TT Electronics plc (TTG) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thank you for joining me for TT Electronics 2022 Final Results Presentation. It's great to be back face-to-face, and welcome to those of you joining on the webcast. As usual, with me today is our CFO, Mark Hoad; and Kate Moy, our Head of Investor Relations. Industrial, you don't want to be the Head of Industrial. We'll run you through the presentation and then we will open up for questions. I'm delighted with our performance in 2022 and that we have fantastic momentum. It's been an excellent year despite many exceptional challenges, the team have been brilliant as always. We've done a really good job in difficult conditions, working closely with our customers to satisfy demand and deliver top-quality products and solutions. So a big thank you from me and all credit to them. There are lots of high points in these results, all very satisfying and reinforce the steps taken to reshape the business, and we are now reaping the rewards. We focused on structural growth markets targeting customers that are growing in those markets, and there's been considerable momentum across the business in both revenue and order intake. The strength in order intake continued throughout the year with book and bill finishing at 118%. Revenue grew by 20% organically and even if you exclude the exceptional material pass-through costs, the underlying organic position was still up a very strong 14%. This resulted in overall adjusted operating profit up 19% at constant currency. While we had a more challenging H1 in Power and Connectivity, we were pleased that the improvement outlined is on track with profit and margin significantly better in H2. The performance in both GMS and our Sensors business there was outstanding. And we've clearly had a period where we have invested in inventory to support the significant growth. Now leverage has come down. It's back into our target range, and there's more to come in 2023. We were really pleased to have completely derisked the U.K. pension scheme in November with a buy-in after many years of work by Mark, his team and the trustees. Significantly, this increases our cash flow by GBP 6 million annually last year and every year from now on. The revenue visibility and business performance from business development success in 2022, all underpin our confidence in further progress this year in both growth and margin. On this slide, I'm going to take you through the reasons that underpin our confidence. First, and importantly, we now see a higher rate of revenue growth across our markets. Our revenue growth is driven by megatrends. And we previously cited growth rates of around 3% to 5% through the cycle. We now believe that market growth has moved up to 4% to 6% over the medium term. And because of our ability to grow share through performance, innovative products and strong partnerships, TT should outperform this. More later in the presentation on this. Secondly, following the business transformation in TT, better quality revenues, coupled with operational leverage on this growth mean that 10% operating margins are in sight. And thirdly, TT's strong cash generation. 2023 will see a significant step-up in free cash flow from the end of the self-help program spend, the pension buy-in and the anticipated strong cash conversion. Importantly, we can, therefore, continue to delever as we go through 2023, retaining the capacity to invest in growth in the business. We continue to progress our own ESG initiatives, but sustainability and the need to have products that are cleaner, smarter and healthier is driving revenue growth and opening up more opportunities. Our technologies address key sustainability megatrends in our target markets, and we work in partnership with our customers to design products integral to their environmental goals, thereby creating growth opportunities for them and TT. This slide highlights 3 examples of how our products and components feed into delivering solutions that are cleaner, smarter and healthier. Firstly, our optoisolators are used in renewable energy solar panel inverter systems. Second, we're developing ultra lightweight power converter technologies for electric aircraft applications. And third, we've developed a more compact current sensors with improved environmental performance and long-term stability for use in defibrillation charge control circuits. And turning to our own environmental actions. I'm delighted to report that we have met our target to half cumulative emissions a year earlier than planned. The investment in shutting older facilities, replacing them with smaller footprints and more energy-efficient operations has helped significantly. A good example being our new Plano site, all part of our self-help program. We'll be hosting a site visit to Plano in Q2, which we very much hope that you will join so you can see it all for yourselves. And on social, we are making sure that we support our lowest paid employees across the business, including a cost of living support payment to U.K. employees. Employee engagement is at the heart of our values. And as a reminder, we are rated as one of the highest engaged global manufacturing companies with a 2-star ranking overall with best companies. And finally, regarding governance, we're delighted that Mick Ord and Wendy McMillan has joined the Board, broadening the experience available to help guide us going forward. So with that, I'm going to hand over to Mark who will take you through the numbers and how they develop from here.

