TT Electronics plc

Good morning everyone and thank you for joining me for the TT Electronics 2023 half year results presentation. I'd also like to extend a warm welcome to those of you joining on the webcast. And as usual with me today is our CFO Mark Hode. Now it's our last double act together as I will be leaving in the autumn and Mark will be working with our new CEO Peter France who many of you will know. So now we'll run through the presentation and then open up for your questions. We've had a really good first half, building on the momentum of last year, and I'm delighted with these results. We've delivered on all the key priorities we set, and at the start of the year, we said we needed to execute on the strong order book that we had and deliver more organic growth, improve margins, continue the improvement in power and connectivity performance, return to positive free cash flow following a period of investment, and finally, reduce leverage. And we've ticked the box on all of them. But importantly, there's plenty more to come. The team have been brilliant as always. I'm really proud of the job that they continue to do. They've delivered strong growth while working closely with our customers to secure more new projects and continue to build for the future. So a big thank you from me to them. There are lots of high points in these results, all of which show we are starting to reap the rewards of the actions taken to reshape the business. The order book remains healthy with good visibility despite the normalization in order intake, which is happening as we expected. And I'll come back to this in more detail later. Our key customers have continued to grow in partnership with us. We've secured 15 new significant contract wins in the first half with over £150 million of potential lifetime revenues. We've also recently been working with a number of them as they plan to reshore parts of their business. Our order book visibility into future years is still similar to the same time last year and being designed in on many multi-year projects means that for TT, it is not all about the order book. It's about the project and platform positions as well. These have long-term forecasts. So an order book, despite the normalisation of intake as expected, it remains materially ahead of pre-COVID times and we expect it to stay that way. So we're executing on the order book. First half revenue is up 12%. This is further evidence of the success in repositioning the group to benefit from structural growth markets, targeting customers that are growing in these markets, and we are increasing market share. We're making good progress towards our key milestone of 10% margins. First half margins up 140 basis points to 8.3%, 8.6% excluding the pass-through revenues. The improvement in power and connectivity has been a contributing factor and more on that shortly. But GMS has delivered another 200 basis point increase in margins to 9%. That's 9.7% excluding the pass-through revenues, a record for the business. And on cash generation, we said 2023 would see a significant step up in free cash flow. H1 is just the start with further improvement expected in H2. Cash conversion in H1 was back to almost 75%, leverage is down, as promised, with further to come. So overall, there is significant forward momentum in the business, giving us increased confidence of the full year outlook. We said we still had work to do with power and connectivity, and I want to go through this in more detail on this slide. Importantly, it is firmly back on track. The recovery that started in the second half of last year has continued. Commercial aerospace, which has been quiet through COVID, is recovering nicely and is expected to underpin growth over the next three to five years. And with the current geopolitical tensions, we're also well positioned to benefit from a favourable market backdrop for defence spend. There's a well documented need to bolster, upgrade and replenish existing defence capabilities, as well as to develop and accelerate new technologies. The team have recently been awarded a contract supporting feasibility studies for the technology development on the BAE Tempest programme. Harnessing our extensive engineering expertise, we will develop electrical power solutions in support of this crucial next generation combat air platform. The outlook for healthcare is also strong with our segments of electromagnetic navigation and implantables. And we continue to expand our medical device portfolio and have ramped up our capacity to meet growth requirements for a number of leading healthcare OEMs. In April, we officially opened our second clean room in Minneapolis, doubling our capacity. We're also proud to announce that we've added two new top tier med tech companies to our customer list by winning new contracts. Year on year, the first half margin was at 430 basis points to 7.4%, and higher volumes will underpin further margin progression towards 10 to 12%. This slide is a reminder of the reasons that underpin our confidence in the transformed group and its ability to deliver higher growth and create value. First, improved growth. The growth is driven not only by mega trends that mean that we can expect our markets to grow around four to 6% over the medium term, but also we have shown over the last 18 months that we are winning share, both through adding new customers, but also growing our share of wallet with existing customers, enabling us to outperform these market growth rates. Secondly, given the work we've done to transform TT, we now have a better quality revenue growth. which coupled with operational leverage mean 10% operating margins are in reach. And thirdly, strong cash generation. As we highlighted previously, 2023 will see a significant step up in free cash flow from strong operating cash conversion, the end of the self-help program investment and the impact of the pension buy-in. Importantly, we are expecting to further de-lever as we go through the second half, retaining the capacity to invest in the growth in the business. So with that, I'm going to hand over to Mark, who's going to take you through the numbers and how they develop from here.

