XP POWER LTD - Final Results

Although we cannot be immune from all external economic shocks resulting from cyclicality in the capital equipment markets we serve, we are optimistic regarding our prospects for 2018.”

Enquiries:

XP Power
Duncan Penny, Chief Executive Officer                       +44 (0)7776 178018
Gavin Griggs, Chief Financial Officer                           +44 (0)7824 144733

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

XP Power designs and manufactures power controllers, the essential hardware component in every piece of electrical equipment that converts power from the electricity grid into the right form for equipment to function.

XP Power typically designs power control solutions into the end products of major blue-chip OEMs, with a focus on the industrial (circa 39% of sales), healthcare (circa 31% sales) and technology (circa 30% of sales) sectors.  Once designed into a programme, XP Power has a revenue annuity over the life cycle of the customer’s product which is typically 5 to 7 years depending on the industry sector. 

XP Power has invested in research and development and its own manufacturing facilities in China and Vietnam, to develop a range of tailored products based on its own intellectual property that provide its customers with significantly improved functionality and efficiency.

Headquartered in Singapore and listed on the Main Market of the London Stock Exchange since 2000, XP Power serves a global blue-chip customer base from 27 locations in Europe, North America and Asia. 

For further information, please visit xppower.com

Chairman’s Statement

Our Progress in 2017

2017 was another year of significant progress in the development of the Company. We have continued to execute our strategy well and favourable market conditions, combined with new design wins entering into production, have driven another set of strong results. We delivered record order intake, revenues, profits and earnings per share in the year. We also acquired Comdel, another business that significantly expands our addressable market by strengthening our capabilities in higher power applications. We believe we now have the most comprehensive product offering in our industry, making XP Power a compelling partner to provide power solutions to our target customers to power their critical systems.

Results

Our financial performance in the year was strong. Revenues were £166.8 million, exceeding the prior year of £129.8 million. This was an increase of 22% in constant currency. Order intake also set a new record of £184.3 million, exceeding the £133.5 million achieved in 2016, and representing a 31% increase in constant currency.

Reported profit before tax was £32.2 million (2016: £27.8 million). After adding back acquisition costs, both completed and aborted, of £3.3 million (2016: £0.4 million) and amortisation of intangible assets of £0.6 million (2016: £0.4 million), adjusted profit before tax was £36.1 million (2016: £28.6 million), an increase of 26% over that reported in 2016. Basic earnings per share increased by 32% to 148.3 pence (2016:112.0 pence). Diluted adjusted earnings per share increased by 27% to 147.0 pence (2016: 115.3 pence).

Acquisition

We have been clear for some time that we intend to use the strength of our balance sheet and cash generation to acquire complementary businesses that expand our product portfolio and engineering capabilities. I was pleased to report the acquisition of Comdel, a company specialising in Radio Frequency (RF) power, in September 2017. This strategic acquisition fulfils our ambition to add a high power capability to our product portfolio and is an excellent fit with the rest of the XP Power family. We are very excited about the prospects for these products and the additional value we can now provide to our customers.

Board Changes

I would like to welcome Gavin Griggs, who joined us on 31 October 2017, to the Board as Chief Financial Officer. Gavin has worked in a range of acquisitive businesses, both public and private and with an international footprint, most recently Daisy Group Ltd, where he was Group Finance Director. Gavin's wide-ranging financial, commercial and M&A experience, will be an asset to XP Power in the next phase of our development.

In December 2017 Peter Bucher, a non-executive director, informed the Board that he would retire in December 2018 and step down from the Board.

We will begin a search for a new Non-Executive Director later this year.

Dividend

Our continued strong financial performance, strong cash flows and confidence in the Group’s long-term prospects have enabled us to increase dividends consistently over a sustained period.  The Board is recommending a final dividend of 29 pence per share for the fourth quarter of 2017. This dividend will be payable to members on the register on 16 March 2018 and will be paid on 20 April 2018. When combined with the interim dividends for the previous quarters, the total dividend for the year will be 78 pence per share (2016: 71 pence), an increase of 10%.

