discoverIE Group plc (DSCV) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to the discoverIE preliminary results for the year -- the end of March '22. It's great to see you all in person. Been -- it feels like it's been a very long time. Before we get into the detail, I would like to just draw your attention to Slide -- on Page 7, which you may or may not have got to in the results. We announced that at the end of the year, our Chairman, Malcolm Diamond, will be retiring after 7 years. Many of you know Malcolm. He's been with us for 7 years now. Unfortunately, he can't be here today, but I'm delighted to say that Bruce Thompson has agreed to become Chairman, and Bruce is here. And to succeed Bruce's position as Senior Independent Director; Tracy Graham, who is also here is becoming Senior Independent. So before we get into anything else, I'll just hand over to Bruce to say a few words.

All right. Well, thank you, Nick, and good morning, everyone. Just reflecting back when I joined the Board back in 2018, it seemed like a very different world at that time. But when I joined, I remember standing up at a very similar results presentation to this and talking about what had attracted me to the discovery and what I thought were some of the features of the business. And at the time, I remember talking about a business that really had a strong bank of technically differentiated products that were able to achieve good margins, and were able to be resilient during the ups and downs of business cycles. I talked about a business that was very international in its ambitions that had a really good growth strategy, which was a combination of organic growth of the existing businesses, but also selective value-added value-enhancing acquisitions that actually accelerated the growth to attractive levels. And very importantly, I saw a group that had very similar entrepreneurial decentralized management culture that I was familiar with from my previous company at Diploma plc. And if I look back over the last 4 years since joining the Board, that really has been reinforced. I think you've all observed under Nick and Simon's leadership, a good growth pattern over that period. We've seen improvements in all of the strategic KPIs in terms of growth, in terms of margins, in terms of internationalizing the business. And also very importantly, an increased focus on target markets that were confident will give growth in the future, so renewable energy, electrical transportation, medical and health care, and then the industrial and connectivity. So a lot has been achieved over that period, certainly in terms of development of the core business. But also, I think, very importantly, additional focus brought to the business by the divestment of the distribution business, which was very successfully divested to good future owners of that business. And so we now have a very focused business on design and manufacturing, with a lot of confidence for the next period of growth ahead. So -- and certainly, again, reinforced by what happened during COVID. I think that really brought out some of the key attractive features of the business. So that's really all I wanted to say at this stage. I'd like to thank Malcolm for his leadership. He's not leaving straightaway, but for his leadership over many years, and bringing the company to where it is. And I just look forward to the next stage of development with a stable and evolving Board and under continued leadership of Nick and Simon. So let me hand over to -- for the main part of the agenda.

