Titon Holdings Plc (TON.L) Earnings Call Transcript & Summary

Good morning, and welcome to the Titon Holdings Plc Final Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review questions submitted today and publish responses where it's appropriate to do so. Before we begin, I would like to submit the following poll. I would now like to hand you over to Tom Carpenter, CEO. Good morning, sir.

Thank you, Charlie. And hello, everyone, and thanks for joining this investor presentation. We're going to take you through our results over the last financial year. And I think more importantly, we're going to show you the progress we've been making executing our turnaround strategy, and then we'll answer any questions at the end of the presentation. So moving to the next slide. So on this presentation, you have Carolyn, our CFO; and myself, Tom Carpenter, the CEO. I will take you through our strategic and operational performance, and then Carolyn will take you through our finances over the year. And then at the end with the questions, we'll answer any questions between us. But before we start, I'd just like to say that this is a turnaround that we're driving through execution. The market is obviously very important, but we can't rely on the markets to recover Titon. And I would also like to say, 2025 marks our first full year of delivery against our strategy. So moving straight to Slide 4, Carolyn. So for those of you who don't know Titon, I thought I'd give a quick overview. So we're a U.K.-based manufacturer, and we serve the residential construction industry through 2 complementary business units, Mechanical Ventilation Systems and Window and Door Hardware. We were established over 50 years ago. We weathered multiple building and housing cycles. Both of our business units have products underpinned by regulations covering indoor air quality, safety and energy efficiency. We recognize that our margins need to improve. However, we currently manufacture and design about 3/4 of our revenues, and this gives us ample scope to improve our margins through value engineering and productivity improvements. As you will see, we're executing a turnaround strategy. We're making solid progress, but we're not where we need to be yet. Finally, we have a strong balance position. We own our own manufacturing facility in Haverhill, Suffolk. We have no real debt, and we have a cash position that allows us to invest in improving the business and weather any market volatility. So what differentiates Titon? Well, like I said, we have 2 complementary business units that sell into adjacent markets, but both servicing residential new build, RMI and social housing markets. We have a broad portfolio of award-winning products, which I will go over in the next slide. And we have in-house system design and expertise in the relevant building regulations, and this allows us to win at the specification level early in project cycles. We have a lot of spare manufacturing capacity. So this will allow us to significantly grow before we need to make any major capital investments. From a value creation point of view, we're actively making margin improvements. We're focused on growth through winning market share, not relying on the market. We're not where we want to be with Window and Door Hardware, but I think we're doing the right things to turn this business unit to growth. And I do think the group will see real upside once we get both business units growing simultaneously. Against this backdrop, we have a set of clear and measurable medium-term ambitions. We want our combined sales to be growing by at least 10% year-on-year and achieving a net profit before tax of 15%. Moving to Slide 5. So you can see in the picture in the middle, and I think this illustrates the range of products and solutions that we sell split between the 2 business units. Historically, we have not adequately been promoting or taking advantage of our breadth of offerings. So if you look at both the business units, we estimate the content of our home ranges between several hundreds to several thousand pounds per dwelling. Importantly, both our business units have in-house design, regulatory expertise and our own manufacturing. Moving to the next slide. If you look at the highlights for 2025, I think we've made good progress on the strategic plan I outlined last year, and hopefully, you'll see that in the numbers Carolyn presents. We further strengthened our leadership team. We've got 2 new sales leaders for both business units, and we onboarded a new operations director last year. On the whole, we've tried to simplify our organization and improve the accountability of our employees. I think we've made good inroads with our customer service, especially from the operational side with improved responsiveness and lead times. Our Mechanical Ventilation Systems business delivered a little bit over 20% of sales growth over the year, but actually, our U.K. sales of that business unit grew by 27%, and this was a record year for Ventilation Systems U.K. sales. We made good progress on profit -- gross profit improvement. We increased gross profit by nearly GBP 1 million and almost 5 percentage points on what was frankly similar levels of overall sales last year. Finally, we reduced our losses. We essentially broke even from an operating profit point of view and compared to a GBP 900,000 loss last year. And more importantly, I think we generated GBP 1.2 million worth of cash. So I'd just like to hand over to Carolyn to go over our financial performance.

