Gooch & Housego PLC (GHH) Earnings Call Transcript & Summary

Good morning. Thank you to everyone here today attending in person and to those of you joining live on the audio webcast. Welcome to G&H's Full Year Results Presentation for the year ended the 30th of September 2024. Chris and I will be following the agenda shown on the screen. After the highlights section, Chris will cover the group's 2024 full year results, including a segmental and an ESG review. And then I will provide a progress update on the implementation and delivery of our strategy, including outlook for the group. We will open the floor to any Q&A at the end. During FY 2024, we've made further positive progress with establishing and implementing the changes required across the business to deliver our strategic plan. I would like to take this opportunity to firstly thank our customers for their continued and growing confidence in G&H. And secondly, to extend my sincere thanks to all our employees around the world for their hard work and commitment during the last year that was characterized by challenges from organizational change, ongoing supply chain issues, several sluggish end markets and cost inflation. The growing positive can-do attitude across the whole company towards the transformational improvement activity underway at G&H has been excellent and this will be a key driver to our future success. After the disappointing outturn in the first half of the year, primarily due to destocking in our industrial and medical laser markets, I'm pleased to report that the group delivered a strong performance in the second half of the year. Revenues for the full year from continuing operations increased by 0.7% to GBP 136 million compared to GBP 135 million in the prior period. Chris will take you through the performance by market sector in more detail later in the presentation. It was pleasing to see further reductions in factory past due backlog in the period, and we continue to see improvement in lead time and delivery performance across the group. Adjusted operating profit from continuing operations in the period decreased by 13% to GBP 10.5 million compared to GBP 12.1 million in the prior year. Following a review of the group's portfolio, particularly focused on our A&D business unit, we completed the divestment of our Boston located EM4 business to Luminar Technologies back in March. Aligned to our strategy, we retained a specialist fiber optic coupler product line from this business, which was successfully transferred and requalified in our Torquay site during the year. And more recently, in line with our strategy, we were pleased to announce the acquisition of Phoenix Optical. The group's order book remains at a healthy level, particularly for aerospace and defense. At the end of September, it stood at GBP 104.5 million compared to GBP 115.3 million at the end of the prior year and it has increased post year-end. G&H generated cash from operations of GBP 14.2 million compared to GBP 16.2 million in 2023, and the group's net debt reduced to GBP 25.8 million compared to GBP 31.7 million at the prior year end, with a leverage ratio down to 0.9x. The Board are proposing a final dividend of 8.3p, giving a total dividend of 13.2p, continuing to support the group's progressive dividend policy and reflecting the positive medium-term outlook for the business. Turning to Slide 4. Before I hand over to Chris to take you through the financial results in more detail, I would like to give a quick update on the recent acquisition of Phoenix Optical, which completed at the end of October. In line with our strategy of speed to value acquisitions, Phoenix is a great fit within G&H, providing the opportunity to expand and accelerate our reach into the U.K. and European aerospace and defense markets with greater value-added content. From its facilities in St. Asaph, North Wales, Phoenix designs and manufactures polished, coated, assembled high-precision optics as well as having operations for molding and annealing glass. In combination with our operations in Ilminster, this means that G&H now offer one of the largest optical diamond turning capabilities in Europe. The strategic rationale for this deal are clear and compelling. Revenue synergies through our combined commercial pipeline have already been identified and the initial customer feedback has been very encouraging, particularly from our A&D partners where scalable U.K. sovereign and European in-region capability and capacity is critical. There are also cost synergies from procurement and through optimizing our combined manufacturing capacity and the engineering expertise in St. Asaph, where we already have a design and innovation center. The addition of Phoenix to G&H brings together industry-leading optical know-how and capability to help us accelerate value creation for the group. I will now hand you over to Chris.

