Trifast plc (TRI) Earnings Call Transcript & Summary

Good morning, everyone. I hope everyone is coping well in these very strange times, and thank you all for joining us for our half year update. Before we get into the main presentation, I'd like to draw your attention to our purpose statement on the front cover. Given the unpredictability and the volatility in the macro environment at the moment, I think this statement has never been more apt. Our customers trust us not to let them down even when countries go into lockdowns, which has, on occasions, in particular, in Q1, made our supply chain a little bit more exciting, shall we say. And obviously, we have seen with COVID, there has been an acceleration within industries to become more environmentally friendly and digitally connected, and customers now need us more than ever to support them with these technological changes. Thank you. I thought that was an important couple of points to emphasize before I move on to the highlights on Page 3. If we can now move on to Slide 3. Given these extremely challenging conditions, I personally believe we have delivered a resilient performance, and I'm incredibly proud of how the group and the Operations Board has put together and taken swift and effective action to deliver the current operating margin of 6% as shown. I'll talk about the progression of revenue streams across sectors and regions later. But before I hand over to Clare to talk through the financial highlights, I wanted to express how delighted that both Clare and myself are with the first rollout of Atlas in October and as planned. And a huge thanks go out to all of our teams involved in this. We now have some very happy people working on the new system. Finally, I'd also like to thank the investor community who supported us in our equity raise earlier this year, which has now put us on to a net cash position and give us just the confidence to invest in our strategic plans going forward, as you will hear about later. Thank you. I'd now like to hand over to Clare who will run through the financial highlights.

Absolutely. So if we turn to Slide 5. Thank you, Mark. Before we go into the detail, which we will do over the coming half an hour or so, I do just want to get through a few key results, like I normally would at this point. I can only echo what Mark said, it has absolutely been a challenging first half of the year, but absolutely, we have shown an awful lot of resilience in the face of those challenges. And I would look at the table there and just draw out really a few things as key points to take into account. Yes, unsurprisingly, revenue has reduced. And you can see it there on the table, we have gone down by 21%, down to GBP 81.5 million in the half year. And as you can also see, that has fed through down into our gross profit margin as well. As you all know, we've spoken about this before, we are operationally geared even at the gross margin level. And so that has fed through, and we have seen a reduction in our gross margin, down 170 basis points to the 27.1% that you see in that table there. There's a couple of other things that are going on, which we can touch on later, but the biggest story really is that reduction in sales. But I think what is important to note is, as Mark said, we have made some swift, effective cost-saving actions. We've done a number of things to make sure that we monitor and we maintain our cost base, including pay raise and bonus deferrals, travel and discretionary spend as well as making use of the various government schemes that have been available to us around the world. And as a result of all of our hard work, we are very pleased to report that we have been able to keep our underlying operating profit margin at the 5.7%, again, you see in the table there. I think one thing I would also mention actually at this point because I think it is important is that, yes, we reacted quickly, exactly as you would expect us to, and we controlled our cost base, but we do and we always will keep an eye on the future. We didn't enter into this half year fat and happy. We entered into this in a period of investment-driven growth. And actually, that's what we want to do is to get the business back to investment-driven growth as quickly as we possibly can. So yes, we've taken the right actions, and we will keep an eye on cost control as we go forward. Absolutely. There's always something any business can do. But it will always be measured, and it will be designed to support and sustain our ongoing growth journey as well as to control our cost base. And I think it is worth saying that, just to emphasize where we are as a business. The last thing I would say on this slide is just on the balance sheet side. We are net cash, as Mark said, following the equity raise. And also, I think it is worth noting that this has been further supplemented by actually the cash we've generated over the period as well. So we've had a very strong cash conversion, 138.5%. We are generating cash. We're generating a reasonable amount of it, which, again, is a very nice position to be in, in such uncertain times. So with that, I'll hand back to Mark now to go through the trading in a bit more detail.

