TT Electronics plc

Good morning. I'd like to welcome everyone in the room and on the webcast to the TT Electronics 2025 half-year results presentation. I'm delighted to be here today to present the results as Chief Executive of TT. This follows a permanent appointment decision by the Board of Directors last month, and I'm grateful for the trust placed in me by the Board and for their support. I'm also very happy to introduce you to Richard Webb, our interim CFO, who joined us in May this year. It's been a remarkably busy five months since the 2024 results were announced in April, and we have made significant progress since then. In the first section today, I will cover the headlines for the half, including the key financials and an update on the actions taken to stabilise the business. Then Richard will take us through the results in more detail. In my second section, I will share more of my early impressions of TT's business. I'll also talk about the overall direction of travel and provide more colour on the outlook for the remainder of the current year. We'll then take Q&A. Before I start, however, I wish to recognise and thank all of my colleagues for their hard work, commitment and support during what has been a challenging time with significant change. Overall, TT has made solid progress over the past few months, including significant strides with the business improvement in North America, and we're on track to meet expectations for the full year. Our European region has once again performed well as momentum continues, benefiting from our strong long-term positions on several aerospace and defence programmes. For the Asian region, business operating margins held up through our lean business program in Suzhou, despite being impacted by some order delays for certain customers. With regard to our North American business, there have clearly been a number of challenges to navigate over the past 12 to 18 months. In the first half of this year, we have taken prompt action to stabilize this North America region. In April, we announced we were launching a strategic review of the underperforming components business. As a result of this ongoing review, we took the decision in June to close our loss-making Plano site in Texas, which lost around £6 million last year. We also established a separate management team for components to focus and provide greater oversight. We stepped up action to turn around the loss-making Cleveland site. We deployed external consultants to undertake a full operational review of the business, which has now concluded, and the local management team is now at full strength. I feel confident that we have turned a corner with the performance of this business. More about that later. Our drive for inventory reduction continues to progress well, which contributed to an excellent cash conversion outcome of 135% in the half and leverage of 1.9 times, which is within our target range of 1 to 2 times and slightly ahead of our previous guidance. Richard will cover this in more detail. Overall, I would summarize the first half as a transitional period. While the performance in the half doesn't reflect many of the operational improvement actions taken, these actions do underpin both the second half improvement in profitability and future run rate profits. Importantly, we continue to expect full year adjusted operating profit to be in line with market expectations. So let's take a closer look at the operational turnaround projects in turn. Firstly, the component strategic review. The components business has a different operating model and characteristics from the other TT businesses of power electronics and manufacturing services. We are therefore undertaking a strategic review that was started in the second quarter. Components is a more transactional, higher volume business with shorter lead times and therefore has less future visibility than other parts of TT. The route to market is predominantly through distribution channels, which also tends to exacerbate the stocking and destocking trends. Consequently, I believe it is the right decision to give this business separate management focus within TT, and we are already seeing benefits from this new structure, including tailored initiatives for pricing, marketing, and product development. This will ultimately drive improved performance through volume, margin, and overhead recovery, especially when we see a positive turn in the industry cycle. We continue to monitor levels of our components product inventory held by distribution partners and, as you can see from this graph, encouragingly the stock levels have been showing a consistent downward trend. Although we haven't yet seen a significant uplift in new order intake, it is encouraging to see a stabilisation of order levels. A key action to improve the performance of the components business was the decision to close the Plano site to stem the losses. Production is planned to discontinue by the end of this year. The factory is currently fulfilling demand from last time buy orders, which also helps underpin the second half improvement for the business. We are now expecting cash closure costs of around £4 million, which is lower than originally anticipated and delivers a payback of less than one year. Now for an update regarding the ongoing activities to improve performance at the Cleveland, Ohio site. There has been a lot of activity at this site, and I'm pleased to share some recent data. In fact, Richard and I were there last week, along with the board, and we were heartened to see the significant progress being made. I'm glad to report we have turned the corner in Cleveland, having implemented a detailed improvement plan, which was developed with our local site team in collaboration with the external consultants. the plan incorporates multiple margin and cash flow initiatives, including pricing, production planning, inventory optimization, procurement, and efficiency measures. Manufacturing processes at the site have become more efficient, supported by improved factory layout, process optimization, and waste reduction. You can see the outcome of these initiatives in the two charts on this slide, which show encouraging trends. In the blue column chart, productivity, which is defined as standard hours earned divided by total labour hours paid, has been consistently improving during the year and has now reached our target level. June was an expected temporary dip due to a planned one-week factory shutdown to improve the layout and flow. Productivity improvement has been delivered partly through a reduction in scrap and rework hours, which can be seen in the purple column chart. In addition, we have further reduced headcount at the site, which is down 17% since the beginning of the year. More efficient operations has led to improving service levels to our customers, including on-time delivery, which puts us in a better position to tighten our commercial terms for legacy, low-margin contracts. The benefit of this workstream will be delivered over several months as existing contract terms come up for renewal. We have also completed a comprehensive balance sheet review, which has resulted in a largely non-cash restructuring charge in the first half of £5.7 million, predominantly related to aged and obsolete inventory. Now that the external consultants have completed their assignments, the improvement project work streams are owned by the Cleveland team. There is full commitment from this team to continue to deliver on the improvement plan, and it was very encouraging to hear updates from them last week So hopefully that gives you a good feel for the progress with our short-term priorities, especially as we focus on improving the operational performance in North America. Now I'd like to hand over to Richard to go through the first half numbers in more detail.