Thanks, Charlie, and good morning, everyone. Moving on then to Slide 5. As you've heard from Charlie, in March 2024, we sold our EM4 business. So as a result, the financials presented here have been represented to exclude the results of that business from our continuing operations. Against the backdrop of mixed end market conditions, group revenue grew by [ GBP 1 million ] -- GBP 136 million. But on an organic constant currency basis, that was 3% lower than the prior year. You will see on the following slides, our A&D and Life Sciences segments delivered revenue growth, but this was more than offset by challenging market conditions for our Industrial segment. The group's gross margins moved forward from 29.8% in 2023 to 30.6% in '24. That was thanks to the progress we're making on operational efficiency and the margin benefit of new products delivered from our technology road maps. Our spend on R&D increased to GBP 7.8 million, which is 5.7% of revenue. And our investment in this area continues to bear fruit with new products contributing GBP 25.3 million to the group's revenues for the year. Adjusted operating profit was down 18.1% to GBP 10.5 million as a result of the organic constant currency revenue decline and our continued investment in the business. Finance charges increased to GBP 2.4 million. That reflects a full year of borrowing costs on the 2 acquisitions that were made of [Technical Difficulty] last financial year. Our effective tax rate was 19%, thanks to enhanced allowances we get from the R&D expenditure through our businesses. Adjusted earnings per share was 25.5p. Non-underlying items totaled GBP 3.9 million, that included GBP 1.5 million for site closure and restructuring costs and GBP 400,000 for M&A activity. There was then a GBP 2 million charge in respect [Technical Difficulty] acquired intangibles. The total cash cost of these non-underlying items was GBP 2.1 million. The loss in respect to the divested EM4 business was GBP 9.6 million. This comprised a loss on disposal of GBP 9.2 million, trading loss in the period of GBP 600,000 and then there was a tax credit of GBP 200,000. Moving on then to Slide 6, cash flow. The group generated GBP 4.8 million of free cash flow during the period. That was after investing GBP 5.2 million in tangible and intangible fixed assets. The most significant investments were our Torquay facility, where we [Technical Difficulty] production areas to the build of new fiber optic modules as well as adding further high-reliability fiber [Technical Difficulty] in the year increased by GBP 3.6 million, but that investment was made in the first half with a total outflow of GBP 4.4 million, principally as a result of an unwind of credit balances from the prior year [Technical Difficulty] from reduced working capital. The cash inflow from the sale of our EM4 business was GBP 1.7 million. That comprised consideration received of GBP 4.2 million, less transaction fees and other costs of GBP 1.4 million and then working cap and net debt adjustments were GBP 1.1 million outflow. The first earn-out payment from the acquisition of Artemis that we completed in 2023 fell during the second half of this reporting year. The business has performed very well and a payment of GBP 400,000 was made. The second and final earn-out payment of up to GBP 1.6 million is payable in the second half of financial year '25. Leverage as measured for our banking covenants stood at 0.9x, which is comfortably within the facility cap of 2.5x. Our debt facility extends through to [ April 2027 ]. And at the end of [Technical Difficulty] in the form of undrawn committed and uncommitted facilities available to support the future growth of the business. [Technical Difficulty] charged at between 160 and 210 basis points above the U.S. dollar overnight rate, depending on our gearing. Lease liabilities then added a further GBP 9.8 million, bringing reported net debt at year end to GBP 25.8 million. Turning then to Slide 7, our Industrial segment. Overall sales into our [Technical Difficulty] market fell 9.7% on an organic constant currency basis. As we reported to you at the half year, destocking by our customers impacted the group's revenues into many of its industrial submarkets with our industrial laser market most impacted. Whilst there was some recovery of revenue in the second half as customers' inventory holdings normalized, we now expect a more sustained recovery in the second half of 2025. Despite the headwinds in our principal industrial markets, we did see growth from our subsea data cable market. That was thanks to important new customer win for the provision of a complex module amplifier as well as increasing demand from our principal existing subsea data cable customer. During the year, we added further capacity at our Southeast Asian contract manufacturing partner. This supported the transition of our Torquay facility to the build of more complex fiber optic modules, an area where we see good growth opportunities [Technical Difficulty] to 11.5% before based on customer [Technical Difficulty] we expect recovery in our industrial laser and semiconductor markets in the second half of financial year '25. And those customers tell us they expect healthy end market [Technical Difficulty] but we remain vigilant in this market space. Moving on to our A&D segment. Revenues grew by 10.3% on an organic constant currency basis. We're seeing strong demand for the super polished optics supply from our Moorpark facility, which are used in ring laser gyros. Our recently acquired Artemis business is also seeing high levels of demand for its laser protection filters that are highly effective in combating new ways in which lasers are being used in an offensive capacity on the modern battlefield. Within this segment, we completed the divestment of our EM4 business. Its sale was an important step in rationalizing our offering into the A&D market, which supports the group's journey to deliver sustainable margin growth. The additional volume in this segment drove margin progression. In the second half, operating profit margins were 2% compared to a loss of 9.4% in the first half, but we still have work to do, particularly in improving production yields, which are currently behind plan. We expect our order book for this segment to grow further in financial year '25, given the number of proposals we are currently providing to customers. And the more complete product offering that G&H can now provide to our customers is helping to grow the business' new prospects pipeline. Moving on then to our Life Sciences segment. Our Life Science revenues were up 1.3% on an organic constant currency basis. In our medical laser market, we saw a sharp reduction in revenue as a result of our customers being overstocked, especially in the first half of the year. We saw some recovery of demand in the second half, but overall, our revenue finished the year significantly lower. Offsetting this, we saw good growth in revenue for our medical diagnostic instruments. Two of our customers' instrument program transitioned into full rate production. And those devices performed well in the end market, generating higher levels of demand. We're also pleased to see our new North American Life Sciences Center of Excellence, which is based in our Rochester facility contributing to revenue. The order pipeline for this business is developing well and in some cases, supported by the polymer optics capabilities that our newly acquired GS Optics business, which is located in the same facility is able to provide. Moving on then to Slide 10, which gives an update on some of the group's environmental, social and governance activities. We achieved another reduction of 14.3% in our carbon intensity measure in the year. We've now reduced that measure by 62% compared to 2020, which is our baseline measurement year. We're steadily transitioning our sites to using electricity generated from renewable sources. And in the financial year 2024, 81% of the group's purchased electricity came from non-carbon sources. The group remains well on track to achieve its objective of being net neutral on Scope 1 and 2 emissions by 2035. We continue to invest in the development of our people. We've added to our on-site HR teams and supported the effect -- more effective development of our people by rolling out a new HR information system, which provides a one-stop shop for all employee management and development activities. Turning to our governance agenda. We work with a number of external accreditation agencies, including now EcoVadis to independently measure our governance as well as social and environmental activities. We know that the company's performance in this area is important to all of our stakeholders. Thank you. And I'll now hand you back to Charlie.

