Discoverie Group (LSE:DSCV) — Half Year Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the Discovery Group PLC Half Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the q and a tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today we'll publish our responses where it's appropriate to do so on the Investor Meet company platform. Before we begin, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from DSCVRY Group PLC. Nick, good afternoon, sir. Hello, Jake. Thanks very much. Hi, everybody. Thanks for joining this afternoon. My name is Nick Jeffers, and I'm joined here with Simon giving Gibbons, our group finance director. Hi, guys.

0:53 So, we're gonna take take you through just a quick couple of slides highlights on the results for six months to September, our first half f y twenty six, and then we'll go over to q and a. So, you know, the first thing to say is that we have achieved a record level of profitability in the first half. Operating profits are up, earnings per share are up, and we'll go into a little bit more detail come on into a little bit more detail of that. But, you know, we've been through a very sort of globally, the world has been through a very tricky cycle since COVID, culminating in a down cycle over the last twelve or eighteen months. But through that period of both up and down cycle, we've delivered progressive improvement in operating profit, earnings per share, and operating margin. So we're very pleased pleased by that. There's no there's no sort of small effort to achieve that, and it demonstrates the resilience of the business model through the cycle. That is that it can grow strongly in good times and be resilient in weaker times.

1:57 In addition to that, we returned to organic growth in the second quarter. Organic sales were up 1% and all organic orders were up 8%. In fact, you know, we have four operating units in the business. Now we have three of those four back into good levels of organic growth, upper mid single digit organic growth across the three of them. And we're just in the final stages of waiting for the fourth division, the controls division, to recover. So during the first half, that figure was still down quite a bit actually, but it's it's coming out, we think, in the second half. So all of that netted out to the with an operating profit up 5% and operating margin up 30 basis points to 14%.

2:45 Again, it's a record margin level for us and puts us on, you know, in good shape to move towards our 17% operating margin target. Adjusted earnings per share up 6%. That's kind of we're benefiting a little bit there from the reducing interest and then which obviously looks like it's set to continue to have fully floating finance rates. So as interest rates come down, we'll continue to benefit from that. Yep. And perhaps, you know, the the the greatest metric of all has been and and is always with us is our cash flow. Our free cash flow continues to be converting it over a 100%. And actually, our average over the last ten years is over a 100%. So very, very strong cash flow, which we're absolutely decisive decisive with.

3:34 We as those of you who are familiar with the business will know, we redeploy that cash flow principally into acquisitions. We have a very strong pipeline of acquisitions underway. Indeed, with these results announced on Tuesday, we announced the acquisition of a small bolt on called KeyMat that we'd signed on Monday of this week for 5,500,000 Sterling. And actually, yesterday, we announced a second acquisition, a business called TreeVal, an antenna business, military antenna business based in Slovenia, which we've acquired for 40,000,000 sterling. And there's more in the pipe behind that. So overall, these results put us on track to deliver full year adjusted earnings per share in line with expectations.

4:21 We're well set for growth. Our first half, second half profit earnings per share weighting is $48.52. So we're not expecting a great hockey stick in earnings in second half. It's a certainly from our perspective, very sort of realistic second half expectation in line with, you know, our historic trend in first half, second half balance. So that is a highlight of the figures overall. I'm gonna pause there and hand back to Jake. Perfect, guys. That's great. And, thank you very much indeed. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab that's situated on the right hand corner of your screen. But just while the company take a few moments to review those questions that have been submitted already, just like to remind you that a recording of this presentation, along with a copy of the slides and the published q and a, can all be accessed via your investor dashboards.

5:12 Guys, you can see that we have received a number of questions, and thank you to all of those on the call for taking the time to submit their questions. But at this stage, guys, if I may just hand back to you to respond to those questions where appropriate to do so, and if I pick up from you at the end, that'd be great. Thank you. Thank you. Thank you, Jake. We do have a question come through. Can you talk about the strategic fit and expected synergy from the KeyMat acquisition, particularly alongside the Cursor Controls in the Manetics and Controls division? Yeah. So KeyMat is a bolt on acquisition into Cursor Controls. Cursor Controls is a business we bought about eight years ago based in New York, a super business in the HMI human machine interface space that's basically sort of trackballs with integrated keypads and custom keyboards.

