Volex (LSE:VLX) Q2 2027 Earnings Call

0:00 Good morning everyone and welcome to Volex's half-year results presentation for FY2027. My name is of course Nat Rothschild, Chief Executive Officer and I'm joined today by John Boaden, our Chief Financial Officer. This is our first set of results since we moved to the main market and joined the FTSE 250 so it is a particular pleasure to be presenting such a strong first half. And I will start with the highlights and update on our strategic progress. John will then take you through our end markets and the financial performance and I will come back to close with the outlook. There will be plenty of time for questions at the end.

0:52 So in the first half of the year, we delivered a record performance with revenue of $723.6 million. Organic growth was 23.6%, and I am particularly pleased that every one of our five end markets grew. Even excluding data centre, organic growth was 19.5%. Profitability improved alongside the top line. Underlying operating profit was up 41% to $80.6 million and our underlying operating margin rose by 130 basis points to 11.1% driven by organic growth, operating leverage and our optimisation and efficiency programmes.

1:40 Alongside that organic growth we made significant progress in other areas. In July we acquired the remaining 64% of Kepler SignalTech or KST which extends our medical offering into patient connected cables and I will come back to KST shortly. We also moved to the main market of the London Stock Exchange in July and joined the FTSE 250 in September. and alongside the move we carried out a £20 million buyback which we completed in October. This is a very strong set of results and John will take you through the numbers in detail shortly. At our Capital Markets Day in April, we set out an ambitious near-term plan for Volex to take revenue from $1.2 billion to $2 billion through around $500 million of organic growth and around $300 million of revenue from acquisitions.

2:41 and alongside that we set our sights on a 12% underlying operating margin while sustaining a return on capital employed of around 20%. Thank you very much. Thank you for watching. Return on capital employed is 23.3% ahead of our target and this shows the efficiency of our operations and the returns we generate from disciplined investment in capex.

3:46 And we have completed the first acquisition of the plan which brings over $50 million of annual revenue and extends our offer in medical. I will give you more colour on KST on the next slide. So KST is a business that we know very well. We first invested in 2017 when the business was established and we have supported its development ever since we essentially co-founded the business. KST specialises in cables that connect the patient to advanced medical equipment in monitoring, surgery, cardiac care and ultrasound. Until now our medical business has made the cables inside the equipment and with KST we are extending the scope of what we can offer.

4:38 Over the years, KST has built a substantial book of business with deep customer relationships and it has proved adept at helping customers solve complex technical challenges with innovation, quality and consistency. It has a strong roster of customers with very little overlap with ours and it manufactures in modern competitive facilities in China and Indonesia. They're also in Batam and they followed us there because we were there. The business had reached a scale where it made sense to bring it fully into Volex and that gives KST formal access to our global healthcare customers. It brings KST onto our platform supporting capacity and efficiency in both manufacturing and the supply chain and it lets KST benefit from our expertise in vertical integration and manufacturing best practice.

5:35 Last year, KST delivered around $52 million of revenue with healthy margins. In the two and a half months we've owned it, it has contributed over $11.3 million of revenue. We believe we can accelerate KST's growth by cross-selling its products to our customers and by opening up the full range of Volex's capabilities to KST customers. As it grows we will apply the same principles of operational excellence that have allowed us to scale our own organisation so effectively, enhancing efficiency and delivering exceptional quality. And scale is increasingly important because the largest medical device companies in the world want to work with a small number of trusted manufacturing partners, organisations that can support them globally.

6:35 Thank you for joining us. Almost half of group revenue, 49% now, comes from these five super sites. That is double the proportion of five years ago. As we said at the Capital Markets Day, the direction of travel is fewer, larger, more capable sites. This move supports efficiency and it's a big part of why operating leverage and cost optimisation added 1.5 percentage points to the group margin bridge which John will go through. Each of these sites continues to develop. In Asia, we offer highly competitive advanced manufacturing across all of our own markets.