The compound average growth rate of our dividend has been 15% over the last ten years, demonstrating the Board’s commitment to our progressive dividend policy.

Our People and Our Values

The success of an organisation is dependent on the people and talent within it. We have significant strength and depth within our Company, with the majority of our Executives boasting long tenures with XP Power. We have conducted annual employee engagement surveys since 2015 and I am pleased that we have shown strong scores each time we repeat the survey, having taken actions to address any issues arising from the results of the prior survey. One of the main findings from these employee surveys was that our employees are proud to be part of our Company, highlighting the significant engagement we have between the business and our people. Our cultural survey score is one of our non-financial key performance indicators.

As the Company grows we continually look to acquire more talent across the business to build even greater strength and depth. A key focus is engineering, which remains a constraint on our ability to address all the opportunities we see before us. Recruiting and on-boarding more engineering colleagues will be a priority for 2018.

Manufacturing Capacity

Our continued growth means we need to add manufacturing capacity. We therefore commenced construction of a second manufacturing facility in Ho Chi Minh City, Vietnam in October 2017, which we expect to complete in the second half of 2018.

Outlook

We are encouraged by the strong performance in 2017 and a good start to 2018. The Group entered 2018 with a strong order backlog and will also benefit from a full year’s trading from the acquired Comdel business which expands our addressable market.

Although we cannot be immune from any external economic shocks resulting from cyclicality in the capital equipment markets we serve, we are optimistic regarding our prospects for 2018.

We are continuing to build a leading position in our industry to realise our vision of becoming the first choice power solutions provider delivering the ultimate experience to our customers and to our people.

James Peters

Chairman

Performance: Operational Review

Review of Our Year

XP Power has enjoyed another excellent year, achieving record order intake, revenues, profits and earnings per share. Improvement in our underlying markets started to take hold from the third quarter of 2016 and continued throughout 2017. Layered on top of this recovery were new design wins entering production, particularly in the healthcare sector, and a strong upturn in the semiconductor manufacturing equipment market. These factors combined to produce an excellent set of results. We continued to move our product portfolio up to higher power and technically more complex applications and to expand the number of design wins with higher engineering solutions content.

We announced the acquisition of Comdel in September 2017. This business gives XP Power a foothold in the Radio Frequency (RF) power market and meets our strategic aim of moving up the power scale to expand our addressable market and provide a broader product offering to our key customers.

We made strong progress toward expanding our manufacturing capacity in Vietnam when we commenced construction of an additional facility at our existing Ho Chi Minh City site during the year. We expect this new facility to come on stream in the second half of 2018. The expected capacity increase from this new facility will be phased over a number of years but has the potential to double our existing Vietnamese manufacturing capabilities in the longer term.

We continue to be excited by the future prospects for our business.

Marketplace

All industry sectors and all geographies experienced revenue growth in 2017 over 2016 and, significantly, sequential growth in the second half of 2017 over the first half. The order performance was also strong, with order intake up 38% on the prior year (2016: 21%) and 31% ahead in constant currency (2016: 9%) which resulted in a book to bill ratio of 1.11 (2016: 1.03), demonstrating the strength of the 2017 performance. We enter 2018 with good momentum and a healthy order book.

During 2017 we specifically targeted the semiconductor manufacturing equipment market. This market is traditionally cyclical and is currently enjoying a strong upturn which has benefitted the Group. Despite its historic cyclicality this market remains highly attractive due to its robust fundamentals, which are being driven by the proliferation of applications involving the internet of things (IoT), augmented intelligence (AI), autonomous vehicles and big data.

North America revenues were US$121.3 million in 2017 (2016: US$93.7 million), an increase of 29%. The acquisition of Comdel at the end of September 2017 contributed US$5.4 million (2016: nil) to North American revenues. As well as a general recovery in the capital equipment markets, our North American business benefitted from a very strong performance in the semiconductor manufacturing equipment sector which contributed US$37.3 million to revenues (2016: US$20.8 million). Order intake in North America was also very strong at US$139.2 million (2016: US$98.6 million), an increase of 41%. The acquisition of Comdel contributed US$7.7 million (2016: nil) to North American order intake in 2017. The strong book to bill ratio of 1.15 for North America bodes well for 2018.

