for the Period was £29.1m, a 4% increase on last year at CER and up 2% reported (H1 2023/24: £28.6m). This delivered an underlying operating margin of 13.8%, which was 1.0ppt higher than last year at CER and 0.9ppt higher on a reported basis (H1 2023/24: 12.9%). We have therefore achieved our 13.5% near-term target six months early and we remain well on track to reach our target for FY2027/28 of 15%.

 

Group reported operating profit for the Period (including acquisition and disposal-related costs as discussed below within underlying adjustments) was £21.1m, 8% higher than last year (H1 2023/24: £19.5m). 

 

£m	H1 2024/25			H1 2023/24
	Operating profit	Finance Cost	Profit before tax	Operating profit	Finance cost	Profit before tax
Underlying	29.1	(5.3)	23.8	28.6	(3.5)	25.1
Underlying adjustments
Amortisation of acquired intangibles	(7.8)	-	(7.8)	(7.7)	-	(7.7)
Acquisition & disposal expenses	(0.2)	-	(0.2)	(1.4)	-	(1.4)
Reported	21.1	(5.3)	15.8	19.5	(3.5)	16.0

 

As shown below, underlying operating profit growth has been achieved through a combination of strong operational efficiencies and accretive acquisitions offsetting the temporary impact of customer destocking on organic sales:

£m	Underlying Operating Profit
H1 2023/24	28.6
Gross profit on organic sales reduction	(8.3)
Organic gross margin improvement	2.7
Organic operational efficiencies	3.3
Organic profit reduction	(2.4)
Profit from acquired companies	3.4
CER growth in operating profits	1.0
Foreign exchange impact	(0.5)
Net growth in operating profits	0.5
H1 2024/25	29.1

 

Through a number of manufacturing and operating initiatives, organic gross margins improved by 1.4ppts and organic operating costs reduced by 5% with reductions shared across divisions and at Head Office. Gross margin improvement was delivered despite volume reduction reflecting the Group's ability to flex capacity resources according to volume.   

 

Sterling was 2% stronger this Period versus 12 months ago, compared with our major currencies, Euro, US dollar and Nordic currencies, giving rise to a reduction in underlying operating profits on translation of £0.5m for the Period.

 

UK employers national insurance rates which were raised in the recent UK budget will increase costs for the Group by c.£0.9m from next financial year.

 

 

Underlying Adjustments

 

Underlying adjustments for the Period comprise the amortisation of acquired intangibles of £7.8m (H1 2023/24: £7.7m) together with net acquisition and disposal expenses of £0.2m (H1 2023/24: £1.4m).  

 

The amortisation charge for the Period of £7.8m has increased only marginally over last year following the annualisation effect of recent acquisitions largely offset by FX movements.   

 

Net acquisition and disposal expenses of £0.2m comprise the costs associated with recent acquisitions of £0.7m; losses of £0.4m incurred by the non-core Santon solar business whose disposal was announced last year and integration costs of £1.2m related to the establishment of our operating clusters mainly associated with removing duplicate positions in our Magnetics and Sensors clusters. This was offset by a credit of £2.1m being the movement in the fair value of contingent consideration on past acquisitions.

 

 

Financing Costs

 

Net finance costs for the Period were £5.3m (H1 2023/24: £3.5m) and include a £0.4m charge for leased assets under IFRS 16 (H1 2023/24: £0.3m) and a £0.3m charge for amortised upfront facility costs (H1 2023/24: £0.4m). Net finance costs related to our banking facilities were £4.6m (H1 2023/24: £2.8m), an increase of 64%, being the annualisation of interest rate rises from last year and higher average net debt levels following six acquisitions in the last 14 months.

