XP Power, one of the world's leading developers and manufacturers of critical power control components for the electronics industry, today announces its annual results for the year ended 31 December 2016.
These Results are available in PDF format.
The slides of the Annual Results Presentation are available to view here.
|Adjusted profit before tax1||£28.6m||£25.7m||+11%|
Adjusted profit after tax and minority interest1
|Adjusted diluted earnings per share1||115.3p||104.3p||+11%|
|Operating cash flow||£27.9m||£21.0m||+33%|
|Final dividend per share||26.0p||24.0p||+8%|
|Total dividend per share||71.0p||66.0p||+8%|
|Profit before tax||£27.8m||£25.4m||+ 9%|
|Profit after tax and minority interest||£21.5m||£19.9m||+ 8%|
|Diluted earnings per share||111.2p||102.8p||+ 8%|
1 Adjusted for one-off costs associated with acquisitions of £0.4 million (2015: £0.3 million) and intangibles amortisation of £0.4 million (2015: nil)
James Peters, Chairman, commented:
"We are encouraged by the strong finish we had to 2016. The Group entered 2017 with a strong order backlog and, despite the mixed global economic picture, we have established positive momentum in the new financial year. The further utilisation of lower cost production capacity in Vietnam is giving us a competitive advantage and we will begin work on a second factory at the site towards the end of 2017, to address our future volume growth requirements.
In addition, the Group has a strong balance sheet and a highly cash generative business that will enable us to help fund further targeted acquisitions to broaden our product offering and engineering capabilities.
We remain excited about the opportunities we believe will be available to the Group in the years ahead."
|Duncan Penny, Chief Executive||+44 (0)7776 178018|
|Jonathan Rhodes, Finance Director||+44 (0)7500 944614|
|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 50% of sales), healthcare (circa 30% sales) and technology (circa 20% 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
Our Progress in 2016
2016 was another year of significant progress; despite challenging economic conditions and political uncertainties, we achieved record revenues and earnings. In addition, we have enhanced our manufacturing capability by reducing our lead times and introducing lean manufacturing principles. We have also continued to ramp-up power converter production in our Vietnam facility, giving us a cost advantage over many of our competitors. Finally, we strengthened our Board, and set the stage for the next phase of our development.
Our financial performance for the year was again strong. Revenues were a record £129.8 million (2015: £109.7 million), an increase of 7% in constant currency. Order intake was £133.5 million (2015: £110.5 million) representing an increase of 9% in constant currency.
Gross margin showed a slight decline to 47.8% (2015: 49.8%) due to product mix and the weakening of Sterling against the US Dollar following the United Kingdom’s vote to leave the European Union, reflecting the fact that the majority of our underlying product costs are denominated in US Dollars.
Profit before tax was £27.8 million (2015: £25.4 million). After adding back costs associated with aborted acquisitions of £0.4 million (2015: £0.3 million) and amortisation of intangible assets of £0.4 million (2015: nil), adjusted profit before tax was £28.6 million (2015: £25.7 million), an increase of 11% over that reported in 2015. Basic earnings per share increased 8% to 112.0 pence (2015:103.7 pence). Diluted adjusted earnings per share increased 11% to 115.3 pence (2015: 104.3 pence).
The Company’s strategy, which it has executed successfully over many years, has generated good results. The Executive Management team conducted a review of the strategy during 2016 with input and review by the Board, to ensure it remained appropriate and up-to-date. This review concluded that the essence of the strategy - to continue to move up the value chain and win a growing proportion of our customers’ available business - should be unchanged but that a number of refinements be adopted to further improve upon our success to date. In particular, we now identify expansion of our product range by targeted acquisitions and achieving operational excellence as additional specific strategic goals. Further detail on our updated strategy is provided in the Operating and Financial Review below.
Strengthening Our Board
We were pleased to welcome Polly Williams, who joined our Board from 1 January 2016 as a Non-Executive Director, bringing with her a wealth of public company experience. Polly chairs XP Power’s Remuneration Committee and is a member of the Audit Committee.
With this latest appointment, we consider that the Board now has the appropriate experience and capabilities to take our Company to the next level of its development.
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. In line with our progressive dividend policy, the Board is recommending a final dividend of 26 pence per share for the fourth quarter of 2016. This dividend will be payable to members on the register on 17 March 2017 and will be paid on 21 April 2017.
When combined with the interim dividends for the previous quarters, the total dividend for the year will be 71 pence per share (2015: 66 pence); an increase of 8%.
The compound average growth rate of our dividend has been 10% over the last five years.
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 consecutive strong and improving 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.