Great. Thank you, Bruce. Okay. Now before we get into the numbers, I thought it was just worth sort of providing a -- looking at a bit of context. We've had sort of steadily improving performance over a few years now. But we've had a particularly troublesome environment to navigate through over the last 2 years with COVID and everything else that's been sort of thrown at over that period and currently. So I wanted to just look at really sort of what's that's -- what's behind that. And I think the first thing that I really want to bring out is this focus that we have on structural growth markets. Our organic sales growth now over the last period back to -- or FY '18, which is the period beginning 2017, is now 10% CAGR organic. So that's -- those of you know us well will know that we always talk about aiming to try and get to 10% organic through cycle growth, and we are now able to say that, that's what we've achieved for this period. At the same time, this focus on sustainable -- sorry, this focus on long-term growth comes from these growth markets that we're aiming at. Renewable energy, transportation, electrification of transportation, industrial connectivity and medical control equipment. They are great markets to be in. They're very, very well aligned with the sustainability agenda. And we are really benefiting from that. I mean, that focus is paying -- increasingly paying off. We've been focused on it now for something like 8 years. And we now are pretty sure it's a very good place to be. At the same time as having that focus on sustainable markets. We've got a very strongly established sustainability agenda underway. The full [indiscernible] is now well and truly embedding and embedded in what we do. And that's only going to deliver more change. It brings a certain level of extra cost and complexity to the business, but that's far, far outweighed by the opportunities that it presents us, and we are quite excited by the period ahead in that regard. The other important point I want to bring out is that the world is changing rapidly. You'll see in our presentation that for the first time ever, our organic growth in China is down to low single digits. Our organic growth in India is 83%. There's this very rapid move globally going on as we speak. And that's not something that customers are outwardly necessarily explicitly stating, but we are seeing it in the actions of our customers. Our customers are Western-based multinationals by and large, and the trends are clear. Fortunately, our decentralized international operating structure plays well into this. As customers move their production, we're there for them. As customers derisk their exposure to any one region of the world and localize where they're unable to react to that as in India. And so we're seeing a much lower risk of disruption to operations through our business, both in terms of that, both in terms of the supply chain where because we use a higher proportion of products made from raw materials, they're less exposed to shortages than buying in of external components, and that's sort of semiconductors, for example. And then finally, the fact that our components are critical in the customer's application means that -- and they're a small proportion of their cost means that their pricing is resilient. And so as we've had all these inflationary pressures that we're all very familiar with, we've been able to mitigate that mostly with customers taking those extra costs. So the business model is quite resilient and what we've seen in these strong results, but we also saw it in the year before through the COVID, [ COVID one ] as we call it, the business is resilient and has reacted very quickly to the changing environment so that we can maximize our position with it. So that's a really important feature of the business, and hence, why I wanted to bring it out. The other thing to just say is we've made now 19 acquisitions in the D&M space. It's a great space to be operating in. It's a huge, huge market. We operate in a tiny corner of it, where it is very fragmented, and we're just choosing and finding to acquire these great businesses that fit our mold and model well. And in the last year, the -- as this data shows, the ROI on the acquired businesses in the last year was 19%, which is a very decent return indeed. As Bruce mentioned, we've sold our distribution business to a very good private equity buyer, but that has left us with a very strong balance sheet, those gearing we've had. And we're a high-margin business and purely focused now on D&M. So we really think, as though we've kind of got the pure model that we've been aiming to create now for over a decade. And then finally, all this top line growth that we're reporting, one of the things we're equally pleased with is the ability of it to convert into cash and earnings. So over the last period to 2017, underlying EPS has grown at a rate of 26% CAGR. And our operating cash flow is generally representing around -- converting at a rate of about 100% of operating profit, which obviously is very good. Moving on just to the key points for this year. So we've seen record organic growth. As the press release says, top line reported sales were up 25%, but the organic element was 14% higher than the pre-COVID period. So very, very strong organic growth. The order book is up, remarkably up 71% organically, 86% on a reported basis, including the acquisitions, really, really exceptional and widespread growth. Underlying EPS, up 20% over the pre-COVID period. We've made 3 acquisitions for GBP 85 million through the last year, Beacon based in the U.S.; Antenova, U.K.; and CPI in the U.S., all now integrated fully into the discovery structure. And I'm very pleased to report that our carbon emissions this year were down by -- this is for the calendar year '19, were down 33% compared with the period -- or since calendar year '19. So that's well on our way to this 50% reduction target. And as we speak, we're working on the development of our net zero plan. So New Year has started well. I mean, there is all this concern about what's going to happen with the economy locally and globally. All we can say is what we see. At the moment, sales growth has started the new year strongly. We're still growing in strong double digits. We've got a very, very strong order book, highest level to forward sales forecast that we've ever had. And we've got record design wins. So we're as well positioned as we believe we can be for the environment that we're in. Just a little look at the strategic targets. So we're now -- we've now got into double-digit operating margins, the 10.9% EBIT margin. Our target is 13.5% by March '25. Our sales beyond Europe are now 40% versus the target of 45%. Our target market sales are at 76% versus the target of 85%. And carbon emissions, as I just mentioned, are down by 33% versus the target of 50%. So making good progress on all of them. This is just a little bit more detail on our ESG. So the 3 key points really are the carbon emissions, which I've talked about. On the left, diversity. We've done a lot -- we are doing a lot on diversity. I mean, being an electronics business, it's kind of not the most naturally diverse environment. So we have to work a little bit harder in certain areas. But I'm pleased to say that the operation, senior operational or management level, which is 68 people. Then we have a diversity there of 36%, up from 18% the prior year. So that's a very significant increase. And that's typically -- it's hard to recruit electronic specialists, female electronic specialists, but it is where we're able to do it more in the operational and finance roles. And so that's where it's having most impact. And then at the executive level and direct -- and plus 1 director level, we made a little bit of progress, diversity of 20% against 15% in the prior year. So moving in the right direction. And then in terms of -- I mean, there's loads of stuff going on in relation to the products, but the 1 I want to bring out is ISO 14001, the environmental management standards. We now have just under 2/3 of our business is covered by that, and we will get that to 80% by March 25. The natural balancing figure is there is when we buy businesses, they often don't have ISO 14001 when we buy them. So that kind of keeps the -- that's why the 80% target is 80%. So without any further ado, I'll hand over to Simon to take you through the numbers.