 

During the Period, interest rates started to reduce with the Sterling base rate reducing by 0.25% to 5.0%, the US Dollar Federal rate by 0.5% to 5.0% and the ECB lending rate by 0.85% to 3.65%, these being the Group's three principal borrowing currencies. Since the Period end, Sterling, US Dollar and ECB lending rates have all reduced by a further 0.25%. Looking forward, a further 1ppt reduction in interest rates for all three of our principal borrowing currencies would reduce annual finance costs by approximately £1.3m and increase annual EPS by c.1.0p or c.3%.     

 

 

Underlying Tax Rate

The underlying effective tax rate ("ETR") in the first half was 24% which was 1ppt lower than last year's first half rate (H1 2023/24: 25%) due to a shift in the profit mix towards lower tax territories. 

 

The overall ETR of 24% (H1 2023/24: 28%) was at the same level as the underlying ETR as shown in the table below.

 

£m	H1 2024/25		H1 2023/24
	PBT	ETR	PBT	ETR
Group underlying	23.8	24%	25.1	25%
Amortisation of acquired intangibles	(7.8)	21%	(7.7)	22%
Acquisition & disposal expenses	(0.2)	150%	(1.4)	0%
Total reported	15.8	24%	16.0	28%

 

 

Profit Before Tax and EPS

 

Due to the significant increase in net finance costs, underlying profit before tax for the Period of £23.8m was £1.3m lower (-5%) than last year (H1 2023/24: £25.1m) with underlying EPS for the Period reducing by 4% to 18.4p (H1 2023/24: 19.2p).

 

£m	H1 2024/25		H1 2023/24
	PBT	EPS	PBT	EPS
Underlying	23.8	18.4p	25.1	19.2p
Underlying adjustments
Amortisation of acquired intangibles	(7.8)		(7.7)
Acquisition & disposal expenses	(0.2)		(1.4)
Reported	15.8	12.2p	16.0	11.7p

 

 

After underlying adjustments, reported profit before tax was £15.8m, 1% lower than last year (H1 2023/24: £16.0m) with reported fully diluted earnings per share of 12.2p, 4% ahead of last year (H1 2023/24: 11.7p).

 

 

 

 

Working Capital and Asset Returns Ratios

 

Working capital (which comprises inventories, current trade and other receivables and payables, excluding deferred and contingent consideration) at 30 September 2024 was £80.0m (H1 2023/24: £89.3m), equivalent to 18.9% of first half annualised sales, broadly in line with last year (H1 2023/24: 18.8%). Working capital reduced by £9.3m during the last 12 months being £3.9m of working capital improvements, £6.8m from foreign exchange translation and £1.4m increase from acquisitions. This ratio is still at higher rates than normal due to lower sales momentum during the Period.

 

Working capital KPIs have remained robust during the Period with debtor days of 48 (1 day lower than last year), creditor days of 73 (1 day lower than last year) and stock turns of 2.9 (0.1 turn higher than last year).  

 

 

Asset Return Ratios

 

ROCE for the year of 15.2% was ahead of our 15% target and ahead of the ROCE reported last year (H1 2023/24: 15.1%).

 

Organic ROCE (which excludes acquisitions completed in the last 12 months), was 17.3% (an increase of 0.3ppts on last year) and we expect this to continue to grow well going forward. The effect of compounding growth on acquisitions over time can be seen in the ROCE for those businesses acquired more than 7 years ago which in aggregate have a ROCE of 29% including an apportionment of Group central costs.

 

Return on Tangible Capital Employed ("ROTCE") for the year, which excludes goodwill, intangible assets and non-operational assets, was 48.9% and illustrates both the strong returns being generated by the Group's operational assets, and the capital-light requirements of those businesses with capital expenditure of only 1.1% of sales in the last 12 months (FY 2023/24: 1.2%). ROTCE was 1.1ppt ahead of last year (H1 2023/24: 47.8%) following the improvements in organic operational efficiency and the increase in operating margin.

 

Cash Flow

Net debt at 30 September 2024, excluding leases, was £98.7m, compared with £104.0m at 31 March 2023 and £111.3m at 30 September 2023, with the reduction in the Period of £5.3m driven by strong free cash generation partly offset by acquisition and disposal net investment and last year's final dividend.

