Gooch & Housego : 2023 Interim Report

6 June 2023

GOOCH & HOUSEGO PLC

("G&H", the "Company" or the "Group")

INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 MARCH 2023

Positive progress in the first half. New strategy focused on "Delivering sustainable margin growth"

Gooch & Housego PLC (AIM: GHH), the specialist manufacturer of optical components and systems, today announces its interim results for the six months ended 31 March 2023.

Key Financials

*Adjusted for amortisation of acquired intangible assets and non-recurring items.

Key points

• H1 revenue up 31.7% at £71.3m (H1 2022: £54.1m) reflecting strong growth in all market segments
• Increase in productive capacity and steady reduction in overdue backlog
• Adjusted operating profit up 32.9% to £5.2m (H1 2022: £3.9m)
• Cost inflation persists but is being passed on with some time lag
• Order book remains strong at £124.4m (H1 2022: £119.9m)
• Cash from operations of £6.0m (H1 2022: £3.2m) despite £5m investment in inventory levels
• Interim dividend of 4.8p per share (H1 2022: 4.7p)
• Full year expectations are unchanged
• Review of the Group's strategy complete

Charlie Peppiatt, Chief Executive Officer of Gooch & Housego, commented:

"Positive progress has been made in the first half with increasing operational output and continued strong levels of customer engagement on new product opportunities. Full year expectations for the Group are unchanged and the outcome of our strategy review confirms a clear route to mid-teens returns in the medium term."

Operating and Financial Review

Performance Overview

Revenue for the six month period totalled £71.3m representing a 31.7% growth over the comparator period, or 20.6% on a constant currency basis. The Group's trading in the first half of the financial year benefited from the additional capacity that had been put in place in both the second half of the previous financial year and the first months of the current trading period allowing us to trade out the record order book brought forward into FY2023. Our production teams are now substantially resourced and good progress has been made in reducing the level of order book arrears and the lead times the Group is able to offer customers for the delivery of new orders.

In the first half of the financial year we have seen strong revenue growth from our industrial laser and semiconductor markets. The Group is supplying products that are at the heart of state of the art deep ultraviolet and extreme ultraviolet lithography equipment used in the production of the most advanced microchips in the world. One of these programmes is now entering high volume production and is expected to provide us with good support for our semiconductor market revenues for several years to come. The drive for technological sovereignty in the area of semiconductor manufacture underpins strong demand from end customers.

Deliveries into our industrial laser markets have also grown, especially into Asian markets. This has been driven by post-pandemic end customer demand for electronic products recovering strongly although demand levels are expected to normalise in the coming period. Revenues from our components used in medical lasers also grew thanks to higher levels of demand for cosmetic procedures but again we expect this to normalise. Finally in our A&D markets we saw strong revenue growth thanks to several US programmes for military guidance systems entering their production phase. Demand for our precision optics used in military imaging systems has also been strong.

Input cost inflation has continued to be a factor impacting the Group's profitability. We have matched general wage inflation in the locations in which we operate in order to both retain and attract the skilled employees we need in our facilities. In addition, our suppliers have continued to pass on their own cost inflation in the form of higher material pricing. To counter this we are running a structured programme to increase our prices on new quotes issued to customers wherever the competitive environment allows us to do so. Nevertheless, given the size of the order book that we brought into the current financial year there is some lag in the benefit of that higher pricing being seen in the Group's results. In the first half inflation, therefore, represented a net headwind to Group profitability although the effect of our pricing actions will provide more benefit in the second half of the financial year.

We are starting to see the order book return to more normalised levels after the record levels of intake achieved by the Group in the second half of FY2022. This was driven by many customers, especially in the Industrial markets, overdriving their supply chains to ensure both continuity of supply and to mitigate the effect of price inflation. During the first half of FY2023 we have, therefore, seen some of these customers slow down the level of new orders as well as seek to push out delivery dates for some of the orders already placed with us as they look to regularise their inventory holding levels. Consequently, the Group's book to bill ratio in the first half of the financial year was 0.8x and the order book finished the period at £124.4m (31 March 2022: £119.9m). This represents a reduction of 15.8%, or 11.1% at constant currency, on the order book at 30 September 2022 of £147.7m. Nevertheless, the order book at March 2023 remained at a healthy level and the Group has the necessary order cover in place for the delivery of full year market consensus revenues.

The Group continues to maintain higher levels of safety stocks given the continuing extended lead times in some part of our supply chain. Furthermore, in some cases our customers have requested that we protect their production programmes by holding higher levels of inventory. Where this is the case we will seek funding from customers for this additional investment.

Revenue

Products and Markets - Industrial

Gooch & Housego's principal industrial markets are industrial lasers, telecommunications, sensing and semiconductor manufacturing. Industrial lasers are used in a diverse range of precision material processing applications ranging from microelectronics and semiconductors to automotive manufacturing.

