Okay, good morning everybody. Welcome, thank you for coming to DiscoverIE's interim results for FY26, the six months to the 30th of September. I'm going to give you a quick intro into the numbers, and then I'll hand over to Simon to take you through some of the detail. It's been a very strong first half for us, actually record profitability and cash flow through the period, cash flow conversion. We're very pleased with that. We've also returned to organic sales and order growth in Q2 particularly. Orders in Q2 up 8%, sales up 1%. That was driven by, we have, as you will remember, three, we have four operating units, two in each division. Of those four operating units, three of them are now back into good levels of sort of mid-single digit organic growth.
The fourth unit controls, we'll talk about later, but that's still down, but we expect that to stabilize through the second half. The results of all that are adjusted operating profit up 5%, CER, operating margin up 30 basis points to 14% EBIT margin, which we're very pleased with. That's over 10 years of continuous growth in operating profits and margins. We're really pleased with that, particularly given that we're running through the low point of the cycle now. That, along with the slightly lower interest rates, means that adjusted earnings per share are up 6%. Again, very strong performance. I think the standout again though is the cash flow. Our free cash flow conversion is over 100%, as is our operating cash flow. Indeed, our average conversion rate of free cash flow over the last 10 years is now over 100%.
That is a very key metric for us and really a function of the sort of low CapEx, capital-light business model. That is important because it funds acquisitions. We announced a, or in these results, we include the announcement of a small bolt-on yesterday, KeyMat, which I'll talk a little bit more about later, for GBP 5.5 million. Behind that, we have a pipeline of numerous other acquisitions coming through. It is all part of the strategy to buy these sort of niche electronics businesses that we can buy at reasonable multiples and then bolt into the platform. Yeah, that is in good shape. As a result of all that, we are on track for a good second half and on track for the numbers that we have had out there. No upgrades this period, but on track for the numbers that are there already.
That's the summary. I'll hand over to Simon to take you through some of the detail.
Thanks, Nick. Yeah, good morning everybody. Yeah, okay, first up from me, the financial highlights. Yeah, as you can see, it's another good set of results. It's delivered in quite tricky conditions with those tariffs being introduced at the start of the period. Despite all that, we've returned the business back to organic sales growth, organic orders growth. Actually, we've delivered record profits. We've delivered record margins, both gross margins and operating margins, and record earnings per share. As Nick said, very strong cash flow, as we typically do. Yeah, we're really pleased with that as a set of results given the backdrop. I think it bodes well for the future as markets improve. I put this share, I think it started off at the capital markets, but it's a good summary. It's our KSIs, our key strategic indicators.
Across the top, you can see our medium-term KSI targets. In the middle, you've got our strong through cycle performance across 10 years. At the base, you've got our results for this year. On the left, in terms of sales, we've delivered 5.5% average growth over a 10-year period. It's around about 10% sales growth overall in that time. This year, we're back to growth, as you can see. Actually, Q2 was 1%, and overall sales were up 3.5%. Good to get that back into growth. In terms of operating margins, as Nick said, we're up to 14%, and that builds on 8% that we've delivered over the last 10 years, 8 percentage points growth. We're really pleased with that, and we're aiming at taking it up another three points, as you remember, to 17% in the next three and a half years.
We feel we're well on track to achieve that. EPS is up 6%, and that builds on a really strong 20% compound growth that we've delivered across that 10-year period. Cash flow, very strong, as Nick said. Yeah, we're delivering averaging over 100% for the last 10 years. ROCE, we've increased ROCE on last year. It's above our target, so we're pleased with that. At the right-hand side, you can see in terms of carbon emissions, we've continued with excellent progress there. We've reduced carbon emissions now by 63% over three and a half years. Well set for the 65% target this year and for the net zero target by 2030. Next up is operating margin and profit. You can see that sketched out on this graph.
