Trifast plc (TRI) Earnings Call Transcript & Summary

Good morning, everybody, and a warm welcome. Thank you very much for taking your time to join us this morning. Welcome also to those of us that are joining online. My name is Iain Percival. I'm the Chief Executive of Trifast plc.

And I'm Kate Ferguson and I'm the CFO.

And we're delighted to be able to share with you the results from our FY '26. So let me talk you through the agenda. I'm going to spend a few minutes talking about the highlights of our results for the year, and I'll also give a flavor of the strategic progress that we're making. I'll then hand over to Kate, who will take us through the financials in more detail. And then I'll come back and explain how we're transforming Trifast to be that mission-critical embedded partner for our customers and how importantly we're investing for growth as we look to deliver on the strategy. And of course, finally, I'll come back with just a few words on the outlook for FY '27. And then we'll open it up for questions. We'll start with questions from the room, and then we'll go online and pick up any that have come in online. So now those that have followed Trifast will know that we set out a strategy that was built on 3 phases: recover, rebuild and resilience. We delivered our recover phase in FY '25. And so FY '26 represents the first year of that second phase of rebuild. And I'm delighted with the progress that we've been making. And on this slide, I'm just showing you some of the strategic shifts and pivots that we're deliberately making as we go through the rebuild phase and execute that strategy. The first message is how we are doubling down on the value propositions of being engineering solution and supply chain simplification led with our customers. And how importantly, that focus of driving value-based relationships with our customers means that today, around 60% of the revenue we have in Trifast is reliant on one or both of those 2 core value propositions. Secondly, how we are moving our portfolio into higher growth markets and sectors, higher growth sectors in the shape of Smart Infrastructure and in the shape of medical equipment and higher growth markets like North America, India and parts of Asia. And specifically on smart infrastructure, I'm delighted to see that the execution of that strategy is delivering that deliberate portfolio shift and now Smart Infrastructure represents 17% of our total revenue, almost double from where we started back in 2024. And finally, on the right-hand side of this chart, you can see how the commercial execution of our strategy continues to deliver with momentum and pace, another 110 basis points of EBIT margin improvement, driven specifically from a focus on getting good value-based pricing with our customers and managing the costs and competitive costs with our suppliers is in the supply chain. And I'm going to come back later and talk about how we're investing behind that commercial engine, how we're investing for growth in those core markets and in those core geographies. But let me then spend a minute just on some of the highlights before -- I don't want to steal all of your thunder, Kate. But look, some real strong takeaways from the delivery of our FY '26. I think seeing gross margins back at 30% and certainly, a significant improvement, you can see there, 170 basis points in the year. Underlying EBIT improved again to GBP 16.3 million, just slightly ahead of market consensus. And again, that EBIT margin showing progression to 7.8%, 110 basis points. So significant progress in all key underlying metrics that we're committed to driving in this business as a result of the efforts and the activities that the team has been making. And it's great to see that looking forward, and again, I'll come back to that later, that we are sitting with the strongest quality and value of pipeline that we've seen certainly, Kate and I started in this business. Now I wanted to share this chart because it shows how we've been delivering since we set out the progress. How we're delivering on the underlying earnings, the underlying EBIT margin and generating cash through execution, through that strategic repositioning of our business into those higher-growth markets, higher value-based customers, higher-growth market segments. How that is helping us deliver that underlying EBIT margin and how the commercial execution, the engine that we've built, the engine room of our business that we've built, both in driving profitable top line growth and driving margin based on value-based pricing using tools like true profit, how that is delivering on the commitment that we made and why we are confident in delivering that double-digit EBIT margin in the medium term. So I think I can -- I will say with confidence, and I hope you can see that we have delivered a successful first year of our Rebuild phase through -- with more margin progression and definitely through delivering on that strategic execution. I'm going to come back, as I said later and talk more about the -- how we're investing for growth in our business and how we expect to see that deliver over FY '27 and beyond. But I wanted to call out one message on this chart. Obviously, as an industry, we've seen that, unfortunately, we faced into a war in the Middle East in Iran. From Trifast point of view, it has not changed our focus on the long-term growth prospects for the Middle East and our customers in -- particularly in the Kingdom of Saudi Arabia. Our project that we talked about at the last time that we met is very much on track. We expect to be operational in the Kingdom at the end of this year, servicing our customers in that region with the great quality service and supply chain solutions that we deliver elsewhere around the TR World. So no impact. We continue -- we see it as a profitable long-term scalable market. And before I hand you over to Kate, I just wanted to take a minute just to recognize the effort that has been made by our teams globally to deliver on that strategy, on the 4 key strategic initiatives that we set out: margin management, focused growth, operational efficiency and organization effectiveness. You can see in this chart that we've delivered significantly in each one of those key levers. And yet we phased into significantly more challenged from a market in terms of economic backdrop, geopolitical challenge, risk, inflation pressures. The efforts from our team has enabled us to overcome that and deliver in line with the progression on EBIT margin that we committed. And I want to thank every single member of the Trifast team globally for what they delivered in FY '26. With that, let me hand you over to Kate.