6:05 And so key matches are sort of a very much aligned with that. They make these custom keypad interface units, particularly for the visually impaired. So the business will continue to operate under the existing management, the main shareholder. It's a retirement sale. And the main shareholder recruited, management to run the business couple of years ago, and that management continues to run the business now and, you know, will do for, at least the next three years. So the business will operate to its pre agreed business plan, you know, very much as it did before, but reporting, you know, into the Cursor business as part of a of a cluster as we do with many of our businesses. Thank you. Next question. MNC saw organic revenue declines while SNC delivered 7% organic growth and strong margin expansion.

7:00 Can you elaborate on structural differences in end markets or product mix driving this divergence? Yeah. So the so M and C magnetic M and C is magnetics and controls division, and S and C is sensing and connectivity. So we have four operating units, magnetics, control, sensing, and connectivity. In MNC, magnetics, grew along with the sensing and connectivity division. Controls is the the one that I mentioned earlier, the one of the four that didn't grow. And there's no structural difference, actually. The cause of the decline in controls was six, large US six large customers, all US based, that have, some had some fairly extensive overstocking.

7:50 So they came late to the overstocking situation, but then when they realized, they, you know, obviously have to address it. So during the half year period, those six customers dragged down the overall controls division. Actually and so within MNC, that's the that's the drag effect. Actually, the magnetics division grew in, you know, good single digit levels. So that that's that's that's going fine. And in fact, aside from the six customers in controls, the rest of controls grew actually quite well as well. So it was just a little bit unfortunate that there were six customers that had all, you know, had this overstock situation to deal with, and it just takes a little bit of time to burn off. But and, you know, in a normal course of business, we always have one or two of the customers that, you know, with such situations. It's just a little bit unusual that we had six at one time, but that all it's kind of harks back to the the post COVID sort of boom supply chain shortage and then correction period, and it's just the final unwinding of that. So it's sort of slightly irritating at some level that it dragged the numbers down, but it's not a structural difference.

9:01 It is just it's individual customer specific issues which will flow through and then, in fact, we expect to start seeing it improve through the second half. It is worth actually noting that the, you know, the actual operating margins in controls are actually, you know, higher than some of the the other three operating units, which sort of reinforces, you know, what what a, you know, good performance it was. So we've actually managed to raise, you know, in all of those actually, of those four operating units and raise average gross margins by around about one percentage point, you know, which is which is very good. So even though the higher margin unit is down, you know, we've managed as you you've seen to to grow the operating profits and operating margin during that period, which obviously bodes well as growth comes back into into controls.

9:57 Thank you. Can you give more background on the two acquisitions that you did well, you announced this week, KeyMat and Travell Antenna? Yeah. So KeyMat, we've talked about a little bit already. It's gonna sit within the cursor cluster. They make human machine interface products. Principal line of their business is products for the visually impaired in for sort of keypads on sort of public use booths and the light passport verification, for example, McDonald's ordering terminals. That business has been growing its sales into The UK and US since the European Union has recently adopted similar legislation. We expect growth similar growth opportunities to present themselves in the EU.

10:46 So it's a it's a good high quality business. It's been around for a long while. It's had a few very good re years recently on the back of this visually impaired this this keypad for the visually impaired. That opportunity still has some way to run, and we will be investing in the business and supporting the management there to continue that growth. So great little business. Absolutely top dead center in terms of a discovery bolt on type acquisition. And then Treval that we announced yesterday is a designer manufacturer of antennas for military, principally for defense applications. It's based in Slovenia, Ljubljana, and they supply NATO friendly countries with antennas.

11:31 So their principal countries are Europe, US, and the such like. Again, of small business, very high quality product. Obviously, defense is an area of growing sort of spend and and opportunity for this business. And so we bought this business to invest in growth over the sort of short, medium, and long term. So the largest sort of territories are Europe and The US, but the absolute sales that they have in those territories is is actually very small. So we feel that by, sort of investing in the business, we can grow the opportunities. As we've done it, there are some characteristics of this business that are very similar to a business we bought, back in the early days, which has gone on to grow very strongly, consistently strongly, for a for a good good deal of time.