What you can see, I've layered along the bottom, you can see hopefully in orange, you've got the organic growth of sales across that period. What it demonstrates is that whatever the sales growth has been, we've actually delivered really good growth in profit and margin across that 10-year period, excepting the first half of the COVID period. For the full year of COVID, we did achieve growth. We've achieved it again this year. Profits up 5% CER, 4% reported up to GBP 30.2 million, margins up reported 0.2 percentage points up to that 14%. That is actually being driven by better gross margins. Actually, again, as with last year, a lot of it's from internal operating efficiencies that we're delivering. We're really pleased with that. You can see over, I don't want to bang on, but it's 17% compound growth of profits since H1 2018.
We've more than doubled profits since just before COVID, that's a six-year period. Those margins are set up 10, over 8 percentage points in the last 10 years. We are really pleased to be able to deliver that through cycle performance. We put this in every year. I don't know if many companies do, but we think it's the right way to do it. It gives you a nice bridge between operating profits last year, GBP 29.1 million, this year, GBP 30.2 million. We split out the first three bars on the left, split out our organic performance in profit terms, split between sales, gross margin, and organic OPEX. You can see that the actual gross margins are up organically. They're at 0.4 percentage points through those operating efficiencies that we're delivering. We've been able to invest in the operations, GBP 1.4 million into that.
About half of that's actually going into engineering resource to help growth in the future. We've also invested in IT integrations and upgrades that are necessary as they come through. Acquisitions, if you remember, we had two acquisitions in the last 18 months. That's Highvolt and Burster back in January. That's adding GBP 1.7 million in terms of profits. Profits at GBP 1.5 million CER, GBP 1.1 million at a reported level. We're impacted there on the FX with a weak dollar. I do like this chart because it shows our strategy. It's about organic growth. It's about operational efficiencies, and it's about creative acquisitions. Next, on to the divisional performance. Just as a note, to better align our businesses, we've actually reclassified SenseTech from S&C into M&C. Conversely, we've reclassified Silvertel out from M&C to S&C.
All the detail of that is set out in the back of the press release. In terms of S&C, organic sales up 7%. Really nice performance there. That builds on 6% organic growth that we delivered in the second half last year. It is coming in all regions, particularly in Europe and Asia. That growth combined with actually better gross margins, the two acquisitions we talked about, we are getting 15% growth in sales, 21% growth in operating profits, margins up 1 percentage point. Really good performance there from S&C. M&C, two operating units there. The magnetics operating unit is back into organic sales growth and organic profit growth, where it is being offset by the controls operating unit. Within that, we still have some destocking in a few U.S. customers. That is offsetting the growth in magnetics.
Overall sales, down 3%. That is partly mitigated by better gross margins there, type OPEX. We have limited the impact on EBIT to 6% and the impact on the margin to 0.4%. In total, we have got three of those four operating units back into sales growth, profit growth, margin growth. That is more of an offsetting the controls, which the good news in terms of M&C orders were up 7% in the second half, positive book to bill. There are some positive signs coming through there. This next chart, next on to EPS, it gives you a walk there from adjusted operating profit, GBP 30.2 million, down to adjusted EPS, 19.5p. Finance costs are down 11%, combination of lower base rates in all three of our borrowing currencies, dollar, sterling, and euro. Taxes up 0.7%, 24.7%. That is just a mixed matter, more profit in higher tax territories.
Overall, 4% reported growth in profits becomes 6% EPS growth, which is 8% EPS growth at constant exchange rates. Lower acquisition costs this period. Actually, the reported EPS is up 11%. Just as a reminder, our borrowings are variable at the moment. Therefore, we will continue to benefit as rates fall. A 1% annualized fall in interest rates will be a 3% kicker to the EPS. Finally, dividend. We've got a progressive dividend policy at the moment. We've put the dividend at 4%, equal to what we put up last year. It's up over 150% in 15 years. Not too shabby. Next, on to balance sheet cash flow. This chart on the top, this is done on a last, we do this on a last 12-month basis.