Thanks, Nick. Good morning, everybody. And -- yes, it's certainly good to see a few of you in person after I think it's sort of 2.5 years of virtual presentations. So just on the financial highlights, I think just a couple of points to flag at the outset of that. So this is -- the top of that, we're reporting continuing operations that, therefore, excludes the distribution businesses that were disposed of and Nick referred to. And then within the press release, the results including that distribution business is total operations. So you can see all of that data. Second point, just to flag is we've also included as comparative the FY '20 numbers that's 2 years ago. That's a pre-COVID period. And we feel that is a really good reflection of the sort of real underlying performance of the business beyond COVID, how we're growing. So if you look at the data, we are pleased. It's really a period of strong growth, strong progress, sales up 25%, operating profit up 34%, and that's across both years. And that's driving EPS, we've got 31% growth this year, 20% versus that 2 year ago period. Operating margins, as Nick said, we're touching 11%. And that's up over 3 percentage points since we reported last year. Cash generation continues to be strong despite the level of high growth, it's still strong, and we're averaging on a 2-year average basis, we're over 100% conversion versus our 85% target. And that has helped reduce our gearing to 0.6 as our lowest gearing we've had for over 7 years. And in terms of ROCE, our ROCE target is 15%. We do obviously do a number of acquisitions. Acquisitions at the outset are typically reduced ROCE before we build those businesses up. So actually, if you see our ROCE now is around about that 15% level, it's up on last year. So we're pleased with that. But I think these results really do sort of really show our business. It's about strong organic growth. It's about operational leverage. It's about accretive acquisitions are very much about cash generation. Just on to sales and orders. I think if you look at the diagram in the middle, that's revenue for continuing operations. And actually, over that period, sort of 9 or 10 years, you can see we've pretty much built that business from scratch. So we're pleased -- very pleased with that. Sales very much driven by 25% up on the last couple of years, GBP 379 million, very much driven by that organic order growth that Nick would have talked about, 36% up on last year, 32% up against the pre-COVID period. And that's driving -- you can see in the table, strong organic growth, 18% up on last year, 14% on 2 years ago. And look at -- I put the H1, H2 numbers there. H2 organic growth versus 2 years ago, 19%. So we finished the period very strongly, and you're seeing growth moving into the new year. If you look at the table, you can see, again, it's sort of a nice reflection of the model, organic growth with the acquisitions quite evenly spread versus 2 years ago. We've got contributions from actually 5 businesses across that 2-year period to really helping drive that 25% growth despite some of the supply chain headwinds we faced and some of the currency headwinds as well. So a good set of results to take us into the new year. The next one to operating profit and margin, that sales growth is driving a big uplift in profits. So profits up 34% versus last -- the last 2 years. And actually, if you look at it since FY '18, that's 34% as well, 34% CAGR. So it's really strong like the sales, it's sort of strong, consistent momentum. That's sort of what we like to be about obviously barring that COVID period. And in terms of margin, you can see it's 10.2 -- there's 2 lines there. The bottom line is the margin, as reported, that would have included the distribution business up to last year. The upper line is then the continuing business. So you can see margin up just 3.2% last year reported. So 2.5% improvement just comes from the sale of the distribution business. It really sort of lifts us up into a much higher margin space. But importantly, look at the growth of the underlying operating margin of the business. So we're up 3.3 percentage points over that -- over that 4 year period. And as Nick showed in our KSIs, operating margins is a really important metric for us. We've made some great progress there. It's progress through operational leverage, progress through buying accretive, high-margin acquisitions. We set ourselves a target to get to 13.5% in -- by FY '25. So we feel we're well on track for that. This is -- I typically put this diagram in. I think it helps you sort of pull apart the numbers. It gives you a walk from the operating profit of 30.8% last year up to 41.4%. And it shows a split between the organic business and the acquisitions that blend -- that the business delivers. So the first 3 bars of the organic performance, so sales -- organic growth of 18% is translating into roughly GBP 90 million of additional gross profit, gross margin. Gross margin, we've really focused on passing those costs on. That's an important part. Nick really touched on why our type of business helps us do that, small products, but critical products allows us to do that. So we've -- the actual organic gross margin is down 0.7%, but largely, that's around about mix. We've got a number of businesses with a range of gross margin moving at slightly different levels. And additionally, 2 businesses were impacted by -- 2 of the controlled businesses were impacted by supply chain -- not supply, the semiconductor shortages that issue that impacted their recovery rates. So we're very pleased with that, and that sort of ability to continue protecting that margin will continue into the new year. We've -- it's a high-growth period. We've invested GBP 10 million in operating expenditure, and that's very much about recruitment coming back in, wages coming back in, bonuses back in, travel, ERP upgrades. So an important part for us. You can see the combination of those 3, GBP 7.3 million growth in organic profit. That's a 14% drop for it. We're pretty pleased with that in this