Thank you, Richard. Good morning, everyone. 2022 is a year where the group has delivered on a number of fronts. There's been a step change in organic growth and order intake. Operating profit is up by 19% and well above pre-pandemic levels. We've derisked the U.K. pension scheme through a complete buy-in and after substantial investment over the last couple of years to support revenue growth and margin improvement, we've positioned the business to start delivering material free cash flow from 2023 onwards. Building on 8% organic revenue growth in the first half, revenue accelerated significantly in the second half, resulting in organic growth for the year of 20%. Even if you strip out roughly GBP 32 million of 0 margin pass-through revenues, growth was still an excellent 14%, roughly 3% price and 11% volume. Growth was particularly good in automation and electrification, in health care and through the distribution channel. We also started to see a stronger recovery in commercial aerospace. Operating profit was up 19% at constant currency to GBP 47.1 million. Margins stepped up in the second half too, as expected. Full year adjusted operating margin was 7.6%, and 8.1% excluding 0 margin pass-through revenues. Adjusted earnings per share increased by 26% and by 11% at constant currency. At the half year, leverage was up as we've been investing in the inventory to support the record order intake and to unlock the growth potential. As expected, by the year-end, Leverage was back then into our 1x to 2x net debt-to-EBITDA range. Debt and leverage will continue to come down through 2023 from EBITDA growth and the step up in free cash flow. Even with that investment in the balance sheet, the resulting improvement in operating profit meant that return on invested capital increased by 140 basis points to 10.5%. On the back of these great results and our confidence in the outlook for 2023, the Board is proposing a 13% increase in the full year dividend to 6.3p per share. Moving on then to the performance of the divisions. At the half year, we flagged a turnaround in Power and Connectivity, and it's well underway. Full year revenue grew by 5% on a constant currency basis and declined by 1% organically. As we described previously, the first half was impacted by timing of parts availability, timing of programme revenues and the COVID-related factory closure. We are confident that the issues of the first half are behind us. In the second half, the division returned to organic growth. That growth, coupled with self-help benefits contributed to a step change in performance over the first half as anticipated. Margins more than doubled to 6.8%, and there was an almost threefold improvement in operating profit in the second half. The Ferranti business acquired in January 2022 is performing ahead of plan. In this first year of our ownership, the business generated revenues of GBP 7.9 million and adjusted operating profit of GBP 1.9 million and is already exceeding our cost of capital. We're now fitting out their new facility in the Greater Manchester area, and we will move the business there in the second half of this year. Order intake in division was a very healthy book-to-bill of 118%, positioning the division for further growth and further margin improvement in 2023, building on the momentum of the second half. GMS had another fantastic year. Already strong revenue growth in the first half, accelerated hugely in the second half and ended up with 37% for the year. Even stripping out the pass-through revenues, organic growth was 25%, particularly coming from the health care and automation and electrification markets. GMS's revenues are already fully covered for 2023 from strong order intake as customers have committed early to secure capacity. Once again, underlying margin continues to surpass our expectations of a few years ago. Excluding pass-through revenues, operating margins were 8.7%. Adjusted operating profit increased by 23% on a constant currency basis and headline operating margins were 7.8%. These GMS margins and order commitments reflect the strength of our customer relationships and the value the customers place on our enhanced business offering and GMS continues to go from strength-to-strength. Finally, Sensors and Specialist Components, which also had a standout year. Here, we grew revenue organically by 12%, again with an acceleration in the second half as more capacity came on stream. As we reported at the interims in the face of long industry lead times, we've been working with customers to secure committed orders and now have order visibility well into the second half of the year. The profit performance has been very strong with good operational leverage on revenue growth, input cost inflation recovered through pricing and with self-help benefits continuing to come through. Adjusted operating profit grew by 20% at constant currency and margins for the year were up by 110 basis points to a record 15.6%. Self-help benefits are an important factor in our results. You will recall that we launched this program in mid-2020, initially to take out about 10% of headcount and closed 3 large sites and 3 small ones, and we then later added the closure of the Covina facility in California. The program transfers are now complete and a cash spend is done as of the end of 2022. There are just some final piece of qualification work pending in Bedlington and Kansas City. As you can see from the table on the bottom right, we're realizing benefits