Volex plc

Good afternoon, ladies and gentlemen, and welcome to the Volex PLC interim results investor presentation. Throughout today's recording meeting, attendees will be in listen-only mode. Questions are encouraged and will be submitted at any time just using the Q&A tab situated on the right-hand corner of your screen. Please simply type in your questions at any time and press send. Given the attendance on today's call, the company will not be able to answer all the questions submitted today, but the company can review all questions and will publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll, and I'm sure the company will be most grateful for your participation. I'd now like to hand over to Group Chief Executive, Nat Rothschilds. Good afternoon.

Good afternoon everyone and welcome to the Volex half year results presentation. I'm going to provide you with a summary before handing over to John who will give you more detail on the performance in each market. Following this I'll update you on our strategy before we take questions at the end. Before we turn to the results I'd like to talk to you about a further step in our strategic journey. I'm delighted that Dave Webster has agreed to join as our non-executive chair, enhancing an already exceptional board of directors. Dave has unique industry experience. In his current role, he's led the transformation of CPM, a global leader in advanced process automation equipment. Prior to that, he was the driving force for growth and transformation as the CEO of Electrical Components International, or ECI, a leader in consumer electrical and off-highway harnesses. He brings decades-long customer relationships in our space, particularly in North America, and he will strengthen the board's sector insight. His experience will be invaluable as we scale our North American operations and deepen our customer partnerships in this important market. This month incredibly marks 10 years since I joined the board of Volex and became executive chairman, in effect combining the chairman and CEO roles. I came into a business that was in decline with less than $400 million of revenue and a market cap of about 50 million pounds. And in fact, it dropped down to 30 million pounds at the low. And I set about building a new organization, including talent from within Volex, who had not been given the leadership they deserved. So with this excellent team to support me, a lot of hard work and endless travel, I We've created one of the true standout success stories in UK industrials. A significant architect of this success is John Malloy, our global COO. And he will continue in the same role and is every bit as committed to the business as I am. And both of us have very significant personal investments in Volex. Indeed, my move into the chief executive position in Volex merely underlines my deep and ongoing commitment to driving further growth and customer engagement. I will continue to lead from the front, delivering our ambitious plans and bringing in new customers. And I'd also like to say that none of this would be possible without John Bowden's exceptional financial skills and cool head, as the business has become increasingly complex. I'm very grateful to John, who is sitting next to me. I'm very much as well looking forward to working with Dave and the existing board to pursue growth in our markets. There are very substantial opportunities ahead and we have big ambitions. This is a sensible time to align more closely with corporate governance best practice, given the scale of our organization and the strong performance we are setting out today. So moving on to the results, we've delivered another excellent first half with revenues of $584 million at an operating margin of 9.8%. We've generated further strong organic growth at 13% despite a challenging macroeconomic backdrop. And in particular, we've seen very strong growth in electric vehicles and data centres. And later in the presentation, John will take you through exactly what has happened in each sector. The strong performance is proof that our strategy is working well. Investment we chose to make in previous years is supporting growth this year and beyond. Our capabilities make us a first-choice provider of critical connectivity solutions for global technology businesses. As the world changes, we're changing with it, and we are evolving our footprint to follow the demands of our customers who are reconfiguring their supply chains to deal with tariff challenges. Our move towards centres of excellence, where we can deliver a range of the most advanced Volek solutions in a single location, has resonated strongly with customers. It also gives us the opportunity to rationalise smaller sites, thereby improving the overall efficiency of the group. We continue to win new projects with our customers, particularly with electric vehicle customers and in the North American off-highway space. Our first half performance positions us strongly relative to our five-year plan, which, as you may recall, sees us getting to $1.2 billion of revenue by the end of FY27. Our strong results for the first half are another significant step towards these objectives. Before we break out the individual markets, it's worth talking about how our customer-centric approach delivers deeply embedded customer relationships, giving us confidence in our strategy. As you should all know by now, we work with the biggest technology brands in the world who have earned recognition as leaders in their fields. They trust us to deliver manufacturing solutions that meet or exceed their quality, reliability and functionality requirements. Although our assemblies might be a small part of large and complex systems, they play a critical role every time. This is no different whether we are powering a domestic appliance that brings convenience to everyday life or connecting the key components at the heart of life-saving technology. We've built a business that revolves around the customer. We anticipate their needs and rise to their challenges. Our engineers define innovative production solutions and optimize processes for products that are assured to perform in challenging environments. This creates strong customer lock-in and sticky relationships. In many cases, regulatory requirements form a barrier to our substitution in the supply chain. In others, our deep expertise and consistently strong delivery position us as a preferred manufacturing partner. So this customer-led approach, disciplined reinvestment and daily operational excellence form the foundation of a business that compounds value over time. Many of our largest customers have been working with Volex for longer than I have been operationally involved in the business. Over the past decade, Revenues have trebled given by expanding share with existing customers, winning new products and customers, projects and customers, and a targeted acquisition strategy. Operating margins have strengthened from 2% to a consistent 9% to 10% range, maintained successfully for the past five full years. And as a result, operating profit has grown from $7 million in FY16 to $106 million in FY25. This performance reflects stringent cost control relentless operational improvement, talent attraction and retention from the top to the bottom of the organization, plus targeted investments in future growth, each aligned with our customers' priorities. And this combination of growth and margin expansion has translated into basic earnings per share rising from $1.5 in FY16 to over $36 in FY25. Volex continues to steadily build capability, deepen relationships, and deliver consistent, sustainable returns creating shareholder value that compounds year after year. I'll now hand over to John to take us through the financial performance in the end market.