It tracks you from adjusted EBITDA GBP 69 million down to free cash flow in that period of GBP 41 million. The two bars on the left, that's our capital investment. As you can see, working capital, we've kept that really tight. CapEx, we've invested GBP 7 million CapEx. That covers quite a lot of stuff. Includes capacity expansions, including one in quite a reasonable size, one in Thailand. A number of line extensions, but it's only 1.6% of top line. We are a very capital-light business, as we do tell you. That, in combination, if you look at the chart in the middle, GBP 63 million of the operating cash flow. Actually, that's a 16% CAGR over a 12-year period. That's pretty good.
In terms of tax, interest, pension, about a third of that, very similar to last year, a third of that goes on those areas, GBP 41 million of free cash flow. As with operating cash flow, both of those converting at over 100%. As I said, just to reinforce, you can see the data at the bottom, which shows all of the conversion rates over the last 12 years, which average over that 100%. In terms of balance sheet, net debt's down to GBP 91 million. That is a gearing of 1.3. During actually last month, we finalized an extension of our GBP 240 million RCF out to May 2030 with options to take that to 2032. Within that, we've actually been given a raised gearing covenant up 0.5 to 3.5.
Up until with a 1.3 gearing allowing for paying for Keymat, that will give us GBP 75 million of acquisition firepower to stay below two times. If given the gearing covenant where it is now, for the right deal, we would take that temporarily over two if we felt it would pay down quickly. Cash flow is in really good shape. We are capital-light and very cash-generative, as we keep reminding you. Finally, just another look at the care size. You can see our sort of financial journey there through the progression of those care sizes. If you look at lines two and three in terms of sales and EPS, in good times, we are delivering very strong growth. In tougher times, we are very resilient. The impact is very much minimized.
On the top, you can see that through that, we're still delivering profit growth and operating margin growth. On four, five, six, and seven, strong cash flows, good returns, and we're sort of reducing our carbon footprint. A good set of results in tricky conditions. With that, I'll pass to Nick to give an operational update. Thank you.
Okay. Just a quick reminder of our strategy. The strategy is unchanged. It's very clear. It's consistent, and it's been like it for a good number of years now. We're designing and making unique custom electronics that we supply to OEM, original engineering, manufacturing customers. Our products are unique and essential for their equipment. Whether it's an MRI scanner, a surveillance drone, or a wind turbine, these manufacturers need the kind of custom electronics that we make. Very long lifecycle, very sticky revenues.
We focus on the wider growth markets. The industrial connectivity, which is driven by sort of automation, robotics, connectivity, medical, medical equipment, transportation, which is rail, non-automotive transportation, specialist vehicles, things like that. The security market, which is typically defense and commercial security. Airport scanners, surveillance drones, and the such like. We continue to be acquisitive. We slowed down the rate of acquisitions earlier this year. We have now reaccelerated that with the announcement of the small deal yesterday and more, certainly much more in the pipeline to come and plenty of debt firepower to execute that. As we bring all these electronic businesses into the group, we generate efficiencies, which is what has been driving our consistent improvement in operating margins. Very clear and consistent strategy. It is worth just also saying that we continue to have a very low customer concentration.
Top 10 customers account for 22% of revenue. That's a very deliberate part of the strategy so as to avoid any undue sort of vulnerabilities to revenue. This is a little bit more detail on the overview. You can see in the top right, there's split by region. North America accounting for just under a quarter of revenue. And then Western Europe, just over a quarter of revenue. Nordics, 17%, and U.K., 11%. You can see on the bottom left the growth by region. Europe has been the strongest performer with organic growth, up 6%. North America has been the weakest, down 9%. The controls business customers that are down are all in North America. That is part of it. It is also influenced more widely by the tariff uncertainty through the year, which we think is now coming to an end.
It's worth also saying that some of the European growth is driven by some of the demand in things like data centers actually that go into the U.S. The bottom right charts are perhaps a little bit interesting. Some of you might remember that sort of 12, 18 months ago when the destocking cycle started, it was the major customers. It was a handful of major customers that led the destocking initially. This chart here, the top 10 customer chart, shows how that situation has now played through and has recovered. Those customers that led into the destocking are now leading their way out of the destocking. What it shows here is that in H2, the second half of last year, our top 10 customers were growing at 13% organically.
