Titon Holdings Plc (TON) Earnings Call Transcript & Summary

Good morning, and welcome to the Titon Holdings Plc Full Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Tom Carpenter. Good morning to you.

Good morning, and welcome to Titon Holdings Investor Presentation for the financial year 2024. We're going to take you through some slides on our performance over the year. I think some plans that we have and our outlook for 2025, and then we're going to answer some questions that you've submitted. If you want to submit a question, please do so before the end of the presentation, and we'll answer as many questions as we possibly can. During the presentation, we're going to be primarily talking about continued operations. So that is performance and results, excluding our South Korean business that we sold earlier, well, about 3 or 4 months ago. Moving briefly to Slide 2. So a quick introduction of the Titon Board of Directors. In this call, we have our Chief Financial Officer, Carolyn Isom. Carolyn has been with us for 5 years. You can say hello, Carolyn.

Hello.

You've got myself, Tom Carpenter. I'm the Chief Executive of the group. I've been with Titon for about 9 months since late April 2024. Not present, we have Jamie Brooke, our Chairman, and Jamie joined us a little over 12 months ago and our 2 nonexecutive directors, Jeff Ward and Paul Hooper. And both Jeff and Paul joined us in April 2022. So we can move over to Slide 4. So a quick intro about Titon. For those of you who don't know us that well, Titon is a well-established company. We've been trading for over 50 years. We have 2 business units with approximately equal sales. About 80% of our revenues are in the U.K. with us exporting the remaining 20%, predominantly into Europe, but also some sales into the United States. The company started with our window and door hardware business unit. And here, we design and manufacture and sell a range of hardware products for the fenestration market. We sell both into PVCu and aluminum window and doors. We are a market leader in terms of trickle vents, where we have the broadest range of polymer and aluminum window vents in the market. However, we also supply a large range of complementary hardware products such as locks and hinges and handles. We manufacture all of our trickle vents ourselves. However, for our complementary hardware products, we have a range of own designs that we outsource or products that we partner with specialist manufacturers, for example, with Maco or with Roto. Our window door hardware business is quite a transactional business. Typically, we have orders that ship within a few days of being received. Our second business unit is our Mechanical Ventilation Systems business unit, which I'm going to mostly refer to as Ventilation Systems. Here, we design, manufacture and sell residential mechanical ventilation solutions. When we say mechanical ventilation, what we mean is ventilation systems that use electrically driven fans to drive air either into or out of the property. This business has a large project-based component, where we bid and won on projects, and we have orders called off over a period of months or even years. These projects can vary in size. We win from -- even from small self-build properties to large construction projects consisting of many hundreds of homes. Building ventilations drive demand for both business units, but in particular, our ventilation systems and our trickle vents. And what's happening is as housing efficiency requirements make homes better insulated and more and more airtight, builders have to incorporate our ventilation products into their buildings, both to comply with regulations and to give the occupant a comfortable home. We have a broad and competitive product portfolio for both our business units, and we continue to invest in new products. We own our own large factory in Haverhill, Suffolk, where we have a broad range of capabilities, including injection molding, metal fabrication and assembly. We have spare space and capacity to grow without significant capital investment, and we manufacture about 70% of our finished goods and buy the rest in from various partners. Finally, we believe we have significant potential to increase our shareholder value. As long-standing shareholders will have seen, our share -- our sales have been eroding in recent years, and our market cap has been penalized accordingly. However, we've managed to maintain a strong balance sheet during this period. We've incurred no debt and have maintained our cash levels. We believe that as we grow the business and generate consistent net profits, that we have significant scope for the company to be valued more favorably. Moving over to Slide 5, please. So I'd like to go over what we've achieved in the last 12 months. My view is our figures don't show this yet, but we've made quite a lot of progress. Firstly, after about 12 months with a vacancy, we had myself as a new CEO join at the end of April 2024. Now I'm not saying that no good work had occurred before I joined. There have been a lot of good work. But I think more from the point of view that a lot of the problems that we have require difficult trade-offs and making decisions that are not necessarily black and white, and I think this has been quite difficult for the business without a formal leader. We completed and initiated the execution of our 5-year strategy, and we'll cover more of that later. We restructured the business in July, taking out significant costs out of the business and simplifying our management structure. We've commenced the gross margin improvement program. We've been making quite good progress in recent months, but we know that we have a lot more work to do. We reorganized our Ventilation Systems into commercial operation. We brought in a new sales director to lead this business unit, and we started a drive to kind of reinforce our solution selling methodology. For Window and Door Hardware business, we've looked at how we go to market. We're trying to pivot towards our aluminum customers where we believe we can recognize higher margins with our products, but that isn't to say that we're going to stop selling and don't value our PVC customers. We will continue to service these customers. And then we reviewed our product margins as a whole business, and we've started to focus much more on our higher-margin products as opposed to focusing on our higher volume products. We kicked off our revised marketing approach. We're trying to move away from brochure selling to actively generating leads through marketing. And if you monitor our website, you should see a new website launched early Q2 of this year. We have continued to invest in new products across both business units. We've had 2 business product families released during the year. For the Winter Door Hardware business, we released our Hexalok range. This is a patio door locking system, primarily for aluminum market, but also suitable for PVC. It's been very well received with our customer base, and we are winning new customers, almost monthly with this product set. For our Ventilation Systems, we released the HRV Cool Plus unit, and this is a combined heat recovery unit with cooling module. And this product has been designed to be compliant with Part O, which is the overheating part of the building regulations. Due to the long product cycle times of this business unit, our sales so far this year have been quite low. However, we have several million pounds of opportunities in our pipeline, and we do forecast sales with this ramping up over this year. For comparison for similar releases of Ventilation Systems products, we released an HRV4 product family late summer 2023. And in 2023, we sold very few of these units in that year. However, during financial year 2024, we sold GBP 600,000 of these products. And actually, in the first 3 months of this year, we sold GBP 300,000 of these products. Finally, we were able to reach a conclusion with our South Korean business. Our JV in Korea historically has contributed significantly towards our products, but this has not been the case in recent years. And upon review, we saw little prospects for this business returning us back into profit. So we view the business as a drag on our group losses, and it was causing a significant noise and distraction as a management team. So I'm very happy to say that we sold our South Korean business at the end of the year for a little bit over GBP 700,000, including all fees. Over to you, Carolyn, to talk about the financial performance.