environment. On the other side, you can see acquisitions. The GBP 6.5 million from those sort of 5 acquisitions that we've done in the last couple of years. In the middle, there's 2 points to highlight. Head office, we've been investing, well, both in terms of growth and in terms of governance, some M&A, ESG, IT. And certainly internal audit and risk are areas we're focused on. LTIPs, the move for our EPS vesting to be more or EPS vesting to be more -- or vesting of LTIPs to be more EPS linked plus the additional national insurance costs that's coming in has given us a 1.9% additional charge. Actually without that charge, we'd have -- the margin would have been 0.5 percentage point higher. But overall, it's a great set of results, GBP 11 million profits up, constant exchange rates for our big leap in profitability. The next chart is a chance for you to look at -- the first chance for you to look at the 2 new divisions that we announced back in February, Magnetic & Controls, Sensing & Connectivity. So 2 new divisions there. And both you can see are performing very well. If you look at M&C in the middle box there, you can see the revenue growth, 27% revenue growth. That's a combination of 22% organic, very strong organic growth, and 5% from the acquisition of Beacon, which is a control business we acquired. In the -- on the end, you can see it's very much -- both divisions very much driven by that order growth, 36% both delivered -- both 36% growth. That 22% organic growth that's delivered in M&C, it's a very, very widespread growth. It's across businesses, it's across territories and markets. Particularly, I draw out growth that we've had in India and U.S., very strong growth that Nick would have referred to, very, very attractive markets for us. So something to look forward to coming into the new year. So that growth is derivative. EBIT is up 27% with the margin moving up to -- it's up 4 percentage points to 12.6%, slightly tempered by the gross margin factors that I talked about in the control businesses that I mentioned earlier, but still a very good result, 27% growth in EBIT. If you look at S&C, another great picture, 11% organic growth in terms of sales, an additional 20% from the acquisitions, the 4 acquisitions that we've done in that space. All of those businesses we've acquired, they're all more than 20% margin, and that has helped lift EBIT up 50% up to 23.3%. And look at the margin, it's up to 3 percentage points to 16%. So the divisions when we chose when we looked at splitting them, we felt those divisions both had the ability to grow organically at sort of similar rates, both had opportunity for acquisitions. So let's see how we develop in the next few years. On to PBT and EPS. This just gives you a quick walk from operating profit GBP 41.4 million, down to EPS of [ 29.4 ]. Key movements there versus last year. Tax rate has gone up 1%. That's more about us starting to sell more into higher tax territories, particularly the likes of China, India. The shares are slightly up 4 percentage points up. That's the placing we did back in September for Beacon. So overall, PBT up 38%, EPS up 31%. If you look at it compared to 2 years ago, it's up 20%, and that's because the tax rate was particularly low in that year. That was some tax losses that we used. And we also did an additional share issue that linked to Sens-Tech. If you look at the EPS growth there of 20% up in that 2-year period and is 26% CAGR over that period from FY '18. So again, as with sales and profits is about strong consistent momentum. In terms of cash, we're a very cash generative model. We're a capital-light model. And I think that's sort of reflected in the chart there, you've got a walk EBITDA through the free cash flow. And even given the strong sales growth that we see this year, we're still delivering good cash flow. So if you look at the chart there at the top, we've invested sort of GBP 10 million in working capital this year. Actually if you look at it across the 2-year period, we've invested less than GBP 5 million. And what you'll see is charts at the back, is that the working capital as a percentage of sales came down from 15.6% 2 years ago, 14.4% this year. And now it's sub 14%. So we continually look at those working capital efficiencies for our central teams. CapEx, that's 5.5%, that's running about 1.5% of sales. But we expect that to sort of move back to sort of -- around about the 2% level, the sort of pre-COVID level next year as we start to invest in more capacity, ESG initiatives, some of the IT ERP upgrades. So overall, if you actually take out that working -- if you look at the bottom chart, you can see there's actually a GBP 60 million swing working capital, just some working capital between last year when sales were down and you get working capital coming in and this year where you're investing in working capital. So if you take out that GBP 16 million swing, 28% growth in operating cash flow, 42% growth in free cash flow at the back end. So we're pleased with that. If you look at the conversion rates, they're both, as I said at the outset, both averaging over 100% across that 2-year period there. And if you see at the bottom of that chart, that's over a 10-year period. Again, we're averaging over 100% conversion of operating profits into cash flow. Gearing, as I said, partly the cash flow, partly the sale of distribution, it's the lowest ever at 0.6. Our range for -- our target range is still that 1.5 to 2x range, and we've actually increased our debt facility. We've moved it up GBP 60 million to GBP 240 million. We've extended it back out to 5 years. So certainly, plenty of headroom for acquisitions. And finally, on to the dividend. We've increased the dividend again by 6% as part of our progressive dividend policy. We've more than doubled that in 10 years. Cover at 2.7. We're looking to take that as we've talked about before, over 3x, that will give us capability to continue to increase the dividend but also fund -- self-fund more of our acquisitions. And with that, I will pass on to Nick to review the operations.