Thank you, Chris. Eighteen months ago, G&H launched a new strategy focused on delivering sustainable margin growth and establishing a clear executable plan back to mid-teen returns over the medium term. As a recap, this will be achieved through G&H becoming an innovative customer-focused technology company delivered responsibly by making a better world with photonics. We are now focused on ensuring G&H becomes and remains the first choice for all our stakeholders, including our employees, our customers, shareholders, our ecosystem partners and the communities in which we operate. We will offer differentiated performance through focusing on 4 key strategic priorities outlined on Slide 11. Firstly, through our people by creating a high-performance, purpose-led culture across the whole company. Secondly, from self-help activities to improve customer experience and operational execution. Thirdly, technology through deploying our advanced photonics engineering talent and know-how more effectively to accelerate our time to market for new technologies into commercially attractive applications. And fourthly, applying greater discipline and rigor in the allocation of resources to deliver accretive growth, both organically and inorganically. We are refocusing the business to invest in higher-margin products and sectors at the same time as addressing non-performers in combination with pursuing speed to value acquisitions. On Slide 12, I would like to provide a progress update. The group's strategy is still relatively nascent, but I'm pleased to report that we are making positive progress in all 4 of these strategic priorities. The turnaround of the company's performance starts with its people, and it is encouraging to see all the primary indicators in this category showing green from recruitment, employee engagement, HR information systems and best-in-class ESG business practices. Changing the culture of an established international business with 1,000 employees into a dynamic, safe, engaging, diverse and inclusive place to work and thrive is a multiyear continuous activity. But we've already made significant progress in this area whilst ensuring we are not complacent about what still needs to be done. On self-help, we are starting to see performance metrics turn in the right direction, for operational output, customer responsiveness and lead times, on-time delivery and past due backlog reduction. We still have work to do around productivity and at manufacturing sites not achieving the targeted performance levels, teams have been deployed to focus on process yield and efficiency improvements. We continue to make notable progress with our proactive outsourcing strategy for products where technological sovereignty is not a differentiator. Despite only showing a small year-on-year increase in revenues from our lower-cost region partners in FY 2024, significant progress was made with qualifying additional product lines in line with our strategy to grow this to 25% of group revenues over the medium term. A significant cornerstone of our strategy is to become a more customer-focused business by delivering an exceptional experience for customers when doing business with G&H. I'm pleased to see how this change of mindset is being embraced across the whole company and to witness the progress being made through disciplined focus on internal and external customer delight. Following our 2024 customer satisfaction survey, it was encouraging to see the step change improvement in G&H's Net Promoter Score up to 42 compared to much lower scores in prior years, demonstrating that our customers are already starting to recognize the transformation underway in this area of the business. Around the key priority of technology, new product or platform introductions into highly regulated end markets that G&H serve take multiple years, but we are starting to see the early-stage benefit from the disciplined refocus of our technology road maps into acousto-optics, optical systems, fiber optics and coatings as well as our medical device and IVD solutions offering. With greater clarity on the deliverables required from each of the specialist innovation hubs, our engineering teams are now working on a richer pipeline of customer-focused design projects. For investment and portfolio, since launching our new strategy in the summer of 2023, we've now completed 3 strategic bolt-on acquisitions, 1 divestment of a nonperforming U.S. business unit and streamlined our operating footprint with the closure of 2 satellite manufacturing facilities, one in Shanghai and the other on the East Coast of North America, as well as applying greater focus and rigor to capital investment allocation. Clearly aligned to our strategy, we continue to consider speed to value acquisitions that enhance value creation through delivering commercial synergies and/or fill any gaps in our existing portfolio. At the same time, we are expeditiously assessing the best path to address underperformance and rationalize noncore product lines that aren't sufficiently differentiated to secure the acceptable returns. On Slide 13, let me provide some more detail on value creation from our technology. Photonics is at the heart of global innovation and a critical enabler for many new frontiers of technology. Over the last 1.5 years, we've redeployed our considerable photonics design engineering capability and know-how into