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

Good afternoon, and welcome to the Gooch & Housego Full Year Results Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Charles Peppiatt. Good afternoon to you, sir.

Thank you. Good afternoon, everyone. Thanks for joining us for this Investor Meet Company live webcast, and welcome to G&H's full year results presentation for the year ended the 30th of September 2024. Firstly, by way of introductions, I joined G&H at the end of 2022, having spent the last 30 years of my career working for 3 British-listed global technology companies, supplying into the medical, telecoms, industrial and A&D sectors. After 20 years with Laird, a FTSE 250 electronics company, I was CEO at Stadium, an AIM-listed company for 6 years and then became Divisional Head at TT Electronics after they acquired Stadium in 2018. Chris?

Thanks, Charlie. Yes, I joined Gooch & Housego back in 2019. Prior to that, I was also at TT Electronics. And then prior to that, my career has been mainly based in a series of technology and engineering businesses, predominantly focused in the aerospace and defense business.

So on the screen, you can see Chris and I will be following this agenda for the presentation. I will provide a short introduction to G&H for those of you who are new to the company, and then Chris will cover the group's 2024 full year results, including a segmental and ESG review. I will then provide a progress update on the implementation and delivery of our strategy, including outlook for the group. We will then address the online questions through the Q&A capability with the time that we have left to us. G&H is a global Photonics business with more than 75 years of history that today focuses on providing specialist solutions to a broad range of blue-chip customers across the 3 end markets that we serve, whether that's the defense primes in Europe or the U.S., global medical device OEMs, leading semiconductor companies or industrial multinationals. You can see on the slide some of the applications by end market. We design and manufacture specialist acoustooptic, fiberoptic, precision optic and optical system solutions for our customers. Example being in life sciences, complex diagnostic devices with integrated bio photonics, ophthalmology instruments or medical lasers. Some examples from the aerospace and defense sector would be examples like unique laser protection optical filters, embedded imaging periscopes or the optics for laser-directed energy weapons. On the industrial side, we are addressing fiber optic solutions into the ASML ecosystem for extreme ultraviolet lithography or providing high-reliability submarine coupling and amplification. On the next page, there's an outline of our footprint. G&H's 970 employees spread across 5 main sites in the U.S. and 5 in the U.K., along with our field-based global sales team and contract manufacturing partners in the Czech Republic and Thailand are a highly dedicated, skilled and technically competent workforce. As part of the new strategy introduced in 2023, the group's footprint has been complemented by the acquisitions of GS Optics in Rochester, New York, Artemis Optical in Plymouth, and more recently, earlier this year, the divestment of EM4 in Boston. We also completed the acquisition of Photonics Phoenix Optical in North Wales earlier this year, October, and I'll provide more details on that later. Now I'd like to hand you over to Chris, who will take you through the financial results of the group.