Overall, sales of products into our industrial markets in the six months ended 31 March 2023 grew by 36.7%, or 22.1% when measured on a constant currency basis, compared with the equivalent period last year. We saw strong growth in our semiconductor and industrial laser markets. First production revenues of our fibre optic splitter units used in advanced semiconductor manufacturing equipment were achieved in the period. Demand for our germanium acousto-optic modulator products used in CO2 lasers was also particularly strong.

Deliveries of our hi-reliability fibre couplers were stable compared with the comparator period. We are in the final stages of approving our contract manufacturing partner in Asia for the production of these products and we expect them to make their first production shipments to customers in the second half of the current financial year. This will provide an opportunity to increase supply and for margin accretion on this product line.

In the sensing market we secured additional volume from our products used in distributed monitoring solutions used for the protection of remote assets. We are also making good progress in securing additional revenues in the wind sensing market where we are increasingly offering a full module solution to our partners in this growing market.

We remain a key supplier to both US and French research establishments seeking to achieve energy generation from inertial confinement fusion. Demand from these customers for our crystal growth capabilities is growing and we are investing in additional growth stations to support this revenue stream.

The additional volume achieved in this segment helped deliver a 29% growth in adjusted operating profit compared with H1 2022, to £5.3m. In common with the reported return on sales figures in the Group's other two markets, the effect on revenues of both favourable currency movements compared with H1 2022 and the pass through of inflationary cost increases in the form of higher pricing suppressed the reported return on sales percentage which was 14.1% for this segment in the first half. (H1 2022: 14.9%). Removing the effects of currency movement and pricing adjustments the reported return on sales for this segment for the half year was 15.1%.

Products and Markets - Aerospace & Defence (A&D)

Product quality, reliability and performance are paramount in this sector, playing to G&H's strengths, along with our commitment to provide value through our wide photonics technical capabilities. We have solid, well-established positions in target designation and range finding, ring laser and fibre optic gyroscope navigational systems, infrared and RF countermeasures, periscopes and sighting systems, opto- mechanical subsystems used in unmanned aerial vehicles (UAVs) and space satellite communications. We are working with our partners on the development of new directed energy weapon systems that are increasingly specified as part of the defensive suites of both naval and land platforms.

The trend in funding priorities in both the US and Europe continues to favour G&H products and capabilities. The need for all weather precision guidance and targeting generates the demand for the product capabilities that G&H can offer. The conflict in the Ukraine is also generating a recognition of the continuing importance of armoured vehicles in the modern military environment, and in that area G&H provides some of the most advanced optical sighting systems as evidenced by our participation on the UK MOD's programme to upgrade the Challenger MBT platform. During the period the recent increase in quotations we have provided for programmes to replenish military vehicles deployed by NATO members in Ukraine is now starting to result in orders for G&H, and there are good prospects for further significant orders to be secured.

Our A&D revenues were up 33.6% on the comparator period, or 24.6% on a constant currency basis. Deliveries to our customers' imaging systems programmes, typically used on manned and unmanned aircraft platforms, grew during the period. Our camera systems are also used for the identification of targets including drones and there is an encouraging level of interest from our OEM customers for our advanced infra-red products that can address their emerging needs in this area.

Our Boston business has delivered good growth in output compared with the first half of FY2022 thanks to its success in recruiting and training new team members. Several of the site's programmes have transitioned from the development to the production phase although the site continues to seek to improve its production yields.

We continue to participate in our customers' programmes seeking to develop laser based communication in the space market, both for satellite to satellite and satellite to ground application. Our hi-reliability fibre couplers are used in these space applications and we are also developing very high power amplifiers that will be used in both satellite and ground station applications. We believe we are well placed to benefit from this market as it progressively replaces the current RF based technologies.

Additional volumes in this market helped to reduce the adjusted operating loss of this segment to £1.9m (H1 2022: £(2.2)m). In the period production yields on some programmes in both our Moorpark and Boston facilities were poor reflecting the continuing training programmes that need to be completed for new employees recruited to service our higher order book levels. We are also reviewing closely some of the product lines within this sector to assess whether we have sufficiently differentiated capabilities to allow us to secure an acceptable return.

Products and Markets - Life Sciences

G&H's three principal Life Sciences revenue streams are derived from diagnostics applications (the design, development and manufacturing of diagnostic systems and fibre-optic modules based around our optical coherence tomography (OCT) technology), surgery / treatments (electro-optics and acousto-optics for medical lasers) and biomedical research (acousto-optics for microscopy applications).

Our Life Sciences revenues were up 19.3% (13.6% on a constant currency basis) in the six months to 31 March 2023, compared with the first half of FY2022. We have seen further recovery in demand for our components used in laser surgery, especially elective cosmetic surgery. Revenues from the sale of our medical diagnostic equipment were slightly down compared with H1 2022. This was due to two of our significant customers migrating to next generation equipment programmes and ramping down demand for