During 2016, we rolled out a number of training programs built around our core values of integrity, knowledge, flexibility, speed and customer focus. These core values are part of our DNA and have been responsible for driving our performance and customer service commitment over the long term. Training programs were delivered across the world and were extremely well-received.
Sustainability is extremely important to our people and our customers. We punch well above our weight in this regard and set ourselves the aspirational goal of leading our industry regarding environmental and sustainability matters. This is reflected in the work we have done to produce a portfolio of ultra-high efficiency products which consume less energy, use less materials and do not contain substances which are harmful to the environment. These XP "Green" Power products grew at an impressive rate of 28% in 2016.
Our Vietnam factory is one of the most environmentally friendly in the industry with an efficient building envelope, ultra-efficient air conditioning, low-energy lighting, water capture and recycling and solar panel array. This is not only important to our customers but resonates with our employees.
We are encouraged by the strong finish we had to 2016. The Group entered 2017 with a strong order backlog and, despite the mixed global economic picture, we have established positive momentum in the new financial year.
In addition, the Group has a strong balance sheet and a robust business that provides excellent cash generation to help fund targeted acquisitions that will broaden our product offering and engineering capabilities.
Review of our year
While, overall, the market for industrial electronics remained challenging in 2016, trading conditions improved during the second half and we had some positive momentum in order intake and revenues. We continued to make progress with the execution of our strategy and reported record revenues, as well as delivering our highest ever level of own designed/own manufactured product revenues which now represent 73% of the total.
We also undertook a review of our well-established strategy during the year, to ensure it remains appropriate and up-to-date. The results of this review are discussed in more detail below.
We have been actively transferring more of the lower power/lower complexity product from our China facility to our Vietnam facility to maintain cost competitiveness and to free up capacity in China. We have also implemented a number of lean manufacturing principles which have allowed us to reduce lead times. We would also expect to see cost benefits from these initiatives as we trade through 2017.
We remain excited about the future prospects for our business.
During 2016, the Executive Management team critically reviewed the strategy we have been successfully executing and which has produced good results over a sustained period. The review concluded that the fundamental essence of the strategy - targeting key accounts where we can add value and gaining more of the available business in those accounts - remains appropriate and effective. However, a number of refinements were made to the strategy, including a greater emphasis on acquisitions to further expand our product offering and making the pursuit of operational excellence a specific strategic goal.
Our refined strategy can be summarised as follows:
We continue to make significant progress against each of these 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 28% in 2016 to £30.2 million (2015: £23.6 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 sales 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 the industrial, healthcare and technology markets. Revenues from our own-designed products set a new record of £95.3 million in the year, representing 73% of revenue (2015: 68%). We expect further growth in this area in 2017.
As we gain preferred or approved supplier status with our blue-chip customers we are gaining exposure to new opportunities in additional product areas. Our broad range of products, excellent customer service, low cost Asian manufacturing capability and engineering support on three continents makes us an ideal strategic partner to these larger blue-chip customers. We have established this position with our standard product offering but now we see attractive opportunities in these larger customers to engage on custom designs. We have already deployed more of our engineering services resource into these areas but also see opportunities for further acquisitions where our customer relationships and supplier approvals at key customers can be combined with acquired custom engineering expertise.
As we look forward, we see further opportunities to capitalise on our customer relationships and large direct sales channel by further expanding our product offering. Our acquisition of EMCO in November 2015 was an excellent example of this initiative and we have been actively seeking further opportunities to expand our product capability into complementary areas in which we do not currently operate or where we are under-represented.
Productivity will be a key area of future focus. We deliver excellent customer service and operating margins demonstrating that we have an efficient and effective business model. As our organisation grows geographically and in complexity we will ensure that we retain and build on the core values of knowledge, flexibility and speed that have served us well to date. In particular, we have continued to upgrade our systems and have brought new talent with experience in complex operations and lean process techniques into the organisation. We will be placing greater emphasis on operational excellence in 2017 to further enhance our productivity.
All industry sectors and all geographies experienced revenue growth in 2016 over 2015 and, significantly, sequential growth in the second half of 2016 over the first half. We therefore entered 2017 with good momentum and a healthy order book.
North America revenues in 2016 were $93.7 million but they did benefit from incremental revenues from the acquisition of EMCO in November 2015. Without the benefit of the EMCO revenues, North America revenues would have been flat year-on-year. However, order intake in North America was strong in the second half of 2016 - with $51.6 million booked compared with $47.0 million in the first half. North America now has the benefit of good momentum going into 2017, with some promising new programs where we expect volumes to ramp-up significantly during the year.
