XP POWER LTD - Half-year Report

·      Revenue increased by 12% to £60.3 million (+7% in constant currency)

·      Gross margin decreased slightly to 49% (1H 2015: 49.4%) due to Euro exchange rate effects

·      Own-design XP product revenues increased 20% to a record £43.4 million (1H 2015: £36.2) , and now represent 72% of total revenues (1H 2015: 67.2%)

·     Revenues for ultra-high efficiency “Green XP Power” products continue to grow and are up by 28% to £14.2 million (1H 2015: £11.1 million) now representing 24% of total revenue (1H 2015: 21%)

·     EMCO, the high voltage specialist acquired in November 2015, performing well with order intake US$5.8 million (£4.0 million) and revenues of US$4.5 million (£3.1 million)

·      Manufacturing progress in our lower cost Vietnam facility – 140,000 power converters manufactured during the first half of 2016 (1H 2015: 24,000)

·      New product introductions and the development of an industry leading in-house manufacturing capability continue to generate new program wins to drive future growth and market share gains

James Peters, Chairman, commented: 

“The Group has had an encouraging first half.  Reported order intake and revenues for the first six months of 2016 all set new records, assisted by a stronger US Dollar and the acquisition of EMCO last year. Our balance sheet is strong and we are in an excellent position to make selective acquisitions to further broaden our product offering and engineering capabilities.”

“Although the global economic outlook remains uncertain, particularly following the United Kingdom’s decision to leave the EU and the resultant weakness of Sterling, we are encouraged by our order intake and strong backlog. While not immune from any global economic slowdown, these give us confidence that we should be able to continue to grow revenues in the second half of 2016 as designs won in 2015 and prior years enter their production phase.”

Enquiries:

XP Power
Duncan Penny, Chief Executive                                 +44(0)7776 178 018
Jonathan Rhodes, Finance Director                            +44(0)7500 944 614

Citigate Dewe Rogerson                               +44(0)20 7638 9571
Kevin Smith/Jos Bieneman  

Note to editors

XP Power is a leading international provider of essential power control solutions.  Power direct from the electricity grid is unsuitable for the equipment which it supplies.  XP Power designs and manufactures power converters – components which convert power into the right form for our individual customers’ needs, allowing their electronic equipment to function.  XP Power supplies the healthcare, industrial and technology industries with this mission critical equipment.  Significant, long term investment into research and development means that XP Power's products frequently offer significantly improved functionality and efficiency.

For further information, please visit www.xppower.com

                                                                                                                                   25 July 2016

XP Power Limited

(“XP”, “XP Power” or “the Group”)

Interim Results for the six months ended 30 June 2016

INTERIM STATEMENT

Overview

The Group has had an encouraging first half of 2016. Our reported order intake and revenues for the first six months of 2016 were aided by the strength of the US Dollar and our acquisition of EMCO in November last year. The resulting solid earnings and cashflow support a further increase in the dividend.

Order intake in the first half of 2016 surpassed revenues with a book to bill ratio of 1.02 (1H 2015: 1.05) and ahead of the 0.97 book to bill experienced in the second half of 2015 due to weakness in the North America industrial sector. Consequently, overall momentum has built in our business and we enter the second half of the current year with an increased order backlog of £50.0 million (December 2015: £48.0 million).

We have continued to execute well against our strategy even though the capital goods markets we serve have remained somewhat subdued. The successful implementation of our strategy continues to drive market share gains and we are encouraged both by the strength of our order backlog and new programs wins.

Our strategy and value proposition

The Group has applied a consistent strategy of moving up the value chain. Our growth derives from targeting key account customers.  Once we are approved to supply these larger customers, we have proven success in gaining a higher share of their business. We also continue to expand the breadth of our product portfolio, both organically and by acquisition, in what remains a highly fragmented sector, therefore enabling us to increase our available market.

Our value proposition to customers is to reduce their overall costs of design, manufacture and operation. We achieve this by providing excellent sales engineering support and producing new products that are easy to design into the customer’s system, consume less power, take up less space and reduce installation times, and which are highly reliable in service.