Thank you, Tom. So I'll start by just going through the income statement. So I'll just summarize the group's performance for FY '25. Total sales for the year were GBP 15.8 million when you compare that with GBP 15.5 million in FY '24. Whilst the overall growth was quite modest, sales in Mechanical Ventilation Systems increased to GBP 8.6 million from GBP 7.2 million, which was a 21% increase overall. But actually, if you look at our U.K. side, that was a 27% increase. This was, however, partially offset by a reduction in Window and Door Hardware sales, which were GBP 7.2 million compared to GBP 8.3 million in the prior year, which is a 13% decrease. Gross margin though improved 32.9% compared to 28% in FY '24. This is a brilliant improvement. We achieved this across both business units, reflecting some of the pricing actions that we have taken, improved cost control, improved productivity and changes in our sales mix. Overall, this contributed to an improvement in underlying operating loss before exceptional items, and this reduced to GBP 40,000 when you compare that to a loss of GBP 900,000 in previous year. Underlying EBITDA improved to GBP 800,000, again, compared to breakeven in FY '24, so markedly improved position. In summary, FY '25 showed a real improvement overall over the previous financial year, driven by significant progress in executing our strategic programs. So this slide just shows you the breakdown of our revenue and the mix of our business overall. As you can see, we've actually flipped this year. So while in previous years, Window and Door Hardware made up the majority of our revenue overall, Mechanical Ventilation Systems actually contributed 54% this year compared to 46% last year. Window and Door Hardware revenue made up the remaining 46% compared to 54% in the prior year, so complete flip. 84% of our revenue came from U.K. sales, which compared to 81% in the prior year and 75% of products were manufactured in our own facility, which was in line with last year, 25% of our products that we sell are bought in from third parties. So this slide shows our improved trajectory across H1 versus H2. Total net revenue for FY '25, as I said, was GBP 15.8 million, increased from GBP 7.65 million in the first half to GBP 8.15 million in the second half, representing a 6.5% increase between the periods. There were, again, contrasting trends across the 2 business units. Revenue from the Mechanical Ventilation side actually increased from GBP 3.97 million to GBP 4.63 million, which was a 16.6% increase and again, offset the decline in the Window and Door Hardware side where revenue has reduced from GBP 3.68 million to GBP 3.52 million, a decrease of 4.3%. Overall, though, obviously, that Mechanical Ventilation Systems growth more than offset, so we did see a modest increase. Gross profit increased materially in the second half. So gross profit rose from GBP 2.3 million in H1 to GBP 2.9 million in H2, which was an increase of 26.1%. Importantly, that meant that the actual overall gross margin improved from 30.1% in H1 to 35.6%, which is an increase of 5.5 percentage points. Again, this improvement reflects a focused approach to the product mix and operational efficiency and the cost actions implemented during the year. Profitability also improved in the second half. Underlying profit before exceptionals and tax moved from GBP 160,000 loss in H1 to GBP 120,000 profit in H2. Underlying EBITDA increased from GBP 260,000 in H1 to GBP 560,000 in H2. As a result, both underlying EBITDA and net profit were positive in the second half, contributing to a full year underlying operating loss of GBP 40,000 and underlying EBITDA of GBP 810,000. In summary, FY '25 showed improved performance in the second half with higher revenue, improved margins and positive underlying profitability. So just moving on to the balance sheet. We continue to have a strong balance sheet. We have -- we still have no nonlease borrowings and our cash position is strong. We ended at GBP 3.5 million compared to GBP 2.3 million in FY '24. The increase was underpinned by positive operating cash flows, reflecting our improvement in underlying trading performance, and we expect operating cash generation to remain positive as the business operations continue to strengthen. We did, of course, also have the GBP 700,000 coming from our sale of the Korean operations, but we expect this to continue into the next financial year. The balance sheet continues to benefit from significant asset backing. Our property assets are still held at a book value of GBP 1.6 million with an estimated fair value of GBP 5.8 million as of end of September '25. We had a revaluation carried out. Based on those external assessments, this value could actually increase to GBP 6.7 million if each of those buildings are sold separately, providing additional balance sheet strength. We've also continued to make good improvements in working capital management. We have again managed to reduce our inventory levels by GBP 500,000 during the year with our continued focus on that stock control and operational efficiency. And as we look ahead to FY '26, all of our capital allocation decisions will remain disciplined with a focus on capital expenditure initiatives aimed at supporting organic growth drivers but also evaluating targeted bolt-on acquisition opportunities where these align strategically and meet our return criteria. So again, in summary, ended with a strong cash position, no bank debt and continued strong working capital discipline with a strong working -- solid asset base.