Our European business grew by 16% to £57.5 million (2016: £49.4 million) which is the third successive year of growth. The industrial, healthcare and technology sectors all saw growth in Europe but healthcare showed the highest growth rate at 27%, as a number of significant new programmes at blue-chip customers entered production.

Asia revenues grew by 18% in 2017 to US$19.0 million (2016: US$16.1 million). Healthcare displayed particularly good growth in 2017 in the Asia region.

Overall, North America represented 57% of revenue (2016: 53%), Asia represented 9% of revenue (2016: 9%) and Europe represented 34% of revenue (2016: 38%). The average exchange rate for the US Dollar compared to Sterling was 1.28 in 2017 versus 1.38 in 2016, representing a 7% weakening of Sterling following the Brexit vote in June 2016. This caused North America and Asia revenues to be inflated, due to translation, but similarly all of our US Dollar denominated product costs to also be inflated when translated to sterling. We discuss the potential impact of the Brexit vote and foreign exchange volatility in more detail in our Financial Review.

Every sector grew in absolute terms but technology grew most strongly due to the strength of semiconductor manufacturing equipment sector demand, and also by healthcare due to a number of new programme wins entering production. Industrial represented 39% of revenue (2016: 46%), healthcare represented 31% of revenue (2016: 29%) and technology represented 30% of revenue (2016: 25%). All our products are designed into capital equipment so our revenues will inevitably be affected by capital equipment cycles. This is particularly so in the semiconductor manufacturing equipment sector which made up 17% of our revenues in 2017 (2016: 12%), although this industry has more recently put forward the argument that the sector will be much less cyclical in the future due to the prevalence of semiconductor devices in our modern world. However, our exposure to a large number of end markets helps mitigate the cyclicality in any particular sector, producing an underlying resilience in our diversified business model. 

Adapting to the Market and the Competition

Since listing on the London Stock Exchange in 2000, XP Power has evolved from a specialist distributor of power conversion products to a designer and then manufacturer of power solutions for the industrial, healthcare and technology markets.

We continue to perform well against our traditional established competition. Our broad range of standard products, now augmented by recent acquisitions, and excellent customer service delivered by the largest direct sales force in our industry is a compelling proposition. We expect future competitors to emerge from Asia as companies with low cost manufacturing and engineering attempt to enter parts of the industrial and healthcare markets in Europe and North America. We need to continually adapt our product offering and services to respond to this threat.

Low cost Asian competitors continue to become more prevalent, particularly in the low power/low complexity end of the market. It is straightforward to source low cost/low power products directly from Asian manufacturers. Engineering solutions are not so easily managed remotely and work most effectively when situated close to the customer so design discussions and design reviews can take place face-to-face. We continue to add more and more value to our customers as we expand our engineering service groups across the globe.

As well as providing a higher content of engineering solutions we have moved our product portfolio up in terms of power level and complexity to help protect our business from low cost Asian competition, which remains a threat. Specifically, we have expanded the capabilities within our product portfolio with the acquisition of Comdel which gives us Radio Frequency (RF) power at high power levels.

We are building a broad and compelling product offering which will make us an increasingly attractive partner to leading companies in the industrial, healthcare and technology sectors in order to power their mission-critical applications.

Strategic Progress

We have followed a consistent strategy which has enabled us to produce strong results over a sustained period of time. The fundamental essence of the strategy - targeting key accounts where we can add value and gaining more of the available business in those accounts – continues to remain appropriate and effective.

Our strategy can be summarised as follows:

• Develop a broad range of competitive products;
• Target accounts where we can add value;
• Increase vertical penetration of target accounts;
• Enhance brand awareness;
• Accelerate operational excellence;
• Lead our industry on environmental matters; and
• Make selective acquisitions in identified strategic markets or of complementary businesses to expand our product offering.