We aim to be the first choice power solutions provider, both for our customers and as a place to work.

Trading and Financial Review

XP Power supplies power control solutions to original equipment manufacturers (“OEMs”) who supply the healthcare, industrial and technology markets with high value, high reliability products.  The increasing importance of energy efficiency for environmental, reliability and economic reasons; the necessity for ever smaller products; the accelerating rate of technological change; and the increasing proliferation of electronic equipment, have established a strong foundation for growth in demand for XP Power’s products.

Order intake of £61.6 million (1H 2015: £56.5 million) was up 9% (4% in constant currency) and set a new record for the Group. Compared to the same period a year ago, Asia increased by 5%, Europe increased by 1% and North America increased by 17%. The average US Dollar to Sterling exchange rate was 1.52 in the first half of 2015 compared with 1.44 in the first half of 2016 representing a 5% strengthening. This increased the reported order intake compared to the first half of 2015 as did orders of US$5.8 million (£4.0 million) from EMCO, the specialist in high voltage modules acquired in November 2015.

Reported revenues grew 12% to £60.3 million in the six months to 30 June 2016 compared to £53.9 million in the same period a year ago. When adjusting to constant currency the underlying growth was 7% in the first half of the year compared to the same period a year ago. EMCO contributed US$4.5 million (£3.1 million).

Revenues in North America were £30.8 million (1H 2015: £26.9 million), up 14% compared to the same period a year ago. Revenues in Europe were £24.6 million (1H 2015: £23.2 million), up 6% on the same period a year ago. Revenues in Asia were £4.9 million (1H 2015: £3.8 million), up 29% compared with the same period a year ago.

On a sector basis, industrial increased by 20% to £28.8 million (1H 2015: £24.0 million) driven largely by a strong performance in Europe but also from some recovery after the weakness seen in the industrial sector in North American accounts in the prior year. The technology sector grew by 11% compared with the first half of 2015 to £14.0 million (1H 2015: £12.6 million) driven by semiconductor manufacturing and broadcast customers. Revenues from healthcare grew more modestly by 1% to £17.5 million (1H 2015: £17.3 million). We expect growth in healthcare to improve over the medium term as new healthcare programs enter the production stage. In terms of overall revenue for the first half of 2016, industrial represented 48% (1H 2015: 45%), technology represented 23% (1H 2015: 23%) and healthcare represented 29% (1H 2015: 32%).  

Our customer base remains highly diversified with the largest customer accounting for 5% of revenue, spread over 120 different programs/part numbers.

Margins

We continue to generate industry leading margins. Gross margin in the first half of 2016 was 49% (1H 2015: 49.4%). The small decline from 2015 was primarily due to reduced margins on revenues invoiced in Euro. In 2015 we were able to raise our Euro pricing as the Euro weakened versus the US Dollar (on which our input costs are based) while still taking advantage of our Euro exchange rate hedges. In 2016 we had the benefit of the previous raised prices but not the gains from the hedging program.

Operating expenses in the first half were £16.3 million (1H 2015: £13.9 million) after adding back £0.1 million of intangibles amortisation (1H 2015: nil) and £0.1 million of abortive acquisition costs (1H 2015: nil). Again there is a significant translation effect from the strengthening US Dollar versus Sterling which we estimate increased reported operating expenses by approximately £0.5 million. In addition we had the full year cost impact of the additional sales and engineering resources added in 2015 to drive future revenue growth, which added approximately £0.7 million to operating expenses over the first half of 2015. The additional operating expenses from the acquisition of EMCO added a further £1.2 million. Gross product development spend was £3.8 million (1H 2015: £3.1 million), £2.0 million of which was capitalised (1H 2015: £1.4 million), and £1.0 million amortised (1H 2015: £0.9 million).

Notwithstanding our investment in additional sales and engineering resources to support future growth and the acquisition of EMCO in November 2015 we continue to achieve excellent adjusted operating margins of 21.9% (1H 2015: 23.6%) highlighting the strength of our business model. We expect further improvement in this metric as market conditions improve.