ahead of the original schedule, and we're on track to hit our run rate of GBP 13 million to GBP 14 million of annualized benefits in 2023 as well as realizing those cost benefits, the site closures have been a major contributor to the step change reduction in our CO2 emissions that Richard talked about earlier. Before we move on to cash flows, I wanted to reflect on the evolution of the growth and margins in the divisions and how we see it evolving from here. On these bubble charts, you can see how organic growth and margins have moved comparing pre-COVID levels in 2019 with 2022 with the size of the bubble representing the size of the division's revenues. For each business, the lighter bubble is 2019 and the darker bubble 2022. And for Power and Connectivity, we've also shown a bubble for the second half of 2022. Power and Connectivity is clearly a division that has had the greatest largest impact from COVID, and we've talked about the issues that impacted in the first half of 2022. Margins recovered to nearly 7% in the second half. With growth in 2023 backed by the order book, we expect margins in P&C to improve through 2023 and be getting back to the 10% level by 2024. At the same time, we've seen a significant step-up in both the margins and the organic growth rates in GMS and in Sensors and Specialist Components. Big margin increases in both divisions. And given that GMS has delivered by far the biggest revenue increase, the 240 basis point margin improvement has the biggest impact on profit. As P&C recovers, we expect GMS and S&SC to at least maintain these sorts of margins and there is some scope for incremental improvement with growth. We are confident that double-digit margins are in sight. I'm going to cover cash flow on the next slide, but first, I just want to touch on working capital. As you'll see in a minute, there was a working capital outflow of GBP 39 million in the year, almost all of it in the first half. As we told you at the half year, this investment has been made to support the growth that we've been delivering. Richard has already talked about the record order intake and order visibility. So although inventory has increased, it's down as a proportion of the order book and that order book is very largely committed by the customers. It's also worth noting that of the GBP 40 million increase in inventory, around 40% of the increase is due to cost inflation, including those premium pass -- premium price pass-through items. Receivables have also grown significantly with the growth in revenue, especially in the second half. Days sales outstanding is pretty stable. The increase from prior year is mainly due to the mix of revenues between the divisions, although we did experience a handful of larger customer payments, adding up to several millions of pounds that we expected to receive in December coming in immediately after year-end. So on this slide, I want to show how we've been investing in the balance sheet to grow and also how our leverage is now coming down. It's a busy but important slide, so to orientate you. At the top, I've set out the numbers related to free cash flow for the year and below for the second half. You saw the movement for the first half in our interim results presentation. There was a GBP 13 million free cash outflow for the year, which was largely driven by the investment in working capital, particularly in the first half and by the remaining spend on the self-help program. In the second half, we did see a real improvement with a GBP 10 million free cash inflow. This level of free cash flow is much more representative of the kind of trajectory we expect going forward. The H2 reduction in net debt as a result, combined with the step-up in EBITDA meant that leverage returns to a 1x to 2x range as anticipated. For 2023, we expect a material step-up in free cash flow. The spend on the self-help program is complete, and we've made the investment in working capital that we need. The usual guidance slide is in the appendix and has a bit more detail, but the key point is that with debts coming down and EBITDA growing we expect to continue to delever as we move through 2023. Last, but an important not least. In November, we announced the complete buy-in of the U.K. defined benefit pension scheme. That was made possible by a lot of work by the trustees and by our team to improve the scheme's funding position to get the scheme data in the best possible shape and to position ourselves to really get the most from a competitive process with insurers. The buy-in has derisked the balance sheet and secured the benefits for around 5,000 current and former TT employees and their dependents. As a result, the GBP 6 million of annual cash contributions that we've been making stopped with immediate effect. We have the option to move to buy-out and take the scheme off the balance sheet completely, and we will look at this during 2023. At the end of 2022, there was a GBP 31 million surplus relating to the U.K. scheme. That is subject to a final true-up in relation to the buy-in and the payment of ongoing scheme costs will be funded out of it. But when the time comes, we could get some of the surplus back subject to 35% tax. To put the buy-in, in perspective and why we're so delighted with it. When I joined TT, the market cap of the business was around GBP 150 million and the scheme buyout deficit was north of GBP 250 million. This material burden has been completely removed. With that, I'll hand back to Richard.