That's great. Thank you, Clare. So if we can now move on to Slide 6. As we said, it goes without saying the first half has been extremely challenging, particularly in Q1, when COVID had such a significant impact. Putting it into some form of perspective, April was down 50% against last year. However, this was our lowest point. And since then, we have continually shown growth throughout the rest of the 6 months, culminating in September, delivering year-on-year growth against last year, and this trend has continued again in October and also in November so far. All of our regions were impacted by the pandemic, as you can see on the chart on Slide 6. Some more so than others and some quicker to recover than others, and I'll come on to those shortly. You can also see that the end markets across all our key sectors were hit hard, with automotive being the hardest hit and now representing only 27% of the group's revenue. However, I'm very pleased to report that this is now rebounding as are all of the other sectors. So although the sectors have fallen, as you can see, I'd like to point out that within them, there are some niche markets that are performing particularly well. The EV market is going from strength to strength and is creating some exciting opportunities across all of our regions. 5G technology is growing. And by the end of this financial year, we envisage that it will have shown a significant increase against prior year. And it's not just the base stations and the antennas that we know are fast and rich, it is also the ripple effect that this has on society and the infrastructure and the power distribution companies that we work with. You've all heard of the development of smart cities and the interconnectedness of all things, which will bring about smart [ rebo ] systems, for example, that was [ staying ] on motorways, smart heating devices. And all of this brings about the need for large, cloud-based data centers, all of which require our sort products, whether it's in the lighting, in the rod systems or the small fasteners to hold the heating devices together or the enclosure products and the fastening elements in the data centers. Finally, I've already talked about the medical opportunities that we're seeing, and this market grew significantly in the first half of the year. A good couple of opportunities and examples we're currently working with are with customers working on the cleansing of offices and the inside of cars through the use of ultraviolet light, which is killing known viruses, and which, again, is an exciting and one would say an extremely timely breakthrough in applications at this moment. Okay. If we now move to Page 7. This shows quite nicely the progression we have achieved throughout the 6 months. You can see that we've achieved in Q1 a decrease of 37%, moving to a more modest 6% fall in Q2, with Europe and the U.S. both showing growth in actually Q2. So despite all the challenges, we were able to keep the overall revenue, as Clare mentioned, down to 21% in the period. Okay. The next few slides will give you an overview of how the regions have performed. If we look at Page 8, first of all, Europe saw the smallest decrease in revenue, down about 15%, with automotive production shutdowns in Holland and Sweden having the largest impact. This was partially offset by an increase in electronic volumes in Hungary as well as the new platform wins we're seeing in our fast-growing Spanish operation. In Germany, TR Kuhlmann was hit particularly hard as a result of reduced levels of investments within the general industrial sector. And sales within the domestic appliance sector, what we see mainly in Italy, was also hit hard due to local lockdowns in Italy and volume decreases with some of our OEMs. However, this sector has been fastest to recover and has helped the European regions as a whole show the growth in Q2. And looking ahead, we expect this growth to continue in Q3, barring any impact on further lockdowns or restrictions. Automotive should continue to show signs of recovery as new electric vehicle platforms come on board. And as mentioned earlier, we're also seeing further growth in medical and the health care sector. Okay. Moving on to Page 9, looking at Asia. This has really been a bit of a mixed bag. Asia's revenue fell by 23%. Lockdowns and reduced manufacturing volumes in Malaysia created a large fall in the domestic appliance and the automotive sectors, particularly in Q1. However, we have seen recoveries start to show up again in Q2. In Taiwan, sales to our European and U.S. automotive distributors reduced significantly as production volume's down. However, in contrast, Shanghai grew over 6%, reflecting a quicker COVID recovery for both the automotive and the medical sectors. If we look ahead, the domestic appliance sector looks set to recover strongly in the second half of the year, and opportunities that I've already mentioned within the medical sector and EV are bearing fruit, particularly in China. Finally, I'd like to update you on a post-balance sheet event. Following a recent strategic review, we disposed of a very small manufacturing site based in Penang, Malaysia. It originally specializes in the highly specialized wooden speaker markets that they used to have and produces more of the standardized fasteners. But as you know, technology has changed to move to more digital mediums. And we thought this company was no longer a good fit to the group, and therefore, we have disposed of it this month. So if we move on to the U.K. on Page 10. This saw the highest fall in revenue of around 25%. We saw automotive shutdowns extending longer into Q1 than in any other region, and also volumes have been slower to recover than in any other region. That said, October and November are showing more promise. General industrial, the sales fell there more than expected due to the extended shutdowns, with customers, in some cases, actually closing down for 5 out of the 6 months during that period. Distributor sales have likewise fallen, reflecting the general uncertainty in the marketplace and a relatively slower recovery within the U.K. That said, we are extremely pleased to report that PTS, which, as you know, is our specialized stain steel distributor, continues to perform well year-on-year and is [ booking ] the trend. Looking ahead in the U.K. We believe that trading volumes will be expected to be lower in the second half of the year due to the slower macro recovery and start-up production dates still being pushed out further, particularly in the automotive. However, we are still seeing plenty of opportunities. The pipeline is there, but the opportunities are being pushed back. And we're also seeing a lot of opportunities still in the 5G, electric vehicle and in the general industrial space. And then obviously, there is Brexit. We believe the actions that we are taking are manageable in any scenario. We [ plan to plan ] in the worst case. We may actually -- you can see a small uptick in sales to our customer -- distributor customers as they stock up as we get closer to the December deadline. And then finally, if we turn to Slide 11. In relation to the U.S., after more than 2 years of double-digit growth, we saw a large fall in volumes during Q1 with our automotive Tier 1 customers. However, by the end of Q2, we saw a significant turnaround, given the U.S. growth against its Q2 prior year. Looking further ahead, we see strong levels of organic growth, as expected, particularly in automotive, as automotive production returns in strong level and new wins come online. However, in the short term, during the next 6 months, it is so difficult to actually predict the trading levels. The start of production in automotive, in particular, become more difficult to tie down. Sometimes they say we want it yesterday, other times, they are pushing it out by months. So that one is, as I said, far more difficult. Okay. I'd now like to hand over to Clare.