7:24 Batam in Indonesia is very popular with customers and continues to grow strongly, with further expansion underway. Suzhou in China is our manufacturing excellence reference site where we develop and share best practice across our major facilities and it is also the group's research and development hub. Both sites are now adding the capability to make off-highway harnesses for global customers. In Sivas, Turkey which I visited earlier this week Thank you very much. In North America, we are responding to customer demand by building a vertically integrated platform in Mexico with moulding in Tijuana and cable extrusion in San Luis Potosi, both live in FY28. That will support the significant growth we see with our EV and electrification customers. It also strengthens our off-highway offer as we take our European off-highway relationships into a key strategic market. So I will now hand over to John who will take you through the financial performance for the first half.

8:56 Thanks Nat. So it's a pleasure to be here in front of so many familiar faces and it's also a real pleasure to be presenting such a strong set of numbers. So let me take you through the financial performance. So let me start with the headline numbers. We're delighted with the revenue growth that we delivered in the first half. Revenue was £723.6 million up 24% and the vast majority of that growth was organic. We grew year on year in every one of our end markets. Equally impressive is the improvement in our underlying operating margin, up 130 basis points to 11.1%. And I'll take you through the drivers of both revenue and margin over the next few slides.

9:47 As profitability has stepped up, so has our return on capital employed, now at 23.3%. That's well ahead of our medium term target of around 20% and it gives us the flexibility to keep investing in our business. Organic growth of 23.6% is a real highlight and it does not depend on a single sector as you'll see when we go through each of the end markets. Taken together, higher revenue and improved profitability delivered an increase of over 40% in underlying operating profit to $80.6 million and an underlying basic earnings per share of 27.7 cents. That's more than 80% higher than two years ago.

10:33 This level of performance is a testament to the strategy that we've put in place. Investing in our business, focusing relentlessly on efficiency, driving automation and building operations that meet the requirements of the most demanding customers. Now let's look at where the growth came from, starting with the first three of our five end markets. Our progress in these markets is proof that the strategy is working. In EV and electrification, organic growth was 46.8%. Our vertically integrated platform has allowed us to keep improving the competitiveness of our production, winning business with new and existing customers.

11:22 Our support for industry innovators and our ability to solve complex engineering challenges means we build broader and deeper relationships. In the first half that meant supplying a greater share of our largest EV customers requirements. We're also applying the same capability to the wider energy and electrification markets where we have a number of customers in the battery energy storage and solar space. The same commitment to high quality products lets end users deploy energy and charging safely and with a global focus on energy costs we see growing demand for these products. In Off Highway we delivered double digit organic growth of 12.6% well ahead of the estimated end market growth of around 4% that we set out in the capital markets day.

12:14 Our efforts to expand beyond Europe are paying off with higher sales in the US and India. That gives us real confidence in our ability to globalise these relationships as we begin to extend our off highway capability into Asia in response to customer demand. One of the strengths of our off-highway business is the range of customers that we serve, and that diversity supports consistent growth. As Nat mentioned, we are consolidating a number of our smaller operations in Turkiye into a purpose-built site in Sivas, which will make our off-highway operations across Europe more efficient. In consumer electricals, we delivered organic growth of 9.5%. That is particularly pleasing given the headwinds that we faced last year from increased competition in Europe.

13:05 As we explained in the Capital Markets Day, we are focusing strongly on harness opportunities in domestic appliances, where the harness is worth several times the power cord. That is particularly compelling for global customers who benefit from our worldwide capabilities. Copper costs were higher than in the comparative period and we continued to use contractual mechanisms to pass these costs through to our consumer electricals customers. That brings me to our two remaining end markets. Medical grew by almost 2% organically. That is below the market growth we expect over the medium term, but as we said in the full year, we expected medical to stabilise this year after a period of destocking and inventory rationalisation by some of our largest customers.

14:01 It has now returned to growth. As Nat mentioned we're very pleased to have completed the acquisition of KST which gives us an entirely new route to market through specialist product sets that is also relevant to many of our existing customers. Our focus in medical is now on integrating KST and pursuing the cross-selling opportunities that we have already identified. In complex industrial technology, we grew 41%. Data centre revenue grew 47% organically. It has ramped up significantly over the last 18 months and demand has settled at a much higher level than in the comparative period. It was, however, lower in the first half than in the second half of FY26, which included some additional volumes that did not repeat.