Those same top 10 customers are now in the first half of this year have grown 18% organically. That is a very strong recovery in those markets. They are all large multinational OEMs, names with which you'd be familiar. What you can see on the smaller bar chart on the right is how the organic growth has accelerated through the quarters compared with the second half last year. The destocking 18 months ago was led by the major customers. They went into it first. They have come out of it first. We're gradually starting to see the rest of the customers come out of that cycle too. The Magnetics and Controls division. The regional growth actually is slightly different between the two divisions. That is purely just a function of the individual customers.
Magnetics and controls is just under 60% of group revenue. H1 orders were up 7% on revenue that was down 3% organically. Actually, the magnetics part of M&C was in good levels of, saw good levels of organic growth. That was more than offset by the continued slowness in six customers actually in the controls division. Orders up 7% organically. The recovery that we are seeing in here is led by renewables and industrial markets. You might be surprised by the renewables. That is a function of both strength in the existing wind customers and a bit of a resurgence in solar. Some of you will have read about the big solar installations in Spain. Some of the power units going into that are made by us. The acquisition that we made yesterday, we announced yesterday, subject to approval yet, Keymat, that falls into the controls division.
You can see here, North America down 14%. That was the biggest area of weakness in the period. In the S&C division, just under half of group revenue, H1 sales up 7% organically. Orders down 10%. In the sensing and connectivity division, particularly, we've seen a bit of oscillation of orders according to the tariff announcements. As tariff announcements were made through the half, that, in some cases, led to customers sort of pulling in or pushing out their order patterns. That partly explains that. The growth has been led by industrial, medical customers recovering, and some of the security, some areas of both commercial and defense security recovering. You can see here, Europe up 8%. Asia and rest of world up 13%.
Actually, there's been some European transfer business from some transfer business from Europe to India in amongst that, which is partly driving the Asian figure. Design wins. I mean, design wins are absolutely critical. I always say if we didn't have any design wins, we wouldn't have any revenue in three to four years' time. Driving the pipeline of new opportunities is super important. Converting those new opportunities into wins, which then become revenue, is super important. We've seen a recovery in design wins. Actually, H2 last year was the low point. We're up something like 40% on H2, but up 2% year on year H1, and up 11% on two years ago. That's good. I mean, 2% is not a huge standout number, but it's worth remembering that the design wins last year, not all of them have yet started to convert into new revenue.
We're just starting to see that come through. There's a bit of a backlog of previous years, last year's design wins that need to come through into revenue as well. Overall, design wins and design pipeline in very good shape as they need to be. This is the acquisition that we announced yesterday, Keymat Technology, U.K.-based designer and manufacturer of assistive interface electronics, HMI, human-machine interface. You can see in that image there on the left, the green illuminated part, that is this piece here. It is a sort of content navigation device, in this case, on a passport recognition unit. If you go through a number of airports, you'll see these automated passport checking booths. Many of them these days have this device in there to enable visually impaired people to navigate it with some ease.
The demand for this is being driven by legislation in the U.K., U.S., and now rolling out into the EU as well. This business, Keymat, is based in the U.K., predominantly was selling in the U.K. and the U.S. We see growth coming over the year ahead in Europe as well as in the U.K. and U.S. A very good little bolt-on business that will sit alongside our Cursor Controls business in the Controls division. Outlook. It has been a good set of results in a tricky market. The growth drivers are in good shape, both organic and acquisitive. Orders and sales trends are improving organically. We have a strong bank of design wins and a very strong pipeline of new opportunities. We are increasing our exposure to the security market, both organically and acquisitively.
We're seeing more opportunities come through the organic design pipeline. We're also seeing more going on in the M&A space. As I've already said, the acquisitions are well underway and expect to see more in the weeks and months ahead. The tariff situation seems to be stabilizing. It was quite disruptive earlier in the year. It seems to have calmed down a bit now, although there is still the outstanding matter of the U.S. Supreme Court hearing on the tariffs. It seems as though at least our customers have sort of digested the situation and are sort of keen to push on, nevertheless. We think we're in pretty good shape. We think that against a backdrop of sort of gradually improving conditions, we're sort of well set to benefit from that, both organically and acquisitively. Yeah, that's where we are.