Thank you, Tom. So as you can see from the slide, we're talking about continuing operations only. So this will be our U.K. and U.S. businesses only. So no inclusion of South Korea. We did see a decline in revenue of 22%, primarily due to continued subdued market conditions in the housebuilding sector. This affected both our sales in our Window and Door Hardware business and our Mechanical Ventilation Systems. Despite the decrease in sales, though, we did manage to maintain our gross margin at 28%. Overall, the loss before exceptionals in the year was GBP 0.9 million compared to the loss of GBP 0.2 million in FY '23. And on a more positive front, EBITDA was just north of breakeven for the year. During the year, we had a real focus on cost management, and we performed 2 restructures in the business as we sought to return the business to profit. This resulted in annual savings of around GBP 600,000. This also resulted in exceptional costs of GBP 0.2 million, but we feel that the structure now is better suited to the size of the business we are now. We also made the decision to make an additional allowance for slow-moving stock this year of GBP 1.3 million, which we announced back in December. So moving on to the statement of financial position and cash flow. So although the results for the financial year were not where we wanted them to be, we did see a lot of positive progress. So it's important to show the change between H1 '24 and H2. Sales decline did level off during the latter half of the year, and we found that while our European OEM sales dropped in H2, we actually managed to mitigate some of the impact of that with the growth of our U.K. Vent System sales. We were also pleased to see that the margin improved in H2 as well as we saw the product mix and other margin initiatives having a positive impact. The previously mentioned cost reductions and restructuring that we undertook also started to take effect in H2. And for the last 2 months of the financial year, we were very close to breakeven. EBITDA followed a similar trend with negative GBP 68,000 achieved in H1, but a positive GBP 73,000 in H2. Another positive story I just want to highlight was our order book growth during the year. Our Ventilation Systems order book doubled during H2 and the company book-to-bill ended at 1.12, compared to 0.92 achieved in FY '23. Slide 9, please. Despite a difficult year, we were pleased to maintain our cash position similar to last year, and this has further been strengthened since December when we received just over GBP 700,000 for the disposal of our South Korean operations, and we do expect to see continued cash generation in FY '25. We've talked a lot about our stock levels over recent years. As you'll probably all be aware that during the global supply chain crisis, our stock levels increased significantly. We have been working very hard internally to bring those stock levels down. And when you remove the one-off allowance this year for slow-moving stock of GBP 1.3 million, we had to reduce stock by a further GBP 1.3 million over the year, and we do continue to target that stock reduction. So we expect levels to further decrease by the end of financial year. This also is helping our cash position. As most of you know, we own our Haverhill site outright. And at the time of the last valuation in September '22, the property was valued at GBP 5.4 million. The current value of this land and property in our accounts currently sits at GBP 1.6 million. We continue to have no debt aside from lease liabilities and our total equity at GBP 10.9 million remains higher than our market capitalization of GBP 8.7 million. I'm going to hand you back to Tom, so he can go through the next part of the presentation.