Thanks very much, Mark. Well done. So upfront, I told you that I'm confident and excited about the opportunities for the future at TT. So let me tell you why. It's about winning in growing markets and developing a business with sustainable growth. In 2022, we secured more than 50 significant new contract awards, working with some great customers. Increasingly, we are getting designed in, and these awards have resulted in a multiyear revenues of GBP 125 million. I'll come to talk in more detail on the growth from our customer accounts and the strong pipeline of new business opportunities. The key thing to note is that the transformed TT business is positioned to deliver both higher revenue growth and margin improvement. So it's great to be positioned in growing markets where customers are helping deliver better environmental outcomes. But one of the things that has really made me happy in the way that our business development has got better and better. This year, particularly, there's been so much to choose from, but I'm going to pick out a few examples of organic wins with both new and existing customers. In health care, new clinical applications using electromagnetic tracking as the emerging technology of choice are adding millions of new health care procedures. We're working with a new customer who specializes in diagnosing various forms of cancer with a new tracking system. That now incorporates TT's micro-coil sensors. We have taken this from prototype to full launch in 2022. The next contract I want to talk about really highlights the collaborative way in which we work to deliver incredible outcomes in the face of significant barriers to execution. Working together with a valued health care instrumentation customer, we supported the successful global launch of a new mass spectrometer essential to vaccine characterization. Having ramped up production and navigated supply chain challenges, their CEO came to us with a request to support a much faster rollout of the vaccine following the product's initial success. This required our team not only to double production in short order, but somehow overcome the extreme supply chain shortages that existed last year. Not easy, but we did it, and it was one of the drivers behind the revenue increase in Q4 while providing real medical benefits in those new geographies. In Aerospace and Defense, following the successful contract win for the power converters on the U.K. Boxer Army vehicle program, we were subsequently awarded additional contracts for electrical cable harnesses, boosting our content on the program now set to extend for 10 to 15 years. And more recently, our power business has brought in GMS, who are now providing their own content for the program, a great cross-selling example in action. And finally, in automation and electrification, Schneider Electric is one of our partners who play a key role in power provision, electrification and energy efficiency. Here, TT developed a bespoke specification center that was required to meet the high reliability requirements gas-insulated switch board used in electricity distribution. Another factor behind our business development success has been targeting the right customers. We have grown business from our top 40 OEM customers by 43% over pre-pandemic levels. You can see the logos on this slide. There are real blue-chip names in our markets. We both -- we've been both methodical and deliberate, building this list of strategic accounts. And these accounts now all contribute more than GBP 2 million of annual revenue with scope to continue to win more share. The client stickiness comes from working in partnership with them to develop products and maximizing design and opportunities. Winning more business on the back of strong performance again and again, and supporting these customers in difficult times to deliver critical products and create opportunities to partner on new projects and capitalize on shifting supply chain strategies. We are delighted with how this part of the strategy is going. It's really delivering, and we can do more from here. These wins and the ramp-up in volume of customers' new products have driven momentum in order intake. The order book hit record levels in Q4 and is providing us great visibility to 2023 revenues at the start of the year with around 90% covered. Book-to-bill in 2022 was 118%, even with the improved revenue growth in the final quarter. Intake has remained strong in the first couple of months of 2023, improving cover in Sensors and Power and Connectivity further. Clearly, we're mindful of macro conditions, but this order book gives us great confidence for the year ahead. We're pricing to recover inflation, and we continue to transparently pass through any extreme cost increases. The gross profit levels have been maintained. And as Mark talked about earlier, we see margin improvement to come from operational leverage in growth, thanks to the better pricing and terms. We're in a much better place than we were a few years ago. But firstly, organic growth. We've transformed TT from a no-growth business to good growth pre-pandemic and now delivering 14% underlying organic growth in 2022. Winning new programs and new customers as well as market demand have led to the order book hitting record levels in late '22 and providing that excellent visibility, thereby underpinning growth and operational leverage that support profit and margin improvement going forward. Our customers are winners in their markets, and they place a high value on strategic partnership with us. As mentioned at the beginning, we've raised our market growth projections on this slide to show how the structural growth evident in each of these markets is supportive of even better outcomes. Technological change, digital transformation are driving demand, whether it be in advancing medical technology, electrification for aircraft power efficiency or improve productivity and environmental requirements. In fact, new applications across all end markets have led to a bigger opportunity pipeline and enable us to win many new contracts, which means TT can outperform these rates over the medium term. So we're in the best shape we've ever been and the outlook is good. The order book is providing excellent visibility into 2023, and we have a strong pipeline of new business opportunities. We're obviously mindful of the wider macro environment, but TT is well aligned to global megatrends driving demand from higher-growth markets. And the benefits of self-help and a better quality revenues coupled with operational leverage, mean 10% margins are in sight. And 2023 will see us return to strong free cash flows now that the investment in the self-help program is finished and the pension buy-in benefits come through. TT is in a great place. Clearly, there's more to come, and we're very excited about the future. So thank you very much. That concludes our presentation. So we're now going to open up to questions from the room. And if you're on the webcast, there is a platform for you to ask questions, which we'll get to after we fielded questions from the room. So Lorna's going to pass the microphone around, if you don't mind using that because we're on the webcast, that would be great. You want to go, Vanessa?