Thank you, Eric, and good morning, everyone. This is my first set of results with TT having joined the group in May and I'm really pleased to be part of the great TT team. It's been a busy few months but I'm pleased with what has been achieved and the actions taken to stabilise the business. Clearly it's been a mixed half with continued strong profit progression in Europe offset by specific challenges at two North American sites and order delays for our Asia business. Now moving on to the group financial metrics. Throughout the presentation, I'll refer to organic performance. This reflects the performance on a constant currency basis and with the impact of last year's Project Albert divestment removed. Revenue was down by 6% organically. If we exclude the Plano site from both periods, we would have been down by 4.3% organically. As already communicated, Plano will be closed by the end of the year. Adjusted operating profit declined by 29.7% organically to 13 million, as strong operational gearing in Europe was more than offset by two loss-making North American sites. Adjusted operating margins dropped by 180 basis points on an organic basis to 5.5%. Adjusted EPS declined to 1.9 pence, reflecting the reduction in operating profit and the impact of a much higher effective tax rate in the current year, as we cannot currently recognise a deferred tax asset for the US. We've taken the prudent decision to focus on strengthening the balance sheet and have decided to continue the pause on the dividend and will not be paying an interim dividend. Return on invested capital was flat at 10%. This metric benefited from a reduced denominator following the December 2024 impairments of North American goodwill on components assets. And just to flag, half one 2024 has been restated, mirroring the restatements of the 2024 full year we highlighted in our announcement of the 10th of April. This all relates to North America. On this slide, we're showing the revenue bridge, which adjusts for the Albert divestment and FX and shows the makeup of the 6% organic revenue decline. Our positioning on long-term programmes in this strong aerospace and defence end market has driven the growth in Europe, offset by the issues at two sites, Plano and Cleveland in North America, and the order delays impacting our Asia business. Similarly, for adjusted operating profits, you can clearly see the strong drop through on the European revenue growth. However, this was more than offset by circa 3.5 million of losses at Plano and the Cleveland challenges, which Eric explored earlier. On a more positive note, we're really pleased with the strong cash conversion of 135% in the first half. Net debts, excluding leases, reduced further to 73 million. This is a 36 million reduction since the end of June last year, and we're very happy with the good progress on cash conversion and debt reduction. Free cash flow was 6.4 million. Over the last 18 months, there has been a significant focus on reducing our inventory levels, and this initiative resulted in a 5 million contribution to the half-won cash flow. putting us well on track to delivering the commitment to a 15 million reduction in inventory by the end of 2026. We closed the half with covenant leverage at 1.9 times. As profits recover and cash generation continues, we expect to see a slight further reduction in leverage over the remainder of this year. Looking at the cash conversion in a bit more detail, Working capital movements were a net inflow of 0.9 million in the half. This comprises the 5 million of underlying inventory reduction mentioned just now, partially offset by 3 million creditor reduction and a 1 million residuals increase. It's a much better picture than half one last year, where there was an 18 million working capital outflow. We expect working capital movements in half two to remain broadly neutral. Before we move on to the performance of the regions, it's worth looking at end market revenue, which shows similar themes to 2024. Aerospace and defence continues to grow strongly, with the main benefit showing through in our European performance. Healthcare was down 6% organically, driven by the well-documented reduction in US research grants and funding into the sector. Automation and electrification declined by 14% organically, reflecting end-market weakness for our customers. And finally, distribution, which is where we have continued to experience our main challenges, with