Okay, good morning, everybody. Thank you very much for attending to hear the talk through the half-year results for discoverIE to the end of September. So let's just take you through the highlights. So, here today are Bruce Thompson, our chairman, Simon, our finance director, and obviously me. So, we'll start with a few highlights, and then I'll hand over to Simon to take you through the details. So, you know, this has been a tricky period from a sales perspective. Sales were down 4%, organically down 10%, but we're very pleased to say that despite that, our operating profit, EBIT, up 4%, with operating margins up to a record high of 13.8%. That's up one percentage point on a CER basis.
So, notwithstanding a softer sales environment, which is all about the destocking that we'll talk about later, the cost management, the efficiencies program, the pricing policies, et cetera, have all enabled us to build or continue a decent operating result. In addition to that, orders were up 1% organically, up 5% sequentially. Quite a difference between the two divisions at the moment. There's a cyclical difference becoming apparent, and we'll talk a bit more about that later, but the essence, S&C, that sensing and connectivity division, orders up 20% organically. Very good to see that. Whereas in magnetics and controls, which is where most of the big destocking industrial customers are at play, their orders are still down 11%. Earnings per share down 4%.
That's all principally all related to the higher interest costs, which, you know, we've now passed through the peak point there, and so we'll start to see some benefit of that as we go forward with, as interest rates come down. Cash flow, absolutely excellent. Simon will talk about that. I won't steal all the thunder on that. We made one bolt-on acquisition in the period, a company called Hi-Volt, which makes high voltage capacitors for, principally medical applications. We bought that for an EBIT multiple of six. And just to note, we announced it in the previous results, but we've completed the sale of the solar business unit. We've got a very strong pipeline of acquisition opportunities. Although we haven't closed many acquisitions in the first half, there's actually been an awful lot going on.
It's all about getting the timing of the transaction right relative to the sort of fairly variable market conditions that we've been seeing. We've got about GBP 70 million of funding capacity for the second half, and there's, as I say, a lot on the go at the moment. So, that we expect more to come in the second half. I always talk about design wins. Design wins continue to be up strongly. They were up 8% in the period and up 33% over two years ago. They are critical to our performance through the cycle. The reason our orders in S&C are up by 20% organically is because we have the design wins in place, which I always say. We have the design wins in place so that when the conditions allow, we get the full benefit of that.
We have the design wins in place in the M&C division as well. As conditions improve and we work through that destocking cycle, we expect to see a similar kind of recovery. All that being said, we're on track for the full year. We'll talk about the outlook later, but the, you know, notwithstanding, that, that comment later, we're in good shape to hit our targets and our expectations for the year. Without further ado, I'll hand over to Simon to take you through the numbers.
Great. Thanks, Nick. Good morning. Good morning, everybody. So, just, yeah, firstly from me, a few of the financial highlights. This was a slide we, if you were at the Capital Markets Day, you'd have seen it, at that event. And what it shows is our strong through cycle, you know, performance across the last 10 years, you know, comfortably ahead of the targets you can see at the top there. And we've layered on underneath, you can see the performance, the summary performance, for this particular period. So, you know, from a sales perspective, you know, we've had really good, decent 6% organic growth across that 10-year period. This, you know, this period, you know, we're coming through with a low point of a cycle. We're at minus 10.
Actually, that's very similar to, if you look at the COVID period, it's a very similar sort of period there. And obviously, we bounced back out of that, very strongly. We've had acquisitions and we've had, you know, a fair number of operating efficiencies, which I'll talk about. And that's helped us drive this operating, continue to drive growth in profits and growth in operating margins. We're up 90 basis points, 100 basis points at constant exchange rates. That adds to the 800 basis points we've achieved in the last 10 years. So, really good progress there. And that's helped us minimize the impact of the destocking and, you know, the interest rates Nick talked about on the EPS. So, we're just 4% down. And the cash flow, yeah, Nick said, very strong.
I'll talk about that later, but very strong generation and conversion rates, 126%, which is brilliant and way above, you know, the average for the last 10 years and obviously our target. You know, we've maintained our ROCE above our target. We're at 15.2%. And we continue to make improvements in terms of carbon. We're down at around about 50%. So, we're halfway to our net zero target for 2030. So, well on track there. More on all these later. So, next slide is sales. So, you know, sales of GBP 211 million in the half. That's sort of down 5%, reported 4% at constant exchange rates. And you know, that sort of comprises, obviously, with, you know, the minus 10%. We've actually got 8% from acquisitions. We've done 14, six acquisitions in the last 14 months.