Thank you, Iain, and good morning, everyone. I'm pleased to take you through the FY '26 financial results. The headline for this year is simple: revenue was lower but the quality of the margins and earnings improved with the balance sheet becoming stronger. Revenue was $207 million, 7.3% down on last year, and that reflects a tougher market, especially in automotive and EV demand. They also reflect the choices we made. We took deliberate action to move away from some lower margin business where the returns were just not good enough. And that focus has come through clearly in the numbers. Our gross margin improved 170 basis points to 30%. Our underlying EBIT improved to GBP 16.3 million, and our underlying EBIT margin improved to 7.8%. Cash performance was also strong. Net debt reduced to $16 million. Cash conversion remained high and ROCE improved to 8.5%. Leverage reduced to 0.7x, giving us more flexibility and resilience. And reflecting on that stronger cash generation and confidence in the outlook, we have increased the full year dividend to 1.9p per share. So in short, FY '26 was a year of lower revenue but stronger margins, stronger cash generation and a better financial platform for growth. And now I'll explain how we delivered that improvement. And the important point is that margin progression reflects deliberate actions that we have taken to reshape the business. There are 3 main drivers: first, the improvement in portfolio and mix. Second, our margin management has become much more disciplined. We have strengthened pricing, delivered procurement savings and we've repriced or exited lower-margin business. Third, our transformation actions are reducing cost and simplifying how we operate. Payroll costs reduced by 6%, head count by 10% and distribution cost reductions have outpaced the decline in revenue, and we have built capability through our shared service center in Hungary. We're becoming leaner, more focused and more commercially disciplined. Reported profit before tax is impacted by separately disclosed items, the main one being Project Ignite, and I'll come on to that in a little bit more detail later in this presentation. So the message is clear. The underlying performance of the business is improving. The statutory result reflects the cost of acceleration transformation, and that is what we need for the next stage of our growth. Turning to the cash and the balance sheet. The story is that we continue to invest in the business while reducing net debt. Operating cash flow before working capital was $15.9 million, and that includes cash investment in Project Ignite. If we look through that, operating cash flow was $21.4 million, which is ahead of last year. Working capital as a percentage of revenue increased, and that is mainly because the inventory and receivables did not reduce as quickly as the revenue declined. And last year also benefited from some higher payables. Our net debt leverage and banking facility headroom continue to give us flexibility to keep investing in transformation, support organic growth and consider selective acquisitions where they accelerate the strategy. So the takeaway is simple. We are investing in the future, but we are doing it with balance sheet discipline. Turning to revenue and EBIT. This slide explains the 2 sides of our performance. On revenue, the market backdrop remained difficult with geopolitical uncertainty, creating even further caution towards the end of the year. We did, however, benefit from some focused growth that you can see there. And the sale of excess and obsolete inventory back to customers, which benefited our profit, but also helped us clean up our balance sheet. Also, tariff surcharges, which passed through revenue but were margin neutral. Turning to EBIT. The story is much more positive. Despite the lower margins -- the lower revenue, margins improved because of the way that we are running the business. We are seeing benefits from better pricing, better sourcing, stronger inventory discipline and lower operating costs. Foreign exchange was a headwind earlier in the year, particularly on U.S. denominated assets in Asia. However, that did not worsen in the second half. So the message here is not that the markets have become easier. They have not. The message is that we're becoming more disciplined, more data-led and more focused on profitable growth. Now turning to regional performance. The picture is mixed on revenue, but much clearer on margin quality. The key message is that where we have taken decisive action, EBIT is recovering. The U.K. and Ireland revenue was down around 11%, but with EBIT margin improvement of 290 basis points to 7%. Europe showed a similar pattern with revenue down 7.5% but with 230 basis point improvement in EBIT margin to 11%. Asia was the main point of pressure. Revenue was down around 10% and margins reduced to 11%. The issue here is