Okay. Thank you, Carolyn. So clearly, we've missed some turnaround. We're not where we want to be yet. Those of you who attended last year, hopefully, you can remember, I set out our turnaround strategy. So this previous financial year has been about executing that strategy. I've got a lot of work. The following slides are set up for people who aren't going to listen to this presentation, so they're quite wordy. I'm not going to read the words out. I'm just going to talk about the slides. So starting with that. So I'm not going to read out the whole strategy, which we kind of detail on the left-hand side. However, briefly, we do know where we want to be and what our ambitions are. We know where we're going to operate. We know how to achieve these ambitions, and we've set out a number of programs inside the company to drive that required change. I'm going to take you through our progress improving our core drivers over the next few slides. But before I do, I just want to point out that all these drivers interact with each other. They're do not operate individually. So for example, products and efficient operations drive margin improvement and our competitiveness, how we sell and customer service, promote sales and the share of the wallet from our customers and effective marketing promotes the company to the right decision makers and generates more leads. And it's all like a virtuous circle supporting each other. So moving to Slide 14, about our superior products. So we want to win by having superior products. But I think rather than just focusing on performance, which has been the strength of Titon in the past, we need to also focus on the costs of our products and their ability to scale and grow. So we've been spending a lot of time and effort over the last 12 months, not just on product performance, but also designing and margin improvement and standardization to allow us to scale and get economies of scale of our products. Over the last 12 months, we've spent -- we focused on reducing our product complexity and improving manufacturability together with improving our product development processes, not just focusing on R&D, but focusing on how we develop products cross-functionally with much more input from operations, sales during the product development process. We've released a new dual handed rationalization -- rationalized platform for our MVHR products. And overall, we've reduced about 1,000 SKUs from our catalog. We've developed an actionable road map of design and cost reductions that we would implement over the next 12 months. We're making progress, but none of this work is complete and these programs will continue through 2026 and beyond. Moving to Slide 15, our customer service. So when I joined the business back in 2024, we identified that our customer service was quite weak. So we've implemented a cross-functional customer improvement program and ensure the whole company is focused on servicing the customers. Over the year, we've made good improvements in our service and responsiveness. It's early days, but our customers are reporting the RC improvements. We've implemented a machine learning order entry system, and this is to allow our customer service team more time to focus on managing customers rather than purely entering orders manually. At the end of the year, we benchmarked ourselves with a program called Investors in Customers, and we achieved the Silver Award. We got our first Net Promoter Score, and this benchmark is now in place, and we're going to drive further improvements throughout 2026. Moving to Slide 16, our manufacturing and organization. So we've been very focused on driving productivity and margins and this focus continues. Again, if you remember, back to last year, I highlighted we had a lot of silos in the organization. So we've actively focused on improving cross-functional working between operations, customer service and product development. I'm pretty happy with the improvements we made of our productivity and cost reductions, which I think you've seen in our gross margins that Carolyn has presented. We've increased our manufacturing output whilst reducing our headcount. And I'm confident that we're going to see significant increase in volumes with very small increases in headcount and capital expenditure. As with our other initiatives, it's really more of the same during 2026 as we continue to drive manufacturing cost reductions and overall company productivity. Moving to Slide 17. We've tried to modernize how we sell our products with both business units with a view of really trying to win at both business units further up the specification chain where we can compete with specification rather than competing on price. So we've been transitioning to a consultative selling model. The goal is for both businesses to add value to the customer via our expertise and to win a greater share of their wallet by selling multiple products and selling solutions to them. Over 2025, we've strengthened both our commercial teams, both from headcount and from leadership. Previously, we're spending a lot of time in resources developing bespoke products for the European market. The reality is the resulting margins were not adequate. So we reevaluated this approach. We're not exiting Europe, but we're not spending the same amount of time and resources on trying to win business there, and we will only sell to new customers opportunistically if their products are based on our U.K. platforms. Our focus on consultative business development appears to be working, especially with our U.K. Vent Systems team with us winning more projects at the specification side rather than trying to outplace competitors during the tender. Our order book grew, and this allowed us to smooth out some of the project phasing issues we saw during the last quarter of the year as new build starts bottlenecked with new regulatory safety approvals. Next year, again, kind of a repeating pattern here, it's more of the same incremental improvement. I'm hopeful that we will get some modest expansion into an adjacent market to decouple us a little bit from