Then we've 2% of sales comes out because of the disposal of the solar business. You know, we announced at the end of last year, so that's 4% overall down. In terms of organically, you can see, you know, the trend is improving, so it was minus 12% Q1, minus 7% Q2. We would expect that trend, we're expecting, and we're sort of seeing that trend improving as we go through the rest of the year, and then in terms of margin, you know, and profits, you know, despite the destocking, you know, we've, as you can see on the chart, we've continued to deliver, you know, strong growth in operating margin, you know, growth in profits. You know, in terms of that operating margin, you know, it is a combination.
We've done those acquisitions, but, you know, a big chunk has come from, you know, our own operating efficiencies. You know, there's a combination of, you know, tight cost control, but also from a gross margin perspective, you know, there's better pricing. You know, we've done clustering, we've done production transfers. We talked about last time, you know, the cross-selling is starting to improve. So, lots of really good things going on under the bonnet, and that's helped us go through that. We had a 13.5% target for the year. We've gone through that six months early. We're at a record 13.8%, and we feel we're well on track to hit that next target, which we've set ourselves, which is 15%, for FY 2028. Profits up 4% at constant exchange rates.
And you can see if you look at the chart, you know, we've delivered 18% compound growth since FY 2018. Actually, if you just look from a period just before COVID to where we are now, we've actually doubled our profitability. There's two down cycles in there as well. So there's a COVID and obviously the period we're in now. That's not too shabby. And this chart, you know, I put it up every time, and I think it's a really good chart. So you can sort of, it gives you a walk from profits last year, 28.6, 29.1 this period. The first three bars on the left, that's our organic performance.
And you can see that we've covered the impact of the destocking, you know, through you know, gross margin improvements, operating costs, you know, and acquisitions, roughly GBP 3 million each. It's you know, quite neat from that perspective how we've done it. Gross margin organically, that's up, you know, 1.4 percentage points. It's up around about 2.5% overall if you include acquisitions. Costs, we've taken 5% of costs out. You know, we've just tightened up the cost base, and that's good. And acquisitions, I said, there's six acquisitions in there, bringing us up to that GBP 1 million, you know, profit increase. And then just, you know, Nick touched on this. This is the divisional performance. And there's a real distinction here between the two divisions, which is a cyclical differentiation.
You know, S&C are roughly six months ahead, we would say for an M&C more early stage, M&C is later stage. So, S&C, you can see, you know, sales down 5% overall, but that was very much an improving trend Q1, Q2. And we would certainly see that, we see that improving even more and going into growth in the second half. That minus five, you know, we've improved gross margin, costs are down 4%. We've done three acquisitions in that division. And so, you can see profits up 12%. And that's taken us to a GBP 17 million EBIT number. And the margin is up 2.4%, up to nearly, you know, 20%. So, a really good shape from that business.
You know, conversely, contrast that, you know, with M&C, it's still coming through that destocking cycle. Sales are down -12%. You know, we've done some good work in terms of reducing, you know, the impact, you know, gross margin improvements again, 6% out of OpEx. There's three acquisitions. So, actually, the impact is reduced down to only 7% at the EBIT line and only 0.3% at the margin line. So, you know, really strong performance, you know, from S&C coming out of the cycle, out of the low point, and a very resilient performance we feel from M&C, as it still, you know, comes through the bottom. PBT and EPS. So, this chart, you know, just gives you a walk from operating profit 29.1 down to EPS of 18.4.
You know, the big standout is obviously the interest. You know, Nick referred to that. You've got it's almost 50% higher on a finance cost line. And that's the annualization of increasing interest rates that were happening last year. You know, and we won't see that happening in the second half. We will, we'll see the benefit as rates are starting to come down. You know, tax rates are better, 1% better. And that's a profit mix. We've got a more profit now in the U.S., which is a low rate for us. And so that you know reduces the impact from an EPS line, you know, to 4%. And as Nick said, as interest rates for sensitivity as interest, you know, we've got a variable rate debt base.
So, as rates come down, you know, we should see the benefit of that. And roughly a 1% annualized reduction in rates is around about 3% on EPS. Something to look forward to there. You know, from a reported basis, acquisition costs are less this period than last period. Actually, we've got a 4% uptick in reported EPS, and we've increased our interim dividend in line with that. Henry, you just moved your foot. You know, onto cash flow and balance sheet, so the chart at the top, that just gives you. This is a last 12 months. We always report on a last 12 months basis, from a cash flow perspective. This gives us a walk from GBP 66 million of underlying EBITDA to free cash flow of GBP 45 million.