not only volume. It is also the ability to flex the cost base quickly enough, especially with the competitive pressure from China auto. We are actively reviewing footprint and the cost structure in Asia, while continuing to build on those resilient segments such as medical equipment. So the regional story is clear. U.K. and Ireland and Europe are recovering margin North America is delivering targeted growth, and Asia is where we are focused on structural improvement. Turning to end markets. This slide shows one of the most important strategic shifts in the business. Our revenue mix is improving. Automotive is still our largest end market, but it remains under pressure, and we are becoming less reliant on it. Smart Infrastructure here is the standout. It now represents 17% of group revenue, supported by demand in data centers and infrastructure applications. And this is exactly where we want to grow. Medical equipment also grew strongly, although from a smaller base. It is an attractive priority market because it diversifies our portfolio and plays to our engineering and quality strengths. Distributors returned to growth and that reflected some recovery in one of our U.K. transactional distributor businesses following last year's warehouse move as well as support from more stable stainless steel pricing. In other markets, the decline reflects both external pressure and our own choices. We have reduced our exposure to lower-margin business, including white goods. So the point is not just that the mix has changed, it is that the mix has become more balanced. It's less cyclical and more focused on markets that create and value. This slide here bridges the -- bridges the movement in the profit before tax. And I only really want to draw out one point on this slide, and that is the impact of Project Ignite on our reported profit before tax, which I touched on right at the beginning. Our spend on Project Ignite was around $6 million, as you can see there. And this has been expensed, not capitalized as we would have done in the past. And this is because of the accounting treatment for cloud-based and SaaS implementation costs. And that reflects our reported profit, but it does not change the strategic value of the program. Ignite is a critical investment in better data, better controls and stronger pricing and improved productivity. So the key message is that underlying profitability is improving, but reported profit before tax reflects the cost of accelerating transformation. And our actions reduced the reported profit in the short term, but they support a cleaner and a more efficient platform for future margin progression. The cash bridge here is important because it shows how we funded the transformation while still reducing net debt. We said last year that we would use improvements in working capital to fund Project Ignite and we have done that. Working capital generated a strong cash inflow, including a GBP 6.4 million reduction in inventory and a GBP 1.8 million from receivables. This was offset by higher FY '25 closing payables. Operating cash flow on a like-for-like basis, if you exclude Ignite has improved, too. So even after this transformation spend and also the FX headwinds that you can see on the bridge, we reduced our net debt to GBP 16 million and maintained our leverage below GBP 1 million. So the message is clear. We are investing in transformation, funding it through internally generated cash and maintaining that balance sheet discipline. And stepping back, the final, final finance slide. This brings the story together. The business is becoming more disciplined, more cash generative and better positioned for sustainable growth. And that gives us confidence that our progress towards our 10% plus margin target is not dependent on cyclical recovery, but driven by how we run the business. We have used self-help levers to manage a difficult market. But the bigger point is that we have made structural improvements. We have improved the cost base, strengthen commercial discipline, and we have simplified parts of the operating model. And those actions are already coming through in the stronger margins. At the same time, we have strengthened the balance sheet. We are generating cash, managing working capital carefully and keeping leverage low. We still have transformation work to complete especially around systems, process efficiency and scaling the platform. But that work will further support our margin journey. The stronger cash position also gives us choices. It supports that progressive dividend, continued improvement in organic growth and the ability to consider selective bolt-on acquisitions where they strengthen the business. So the closing message is simple. Trifast is becoming leaner, more focused and more resilient with a stronger platform for profitable growth and better returns over time. Thank you. I'll pass back to you.