 

£m	H1 2024/25	H1 2023/24		Last 12 Months
Opening net debt	(104.0)	(42.7)		(111.3)
Free cash flow (see table below)	15.7	8.1		44.6
Dividends	(7.9)	(7.6)		(11.5)
Acquisitions & disposals	(4.9)	(67.5)		(22.8)
Equity issuance (net of taxes)	-	(0.2)		(0.1)
Foreign exchange impact	2.4	(1.4)		2.4
Net debt at 30 Sept	(98.7)	(111.3)		(98.7)

 

 

Acquisition and disposal net cash outflows of £4.9m in the Period comprised £3.3m for the acquisition of Hivolt, £1.7m payment of earnouts, £1.9m of acquisition and disposal expenses partly offset by disposal receipts of £2.0m, mainly related to the disposal of the Santon solar business announced last year. Additional receipts of around £5m are due in the second half related to the solar business and facility disposals.

 

Last year's final dividend of £7.9m, which was paid in August 2024, was an increase of 5% over the prior year. 

The impact of stronger Sterling in the Period led to an FX gain of £2.4m compared with an FX loss last year of £1.4m. The Group's policy is to hold net debt in currencies aligned to the currency of its cash flows in order to protect the gearing of the Group. 

 

Underlying operating cash flow and free cash flow for the year (see definitions in note 7 to the summary consolidated financial statements) compared with last year are shown below:

 

£m	H1 2024/25	H1 2023/24		Last 12 Months
Underlying Profit before tax	23.8	25.1		46.9
Net finance costs	5.3	3.5		10.8
Non-cash items	7.1	7.5		15.5
Underlying EBITDA	36.2	36.1		73.2
IFRS 16 - lease payments	(3.8)	(3.1)		(7.5)
EBITDA (pre IFRS 16)	32.4	33.0		65.7
Changes in working capital	(5.0)	(12.3)		5.1
Capital expenditure	(2.3)	(2.7)		(4.5)
Underlying operating cash flow	25.1	18.0		66.3
Finance costs	(4.6)	(3.7)		(8.6)
Taxation	(4.2)	(5.2)		(11.5)
Legacy pension	(0.6)	(1.0)		(1.6)
Free cash flow	15.7	8.1		44.6

 

 

Underlying EBITDA (pre IFRS 16 lease payments) of £32.4m was 2% lower than last year (H1 2023/24: £33.0m) with operational efficiencies and contributions from the six acquisitions made in the last 14 months minimising the cash impact of reduced organic sales.

 

During the Period, the Group invested £5.0m in working capital, a reduction of £7.3m on last year, partly linked to an ongoing drive to reduce inventory levels and partly linked to lower sales levels. With working capital released during the second half last year of £10.1m, a net £5.1m was released from working capital over the last 12 months. 

 

Capital expenditure of £2.3m was invested during the Period, similar to last year (H1 2023/24: £2.7m) including new facilities and various new production line extensions. Capital expenditure levels are expected to increase in the second half to around £7m for the full year.

 

£25.1m of underlying operating cash flow was generated in the first half, up 39% on last year (H1 2023/24: £18.0m). Together with £41.2m generated in the second half of last year, a record total of £66.3m of underlying operating cash was generated over the last 12 months representing 115% of underlying operating profit, well ahead of our 85% target. This was 33% higher than the comparable 12 month period (12 months ended 30 Sep 2023: £49.8m). Over the last 10 years, the Group has consistently achieved high levels of operating cash conversion, averaging over 100%. 

 

Finance cash costs of £4.6m were £0.9m higher than last year being the annualisation of interest rate rises last year and the cost of acquisitions, while corporate income tax payments of £4.2m were £1.0m lower than last year reflecting changes in the timing of payments. Around a further £8m of tax payments are expected during the second half.