The two bars on the left of that, that's our capital investment. So, actually, you've got working capital. We've actually released GBP 5 million of working capital in that period. And you'd expect that as sales come down, you expect to release some working capital. But, you know, we've also made improvements. Our inventory turns are starting to improve slightly. So, they're up to 2.9. And once sales growth does return, we would expect, you know, those turns to go nicely through the three times and above. From a CapEx point of view, we've invested GBP 4.5 million in that 12-month period. That's quite, you know, it's a very capital-like business that does cover, you know, we've put in a new facility in China. We've done other capacity expansions, you know, and some line extensions.
So, it does cover quite a bit, you know, for us, but it is only 1.1%. So, you know, I keep echoing, you know, we're a very capital-like business. In the middle chart, you can see we're achieving 33% growth in operating cash flow, 46% growth in free cash flow. Both of those are up over 80% in two years and tracking at about 17% compound over that 10-year period, you can see. So pretty good progress there. It's a strong balance sheet. Net debt is at GBP 99 million. We brought the gearing down across the year from 1.6 down to 1.45. And we've made four acquisitions in the process. I feel that gearing will come down to about 1.2 by the year end. And that will give us access to around about GBP 70 million of firepower.
You know, some good resources to spend in the second half. It's a capital-like, and it's very cash-generative as a business. Onto ROCE, you know, it's a compounding model. I've talked about this before. It's just a reminder. It's a compounding model. You know, the organic ROCE will grow as the businesses grow, but that's tempered as we do acquisitions. We'll be looking to do more acquisitions. You see, you'll see that theme happening. On the chart, you can see that across an 18-month period, our organic ROCE has gone from 15.9 up to 17.3. Then in that period, we've made a record number of acquisitions, GBP 87 million of acquisitions. That tempers the ROCE rate down to 15.2.
And if you look at it, and that there's a chart in the back, and we presented at the Capital Markets Day, businesses that we acquired before FY 18, they're actually now delivering ROCE of 29%. And that sort of includes head office costs. And we would expect the businesses acquired after FY 18 to also continue to compound and grow up to that 30% level and so on. That's the sort of a compounding model. And we've also got a ROTCE measure. So, ROTCE sort of excludes goodwill and excludes intangibles. And so, it's a measure of the underlying returns of the business. And that's sort of moved at 1% to 49%. It really just reflects how profitable and cash-generative those businesses are. Capital allocation, again, we've talked about that.
Just a reminder. You know, it's a simple policy. You know, we invest in organic growth opportunities as they arise. You know, typically, CapEx will have paybacks in the two- to four-time range. You know, we pay a progressive dividend, and then the rest of free cash flow we invest into acquisitions, whether it's bolt-ons with multiples around four- to eight-, or new platforms in the sort of nine- to twelve-range. So you can see on the chart, GBP 235 million of cash flow since FY 2018. 75% has gone into growth opportunities, acquisitions and CapEx. And a quarter has been returned to shareholders. Overall, GBP 460 million of capital has been spent in that period.
Half of that has come from free cash flow and a quarter each from debt and from equity raising. So, a very, very balanced and disciplined approach to funding. I hope you can see, and in turn, you can also see that reflected on the lower chart, which shows all the gearing levels across, you know, since FY 2015, and you can see that we've never exceeded our target range of one and a half to two times, so it's a very disciplined approach. On the right, you can also see reflected how our sort of cash generation, so I've got what I call an organic gearing. So, if we hadn't done any acquisitions, beyond FY 2023, our gearing would have come down from 0.7 down to 0.2.
And that's given us the capacity to do that record value of acquisitions and still be, you know, below the target range. And just finally for me, it's just a refresher of the financial journey we've been on, you know, for the last 10 years. And you can sort of see it in the CERs that we've been reporting on. So, in the good times, if you look at, you know, we're delivering, you know, strong sales and EPS growth. But in the tougher times, you know, it's a very resilient performance you can see. That's number two and three on the chart there. Throughout that, you know, we've delivered strong, we've got profit growth and margin growth. That's number one. And also, you know, strong cash flow and returns.
That's four, five, and six, you know, and we're continuing to do our best to help the environment, which is number seven. So, it's a resilient first half. You know, we think we're very well set, you know, going into the future. And with that, I'll hand over to Nick for a look at the operations.
All right, thanks. Okay, so I want to start with just a recap of some of the highlights from the Capital Markets Day, really just to sort of take us up to the high level of what, where we are and what we're trying to do. So, the first thing to emphasize is that we're all about unique, essential electronics. We design custom super niche products for high quality through cycle structural growth markets. That's what we're all about.
As Simon said, we've been on this now for the past now for over, over 10 years. And, you know, we believe it or not, we still feel as though we're only really getting, just getting started. You know, most of our revenue is derived from big international customers that are sort of leaders or major players in their fields. And I've listed a few of the customer names, typical customer names there. And we have a, a very low customer individual customer concentration, but collectively a very large base of wide base of large international operators.