areas where G&H has technology differentiators with strong growth opportunities underpinned by the world's megatrends. Let me provide an update on progress over the last year and share a few specific examples of early successes and design wins from this more focused approach. Following a group-wide technology road map review, we have now refocused our engineering resources on the areas where G&H's technology and know-how can drive value creation. Our R&D teams are actively prioritizing their effort behind 7 vital few areas that are listed on Slide 13, combined with focused investment into innovation hubs and centers of excellence. Six out of the 7 areas selected are performing in line with or ahead of our plan. The medical lasers initiative listed second on the chart and showing red has come under threat from lower-cost Asian competition faster than expected. We are actively assessing how to address the challenges for this product family. Over the medium term, we still expect these R&D work streams to deliver more than GBP 50 million of margin accretive new business from next-generation product introductions. On the next couple of slides, I would like to share updates on some specific examples of successes from this approach. Firstly, related to the third item on the vital few list, grow fiber technology for submarine networks. G&H has had a significant presence in the growing submarine cable market with our high reliability couplers for some time. However, as networks are being challenged to meet the demands of a data-driven age with the requirements to offer fluid capacity and bandwidth on demand, the need for greater functionality, lower power consumption and miniaturization become increasingly more challenging. Previously, I shared how G&H had secured several significant multiyear design wins for next-generation high-reliability couplers and subsystems. I'm pleased to update today that we are now in the final stage of design and qualification of our next-generation high-reliability couplers for new compact undersea repeater systems. We've also received customer qualification and entered the mass production phase on our advanced amplifier modules to enable higher capacity submarine links. Both are expected to unlock multiyear, multimillion pound new business opportunities for the group over the coming years through our unique photonics design engineering and material science capabilities. Secondly, on Slide 15, related to Item 5, maximize precision optics with value add. Lasers are in widespread use on the battlefield with applications including target designation and illumination, range finding, ordinance guidance and countermeasures. More recently, a paradigm shift has expanded the use of laser devices in war zones to include retroreflection detection through scanning and identifying the optical signature of equipment using optics. Following the acquisition of Artemis in July 2023, G&H have developed unique and highly innovative optical filters that protect against the latest laser threats and are also able to manage the signature of affected optics, mitigating or nullifying the impact of these new retroreflection devices. G&H's best-in-class laser protection design capability alongside our superior high-precision optical systems that are all manufactured in the U.K. and the U.S. provide a clear differentiator into the A&D market and are accelerating the growth of our pipeline in this sector. Now turning to Slide 16 to look at outlook. The FY 2024 closing order book of GBP 104.5 million when compared to pre-pandemic levels and adjusted for the reduction in past due backlog remains solid with strong demand for our medical, diagnostic and A&D products. The outlook for the latter is particularly encouraging with a growing pipeline of large multiyear opportunities. The recovery in the semiconductor market is further delayed, which is impacting demand for our industrial lasers, and this is now not expected to bounce back until the second half of 2025. However, since our financial year end, we've seen the group's order book continue to grow and our current order book, including Phoenix, stands above GBP 110 million, providing 70% cover for the FY 2025 expected full year revenues. To summarize, G&H's technologies and capabilities are now better aligned to harness the growth potential from the global megatrends like 5G, AI, virtual reality, remote patient monitoring, nonintrusive health care, environmental sustainability and geopolitical tensions. The group has a healthy order book and strong opportunity pipeline despite the delay -- the delayed recovery of the semiconductor market. And with increased operational capacity, both in-house and from contract manufacturing partners, we are well positioned to respond dynamically to end market demand changes. Value creation synergies from Artemis and GS Optics are being realized as planned and the new more collaborative and strategic approach to the integration of acquired businesses is working. The recent acquisition of Phoenix is a great fit, offering further commercial and operational synergies to help deliver our sustainable margin growth strategy. Finally, while mindful of persistent macroeconomic and growing geopolitical uncertainties, we expect an improved financial performance in FY 2025. Thank you. That brings the presentation to a close, and I would now like to hand over for any Q&A.