Thank you. Okay. So just a quick recap. We have, as I said right at the beginning, 30 manufacturing sites across 18 countries. I think the key point to bring out is that we have low-cost manufacturing in Asia and Mexico. We have low-ish cost manufacturing in some of the Eastern European countries, but they are higher than Asia and Mexico. But the point is we have regional manufacturing plus a number of smaller sites as well in other countries as well, such as the U.S., Germany, Sweden and the like. We've made 19 acquisitions since 2011. We are -- what we've seen over the last year with the strong growth is we always keep an eye on our production capacity rates. We have, during the year, expanded capacity in both the U.S. and Mexico. We are expanding a facility which will go live next year in Germany. That's the third expansion on that facility that we bought -- that business that we bought back in 2011. So that's a great growth story. And in India, where 5 years ago, we had 1 site in Kerala, Southern India, then we started a new site in Bangalore 4 years ago. Both of those sites, we're now expanding. We're enlarging the facility in Bangalore, and we're going to be moving to a new site in Kerala, just in response to that very strong growth that we've seen. And the chart on the bottom right here just shows the organic growth over the period since FY '18, H1 -- H1 '18. You can see there the organic growth, quite strong really through the period starting over at 12% and then in double digits for 2 years solid. Then starting to slow a bit as we got into that 2019 global inventory correction just before COVID that probably most people have forgotten about by now. And then COVID hit, we were down about minus 5% organically there. I mean, that's a very resilient performance. In our space the market was down -- in the wider industrial space, I should say, which we sort of monitor, the market was down probably early mid-20%. So we were very pleased with that performance relative to that. And then you can see the bounce back since then. And the strong organic growth, as I said right at the beginning, is all about selling into the sustainable growth markets. We felt for nearly 10 years now that these are the right markets to grow on because they have better growth prospects. These markets are driven by macro trends which aren't going to go away anytime soon. Technology is needed to enable them, and therefore, there's a very rich theme for our kind of technical custom super niche solutions. And that really resonates with our customers, and it builds us. The more we can do to get our products specified into customers in these spaces, the more we will grow. And the more -- so the more -- our job is all about layering up design wins in these markets because as our customers grow, then we also grow. And that's what's been driving the performance thus far, and that's what we expect to continue for a good many years yet. So super important. And it really is sort of the platform from which everything else comes. And to that point, 76% of our revenue now comes from those target markets. But on the right, you can see here, the -- this is the 5-year organic growth. And over that 5-year period, our target market revenue's grown by 12% organically, whereas the other markets, which is sort of, in the wider sense, general industrial have grown by 6%. So a consistently strong outperformance and it really just reinforces that they're the right markets for us to be focusing on. So just a very brief word about the 2 divisions that we established earlier this year. So -- once we sold the distribution business then we just arranged our ongoing, what we called our, D&M, design and manufacturing business into 2 divisions. And really what that's about is creating more management bandwidth to manage those divisions as we grow. So we now have 2 people at the group exec responsible, one for each for a division. And we've grouped them in a way that makes them -- that brings them together in clusters. So there's a cluster in each division, and then there are a bunch of independently operating businesses in them as well in each of them. And they're very -- I mean, you can think of them as sort of 2 sort of mini D&M divisions you might say, they're both very similar. They have similar geographic profile. They are similar size, Magnetics & Controls is larger at the moment, but don't read anything into that. That's just where we're at, at the moment. The margins are a little bit -- the operating margins are a little bit lower, as you saw in Simon's slide. But again, don't read too much into that either. The basic point is that both of these divisions, we believe will grow organically at sort of consistently, we aim for double-digit levels through the cycle, and they have plenty of acquisition opportunities as well. And you can see at the bottom of the slide are the list of the businesses we've acquired and the year in which we acquired them. On the bottom left chart shows the organic growth of the division. You can see there the Asia organic growth of 30% and the U.S. growth of 28%. But you can see equally that all the regions are in double-digit growth. And then on the right-hand side, the absolute revenue growth that's showing the acquisitions coming in as well. And then similarly, in Sensing & Connectivity, these are sensing products, and connectivity is quite a wide area. It covers the sort of switching fiber optic connectivity and basically products that are aligned to principally growing connectivity, industrial connectivity. So that's playing to the sort of 4G, 5G rollout into Internet of Things and also into renewable, switching for solar applications as an example. And again, you can see the acquisitions that we made -- have made along the bottom. The German expansion that I referred to earlier is MTC. So we acquired MTC in October 2011. I think it was our second D&M business. It had something like EUR 3 million of revenue back -- EUR 3.5 million of revenue back then. It's got -- approaching EUR 20 million of revenue now, all through organic growth. So we're just expanding that facility. And again, you can see the organic growth. North America here is low. You may remember back in the first half results, the North American organic growth was slower to recover we found than the other regions, and that's still the case. Although it's finally starting actually now to come through, but it's taken a while to get going up post COVID. And again, the revenue split, very similar to the Magnetics & Controls division. So roughly half -- just under half of the revenue from Europe and then North America and Asia of similar sizes. So design wins. So this is over important. This is a sort of -- I always say this is a proxy -- these are proxy figures to give an indication of the level of demand that we think we are creating -- level of demand -- future revenue demand. And we talk about ELV, which is estimated lifetime value. So we aim to get a product. We have an engineering-led sales force and those -- the way we use the -- or the way the engineers use their time is super important. So they're very much focused on getting design wins into projects, in target markets that will lead to the biggest return on the time. So that's longer life cycle, higher growth revenue applications. And so we measure the forecasting of the opportunities by the estimated lifetime value of the opportunities that they're working on. And what you can see here is that the design win estimated lifetime value increased to GBP 245 million during the year, which was a very substantial bounce back from last year's subdued COVID figure, but 12% up on the period 2 years ago, as I said, GBP 245 million of estimated lifetime value. 86% of those design wins are in our target markets, which means that 14% are in other markets. Our focus with our teams is not -- is to focus most of their time on the target markets, but that does mean there are occasionally opportunities in other areas. So for example, we supply sensors into Formula One Motorsport. It's not a target market, but it's a business we've had for years, pre-acquisition and it's very profitable. So things like that continue. And we've seen a good bounce back in those opportunities as well during the year. Everything bounced back during the year. Our biggest increases in design wins are in renewable energy, both wind and solar. I don't think you'll be surprised to hear that. And in addition to the design wins, I mean, the driver of design wins is design opportunities, and we have over GBP 600 million worth of estimated lifetime value in project pipelines that are underway. And not all of those will go through into design wins by any means, but it's a very important point for us to focus on the level of opportunities we're creating. The order book, so we talked about that right at the beginning, but this shows -- the chart shows the order book, both the organic order book in orange and yellow and then the black is the effect of the acquisitions coming in. So this is a -- this is 86% higher at an absolute level than last year, which is extraordinary. This is 2 things. Customers are ordering more than they had expected to order. So if they had been ordering 100 a month, they're now ordering 120 a month. But whereas they might have been ordering for 3 months out before, they're now ordering for 6 months out. So our forward order book represents over 6 months' worth of future sales demand. So it's both extra volume or additional volume and additional caution, I suppose, you could say, from customers ordering further ahead to mitigate any supply chain concerns that they inevitably have. And so I think it's reasonable to assume that with such a high order book level, that level will probably start to normalize through the year. I think with the growing wider economic environment, I think with the consumer economy turning down, that's going to lead to a freeing up of semiconductor capacity. So that's going to start coming into our industrial world. So that means that customers will probably be a little bit more uncertain, and they'll probably not feel the need to place such long-term orders if there's improving availability. So all of that will -- I think will transpire into order books probably moving more towards the sort of 4 or 5 -- 4, 4.5-month level as opposed to the 6 and 6.5 month level. But nevertheless, super position to be in as we stand here today. So the outlook, the new year has started well. We -- we're 2 months in, and we've got strong -- very strong double-digit organic sales growth continuing. The record order book continues. We have a record design win funnel. So we feel that all of the metrics we look at are certainly very positive. We're very mindful of the wider economic environment. And when we feel it, we'll report it, but we're not seeing it yet. The supply chain headwinds are continuing. There have been some improvements in some areas, small at this stage. So some semiconductor availability has improved in recent weeks just over in the last 4 weeks. So perhaps, that's the sort of the first signs we'll see. But that and the inflationary pressure is continuing. We've managed them well over the last year, and we expect that continuation to be continuing -- we expect to be able to continue to manage that. Acquisition opportunities, we haven't done any acquisitions for 6 months, but there are lots -- there's lots going on. We have some good opportunities in the pipeline, and we expect to make progress through the year on that. So all told, we feel as though we're in a good position for a robust year ahead despite whatever might happen in the wider economy. So that concludes my presentation. I think what we'll now do is go to question-and-answer. So we'll probably take this back to the -- can we take this back to the cover page? I don't know if we can -- can we do that? All right. And then I think Bruce and Simon will come up -- we'll sit up at the front and take questions.