14:54 We've also seen strong growth outside data centres, particularly with our aerospace and defence customers, with the rest of the sector up 34%. That includes revenue brought forward from the second half, which I want to explain. The consolidation of our two US manufacturing sites is on track, with production moving from Washington State to our specialist PCBA facility in California. As part of that transfer, and in agreement with our customers, we shipped around $10 million of goods early, with the revenue recognised in the first half. That creates a buffer while the manufacturing equipment moves in the second half. It brings around 10 million dollars into H1 with a corresponding reduction of a similar amount in H2.

15:41 We remain confident in the opportunities across complex industrial technology in areas such as aerospace and defense and in the next generation of high-speed data center products as customers begin to adopt them next financial year. It is this growth across diverse end markets that allows us to deliver such strong organic growth without depending on any single sector. Excluding data centres, group organic growth was 19.5%. On slide 12 we show why diversification matters so much. It was particularly clear in FY26 when we delivered our previous five-year plan a year early, despite headwinds in consumer electricals and medical.

16:29 This half, both of those markets returned to growth. diversification is a significant strength for us it gives us the confidence to invest to make long-term decisions and to follow through on our strategy each market has its own demand drivers and they operate independently of each other These are factors such as electrification, rising complexity and off-highway, AI infrastructure and defence spending as well as an ageing population in medical. These structural growth drivers are the reason that we focus on these markets. The common theme across all our customers is the demand for reliable, high quality competitive manufacturing of complex products. We share expertise across our facilities and end markets to keep improving what we offer and that is why we work with some of the biggest, most innovative and most demanding technology companies in the world.

17:29 Now turning to the underlying operating margin, I'd like to step you through the 130 basis point improvements. Product mix added one percentage point. Our investment in equipment, engineers and research and development lets us meet our customers' most complex requirement in every end market we serve. As we support customers with our most demanding technical challenges, our margins improve, reflecting the value we deliver. This is not just about the changing proportions of our end markets, it is about rising complexity within each of them. as ever we invest in our operations so we can keep delivering at the cutting edge growth investments reduce margin by 0.6 percentage points in the half we will keep investing in the second half with dual running and ramp up costs as several significant programs come online and i'll come back to those shortly Cost optimisation is a continuous journey for us and alongside operating leverage it's added 1.5 percentage points. That includes the benefits of automation and continuous improvement as well as site consolidation that improves our overhead recovery and it more than offsets inflation and foreign exchange.

18:47 As our business grows, revenue is growing faster than operating costs and that's delivering operational leverage across the organisation. Finally, KST added 0.2 percentage points as its margins are slightly higher than the group's. This margin performance demonstrates the progress we are making. At 11.1%, this is our highest first half margin yet. So turning to the cash flow, Higher profitability lifted EBITDA by 35% to $99.4 million and underlying free cash flow increased to $22.3 million from $4.8 million a year ago. In a business growing this fast, we continue to make sensible investments to expand capacity and capability.

19:40 Net capital expenditure was $23.7 million or 3.3% of revenue. Our working capital also continues to grow as we expand our relationships with customers and make sure we have the resources on hand to respond quickly to their changing requirements. Cash conversion was 56.5% up from 33.4% a year ago and reflects the pace of our growth. below free cash flow we invested 63 million net of cash acquired in KST and returned 22.7 million dollars to shareholders through the share buyback that accompanied our move to the main market we've also increased the interim dividend to 1.7 pence per share even after allowing for the acquisition of KST in the buyback covenant leverage was 1.1 times the same as a year ago and consistent with what we said at the time of the acquisition leaving us with significant headroom to keep investing and to pursue further acquisitions.

20:45 And on the subject of investment, this slide sets out the key projects we're working on this year. As I mentioned earlier, delivery of these programmes is weighted to the second half and for some continues into the next financial year. We therefore expect capital expenditures to step up in H2 to around 5% of revenue for the full year. These programmes include additional EV capacity in Batam and Suzhou and bringing vertical integration to North America initially for our EV customers with moulding in Tijuana and cable extrusion in San Luis Potosi. All these programmes are underwritten by incremental customer projects that we have already secured.

21:30 We are responding to customer demand for global off-highway capability by building what we need to deliver it in Asia. In India, we are expanding our existing facility in Pune and we will be opening a second site in Bangalore, giving us access to more regional markets in this fast growing and attractive market. We will also continue to invest in research and development through the second half with a particular focus on data and power products for data centre customers and on evolving our EV and electrification product set. Several of these programmes are now moving into our factories, installing equipment, testing it and ramping up before the full volume production FY28.