Thank you, Carolyn. So I'm going to talk a little bit about our challenges. So we've been doing a program of benchmarking ourselves against our competition. Generally speaking, if you look at our competitors, you can see the main ones have been growing whilst we've been shrinking. Their margins are significantly better than ours, and they've been making typically between 10% and 15% net profit. So on one hand, this shows us how much work we have to do. But on the other hand, for me, it shows us that it actually is possible to be successful in this market. And I don't see any reason why over the medium to long term, Titon can't ultimately match its performance. I split the challenges of the business into 5 broad interlinking categories. So firstly, from a new business development point of view, we've not been winning enough new customers, and we've not been growing our market share in either business unit. If we look at our vent systems competition, if you look at their annual reports, they've grown in recent years due to servicing social housing. We haven't entered that market. And as such, we've suffered as the core residential new build market has declined. So I think it's important as well as winning market share in our core markets that we reduce our dependency on this one new build residential market. So over the next few months and years, we're going to actively enter one or more adjacent markets. Again, talking to customers and potential customers, I think the market doesn't know enough about us. Where we are known is as a trickle vent manufacturer. So we're working on improving both our value proposition and general awareness of Titon in the market. I think within the business, we have a lot of unnecessary complexity. So the company's organization and processes have grown organically over many years. And I think this has resulted in what I call well-intentioned complexity. So for example, we have well over 250 different variants of HRV products, where in reality, we could probably get 90% coverage of these for the market within 20 or so variants. We've got a lot of unstructured complexity in our processes and systems, and this results in a lot of noise being generated as we run the business. This complexity is making it difficult for us to be efficient and to drive economies of scale. From a customer service point of view, all the feedback I get back from our customers is that our products are competitive and they like our products. However, we do need to recognize that there are alternative products available for our competitors. So if we don't want to compete on being the cheapest, we need to compete by providing value-added customer service. So we need to align the whole company behind giving value-added and differentiating service and improve our customer service processes so that we can utilize our great customer service team and release them to servicing the customer rather than doing a lot of manual processes. As I touched on earlier, our gross margins and obviously our net margins are lower than our main competitors. We do believe that increased volumes will drive improvement. However, we are actively working on margin improvements throughout the business. We're working on a cultural change within our new product development team. Historically, we've developed products purely on performance and not really taking enough attention on what the market requirements are and how easy the products are to manufacture and the overall product costs. And we've had, frankly, a tendency to add features to products that have turned out to be not valued by the customer while adding cost to the units. We are now driving a culture where design for manufacturing is as important as product performance. We're increasing our focus on selling solutions rather than price, and that's not just for Ventilation Systems, that's also for Window and Door Hardware. And as our 250 variants have shown, our product portfolio has grown organically for many years. So we're actively trying to reduce this and simplify our product offering in order to gain some economies of scale. Organizationally, we recognize that we need to grow our revenue without growing our headcount, and we are looking at processes and automation that will allow us to do this. As a leadership team, frankly, we're not going to be happy until we're matching or beating the margins of our best competitors. From a productivity point of view, linked to our organizational efficiency, we are relying on a lot of manual and inefficient processes, and we need to simplify and automate as much as we can. Our factory has not been adequately invested in for some years, and we have a lot of work to do to improve our throughput times, and we're going to be investing in assembly systems, modernizing some of our equipment and where we can, investing in automation. Moving over to our strategy slide. I mean, obviously, there's a lot more going on in this picture, but I think this shows a good vision of where we want to be by the end of 2028. Starting from the top, we want to be the industry's supply of choice for both mechanical ventilation and window and door hardware. We do have revenue targets that we mean to hit each year, but I'm not going to share them in this presentation. However, we should be growing organically by at least 10% a year, and we should be achieving 15% of net profit. So we're going to continue to service the residential new build and penetration markets, and these will be