Thanks, Charlie. So what you see here is the highlights from our year ended September '24. We'll probably come back later in the presentation actually to give you a bit more of a flavor in terms of the progress we're making on delivering our strategic plan. But purely on the financials, the second half of the year was good. We grew revenues 15% compared to the first half, which had been impacted by customer destocking, particularly in our industrial and medical laser markets. As a result, revenues moved forward on a reported basis to GBP 136 million for the year, which was up 7% -- sorry, 0.7%. But on a constant currency basis, organic constant currency basis, we're actually down 3%. Our adjusted operating profit for the year was GBP 10.5 million. I think Charlie mentioned earlier, during the year in March 2024, we divested of our EM4 business. And just much more recently, at the end of October, we've acquired Phoenix Optical and added that to the group. Both of those transactions are important steps in the group's transformation and supports its recovery to the mid-teens margins levels that we're targeting through the strategic plan period. Our order book closed at GBP 104.5 million. We consider that to be a good level of order book and order pipeline, particularly for our A&D businesses. Our net debt reduced to GBP 25.8 million at the end of September '24. And we've proposed a final dividend of 8.3p per share, which gives a full year dividend of 13.2p per share. If we then move on to the summary income statement here. And as I mentioned on the previous slide, in March '24, we sold our EM4 business. So we've represented the financial statement shown here to exclude the results of that business from our continuing operations. So against the backdrop of mixed end market conditions, group revenue grew by GBP 1 million to GBP 136 million. But as I mentioned before, on an organic constant currency basis, that was 3% lower than the prior year. You're going to see on the following slides that our A&D and Life Science segments delivered revenue growth, but that was more than offset by challenging market conditions for our Industrial segment. The group's gross margins moved forward from 29.8% in FY '23 to 30.6% in FY '24. And that was thanks to the progress we're making on operational efficiency and the margin benefit of some of the new products that have been delivered from our technology road maps. Our spend on R&D increased to GBP 7.8 million, which is around 5.7% of revenue. Our investment in that area continues to bear fruit with new products contributing GBP 25.3 million to the group's revenue for the year. Adjusted operating profit was down 13.1% to GBP 10.5 million, really as a result of the organic constant currency revenue decline as well as our continued investment in the business. Finance charges were GBP 2.4 million, reflecting a full year of borrowing costs on the drawings that were made last financial year to fund the acquisitions of GS Optics and Artemis Optical. Our effective tax rate was at 19%. That's thanks to enhanced allowances we're able to claim for our R&D expenditure, both in the U.K. and the U.S. Adjusted earnings per share was 25.5p, and then our non-underlying items totaled GBP 3.9 million. Those included GBP 1.5 million for site closure and restructuring costs. There was GBP 400,000 for M&A activity, and then there was a GBP 2 million charge in respect to the amortization of acquired intangibles. Total cash cost of non-underlying was GBP 2.1 million. So after accounting for those non-underlying items, the reported PBT for the year was GBP 4.2 million. Discontinued operations accounted for a loss of GBP 9.6 million. That comprised loss on disposal of the EM4 business of GBP 9.2 million, and then there was a post-tax trading loss in the period from that business of GBP 400,000. So moving on to cash flow. In the year, the group generated GBP 4.8 million of free cash flow, the number you see just below the middle of the table there. That was after investing GBP 5.2 million in fixed assets. The principal areas of investment in the year were at our Torquay facility. We invested there to support the transition of our production areas to the build of new fiber optic modules as well as adding further high reliability coupler build capacity in our contract manufacturing partners facility, which is based in Thailand. Working capital levels increased by GBP 3.6 million in the year, but that investment was made in the first half with a total outflow of GBP 4.4 million, mainly as a result of the unwind of credit balances from the September '23 balance sheet. But in the second half of the year, the group inflowed GBP 800,000 from reduced working capital levels despite higher volumes. The net cash inflow from the sale of our EM4 business was GBP 1.7 million. And then you'll see that the first earn-out payment from the acquisition of Artemis Optical in FY '23 fell due in the second half of the reported year. The business has performed well and a payment of GBP 400,000 was made. There's a second and final earn-out payment of up to GBP 1.6 million payable in the second half of financial year '25. Net debt, excluding lease liabilities, fell to GBP 16 million. Leverage as measured for our banking covenant stood at 0.9x, which is comfortably within the facility cap of 2.5x. Our debt facility extends out to 2027. And at the end of the year, we had just under $40 million available from committed and uncommitted facilities available to support huge future growth of the business. Lease liabilities then added GBP 9.8 million, bringing total reported net debt at the year-end to GBP 25.8 million. So moving on to the first of our 3 segments, industrial, which accounts for around 50% of the group's revenues. Overall, sales into our industrial markets fell by 9.7% on an organic constant currency basis. So as I've mentioned earlier, we had significant destocking from our customers, particularly in our semiconductor and industrial laser markets, which impacted the first half. And while there was some recovery of revenue in the second half as customers' inventory holdings started to normalize, we do now expect a more sustained recovery from those markets in the second half of 2025. Despite the headwinds we had from our principal industrial markets, we did see good growth from our subsea data cable market. This was thanks to some important new -- an important new customer win as well as an increasing demand from our principal existing subsea 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, which is an area where we see good growth opportunities. So declining revenues in the segment pushed margins lower to 11.5% in FY '25. And as I noted before, based on customer feedback we're getting at the moment, we expect recovery from our industrial laser and semiconductor markets in the second half of 2025. And those customers tell us that when the recovery comes, they expect healthy end market growth in the medium term, but we do remain vigilant in this market space. Moving on then to our Aerospace and Defense business. Our revenues here grew by just over 10% on an organic constant currency basis. We're seeing really strong demand, particularly for the super polished optics that we supplied of our Moore Park, California facility. Those 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 proving highly effective in combating some of the new ways in which lasers are being used in an offensive capacity on the modern battlefield. Within this segment, we completed the divestments of our EM4 business. And as I mentioned before, its sale was an important step in rationalizing our offering into the A&D market, which will support the group's journey to delivering sustainable margin growth. The additional volume in this segment drove margin progression. In the second half, operating profit margins were at 2% compared to a loss of 9.4% in the first half, but we recognize we still have much 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 FY '25, given the number of proposals we are currently providing to our customers. And the more complete product offerings that G&H can now provide to our customers is helping to grow the business' new prospects pipeline. Moving then on to our Life Sciences segment. Our revenues here 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. Again, we saw some recovery of that in demand in the second half. But overall, our revenues finished the year slightly significantly lower. Offsetting this, we saw good growth in revenue for our medical diagnostic instruments. Two of our customers' instrument programs transitioned into full rate production, and those devices performed really well in the end market, generating high levels of demand. We're also pleased to see our new North American Life Sciences Center of Excellence, which is based in our Rochester, New York State 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 GS Optics business that we acquired in June '23 and located in the same facility is able to provide. We move on then to Slide 10. This just gives you a quick update on our ESG 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, 81% of the group's purchased electricity came from non-carbon sources. The group is 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 more effective deployment of our -- sorry, more effective development of our people by rolling out a new HR information system in the year, and that provides more of a one-stop shop for all of our employee management and development activities. And then finally, turning to our governance agenda. We work with a number of accreditation agencies, including now EcoVadis to independently measure our governance as well as social and environmental activities. We understand that the company's performance in this area is important to many of our stakeholders.