22:19 New capacity comes online ahead of the revenue it supports and it adds to our cost base while it ramps up. So as we said in today's statement, margin progression is unlikely to be linear. We think that is the right trade-off. We're investing now for revenue from FY28, balancing growth and margin as we always have. With that, let me hand back to Nat to summarise.

22:48 Thank you very much John. So this was a record first half with growth in every end market. A margin of 11.1% and capital put to work through KST and the buyback all alongside our move to the main market and the FTSE 250. So I'd like to set out our thoughts on the second half which has started well. We expect second half revenue to be broadly in line with first half revenue excluding the circa $10 million brought forward. Customers will draw down the buffer stock built in the first half ahead of the US site consolidation that John described and we expect this to be offset by a full six months of KST rather than the two and a half months in the first half.

23:47 In EV and electrification, we expect revenue broadly in line with the first half, driven by our share of customers' requirements rather than vehicle volumes. For the full year, the Board's expectations as upgraded at the October trading update are unchanged. In addition, We have substantial headroom under our $500 million facility to keep investing and to pursue acquisitions. Looking further ahead, we are well positioned to deliver our medium term targets of $2 billion of revenue, a 12% operating margin and a return on capital employed of around 20%.

24:36 Thank you very much. we currently have a lot of incremental opportunities ahead of us and as a management team we feel highly confident in our future prospects and our ability to execute against our medium term objectives so John and I would now be extremely happy to take any questions

25:38 Andy from Jefferies, morning both on the EV and electrification side clearly very strong growth and I know we're talking about share of wallet but it does seem to be extraordinary numbers given the underlying market so maybe you can go into a bit more detail about maybe your largest customer or where you're going with that because the numbers don't seem to make a huge amount of sense so that would be helpful to know on the A&D side I think when you guys came in to see us about 6 months ago and probably 12 months ago you were really pushing hard to try to get into more defence markets so A&D growth clearly good but can you talk about whether this is a function of more projects with new customers, whether there's more customers to come etc so just trying to figure out where A&D goes from here and then last but by no means least on M&A clearly recent acquisition has been good but just the pipeline and commentary would be really helpful Look you're right Andy that it's been very strong in

26:30 Evie and if you look at global sales in Evie we're up 40% plus and sales of Evie's are not up 40% plus so what it comes down to it is it's his share of wallet and why are we winning those incremental opportunities it's because of the investment that we've made over multiple years in vertical integration so we've got to a point where we are incredibly efficient we've got in-house extrusion we've got in-house plastics we make Thank you for joining us. to meet commitments that we've already undertaken with our largest customer but of course it gives us access to the rest of that North American market with an in-market capability that we think is a differentiator and that's really what drives it.

27:36 in Indonesia we've got two new buildings with sort of turned parts, plastics extrusion, all vertical integrating the EV business. I mean it's pretty exciting when you go and look at it. On the defence business, we bought this company in California, Irvine Electronics, about five years ago. And that business is doing incredibly well. And they're making advanced PCBAs for various household names of tier one defence companies. So that business is... is enjoying incredible growth and then the other side of the business is on the thing that's getting me excited about Turkey again is the Turkish military business where we have just won a very large order for one of the big Turkish defence companies and that's a very very significant piece of domestic Turkish business and then there's obviously depressing as it is the Ukraine situation where we've won significant businesses as well with unmanned aerial vehicles out of our Poland

29:11 so those are the sort of three main the three main defense drivers and then on On M&A actually it's been a bit sort of quiet until very recently and then things have just sort of picked up in the last few weeks. So we've got a couple of interesting ideas in what I would call kind of traditional Volex business. So wire harnesses, cable assemblies. So I think there are things that are picking up there as well. Thank you.

29:50 Henry?

29:54 Henry Carver from Singer, just one around the capex, lots of growth, capex clearly, is there or how much of that 5% would be maintenance, basically just a split on the capex?

30:10 I mean it's very low, it's between half percent and one percent, virtually the bulk of what we do is going into projects that support the organic growth and the incremental opportunities. Thank you.