our core markets. We will be focusing our efforts primarily in the U.K., but we will be exporting tactically when our products align with export requirements. However, as I touched on before, we think it's important that we grow into adjacent markets so that we reduce our dependence on the new build market. We're going to do this by having efficient and reliable customer service by being an efficient manufacturing and organization. We're going to have superior products that follow a set vision. We've had a tendency to kind of go with very bespoke customer requirements, and we're going to rationalize and simplify our product ranges. We're going to not sell by brochure and price. We're going to move towards a consultative selling and superior customer relationship management scheme, and we're going to effectively market ourselves and actively generate leads through our marketing program. And by doing that, we've kicked off a set of 9 programs. And these programs may change as we go along. But right now, we have these 9. So we have a gross margin improvement program where we're focusing on improving our margins through both manufacturing efficiencies, value engineering of our products and reviewing our product mix. We continue to review our product road map. We are going to continue to add new products to our road map, but at the same time, streamline our portfolio so that's a simplified portfolio that we can get economies of scale. We're going to invest in our marketing programs, again, moving from brochure selling to basically shouting about our value proposition and actively generating leads. From a commercial excellence point of view, we're focused very much on the growth and aligning the whole organization behind value-added customer service. We recognize that we need to start growing market share. So we're investing in business development and entry into adjacent markets. So as I said, we really want to diversify beyond just residential new build. From an operational excellence point of view, as I've touched on, there's a lot of noise and complexity within the business. So we're actively improving our processes and actively improving our productivity across the organization. From an organizational development point of view, we've done a lot of this already over the last year, but the key goal is to make our organization aligned behind the performance of our business units and making roles and responsibilities aligned to the company's strengths and individual strengths. And we're trying to create a culture within Titon where we both make the business to be an interesting and satisfying place to work whilst also fostering accountability and professional development. And finally, we've got quite traditional way of managing quality within the business, and I think we need to invest in Six Sigma methodologies to become a world-class manufacturer. So all of these programs have an owner within the senior leadership team, and we have metrics to track our progress, and we report on these programs at every single Board level. And where we start tracking behind with these metrics, we have actions to bring performance back into line. On to our outlook. We are forecasting modest growth for 2025. Our order book is at a much better level than it was this time last year. It's more than doubled since I've joined the company. We're seeing nice positive signs with our Ventilation Systems business. Again, it's ahead of our expectation and ahead of this time last year. We do think -- we are seeing good signs with window and door hardware. We do think we have further work to do with our window and door hardware business, and that has a lot of focus within the business. The business is generating cash. It has generated cash 4 out of the 5 months -- over the last 5 months. We have a healthy cash balance, and we think that's going to allow us to both invest in the business and continue to grow our cash balance throughout the year. Our performance so far this year is slightly ahead of expectations and is actually ahead of the same period for the last 2 years. We know we have a lot of work to do. We have a lot of initiatives, which I've covered, but also other initiatives ongoing, and these initiatives are making a difference to our business. We believe the foundations of our business is strong, and we believe that we will be able to grow this business. From a market point of view, we are seeing some cautious indications of optimism. We are seeing certainly improving market conditions again, especially within the Ventilation Systems business. We do recognize that the U.K. is forecasted to see some economic growth, and we do recognize that the U.K. government's plans of residential new build, if they can deliver on this, will be a very good driver for us. However, as I'm sure you do, we do see that the U.K. and the economy have significant challenges that are faced in 2025. The National Insurance minimum wage uplift will add additional burden to the business. From a minimum wage point of view, it's not that we have hundreds of employees and the minimum wage, but what it does, it kind of -- it compresses our grading structure and so it has a knock-on effect on multiple grades. The Board remains confident on the work that we're doing and the prospects of the business. So we are confident that we're going to make progress during the year, but we do see 2025 as a transitionary year. And that concludes my presentation, and I'm opening up for questions.