Technology represented 31% of revenues in North America in 2016 compared to 30% in 2015. The industrial sector rebounded and represented 35% of revenues in 2016 compared to 31% in 2015. Healthcare also performed well in North America in absolute terms, with revenues ahead by 10% as a number of new programs ramped-up, but its share of revenues declined to 34% (2015: 39%) as it did not match the pace of the recovery we saw in the industrial sector.
Our Asia business continued to grow despite the widely reported slow-down in China. Asia revenues grew 18% in 2016 to $16.1 million (2015: $13.7 million). The customers driving this increase generally sell their end products outside of the emerging markets. Industrial and technology sectors showed good growth in Asia whilst healthcare remained flat year-on-year.
Our European business grew by 10% to £49.4 million (2015: £45.1 million) which is the third successive year of growth in challenging market conditions. The industrial, healthcare and technology sectors all saw growth in Europe and we gained increased traction with some of the bigger blue-chip clients, which we expect to drive further European growth in 2017.
The geographic split of reported revenue was broadly maintained year-on-year. Overall North America represented 53% of revenue (2015: 51%), Asia represented 9% of revenue (2015: 8%) and Europe represented 38% of revenue (2015: 41%). The average exchange rate for the US Dollar compared to Sterling was 1.38 in 2016 versus 1.54 in 2015 representing a 10% weakening of Sterling following the Brexit vote. This caused North America and Asia revenues to be inflated, due to translation, and all of our costs reported in Sterling to be inflated as our product costs are predominately denominated in US Dollars. We discuss the potential impact of the Brexit vote and foreign exchange volatility in more detail below.
The overall picture by sector reflects the narrative above. Industrial represented 46% of revenue (2015: 44%), healthcare represented 29% of revenue (2015: 31%) and technology represented 25% of revenue (2015: 25%). All our products are designed into capital equipment so our revenues will always be affected by capital equipment cycles, 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.
We continue to perform well against our traditional established competition. Our broad range of standard products 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 ensure we continue to drive down our manufacturing costs and maintain our reputation as the experts in power to mitigate this threat.
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. We increased our design engineering resource and capabilities during 2016 in both our North America and United Kingdom design centres, including the introduction of a firmware capability for which we are seeing increasing demand. We released 47 new product families in 2016 (2015: 22) and 33 of these can be classified as ultra-high efficiency.
The high level of new product introductions was driven by the addition of a new third party supplier to enhance our DC-DC product offering.
The addition of a manufacturing site in Vietnam in 2012 added much needed capacity and also enhanced our cost competitiveness as production costs in Vietnam are significantly lower than those of our existing Chinese facility.
Production volumes of magnetics windings at our Vietnam facility have continued to ramp-up and in 2016 we produced 4.9 million windings compared to 4.3 million in 2015. We have been actively transferring the lower power/lower complexity products from China to Vietnam in 2016 to improve our cost position and free up capacity in China. In 2016 we manufactured 377,700 power supplies in our Vietnam facility compared to 172,500 in 2015.
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. We expect to derive cost benefits from our lean manufacturing initiatives as we trade through 2017.
Our longer term planning indicates we will need additional manufacturing capacity in the first half of 2019. We have therefore allocated US$1.5 million of our capital budget in Q4 of 2017 to break ground on a second factory at the Vietnam site, as envisaged at the time of our original investment.
Enhancing our digital presence
In December 2015 we launched our completely revamped website at xppower.com. The new mobile-optimised site was specifically designed to improve interaction and the overall user experience and has been well-received by customers.
In the first quarter of 2014, we signed a distribution agreement with global electronic components distributor Digi-key, to complement our existing distribution partnership with Premier Farnell, incorporating Farnell in Europe, element14 in Asia and Newark in America. In the summer of 2016, we engaged with another global electronic components distributor, Electrocomponents plc, incorporating trading brands RS Components in Europe & Asia, and Allied Electronics in America. With this appointment, we now have a presence with three leading global high service level/online distribution channels, making our product more readily available to a larger number of small and medium-sized customers and enhancing our brand recognition. We are experiencing excellent growth through these channels, allowing our direct sales teams to concentrate on our larger blue-chip accounts.
Efficient and robust systems are essential in order for us to manage an international business with a highly diverse customer base. In 2014 we upgraded our Customer Relationship Management systems across all three regions. This has allowed us to collaborate and share information much more effectively and provide even better customer service. From the beginning of January 2015 we replaced our North America business systems with SAP and are now running the same Enterprise Resource Management System across all three geographies which further enhances the speed and capability of our internal reporting.