Just a couple of questions for me, please. Could you just give us a flavor of how big the undersea opportunity and the A&D opportunity could be? I know you don't have a crystal ball, but are they -- particularly on the A&D side, are they asking you for your capacity, how much you could supply that sort of stuff. So do you have a feel for how big that can be? And secondly, with working capital improving in the second half, how is that playing out so far this year? Do you see working capital -- the inventory reducing as your order book normalizes?

Maybe if I take the first one, [ Scott ] if that's all right. So I think, firstly, on the high reliability piece, I think the market has positive dynamics, which is high single digit growth is generally understood for high reliability submarine outlook. I think what we're doing to hopefully outperform that type of growth in that specific segment is by putting -- moving up the value chain, going from a highly complex sophisticated component, a high reliability fused coupler into a more integrated module, which provides a greater value add. So I think our hope and expectation would be that we could outperform the growth in that market. On A&D, again, some of this -- we need some more time to really be able to assess what the full potential is here. But I think we're seeing some very -- there's clearly the fundamentals, as Chris referred to, in this sector are seeing growth. The areas in which we bring value are also in the sweet spot of where investment for A&D is going. And so I think there's -- again, there's an opportunity in certain segments around laser protection and other forms of measures that we've described here to hopefully deliver high single double-digit type growth in that area.