Great. Thank you, Richard. Good morning, everyone. This is a really good set of results. They show that we're on track to hit the targets we set in March and that we have a great foundation for the future. In the first half of the year, we delivered 12% organic revenue growth, reflecting good underlying growth and the anticipated return to a more normal H1-H2 weighting compared to last year. Operating profit increased by 34% at constant currency to £25.6 million. Adjusted operating margins took a very healthy step forward, increasing by 140 basis points at constant currency to 8.3%. Excluding roughly £12 million of pass-through revenues, margins were 8.6%. This margin improvement was a result of operational leverage on growth and the benefits of the now-completed self-help programme. Earnings per share increased by 28% at constant currency, net of a higher interest expense and an increased tax rate of 25.2% due to the increase in the UK tax rate. After a couple of years of investment to support growth, we told you in March that cash flow had now reached an inflection point. What does that mean? It means cash conversion up because the big investment in working capital is behind us. It means no more self-help spend because the programme is complete. And it means no more pension contributions because of the buy-in. You can see this coming through in the first half with a free cash inflow of £7 million, and leverage has continued to reduce with a further reduction to come in the second half. With the improvement in profits, along with healthy cash conversion, return on invested capital took a step forward, increasing by 150 basis points to 12.0% since the end of 2022. And given the strong first half performance, the positive outlook for the second half of the year and beyond, the board is declaring an 8% increase in the dividend to 2.15 pence per share. Moving on then to the specifics of the revenue and profit performance in each of the divisions. The recovery in power and connectivity that started in the second half of 2022 has continued as expected in the first half of 2023. H1-22 was difficult for the division, impacted by COVID, site moves and programme delays. In H1-2023, revenue increased by 13% organically as the business executed on the order book built through 2022. Adjusted operating profit increased almost threefold to £5.9 million. and operating margins by 430 basis points to 7.4%, reflecting revenue growth and the benefits of the self-help programme. The division has also been busy preparing for the move of the Ferranti business into its new facility in the Greater Manchester area. That move has now started and is expected to be completed during the second half of this year. Alongside substantial revenue growth, order intake has been strong and the order book has continued to grow. We've also had a number of significant new business wins. This supports our confidence in further improvement in the second half and for the medium term. The GMS business has been transformed and continue to build on the strong momentum of 2022. GMS delivered organic revenue growth in H1 of 12%. This largely reflects a more normal weighting of first and second half revenues. As we've said previously, after several years of exceptional growth, 2023 is a year of consolidation for GMS, so you can expect growth for the full year to be more muted. As I said, within the revenue number, there's around 12 million pounds of pass-through revenues. We expect this to be similar in the second half before substantially reducing in 2024. As these pass-through revenues unwind, this will be a headwind to headline growth for the group, but on an underlying basis, the group is well positioned for growth in 2024 and beyond. GMS order book visibility remains very good, with revenues for the balance of the year covered, and we have good visibility building for 2024. Profit performance was again excellent. Adjusted operating margins, sorry, operating profit increased by 44% to £13.8 million. Margins increased by 200 basis points, benefiting from the first half growth as well as pricing actions. Excluding the partial revenues, margins were 9.7%. These are truly best in class margins, and with the relatively low capital intensity of the business, return on invested capital is now in excess of 20%. We believe that both these margins and the ROIC are sustainable at these sorts of levels, significantly ahead of our expectations of a few years ago. Finally, in the divisions, sensors and specialist components, here revenue was up by 11% organically as the division delivered on its very healthy order book. This level of growth was delivered despite machinery breakdown in June, which moved some revenue into the second half of the year. There was a small reduction in adjusted operating profit in the first half, reflecting that breakdown, but overall still a robust performance with 13% adjusted operating margin. And for the second half, we expect margins to be back to mid-teen levels. This is clearly the earliest cycle part of the group and is where we're seeing the greatest normalization of order book. But despite that, we have over six months of order visibility against historical norms of eight to 12 weeks with the order book for 2024 already building. This slide on cash flow illustrates the point of inflection with operating cash generation now returning to much healthier levels. Cash conversion improved to 74% in the first half of the year, back to the kind of conversion we've normally delivered in the first half. We're still investing in the business. Investment in capex ran a bit higher than depreciation, as we invested in efficiency projects, the new Ferranti