Thank you, Chris. 18 months ago, G&H launched a new strategy focused on delivering sustainable margin growth and establishing a clear executable path back to mid-teen returns over the medium term. 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, 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 the slide. Firstly, through our people by creating a high-performance, purpose-led culture across the whole company. Secondly, from self-help activity focused on improved 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, by applying greater discipline and rigor in the allocation of resources to deliver accretive growth, both organically and inorganically. We are now refocusing the business to invest in higher-margin products and sectors at the same time as addressing nonperformance in combination with pursuing speed-to-value acquisitions. On the next slide, I would like to provide a progress update. The group's strategy is still relatively nascent, but I'm pleased to report that we're making positive progress in all 4 of these key strategic priorities. The turnaround of our company's performance starts with its people, and it is encouraging to see all the primary indicators in this category showing green from recruitments, employee engagement, HR information systems and best-in-class ESG business practices. Changing the culture of an established international business into a dynamic, safe, engaging, diverse and inclusive place to work and thrive is a multiyear continuous activity. But the growing positive can-do attitude across the whole company towards the transformational improvement activity underway at G&H has been excellent and will be a key driver for our future success. On self-help, in the left-hand corner, we are starting to see the performance matrix 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 our manufacturing sites not achieving the targeted performance levels, teams have been deployed to focus on progress -- process yield and efficiency improvements. We continue to make notable progress with our proactive outsourcing strategy 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 products in line with our strategic objective 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 when doing business with G&H. I'm pleased to see how this change of mindset is being embraced across the 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 that is underway in this area. Regarding the key priority of technology, new product or platform introductions into highly regulated end markets that G&H serve take multiple years. But we're starting to see the early stage benefits from the disciplined refocus of our technology road maps in acousto-optic, optical systems, fiber optics and coatings as well as our medical diagnostics device solution 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. And for investment and portfolio in the right-hand corner. 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 one 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 acceptable returns. On the next slide, let me provide some more detail on value creation through 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 technological differentiators with strong growth opportunities underpinned by the world's mega trends. Let me provide an update on progress over this last period 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've now refocused our engineering resources on the areas where G&H's technology can drive value creation. Our R&D teams are actively prioritizing their efforts behind 7 vital few areas that are listed on the slide with focused investment into innovation hubs and centers of excellence. 6 out of the 7 areas, as you see from the traffic lights, 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. However, 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, here, capturing a third item on the vital few list, grow fiber technology from 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 have been 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've shared how G&H have secured several significant multiyear design wins for next-generation high-reliability couplers and subsystems. I'm also pleased today to update this week that we have now achieved 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. On the next slide, related to Item 5 on the Vital few list, 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 retro reflection detection through scanning and identifying the optical signature of equipments 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 retro reflection devices. G&H's best-in-class laser protection design capability alongside our superior high-precision optical systems manufacturing in the U.K. and the U.S. is a clear differentiator into the A&D market, and we are seeing accelerated growth of our pipeline in this sector accordingly. Turning to the next slide. I would like to give a quick update on the acquisition of Phoenix Optical, which completed in October outside of our financial year, but obviously, much of the work was being done in the second half towards the completion of this transaction. 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 and assembled high-precision optics as well as having operations for the molding and annealing of glass. In combination now with our operations in Ilminster, this means that G&H offers one of the largest optical diamond turning capabilities in Europe. The strategic rationale for this deal are clear and compelling. Revenue synergies to 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 is also -- there are also cost synergies from procurements and through optimizing our combined manufacturing capacity and 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 accelerate the value creation for G&H in the future. Now turning to the next slide to cover outlook for the group. 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 diagnostics and A&D products. The outlook for the latter is particularly encouraging with a growing pipeline of large multiyear opportunities. As Chris referred to earlier, 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 at above GBP 110 million, providing 70% cover for the FY 2025 expected full year revenues for the group. So on the summary slide to draw this together, G&H's technologies and capabilities are now better aligned to harness the growth potential from global mega trends 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 delayed recovery of the semiconductor market. And with our increased operational capacity, both in-house and from contract manufacturing partners, we are well positioned to respond dynamically to end market changes when they occur. Value creation synergies from Artemis and GS Optics acquisitions 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, as I've just covered in the previous slide, is a great fit, offering further commercial and operational synergies to help accelerate the delivery of our sustainable margin growth strategy. So finally, while mindful of persistent macroeconomic and growing geopolitical uncertainties, we expect an improved financial performance from the group in our financial year 2025. Now that brings the presentation materials to a close. So I'd like to -- we'd like to thank you for your attention with that. And now we'll move to some of the Q&A. So I know, Chris, there's some questions that have come in.