Thank you for your attention. Right. We'll now go over to Q&A.
Let me just get my notes. Hey, Andy. Morning, gentlemen. Andrew Douglas from Jefferies. Three questions, please, if I may. Can we just focus on S&C for the time being? Order intake's down 10% in the—and I understand the tough comp in the fourth quarter meant you probably had a slow start to the year. Can we just walk through first quarter, second quarter, both in terms of order intake organically and book to bill? What I'm trying to figure out is the 8% order intake at the group level looks really good. I'm just trying to figure out why book to bill is still only one because it feels like orders have been below sales and we're kind of just about catching up.
Can I just make sure that I understand the shape of S&C in that first half, please?
I think the orders are—as I sort of alluded to, the orders, there is a bit over the last year, really, the orders have been a bit of a quarterly sawtooth affected by tariff pronouncements mainly. The key point is the book to bill is about 1. And if you look in Q2, the book to bill was about 1.04. If you take out the controls sector, which has yet to get back to positive book to bill, then the book to bill for the remaining three is about 1.07. That is dry. That is consistent, actually, with the recovery in orders organically across the rest of the unit. I suppose what I am trying to say is that the controls sector kind of clouds it.
Yeah, do not—yeah, the eight.
Because book to bill in S&C is 0.92. That does not quite add up in my mind. As you put, you said it yourself, yeah, we had really strong orders in that prior second half, in the fourth quarter building up to the introduction of tariffs. I think if you look at the order book of S&C as a whole, it is still very robust. It is just obviously a lot of the orders ended up in Q4 rather than in the first half. That is the issue.
Yeah. What we saw is as the announcements were coming in and out or being made and then retracted or whatever, the order book would sort of jump up a bit. The next quarter, it would calm down a bit.
The sales trend is actually quite smooth, but the orders are kind of doing this a little bit. Clearly, we've had a tricky couple of years for all industrial and electrical companies. Can we just talk about how much investment has to go back in, both in terms of bonuses? Because what I don't want to do is get really excited about the top line and then you're having to pay people more. You started putting more money into ERP. You're starting to hire sales and engineers, etc. How do we think about that cost going back in and how much?
The drop-through rate will ramp up. There's a bit of cost to go back in.
As you saw in the profit bridge that Simon showed, we started to put some more cost back in, principally in engineers that will drive further growth sort of two-plus years out. We are putting that in in a phased manner. We have got a bit of catch-up to do. We will not go straight back to full EBIT drop-through. It will be a bit of a phase over the sort of 6-12, over the next 6-12 months. Okay. Cool. Great. We will get back to those levels of drop-through rate. Drop-through rate, yeah, just not initially. Just not initially.
On the 300 basis points of margin improvement from 14 to 17, please, can you remind me how we should be thinking about that between organic and M&A?
From memory, it was one-third, two-thirds. That has not changed over the years.
No. Okay. Thank you.
Hi, James.
Thanks.
James Byrne from Deutsche Numis. Yeah, two questions, please. Firstly, can you just give us a little bit more color around those six customers that you mentioned in the controls business? Doesn't sound, at first glance, as though they're within that sort of larger customer set given the sort of strong growth within the top 10 customers. Just trying to get a feel for exactly what's happening there. It sounds like a bunch of smaller customers seem to be causing somewhat disproportionate impacts to sort of top-line growth. Second question, you flagged on the design wins point that you're seeing a sort of growing backlog of design wins from previous years that have not converted into revenue at this stage. Is that a trend of a greater sort of latency between getting a design win and actually seeing that sort of come through and materialize as revenue?
If so, what impact do you expect that to have on sort of growth rates as we look into the outer years?