facility, and in additional capacity in GMS as planned. The H1 working capital outflow is largely a reflection of normal seasonality, as accruals built in H2 last year were paid out in the first half. The second half should see some improvement on this position. The real driver that caused free cash flow to inflect was the almost complete absence of exceptional cash restructuring costs and no pension contributions. With the self-help programme complete and the pension scheme buy-in done, this will remain the case going forwards. As a result, we generated a free cash flow in the first half of seven million pounds and we expect the rate of free cash generation to step up in the second half. With that free cash flow and improved EBITDA, leverage is now down to 1.8 times and again we expect a further reduction in H2. Finally, in the first half of the year, we increased our debt facility size to £162 million and exercised the one-year extension option on the RCF, taking the maturity out to June 2027. All of this leaves us with more capacity and flexibility to invest in the business at prudent leverage levels. Lastly, before I hand back to Richard, I just want to take stock of some of what we've achieved over the last 12 months. TT is now delivering much better returns with more to come. Margins have increased by 140 basis points to 8.6%, excluding pass-through revenues, a meaningful step towards the 10% milestone. Even with investment in the business, return on invested capital has increased by more than 300 basis points in 12 months to 12% pre-tax. Cash flow has now inflected. We've generated 17 million pounds of free cash flow in the last 12 months, and leverage has reduced by 0.6 turns in that time. And again, further improvement is expected. We've extended our debt facilities. The RCF now matures in 2027. It's complemented by the long-dated fixed-term PP debt that we put in place in 2021. And last but not least, we've de-risked the UK pension scheme by completing a buy-in with Legal & General, That scheme represented a £200 million plus burden back in 2016, and we now have a surplus of £29 million. The business is in a really good place, and there is more to come. With that, for the last time, I'll hand back to Richard.

Thank you very much, Mark. So, the group's in great shape as I prepare to hand over to Peter. we have a great platform to accelerate the ambitious growth strategy and support the next chapter for TT. So a quick recap on our achievements in the first half, all in line with the commitments we made when I stood here in March. We're growing our top line and executing on our order book. Megatrends and our repositioning into structurally growing end markets will continue to drive revenue growth going forward. All meaning that TT is now a sustainable organic growth business with significantly enhanced sales visibility. We committed to drive the group margin to 10% and beyond and we've made really good progress with 140 basis point improvement. Power and connectivity is on track and recent wins in the business will support further progress. And importantly, this is the year when TT gets back to generating strong free cash flow. £17 million of free cash flow in the last 12 months and leverage to come down further by the end of the year. We have transformed the business to ensure it faces into markets with long-term structural growth. When Mark and I started at TT, our first priority was to turn around the transportation business, at the time representing 45% of group revenue. We did it and then successfully sold it for a good price. And over the last few years, we've reinvested the proceeds focusing on structural growth markets with long-term visibility, such as healthcare, which now represents a quarter of TT sales to reposition us for growth. On this slide I want to show you how we have transformed the business on a number of metrics. It is this transformation that gives me confidence that TT is in a strong place with momentum across the business. We have taken TT from a no growth business to one delivering good growth from key customer accounts and an improving share of wallet. This has come from new customer wins and the development of a strong pipeline of business development opportunities. Market growth is driven by mega trends in the segments that we operate. And as I mentioned earlier, we believe that the market growth rate of 4% to 6% is achievable over the cycle. And TT has shown that we can outperform and take share. On top of that, the business is positioned not just for revenue growth, but also ongoing margin improvement. Although the supply chain has eased a little, there remain opportunities to drive further efficiencies within the business as we bed down our new facilities and processes post the completion of the self-help programme. Margins have already doubled since 2015, with GMS transformed from a business that was contributing just 4% margins. And as you can see from the top right chart, recent progress shows our 10% milestone is now in touching distance and there's more opportunity from there. Our other key financial metric, the chart bottom left, shows that we've improved ROIC in the group, now up 300 basis points to 12%, with GMS leading the way at 24%. And finally, employee engagement has always been core to the strategy. It's at the heart of our values, and in July we completed our latest group-wide survey. I'm delighted that we achieved an exceptional participation rate of 91%. That's up from 68% back in 2015, but even more so that we achieved the highest rating, a three-star world-class company to work for ranking. That makes us one of the highest engaged global manufacturing companies