Henry Carver from Peel Hunt. Just a couple for me. First of all, that shift from China to India that you're seeing, obviously, you're investing in capacity in India. Is there any -- do you need to be doing anything in China to adjust downwards for the levels of capacity there? Or sort of longer term, how do you look at that? And then if there's any other sort of potential regional shifts and just being aware generally of managing those? And then just around the order book and how to think about it going forward because it feels like it has gone up partly because of conservatism in a way, ensuring supply, and it will, at some point, normalize. But is that as likely to happen as confidence returns because you don't -- conversely, you don't really need to get orders booked out as far in advance because you feel the supply -- there's not going to be supply chain disruption. So in fact, just trying to think of how we should think of the various scenarios of order book playing out over the next sort of 18 months, 2 years?

Yes. Okay. So in China -- we've got 2 plants in China, and they are both quite well utilized at between sort of 60% and 70% utilization, which is kind of a pretty good place to be. So you're running fairly hot but not full. We were actually looking at expanding -- thinking about expanding one of the Chinese sites a year or so ago. So that's now not going to happen. And if -- one of the other site will probably expand into India. We're looking at that at the moment. So the speccing up at one of our Indian expansions will probably include a section for one of the Chinese businesses. So -- but that's not confirmed yet, but that's the kind of way we're thinking about it. So we've got reasonable facility sizes. If it's going to sort of flatten off, that it will be fine as it is, and we'll just expand elsewhere into India. In terms of order book, so -- at the height of COVID, order book was down to 2.5 months, you might remember. And typically, in normal -- well, what are normal times? There's no such thing as normal now. But pre-COVID periods the order book would run at about sort of 4, 4.5 months in sort of steady state times. And we're running at about 6.5, 6, 6.5 at the moment. So I think it's -- I think it's reasonable to assume that it will head towards a sort of 4.5% kind of level. I mean I only say that because I think that's what will happen. I've got no data to say that will happen, but it feels -- when customers don't feel the fear of having to place orders to ensure their availability. As soon as that sort of fear goes away, then I think that's what that's going to lead to is just shortening their order window slightly. So -- yes, that's what it feels like.

Yes. I think you'll always see a level of volatility, much more volatility in our order patterns if you look back historically, sales that, as Nick shared with this chart, we delivered consistent sales growth because that's the nature of the ordering patterns and we typically take off monthly deliveries, whereas the orders do -- are more volatile.

I think I'm still in the -- placed in the queue -- James Beard from Numis. I've got 3 questions, please. First one, relatively quick one on that order book point, the 4, 4.5 months steady state that you quoted in pre-COVID times, is that D&M specifically or...