30:26 Hi, it's Andrew at Peel Hunt. I've got three if that's all right. I wanted to ask about off-highway and the North American market in particular. You've clearly highlighted how parts of the vertical integration strategy and the manufacturing are kind of helping you win business there. I wonder if you could unpack that a little bit because I think clearly we know about the scale of the opportunity in agriculture in North America and you've talked a lot about some of those markets just kind of understanding how you see that shaping up over the next few years would be really interesting I think. Second on consumer, clearly doing very well there against some mixed end markets. We know some of the areas you've been winning business to the extent you want to talk about the opportunities there. And then finally, just following up on CapEx, I thought the slide on showing us how those projects phase out.

31:21 Thank you very much.

31:40 I can make an important point about growth generally. One of the things about the off-highway business is that you have a tremendous number of part numbers, a tremendous number of SKUs, a significant upfront cost for the equipment that you have to buy and and many more. very very small numbers of part numbers and you know pun not intended electrifying growth you can you go back to what we were talking about with with the vertical integration on and why and the growth that you saw on the EV side of the business in the last in this in in this set of results We're more focused on the growth side and on the simplicity of the EV electrification side in terms of when I get up in the morning I think about what are the real opportunities in the business. It doesn't take anything away from the off-highway business which also grew in a very very healthily, but the peculiarity about the off-highway business at the moment is there is a

33:16 There is a tremendous amount of opportunity in the off-highway business, but to use a kind of unconventional statement, Volex's eyes are larger than their stomachs. In other words, too much opportunity in off-highway. So what we're doing is that what we're trying to do is we're trying to kind of selectively go after, I wouldn't say cherry pick, but we're trying to prioritize our existing customers, first of all. There's simply too much opportunity and there's not enough time in the day to satisfy that opportunity.

34:07 I think that the development of the San Luis Potosi site will really help that because it's obviously slightly lower labour costs. We're making this big investment in extrusion which will... which will help that but it's the there's an opportunity if you take for example battery cables which is actually something that we do with some complete virtual integration already in Turkey that will you know once we get our extrusion up and running next year that's the sort of the type of business that will be incredibly well suited to

34:54 to Mexico does that answer is that a helpful sort of I've forgotten the other question the next one was around consumer electricals and as we said at the capital markets day it's very much about the harness, the harness is worth several times more than the power cord it's stickier business, we prefer we're very good at harnesses that's where we're sort of very focused as an organisation we build harnesses incredibly efficiently so we continue to focus on the harness opportunities and they're coming through and they take longer to onboard than a power cord would obviously because it's more complex but that equally means that once you're on those programmes you've got more Clarity around the opportunity because you're less likely to be displaced.

35:52 So that's the focus there. And your last question was around the shape of the CapEx. What we said and what we said at the Capital Markets Day is the The right level of capex for this business should be 4% per year, maybe 3-4%. But when we're growing at these levels, it's going to be at the top end of that. In fact, it's going to be higher, which is what we will see in FY27. and really there is some significant investment going in but as we said in the presentation it's underwritten by customer commitment so it's it's low risk for us but the benefit that it gives us particularly the vertical integration in North America is massive because we feel that's a real point of differentiation and allows us to manufacture those products into the US market with significantly lower tariff profile relative to the competition

36:53 and any indication of how those shifts into next financial year or I mean would you expect to be in the range of FY28 or still above?

36:59 Yeah I'd expect to go back to circa four percent next year but it depends that the growth that we've had we're at five percent because there's a huge amount of growth if we have another year next year where growth exceeds our expectations then CapEx will likely exceed those expectations but in general it's a no-brainer for me as a CFO that we've got projects that deliver cash payback in less than two years so why would I not invest in that good thanks Andrew Rob

37:34 Morning guys, thanks very much. Rob Byde from Zeus Capital. Just on costs and tariffs and copper prices which you mentioned, can you talk a bit more about your ability to manage those costs and pass through those higher costs to customers?

37:51 yeah of course look in terms of the like all businesses we we deal with inflation we saw a 20 basis point headwind in the operating margin bridge from inflation and that's on a net basis so you've got the the price increases that we pass through to customers including the copper and then you've got the the material costs and the Inflation that offset that. So to me that's demonstration of our ability to pass those things through. In fact copper is very straightforward across much of our business where the standard industry approach is that you have contractual pass-through mechanisms. So as copper is increased we've been able to increase our pricing through effectively a formula in those contracts and So that removes a lot of the impact of copper across the organisation and of course we work really hard with other inflation.