Thanks, Kate. So Trifast has a long history of servicing the world's leading engineered products and assemblers. We're very proud of that heritage that we have. And we do -- we service those customers and have a reputation in the market for great quality, great service and great support, great customer focus. What we've been doing is building on that foundation and moving higher up the value chain by using our engineering solutions-led capability and increasingly, focusing on how we drive and work with our customers on removing the complexity out of the fastener and C-class component supply chain. Why is that important? Well, I think this graphic is quite nice to illustrate what's going on in the world of fastest and C-class component supply chain. Actually, when you look at the costs involved, only around 15% of the total cost of ownership for a customer is related to the component cost itself. The vast majority of the cost is actually associated with managing the complexity of the supply chain. Often fasteners and C-class components can represent 40%, 50%, 60% of the SKU count in our engineered assembly but of course, only represent a few percent of the total value. So our customers want to use their engineering, their supply chain, their procurement time on managing the higher value-added parts within their assembly. And that's why they turn to trusted partners like Trifast to be that mission-critical embedded supply chain solutions partner. So now that we've explained a little bit about the supply chain solutions, let's turn our attention to how we've been investing in this business for growth. I've got a few examples that I wanted to talk through. And the first one plays very much to that core value proposition of being that integrated supply chain solutions partner. We've been investing in both technology and in capability as we seek to help our customers use different solutions, and we work really closely with our customers to define what their specific needs are and how we can best service those needs with the right supply chain solution, again, moving further up the value chain, creating an embedded relationship, a trusted relationship where we can deliver value for our customers. We're one of only very few global partners that our customers can turn to. And when it comes to having engineering and manufacturing capability, there are even fewer. So this is a critical differentiator in our world. The next area that we've been investing for growth that I wanted to stress is this pivot that we're actively making away from being an auto components type supplier into these solutions partner with a much broader portfolio and in this case, in Smart Infrastructure. I used this slide at the last meeting, but I thought it's important to remind us because we read it every day, don't we? The AI and data center growth is booming. And that's what we're playing into. It's not only about data centers, it's about the wider infrastructure investment that our customers are making into power, water, lighting, data connectivity, HVAC solutions. We know only that too well, don't we hear in the U.K., how we wish we -- some of us had HVAC at home and we don't. So this is a significant growth sector for us, driven by some pretty strong fundamental underlying drivers. And as I mentioned earlier, it's great to see that our business has been able to grow almost twice since we set out this strategy. And this part represents 17% now of our total portfolio. And we expect to drive this portfolio share further as we look out to the mid- to long term with an ambition of reaching 30% of our total portfolio. And I wanted to share this quote because I think it plays very much to that supply chain and engineering solution value that we bring. This is a quote from a Chief Engineer of one of our North American Smart Infrastructure customers who had participated along with all of his engineering, procurement and supply chain team in a tech day that we ran at their facility with our engineering and supply chain teams. And what he said is, look, and this was to his team: for anything fastener or C-part related, you need to use these guys in TR, they're the specialists. We haven't got time to be focused on that part of our bill of materials. We need to be focused on supporting our growth. And just like many customers that we talk to, that is exactly their focus. They've got significant order backlogs and order books that they need to focus on how to convert and deliver. And we are their trusted partner to be able to support them deliver that focus and take that complexity out of their billing materials out of their supply chain. So a very exciting, good example of how we're driving and delivering value for customers in Smart Infrastructure. The next example is about how we're investing in growth markets. And in this case, I choose India is a great example. I was there a few months ago. And we have been investing heavily into India. We started with implementing, as Kate was talking about Project Ignite, our Microsoft D365 platform, giving the team in India for the first time, a scalable, capable data-driven platform with standardized processes, access to the group support structure that allows them as a team to have confidence to scale their business. We invested in the sales team in India to be able to go out and then start to sell our capability in engineering and supply chain solutions and what we're seeing is really encouraging. In the first quarter of this year alone, 90% growth, yes, it's from a low base, but it's a good signal when we look at that growth already and the pipeline of great opportunities in Smart Infrastructure, in medical equipment with both multinational MNCs that are embedded in India and growing, but also with Indian MNCs. And that market, as we all, I think, know, is the world's fastest-growing industrial market. So very exciting opportunity. We're making further investment into this market. We'll be moving to a larger distribution center to be able to support our customers with growth. That center will also house innovation and customer experience center because we want to engage with our customers and bring the value propositions of Trifast into that market. And beyond our own organic growth, we see opportunity for bolt-on acquisitions to give us geographic or capability expansion within India. As I said, it's a huge market, huge opportunity. We're only just getting going, but we can see the excitement and the opportunity for us. And then both Kate and I have talked about Project Ignite. This is our investment in technology, in digital, in us becoming a more digitally enabled business. And it's already, as I just shared with the example in India, we're seeing the benefits from Project Ignite. And historically, of course, we have invested in Microsoft D365. And I wanted to remind us of why this technology platform is helping us deliver the EBIT margin, the earnings growth, the cash generation that we're delivering year after year after year. It helped us consolidate our U.K. operations and deliver operational savings as a result. It's helped us create that commercial engine with data that we can use tools like true profit to understand the total cost to serve to pinpoint specific underperforming contracts or underperforming components and address them with a laser focus with customers to drive margin management. And it's allowed us to drive inventory improvement working capital improvement that we've seen every year, year after year reducing the amount of inventory that we hold, generating cash that, as Kate said, we're using to reinvest into the business. So part of our digital investment strategy will go beyond D365, lots of opportunity as we seek to become a digitally enabled, a digitally connected business across the supply chain. So let me then move to the outlook. And I think to start with, just to reiterate that FY '27, as we enter this year, is carrying the momentum that we've been building over the last 2 years. I showed you earlier the benefits that we're getting in all 4 strategic levers. And we're confident that the strategy that we've put in place and that we've been executing is going to continue to deliver further progress in FY '27. We see further opportunity for earnings growth, margin improvement, cash generation but importantly, building on the pipeline of profitable growth that we're now seeing in higher and more scalable markets, both geographic and end market sectors like Smart Infrastructure, medical equipment and return to profitable top line growth. So we're very excited about what FY '27 can bring. I can say that our start of the year is in line with the Board's expectations. And I wanted -- before we move to Q&A, just wanted to leave you with 3 key messages. Firstly, we've delivered a successful FY '26, generating further earnings, margins and cash generation. Secondly, the strategic pivots and the strategic execution that we're making is driving us into higher growth market, higher growth sectors, and we're investing into that as part of our business strategy. And third, and perhaps most important, we're on track and confident to hit the double-digit margin commitment that we made for the medium term.