Thank you, Nat. So first and foremost, I'm incredibly pleased with the results that we've been able to deliver. And this is an excellent performance at $584 million of revenue in the first half of the year, which represents organic growth of 13%. Profitability is towards the top end of our margin target at 9.8%, which means we've delivered 57.2 million of adjusted operating profits in the first half of the year. With lower interest costs, that means we've increased basic earnings per share by 30% to 19.7 cents per share on an adjusted basis. We've maintained a strong track record around return on capital employed, despite the investment that we made in our business, which includes putting in additional working capital to support customers. And as a result, we've stayed at 20% return on capital employed. These results are an indication of a business that is in great shape and navigating dynamic market conditions effectively. Over the next few slides, I'm going to take you through what we've seen in each of our end market verticals. We've established a market leading capability in electric vehicles and are recognised for our proficiency in both designing and producing key components to power the next generation of transports. Our long-standing partnership with leaders in EV technology has positioned us well to support a broad cross-section of the EV market. Much of our 13% organic growth has come from expanding our capabilities laterally to meet evolving market demand. This includes delivering complete AC charging solutions through integrated end-to-end manufacturing. Consumer demand for electric vehicles has continued to grow in our key markets in the US, Europe and China. EV sales as a percentage of new car sales recently hit 30% in Europe and 58% in China. While changes in government incentives in some markets, such as the US, may soften short-term consumer demand, long-term prospects across key geographies are strong. Our footprint allows us to be flexible around customer requirements. For example, we are moving a new program to Mexico to support a customer's tariff optimization strategy. And while this will push out the timing of the initial ramp up, it is exactly the type of dynamic problem solving that strengthens relationships. With enhanced capabilities supporting a wide range of global automotive brands, we have confidence in our ability to grow EV in the medium term. It's worth starting the explanation about consumer electricals with some context about the performance we've seen over the last 18 months. We had what you might call a post-destocking rebound in the first half of FY25 when we hit $132 million of revenue. This normalised to $125 million in the second half of FY25. For the first half of this year, we delivered $126 million, slightly down versus a year ago, and more in line with the H2 performance. This represents an organic decline of 6%. Mains voltage power cords continue to represent the largest share of what we do. We work with some of the biggest consumer brands in the world, where reliability, reputation, and customer experience are key priorities. These brands choose Rolex because they have confidence in our ability to exceed their quality and safety demands. Our vertical integration and scale in this market means that we have relationships with all the major domestic appliance manufacturers. This is giving us significant traction as we continue to push our harnessing capabilities, an area where we see strong opportunities for growth. In fact, harnesses and other complex assemblies now constitute almost a third of revenues. In the second half of the year, we have new incremental harness opportunities in Europe. We've seen some secondary impacts from tariffs on European domestic appliance manufacturers. Some of the Chinese competition have reallocated their marketing spend from the US to Europe and are pushing inventory into the European market in response to US tariffs. This is likely to result in some short term rebalancing with medium term growth weighted more towards harnessing opportunities. Although medical is the smallest of our sectors, we proudly support health care innovators whose technologies are transforming patient outcomes and improving lives. Our assemblers distribute power and data throughout sophisticated medical equipment, ensuring reliability, accuracy and patient safety. The first half of the year has seen disruption in demand for complex medical devices. Reductions in spending for both medical research and public health care and the impact of tariffs are leading to reduced or delayed orders for some large medical equipment. The effect is different between customers, with some customers continuing to increase demand during the period, but others looking to reduce orders and manage inventory levels. We have the flexibility to manage this variability within our operations and support customers' demand pattern shift. It is against this backdrop that we saw our sales in the medical sector decline by around 10% organically during the first half of the year, It is likely that the uncertainties caused by the impact of tariffs and policy changes will continue in the short term and will result in a headwind to medical demand. However, we remain very positive in relation to the medium term. This is partly due to the success in winning new projects with significant medical brands, expanding the range of customers that we work with. In addition, structural growth drivers are very strong in this sector, with rising demand due to demographic change and advances in technology, creating new diagnostic and treatment options. And with our significant and in-depth understanding of our customers requirements, we are well positioned to meet the needs of these healthcare innovators. We've seen excellent organic growth of 48% in complex industrial technology, with data centres a significant part of that. But we've also had growth across the other categories. Outside data centres, which I'll