Taxation

The tax charge for the period was £2.9 million (1H 2015: £3.0 million) which represents an effective tax rate of 22.5% (1H 2015: 23.8%). We maintain our guidance range for our future tax rate of 23.0% to 24.5% depending on how profits fall geographically.

Acquisitions

In November 2015 we announced the acquisition of the business and assets of EMCO High Voltage Corporation (“EMCO”), a designer and manufacturer of high voltage power modules, for a total consideration of US$11.7 million (£7.7 million) in cash. 

EMCO, based in Northern California and with manufacturing operations in Nevada, supplies the healthcare, industrial and technology sectors with a broad range of standard, modified and custom high voltage products.  The integration of the EMCO business has progressed well and in the six months ended 30 June 2016 we received orders of US$5.8 million (£4.0 million) for EMCO products and we shipped US$4.5 million (£3.1 million).

As well as a product offering suitable for an array of applications used by some of our existing customer base, EMCO brought with it a number of new customers to XP Power.

Financial Position

Class-leading gross and operating margins and modest capital requirements have resulted in continued strong cash flow. After payment of the 2015 final dividend our net debt was £6.0 million at the end of the period. This compares with net debt of £3.7 million at 31 December 2015 and £0.4 million at 30 June 2015.

Product Development

New products are fundamental to our revenue growth. The broader our product offering, the more opportunity we have to increase revenues by expanding our available market. As expected, the significant number of new product families introduced over the last three years is yet to have a material impact on our revenues, given the time lag from launch to them entering production. This is due to the lengthy design-in cycles required by customers to qualify the power converter in their equipment and then gain the necessary safety agency approvals.

XP launched 27 new product families in the first half of 2016 (1H 2015: 13). The relatively high number of new product introductions was aided by the introduction of a new labelled product supplier to increase our offering of DC-DC converters. We continue to lead our industry on the introduction of high efficiency, “green” products, with 18 of those new products released in the first half of 2016 being of high efficiency design.

Examples of products released in the period which demonstrate the diversity of our product portfolio include the ALM65 family and the XT16 three phase input version of our configurable fleXPower range.

The ALM65 family is an external 65 Watt AC-DC power converter that complies with the latest Level VI energy efficiency standard, which was only introduced in February 2016. This new standard ensures that much less power is consumed when the end-unit is switched off or not connected, and seeks to increase average efficiency to reduce waste power when the load is connected. The ALM65 family of products also meets the latest medical standards so can be designed into healthcare applications.

By contrast the XT16 is an addition to our existing modular fleXPower series which can be configured into a bespoke solution for quick delivery of samples, prototypes and production, with up to 1,600 Watts of output power. The product can be populated with up to seven output modules chosen from 44 single output and 16 dual output modules, ranging from 3.3V at 66W to 60V at 750W. Introduced in response to customer demand, the XT16 is the first three phase input version we have introduced to the fleXPower family.

Revenue from own design products was £43.4 million (1H 2015: £36.2 million) up 20% from the same period in 2015 and now represents 72% (1H 2015: 67.2%) of total revenue.

With larger customers continuing to reduce the number of vendors they deal with, XP Power’s broad product offering, excellent global engineering support, in-house manufacturing capability and industry-leading environmental credentials leave the Group well-placed to secure further preferred supplier agreements.   

Manufacturing Progress

XP Power’s move into manufacturing in 2006 has been instrumental in enabling the Group to win approved and preferred supplier status with new Blue Chip customers, who demand that their suppliers have complete control over their supply chain and product manufacture to ensure the highest levels of quality.

In addition to our Chinese manufacturing facility located in Kunshan near Shanghai, our Vietnamese manufacturing facility, located in Ho Chi Minh City, began production of its first magnetic components in March 2012 and is now producing the majority of the Group’s  requirement for magnetics.

Producing our own magnetic components in Vietnam is helping us mitigate the continued rise of Chinese labour costs and the appreciation of the Chinese Renminbi. In addition, extending vertical integration to the critical magnetic components used in power converters is seen as an additional value proposition by many of our customers, notably in the healthcare and high reliability industrial sectors. 