We continue to make significant progress against each of these strategic objectives. We believe we have the broadest, most up-to-date portfolio of products, many of which are class-leading in terms of efficiency and low stand-by power. Our portfolio of XP “Green” Power products grew by 31% in 2017 to £39.7 million (2016: £30.2 million) demonstrating how well these products have been adopted by our customers. We also continue to see revenues from our own-designed/manufactured products grow at a faster rate than those from other products.

We consider that our transition from a specialist distribution company, through the addition of a design capability, to designer and manufacturer is now complete. We are now clearly recognised as both a designer and manufacturer by key customers in our target markets. Revenues from our own-designed products set a new record of £127.4 million in the year (2016: £95.3 million), representing 76% of revenue (2016: 73%). We expect further improvement in the mix of own-designed products in 2018. We are now moving our business further up the value chain by providing our key customers with higher levels of engineering solutions where we add value, enabling the customer to more easily integrate the power solution into their critical systems. These services range from providing simple voltage and connector changes, through to changes in mechanical format, the addition of thermal management, communication to the customer’s end equipment utilising firmware and ultimately full custom designs. This is a much more engineering intense activity but does mean we work very closely with the customer’s design engineers to provide them with a complete power solution in the shortest possible time, delivering genuine value.

Acquisition of Comdel - Radio Frequency (RF) Power

On 29 September 2017 XP Power acquired the assets and business of Comdel, a company based in Massachusetts, USA, specialising in Radio Frequency (RF) power generation products which it supplies to the industrial and technology sectors. Total consideration of US$25.2 million (£18.8 million) was paid in cash on completion.

Radio frequency power is used in a variety of applications. The most common are plasma generation for deposition or etching of materials in semiconductor manufacturing equipment or industrial processes, ultra-sonic welding, induction heating, and dielectric heating. RF power is also used in industrial lasers, medical equipment and ion beam inspection equipment. Ultra-sonic welding is used to splice wires to terminals, weld thin foils with precision, and to weld aluminium parts in automotive applications.

Comdel and XP Power share several customers, and while there is no direct overlap in product lines, the power supply solutions of the two companies are highly complementary. Comdel’s products and engineering capabilities will enhance the Group’s ability to implement its strategy of winning a greater share of business from its target customers by achieving wider vertical penetration of these accounts. As well as a product offering suitable for an array of applications used by some of XP Power’s existing customer base, Comdel also brings a number of new customers to the Group.

The acquisition will enable XP Power to provide its existing customers with a comprehensive product offering in RF power generation and RF matching systems, a market segment with robust demand fundamentals but one in which we did not previously operate.

XP-Comdel has already experienced excellent growth in orders since the acquisition, benefitting from the favourable conditions in the semiconductor manufacturing equipment sector.

We are delighted to welcome Comdel to the XP Power Group and are excited about the opportunity of offering their complementary product ranges through our global sales channel.

The combination of XP Power’s existing low voltage power offering with the high voltage/low power DC-DC converters acquired through the acquisition of EMCO in November 2015 and now the RF power from Comdel substantially expands XP Power’s addressable market and makes us a compelling power solutions provider for many customers involved in industrial, healthcare and semiconductor manufacturing equipment.

Engineering Solutions

As well as expanding our product offering we have continued to expand our engineering solutions groups in Asia, Europe and North America. Our customers frequently require a high degree of customisation to allow the power conversion system to operate within their end equipment or simply to make it easier for the customer to integrate the power conversion solution into their application. Our engineering solutions groups work closely with the customer’s engineering teams to provide these customised solutions. Speed and proximity to the customer are critical as the power solution is often one of the last parts of the system to be designed so is invariably one of the gating items to get the end product to market. This is an area where XP Power add significant value to the customer and we are seeing increasing demand for these services. The addition of high voltage and now RF power allows our engineering solutions groups to leverage off additional standard products as building blocks to expand our addressable market.