Thank you, Mark. Thank you. If we look at Slide 12, so look, we've heard all about the top line and the challenges and the opportunities that we're seeing there at the moment. But of course, it's not just about the top line. We do need to understand how that is feeding down into the 5.7% underlying operating profit margin that I spoke about at the beginning. Now Slide 12 is something of a high-level overview. We've put this in for the first time at the year-end. I think it is useful, but I do think that for this meeting, we probably need to go into a little bit more of the detail on a regional level. So if anyone has any questions on that, please ask them at the end. But for now, I'm going to suggest we turn to Pages 14 and go through this on a regional level. And here, as normally, you can see our normal pies goes. I'm going to be honest. There are a lot of very similar stories here, a lot of similar messaging. So I'm going to try and go through this as quickly as possible, but I think it does make sense for us to understand what's going on regionally. If I look at Europe first, you can see here that it's actually the smallest reduction in underlying operating profit, and we're down 110 basis points from 8.5% down to 7.4%. The main reason for this is the reduction in sales, pure and simple. The reduction in sales and the operational gearing flow through has cost us to the tune of about 450 basis points on that European margin. On the good news side, though, we have been able to partially offset that by cost-saving actions, including some use of government schemes in the region to get us back to that 110. If we look to the U.K., well, this is a bit more of a complicated picture. Here, we've seen underlying operating margins reduced by 820 basis points, and we're down to 2.1% from 10.3% in the prior year. Yes, sales has had the hugest impact on this, and Mark mentioned the 25% reduction in sales. This is our region that has fared the most bally in the half year, and that has fed through to about 800 basis points of underlying operating profit margin reduction. We've also got some other stuff in here as well, though. So we've got some product mix shifts. We've seen lower distributor sales. Mark mentioned that they may start to come back and the roll-up to the next Brexit deadline. But for the meantime, in the half year that we've just seen, those higher-margin distribution sales have been lower, and that has had an impact on our gross margins. And we are also seeing higher stockholding levels, and we can touch on this later when we get to the net cash bridge in a couple of pages' time. But those high stock levels have led to temporarily high provisioning levels, which have impacted our margins. So you've got a few things acting against the U.K. particularly. But again, there is some good news. We have made cost savings where we can. We have used government schemes such as the furlough scheme where we can, and we've been able to offset some of the impact of this. If we turn to Asia next. You'll see that's only 150 basis points down, and we're at a margin of 14.4%, down from 15.9%. But I think most of us would still agree, really quite high. Again, sales reduction is the biggest reason for that. They probably lost about 600 basis points on that sales reduction. They did get hit by an FX balance sheet translation loss as well of about GBP 600,000. We talk about this pretty much every year. Our Asian currencies do -- our Asian sites do operate in U.S. dollar, and so they do move up and down as the U.S. dollar gets stronger and weaker. But that GBP 600,000 loss has had a noticeable impact on the underlying operating profit for Asia, about 250 basis points. However, as a result of cost savings, and this does -- I think it's probably fair to be said, this does include some -- the more generous regional schemes that are available over in Asia. We have been able to offset the vast majority of those 2 negative impacts to get us back up to 150 basis points of margin movement. So just turning briefly to the U.S.A., our smallest region. Here, underlying operating profit has fallen by 900 basis points. And we have gone into a loss-making situation. We're at 4.2% underlying operating loss. That sounds like something different, but actually it is just the same story. The only reason it is a loss rather than a profit elsewhere is because, as you know, we've been investing significantly into our U.S. operations over the last 5 years as they've significantly grown. So all that's happened here is they started from a lower underlying operating profit and therefore weren't able to mitigate the reduction so well. There are some cost savings in there offsetting that reduction. It is more limited, though. Mark said, we expect the U.S. -- not so different [ for about ] the next 6 months, but we expect the U.S. to absolutely return to double-digit growth for the foreseeable future. So we have to be very careful with any cost savings that we make within that region so that we don't damage that potential growth for the future. So that would be everything I would say to cover the income statement side. If we want to turn over the page now to Slide 16, and this really just takes us through what's happening on the balance sheet, because it isn't just income statement, it is balance sheet. And the best way, as ever, to try and analyze what's happening on the -- on Trifast balance sheet is to look at our net cash as it currently is. It used to be a net debt bridge, but we are obviously in a net cash bridge now, which is a very pleasant situation to be in. High level, we have seen cash -- net cash increased, GBP 18.6 million from a GBP 15.2 million net debt at the end of March 2020 up to a GBP 3.4 million net cash position at the end of September. And you will notice there, I'm sure that, by far, the biggest impact that we see on that is the successful equity raise that happened in June, and that brought in a net GBP 15.4 million of cash into the business. And yes, absolutely the right thing to do. I'm very pleased with the support that we got. Outside of that, we have made some investments in plant and machinery, but I'm not going to dwell on them. There's nothing there that I would particularly pull out to you. Really, that's just shy of GBP 1 million. It's just standard routine maintenance, guys. And so that's just something that we've spent to ensure that can happen. What I would like to draw your attention to, though, is the net working capital reduction of GBP 2.8 million. [ Any ] net working capital reduction is a good thing to have, particularly in the circumstances like this. I think where I'm particularly impressed and I think we've done a particularly commendable job is on the stock levels. I expect many of you remember me saying when we came out to talk to you only in July that actually we were impressed to be able to maintain the stock levels at the level we did at the end of March because of everything that was going on. It is incredibly difficult to manage stock levels when volatility of demand is going up and down, when you can't necessarily forecast when is my customer going to need that, when is that start of production day. It is very tough. I was impressed at the end of March that we were able to do that. I'm even more impressed that we've managed to keep that stock level stable. It is still higher than historically, I'm not going to deny that. But to keep it stable is a win, and we will continue to work on that as more stability returns to the market. On the positive side, and what's driven the reduction is the reduction in debtors. And that really is just trading the comparatively quarter, quarter 2. So that is exactly what you would expect in a situation like this. But overall, you put all that together, and as I said at the beginning, you get to a very strong cash conversion rate, 138.5%, which is much stronger than we would normally see in the half year and really does mean that we're in a good cash-generating position at this point. I'm not going to go much on to the banking side. It probably is worth mentioning just again that we do have significant facility headroom at the moment, just north of GBP 40 million. And that is giving us the confidence and the ability, the capacity to actually continue to invest in our strategic opportunities and in our ongoing market share growth. So it really is a nice position to be in. If I turn this over to Slide 18, we can have a quick look at dividends. What I would say here is, as a Board, we are committed to a progressive dividend policy. We have been since 2012. Long term, nothing has changed, nothing has changed. But in order to allow us to appropriately manage our financial position, same as many other businesses at this time, and our flexibility, we are not proposing an interim dividend at this moment. Now the Board does plan to review this decision before the year-end. And depending on where the wider macroeconomic environment is, we will reach a sensible and suitable decision at that point. But for now, there is no interim dividend being declared. But I think it is important, there's a quote on there. Look, as a Board, we are very keen that dividends do play part of our TSR, absolutely, and we really do want them to come back into play as soon as it's practical and sensible. And in the medium term, we will continue to see that target range. 3 to 4x is the right range, we continue to believe, for the business going forward. So we turn over to Slide 20, and I'm not going to say very much more actually. This is our earnings per share slide. I'll skip pretty quickly over. It speaks for itself, which is hopefully what you want from the graphic. Inevitably, you can see that reduction in profit has fed through into a reduction in our underlying diluted earnings per share, 6.52p down to 2.31p. The only other thing of note on there is that you can see, we pulled out the small impact of the equity raise, the 0.34p in there as well. But that is as far as I'll go on that slide. And on that note, I'll hand back to Mark who's going to go through the strategy update.