And the model that we provide them, which is unique products designed to the applications that they need, that we can design, make, and support them internationally, is one that has growing resonance for these, you know, international customers that in themselves, of themselves are trying to differentiate and create, you know, sort of world-beating products in their respective markets. So, it's a great value proposition, we think. We're a niche player in a very, very large market. But we have a very clear strategy. It, as I say, hasn't really changed at all, really, over the last 10 plus years. We want to focus on high quality growth markets, where we can focus through design activity to get high quality revenue streams into these high quality customers. We then want to be able to, you know, layer that up such that we grow ahead of GDP through the cycle.
In addition to that, we then want to go and acquire more businesses that we can work with and, sort of roll out the same, the same model. So, we've acquired 28 businesses now, over the last sort of 10 years or so. And one of the benefits of acquiring these businesses is that they all kind of have a very similar DNA, even though the products may be different, the, you know, what they do and how they do it, the business process is very similar. So, as we bring these businesses in, we're increasingly find that we can get more efficiencies by arranging the businesses, and, and, you know, introducing sort of collaborative, collaboration initiatives and the like. And that has, you know, played a big part or is playing a big part in, improving our margins.
So, generating efficiencies to improve margins, further improve cash flow is what it's all about. And then underpinning all this is, you know, as Simon said, we're halfway to reaching our Net Zero goals, also very important. But strategies aren't static as well, although it hasn't changed substantially over the years that we've been at it. It evolves and it's evolving now. You know, we're increasing the level of product innovation and differentiation. At the Capital Markets Day, we introduced some of the higher-end products that we're making for some of our customers now, some of which are involving multi-Opco collaboration, you know, within discoverIE, across different clusters, which is really exciting, and generates real, very, very highly differentiated product solutions that in many cases, customers can only, only get from us, partly because we help them come up with the idea in the first place.
As we grow bigger, we're expanding and rolling out this cluster concept. We have two large clusters now, and four smaller ones that in time will become larger themselves. We've introduced a fifth target market, which is security. It's about sort of commercial security. So, things like data centers is obviously a hot topic at the moment, but also passive defense, also a fairly hot topic at the moment. We've introduced more operational integration to get these efficiencies. We don't, you know, we're not a company that creates massive restructuring costs by closing a factory here and putting it together somewhere else. But what we do is we have lots of tactical initiatives that enable effective integration and importantly do it without having big, you know, big associated restructuring costs. And we're scaling up the rate of acquisitions.
As Simon said, we've done a record rate of acquisitions over the last 14, 18 months now, or, and that will certainly continue. We operate in, our part of the market is about a 30 billion market. So, we have, we're a very small player in a very, very large, very fragmented global components market, driven by, or the markets at least that we focus on, driven by structural change. So, we think we're in a very good space, both now, but for the medium and longer term as well. One of the best things about this strategy, you know, I said it 10 years ago, I say it now, and I'll probably say it again in 10 years' time, is that there's a very long path that we're on. This is not a strategy that's going to run out of steam anytime soon.
So, just to look at the group a little bit, you can see in the pie chart in the top right that North America now accounts for 26% of our revenue. Western Europe, which is principally, or half of that is Germany. Western Europe accounts for 21%, Nordics 17%, UK 12%, Asia, Asia and rest of the world 17%. You can see in the bar chart at the bottom left that the biggest slowdown in the period was North America, down 19%. That's on the back of growth of 38% last year. So, and just a sort of bit of a sort of corrective adjustment there. That's principally driven by the industrial and transportation sector in mostly in the M&C sector. But you can also see there Germany down 8%, Nordics down a similar amount, and UK relatively resilient at 4%.
Principally, the UK's resilience is due to some of the transport security projects, which are all led and designed and made in the UK. Design wins. So, I think the you know the key point here is that, although 8% year on year is pretty good, not bad, over two years it's up over 30%, over 33%. And you can see in the bar chart on the right the extent of that growth, over the last you know sort of several years. It's just something that we can apply continuous focus on. Actually the quality of the design pipeline that we have now and the opportunity pipeline, which is you know significantly over GBP 1 billion in lifetime value estimate as well, is probably the highest it's ever been, the highest quality it's ever been.
And it is. It continues to expand and build the, you know, the engine that is what drives organic growth when markets turns. And, you know, as I said right at the beginning, if we, if we didn't have the focus on this that we do, we wouldn't have, we wouldn't be seeing the 20% pickup in orders in S&C at the moment. It's a, it's the two are, although they can't be, you know, you can't predict when the orders are going to come, you can be absolutely sure that without these design wins, you're not going to get that kind of recovery. So, super, super, super important. And we're very, very pleased with the progress that we're making. Magnetics and Controls. So, this is 60% of the group revenue. So this is, as Simon said, it's about six months later cyclically.