Just Scott, on the working cap measures, I think it was good performance actually in the second half, in particular on receivables. So we kept receivables under control despite the revenue growth that we had. I think going forward, it's always -- it's a trade. So the bigger customers are always looking for extended payment terms. So every time new contracts of any materiality comes up for debate, that's on the table. We try to resist that as much as possible, but there may be some pressure to grant additional turns. The other big factor, obviously, is inventory. We've made pretty good progress over the last couple of years of getting inventory down. Our operational teams are focused on making further improvements. So my hope expectation is that by getting better on inventory management, but obviously absorbing a bit of pressure on receivables, generally speaking, the flow-through to working cap should be reasonably limited from the revenue growth.

I think the final bit you asked specifically was about customer feedback. I think if we take the recent example of the Phoenix acquisition, where we've obviously spent a lot of time in front of major U.K. and European defense customers, the feedback has been very positive indeed, where the growth that they see taking place, one of their largest concerns was the supply chain's ability to keep up with that. And so what G&H has done with the acquisition of Artemis and Phoenix, both to increase capacity and capability is being very well received by the customer base.

Robin Byde from Zeus Capital. Just on your operating margins, I mean, these are still under quite a lot of pressure. I mean, are you still confident you can get to mid-teens operating margins in the next I think it was 3 years. And can you give us a few insights on the steps from here to lifting operating margins? And then secondly, just a follow-up on inventory turn to Chris. What's your target or target range for inventory turn?

I mean, firstly, on the strategy to deliver the improvement to mid-teen returns, initially, we outlined a number of building blocks that deliver that 700 to 800 basis points of improvement to do with volume, outsourcing, productivity, the introduction of new products and portfolio adjustments. And we believe that the actions that we're taking in each of those areas underpin the journey and the path to be able to deliver that.

And do you think that's still by '26, '27?

I think that's what you're originally saying. We are working to a plan to be able to deliver that. And obviously, the outlook and the numbers that we are presenting for FY 2025 support that type of direction of travel.

Just on inventory turns, I mean we've targeted actually our operational areas to make a 10% improvement in turns in '25. I would say there's probably then even once they've achieved that further progression we could make. I mean some of our sites, they do have good reasons for carrying quite high work in progress inventory levels. And it's just the time it takes to push product through our factories, drive some of that. I'd like to have [ an ambition ] to get full turns, but I think it will take a few years for us to get to that.

And what would a 10% improvement in inventory turns, how much cash would that release just in broad terms?

About GBP 3 million, GBP 4 million.

Tom Elgar, Deutsche Numis. A couple of questions. I'll do them in turn. Firstly, looking at the strategy update, looking at that 56% of sites achieving the efficiency target, so obviously, 44% below that. What's catalyzing those sites? I mean I know we've talked about before labor and training and such forth, but mentioning the sort of labor constraints mentioned in the outlook statement, can we just sort of cross those [ Ts ] there, please?

Yes, certainly, Tom. I mean, I think you're absolutely right, we obviously have internal matrix outlining the health and the performance of the businesses, the sites that are flashing red in that area are around -- predominantly in the precision optics part of the group related to process yields, what we describe as cost of poor quality going through that process. And that is linked back of all of these things in manufacturing, there are the 4Ms, manpower, machines, materials and methods. Our machinery in G&H is very good. This has been a lot to do with methodology, manpower and skills and training are the main areas that we're focusing on.