This integrated approach ensures that we have the robust systems and reporting necessary to support our future growth.
Revenue and order intake
Revenues set a new record and grew 18% over the prior year (7% in constant currency) to £129.8 million (2015: £109.7 million). Order intake grew by 21% (9% in constant currency) to £133.5 million (2015: £110.5 million). Revenues from our own designed product - a key indicator of our strategic progress - grew by 28% (or approximately 15% in constant currency) to £95.3 million (2015: £74.6 million) representing 73% of revenue (2015: 68%) and setting another new record.
Gross margin declined slightly to 47.8% (2015: 49.8%), largely due to product mix and the effect of the depreciation of Sterling versus the US Dollar. The majority of our product costs are denominated in US Dollars so while the weakening of Sterling helps our revenue line, product costs increase more than the revenues as a result of the weakness of Sterling. Operating margins declined from 23.3% in 2015 to 21.6%. This was partly due to the weakness of Sterling but also due to the operating margins of EMCO being lower than those of XP Power as a whole.
Profit before tax was £27.8 million (2015: £25.4 million). After adding back costs associated with aborted acquisitions of £0.4 million (2015: £0.3 million) adjusted profit before tax was £28.2 million, an increase of 10% over that reported in 2015.
The tax charge for the year was £6.3 million (2015: £5.5 million) which represents an effective tax rate of 22.7% (2015: 21.7%). The effective rate is primarily determined by how our profits are distributed geographically. We expect a slight increase in the effective tax rate again in 2017.
Earnings per share
Basic earnings per share increased 8% to 112.0 pence compared to 103.7 pence in 2015. Diluted earnings per share increased by 8% to 111.2 pence compared with 102.8 pence in 2015.
After adding back costs associated with aborted acquisitions of £0.4 million (acquisition costs in 2015: £0.3 million) and intangible assets amortisation of £0.4 million (2015: nil) adjusted diluted earnings per share was 115.3 pence (2015: 104.3 pence) an increase of 11%.
Cash flow, funding and net cash
Our high margin business model, with modest capital requirements, continues to produce excellent free cash flows.
We finished 2016 in a net cash position of £3.7 million compared with a net debt position of £3.7 million at the end of 2015. This position was achieved after returning £12.9 million to Shareholders in the form of dividends.
In order to finance the acquisition of EMCO in November 2015 the Group took out a US$12.0 million term debt facility with Bank of Scotland PLC. The facility is repayable in equal quarterly instalments of US$1.7 million commenced in June 2016 and ending in December 2017. The facility is priced at LIBOR plus a margin of 0.95%.
In September 2016 the Group renewed its annual working capital facility at a level of US$7.5 million (2015: US$ 12.5 million). The facility is priced at the Bank of England base rate plus a margin of 1.5%. Bank of Scotland PLC provides the facility.
At 31 December 2016, no working capital facility was drawn down.
The attractive cash flow aspect of our business model has enabled us to pursue a progressive dividend policy over a sustained period of time.
Our policy is to increase dividends progressively whilst maintaining an appropriate level of cover. This year’s financial performance in terms of both profitability and cash flow has enabled us to recommend a final dividend of 26 pence per share which together with the quarterly dividends already paid gives a total dividend for the year of 71 pence per share (2015: 66 pence per share) an increase of 8%. Dividend cover for the year was 1.6 times.
The Group’s financial instruments consist of cash, money market deposits, overdrafts, and various other items such as trade receivables and trade payables that arise directly from its business operations.
The Group uses forward currency contracts to hedge highly probable forecast transactions. The instruments purchased are denominated in the currencies of the Group’s principal markets. The Group had £11.5 million of forward currency contracts outstanding at 31 December 2016 (2015: £11.3 million).
The weakening of Sterling versus the US Dollar in the period following the United Kingdom Referendum on EU membership on 23 June 2016 has obviously had a material effect on the presentation of our financial results in 2016.
Approximately 75% of our revenues are denominated in US Dollars and the translation of these revenues into Sterling for reporting purposes has had a beneficial effect. However, the majority of our cost of sales and a large proportion of our operating expenses are also denominated in US Dollars. While a stronger US Dollar helps our overall gross margin in absolute terms (albeit to a limited degree) it also has the effect of reducing the gross margin percentage as costs rise disproportionately to the revenues. We estimate that our reported 2016 gross margin percentage could be approximately 130 basis points lower as a result.