And so, when we started to see the slowdown, Magnetics and Controls was holding the numbers up, as S&C started to soften. Now here we are a little time later, and it's Magnetics and Controls that is still down while S&C is recovering. And that's principally due to the big industrial customers and some transportation customers and their destocking. We've seen, as I've said before, very, very extensive destocking as these big international customers that got, you know, very substantial shares of semiconductors to sort of support their internal supply chains two years ago, ended up with, you know, very significant overstocks, which have taken a long time, a year now really to really sort of pull back and correct.
Notwithstanding that though, we've almost held operating margins only down 30 basis points, which on revenue that's, you know, down 12% is, is, you know, a reasonable result. Book-to-bill is still a little below one at 0.91. I think the key point to make is that from Q1 to Q2, the booking trend amongst the major industrial customers improved quite significantly, still negative year on year, but sequentially Q1 to Q2 was up, actually 13%. So, you know, we need that trend to continue in Q3 and Q4, but, and it, it looks at the moment as if that's going to happen. Geographically, Asia is quite strongly up. You might be surprised to hear driven by China, up 16%. That's due to Western-based customers operating in China, some big renewable and medical customers that, Western medical and renewables customers that are operating there that drove that growth.
Conversely, North America down, big industrials, destocking in industrials and transportation, and you can see just geographically North America accounting for 20%, 27%. They actually the geographic split is actually fairly similar across the two divisions, as you can see, slightly less in North America, but you know, to all intents and purposes, quite similar in sensing and connectivity, but the big difference is in the geographic performance in sensing and connectivity. Asia down, Europe sort of flat up slightly at 1%, and Asia down actually principally because of some domestic Chinese customer delays, which drove that. North America, a better performance here, principally because of some big commercial transport security projects that are in this sector, that sort of prop that up and offset some of the corrections elsewhere, and yeah, Europe 1%.
Actually, there are some good projects in Germany, believe it or not. I mean, our view on Germany is that it's not quite as bad as everything you read about in the media, principally because we don't operate in the automotive and consumer markets and the, some of the sort of the niche industrial German markets are actually doing pretty well. So, we supply in one of our businesses, we supply into, EMI shielding projects that go into data center applications, internationally and areas like that are actually still doing quite well. I missed anything else on there? No, I think we talked about the recovery in the, orders up 20%. Book-to-bill over one, 1.08. That's very good, obviously. So, yeah, we think, you know, hopefully the corner is turning. So, the order book, I mean, it still shows a downward trend there. That'll start flattening out now.
It should start flattening out now from here on. The order book's down about 20% year on year. You know, that's, you know, principally due to the normalization of lead times. Lead times are back to normal, and therefore order books don't need to be as long, and that's a good thing for us. We want reasonable order book, but, you know, we don't need it to be unduly long, and it isn't now. It's back to four and a half months, which is slightly higher than pre-COVID levels, and that's plenty for us to drive our production planning cycles, so to summarize, Q3 trading is in line. Orders are running ahead of sales and ahead sequentially, which we're obviously very encouraged by.
We think more importantly than that, though, that we've got the right growth drivers in place to really keep that progress, that early sign of progress going. The design wins I've talked about, they're in place. And as I mentioned earlier, even though we didn't do that many acquisitions in H1, we've got a lot going on and we've got a fairly full pipeline that should start to come through in the not too distant future. So, we've got a lot going on in those two areas. The margins looking good. That again is a reflection of all of the initiatives that we've put in place for several years now that really started to come through to fruition. So, we're, you know, we're looking eagerly at our next target of 15%, which we state officially is around FY28.
But we're, you know, making very good progress ahead of schedule so far. Just got to keep it going now. So, all told, we're on track to deliver the results for the year that we, the board and the market are expecting. So, yeah. So, without further ado, I'll hand over to any questions. Okay. Who's going to go first? Hi, Andy.
Hi. Andy Douglas from Jefferies. Three questions, please. Can you talk about costs? You've done a cracking job on the margin through lots of different things, but cost has come out. Do you have to put cost back in if we get a volume recovery coming through over the next few years, or is this more structural cost that you've taken out?
I appreciate you've got clustering, you've got all kinds of stuff going on, but in terms of OpEx, does that come back in or have you taken that out forever?
So, I'd say there's a bit of both. There is structural improvement. I mean, we've, you know, we've definitely taken the opportunity through this period of the cycle to, it's a bit like a heavy frost, you know, kills off all the bugs. You just kind of make a check on everything, make sure your costs are in the right place. It's the time to reconsider stuff and do things slightly differently if it warrants it. And so, there are several of those kind of initiatives that, you know, means that those costs won't come back.