Yes, we've got questions coming in already. So thank you. So first one, so what are G&H's competitive advantages?

Okay. Shall I -- let me take that. So I mean, competitive advantages. I think as hopefully, we've been able to cover a little bit in the presentation, I think, first and foremost, G&H provides a unique engineering design and technical know-how around the specific technologies that we offer linked to photonics, primarily in acoustooptic, advanced precision optic, optical systems and fiber optics. So many of the biggest and the best companies in the world will come to G&H for that technology/at the same time, we've got an outstanding workforce with the capability to deliver on that. And more recently, we've been really addressing our service and more customer-focused approach to doing business, which I think you combine that, you have something that's really unique. Obviously, a business that has great customer service and doesn't have great products is still not a great business. A business that has great products and great customer service has the opportunity to become a really great business.

Thanks, Charlie. We've got a question. You said you have target mid-teen returns. Do you expect each of your 3 segments to get to that level? And perhaps I'll take that one. Yes, we said -- I mean, our strat plan is all about getting the group to mid-teen returns over the strat plan period. I would say, I think of our 3 segments, probably the one that has the opportunity to take the return on sales to the highest level is probably Life Sciences. We see the opportunity given our products and the market landscape to probably be able to get that one to probably high teens returns on sales. I think industrial, it's -- again, it's a good marketplace, and we expect that to be probably mid- to -- sorry, low to mid-teen returns probably from that segment. Aerospace and defense is probably -- obviously, given where we're coming from, it's probably going to lag behind a little bit. But nevertheless, for that segment, we see high single-digit returns is very achievable given the steps that we're putting through on our strat plan.

There's one here about acquisition. Do you want to read that?

Yes. So yes, we -- yes, so it said we've got -- in our results commentary, you're still looking at further acquisitions, which territories, sectors are you looking at? And how much would you be prepared to pay for such companies?