within the best company survey. And we continue to progress our own ESG initiatives. Sustainability and the need to have products that are cleaner, smarter and healthier is good for us all and good for TT. It drives revenue growth and continues to open up more opportunities. Our products and technology address key sustainability megatrends in our target markets, and we work in partnership with our customers to design products integral to their environmental goals, creating revenue opportunities for both of us. I was delighted that we met our target to halve cumulative emissions a year earlier than planned at the end of 2022, but there is no let up. We continue to push for further reductions. Our investment in solar energy in the Kwantan facility is the latest example, commissioned earlier this year. This will reduce its emissions by around a third. And as I flagged previously, we are delighted to have delivered an exceptional engagement score, this year demonstrating a highly engaged workforce, a critical part of the strategy. The business is humming, and there's so much going on. On this slide, we show a number of the latest successes. Now, I'm not gonna cover all of them, but I'll pick out a few examples. In our medical technology segment, we have had a number of wins in the growing surgical navigation space and implantables market. And notably, these include two new clinical applications in surgical navigation. I mentioned the BAE Tempest win earlier. And in the automation electrification markets, following a best-in-class supplier award from AMI at the end of 2022, we have recently won a further significant contract, this time out of Quantan, as we support their expansion into Singapore. So the message is we're continuing to win new programmes, building out multi-year revenue streams we have been targeting and giving better visibility to future growth. Our strong order book gives us great visibility as well. Our new business generation has got better and better, and it's great to be positioned in growing markets where customers are helping to deliver improved outcomes, whether cleaner, smarter or healthier. As we expected, our order intake has been normalising a bit, but as I mentioned up front, in the first half of 2023, we secured 15 new significant contract awards. These have the potential to deliver over £150 million of lifetime revenues, working with some great customers and reflecting the fact we are designed in on long-term programmes. This underlines the visibility that we have. But the order book also remains close to the peak level seen in the second half of last year. It provides visibility to the balance of 2023, and building nicely for 2024, and visibility is still 40% higher than we operated with back in 2018 and 2019. And remember, I said it's not just about the order book. It's also about the business now having multi-year visibility on long-term projects and programs. And furthermore, we're having very constructive conversations with our customers to facilitate reshoring, which is increasing the pipeline of new business opportunities with modest incremental capex. We've successfully grown our Quantan facility for the GMS division from scratch to $25 million of turnover in just 24 months. And, using the same low capital intensity model, we're establishing GMS capabilities within our existing Mexicali facility in Mexico. So we're in the best shape ever. The outlook is really positive. Good momentum continues in our chosen structural growth markets, more significant new contract wins, and the strength of our order book provides excellent visibility well ahead of pre-COVID levels. The benefits of the self-help program and better quality revenues coupled with operating leverage mean 10% operating margins are within reach. And we are back to generating positive free cash flow with great momentum for H2 and 2024. All of this giving us increased confidence in delivering full year expectations. Now we're obviously mindful of the wider macro environment, but TT is executing well and positioned in markets with strong mega trends and structural growth drivers. So, as this is my last presentation, I would like to thank my excellent team for their incredible passion, hard work and support to create the business with the opportunities it has today. I'm proud to pass on to Peter, a group positioned for sustainable organic growth with excellent visibility, significantly improved margins and more to come, and the best in class engaged workforce. I'm confident that in Peter and Mark's hands, TT has a very bright future. Thank you very much. That concludes the presentation. But perhaps before I open it up for questions, maybe just if you indulge me a minute, just a couple of few words about Mark. So, Mark. Mark came to join me, I think as most of you know, from a much bigger company. So Mark was taking a bit of a risk on a first time CEO, I think it's fair to say, on a promise of, I think the promise was quite a lot of hard work, but we'd have some fun. I think that was broadly the way I put it. Anyway, Mark has been an absolutely fantastic business partner. He supported, and I guess not just supported, but trusted me, frankly, when we decided to take some pretty big risks with the group early on. But after that, basically been a huge part of generating a company that is significantly bigger, significantly improved profits, enhanced margins, and I would say a much higher quality business as a result. But I guess more importantly than that, Mark's become a great friend. So, I'd like to say thank you, Mark. I've just loved every minute of it. And anyway, I guess the one thing I would say is it's just been fun. Thank you.