[Operator Instructions] Our first question for today is you've reiterated your ambition to achieve EBIT margins above 10%. What do you see as the biggest milestones that need to be achieved before that target becomes a reality?

Thanks very much for the question. And hello there, everybody, thanks very much for taking the time to join the webcast. And before I answer the question, probably just to point out for those eagle-eyed amongst that unfortunately Kate's [indiscernible] was one slide out of sync with the slides. We'll fix that on the version that's on the website, but apologies for that. So to the question, what are the milestones that we expect have to be achieved to deliver the double-digit margin. I think a couple of key points I'd call out. First of all, in our planning, we're not forecasting and not expecting for the market the industrial markets to return to any strong sort of tailwind of growth. So industrial PMIs have been below 50% in most markets for the period that we've been executing the strategy. And we're very much of a forecasting view that says we don't want to be reliant on that changing. So importantly, the delivery of double-digit margins needs to be, and we believe, is within our control, in our hands. We have further scope and further runway. And as I talked in the presentation, we have momentum across all 4 of our strategic initiatives: margin management, operational efficiency, organization effectiveness. When it comes to focused growth, I think the key change and probably there's -- we may dig into that later as well. I think the key change is to be demonstrating and delivering profitable top line and mix accretive growth to really generate that additional fourth significant improvement in the margin. So I think that's probably, to my mind, our mind, at least what we need to drive and demonstrate and deliver in FY '27 and beyond. But I think the message is, look, we've got a very strong pipeline, high quality, the right kind of mix of portfolio, and it's very much now in terms of our ability to execute and go deliver that.