a 17% organic reduction. The biggest impact was in the North America region, particularly for our Plano site. As Eric mentioned earlier, we are now seeing distributor inventory levels stabilise. Now moving on to the regional performance. The European region continues to perform well, reflecting our long-term positioning with key customers in the A&D sector. We have built on a strong 2020 performance to deliver a 5% revenue increase on an organic basis and a 34% organic increase in adjusted operating profit. Operating margins have further improved, up 330 basis points to 15.6%, benefiting from a favourable product mix in the half, good operational leverage on growth and further efficiency improvements coming through. Order cover for the region remains very strong and we expect to deliver further organic revenue growth for the year as a whole. Clearly North America has faced another difficult half given the slow components market and the execution challenges at our Cleveland site. However, as Eric has explained, action has been taken, and although not visible in the first half results, we expect to see evidence of these actions in our second half performance. Revenue is down 10% on an organic basis, with some good growth in Kansas City, where a successful turnaround has been achieved from the challenges noted last September, more than offset by declines in Cleveland and in components. If we exclude Plano from both periods, the organic revenue decline is 5.8%. The 5 million loss in the region includes a circa 3.5 million loss at the Plano site, which will be closed in the second half. In the half, we have booked restructuring costs, taken below adjusted operating profit, with 6.7 million booked in relation to the Plano site closure and 5.7 million for restructuring of Cleveland, which is mainly inventory related. As we look into the second half, a combination of higher revenue, management actions taken, such as the Plano closure and the Cleveland improvement plan, means we expect the region to return to profitability in the second half, although the region is expected to be loss-making for the year as a whole. Finally, Asia, which has made another good contribution to the group, despite lower levels of revenue, reflecting order delays due to geopolitical and related uncertainties. On an organic basis, revenue is down by 9%. Operating profit reduced by 14% organically, driven by the adverse impact of volume reductions. 2035 is a transition year for the region. with the ongoing transfer of production for a major customer at their request from China to Malaysia. This is progressing to plan. The region is still delivering a strong margin performance, with margins broadly maintained at 13.2%. Revenue in the second half is expected to be slightly lower as the order delays are expected to continue. The drop through impact will result in half two margins being marginally lower than half one. I wanted to highlight on this slide the ongoing balance sheet de-risking. Inventory has reduced by 22 million in total. Five million was as a result of the sustained hard work on our ongoing inventory reduction initiatives, as I mentioned for the cash conversion slide earlier. These initiatives are expected to further reduce inventory in the second half and we are on target for achieving the previously stated 15 million reduction by the end of 2026. This is on top of the 14 million reduction in inventory delivered in 2024. Separately, the Plano closure announcement has resulted in around 5 million of inventory being written off below adjusted operating profit, and the comprehensive balance sheet review at Cleveland also resulted in the circa 5 million of inventory being written off, also below adjusted operating profit. As previously flagged, profit in 2025 is expected to be weighted to the second half. This slide gives some of the building blocks, not drawn to scale, to deliver the step up in second half profitability. The Plano and Cleveland sites were significant drags on half-want profitability. The decision to close the Plano facility and subsequent last-time buy activity into the site in half two will provide a positive contribution. The Cleveland improvement plan will start to deliver improved performance. We have also factored in the impact of the ongoing order delays for our Asia business. We expect full-year adjusted operating profit to be in line with market expectations. With that, I'll hand back to Eric.