the residential new build market. Moving on to Slide 18. So on to our marketing. So we acquired a traditional catalog selling marketing business 18 months ago. And we really wanted to improve our online messaging and the content really again about winning leads. So we've -- over the last 12 months, we've released a new website and we have separate landing pages for the 2 business units. I would encourage you to please go and have a look at our website. And what we're trying to do is position ourselves as experts in our field and as solution providers. We've released a lot of content on technical and regulatory issues, and our goal is to engage decision-makers at the earliest stage possible. We've seen this contribute well towards early-stage engagement, and we are seeing a lot of high-quality leads and business quoted and wanted this approach. We have several marketing projects ongoing. This year, we plan to implement a web shop, we initiate to sell our accessories and our consumer-orientated products. This is really to make the life easier for some of these customers, but also to give us more time in our customer service team to focus on servicing and managing customers. And as AI gets more and more important, we need to work on our website to facilitate AI-enabled search and research. And again, this is with a view of getting ourselves in front of architects and decision-makers at the earliest possible stage. Moving to Slide 19, please, Carolyn. So we're now quite a metric-driven company. So I thought it would be good to share a turnaround scorecard with you. We use quite a lot more metrics in this in the business. But at a top level, we think these are a good way to track our progress. I'm not saying that any of these numbers are world-class. But with the exception of one metric, and that's Window and Door Hardware revenue, I think it demonstrates good momentum over the last year, and we'll report this or a very similar scorecard next year. In summary, there's no real magic shortcuts to our turnaround. Our turnaround is mostly common sense. And really it's just persistent incremental improvement everywhere all the time. As I said earlier, I'm relatively happy with our progress. We could have done better, but I think I would have taken what we did when I joined the company. But we're not content with our performance, and we see a lot of scope for further improvement over the months and years to come. Moving to Slide 21. So over to our trading and outlook. The new build market is not helping us at the moment. It was subdued, I think, pretty much throughout most of 2025 and especially the last quarter or so. The key issue for us has been what's called gateway to building safety approvals, and this is severely bottleneck construction starts. I think if you do some search on the Internet, you can see that the construction starts in the U.K. have really -- over the last few months have really reduced. However, our goal has been to make strategic and financial progress regardless what the market does. So trading at the end of December is in line with our expectations. Markets -- challenging markets aside, actually, Vent Systems continues to grow. However, the delayed construction starts have impacted our mix and gross margins. So what's happening is that we're selling at the moment less of our own manufactured products that go into the fabric of the buildings, which ironically have been specified because of the new fire safety regulations, but we're selling a lot more first-fit products, which largely consist of lower-margin bought-in products. We do believe that the gateway to approvals bottlenecks are easing, and we expect them to normalize over the next coming weeks and months. And once they normalize, our full expectation is that our mix and margin from Mechanical Ventilation Systems will normalize. Window and Door Hardware sales do appear to be flattening out. And I'm hopeful that we can see this return to growth in the second half of the year. Our order book is strong. It's about 60% higher than it was this time last year. We have -- we retain a healthy cash balance, and this gives us flexibility in our turnaround. And as our cash position strengthens, we're making selective investments in the business. If we come across a suitable opportunity, we're very conscious of the size of the business and the size of acquisitions we can make, but if a suitable one comes across, we'll potentially make a small bolt-on acquisition if we can. I think as our businesses grow over the medium term, I think, hopefully, a bit of M&A will be part of our story. Finally, the Board does remain confident in the outlook of the group. We believe that the incentives we're taking are the right ones, and we think that they continue to make traction for us over the medium term. Ultimately, we believe that our medium-term ambitions to deliver a blended revenue growth of 10% and achieve an underlying net profit before tax of 50% is achievable, and our goal is to do this in financial year 2028. Moving to Slide 22. Finally, I'd like to summarize the case of Titon. So we're an established industry player with over 50 years of trading history. While our core market is cyclical, sensible regulations drive the demand for our core products. We have growth opportunities for both business units. I think we've demonstrated the potential for Mechanical Ventilation. It's now up to us to demonstrate this Window and Door Hardware. We have a healthy balance sheet, and we're generating cash. We have our properties valued really at GBP 6.7 million. We have GBP 3.5 million of cash. We have another GBP 3.9 million of net assets. So I'm of the view that our enterprise value to sales ratio is out of proportion to the health of the company. Finally, we're executing a clear strategy that's definitely not easy to turn around our business, and we're still very sensitive to small movements in revenue and mix. But hopefully, you can see that our trajectory towards achieving our medium-term goals is in place. So that completes our investor presentation, and I'd like to now hand over to Charlie.