Okay. Thanks again, Clare. Hopefully, the previous slides are giving you a flavor to how we have performed over the last 6 months and the positive actions that we have taken. As Clare mentioned, we never went into this recession fat and happy. But there were a few areas that were a bit flabby that needed tuning up, which we have now done and we are addressing accordingly. I mentioned previously the benefits of the operations back in July, and having them in place has been invaluable. It really has enabled us to act quickly and decisively across the whole group, as you have seen from some of the savings that Clare has mentioned. But it doesn't just stop there. We see the effects of COVID. It's really just a short-term blip for us. The main purpose of the Board is to look ahead, look at the strategic objectives that allow us to put us one step ahead of the competition and take market share [ and one ], as you know, it's a very fragmented marketplace. You can see there a couple of examples, which I'll expand on. If we look at the strategic sales, we have some excellent sales teams around the group. We're now developing a structure within them so that they can work more collaboratively together, being able to share market pricing, for example, and also drive some of the new product initiatives that we are currently working on. We have 2 quite sizable ones on the go at the moment. Both have the ability to deliver multi-million pound sales, and one of which can actually be produced [ 2 of our ] manufacturing sites, which is great. And as you know, an increase gives us double margin within the group. If we look at the other side, the supply chain, we recruited a global supply chain director in June this year to head up this function. And as with sales, again, we've got a great team around us. But again, it's about developing the internal structure to enable the group to benefit from the group's overall spend that we have with our key vendors. We've also set up within that team a sourcing committee to, amongst other things, to review and prioritize our products and where they go, whether it's between external vendors or our own intercompany manufacturing. Obviously, the aim is to be more in-house where that is appropriate to do so. You can also see that we've set up a manufacturing forum, and that's across all our manufacturing sites. The aim of this is to share knowledge, best practice on all the costs and processes, and then target cost and efficiency savings across them all. Although it's early days, just setting it up, we've already seen some positive potential savings from all those sites. And then obviously, there is Atlas, which Clare will expand on shortly. I've already talked about some of the initiatives above. But Atlas will only enhance and facilitate those benefits. We've spoken on numerous occasions about the return on investments and the benefits that Atlas will bring. But to ensure they are achieved, these need to be assigned and will be driven by key individuals on the Operation Board, which is great. Most of the initiatives I've mentioned on that page, obviously, are there to improve our organic growth. But as you can see on Slide 24, a large element of our growth will also come from acquisitions. At the end of Q2, we -- as we mentioned before, we recruited a full-time M&A lead to drive this strategy. We believe that this will bring renewed momentum, and it certainly is at the moment, both on proactive searches as well as reacting to opportunities that could become more likely in this current environment. So yes, I can now hand over to Clare to give you more of an update on that.