 

Free cash flow (being cash flow before dividends, acquisitions and equity fund raises) of £15.7m was generated in the first half, 94% higher than last year (H1 2023/24: £8.1m). Together with £28.9m generated in the second half last year, a total of £44.6m of free cash flow was generated over the last 12 months being a free cash conversion of 126% of underlying earnings, well ahead of our 85% target. Free cash flow was 46% higher than the comparable 12 month period (12 months ended 30 Sep 2023: £30.5m).

 

 

 

 

Banking Facilities

 

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

 

With net debt (excluding IFRS 16 leases in accordance with our banking covenants) at 30 September 2024 of £98.7m, the Group's gearing ratio at the end of the Period (being net debt excluding IFRS 16 leases divided by underlying EBITDA as annualised for acquisitions) was 1.45x compared with a target gearing range of between 1.5x and 2.0x. Together with expected cash flow in the second half, the Group has access to acquisition funding of c.£70m for the rest of the year while remaining within our target gearing range.

 

Balance Sheet

Net assets of £296.6m at 30 September 2024 were £5.0m lower than at the end of the last financial year (31 March 2024: £301.6m). The reduction primarily relates to last year's final dividend of £7.9m paid during this Period and the currency translation impact of £8.8m being partly offset by net profit after tax for the Period of £12.0m. The movement in net assets is summarised below:

 

£m	H1 2024/25
Net assets at 31 March 2024	301.6
Net profit after tax	12.0
Dividend paid	(7.9)
Currency net assets - translation impact	(8.8)
Loss on defined benefit scheme	(0.1)
Share based payments (inc tax)	(0.2)
Net assets at 30 September 2024	296.6

 

 

Defined Benefit Pension Scheme

 

The Group's IAS 19 pension asset, associated with its legacy defined benefit pension scheme, decreased over the Period by £0.4m from £0.3m at 31 March 2024, to a liability of £0.1m at 30 September 2024 (30 September 2023: £0.7m asset). The key driver was the running costs associated with the scheme.

 

 

Risks and Uncertainties

The principal risks faced by the Group are set out on pages 71 to 81 of the Group's Annual Report for year ended 31 March 2024, a copy of which is available on the Group's website: www.discoverieplc.com. These risks comprise: the economic environment, particularly linked to the geopolitical issues arising from the ongoing Ukraine conflict and in the Middle East; potential for increased trade tariffs following the US election; the performance of acquired companies; climate-related risks; loss of major customers or suppliers; technological changes; major business disruption; cyber security; loss of key personnel; inventory obsolescence; product liability; liquidity and debt covenants; exposure to adverse foreign currency movements; and non-compliance with legal and regulatory requirements.

 

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

 

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

 

Summary and Outlook

discoverIE delivered a resilient first half performance with a 4% increase in underlying operating profit, growth in operating margins to 13.8%, ahead of our near-term target and excellent cashflow. This was in an environment of supply chain lead times returning to normal and widespread customer inventory reductions resulting in sales that were 4% lower.

 

Our flexible operating model allows us to control costs in response to lower production volumes, which along with ongoing efficiency initiatives and accretive acquisitions, has more than offset lower sales. This is a great strength of the business that has delivered improved underlying operating profits and margins in each of the last ten years (in-line in the covid year).

 

Orders increased by 5% sequentially, with a book to bill ratio of around 1.0. In the S&C division, orders grew by 20% organically as design wins converted into new orders whilst in the M&C division, orders were 11% lower as industrial destocking continued to work through.

 

Third quarter trading to date is in-line with our expectations with orders run rate ahead of sales and ahead of the second quarter.

 

We remain focused on generating above-market growth through the cycle and our design win pipeline remains strong. This, along with our acquisition opportunities, is our engine for growth and we remain on track to deliver full year underlying earnings in line with the Board's expectations.

 

 

 

 

Nick Jefferies                                                               Simon Gibbins

Group Chief Executive                                                 Group Finance Director

 

2 December 2024