Okay. Well, let me start, Chris. So I think as part of our strategy, we remain acquisitive, but we're applying a very disciplined lens to that, as was outlined in the presentation and explaining our strategy, where we have the opportunity to deliver speed to value acceleration of our journey to deliver sustainable margin growth, then we're looking at that from M&A. And that's really about identifying, firstly, are there synergies that are realizable within the first 2 or 3 years of owning a new business and/or are there gaps in our existing technology portfolio which we can bring in and provide value to our customers with faster by acquiring rather than developing ourselves. So we've had examples where Artemis in the U.K. and Phoenix more recently do both of those things, very much focused on our A&D business. And then the acquisition of GS Optic, which is a business that had covered multiple markets, but focused on life sciences and the further investment that we've done post acquisition there have all gone very well. So I think we're encouraged by what we're seeing from choosing the right business and then addressing the integration appropriately. At the moment, all of the opportunities in our pipeline are still bolt-on and tuck-in in nature. There isn't anything that would be described as sort of a transformative acquisition, but we are particularly looking in North America around A&D and Life Sciences as opportunities to drive forward our proposition in that very large market. And do you want to say anything about the funding element?

Yes. I mean I think as we reported earlier, we've just completed the acquisition of Phoenix Optical at the end of October. That took our net debt-EBITDA gearing up to around about 1.1x. So still kind of reasonably modest. I would say, as a Board, we'd be reluctant to go beyond about 1.7x, 1.8x net debt to EBITDA. But that gives us even within that significant firepower to execute on some of the kind of bolt-on acquisition targets that, as Charlie described, we're currently looking at.

So there's one thing I can read out, Chris, is how would higher tariffs on imports into the U.S. impact your business?

So yes, very timely question at the moment. I suppose if we deal with the cost input side, so what we've done is -- so our U.S. sites are obviously importing a degree of material from outside of the U.S. What we've done is we modeled the impact. If we go with what everybody seems to be thinking is going to have a 60% tariffs on product coming out of China into the U.S. and 20% on product coming of other territories into the U.S. I mean the cost impact of that would be somewhere around about GBP 1.3 million, GBP 1.5 million per annum for the G&H Group, our U.S. sites. Now we expect to pass that on to our customers because, frankly, we're probably being a good company. I suspect all other U.S. manufacturers will be looking to pass costs on as well to their end customers. And I suppose that kind of deals with the cost side, the downside of it. I mean, given we are a U.S. manufacturer, we see there is good upside actually potentially from this. Particularly one area we're focused on at the moment is considering our medical diagnostics business that we've just established. We described the investment we put into our facility in Rochester, New York State. That facility has capacity to take medical diagnostic instrument manufacturing programs, which may well currently be out in China, as an example, and they are obviously very soon probably due to become much more expensive to import. So those kind of programs that take time because obviously medical instruments that have to be accredited. So there is a certain lag from the tariffs going on to revenues coming into us, but it's clearly potentially beneficial to us to be a U.S. manufacturer at the moment.

Chris, if I jump -- there's one here that's linked. So it might be a good time to capture it, which is on the inflation side from David. What will be the annual cost impact of the recent U.K. budget?

So on an annual basis, so this is the employees insurance changes that came through. So on an annual basis, about 600,000 for us. So for FY '25 and half year for us, about 300,000. Again, our intention is to try and push that on to our customers in terms of pricing.

There's another one here, which let me read out and we can have a go together because we've been asked this question a couple of times this week. With the divestment of EM4, are there other noncore assets that may be divested in the near term?

So do you want to start? Yes. I mean I think the divestment of EM4 was in some ways kind of an easy divestment to make because we'd identified really a number of product lines that, that business was offering to the market where we didn't really have a differentiated product offering. It just that was neatly bundled into a legal entity in one of our businesses. There was a small bit of technology we did want to retain, and we sort of work to actually migrate that out before we sold the business. But -- so yes, we had a kind of a neat package divestment there. I think for the rest of the group, we don't -- what we're now doing is we're assessing individual product lines. There's nothing where it's kind of like a neat bundled divestment of a business that we're anticipating.