In the fourth quarter of 2014 we began production of the first complete power converters in Vietnam. We now have 113 part numbers approved for production in Vietnam with many more in the pipeline. XP manufactured 550,000 power converters in total during the first half of 2016 and 140,000 of these were produced in the Vietnamese facility. We expect the proportion of power converters produced in Vietnam to increase as we transfer more products to that facility.

We continue to build on our manufacturing capabilities and are currently undertaking a project to introduce lean manufacturing principles in both our Chinese and Vietnamese facilities to reduce costs and improve cycle times.

Dividend

Since April 2010 the Company has been making quarterly dividend payments. Our strong cash flow and confidence in the Group’s prospects have enabled us to increase total dividends for the first half by 7% to 29.0 pence per share (1H 2015: 27.0 pence per share). 

The first quarter dividend payment of 14 pence per share was made on 8 July 2016.  The second quarter dividend of 15 pence per share will be paid on 13 October 2016 to shareholders on the register at 16 September 2016.

The compound average growth rate in dividends over the last 10 years has been 15%.

Environmental Impact and “Green XP Power” products

XP Power has placed improved environmental performance at the heart of its operations both in terms of minimising the impact its activities have on the environment and, as importantly, in its product development strategy. These practices and initiatives not only resonate with our customers and employees; they also make significant commercial sense as countries legislate to reduce power wastage, improve recyclability of manufactured goods and ban the use of harmful chemicals.

We have developed a class leading portfolio of green products with efficiencies up to 95% and many of these products also have low stand-by power (a feature to reduce the power consumed while the end equipment is not operational but in stand-by mode). We now apply our own “Green XP Power” logo to the products we designate ultra-high efficiency. During the first half of 2016 24% of our revenues were generated by “Green XP Power” products compared to 21% in 2015, 17% in 2014, 11% in 2013, 6% in 2012 and 5% in 2011.

At present, the uptake of these products by customers is primarily driven by their improved reliability and the ability to dispense with mechanical fans to dissipate waste heat, rather than the fact that they consume less energy in operation. However, we expect this to change as lower energy consumption becomes a higher priority to end users of capital equipment and more legislation is introduced.     

Board Changes

On 1 January 2016 Polly Williams joined our Board as a Non-Executive Director. Polly, a chartered accountant, is a former partner at KPMG LLP and holds a number of Non-Executive Directorship roles, including at Jupiter Fund Management plc, TSB Group plc and Daiwa Capital Markets Europe Ltd. Polly chairs XP Power’s Remuneration Committee and is a member of the Audit Committee. Polly has a wealth of public company experience and adds significant strength to our Board.

John Dyson stepped down from the Board following this year’s Annual General Meeting after many years of excellent service to the Company.

Outlook

The decision of the United Kingdom to leave the European Union has resulted in a significant weakening of Sterling versus the US Dollar and a degree of economic uncertainty. Approximately 20% of our revenues derive from UK customers. It is difficult to judge how our business in the UK will be affected at this point in terms of whether we will see a slow down in this market or whether our customers might actually benefit in export markets from the depreciation of Sterling. What we can say is that if current exchange rates persist in the second half of the year it will have a favourable translation affect on our reported revenues, as over 76% of our world wide revenues are derived in US Dollars, but a slightly adverse affect on United Kingdom margins if we cannot pass on price increases to the circa 67% of our UK customers who we currently invoice in Sterling.

The Group continues to have a strong balance sheet position which places us in an excellent position to make selective acquisitions to further broaden our product offerings and engineering capabilities.

While the global economic outlook remains uncertain and exchange rates are volatile, we are encouraged by our record order intake and strong backlog. This, together with new program wins gives us confidence that we should be able to continue to grow revenues in the second half of 2016 as designs won in 2015 and prior years enter their production phase.

XP Power Limited

Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2016

XP Power Limited

Consolidated Balance Sheet

At 30 June 2016

XP Power Limited

Consolidated Statement of Changes in Equity

For the six months ended 30 June 2016 (Unaudited)

£ Millions

XP Power Limited

Consolidated Statement of Cash Flows

For the six months ended 30 June 2016

XP Power Limited

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