But yeah, otherwise there will be costs that come back in as we start to grow, as we want to put more engineers in and things like that, and we will invest for those. But as always, we always invest in our OpEx in accordance with the rate at which we grow. And we aim for this sort of drop-through rate that allows for, you know, some operating leverage as well. So,
yeah, like, you know, we've got, you know, quite a bit of flexibility from a sort of bonus and, you know, commissions basis. So, obviously that's designed in order that as, you know, in times like this, that number comes down and, you know, we'll pay it out of, you know, increased profitability.
Yeah. Perfect. In M&C, clearly a tough market from a destocking perspective.
What's your best guess on how long that destocking will go on for? As and when it finishes, do we automatically go back into a big restock phase or do we go back to more of a just-in-time perspective, just for our modeling perspective?
Well, so we think that there is a six-month lag between S&C and M&C. We think that we're, you know, the destocking is getting less bad in Q3. So we think, you know, that bring those two points together by the end of the second half, hopefully we will have seen that. Now, whether that's Q3 that's finished or whether it's Q4 remains to be seen. But, you know, we're, you know, it's ending. I think we're getting close to the end of it now.
But also, you know, the shift to sort of just-in-time, you know, to just-in-case, you know, came about because of the supply chain constraints and obviously lower interest rates. And as interest rates went up, people go, "Crap, I don't need all this stock." So that's sort of come back down again. So I don't think it will necessarily go back to just-in-case. Yeah, although to your other, sorry, to your other point, you know, what level of bounce back will we see? Well, I don't, you know, who knows? Hopefully it'll be quite a nice bounce. I think we'll hopefully see a decent bounce back in orders. That's usually what happens because in order to destock, they need to be running below their demand level. So usually when that comes to an end, it comes back up quite sharply.
But I think beyond that, you know, end market pull-through is not going to be strong for certainly the first half of calendar 2025. You know, the macro conditions have, you know, probably got to improve a bit yet for end market growth to be stronger.
And then last one, national insurance contribution. Can you give us an impact on next year?
Yeah, there's a number, yeah.
I'll set that up.
Yeah, it's a good question. There's a number in the pressure. It's GBP 0.9 million for the, you know, for next year.
So, is that set down by price or cost?
Yeah, possibly. Yeah, possibly. But, you know, we'll look at that. But yes, it's, you know, it's a chunk, you know, we've got quite a few employees in the UK, so it does hit. Yeah.
Thank you very much.
Hiya.
Can we talk a bit more about the U.S.? I take the point about the tough comps and some specific destocking. Is there anything else causing concern though? Obviously, it's big political change and some suggestions that some of those renewable projects are in a rather more difficult territory as a result. Is it just a question of destocking ending or is there something underlying behind that weakness, do you think?
I, so we did very well through the Trump one. As tariffs were introduced in principally China, we were able to move our production globally, accordingly. And, in fact, we, we gained business during Trump one because we benefited from having, facilities that, you know, in Mexico actually, that could pick up production from elsewhere in the world.
So, as customers moved and moved their demand around, or as customers responded to this, we were able to respond by moving production around, which not everyone could do. So, we actually benefited from it. I don't think we know enough of the details to know what's going to happen this time. There's a lot of talk and there's a lot of sort of hot tweets, but what that really means in terms of tangible action is too early to really comment. I'm very confident that we will weather it. You know, the two things to say. Firstly, over half, just over half of everything we sell in the U.S. is made in the U.S. The next biggest region is actually made, is that our products made in the U.K., which is about 15%. So, you've got 65%, 70% of our products made in those two regions alone.
14% of our revenue in the U.S. is derived from products manufactured in Mexico. But it's manufactured in Mexico using raw materials, principally from the U.S. So, there'll be some netting off, presumably. So, I think from a tariff perspective, I think we will weather the storm. If Mexico were to become penalized through tariffs, we can make those products elsewhere, cost-effectively. So, I think that'll be okay. In terms of end markets, well, our renewable business that we have is actually doing quite well at the moment, and it's on an international basis. So, it's not heavily dependent on the U.S. at the moment. So, I don't think there's any, well, yeah, I don't think we're likely to be dramatically affected by that, but I don't really know.
Thanks very much. Can I ask one more? I think previously you've talked about nine big customers being behind the bulk of the destocking. Any change to that number? Are some of them through that process, some sticky?
