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71. Bull, Bear & Beyond – discoverIE Group: executive interview
5 Plays8 months ago
Nick Jefferies, CEO of discoverIE, joins Katherine Thompson to provide an update on the current trading environment for the business. While the tariff situation creates uncertainty, the company does not expect it to have a material impact on its operations. Nick reflects on the destocking phase that has seen the company’s largest customers unwinding the elevated levels of inventory accumulated in response to post-COVD supply chain disruptions, depressing order intake. He discusses the company’s track record of organic growth and how growth is likely to bounce back as customers start to order in line with demand for their own products. Reflecting the company’s buy-and-build strategy, he discusses the M&A pipeline. Finally, he highlights how the company’s flexible operating model has protected profits during the downturn and, with strong design wins in recent quarters, is well positioned for revenue and profit growth as these convert to orders.
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Bull, Bear & Beyond': features candid conversations with senior executives and from our own team of experts from across industries, exploring strategy, innovation, and the opportunities shaping their markets and 60-second pieces are a compressed summary of content designed to convey our message in a single, easily shareable hit.
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Original interview published on 16/04/2025 and reposted as a podcast
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Transcript
Introduction of Edison TV and Guest
00:00:07
Speaker
Welcome to Edison TV. I'm Catherine Thompson, technology analyst at Edison, and I'm here today with Nick Jeffries, CEO of Discovery.
Overview of Discovery's Business Model
00:00:16
Speaker
Discovery is a FTSE 250 designer and manufacturer of custom electronics for industrial applications. The group has a decentralized operating model and has over 25 businesses operating across 20 countries in Europe, North America and Asia.
00:00:33
Speaker
So welcome, Nick. Hi, Catherine.
Current Market Challenges
00:00:35
Speaker
ah To kick off, could you give us an update on the trading environment for the company? I know orders have been depressed recently as some of your customers have been working down their inventory. Where do you think you are in that process?
Future Growth Predictions
00:00:49
Speaker
Yeah, it's been a tricky year. The market has been destocking. um ah Customers, that is, have been destocking following the post-COVID boom. Two years ago, there was a shortage, three years ago, there was a severe shortage of electronics components and components generally.
00:01:07
Speaker
which led to customers stocking up to secure supply. ah that has started to um That started to unwind a year ago, and we're now in the final stages of that de-stocking cycle. So customers have reduced their order into or order placements upon co component suppliers such as ourselves whilst they burn off the inventory that they that they built up.
00:01:29
Speaker
ah In some areas, in some sectors, we've come through the end of that um and certain areas are back into growth. Other areas, we're probably going to see the end of it in the next sort of couple or three months or so. So, yeah, so it's been a 12 month destocking that we're approaching the end of.
Long-term Growth and Impact of De-stocking
00:01:46
Speaker
And that destocking is obviously weighed on your organic growth, um revenue growth rate in recent quarters. um To put that in context, do you think you could talk us about your track record of organic growth and also how you see that playing out in the medium term?
00:02:01
Speaker
Yeah, so i mean so over the last 10 years, we've grown about 6% CAGA organically. It's come down a little bit over the last five years with this destocking that I've just referred to. But we're still, over an extended period, well above 5% organic growth CAGA. So we've got a good track record of providing or generating decent through-cycle organic growth, albeit not as high as we would like to get to. We think there's scope to do to do more, but our track record is of that kind of ilk.
00:02:33
Speaker
um And what we've been seeing just more recently is that... yeah the organic growth figure has come down because mathematically for customers to burn off their inventory, they need to take less inventory from us. So where some of our customers are still growing quite well in their end markets that they're selling through to, they're taking much less inventory in from us.
00:02:54
Speaker
in the intervening period. And that obviously has impacted our short-term organic growth. But sure as eggs are eggs, that will finish when they have adjusted their inventory, then their demand upon us will bounce back up to their pull-through level.
00:03:08
Speaker
And that's what we're fully expecting to happen over the next sort of three, six months.
M&A Strategy and Financial Position
00:03:15
Speaker
M&A has been a key part of Discovery's growth strategy for some time now. and What are you seeing in your M&A pipeline and how do you expect to fund any future acquisitions?
00:03:26
Speaker
So M&A has always been a very large part of what we do. The whole business now that we have is built so on acquisitions. We acquire high-quality niche businesses that make customised electronics for high-quality industrial-type customers.
00:03:40
Speaker
we now now Nowadays, we have a team of five people running our M&A activity. Some of the people in that team are engineers, and those engineers work with our opcodes to identify and generate our own acquisition targets and opportunities.
00:03:58
Speaker
And the the result of that now is that most of our acquisitions are generated in-house through our own outreach programs. um And we therefore have quite ah quite a substantial pipeline of of businesses that we're in various stages of discussion with.
00:04:14
Speaker
um We made an acquisition in January of Burster, a German specialist sensor business. And we have sort of others that are in the in the pipeline and ongoing now. In terms of firepower, we have currently around about 35 million of debt capacity for acquisitions over the next few months, which will probably take us up to about the September half year. um And yeah, and we fully expect to utilize that.
Profit Resilience and Flexibility
00:04:43
Speaker
um The stock's currently trading on a five-year low when looking at forward PE, and that's despite very resilient profit generation through the downturn. um you know What are your thoughts on the disconnect between your financial performance and the valuation?
00:04:59
Speaker
Yeah, so in sort of the the sort of conventional world of industrial manufacturing, when sales come off, then that drop-off in revenue drops straight through a fixed cost base through to profitability. So you get an amplified drop-off in profitability. That's what happens in you know in in in many industrial manufacturing businesses. That doesn't happen in our business because we have a flexible manufacturing capacity where we can add where we can modulate or demodulate the cost base according to the demand levels, which means it protects our profit drop through.
00:05:33
Speaker
And the net result of that is that through the cycle, our operating profits have been increased that's very steadily actually grown over 16 years. and and And therefore we've reduced any kind of cyclicality that have been to mitigate any cyclicality that we saw at the top line.
00:05:53
Speaker
So we have very resilient profits and earnings growth um as a result of that, notwithstanding you know a bit of the top line cyclicality that we can't avoid.
Return to Organic Growth
00:06:04
Speaker
So with the return of organic growth at some point, hopefully in the near term, we should really start to see things picking up again. Yeah, so yes, exactly. So as the as the but as the cycle turns, as it inevitably will,
00:06:17
Speaker
and money supply the other the global money supply data is kind of pointing in that direction. it's It's positive money supply data, and that's a pre-indicator of industrial, global industrial output demand and output.
00:06:28
Speaker
Then we will see and the order and the sales levels recover to previous kind of levels, and then we'll grow onwards from there. And for us, the biggest driver of our organic growth is design wins. Our design wins are very, very strong.
00:06:43
Speaker
And what we've seen over the last year or so is that as the design wins have built up very strongly, they haven't all, a lot of them haven't converted into revenue yet um because customers have been clearing out their previous inventories.
00:06:57
Speaker
As all that comes to an end, then those new designs will convert into revenue and that will drive our organic growth. So we fully expect that sort a bounce back to occur. Great. Nick, thanks for coming in.
00:07:08
Speaker
Thanks, Catherine.