Yeah. Let's deal with that. I think the design wins, it's a kind of logical extension. It's a flow-through of the effect of customers rebasing their stock levels. As customers ended up with too much stock, it took longer for them to then—well, they had to then sell through what they got. That led to them delaying new product launches initially. That, in turn, led to them delaying new project design, next-gen designs.
In some manner, it kind of makes sense that the design wins came down a bit last year at the end of the second half of last year because if they just kept growing at the original rate, it kind of would not stack up with what we were seeing on the sales of those customers, sales out of those customers. It is just kind of logical that it would have come down. Therefore, it is logical that there is a bit of a backlog of products that they have then got to launch into production to catch up. I think the question that remains to be answered fully is to what extent will that come through? Will there be some—there are bound to be cases where customers will say, "Well, that was a year ago.
We're going to change our plan, and we're going to do a rev two or something like that. There will be some fallout rate from that. At the moment, that seems very low, actually negligible. I suspect we'll see a little bit more of that come through because things change. I don't think it's anything more than that. I don't think it's part of a trend. I just think it's a consequence of the unprecedented sort of conditions that we've been through. To go to the first part of your question on the larger customers, on the customers in the controls sector, they're big companies. They're still important, mid-size, and in one case, quite a large customer for us. They've just overstocked, and they've just had some problems as a result of that.
They've taken quite a long time to kind of get to grips with that. I mean, it reminds me—I don't want to go into any specific customer names, but it reminds me of the well-publicized case in Peloton post-COVID. They stocked up thinking the boom would go on forever, and it didn't. There are parallels in some of the customers that, with that situation, they just thought the boom would go on forever and ended up with product that was far more than they needed. They're just working through that.
Can I just follow up on that quickly? Because obviously, it's a long time since that spike in inventory kicked off. It's a couple of years back now. You're confident there are no changes in competitive dynamics or indeed the sell-through potential of those products? It is just timing and stock.
Yeah, I mean, it's taken a long time for them to adjust their inventories. Some of those customers are now recovering quite, which is why I say that we're going to see a stabilizing second half. I don't want to sort of go too much into that at this stage, but there will be more of that coming through in the Q3, Q4 updates. We're already seeing some of that. To some degree, if it were only one customer doing this, we would not be talking about it. It was kind of slightly unfortunate that there were six of them, and they all sat in one division, and they are all based in North America. I thought we had a diversified customer base. Yeah, it's just that going on. It's just a consequence of customers changing their plans.
Some of them have struggled to sell through. The reason it's taken so long to adjust is they were originally saying six to nine months adjustment period, and it's taken sort of double that because they weren't selling through at the rate they expected to sell through. That's an important consideration for them as well.
Okay. I guess on a more positive note, controls in the past has been higher margin, hasn't it? As those stabilize and come back, is that part of the organic bridge to 17%?
Yeah, that's right. I mean, we've delivered organic improvement in gross margin and EBIT margin despite controls, which is the highest margin operating unit, being quite weak. There's the flip side of that as it starts to stabilize, yes. Good.
Achieving that, is that more clustering that you've been doing, or is it just sort of straight organic efficiencies?
It is organic efficiencies, really. I mean, we haven't been sort of moving stuff around much during the first half. We've only had the one acquisition in the second half last year of Burster, which sits within the cluster. Other than that, it is all basically operational efficiencies.
Yeah. We did sort of move stuff out. For instance, Poland, we've been moving production into India, which is, it is examples of that. There are lots of opportunities where we can move to a slightly lower cost base. That is part and parcel of that.
Yeah, it is worth commenting. I mean, India is very active. To Simon's point, we've transferred some organic production there in line with some of our major customers' support. We are also expanding one of our facilities.
We have a facility in Bangalore that was a sort of startup eight years ago. We're now halfway through the construction of a new place, which is three times the size, which will make sort of power units for major customers. Also, it will have a facility, a third of the facility will be—a third of the floor space will be put aside for other discoverIE Group companies to produce. We're seeing sort of very high levels of activity. Already, we're starting across businesses to introduce the Indian sort of facilities and capability to our businesses so that they can start producing there. I think we'll see more of that over the next—Okay.