We will expand these resources in 2018 to address the opportunities we continue to identify.

Research and Development

We have continued to invest in research and development to further expand our portfolio of products and the size of our addressable market opportunity. In particular, we increased our design engineering resource and capabilities during 2017. We released 27 new product families in 2017 (2016: 47) and 19 (2016: 33) of these can be classified as ultra-high efficiency.

The high level of new product introductions in 2016 was driven by the addition of a new third-party supplier to enhance our DC-DC product offering.

Manufacturing – Vietnam II

In 2012 we expanded our manufacturing footprint outside China when we started manufacturing magnetic windings in a new Vietnamese facility situated close to Ho Chi Minh City. This added much needed capacity and also enhanced our cost competitiveness as production costs primarily labour in Vietnam are significantly lower than those of our existing Chinese facility.

Production volumes of magnetics windings at our Vietnam facility have continued to climb and in 2017 we produced 6.7 million windings compared to 4.9 million in 2016. We have been actively transferring the lower power/lower complexity products from China to Vietnam to improve our cost position and free up capacity in China. In 2017, we manufactured 1.0 million power supplies in our Vietnam facility compared to 0.4 million in 2016.

We continue to make process improvements in our manufacturing facilities, where we are applying more lean process principles. Our internal yields continue to improve and we have redesigned some of our processes to reduce product lead times to provide improved customer service and reduced freight costs.

In October 2017, we commenced construction of a second manufacturing facility on our existing site in Vietnam. Our Vietnamese site currently houses a 2,100m² administration building and a three-storey 9,260m² manufacturing facility. The new Vietnamese facility will be a four-storey building with 11,000m² of floor area. We have spent US$0.3 million in 2017 and anticipate a further spend of US$5.0 million in 2018 to complete the project. Our longer-term planning indicates we will need this additional manufacturing capacity in the first half of 2019.

Our key operational challenge in 2017 has been keeping pace with the growth in the business. Our lean manufacturing initiatives have helped in that regard but we still have opportunities to improve our supply chain and planning processes to reduce our lead times and make our supply chain more agile.

Outlook for 2018

We enter 2018 with a strong order book and good momentum in our business, and a strong position in our marketplace. We will also have the benefit of a full twelve months contribution from the acquisition of Comdel, providing us with RF Power capability. While we cannot be immune from any economic shocks or cyclicality in our end markets, and in particularly the semiconductor manufacturing equipment sector which represented 17% of our business in 2017, we are optimistic regarding the outlook for 2018.

We remain excited and confident regarding the long-term prospects for our Group.

Duncan Penny
Chief Executive Officer                                                                   

Performance: Financial Review

XP Power delivered a strong performance in 2017. The significant order and revenue growth, coupled with effective control of operating expenditure, has delivered strong year-on-year growth in profits. We have also made further investment in capital projects in order to build the capabilities necessary to support our future sales growth. The business exited the year with a robust financial position.

Revenue and Order Intake

The Group generated revenue growth of 29% during the year on a reported basis (22% in constant currency and 19% on an organic constant currency basis). The Group’s performance was driven by revenue growth from XP Power’s own-designed products, a key indicator of XP Power’s strategy in action, which grew 34% (or approximately 24% in constant currency) to £127.4 million (2016: £95.3 million) representing 76% of revenue (2016: 73%).

Regionally, North America grew strongly, up 38% (29% in constant currency and 24% on an organic constant currency basis), supported by good revenue growth in Europe of 16% (12% in constant currency) where the Nordic markets and Italy were stand out performers up 21% and 26% respectively, and Asia, up 26% (18% in constant currency), with a notable performance in South Korea, which was up 50%.

This performance was driven by strong order intake of £184.3 million, an increase of 38% over 2016 on a reported basis, or 31% in constant currency.

Orders and revenue for 2017 represent a full year book to bill ratio of 1.11 (2016: 1.03) reflecting the strength of customer demand across the year.

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