discoverIE Group - Simon Gibbins, Group Finance Director & Lili Huang, Head of Investor Relations

My name is Simon Gibbins, I'm the CFO of FTSE 250 Electronics group discoverIE. People also call it discoverIE, which stands for Innovative Electronics, and that sort of neatly sums up what we are. It's innovative customized electronics, and that's going to lead on to the next slide where, just to help you, what we are versus what we're not. So we design and manufacture customized electronic components for industrial applications. It's industrial, we're supplying OEMs, and this is the more niche, high-margin, longer-life part of the electronics market. We're focused on four or what we call target markets: renewable energy, the electrification of transportation, medical, and industrial connectivity. And these are all in long-term, strong growth momentum markets. We're an acquisitive company. We've made 20 acquisitions in the last 10 or so years. It's a decentralized model which allows the companies we buy to continue to be entrepreneurial, to continue to do what they're good at, while having our strong governance and controls underneath them. We're a capitalized model, and that means that we are very cash generative. What we're not, on the right-hand side, we're not a distributor or a contract manufacturer. They are lower-margin business types, much more cyclical. We don't supply standardized electronics; again, that is a very competitive part of the market, driving much lower margins. And we don't supply consumer electronics, which is typically much shorter-type lives and also very competitive.

It's an organic growth and acquisition model, as you guessed. The organic growth very much comes from driving sales through those target markets that I mentioned, striving and driving to achieve operational efficiencies as we develop, and certainly delivering strong cash flows, all augmented by high-quality acquisitions. And you can see that's driving, if you look at the bottom right-hand side of that chart, really strong financials. So since FY18, we've grown sales at 19% CAGR a year, which splits roughly 50/50 between organic sales growth and sales we're achieving from the acquisitions we made. Operating profits are at 34% CAGR in that period, and EPS is up 26% CAGR. And as I said, we're generating a lot of cash, and we converted—we sort of measure it on how much profit we convert into cash—and we're averaging around about 100% conversion in that period. If you look at the chart at the top, really strong returns to shareholders. So on average, over the last three years, five years, and ten years, we're delivering 20% per annum, 20% CAGR gross in TSR, including a dividend which is growing at 6% a year, which is roughly at the moment about 1.4% yield.

We're an international company. We've got operations in 20 countries, and we're selling to 66 countries, and that's very much to support a global base, our global customers. We've got sales of around 400 million, with 10% of sales in the UK, 50% in the rest of Europe, and 40% between North America and Asia. We've got 5,000 employees, 30 manufacturing sites, and that all helps flexible production. We need to be flexible because of the size of batch sizes, and it also allows us to support localization, local supply.

A chart just to give you a look at the history of the company. It was actually formed a while ago; it was a commodity distribution company. Then Nick Jeffries, the current CEO, joined in 2009, and I joined about a year later. We've devised and followed the same sort of strategy that we're continuing with today. And you can see that we've made 20 design and manufacturing acquisitions—that's the orange boxes along the top—in the last 10 or 11 years. And in the meantime, we've cleared out non-core businesses, including laterally right at the end that we sold out of distribution a year ago. And so we're now a pure design and manufacturing group. We have used equity to fund transactions in part as we proceeded, but that's a much lower part now as we focus on becoming much more self-funding, self-financing of our acquisitions. And just a note in the middle, Bruce Thompson is our chairman. You might want to come across Bruce; he was 25 years CEO at building Diploma into a highly regarded FTSE 250/50 company, similar model, buy and build. So his coming on board has been great.

So why invest in discoverIE? There's five key factors I've noted down here. We're in these strong target markets, these strong growth markets which should continue to grow. We're making highly differentiated products, really important for our customers. It's a strategy we're continuing to follow, a strategy that we've had for the last 10 or so years, and that's delivering strong financials and, as I showed up front, some decent shareholder return. So taking those one by one, the great markets we're in, these four target markets, they're all markets which have strong growth, you will continue to grow, the forecasts are very much about that. So if you look at each one, renewable energy very much driven by the need to decarbonize, more important in this age. So too with the electrification of transportation, massive markets potential with both of those. Medical, we're all sort of living longer, we all need better treatments, better diagnosis, so that market will continue to grow well. And finally, industrial connectivity, that's sort of automation, robotics, the internet of things, that's in everything these days and it will just continue to be more so. But all of those markets are UN SDG, so sustainable development markets, which is really important to us. We take the whole environmental aspect seriously, so that's key for us. If you look at the top chart, you can see that these target markets are 77% of our sales, and they're growing over the last six years nearly twice as much as other markets, so 12% average growth per year in that six-year period and 10% for the group as a whole.

We're making highly differentiated products. We make customized components that help our customers differentiate their product. It's a very critical part for the customers, but actually a pretty small part of the overall cost make-up for the customer. So actually that's allowed us to continue with high margins, and despite the sort of inflationary pressures we've all been witnessing, we've been able to pass costs on and maintain stable margins. We make a very broad range of technologies which would include magnetics and sensors, controls, and wireless connectivity. Sensors is a great example; you've got it on the chart there. Sensors are in everything as heat sensors, pressure sensors, motion sensors, and you can see on that chart how we were able to develop our sensor products into each of the target markets.