For our United Kingdom business invoiced in Sterling, which represents approximately 13% of our worldwide revenues, margins were reduced in the second half of 2016 as the associated product cost is denominated in US Dollars. We have therefore been raising prices as customers place new orders to compensate for this effect. Although no customer is ever happy with a price increase, our reasons for doing so are well understood. We therefore expect to recover a significant portion of our margin losses in the United Kingdom in 2017.
In terms of the broader economic impacts of Brexit on our business, we do not consider that they will be material. The evidence to date is that some of our United Kingdom customers are benefiting from the weakening of Sterling as they are frequently net exporters.
Our products are made in Asia and are already imported into Europe where we have warehouses in both Germany and the United Kingdom and hence we could ship our product destined for the European Union directly into Germany or another appropriate location.
Outlook for 2017
Although there continue to be a number of economic and political uncertainties which could potentially affect our business in 2017, we consider that we are well positioned in our marketplace. We have good momentum as our design pipeline continues to grow. Our order intake in the fourth quarter of 2016 was strong at £37.1 million and we entered 2017 with a healthy order book.
We also continue to work to identify acquisition opportunities that would be complementary to our product portfolio.
We remain excited and confident regarding the long term prospects for our Group.
|Duncan Penny||Jonathan Rhodes|
|Chief Executive||Finance Director|
|Cost of sales||(67.8)||(55.1)|
|Distribution and marketing||(26.6)||(22.0)|
|Research and development||(5.9)||(5.8)|
|Profit before income tax||2||27.8||25.4|
|Income tax expense||3||(6.3)||(5.5)|
|Profit for the year||21.5||19.9|
|Profit attributable to:|
|Equity holders of the Company||21.3||19.7|
|Earnings per share attributable to equity holders of the Company
(pence per share)
|- Diluted adjusted||5||115.3||104.3|
|Cash and cash equivalents||9.2||4.9|
|Trade and other receivables||21.5||17.5|
|Other current assets||2.4||2.4|
|Derivative financial instruments||0.4||-|
|Total current assets||65.7||53.5|
|Property, plant and equipment||19.1||16.1|
|Deferred income tax assets||0.4||0.4|
|ESOP loan to employees||0.7||0.7|
|Total non-current assets||73.2||65.4|
|Current income tax liabilities||3.3||1.2|
|Trade and other payables||16.1||14.6|
|Provision for deferred contingent consideration||0.5||-|
|Derivative financial instruments||0.4||-|
|Total current liabilities||25.8||19.8|
|Provision for deferred contingent consideration||1.5||1.5|
|Deferred income tax liabilities||4.7||3.9|
|Total non-current liabilities||6.2||10.0|
|Cash flows from operating activities|
|Profit for the year||21.5||19.9|
|- Income tax expense||6.3||5.5|
|- Amortisation and depreciation||4.6||3.8|
|- Finance charge||0.2||0.2|
|- ESOP expenses||0.3||0.1|
|- Loss/(gain) on fair valuation of derivative financial instruments||0.2||(0.2)|
|- Unrealised currency translation loss||5.0||1.0|
|Change in working capital, net of effects from acquisitions:|
|- Trade and other receivables||(4.0)||(1.5)|
|- Trade and other payables||1.5||(0.2)|
|- Provision for liabilities and other charges||(0.1)||(0.1)|
|Cash generated from operations||32.0||25.7|
|Income tax paid||(4.1)||(4.7)|
|Net cash generated from operating activities||27.9||21.0|
|Cash flows from investing activities|
|Acquisition of a subsidiary, net cash of cash acquired||-||(0.6)|
|Acquisition of a business, net cash of cash acquired||-||(7.7)|
|Purchases and construction of property, plant and equipment||(2.6)||(2.5)|
|Research and development expenditure capitalised||(4.2)||(2.9)|
|Proceeds from disposal of property, plant and equipment||0.1||-|
|ESOP loans repaid||-||0.2|
|Net cash used in investing activities||(6.7)||(13.5)|
|Cash flows from financing activities|
|(Repayment of borrowings)/proceeds from borrowings||(3.7)||8.0|
|Sale of treasury shares||0.3||0.3|
|Purchase of treasury shares by ESOP||(0.1)||(0.3)|
|Dividend paid to equity holders of the Company||(12.9)||(12.0)|
|Dividend paid to non-controlling interests||(0.2)||(0.2)|
|Net cash used in financing activities||(16.8)||(4.3)|
|Net increase in cash and cash equivalents||4.4||3.2|
|Cash and cash equivalents at beginning of financial year||4.3||1.3|
|Effects of currency translation on cash and cash equivalents||0.5||(0.2)|
|Cash and cash equivalents at end of financial year||9.2||4.3|
The notes are available in the printable pdf of the results. To download it, please click here.