And then in terms of just moving over towards the portfolio, obviously, you mentioned the acquisitions you've had and obviously, the divestment in the year. Can you give us a picture of where you see yourselves right now? And perhaps could you add a few words on underlying rationalization within the A&D business? I know we've touched on before that there was both the inorganic and the organic aspect of that strategy. Can we sort of get an update specifically on the organic part of the A&D strategy, please?

I'd say we continue to look for new acquisition targets. I mean, I think we would say we're focused more on sort of bolt-on acquisitions and anything that's sort of completely transformational for the group. But yes, there's a pipeline of opportunities out there that we're looking at. I would say probably more focused on the A&D and Life Sciences segments for us at the moment. But we have the balance sheet to be able to execute from debt facilities, existing debt facilities. And I would say in terms of sort of rationalization around the A&D portfolio, your question there. I think the EM4 business was a nice sort of discrete package of, should we say sort of nonperforming business that we were able to [ divest in ] our technologies. There was a small nugget of technology we transferred out actually before we sold, but the majority of the business was nicely packaged, anything similar to that illustrated in the group at the moment, so we're now focused these going down product levels to assess where [indiscernible] performing product and continue. It's not just A&D, I mean, give a choice as well, medical lasers is an area where we're just assessing some of that individual product lines within that portfolio as well.

It's Thomas Rands from Davy. Two questions. First one is around the industrial lasers market and your hope expectation of a kind of recovery next year. Can you just talk us through the kind of competitive landscape in that end market that you've seen in recent years, but more detail in the last kind of couple of months and how that could kind of help or detract from kind of the -- how you can take that recovery next year, please?

So I think the challenges that G&H faced some years ago related to the Q-switch, where there was -- in the industrial space, there was acceptable lower-cost Asian equivalents that were -- that eroded some of the market share G&H had in that space previously. We are not complacent, but the current threat is not from being designed out of the platforms that we're on. I think the engagement that we have with many and most of our industrial customers is very positive. We are working with them on next-generation products. It really is about the fact that the pull-through and the demand in that sector has been softer and has been more prolonged than was expected on that side. At the moment, some of the implications, maybe you're referring with regard to tariff type environment and some of the competitive changes that are going on through changes in administration in North America and what's going on there, we are assessing that and what that means for G&H and what it means for some of our customers to be able to fully understand that. There's obviously a large part of semiconductor tooling goes into China. And at the same time, there's also a significant amount that European and North American products will suddenly become much more competitive in those markets than Chinese products have been. So it's something that we're assessing.

Great. And then the second one is linked to the subsea couplers. On the bottom of the Slide 14, you mentioned around qualification of new Fiber-Q sensing technology. That's separate to the couplers inside the cable. This is more kind of security of the cable on the outside. Given what we've seen in recent weeks of kind of various cables being cut, is this a big opportunity to use your existing and developing technology to help protect kind of cables of varying varieties under the sea from threats?

Yes. I mean, it's a potential development. I would say it's kind of an established market at the moment. I mean most of the sensing technology we have is more [indiscernible] protection and border protection as well. So yes, it's potentially a developing market for the future.

Okay. And then one quick follow-up, if I may. In Life Sciences, destocking has obviously been a hot topic through this year. Is there any comments or color you can give us on what your customers are saying around the timing of kind of destocking when? I know it's very lumpy depending on customers across some of your competitors as well, but any extra info you can give on that would be great.

Yes. I think it's similar time lines to what we've been told around the Industrial segment as well. So they expect to recover during the second half of 2025.

I think that's very much on the medical laser piece rather than the diagnostics part, just to be clear on -- we are seeing strong pull-through on the diagnostics and IVD.

Andy Edmond, Equity Development. Multiyear demand in A&D, it's an encouraging sign as much as you can. Can you give a little bit more flavor on the duration of that because, of course, some defense projects can literally run into decades if you can get in at the early stage? And linked to that, how you see the recovery in margin gradually progressing in that division? You mentioned some of the negatives of dealing with larger people in terms of payment terms, but there might be margin compensations as well.