Perfect. Tom, Carolyn, thank you for your presentation. [Operator Instructions] I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Carolyn, could I please ask you to read out the questions and give responses where appropriate to do so and I'll pick up from you at the end.

Great. Thanks, Charlie. So first question, what are your growth ambitions? Where could Titon be in 5 to 10 years' time?

Well, we've laid out our growth ambitions to grow by at least 10% a year. I'd like to, in a few years' time, hopefully be growing inorganically as well, sensible acquisitions. So 5 years' time, there's no reason why we can't be in excess of GBP 25 million of revenue, perhaps a little bit more some acquisitions. And in 10 years time, definitely some acquisitions. I don't see why we can't be a GBP 40 million business or more.

Great. Thank you. And how are you maximizing the use of AI within the business?

I don't know if we're maximizing use of AI. I think we're sensibly using AI. So obviously, beyond ChatGPT, we've got machine learning with automatic order entry, which is actually pretty smart. And again, the idea for that is to release our customer service time to actively manage our customers rather than just tapping in orders. We use a similar system for purchase orders that we receive. And we're investigating the use of chatbots to help the actual house owner to answer technical questions and help them to use our products. That's early days, but hopefully, we can do some with that over the next 12 months.

Okay. Do you have a trade counter? And if not, why not?

We don't have a trade counter. I don't think we're set up for that. We sell via distribution for that. I don't think this is something we would look at over the next 12 months.

Are we any closer to getting back on the dividend list?

Well, I [indiscernible] sound clear, so apologies, it just does. I mean we're 12 months closer. I don't think -- so we broke even. We've got modest -- with the market, we got modest ambitions for this year. I mean we can overachieve those ambitions, I think. But I'm of the view that we should only be paying dividends once we have sustainable high levels of profitability.

Okay. Titon has some great brands, but they don't seem to be that widely known in the industry. How are you marketing and promoting these brands? And what is your marketing spend per annum? And what can you do to lift the recognition of these brands?

Okay. Yes, it's a great question. And I agree. I think we do have a great brand, but we aren't a well known industry. So I completely agree. I think we're really trying to focus on the online content. The reality is that most branding is -- most research is done online. I think it's much less about catalogs now, much less about trade shows, that we still do attend trade shows. So I think we covered what we're trying to do with what we're trying to do to raise our brands. And I think also part of our issue is that people know us only very small product categories and actually, we sell a whole wide range of solutions and that our goal is to be selling these solutions to our customers. So I think I covered that in my marketing slides. Our spend, excluding trade shows is about GBP 200,000 a year. So we are spending significantly on marketing.

Great. Thank you. Next question. At this valuation, do you think a takeover approach is likely?

It is. I think we're very undervalued. So potentially...

Okay. What gives you confidence the growth in Ventilation sales will continue? And what are the drivers or trends that you are seeing?

I think our sales team is very strong. I don't -- I think actually the construction business will probably recover in the second half of the year. I think our products are really good. I think all the actions we're doing will continue to show growth. I don't think -- I mean, hopefully, I'm wrong, but I don't think we'll have too many 27% revenue increases per year. But the regulations that for new builds and what we're trying to do with air quality and heat efficiency and safety, fire safety or drive demand for our products and housebuilders have to buy our products in order to hit those regulations.

And with minimum wage rising sharply from next April and many more jobs around the country becoming minimum wage, how will this affect Titon?

Yes, it increases our costs. We do have -- ideally, we'd like to pay everybody more than minimum wage. We do have some minimum wage folks on the shop floor. I'll let Carolyn answer about how it impacts us financially. But I think one of the -- from an employee point of view, what it does, it basically causes a problem because it basically narrows the band. So the entry level wages are getting closer and closer to actually quite skilled and quite experienced employees, which I think is a bigger problem. But maybe, Carolyn, you want to touch on the...

Yes. So I mean financially, I think I reported on this last year, the hit was about GBP 40,000 a year for us. And this year, it will be of a similar amount. So financially, it does have quite a big impact. What we're trying to do though is mitigate that with efficiencies in the factory. So we have reduced our headcount quite significantly through natural attrition, and that will continue as we become more efficient. And the next question actually is very similar. So approximately what -- and I'll take this one, Tom. What effect has the major NI changes had on the bottom line? Again, that's between GBP 40,000 a year -- GBP 40,000, GBP 50,000 a year that we've seen as a direct hit. And again, just going back to what I've just said, we're trying to mitigate that with labor efficiencies. Okay. Is there a spares requirement for the Ventilation products? And if so, do you have a rapid response system? Again, if there is, is the precise model number easily visible to the person who may be asking for spares?

So yes, there's a spares requirement for the Ventilation products. We do a spares program. From a household point of view, there's a requirement to change the filter, I can't remember actually, but once every 12 months, once every 24 months. There is a precise model number visible. I think there's probably more we could do with this with some 3D -- 2D barcodes, which we'd like to look at. And also, we want to have -- this is also part and parcel of why we want to have the web shop to make it easier for the homeowner to buy these filters. We -- yes, it's a reasonable part of our revenue every single month. And we typically, at the moment, sell to distributors these filters and spare parts.