Yes. It's very similar. Yes, they were both very similar. You're referring to -- what was it like with customer supply, it's very similar.

Okay. Great. That was nice and easy. Second question is on the renewables side of the business. There's been a lot of sort of press over the last few months about pretty terrible performance amongst particularly European wind turbine manufacturers. Are you seeing any sort of indication of, I guess, sort of a normalization or a drop-off in sort of future demand profile from those businesses that might sort of impact longer-term growth rates within your renewables exposed parts of the business?

Yes. Okay. I think -- well, I think it's important to distinguish between their top line growth and their profitability. So they've struggled -- some of the wind turbine manufacturers have struggled with it -- rising input costs. And we're a tiny part of that, but only -- not the biggest problem by a long way. But their top line growth has been quite strong. Obviously, we benefit from the top line growth. So I think it's important to distinguish that. Will that lead to a problem for them further out if they can't make their model more profitable? I don't know. We'll -- that's for them to solve. Well, I think we just -- we supply the leading players of wind turbine, particularly in Europe. Their top line is growing well, and therefore, we are growing well. I can't really comment on what will happen to their business. But I'd be surprised if they weren't able to keep growing because how else are going to do it. I mean, if you want clean energy, you got to put wind turbines up and there are sort of 3 major wind turbines in the world -- manufacturers in the world. So there don't seem to be any viable alternatives to them at the moment.

And then a third question, how much of your production capacity is in Sri Lanka and how -- to what extent is the business there been impacted by the political situation in that country over recent months?

Yes, that's a good question. Yes, I used to, in my Board report, refer to a disruption in the singular, I now refer to it in the plural. And Sri Lanka is one of them. So -- yes, the well-publicized strikes. We suffered 2 days of closure when the strikes first occurred. We quickly -- the situation returned to normal for us. We're on a government-sponsored park, business park near the airport near Colombo. And that has kept opening -- has remained open throughout. And our people -- most of our employees live quite closely to the -- relatively closely to the facility and they're able to get in, either by their own means or by transport that we provide for them to commute. And so that is continuing. There have been power cuts in Sri Lanka. We've installed backup generators. And so we have big diesel generators to keep the site going, not very environmentally friendly, but there is an option if power supply -- power interruptions become a recurring theme, which they're not at the moment. So, so far, so good.

And just on -- just to clarify that point around production capacity as a proportion of your [indiscernible]...

Oh, sorry. So it's our largest single production site, but it accounts for production output. I think it's about 10% of our group revenue. And in -- but importantly, the products at Sri Lanka can be made in China, India and Mexico. So there are 6 other sites around the world where that same product can be made. The sum of those products would require customer approval to move them should we need to, a bit like when we went through COVID 1, and we had to look at moving production, mitigating production. But if Sri Lanka got a lot worse, we'd move production elsewhere.

Mark Davies Jones from Stifel. A few around M&A, if I can. Is what's going on in the world making entrepreneurs more willing to have conversations about selling their businesses to you? If so are valuations, expectations beginning to come down a bit. And if not, is that why you haven't seen any deals for the last few months? Are you waiting for that to happen?

Yes and yes. Yes. So we've seen -- we saw quite an unseemly rush a few months ago of businesses coming to the market, particularly some [ PE-owned ] businesses that weren't right for us at that the kind of valuations that were being sought. We are seeing discussions now, which are more balanced, you might say, and expectations perhaps a little bit more reasonable. And so I think what the -- where we're at now, the froth has gone off things and people are a bit more fearful, which is no bad thing. So -- yes, it's a little bit more balanced. Whereas 3 or 4 months ago, it was strongly in the sellers' favor, I would say. And what you saw -- I mean, for example, you saw Spectris sold their business for 20 multiple. Well, we're not paying 20 multiple for anything, simple as that. So that kind of limited what we were interested in pursuing.

Just an additional word on that, having been involved in new acquisitions over the years. The key thing really is to make sure you make the right acquisitions at the right valuation. So from my point of view, the fact that Nick and his team haven't made acquisitions for 6 months is not something which concerns me.

No. It makes a lot of sense. Related question, if I may. Do you think you need acquisitions to see further margin progress this year given the fact that we had a big jump up? And clearly, there are inflationary pressures out there. Can you grow margins organically? Or does that need more high-margin acquisitions?

Our plan is always to grow margins organically and then to top it up with acquisitions, which is the big dial mover actually. So -- yes, we expect organic margin development this year. Yes. Definitely.

I just wanted to double check. On the divisional split, you've given the operating margins for both of those -- are there any structural reasons for the difference in the margins between the 2 divisions? Or is it just kind of the mix of the different businesses within both?