Yes. Absolutely. Thank you, Mark. So if we look at Slide 26 to start with. I mean Mark mentioned this right at the very beginning, but I wanted to go through in a little bit more detail, I guess, here, guys. As we said in July, inevitably, COVID has had some impacts on our ability to roll out in the first half of this year. So originally, our pilot site was meant to go out in, I think, March, April time, wasn't it? And we decided that, that was better planned for October, given everything that was going on. But we didn't sit idle. You would have imagined we would have sat idle over those 6 months. And we've done a lot of upfront work, upfront site by site preparations, additional development and training of our teams and the focus on increasing our internal expertise to try and get us as self-sufficient as possible, which is absolutely key as we continue to roll this thing out and implement it around the world. And all of that hard work culminated in the successful pilot in October in Mallow in Southern Ireland with minimal disruption. And so we are very proud. We have patted ourselves on the back a couple of times, and at least Mark, he [ affirmed ] others and the project team as well. Yes, we're not going to claim all the glory. But no, that was very good. And then the global HR system as well, and that successfully rolled out to its first site in October as well, which is Holland, and as Mark said earlier, is now continuing to go up -- go out and around Europe and the U.S. If we turn to Slide 27, I can just give you a little bit more detail on what we've spent doing all of those wonderful things. So in money terms, we've spent just over GBP 1 million in the last 6 months, and we've capitalized around GBP 600,000 of that. And that is entirely in accordance with accounting standards. That's what's driving that. Obviously, we'll keep you up-to-date on progress as we go through this, and we look forward to doing that. But just to give you some context of what we expect to spend for this financial year, at least, we probably, in total, expect to come in with about a GBP 2 million to GBP 3 million spend in the whole of financial year 2021. I think it is worth noting the impact of COVID-19. I mean I mentioned it at the beginning. In fact, it pushed us back by 6 months, but we did some sensible work in that time. It is probably almost inevitable that this will continue to cause practical issues. It is just incredibly difficult to implement and roll out a system globally, to do training, to do [ appropriate hyper care ], to do all of those good things and win all the hearts and minds over if we can't actually get into countries easily to do that. That is just an inevitable practical issue, especially at the minute where we've got a second wave of infections pretty much taking over Europe and the U.S. We will continue to monitor this situation closely, as you'd expect us to, and we will react accordingly. But it probably is worth noting, it's unlikely we're going to be able to 100% mitigate what is going on at the moment. Now that doesn't mean anything in terms of benefit cases, all of those are still there. We still think that will happen. What it might mean is that the time line has to move to the right. But we will keep you up-to-date on that, and you know we will work as hard as possible to keep that impact as minimal as possible. And I think the last thing I would say on this is just in summary. Look, this Atlas is a very exciting project for us. What are we, third year, starting our third year, it continues to be absolutely a very exciting project. There's a lot of hard work being done. We've got a system built. That's one of the big key risks that can be ticked off. We're ready to go. But we're not complacent, we never are. But we're not complacent with this. There is still a lot of work to come, but we will carry on doing that. And I'm not going to say if we managed to do this, I'm going to say when we managed to get this system rolled out. And all the processes and policies rolled out around the world, we really will have built the Trifast of tomorrow, absolutely. And this project really will [ underpin ] and form the foundation, our organic and our acquisitive growth journey. So it just is that important. So on that positive note, I'll hand you back to Mark who's going to go through the summary and outlook.