38:50 Inflation in labour can be significant in some markets and how we tend to approach that is we're delivering efficiency programmes, we're delivering automation, we're consolidating sites and that's allowing us to reduce our wage roll and offset those inflationary factors.

39:09 and to what degree do you use open book contracting?

39:13 some of our customers require it but in general we don't operate on an open book basis very often it's by exception but we're operating in a competitive market where we have to run our business as competitively and efficiently as possible so when we quote for customers that we can demonstrate that we're the best option thank you Joel?

39:50 Hi, morning. I've just got a couple of questions, one on consumer and one on EVs. So maybe to start with consumer, you mentioned appliances as an area that you've had some success in. The numbers coming out of some of the big appliance manufacturers have been horrendous, so I'm kind of interested to know how you've managed to sort of gain share is it the same reasons that you mentioned say for EVs where it's about vertical integration are there specific parts of the world where it's been particularly successful so maybe a bit more color around that would be helpful and then on EVs pretty simply I'm just keen to understand obviously given the very very strong growth to what extent was it driven by your one largest customer or was it more diversified than just one taking a significant share with one specific customer

40:36 I might answer the question on consumer. I think, look, first of all, we came from the world of power cords. So when we bought... Decker, they had 80% 80% of Electrolux's power core production they didn't make any what any harnesses at all for Electrolux and so it was a natural kind of it was a natural segue into you know having a discussion with your customer about you know doing more for them and that's what our acquisitions do so that's I think the first the first point so we inherited a lot of consumer electrical Power Cool Customers, we were able to then sell them harnesses but obviously to do that we needed the right locations and I think what's really helped us is that if you just take the North American market since the beginning of time consumer electrical harnesses have been manufactured in Mexico and we whilst we do have some production there labor rates in Mexico as we all know quadrupled in the last five or six years and what we have we have this tremendous advantage in this very very low cost site in Indonesia where the labor costs are you know a quarter of what they are now

42:06 in Mexico so that's the second thing so we've been able to kind of migrate business and really major OEMs are looking for ways obviously like we all are to take cost out of the business and the only place you can really do that now is in Southeast Asia because a lot of people don't want to manufacture in China and I think the final point which is in many ways the most important point and forgive me for making the same point again and again and again but many of our large competitors aren't interested in vertical integration they're more interested in managing their they're balance sheets and they are in sort of in sort of putting investment in and actually making some of the constituent parts.

42:59 So we have been very, very successful and continue to be very successful in going against the conventional wisdom and vertically integrating. So if you take, for example, you divide consumer electorals up into washing, cooking, refrigeration. And if you take, for example, on the cooking side, We make all the heat resistant silicon wire that goes into convection ovens, microwave ovens, we do that internally and that's a huge part of the cost and we make that in our Indonesia facility and that makes us more competitive and the customers like it when they come round, they see that we're doing it in house and that's what they want to see they see us as a kind of progressive supplier so we have been successful and I think the final thing is I just add one more thing is engineering so we've done very well we have a nice you know we have a nice business with Dyson for example and that really comes from engineering and believe it or not in some cases actually patent protection where we've actually you know done some quite sort of clever things so that's the answer yeah do you want me to take the EV question look EV

44:29 it's the same pattern that we've seen previously that we grow first of all with our largest EV customer and that is what is happening here and that is a testament to the breadth and depth of our relationship with that customer and how flexible we can be for them and all the different things that we can can deliver but where I see the opportunity is The work we're doing with them is allowing us to vertically integrate into Mexico for the US market and once we've delivered our commitments to that customer and we're up and running and the volumes are where they've asked them to be we will have surplus capacity that we can market to other US Thank you for joining us.

45:48 Thank you. So I think that's all the questions in the room. Shall we just check whether we had any questions online?

45:59 There are no questions online at the moment.

46:00 Okay, so do you want to wrap up?

46:03 Yeah, well I'm just, as always, grateful to everyone for coming here, these magnificent new offices of Sodali. And we're working very hard and we are... you know we'll be back in six months time with hopefully more good news so thank you everyone