Manufacturing hub for—
Yeah, manufacturing hub, yeah.
Yeah. Cool. Thanks.
Thanks. It's Andrew Humphrey, Peel Hunt. You're handy.
Just on that point on margin drop-through and investment in the business, you've highlighted cost going into the business in engineering resource and I think being quite measured about how long that takes to turn into crystalized commercial opportunities. It seems as though there's also some working capital investment in the business over the last six months or so, which might turn into growth in the shorter term. I wanted to ask about to what extent is the addition of resource, either in working capital or in overhead, related to tariffs and moving around production? And how far is it sort of related to stronger shorter-term growth opportunities that might emerge?
Yeah, there's no cost to us. There's no sort of cost increase as a result of tariffs. We have offered—so half of what we sell in the U.S., we make in the U.S.
We've offered to make, and we've said that we can make and engineer the rest in the U.S., and we can engineer new product in the U.S. We've told our customers that. I mean, we're a small but critical part of their supply chain. In many cases, they're satisfied that we can move it if and when we need to, but kind of not the biggest problem. They're focusing on the bigger problems in the short term. I think over the next 12-18 months, that will gradually pick up pace. The big thing that we have to sort of also see settle is India tariffs are currently 50% into the U.S. That is hopefully going to settle at a lower figure. Certainly, that's what some of our customers are expecting.
We have the US-Mexico-Canada agreement that is due for renegotiation next July. Those two things need to shake out, and they'll have an influence on the tariff picture and therefore where customers choose to produce and make stuff. We have positioned well. We have basically said we can accommodate whatever they need to do, and the bull's kind of back in their court to let us know when they want to do that. In terms of working capital, we have put a bit more inventory in the first half. A bit more inventory has gone in to support second half order book. We are fully expecting stronger sales in the second half and have the inventory in place to do that.
It's also worth noting that the acquisitions that we make, we do typically end up reducing being able to sort of release quite a bit of working capital. We've got a quite centralized team with lots of learning on how to do that. You will see the benefits of that coming in, which allows, again, to invest in some of the organic working capital.
Yeah. Maybe on M&A as well, good to get one deal over the line. I think previously you've highlighted a pretty robust pipeline on potential targets. You've also said we've sort of restarted several processes since the summer. Any update on the health of the rest of the pipeline or kind of how far advanced those opportunities might be?
Yeah, there's a lot going on.
We always have a sort of pipeline of opportunities and targets of sort of 200-300 in number. Then it's a question of where they are in the sort of the funnel. We've got a lot that are in the kind of well-developed stage of the funnel at the moment. Some are quite close. Yeah. I mean, we paused our M&A activity at the beginning of this calendar year springtime just because we wanted to see what the fallout from the tariff situation was and where that was going to sort of settle. We, and more importantly, our customers have seemed to have got to a sort of point of some comfort over where that's settling. Over the summer, we restarted the acquisition activity.
There are a lot of opportunities of high-quality businesses, both as with KeyMat in the commercial space, in that case, a regulatory-driven demand, which is quite interesting for us. We are also looking at businesses that have more of a defense exposure as well, as well as the traditional commercial market. Yeah, loads going on. Expect to see more. We have the funding firepower to do it.
Thanks.
Thanks, guys.
Thanks. Dan from Shore Capital. Just quick questions, actually. Just on the M&A pipeline, are you seeing multiples moving around a lot or not? That is one question.
Just over the last few years. Yeah. Multiples have come down over the last year, a turn or two.
Multiples vary according to the size of the target and the level of resilience of the structure of the business. I'd say they're pretty stable. That's another reason it's quite a good time to buy.
Yeah. The other question was, you already answered this in a way, but on controls being the laggard in the late cycle, if you were to look at it on a sectoral level or indeed a regional level, what are the trends there within that controls bit that's still quite sticky?
I'm sorry, I don't understand your question.
What I mean is in controls, it's late cycle, and it's the thing that hasn't recovered. Are there bits of it that are looking better than others?