Yes. Katherine, it's the mix of -- it's as we've developed our strategy over the last sort of 10 years or so, there we've focused on acquiring businesses that have more complex, more highly differentiated products and they, in turn, are able to command higher margins. And so that's -- so in the Sensing & Connectivity area, there are some particularly sort of sophisticated products, which command much, much higher margins than in some of the more power-related applications. And so it's just a function of the technology and the complexity and the level of sort of differentiation that, that creates in the eye of the buyer -- of the customer.

if you look back at the -- Over a 10-year period, if you look back at the acquisitions that we've made, we have just been gradually moving up to acquire much higher margin businesses as our business evolves, yes. So when we were acquiring the likes of Myrra and Noratel, they were lower-margin businesses. You're looking at, as I said, the last 4 acquisitions in S&C have all been plus 20% margin, which helps grow that overall group.

And then going forward, do you have a kind of a minimum operating margin you would consider from a target?

Yes. We don't really entertain -- we're not really interested in anything below 15%. It'd have to be a very good reason as to why we would entertain something lower than that, perhaps it would be a very -- something we'd integrate heavily and therefore, take a lot of cost out or something. But generally, we don't do those kind of acquisitions. So we -- most of the stuff we look at is 20% plus now.

Joe Bloomfield from Berenberg. Just 2 questions. One on just a kind of trend so far this year. You touched on the revenue growth has continued to be very strong. And the order book is still at a record high. But have you seen any changes in kind of order intake patterns or any kind of changes in customer behavior yet on that side? And I'll pause there.

Joe, so the order levels are at very high absolute levels. The growth rates are slowing mathematically because the prior year comps. But the absolute levels are high. And -- no, the customer order patterns are sort of continuing. Yes -- no, they keep going.

Okay. Great. And then just on the kind of supply chain and pricing. Clearly, last year, you did a great job at passing through the kind of price increases. Is it getting any more difficult? Are you getting any more kind of pushback from customers? Or again, this year, it's still -- I mean, I know it's never easy, but you're still managing to push increases through.

Well, I think -- so most of the raw material prices have stabilized more recently. And so we've done a lot of the price increases that we have needed to do. There are still some that need to go through, but a lot of them have been done. I think it's fair to say that customers never like a price increase, do they. And I think some customers are a bit tired of maybe the third increase in a year. So I think in that sense, they've kind of had enough of them. And if raw material prices sort of level out at where they seem to be at, then perhaps there won't be a need for further price increases. But we're very clear. And if we need to, we will. And that's the approach we've taken over the -- well, always but particularly over the last year. And if we need to keep doing it, we will. But I think it's fair to say that customers are finding it quite difficult in some cases.

Okay. One more question from the room.

Mark Fielding from RBC. Just a quick follow-up actually to that. Could you just talk about where you are in terms of labor inflation and how that phases through because that might be a slightly more elongated issue and just what you do to mitigate that?

Yes. Mark, so in the lower-cost countries, the wage inflation is in the sort of low double-digit levels. In the higher cost regions, the wage inflation in the -- where more of the so-called white collar worker force are, wage inflation is in the sort of 4% to 5% level. We have the benefit this year of bonus schemes around the businesses are paying out. And so that sort of helps to keep salary inflation levels in check a bit. But obviously, that meant it's not going to continue forever. But certainly, at the moment, that's enabled us to keep the salary level increases in the 4% to 5% range. But we're finding where we're doing new hires, there is quite some pressure on some of the new hire levels or the absolute numbers are pretty small, but they are quite -- can be quite chunky.

Thank you. We'll now go to questions from the webcast. We have a few questions that come through just a reminder. If you'd like to ask a question, please type it in through the bottom of the webcast. First question is, talk us through the impact of the potential recession stroke stagflation on your business?

So stagflation implies low growth or no growth. I mean the theory -- our theory is that we are focused on markets that are going to help to make the world a better place, e.g.: renewable energy, clean energy. So in theory, our markets will do better than other markets in that environment. And so we would expect to be able to continue to perform well. What does well mean? Well, if there's zero growth, one would hope that we can grow in sort of low mid-single digits, something like that at the minimum. I think that it's -- the 10% through cycle is the way we measure the growth. And so the low point growth is determined by the extent to which there is growth in the market and to which there's any extent to which is an inventory correction because that tends to be what makes the biggest impact at the bottom of the cycle or downside cycle. Yes, that's all I would say to that.

Thank you. The next question from webcast, what level of recurring or repeatable revenue does the group have?

Very, very high. Very, very high indeed. Over -- I mean it's driven by design wins. It's -- with our products, it's a very low proportion of revenues where people just come in and buy something off the shelf. So on a group level overall, the recurring revenue proportion is probably at least 85%, if not higher.

And we've got one final question at the moment. Have you been impacted by the China lockdown?

Our direct operations in China were not impacted by the lockdown, Guangzhou region where we are stayed open and shipping stayed open, and so we were unaffected. We have felt some supplies in upstream suppliers to some of our businesses where our manufacturing is dependent upon -- our manufacturing not necessarily in China has depended upon supplies from upstream Chinese suppliers. So there has been a bit of effect -- indirect effect, yes.

Superb. No further questions from the webcast Nick, I'd like to pass back to you for closing remarks.

Okay. Thank you, Scott. Well, thank you, everybody. That concludes the questions. That's -- very much appreciate your attention and coming today. And great to see you all and look forward to seeing you in 6 months' time. Thank you very much.