Vanessa Jeffriess from Jefferies. Well done. Just wanted to ask on P&C margin. If you back out FX and for R&Ds 3.7% for the year, I think, what's the pathway to improvement to 10% by '24? So as you know there's total in there as well, which is like mid-teens margins. So is the underlying business ex-Torotel and Ferranti kind of less than 3% at the moment?

No. So Torotel is one of the businesses that was impacted by the timing issues in defense programs in the first half, and that had a kind of a high drop-through impact. So as we go into '23 and through '24, really, that step-up is coming from self-help program. And obviously, we talked about delivering benefits ahead of schedule. That's really contributed some of the outperformance in Sensor and Specialist Components. But in Power and Connectivity, there are still benefits to come through. And then as we grow particularly in those sites that really got hurt by the reduction in revenues. So particularly in '23, you kind of see a beneficial pickup that sort of higher drop-through that hurt in the way down sort of helps on the way back.

Okay. And then just on price. So obviously, there's a headwind from raw materials next year from the pass-through. Are there any kind of press down conversations going on incentives where pricing is more dynamic? Or is that share you holding up to change?

No. I mean, it's simply no, puts [indiscernible] not at the moment. I mean, as we talked about the -- I think the way to think about that is booking now towards 80%, 85% for the year. With that means we're talking about very long lead time still for those components and demand being in a relative sense high. So there's still -- there's definitely sort of opportunity there as we move forward in terms of pricing.

It's Harry Philips, Peel Hunt. Just can maybe come back to the sort of revenue debate. Just looking at the sort of moving parts into '23, you got this huge step-up in GMS in the second half. You've got I suppose some price realization annualization to sort of come through to Vanessa's point, you've got some probably pass-through that's maybe going to go back in '23. . And then you've got sort of P&C picking up as well. So I suppose what I'm trying to get to is to really understand where -- how much revenue growth we can expect underlying in '23 because I say to particularly GMS being such a big part? And then secondly, just around CapEx. I mean I haven't managed to look at the slide yet, so I'm sure it's there, what CapEx is going to be. And then just really where that CapEx goes because clearly you streamlined the cost base. So it's not sort of facilitating cost reduction and stuff like that, this is now all about growth. So how do you sort of deploy that capital in that context of capital allocation?

Yes. Let's deal with CapEx one first. So yes, it's in the slide. We're guiding to GBP 22 million to GBP 24 million of cap expenditure and capitalized development expenditure in 2023. The main areas without stepping up is first. I mentioned that the Ferranti business has been moved into a new facility this year. So we're in the process of fitting that facility out and they'll move there in the second half of the year. GMS because of that big step up, they are now kind of really bumping up against not physical capacity, but some machinery capacity issue. So there is some CapEx that's going to go into GMS to open up some more capacity, which will come back to you with the growth, but that partly goes into the growth dynamic as well. And then there are other areas selectively where we can invest in capital to help unlock some more capacity in sense, some specialist components is one of those areas where there's some things that we need to do. And then on growth, yes, so I mean, in 2022, clearly, the H1-H2 split was slightly unusual. We were way more second half weighted. So I think we'll see some normalization in 2023, both in the revenue line and the profit line, a far more equal weighting. And therefore, in terms of shape of numbers, actually, you'd expect H1 revenues to be quite well up in H2. We won't have that same kind of catch-up. It will normalize a bit more. On the pass-through revenues, so we obviously talked about it being about GBP 32 million of pass-through revenues in 2022. We've got quite good line of sight of that for 2023 because essentially, it's already in order book and actually a lot of the inventory is already there. I talked about the increase in inventory, that inflation increase inventory contains quite a bit of the pass-through. So we think the GBP 32 million go to more like GBP 25 million in 2023. So from a sort of headline organic perspective, that's a 1% headline for the group's organic growth. Ex the pass-through, we think there's probably -- it's the order of 3% to 4% growth at this point, and then we'll see where we go to.