Yeah. Yeah. Yeah. Yeah. That's right.
I mean, that's a good point. It's six customers that are soft. It's not the entire controls. In North America. In North America, yeah. It's not. There are lots of customers. I mean, one of our business units, there's always a natural ebb and flow of customers. They have a stronger period, and then things soften. That's why we have this diversified sort of de-risked customer profile. Some of our other controls businesses, funnily enough, one of them had a major customer that for them softened about three years ago for various reasons of the customers. That business is doing very, very well. You don't see it in the overall controls numbers because of the big six that have softened. The underlying profile is actually pretty good. Hopefully sooner rather than later, we'll start to see that come through in the headline numbers.
Yeah. And that business, the business we've acquired, KeyMat, is very aligned to that, which is going into controls. There is some good growth within there in certain businesses. Hi, Catherine.
Hi, it's Catherine from Edison. Are you able to tell us the operating margin for KeyMat?
It's above our target. Okay. All of the acquisition opportunities we're working on are above our target margin.
Just looking at your CapEx guidance, it looks like a bit of a step up in H2. Is that mostly due to the Bangalore facility, or is there something else going on there?
I think Bangalore is sort of mainly investment will be next year, but there will be some of that. There's some IT, and I think typically we don't end up spending quite as much as we want the businesses to bring stuff.
You'll probably find we won't quite spend as much as that. There's always areas we want to sort of improve.
We're doing some IT upgrades in some of the businesses, some of the business areas that we want to do. That's the bulk of the additional that's in there in the second half. Over here, Jude, please.
Hi. Morning. Just a quick one, really, guys. I just wanted to come back to the comment you made earlier that you haven't seen any significant change in the multiples that you're paying for acquisitions. You're obviously targeting increasingly businesses with margins at the upper level, above 17%. Intuitively, one might think that the prices that you would have to pay for higher margin business would be going up, but that's not what you're saying you're seeing. I was just wondering how we square that circle.
The multiples depend on sort of the size and sort of resilience of the business. It depends partly on the margin as well. It depends partly on the territory. US acquisitions are generally a turn or two more high multiple than Europe. There are all those kind of things in the mix. What we are really saying that we have seen is we have seen multiples come down. There is still a range of multiples. They kind of go from the sort of low-mid single digits to a 10-12 at the top end. We do not go above that. Twelve is the max we have really paid. EBIT, multiple. EBIT, not EBITDA. That is kind of the max that we will go to. They are typically for sort of platform-style businesses.
We try to do more in number of smaller deals, and then we do the occasional larger deal, which creates a platform that you can then bring the smaller bolt-ons in, and then you can make them more efficient and all the rest of it, and you get operational efficiency and synergies out of it. That is the kind of model. We tend to pay a little bit more for those bigger ones than the smaller ones. What we try to do is to balance the allocation of capital accordingly. We never actually quite achieve it, but you would want to kind of spend as much on five smaller ones as you would on one larger one in absolute amount. You would end up with a blended multiple, which is probably in the mid-upper single level. That is kind of the aspiration.
You're confident overall that looked at in the round, if we think about that sort of mid-term margin target, two-thirds of that improvement is going to come from acquisitions. That you can do that at a price that is still consistent with the target.
Yeah. Absolutely. Yeah. And we're very confident of that. Yeah. Okay. I think that concludes.
Okay.
Okay. In that case, thank you very much for your attendance and your questions. Have a great day. Sorry.
Two questions on the podcast. Okay. This is from Tom Frain from Shore Capital. The first one is, when do you expect to get a clear idea on the timeline for recovery in controls and how much higher is its margin versus the other three operating units?
We'll, I mean, we see controls stabilizing through the second half, and we'll report more on that as we go.
The final question is from Tom again. Can you comment on your expectations for Q3 organic orders?
No. Thank you for the question.
Brilliant. That's all. Hand back to you for closing remarks.
Sorry.
We'll just hand back to you for some closing remarks.
Thank you very much. Thank you, Habit. Thanks for attending, and have a good day. Thank you. Thank you.