Next, we have, given today's valuation, how do you think about the relative attractiveness of investing in the business versus returning to more capital -- sorry, versus returning more capital to shareholders? And what do you think the market is currently overlooking about Trifast?

Sure. I will...

Do you want to take the first part of that?

I'll take that one. So first of all, I mean, I think that started with given today's valuation, what do you think about the attractiveness about the investment in the business. I think, first of all, I do think that we're an undervalued stock. And for that reason, I'm going to say that we're a growth stock, primarily. We have got a strategy which is focused on achieving double-digit margins, and we're executing on that. So the potential for the improvement in shareholder value is quite immense. Having said that, we also did pay a progressive dividend this year. So we increased the full year dividend from 1.9p -- to 1.9p from 1.8p last year. So that just shows that whilst we see ourselves as a growth stock, we also see the benefit in rewarding our shareholders and our investors, especially when we've got confidence in the outlook and confidence in our cash generation.

I think what might we think the market is overlooking about Trifast. Look, I think we're focused on executing the strategy and delivering on what we've committed. And I think -- we've made really -- we've demonstrated really strong progress on both the P&L and in terms of the balance sheet. So I think that will continue, and that's the momentum. I would suggest our view on perhaps what's holding the market view back a little bit is the fact that we haven't demonstrated the profitable top line growth. We are growing. We showed that in the presentation in core markets, core sectors. But overall, as a business, I think the market wants to see the business delivering a year-on-year revenue growth, profitable revenue growth. And so that's why I said that's the -- to us, that's the key build that we need to demonstrate in FY '27 and beyond.

Next, we have revenues down nearly 7%, but profits up nicely. Is this just cost cutting? Or are you actually winning better quality business?

I can answer that. So it's a factor of 3 different things. First of all, it's the improvement in portfolio and mix. We are investing more into our commercial teams to deliver on smart infrastructure, medical equipment. So as sectors, they have higher margins. So if we get a better mix, which we are, then that will improve the margins, including the gross margin and the EBIT margin. Secondly, we have got the margin management, which is the improvements we're making in pricing, in sourcing. And then we've also got some operational improvements that we're seeing as well. And that's coming through because we've got much better data from the D365 system that we have. And then the third one is the transformational changes that we've made. We have made transformation changes in the business. It's not just about cost cutting. It is about making sure that we're set up more efficiently. An example of that is the shared service center in Hungary, where we're now collecting on debt a lot faster and being a lot more effective at collecting aged debt. It has also helped us, of course, in terms of self-help and being able to reduce slightly our aged debt provision on the balance sheet. But it's not all about cost cutting. It's doing what we can to become more efficient. Another example is we can see our distribution costs coming down faster than the decline in revenue. And again, that is attributable to the efficiencies that we're achieving, working as a more disciplined organization with a leaner structure. Anything you'd like to add to that?