It's probably fair to say the pass-through stuff is also a sort of dynamic moving fees right going forward. So there is some -- we can see some signs of easing in some parts of that market overall and how it will play out is a bit early to be sure at this stage, Harry.

It's Mark Davis Jones from Stifel. Very strong year, but also quite a lot going on below the line. Can you run us through -- I mean the total adjusting items were slightly bigger than the reported profit. So can we talk about that a little bit, particularly around the impairments, I guess, no surprise to see viral's write-down, probably more surprise around some of the stadium business. So can you tell us what's happening there and why that decision was taken?

Sure. And so I think there are the cash element of the adjusting items is GBP 11 million, which is principally related to the self-help program that's in line with what we said. There is a round numbers, GBP 12 million pension settlement. That's one of the elements of the whole pension buy-in. We did an ETV exercise before the buy-in and just the technical accounting means that some of that goes through the P&L accounts. Some of it goes through OCI. And then, yes, GBP 23 million non-cash impairment in the connectivity part of the business. So there's GBP 5.4 million related to the [ Firelands ] assets. No change in that project. It's still there as a potential option for the future, but we've just taken the view that given it's not as commercial take-up at this point, it will be prudent to impair that. And then the connectivity part of the business, part of the [indiscernible] business, it was harder hit by the pandemic and it's a bit that is slower coming back. And again, we've just taken a prudent view there of the growth rates going forward. And that, combined with the fact that discount rates have increased because of the change in interest rates. I mean we've just taken a prudent view and written some of that down.

Okay. So it's not a fundamental reassessment in any of that business, it's just...

It's not.

Okay. And then for '23, are you expecting a cleaner year. Obviously, the restructuring spend slows. Anything else that we should be aware of in terms of below-the-line staff for this year?

So again, it's in the guidance side from a cash perspective, there's about GBP 3 million that's roughly half pensions and half M&A integration costs.

That's a small number.

That's a small number.

Excellent.

As you said, Mark, it's an inflection point for free cash flow 2023.

Mark Fielding from RBC. Can we just talk a bit more actually, I'm going to pick up P&C model. But first, maybe sensor specialist component margins. Obviously, a very good second half again. Just is this now the sustainable margin level? Or is the potential to drive it higher over time, I suppose, on that side?

I think we're delighted with sensors performance. As I said in the presentation, it was outstanding. I know GMS stands out from all those headline growth, but as well as their margin. But sensors was great. For guys doing a really good job in there. And so yes, is the answer to the sort of basic margin to start with. And then I think it's -- we're -- I suppose we're hopeful that over time that they can keep working to eat that up assuming volume stays there as a sort of a supportive nature, let's call it, which we'd expect it to.

And then on P&C, obviously, path back to 10%, but previously, it's been near to mid-teens. What is structurally changing that because by 2024, we're well back above volumes from sort of pre-COVID.

So to be clear on where it was. It was moving into the 10% to 12% range pre-pandemic. That's kind of the first step as far as we are concerned, getting back there, which as Mark articulated we see clear visibility too. The new -- there's a number of those new business awards that I talked about that have got multiyear revenues going well out into the future that we are winning the kind of gross profit gross margin levels that are commensurate with sensors margins with the way that we've sort of thought about that business going forward, which, as we said before, we see no reason over time why that business went -- move towards those sort of levels.

Jonathan Hurn from Barclays. So I just have 2 questions, please. Firstly, obviously, just in terms of leveraging the cash flow, obviously, there's a big focus on that in '23 and bringing that level down. Does that kind of preclude any M&A, bolt-on M&A in '23 to essentially make that maybe less likely? And the second one was just in terms of -- or maybe following on from Harry's question, just in terms of that capacity addition that you're adding at GMS, can you just give us a feel for the revenue opportunity from that excess capacity or that new capacity that you're adding, please?

Sure, Jonathan. Yes. So firstly, in terms of the sort of the idea of M&A and precluding any bolt-ons, I think short term, as we've articulated, we think there's a really good leverage reduction opportunity which we think is the right thing to do as a priority, particularly to show the sort of free cash flow generation potential of the group and having gone through the investment cycle. So in terms of M&A, there's a pipeline out there that we stay in touch with, but I think short-term focus will be on that leverage reduction. And in terms of capacity?