come back to shortly, we're delivering complex assemblies, both wire harnesses and printed circuit board assemblies, into highly specialist and demanding applications. Our customers need exceptional quality and complete confidence that the solution will work first time and every time. Meeting their challenging technical and scheduling requirements takes coordination across our operations and engineering experience to support the build process. When we successfully deliver, we unlock additional project opportunities and further repeat business which contributes to our growth. We are well positioned in the US market with advanced facilities which are accredited to deliver defence and aerospace products. This includes involvement in major programmes that are stepping up to address current defence challenges. Our overall organic growth outside data centres was over 20% and much of this came from defence projects. In parallel, we're seeing increased demand from core industrial applications such as building environmental systems. Although the end uses are different in all cases, customers are relying on us to deliver a complex solution with maximum reliability in a competitive way. Our additional capacity in Mexico is an important part of fulfilling these requirements. In data centers, we supply high performance copper data interconnects operating at speeds of up to 800 gigabits per second. These cables form the critical physical links between servers, switches and storage systems within data center racks, enabling ultra low latency, high bandwidth connectivity for AI and cloud applications. Growth in data center investment globally is fueling demand for these products, and revenue is up by 80% compared to the comparative period. As with so much of our portfolio, our ability to manufacture in a variety of locations gives us a competitive advantage given the ever-changing tariff landscape. And finally, turning to off-highway. Here we've delivered really strong organic growth of 20% in the first half. This included a project for specialist military vehicles in Europe that doesn't repeat in the second half of the year. This was a project that we were able to win because of our ability to move quickly and respond to customer demand. Our success in this market is down to supporting specialist vehicle manufacturers in areas such as construction, agriculture and large passenger vehicles who have demanding requirements across a significant variety of products. Our ability to leverage our advanced manufacturing platforms to deliver efficient and repeatable solutions despite variable lot sizes is a differentiator in this market. We're making excellent progress in the North American market, where expanded capacity and our highly skilled engineers and sales colleagues are securing new project wins. This comes at a time when US-based manufacturers are looking for regional production to manage their supply chain objectives. Let me step you through what we've achieved on margins during the period. We are blending together various operating margins across our entities and then adding in investments into capacity growth and capability expansion. These investments include adding incremental manufacturing space or additional salespeople. On a year on year basis, we've improved our first half margins to 9.8%, which is towards the top of our five year plan margin range of 9 to 10%. In achieving this, we've identified cost optimisation improvements worth 0.7%, which broadly offsets the impact of inflation in the period. This optimisation includes further benefits from rolling out automation, as well as the productivity actions highlighted as part of the integration of Murat Tijeret. We also achieved savings through site rationalisation of 0.5%. We have a mixed benefit, which reflects lower consumer power cord sales and higher revenues from our data centre customers. There is a small adverse impact from the weakening of the US dollar, which is our main sales currency. Overall, 9.8% is a very strong first half result, particularly given the amount of investment that has gone into our business recently. And that will come back to the theme of investment shortly. Moving on to cash flow, as in previous years, there are some factors in the first half that tend to result in lower cash generation in H1 compared to the second half of the year. EBITDA was up to 73.6 million, a 20% increase in the comparative period. Capital expenditure was lower at 21.3 million, which is approximately 3.6% of revenue and well within the 3-4% range we had guided to. Once again, we had an increase in working capital and higher inventory was a big driver in this. About half of the increase in inventory is coming from data centres, where we hold stock in hub locations to support timely fulfilment of demand. The remaining increase in inventory is across our other go-to-market sectors, and reflects the impact of increased demand, as well as building buffer stocks to support relocation activity. Part of this expansion includes an increase in defence projects, where we hold a greater level of raw materials for operational reasons. Interest and tax are similar to the comparative period, which reflects the timing of tax payments and current debt interest costs in our growing business. The repayment of leases shown below free cash flow includes the exercise of an option to secure the freehold on two existing sites at a significant discount to market value, providing greater security and control. Our covenant net debt ratio, which is our preferred way of looking at leverage and excludes operating lease commitments, improved from 1.3 times to 1.1 times, giving us great balance sheet strength and flexibility. Our capital allocation priorities are unchanged from prior years. Our primary focus is on organic investments. In addition, we continue to explore acquisition opportunities in a disciplined way. I'll now hand back to Nat to update on our strategy. John, thank you very much.