Thank you, Clare. So if we turn to Page 29, I'd like to [ do a ] quick summary before the Q&A session. Along with most companies and industries, it has been a challenging period, as everyone knows. But I hope you can see that we have acted quickly and effectively to face those challenges head on. Volumes, as you've heard, have started to recover again, and it is great to see that some of those opportunities that have been won are not just in the automotive, but also within environmental, medical and 5G-related areas. As you've heard and read, we have a strong balance sheet providing significant facility headroom to give us the confidence to invest both organically and acquisitively when the opportunities arise. And finally, we now know that Atlas works, and all the blood, sweat and tears that have been shed getting us to this position have paid off. There is still a hell of a lot of work still to do. But with every rollout, we gain more knowledge, more experience and, ultimately, more momentum. So with that, thank you. And over to read the questions now. The plan is to go to the conference callers first, if that's okay.

[Operator Instructions] We will take our first question from Henry Carver from Peel Hunt.

Just -- it would be helpful for me. I just was thinking about the M&A. Obviously, you've got a new man in. He's not been there for very long. But can you give any sort of comments, thoughts around the pipeline, how it sort of looked over the last few months and perhaps what sort of profile there is as it stands now and if it's changed materially? We've seen quite a lot of activity across the sector in that regard. Just wondering if you have any thoughts there. And then secondly, just around the sort of general supply chain consolidation amongst the OEMs. Did -- have you seen that accelerate during the pandemic? Would you say that you've seen market share gains? Or any sort of thoughts around that would be great as well.

Okay. Thanks, Henry. Looking at the M&A element, first and foremost, I think the thing that Paul has brought is very much around getting the system set up on the proactive search, working with M&A advisers, external M&A advisers to get our status out there and our intent, particularly more so in the states, which is obviously where we're keen to develop, because from the regional imbalance that we've got there. Organically, as you've heard, it is growing -- it will grow double-digit growth, but we'd like to do more of a step change in that region. So that has certainly been very useful, and we're seeing progress in that area. Regarding the reactive side of things, to be honest, we're always getting opportunities coming across the desk. Some of those, I'll be honest, are basket cases, which you look at and you can very easily say no, it's too much energy, too much hassle to actually turn something around. And there's not enough niche products or niche -- nothing really special about it. It could just be a more of a standardized company. That said, there are several that we are looking at, may not go anywhere, I'll be perfectly honest. But some, it's a case opinion [ about the union ] and seeing what's in there, basically. So it's -- I would say it's the same sort of thing that we're looking at. It's just we've got more momentum now, I think is the way to look at it. Regarding with the supply chain with the OEMs, I don't think we have really seen any of the major -- our customer OEMs consolidate. I think a lot was done previously. There was a few on the automotive side of things, but haven't really seen any major OEM consolidations this half of the year, no, not really. Regarding market share, we have seen certainly a lot more opportunities, shall we say, on quoting with -- that we know were once with incumbent competitors, for example. Now obviously, that -- that is obviously, we've got to work through those. It may again come to nothing, but it's certainly nice to be able to have the opportunities to be able to quote on things that perhaps we haven't done before. And certainly, we are seeing opportunities more so in the medical sector as well that I've mentioned, again, which we may not have the opportunities to quote on before.