So if you look at the, you know, last year we had our industrial and connectivity sector was down 19% and the rest of the businesses grew 9%. This year, industrial and connectivity is only down 10%, but the other sectors, all the other sectors are also down 10%. So, it's got the big nine are less bad, but the general destocking has spread across the industry more broadly.
And so within that industrial and connectivity, actually what you've got is you've got the industrial customers which still lead the charge of that reduction, although not as badly as last year, offset to quite a degree by some of the big connectivity projects that are coming through. So, that's a sort of long-winded way of saying the big nine are still down on sales, but still down from a sales perspective, but destocking had more broadly spread more widely throughout the industry. From an orders perspective, as I mentioned just earlier, the order run rate from Q1 to Q2 amongst the big nine customers was up by 13% sequentially. So, it's still negative year on year, but it's a lot better than it was.
Good morning. It's Maggie Scully from Redburn Atlantic. I have two questions, very quickly if I could.
Almost the same question as Andy's, but focusing on working cap. So, you've taken working cap; it's been quite nice. When you see the pickup, do you expect that to be structurally slightly lower? So, how should we think about working cap as you move into a rebound?
Yeah, I think if you look at our trend over a number of years, as obviously sales start going up, you know, we're going to have to invest back in working capital. So, you know, we are, as I said in the presentation, I'd expect to see set inventory turns improve. You know, we should get some benefit from that. But ultimately, you know, you do have to invest back in working capital.
What you'll see, you know, our rate of working capital as a percentage of sales, which is currently around about the high 18%, will come back down towards the sort of 16%-17% level. This is what we'd expect. But ultimately, you know, sales grow, you know, we would typically see, you know, conversion rates of cash come down, you know, to around about the 90%. And obviously, as sales, you know, are down, you've got the rates north of 100%.
Okay, thanks. And the second one, just a follow-up actually from the capital markets day. You're tracking ahead of your margin targets, clearly, of the 120 basis points to get to the 15. Can you remind us what you think the mix is going to be between organic and acquisition? Or, well,
we said at the capital markets there'd be about 50/50.
Yeah, I mean, it sort of ebbs about 50/50. Sometimes it can move a little bit in favor of acquisitions, maybe sort of 60/40 in acquisitions. But you know, we think rule of thumb, it'll be about 50/50.
Lydia Kenny from Investec. Two questions from me. So, firstly, on the S&C division, obviously orders are up 20%. Could you give kind of more color on what sort of demand you're seeing there?
Yeah, so we've seen, it's quite a lot. So, the 20% includes one Opco in particular, which has seen a very strong pickup in orders in transport security and actually food processing. This is screening equipment for those applications. If you exclude that very large pickup, then across the rest of S&C, the orders are up by 13% organically.
And that's driven by data center applications across a number of our opcos. It's driven by communications applications for passive defense, literally communication amongst from military in military fields. And then we've got some general industrial pickup as well in the mid-size industrials. Actually, you know, we think that that's principally due to customers that have sort of worked through their stocks earlier because they weren't as overstocked in the first place. So we've got a rollout, for example, of a big industrial water metering project in the US, which is underway and things like that. So quite a, you know, reasonably widespread.
Okay. And then my next question is on China. You're obviously investing here or put a bit of investment into facilities here when others are sort of pulling back. And then you see a mix between the divisions and the performance in China there.
So, I guess, how are you guys positioned when local competition is also intensifying?
Well, so we're now in a position, you know, differently to several years ago. We're now in a position where China's in, we produce in China for Chinese demand and our customers, so it's a China for China market, whereas it was a China for global market, sort of several years ago. And in that market, it's an important market for us. And there are a number of very large, international customers there that we work with. And in that context, it will continue to be an important market for us. The divisional differences between M&C and S&C is not actually that meaningful because it sometimes comes down to just a handful of customers that make the difference.
But the territory generally is still an important region for us. And the customers that we're selling to are generally, you know, very highly differentiated in the technologies that they're providing. And so, they don't tend to see the same extent of, sort of copycat or, me too local competition that a more commoditized product range might do.
Thank you.
Thanks. Morning guys. Henry Carver from Davy. Just one around pricing trends. If I'm obviously the gross margin was pretty strong. I just wondered if you could elaborate any more on trends and outlook on pricing and, and between the two divisions, if there's any real, discrepancy there to be aware of.
The price, so the pricing, there's a, you know, there are some slight mix effects that contribute to the margin from pricing.
So, as the big nine have dropped off, then that's given a slightly favorable margin mix because inevitably some of the bigger customers are lower margin. So you get little effects like that. Yeah, I think that's probably the biggest pricing effect. I mean, if you look at the makeup of our margins, principally it's volume related, you know, the margin change is volume related and there's some mix related to the relative growth rates of higher margin versus lower margin operating businesses as well. So, there's a bit of that coming through. And that has certainly influenced, partly influenced the stronger EBIT margins that we're seeing in S&C at the moment because there's some of those areas are growing better and they're slightly high margins.