12:23 And that is that it they make a very niche product, that they sell into into very large customers, but they're at you know, their their sizes of supply into the customer is very, very small. They just focus on super niche products, which have a very high opportunity for margin, good margin. And what we found with the one of our other businesses is that by just investing in the sales channel to look for more of those sort of niche micro niche opportunities in these big customers, you can build a really strong position. And we think that Tree Valley is gonna do the same. And that kind of builds on their fundamental organic growth opportunity, which is, you know, particularly in Europe, there are a lot of countries, particularly sort of Nordic regions, some of the Eastern European countries that are investing in their military capabilities.

13:11 And these the markets that Treval's supplying to are principally antennas for things like radio, man packs, you know, the combat soldiers, man pack radio communication, and antenna masts for infield use. So an area that is already receiving more attention spend, and we think will continue to grow. Yeah. Also, it will it will sit you know, that business will sit alongside our existing cluster of you know, we've got two two of our antennae businesses, two g and Anza Nova. So it'll sit alongside that. You know, they don't just yet sell into military, but the products are very compatible. So, you know, it gives us a really nice opportunity to develop their sales channels, you know, working alongside Treval. So, you know, we're hoping we'll get some good top line synergies from that.

14:11 Thank you. Are you comfortable with the ability to source rare earths on an ongoing basis? Rare earth materials. Yeah. Rare earth magnets. Yeah. So, yes, we have we have looked into this as you might expect in some detail, and we are able to resource the materials we need. At the moment, we don't actually need to do the resourcing because we are getting the supply. Products are now subject to export license from China. The one that we source is that subject to export supply from China, and that is happening. So we're we're receiving the products, but we do have contingency plans should we need them. Thank you. With with regards to your acquisition pipeline have changed market conditions changing market conditions, changed your pricing expectations, or shifted your focus towards your particular end markets?

15:09 So we have seen over the last year or two that the pricing the frothy pricing expectations have tempered. I mean, two things have happened. The the you know, two years ago, businesses were attempting to be sold on the basis of forward earnings growth and at a high multiple. So you get a higher multiple on a higher predicted or half expected profit figure. Whereas now that, you know, that people are businesses are being valued on current or last twelve months valuations at profitability, and the multiple has typically come back a turn or two. So, yeah, the combination of that is of those two things having changed, it makes quite a material difference to the value being paid.

15:56 So yeah. So they have tempered, and that's why we are, you know, buying particularly at the moment. And it's a good it's a good time to be buying from that perspective. In terms of focus, I mean, we what we, you know, what we are doing more of is both organically and acquisitively, we're investing and focusing on the defense markets. We do quite a lot in particularly passive defense. So we have, with this acquisition, obviously, established a position. We've got more acquisition opportunities that, you know, are facing into the defense market. And also, organically, we're developing both our opportunity pipeline within our existing businesses in the in the in the defense space, and we're also investing in sales development resource for the defense market. So yeah. So the the the defense market will become a a growing part. It's a small part at the moment, and it it's never going to become defense only business. It will always become one of our five target markets. So the reason we have five target markets in a low relatively low or a very low customer concentration is because we we want to achieve consistent growth in earnings and profits through the cycle. So in order to do that, we want to have five target markets which will create revenue growth of varying degrees through the cycle and then augment that with acquisitions.

17:22 And so to all all to try and create a blended growth in earnings that, you know, is delivered consistently. And as if you look back at our ten, fifteen year record of earnings and profitability growth, that's exactly what you see. So our increasing focus on the defense market is just a sort of one step in building that capability. Thank you. There seems to be no more questions. I'm gonna hand the floor back to you, Jake. Perfect, guys. That's great. And thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And, of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended. But, Nick, perhaps before really now, just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments just to wrap up, that'd be great.

18:16 Yeah. So so thank you for the time today. I mean, the the business has delivered a strong set of results through a tricky old period. We're very confident in the ability of this business to deliver sort of sustainable performance and with the businesses in in good shape. We're well set and coming through into the recovery phase of the cycle. Obviously, that will be modulated to the degree of economic activity, but as you've seen through the last couple of years, the businesses, you know, it it it so far has always performed ahead of the market overall, both with focus and by not focusing on weaker markets. So we feel that we're in good shape to do that. All our growth drivers, organic and acquisitive, are in that shape in in good shape.

19:06 And, so we keep going and, look forward to sort of having a, you know, another good performance next year. Perfect, Nick. That's great. And thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team could really better understand your views and expectations? This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of DSCVORY GROUP PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.