Yes, the capacity. I think the way to think about that is, as I said, this year, after a big step-up in terms of GMS will stabilize, pushing that capacity in unlocks the kind of growth rates that Richard talked about 4% to 6% from the market and as hopefully us expecting to be better than that. So once we get to '24, it gets -- it moves back into that mid-single digit plus kind of growth.

Richard Paige from Numis. Just a couple of questions around the order book again. I think at the interims, you were talking about a level of sales that you could deliver tomorrow, if you had the parts. Have we caught that up or where is that now, please? Secondly, just your view on normalization as this year goes on, where do we get back to in terms of visibility across the businesses? And then thirdly, that growth with key customers, have you got any idea of the extent to which you've won business because you've been able to supply and peers haven't been able to or what's going on there, please?

Right. Order book and backlog. So in some areas, yes, we have made some very good headway, which clearly helped the outperformance through the back end of '22, as I sort of was trying to allude to in the presentation. One of the things I think the team have been fantastic at during last year is their agility and ability to find a way to get parts to enable us to deliver to customers has been amazing. Now clearly, we've invested in inventory as well to support that. So is it normalized yet? No, it hasn't. There are still parts of the business that still have some backlog to try and get to customers as quickly as we can. And that's reflected in the sort of way we think about lead times and how fully booked we are. So normalization, I'd love to know exactly when -- what normalization now is. But I think we see, in general, that it should start to feel a bit better as the year goes on. I think it's the way I'd put it. We're not planning on everything being super smooth in 2023. And we're certainly not planning on supply chain being in any way back to normal. We're expecting relatively long lead times and still educating customers that that's the way it's probably going to be for the majority of '23. Hopefully, we might see a bit more easing than we're currently seeing. And if things get a bit better, then there could be opportunities all over the place that come from that, either through delivery or efficiency or whatever that we're having to fight our way through. And then the customers and winning business, right? So sort of sense of share, I guess, you're getting out of that. I think, look, from the level of growth that we are getting out of those large customer accounts and the new project opportunities and the number that we're winning versus perhaps we would have secured as a percentage back in sort of 2018, 2019, it's clearly higher it is very clearly higher. The growth rates are higher than market growth rates. The growth rates are higher than those customers are growing themselves. So whichever measure you want to use there, it's pretty clear to me we are doing a fantastic job in taking share.

Mark Fielding from RBC again. Just actually following up on part of that answer, which was just around your order book and your visibility and how we think about that normalizing. And I mean, I suppose in the past, I think you've talked about S&SC having sort of 3-month type visibility. And obviously, we're at 6 to 9 of or so. And just do you think that's a -- is any of that structural change in your business versus is that just the effect of the last year or 2? Or is it to do with these new contracts, new customer wins embedding those bigger customers just -- and maybe for each division, how do we think about how that has maybe shifted or not?

Yes. I mean, a really good question, Mark. And it's important to understand it as well. So I think if you take sort of the way that GMS and Power and Connectivity have evolved on will continue to do so. That's definitely in the sense that the business model will drive longer-term forecasting visibility. And in general, I'd expect, as a result of that, depending on supply chain lead time dynamics, you'd expect order books to sort of stay a bit structurally longer, I suppose for us as a business. In sensors, I think that's perhaps a bit more of a judgment about how the market itself is going to evolve through the whole value chain. And I think we were all very used to just-in-time supply and expectations and lead times are really short and book and bill ordering off the shelf and all those kind of things, pre-pandemic. Clearly, we're booked in that business now going out into Q4. That's a long lead time. It's going to take a while for that to change. And I don't think people are just going to shove the capacity and to bring those lead times down. So it will be a blended result there. And I think structurally through the value chain, people are not going to rely on super low inventories anymore. So not just pile the pressure on to us to do it or either through lead time or through inventory. I think it will work its way through the chain there. And I think people have realized it costs them more generally speaking, to run lower inventory and have the disruption than it does either way around. So long answer to say, I don't think 3 months is likely anytime soon. Will it come back a bit? Yes, it will. And there will be a reduction in those book and bill numbers when it does, and we're fully expecting that to happen. So nobody should be surprised or worried by that when it does, but just kind of keep an eye on it.

As that concludes questions in the room, and we have no questions from the online audience, I'd like to hand back for closing remarks.

Brilliant. Thank you very much. Well, look, it's been fantastic to have so many of you in the room, and thanks for the interest in the results. We're obviously hopefully conveyed, we're delighted with where we are and the potential for the future. So look forward to chatting as we go around and thanks for coming.