Yes. I mean, typically, particularly if you're providing into a vehicle program, the production programs go over [ multi-year ]. What we are seeing more recently is some of the replenishment orders where it looks as though the demand is being compressed a little bit more from traditional vehicle program, delivery programs. But even so you're talking multiyear rather than single year delivery. I think where we're able to provide complex systems that knit together a lot of our different capabilities, that putting coating on to optical substrates and having some electro-optical interface as well into the optics, then the margins for that kind of product is good. They are superior to providing just a simple lens or optical component. So yes, we're very focused on trying to move up the value chain. And it feels like the momentum in defense spending is coming in the direction of Photonics exactly where we...

It's James Tetley, also Equity Development. A couple of questions. On the outsourcing revenue, did you say that the target there is 25%?

That's correct. Yes. We've outlined that to 25% of the group's revenues would be coming from contract manufacturing partners.

And that's sort of showing steady growth at the moment, but at the current rate of growth, it will take a long time to get to that 25%. So is there anything to give that a bit more momentum?

Yes. I mean, again, I have to make the point clear if I didn't, but the real progress that's been made in FY '24 was the transfer and setup and qualification of products into that -- into those channels. Typically, due to the type of markets that we're supplying into, this is not a sort of send it over there, start building and ship it back. It can be a 12- to 18-month qualification process for those products. So we've made significant progress in having a much wider basket of products that are now qualified and ready to ramp in '25 and '26. So we should -- we feel positive about that, that should be -- see growth. The other side to it as well is that by the nature of the technological sovereignty element, it's typically not A&D. It's most often and likely to be industrial and life sciences. And so we've seen a little bit of sort of the softness in the industrial market has also put a bit of a weight down on that number, which should bounce back again at the same time as that market recovers.

Great. And just a question on -- you said you've got 70% cover for current year forecast, I think, at the moment. And just how does that compare with previous years and where you'd expect to be at this stage?

It's lower than this time last year in terms of actual revenues achieved. I'd say around about 10% of revenue lower. But we have got a pretty good pipeline of prospects at the moment. So we're quite hopeful of getting some good intake in the [indiscernible].

And I think the makeup of that is very much, as we said, A&D is -- would be stronger. Life Sciences is very similar and the weakness where the gap is in the life science. In the industrial, the industrial part of our business also has the shortest lead time on the order book as well. And I think the other thing I would like to draw attention to is the significant progress that's been made in our service proposition. One of the drawbacks of doing that of getting your lead times back under control is people change their ordering patterns because they know that you're now a reliable supplier. So there's elements of that as well.

Tom Rands again from Davy. Just a quick question on -- a key differentiator in the past has been your kind of ability to grow your own crystals internally and then to turn them into value-add products. Is that still a key differentiator for Gooch & Housego? Or is the ability to grow crystals more commoditized today and getting -- seeing competition from Asian competitors and that's enabling them to kind of chase you down in certain end markets?

So the -- I mean, as you know, in terms of our primary crystal growth center of excellence is in Cleveland, Ohio. And so a large proportion of what we grow in that facility is for internal use going into our acousto-optic or precision optic products. And we are -- we believe strongly that we are able to get superior performance from those products that end up, for example, in extreme ultraviolet [ ASML ] platforms from the ability to grow a pure, better quality of crystal. So that will -- that is very much part of our strategy going forward. There is another piece for us to sort of consider with some of the changing dynamic linked back to the tariff question. There aren't that many people that grow crystal in North America. So is the change potentially going to provide us with another opportunity there. But these crystals take several years to grow, just so that we get a sense of the type of time frame we're talking about there.

Any questions online? No. I'll pass back to you guys for closing remarks.

I mean, just firstly, thank you very much for being here and those joining on the webcast. I appreciate it.