Yes. No, I was thinking more around not so much the OEMs themselves consolidating but them reducing their supplier list and making their supply chain...

That's always [ upcoming ], yes. No, absolutely, they're always trying to reduce their supplier base down. And thankfully, [ positive ] word here, we're part of that platform. I think the key thing for us is about being able to offer the engineering support, particularly on the lines, as I mentioned right at the very beginning, with the technological changes which are going on, particularly when you're looking at electric vehicles and the technological changes in battery and how that actually is being implemented within the cars. The parts that we need to produce now need to be -- it's built in like extremely clean, and the conductivity needs to be -- it [ meant ] basically so that you've got the electricity flowing around the car. And that's been out to attach cables to the battery case lens, to the busbars and batteries and also leads to, for example, more lightweighting on our products, such as screws going into plastics or plastic fasteners, for example. So it's all that good stuff. So really the key of where we are winning is more on the engineering and the technical side of things to get in at the early stages because a lot of these -- and I'll be honest, were winning new -- we've got new customers as well that we're working on who are developing the new technology in the electric vehicle. And so they will work on the big applications, but they will outsource that to ourselves to work on the -- how to connect it all together effectively.

[Operator Instructions] We'll take our next question from Christian Hinderaker from Liberum.

Yes. I hope you can hear me. Two questions, if I may. Firstly, perhaps you can elaborate in terms of a little bit the dynamics within the medical and health care markets, and I'm thinking perhaps the extent to which this might differ in terms of designing, typical lead times, order size and whether you're able to comment on the sort of margin profile versus other businesses. And then secondly, perhaps I can just ask in terms of returns, which obviously perhaps were weighed upon by the cash raise earlier in the year and the extent to which these might rebound as you implement your M&A strategy going forward and sort of how we should think about those perhaps in terms of sort of medium-term guidance on ROCE.

Okay. Just looking at the medical sector. It's quite interesting, actually, here. I think one of our companies that is doing particularly well in the medical sector is PTS, for example. As the -- as you saw, we like ventilators that needed producing, devices that needed creating, hospital beds that needed being erected, such as in the [ intensive-care ] hospital. The fasteners that they need, obviously, need to be high-quality and not rust -- not to rust. And that certainly has delivered the strength of PTS, who are a specialized stainless steel distributor. And we have seen great growth in that area to support that sector. But it's kind of not just in there. What we're also seeing is growth in our customers which aren't actually in the medical sector per se. I talked earlier about applications on cleansing through a car. For example, when the door is opened, the ultraviolet light will cleanse the inside of the car. And that's an automotive customer that we are working with on -- to create -- to fasten the application within the car effectively. And likewise, in offices as well, that, again, is a company in electronics sector that is working on the lighting systems in there. So there is, on top of existing customers in different areas moving into the medical sector, which, again, is supporting -- is helping us grow in that area. There are new customers as well that have developed, particularly during the time when we were in lockdowns and restrictions during April, May time where they needed support, and sometimes their incumbent supplier couldn't do that because they were in lockdowns. And so they came to us, and it created more opportunities for us. Obviously, the medical sector is small when you compare it to the automotive, but we are certainly seeing an increase in that and a significant increase in the first half of the year. Does that help Christian for that bit? Yes?

Yes, it does. Thank you.

The returns, Christian, might be better, if I try and answer that. I mean I think this is something we did talk about when we went out and did the equity raise in June. We do tend to run with an operational gearing flow-through of about 33%. And so obviously, as revenues decreased, as you saw when I went through the underlying operating profit margins around the group, we do then see that knock-on effect and the reductions that are coming through underlying operating profit level. There is no reason, there's nothing that we're seeing at the minute or in the way that we're forecasting going forward that, that knocks that slightly affect 33% metric out the water at all. Obviously, it is more true in some sites than it is in others. But as a group, that is a sensible way of looking at us. As we continue to grow and recover again, on the other side of this thing, one would expect us to be able to have that drop-through with sales as they come on. I think what I would say is just with some hesitancy, obviously, there's an awful lot of cost savings we're able to do this year that are not recurring. I can't imagine -- I don't think anything -- any of us can imagine that the government schemes will continue or will continue the generosity that they have done over the last half year. And so obviously, we'll need to -- that needs taking into consideration as you're looking into our overhead and our cost of sales as we move forward. We also do have, in the short term, Project Atlas rolling out ahead of a benefits case. Obviously, we need to roll the thing out in order to secure the benefits. And as we roll it out, business as usual. Atlas costs will start to come through, things like license costs, maintenance costs, additional IT support, amortization, all those good things that come on the back of a global ERP system. Now they're all part of the benefits case, and they're absolutely taken into account with the return on investment we calculated. But there is a period of time, particularly in financial year 2022, where we expect the cost base to outweigh the benefits we're able to generate. In '23, that starts to reverse. And then as we go forward, we start to see that reverse more substantially. And I think it probably is worth just keeping in mind that, that can largely come through the overhead level, whereas the benefits case are predominantly into the cost of sales and the gross margin because of the nature of what they are to do with sourcing and to do with intercompany manufacturing and the like. So I hope that helps give a flavor, Christian.