This is from Peter. Which new technologies or products are expected to generate the most significant revenue growth in the next 2 or 3 years? Let me start on that one. So I mean we outlined on what we describe as our vital few, those sort of 7 areas of technology focus. And again, some of them are panned out over different time ranges. I think I would answer that by saying we're seeing -- already we're seeing a very exciting take-up in our fiber optic part of the business. So this is where we're linked to our high reliability submarine network capability, but then also what's being done from our fiber optic business into some of the semiconductor extreme ultraviolet ecosystem. So that would be an area that we would expect to see strong growth. Obviously, the recovery in the semi market would accelerate that. But what is most exciting for us is we know that we are being designed into the next generation of platforms in those spaces. I think also one of the really exciting things, which has been accelerated by the acquisition of Artemis is our sort of optical systems precision value add, which due to the nature of what's being learned from the battlefields in Ukraine and elsewhere, means that the technology that we provide is absolutely addressing an immediate need. And we've got a really quite unique capability there with our laser protection filtering. And then on top of that, we can offer the entire optical system for the device behind it. It might -- 2 years, 3 years, just to finish word to say, might be a little too short a horizon. But Chris referred to the investment we've made in Rochester, New York in North America to expand our diagnostics capability into that largest market for those products in the world. We have seen a really, really positive response there. And this is a case, as Chris just referred to, where the tariffs could actually be a shot in the arm for having manufacturing and capability enhanced and increased in North America. These are regulated markets though. So this requires FDA and other regulatory approvals. So there is a time lag before that does turn to higher volume.

There's one here actually, which is a bit tied to what you just answered around technology road maps, I guess. But what are the primary growth drivers for FY '25, especially considering the ongoing challenges in industrial and medical laser markets. And I guess I suppose kind of just if you look at it in the 3 segments, we've spoken about the momentum we've got with medical diagnostics instruments. It's going strongly. There's good end market demand and that new investment we're making into North America looks as that's going to help us significantly as well in 2025, which I think can certainly offset and some the issues we've got with the medical laser market. I think the other segment for us that is going very strongly at the moment is the aerospace and defense. There's a strong end market demand there. We're on good programs. We can see from the volume of quotations that we're putting out to customers at the moment that again, that is a really good area for growth that would underpin some of that step forward that is expected in financial year '25. There's one here around time line for completing transfer of production to lower-cost regions and also what levels of margin improvement do you anticipate from this shift?

Okay. Let me -- so typically, the nature of the products that we're building, designing and manufacturing are complex, and they're going into highly regulated end markets. So firstly, the choice and the selection of the contract manufacturing partner is a very -- this is not sort of standard EMS type transfer of printed circuit board manufacturer. This is highly complex technologies, as we said, in fiber optic, acoustooptic and advanced optical systems. So establishing a partner that has a base level of know-how is critical. Then obviously, in many cases, we're investing in our equipment to put into that contract manufacturer because it's highly customized. And then there's the piece around the qualification and all the other requirements, both our qualifications, customer qualifications and then any regulatory requirements that are needed. So 12 months would be a very fast transfer to sort of to achieve that. And that was the point I tried to pull out earlier in the presentation is that even though we've only seen the percentage of our revenues with contract manufacturer grow from less than 5% to 8.5%, the work that's been done in the last 12 months, specifically around qualifications means that the basket and stable approved products has increased and supports our plan. With regard to benefits, there's a range of benefit here. But typically, we'd be looking at 10% as a sort of -- as a guideline of margin accretion from that move. And that varies depending on a whole host of different things.

It's quite a straightforward one here. How many of your sites are freehold and how many are leasehold? So we own our sites in Torquay, Ilminster and Ashford. All of the rest of our sites are leased. Maybe another one here for me as a global company, what's your ideal scenario with respect to currency exchange rates? So weak GDP, strong U.S. dollars and euros? Yes, basically speaking, I mean, we are long in U.S. dollars, plus obviously, we have the effect of translating our U.S. earnings from our U.S. sites into GBP. So we like a strong U.S. dollar broadly speaking.

So Alexandra, I think that brings us to the end of the questions.

Perfect. Charlie, Chris, thank you very much for answering those questions that came from investors. Of course, the company can review all the questions submitted today, and we will publish the responses on the Investor Meet Company platform. Just before redirecting investors to provide you their feedback, which is particularly important to the company, Charlie, could I just ask you for a few closing comments?

Yes. I mean I do really want to say thank you for those that have joined the live call and for those of you that are listening to the recording afterwards. We appreciate that. I mean I think G&H is on a journey, and we've made substantial progress already in a relatively short space of time in preparing the foundations to deliver a strategy to transform the business to being a mid-teens return U.K. Technology Plc over the next 3, 4, 5 years. Thank you very much for your time.

Thank you.

Charlie, Chris, thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Gooch & Housego PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.