The strategy, it's a clear and proven strategy and it's actually a simple strategy. We've been applying it for over 10 years. It's good growth in sales; we're delivering sort of 10% average growth in the last four or five years. If you move up that value chain, that'll come through operating efficiencies and also as we acquire high-quality growing businesses. And we're also looking to broaden the business out. It was a UK and then a European business, and our products are equally compatible for North America and Asia, so we've been striving to grow there to support our customers. All of that is underpinned by the need and what we are doing is delivering strong cash flows and also the very important factor of reducing our own impact on the environment. And so in terms of that strategy, we've been setting ourselves targets. These have all been externally published targets that we set ourselves. We've been doing that for the last eight or nine years. Targets at the top, you can see key strategic indicators focused on growing our operating margin, growing ourselves outside Europe, increasing our target market sales, and reducing our carbon footprint. And if you look at the operating margin, we started off life, Nick came on board, it was a loss-making business back then, and we built it into a margin now of 11.7% reported in the first half, and our target is 13.5%. And when we achieve that target in FY25, we'll then push that target even higher. We've increased that target about four times already to date. If you look at the table below, that's our key performance indicators focused on creating sales, creating EPS and growth in dividend, the achievement of at least a 15% return on capital employed, and the final two very importantly are about the ability to convert our profits into cash flow. We're delivering well on all of those.

And these are delivering, as I showed up front, strong financials. So 19% CAGR of growth since FY18 in sales, and in fact we've just reported that the year ended March 23, so the first half we've just reported another 26% growth in top-line sales. 34% CAGR growth in operating profits since FY18, and we've just reported 42% for the first half growth. And 26% CAGR EPS growth, and we've just reported 37% growth in 23. In terms of consensus, the market's looking for the full year FY23 around 430 million of sales and 48 million of profits. So that just shows you the size of business we now are.

Finally, look at our capital allocation. We've got a simple approach to capital allocation. The chart on the right is the capital we've used over the last five years, so 350 million of capital. Basically, we invest in any sort of organic capital growth projects that we can. That's 27 million, so over five years it's averaging less than 2% of sales, hence what I talk about, it's a capitalized model. We're investing in that progressive dividend, and the balance, which is nearly 250 million, has gone into acquisitions. And in terms of where it's come from, nearly half of that capital has come from free cash flow that we're generating, 100 million or so from equity, and the balance from debt on my balance sheet and from the disposals, the non-core disposals we've made. And if you look at the bottom chart, our target in terms of gearing on the balance sheet is, we've always externalized that it's 1.5 to 2 times, and you can see we've always kept within that limit. And finally, if you look at gearing as we exited the first half, it was 0.8, and we've got a very good pipeline of acquisitions, and 70 million spent on acquisitions will take the gearing to about 1.6. So we've got plenty of headroom on our own balance sheet for acquisitions, and we've got a good pipeline.

So with that, I will conclude and pass it over for questions. Thank you very much for the presentation.

Well, we certainly look at the financials. We're looking at strong companies that are in good condition, they're growing, they're either in our target markets or capable of being in our target markets. We're looking to deliver multiples typically around about eight to ten times is where we pay, and we're looking for them to within at least two years to achieve a return on investment of around 15%. The very key to that is the quality of the management team. The management team need to have this, they need to be entrepreneurial, they need to sort of buy into our model, and the business needs to fit. So while we run it as a decentralized business, we want them to work and operate with those other businesses and try and sell their products across to each other's customers.

We will typically set an earn-out target over three years, so we want them to stay. They don't always stay; some are retirement sales. We've got a very good track record of bringing in new management to take businesses forward, and sometimes managements do change, and again we've got a very successful record of bringing in new management to take businesses on to the next level.

We're certainly looking to continue what we call bolt-ons. As we're getting bigger, we're sort of clustering our businesses around a sort of common technology. So we have two key clusters at the moment, which is a magnetics cluster and a sensors cluster. Anything coming into that is what we'd call a bolt-on, and that gives us sort of bandwidth and they will sort of report through to the larger business. But we will look at bigger businesses. I think generally the size of acquisitions, if you look back, has grown. But the last acquisition we did was five million, so we're certainly still looking. We certainly get if there's excellent value to be achieved from smaller deals, the multiples you can get are extra super.

It's all of those. So we've got our own team, we've got an internal team who scour looking at targets. We use our own management teams; companies that have been acquired typically know the sort of companies they want to buy, so they bring opportunities. Obviously the banks are all over us with opportunities. We're known as an acquirer now, so we'd sort of expect to be on the list for any company that's looking to sell itself.

Yeah, increasingly, a lot of it is know-how, and it is very valuable. But as we, yes, all the IP itself belongs to us. They're not necessarily patented, but the IP does belong to us. It's not contract manufacturers.

Well, our biggest markets are over in Asia and Eastern Europe. So we've got plants in China, Sri Lanka, India, Poland is large, and then Mexico is also one of our large sites.

Yeah, obviously we're watching China with interest. Our production, certainly through the whole COVID side, hasn't missed serious regard as a required development. But we are capable of moving that. We have moved production into China, we've moved production out of China, and that's quite key to us. That's why we have sort of 30 manufacturing sites. While we occasionally rationalize some of the manufacturing when we acquire, it's quite because they're quite manual, semi-automated businesses, there's not a huge amount of cost to take that you can save from doing it, and then that allows us to move production around if we needed to.

Yeah, Lily, do you want to run through the major shareholders?

Yeah, it's a combination of operational efficiencies. We're very careful with costs; we put costs in carefully. We make sure that the increasing costs is less than the increase in sales. We're very keen on that. But equally additive to that, we're buying high-margin businesses. So the businesses we're now acquiring have their own operating margins of over 20%, so that itself will be additive. So it's a combination of the two. If you look at our first half results, despite the inflationary pressures that are on, we seek to achieve what we call a drop-through of 50% of the gross margins. So our gross margins are around 40%, we're looking for 20% increment as a bottom line from new sales, which therefore drives operating margin growth. And that's what we achieved, and that's the sort of history of what we typically did.

Thank you.