We will take the next question from Annabel Hewson from Stifel.

I just -- I've got 2. I want to just go back to the dividend again, sorry to ask, but just really in terms of timing. You want to review it for the year-end, but what do we need to see to be able to reinsure it? And also, are we looking at maybe we'll get sort of an interim for the whole year? Or would you look to sort of back date what we've kind of missed in this half and the half before? And secondly, I mean great job on the working capital management. Is there anything that we should be focusing on or anything that you can do to keep things a little bit easier, albeit I appreciate how difficult end markets are right now?

Start with working capital, yes. Yes. No, that's fine, Annabel. Thank you for the question. Yes, I mean you're absolutely right, it is very difficult. I think where we are fortunate, and I think it is worth saying is actually the benign situation that we've seen on the debtor side. I think when everyone into this situation, particularly in quarter 1, there was an awful lot of fear about what would happen in terms of recoverability of debtors, whether we were likely to see some quite significant names, particularly on the automotive space. These guys don't run with an awful lot of bandwidth and obviously shut down production facilities, what was going to happen there. And I think there was also a fear that as people then came out, as customers came out of that and started to put volume back in, would they be able to have the cash flow to do it? Now that has remained benign, and I'm touching plastic, wood. Again, here, that has remained benign, and I think we're very grateful for that. We have kept absolutely on top of it, and we've had to have a couple of conversations here and there along the way to manage things more proactively. But we have not seen any significant cost coming out of that. So that's one thing on working capital I would just say I'm just very pleased with and I'm very relieved with. On the stock side, absolutely, Annabel, it is difficult. What I would like to think that we can do as a business if the world becomes more stable, and this is a big if for all of this, is what actually is going to happen over the next 6 months. If we do get to some kind of more stable ongoing recovery, we can start to get a little bit more credibility into start of production dates actually happening, not constantly shifting about backwards and forwards, particularly on the automotive side. Then I would like to think that the business can go back to more business as usual, and we'll be able to manage its stocks accordingly. At the moment, I think our main issue is that where you do have a start of production date shift out, suddenly, it's gone to the right. You've had to get that stock in, and there really is nothing you can do if you want to be a reliable supplier other than sit on it. So I would like to think, as more stability comes back in and we can get better information, we will be able to start planning better, and I would like to see that inventory come down. I'm not going to promise how far or how quickly, but I would like to think that it can come down over the second half of the year. What could happen is if we do then see a big uptick in volumes at this -- at the end of the year, we may though need to invest in order to support that. And that's just the one thing we have in the back of our minds. There's so many interchangeable parts here. All I would say, Annabel, is we will be working as hard as we possibly can to keep this at the right level or at the optimum level and to ensure that we don't end up letting any customers down along the way.

Thanks, Clare. Moving on to the dividend question, Annabel. I think it's absolutely fair to say, and Clare did mention, dividends is a key part of the total shareholder return, and it's something that the Board is very, very conscious of. Obviously, we are deferring that decision before obviously the end of the year. And that's what we will do. We are pleased in the way September, October and certainly November are progressing. And we would like to believe and hope that January, February and March will also continue to be pleasing. However, we need to actually see those to be able to give a statement as such before the year-end. So again, it's not yet probably the answer you want to hear, but we need to defer that with the Board's decision then.

There are no further questions over the phone, so I will hand over to Scott for any questions from the webcast.

Thank you for that. Mark, Clare, thank you for the presentation today. We've got a few questions from the webcast. The first is from David O'Brien for ALM Consulting. The first question from him is what are the exit rates of sales versus a year ago at the end of September? The second question is you mentioned stock obsolescence. What is the scale of this? And do you anticipate the full year levels deteriorating further in the event of additional lockdowns globally?

I probably need to look at a number. You can do [ accelerate ] some sales, but no. [ I'm going ], guys, I just need to find the piece of [ that ].