Great. Thank you.
Hi, it's Andrew Humphrey at Peel Hunt. I wanted to ask about M&A and the pipeline there.
You've talked about that, I think fairly extensively back at the Capital Markets Day in September. You were indicating sort of vendor expectations around pricing have sort of adjusted and become more reasonable. Would love an update on kind of where things are at with the M&A pipeline, how we should think about the next six, nine months there. I wanted to ask about Europe as well. Clearly kind of there's a lot of focus on the political situation in the U.S., but Europe has some kind of challenges over the next few months as well in terms of potential government changes in Germany and France. Any feedback you're getting from customers on that would be interesting.
So on, I've forgotten your first point, Andrew.
M&A.
M&A, thank you.
On M&A, the multiples, so we paid six for our recent acquisition, which was a small bolt-on for mid-size acquisitions, the kind of margins that they're generating. So, sort of 20% plus margin businesses. We're looking at sort of eight-to-nine typically EBIT multiples, something like that. And generally a bit lower for smaller businesses. So yeah, so I mean, you know, the multiples ebb and flow a bit, obviously according to sort of the overall market conditions. It's worth saying that two-thirds of our deals these days are generated in-house, as well. So, and I would say that at the moment, you know, the multiples are, they've come down over the last year, a turn or two, and they're pretty static at the moment. And they're kind of back where they should be.
The hubris has gone and they're kind of back where they should be. In terms of, yeah, who knows what political. Goodness only knows what's going to happen politically in Europe. From our perspective, Germany isn't as bad as I said earlier, sort of perhaps the media portrays the German economy because we're in these industrial niches where Germany is very, very strong. And these German, you know, Mittelstand German companies create great products often. They sell them to great customers, both domestically and internationally. And often those domestic customers buy, you know, have a strong export contingent themselves. So, they're relatively immune from, you know, some of the more, sort of high-profile problems. So, high-quality German businesses, we really like that Mittelstand concept really fits with the discoverIE DNA.
So we, you know, we will continue to develop businesses in those areas and acquire businesses in those areas. You know, as with any acquisition, we're super cautious on, you know, what we're buying. We're very diligent, very, very carefully. We look at the customer concentration, the customer trading metrics, and all manner of detail to make sure that there's real substance and quality in the revenue that's been generated. Then you've got to sort of choose your timing right. If it passes all of our sort of diligence points, then we generally crack on. To that extent, we think now is a good time to be cracking on. Yeah. Great. I think that probably concludes all the questions in the room. Are there any questions coming in online?
Yep. We've got some questions from Nathan Swamy from HSBC.
He's got four questions. Okay. First question, with organic orders turning positive, when can we expect the inflection point for organic sales growth? Second question, is there any potential impact from U.S. tariffs? Third question, since short-term margin target is achieved ahead of schedule, can we expect a medium-term guidance lift when sales growth flows in? And last question, in the absence of M&A, can we expect share buyback from excess free cash? Thanks.
Right. What was the first question again? Yeah. What it was.
With organic orders turning positive, when can we expect the inflection point for organic sales growth?
Yeah, well, typically, goodness, good question. I mean, the order book will start to rebuild, and that typically flows through into sales in about three to four months.
So you can sort of work on an assumption of four to six months following the return of order recovery as a sort of rule of thumb, I would say, and the second question.
Is there any potential impact from U.S. tariffs?
Yeah, we kind of covered that. I mean, I think we feel as though the impact is. We certainly didn't feel any negative impact under Trump one. I think we're well placed, as any business can be, to not be negatively impacted. You never know, we might even be able to slightly positively benefit from it because of our global footprint. Yeah, I think that's probably all we need to say on that. Third one, the third point was it's something about raising guidance. I don't think we're in raising guidance territory.
Nor are we in share buyback territory either.
The fourth question was, in the absence of M&A, can we expect share buyback for excess free cash?
No. No. There isn't an absence of M&A. There's a lot going on, and it's all about getting the commercial terms of the M&A deals right. If that means we might have to wait a few months longer, as we've done over the last sort of first half, then we'll do that to get to the right position. We feel as though we've done the right thing there.
I think you've got to, you know, typically you'd want to be sitting on a lot of surplus cash.
You know, we wouldn't want to. You know, we're not in that position.
So, you don't want to be sort of borrowing to buy shares by buybacks. So, no. Thank you.
There are no further questions, so I'll come back to you.
Okay. Well, thank you then. Thank you very much for your time. Have a great rest of your day.