Thanks, Richard. So, having spent much of the presentation so far looking back and reviewing the turnaround activities in progress, what's next? It is still the early days in my tenure, which has been focused significantly on steadying the ship, but I do want to share with you some of my early take and direction of travel. TT has foundational capabilities, but there remain areas where we still need to improve our operational efficiency and leverage all of our assets across the business. We must continue to develop our people, products, and market positioning to drive sustainable shareholder value in the long term. I'll shortly be covering examples of where we have been investing technology for future growth. In the meantime, our short-term priorities are clear. we must complete the fix of operational issues, complete the component's business strategic review, including performance improvement, and restore confidence and deliver on our commitments to all stakeholders. I also want to mention that early on in post, I empowered the three regional heads by bringing them onto the executive team. This brought clear lines of responsibility and accountability and encourages collaboration across the organisation. The executive team also now includes a leader for the component's business. Beyond our short-term focus, we also need to look further out strategically and drive top-line growth. I've been impressed by many things that I've observed, getting to know our business and our employees over the last few months, which I think goes to the heart of the underlying investment case. TT is focused on structural growth and markets driven by megatrends and rising demands, While there have been some short-term softness related to geopolitical uncertainties, I believe ultimately that these are the right strategic markets to be in. Our engineering, manufacturing and sales teams have deep domain and application knowledge across these sectors. TT has particularly strong capabilities in power electronics, including conditioning and conversion, and electronic manufacturing services, known as EMS. TT offers high specification, highly customized electronics for mission-critical applications, which provides strategic advantage through differentiation. We collaborate with our blue chip customers on long-term programs, and I believe there's a real opportunity to accelerate target investment in innovative technologies and products compatible with customer needs. A good representation of TC's strengths is demonstrated by some significant recent customer wins, including a £23 million contract this month with long-standing customer Kongsberg. Next, I want to remind you of the broad customer relationships we have across our end markets, which is so important for the business. We are proud to work with many Blue Chip customers with whom we have long-term relationships, In fact, our top 10 customers have all been working with us for over a decade, and many have been partners for 20 years or more. First, in healthcare, Asia has secured some notable contract wins this year, reinforcing our regional strategy supporting life sciences OEMs with local production capabilities. In North America, our Minneapolis site is working with a medical equipment partner on next-generation surgical device development that uses electromagnetic tracking technology. In aerospace and defence, we see continued growth opportunities with the NATO commitment to raise defence spending targets from 2% of GDP to 5% by 2035. And we're also seeing momentum in civil aviation, driving demand for new aircraft and spares. For automation and electrification, we are well-placed for growth through the cycle with strong brands across different specialist sectors, including semi-equipment, power, security, rail and data centres. This chart may be familiar to you, but it illustrates our business model and customer spend patterns, and how we seek to partner to support our customers from the concept stage through to full-scale production, leveraging our global footprint for engineering and manufacturing at each stage of the product lifecycle. This development path varies by market, and some programs can extend for many years, with high barriers to entry in regulated markets, which provides visibility over long-term revenue streams. We have established a group-wide engineering and R&D function to leverage TT's expertise across all regions with product roadmaps for all sites. I've been greatly impressed with the technology and industry experts at our sites who helped develop solutions for our customers' challenges. The image on the left shows how TT combined a fully integrated offering. For example, the use of our magnetics devices on our PCB assemblies, which along with our hybrid micro-electronic devices can be designed into high-level assemblies. A core product of TT is our power units, which can incorporate our own PCBs as well as TT connectors and cable assemblies. On the right is an example of our customer-led approach to investment. Silver sintering is a key manufacturing capability that enables cutting-edge power modules for critical applications to be fabricated using the latest silicon carbide semiconductor devices. This represents the next generation technology enabling higher power with superior reliability and thermal performance within a smaller, lighter package which are particularly valued by aerospace customers. Another investment example is Altitude DC, our high voltage direct current power system that was launched at the Farnborough Airshow last summer. We developed this in collaboration with the Aerospace Technology Institute as well as shared investment with them. This platform provides efficient and reliable power conversion solutions to enable longer duration flights at higher altitudes in civil aerospace, defence and air mobility vehicles. The modular design means reduced development time and costs and simplifies the qualification process. So that's just a couple of examples I wanted to share with you to illustrate our investment in the future. Let's finish with an outlook for the remainder of the year. We are clear on our short-term focus to deliver improvement in operational performance and margin, and have taken decisions to accelerate this. This includes the component strategic review and the planned closure of Plano, as well as the Cleveland turnaround project. Very important to me this year, and the future for TT, is that North America is expected to show a step change in performance, leading to a return to profitability in the second half. Yes, it's still expected to be loss-making for the year as a whole, but it's good to have positive momentum in the region. This sequential improvement together with further second half progress in Europe and a resilient contribution in Asia is expected to underpin a significant uplift in profitability in the second half of this year compared to H1. As stated earlier, we expect adjusted operating profit to be in line with market expectations. While our short-term priorities are clear, I plan to share further thoughts for the longer-term strategy in the new year. In conclusion, following my first few months in the business, I am convinced that we have a robust platform for growth with leading products and capabilities, deep customer partnerships in attractive end markets, and this makes me excited for TT's future. So now we're happy to open up to questions, initially from those in the room. There's also a facility for those on the webcast to submit questions, which we'll cover after those in the room. Thank you. Okay. First hand up.