[Operator Instructions] Tom, Carolyn, as you can see, we have received a number of questions throughout today's presentation. And Carolyn, if I may now hand back to you to chair the Q&A, and I'll pick up from you at the end. Thank you.

Thank you. Yes, I'll deal with the 2 pre-submitted questions first as I'll take those. The first question being, please indicate clearly the anticipated effect on labor cost of employers NI and minimum wage changes from April. Are these expected to impact on pay rises and staff numbers? So for us, the annualized cost of these changes are around a minimum of GBP 160,000, GBP 110,000 of that is in respect of the NI and around GBP 50,000 for the national living wage increase. I won't comment on staff number reductions at this stage, but we wouldn't base any reductions on this factor alone. We have already mitigated some of this impact by delaying some recruitment and also not replacing leavers in certain departments, and we're continually reviewing this. And actually, it did have an impact on pay rises. We had previously budgeted slightly more than what we awarded our staff in January. The second pre-submitted question. When can we reasonably expect the company to be back on the dividend list? So we do understand the importance of dividends to our shareholders, and we are committed to paying dividends as soon as our performance supports it. So we need to get to that position first where it's -- we have a level of sustainable profitability. Next question, Tom, how quickly can you expand into adjacent markets and what challenges might arise?

Well, it's not about its challenges. Obviously, we're late to the game. If you take social housing, our competitors have been in this market for a number of years and the product base -- the products that you require are slightly different than the products that we have. So I think there's a couple of challenges. We have one particular product that we would need to develop. I think we can use our current -- some of our current products as a base of that. But I think the biggest challenge is really what is our route to market for both of those. So we're looking at that right now. We're kicking off discussions with potential customers and figuring out how we can enter these markets. When can we do it? I mean, we like to have the product set for this calendar year and maybe have a few sales this year with really perhaps growth in the following year.

Thanks, Tom. What are the key milestones you are looking to achieve in 2025 to ensure that we are well positioned for long-term profitability?

Well, obviously, we've got a budget, and we want to -- and our budget is showing growth. We have targets for gross margin. I think gross margin is something you can impact because it's internal. I think impacting the external world is always more difficult. But yes, we have targets for new business development, targets for gross margin and targets for EBITDA and targets for operating profit. Obviously, if we miss these targets, then we'll have to have a look at how we can mitigate that and recognize those and bring those targets back into play.

Thank you. The order book more than doubled in FY '24. How confident are you in sustaining this momentum?

I'm not sure it's going to double over the next 6 months again, though that would be great. I mean it is continuing to grow. It's bigger than it was in December, and we are continuing to see some growth. Yes, well, I'm confident it's not going to shrink. I'm not confident it's going to double again. But yes, I think it is going to continue to grow over the next few months. Certainly, all the indications are that it is. We have a new sales director who's -- in the Ventilation Systems side, who's bringing great momentum with this. And we've also hired a new sales -- area sales manager for the South who's already bringing in business. So I'm pretty confident that it will grow, not necessarily going to double again.

Thank you. What action have you taken regarding the lease or sale of the surplus floor space in the factory? What size is this and the anticipated time line?

Yes. Well, we -- if you look at our site on Google Maps, you can see we're kind of spread over 3 different buildings. We do have spare space. So we've got -- at the moment, we have about 100,000 square feet of total floor space. Probably, we could operate out of 66,000 to 75,000 square feet. Easier said than done to release that space and to sell it. It would cost us quite a lot of money to consolidate that. What's happened is that as we've kind of grown, we've kind of gone like a piece of oil and filled up every single space. So I think at the moment -- certainly in 2025, probably not looking to go and release any space. But what I am doing is trying to use our space more efficiently, and I'm treating more as free capacity right now. So we are going to be consolidating a lot of our areas, and we are going to be creating fee space and perhaps that's something we'll look at in 2026. But the reality is it is the most obvious place that we would have free space, which is one of the buildings. We actually would have to make a significant investment to empty. It's got our paint plant in it and our lab in it, and that would not be very cost effective to move somewhere else.

Okay. You appear to tender to housing developers on individual sites. Are you not targeting to become their preferred providers on the majority, if not all, of their developments?

I'm not sure I understand that question. We have -- I mean, what happens? It depends on the -- depends on -- I think I understand that. It depends on the developer, and a lot of these developers are very regional. We tend to have some developers in some regions where we are the preferred supplier. And then you find that in another region for the same developer, they have a different deferred supplier. We do have 1 or 2 developers where we are nationally their preferred supplier, but you find every customer is different, every housing developer is different, and you just have to go with how they operate.

Okay. And you've mentioned that the U.K. Ventilation Systems order book has more than doubled over the full year. Could you give us some rough numbers to understand the magnitude?

So yes, okay. So in April, it was like GBP 1.2 million, and now it's just shy of GBP 3 million.

Thank you. Practically, how will the move into social housing work for U.K. ventilation systems? What are the next steps? Is there a time line for achieving sales in this new area? I think you covered some of that. Is there anything you want to add?

No.

Okay. As we are nearly 4 months into H1, what margin improvement are you expecting?

We're expecting low single-digit margin improvement, which I think is pretty meaningful from where we are. So I don't -- I'd like to see more in the interim report. So I should be able to share more in the interim report to see what we've executed between now and then.

Okay. The Titon transformation strategy is arguably a road down which its competitors have long traveled. As you belatedly pull into the middle lane, are others not just pulling further ahead?

Well, again, that's -- you could argue that. I mean, I think ultimately, there's only certain amounts of ways you can pill this. Again, I think the key thing is to grow what we're good at and address what we're weak at. I think -- as a whole, I think our industry is quite traditional. So I do think there's opportunities for us to leapfrog our competition. And again, if I look at our different competition, I think we are choosing a route to go down. I mean I'm not going to name names, but we do have some of our competition very much focused on low cost and winning that way, and we have other competition very much focused on social housing. I do think we have a route that we can travel to be differentiated. I do think that's around about providing quality products and good customer service. But I think internally, we can probably take some leapfrogs with processes that our more traditional competition don't do already. But yes, the fact is we are behind. But I think just what we have to do is, just have to be -- do everything a lot better than what we're doing already.

Lovely. And the final question, which I can take, Tom. Can you talk about the expected CapEx spending for this coming year, ideally breaking it down between maintenance and growth? We've forecast about GBP 600,000 CapEx spend this year, and it's pretty much 50-50 between maintenance and growth. It's currently under review at the moment. We would like to do a bit more investment in the factory, but it's likely to be slightly more than previous years.

Perfect. That's great. Carolyn, Tom, thank you for addressing all those questions for investors today. And before we direct investors to provide you with their feedback, which is particularly important to the company, Tom, could I please ask you for a few closing comments?

Okay. Yes. There's no magic bullets on what we need to do to turn the company around. There's no one scheme that's going to work. We just basically have to do everything better. And I think having a direction and having a focus on what we want to do is what will drive success. So I'd like to take this opportunity to thank everybody, thank the shareholders for your support. I'm sure I see some of you in our AGM later on this year, and I look forward to talking to you in our interim results at the end of April this year. Thank you very much.

Fantastic, Tom, Carolyn, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure it will be greatly valued by the company. On behalf of the management team of Titon Holdings plc, we'd like to thank you for attending today's presentation, and good morning to you all.