TT Electronics plc (TTG) Earnings Call Transcript & Summary

Fantastic. Right then. Good morning, everyone, and thank you for joining me for the TT Electronics 2023 Half Year Results Presentation. I'd also like to extend a warm welcome to those of you joining on the webcast. And as usual, with me today is our CFO, Mark Hoad. Now it's our last double act together, as I will be leaving in the autumn, and Mark will be working with our new CEO, Peter France, who many of you will know. So now we'll run through the presentation and then open up for your questions. We've had a really good first half, building on the momentum of last year, and I'm delighted with these results. We've delivered on all the key priorities we set and at the start of the year, we said we needed to execute on the strong order book that we had, and deliver more organic growth, improve margins, continue the improvement in power and connectivity performance, returned to positive free cash flow following a period of investment and finally, reduce leverage. We tick the box on all of them. But importantly, there's plenty more to come. The team have been brilliant as always. I'm really proud of the job that they continue to do. They've delivered strong growth while working closely with our customers to secure more new projects and continue to build for the future. So a big thank you from me to them. There are lots of high points in these results, all of which show we are starting to reap the rewards of the actions taken to reshape the business. The order book remains healthy with good visibility despite the normalization in order intake, which is happening as we expected, and I'll come back to this in more detail later. Our key customers have continued to grow in partnership with us, and we've secured 15 new significant contract wins in the first half with over GBP 150 million of potential lifetime revenues. We have also recently been working with a number of them as they plan to reshore parts of their business. Our order book visibility into future years is still similar to the same time last year and being designed in on many multiyear projects means that for TT, it is not all about the order book, it's about the project and platform positions as well. These have long-term forecasts. So on order book, despite the normalization of intake as expected, it remains materially ahead of pre-COVID times and we expect it to stay that way. So we're executing on the order book. First half revenue was up 12%. This is further evidence of the success in repositioning the group to benefit from structural growth markets, targeting customers that are growing in these markets, and we are increasing market share. We're making good progress towards our key milestone of 10% margins, first half margins up 140 basis points to 8.3%, 8.6% excluding the pass-through revenues. The improvement in Power and Connectivity has been a contributing factor, and more on that shortly. GMS has delivered another 200 basis point increase in margins to 9%. That's 9.7%, excluding the pass-through revenues, a record for the business. And on cash generation, we said 2023 would see a significant step-up in free cash flow, H1 is just the start with further improvement expected in H2. Cash conversion in H1 was back to almost 75%. Leverage is down as promised with further to come. So overall, there is significant forward momentum in the business, giving us increased confidence in the full year outlook. We said we still have work to do with Power and Connectivity, and I want to go through this in more detail on this slide. Importantly, it is firmly back on track. The recovery that started in the second half of last year has continued. Commercial Aerospace, which has been quiet through COVID, is recovering nicely, and is expected to underpin growth over the next 3 to 5 years. And with the current geopolitical tensions, we're also well positioned to benefit from a favorable market backdrop for defense spend. There's a well-documented need to bolster, upgrade and replenish existing defense capabilities as well as to develop and accelerate new technologies. The team have recently been awarded a contract supporting feasibility studies for the technology development on the BAE Tempest program, harnessing our extensive engineering expertise. We will develop electrical power solutions in support of this crucial next-generation combat air platform. The outlook for health care is also strong with our segments of electromagnetic navigation and implantables, and we continue to expand our medical device portfolio and have ramped up our capacity to meet growth requirements for a number of leading health care OEMs. In April, we officially opened our second clean room in Minneapolis doubling our capacity. We're also proud to announce that we've added 2 new top-tier medtech companies to our customer list by winning new contracts. Year-on-year, the first half margin was up 430 basis points to 7.4%, and higher volumes will underpin further margin progression towards 10% to 12%. This slide is a reminder of the reasons that underpin our confidence in the transform group and its ability to deliver higher growth and create value. First, improved growth. The growth is driven not only by megatrends that mean that we can expect our markets to grow at around 4% to 6% over the medium term, but also we have shown over the last 18 months that we are winning share, both through adding new customers, but also growing our share of wallet with existing customers, enabling us to outperform these market growth rates. Secondly, given the work we've done to transform TT, we now have a better quality revenue growth, which, coupled with operational leverage, mean 10% operating margins are in reach. And thirdly, strong cash generation. As we highlighted previously, 2023 will see a significant step-up in free cash flow from strong operating cash conversion, the end of the self-help program investment and the impact of the pension buy-in. Importantly, we are expecting to further delever as we go through the second half retaining the capacity to invest in the growth in the business. So with that, I'm going to hand over to Mark, who's going to take you through the numbers and how they develop from here.

Great. Thank you, Richard. Good morning, everyone. This is a really good set of results. They show that we're on track to hit the targets we set in March and that we have a great foundation for the future. In the first half of the year, we delivered 12% organic revenue growth, reflecting good underlying growth and the anticipated return to a more normal H1-H2 weighting compared to last year. Operating profit increased by 34% at constant currency to GBP 25.6 million. Adjusted operating margins took a very healthy step forward, increasing by 140 basis points at constant currency to 8.3%. Excluding roughly GBP 12 million of pass-through revenues, margins were 8.6%. This margin improvement was a result of operational leverage on growth and the benefits of the now completed self-help program. Earnings per share increased by 28% at constant currency, net of a higher interest expense and an increased tax rate of 25.2% due to the increase in the U.K. tax rate. After a couple of years of investment to support growth, we told you in March that cash flow has now reached an inflection point. What does that mean? It means cash conversion up, because the big investment in working capital is behind us. It means no more self-help spend because the program is complete, and it means no more pension contributions because of the buy-in. You can see this coming through in the first half with a free cash inflow of GBP 7 million and leverage has continued to reduce with a further reduction to come in the second half. With the improvement in profits, along with healthy cash conversion, return on invested capital took a step forward increasing by 150 basis points to 12.0% since the end of 2022. And given the strong first half performance, the positive outlook for the second half of the year and beyond, the Board is declaring an 8% increase in the dividend to 2.15p per share. Moving on then to the specifics of the revenue and profit performance in each of the divisions. The recovery in Power and Connectivity that started in the second half of 2022 has continued as expected in the first half of 2023. H1 '22 was difficult for the division impacted by COVID, site moves and program delays. In H1 2023, revenue increased by 13% organically as the business executed on the order book built through 2022. Adjusted operating profit increased almost threefold to GBP 5.9 million and operating margins by 430 basis points to 7.4%, reflecting revenue growth and the benefits of the self-help program. The division has also been busy preparing for the move of the Ferranti business into its new facility in the Greater Manchester area. That move has now started and is expected to be completed during the second half of this year. Alongside substantial revenue growth, order intake has been strong, and the order book has continued to grow. We've also had a number of significant new business wins. This supports our confidence in further improvement in the second half and for the medium term. The GMS business has been transformed and continue to build on the strong momentum of 2022. GMS delivered organic revenue growth in H1 of 12%. This largely reflects a more normal weighting of first and second half revenues. As we've said previously, after several years of exceptional growth, 2023 is a year of consolidation for GMS, so you can expect growth for the full year to be more muted. As I said, within the revenue number, there's around GBP 12 million of pass-through revenues. We expect this to be similar in the second half before substantially reducing in 2024. As these pass-through revenues unwind, this will be a headwind to headline growth for the group. But on an underlying basis, the group is well positioned for growth in 2024 and beyond. GMS order book visibility remains very good with revenues for the balance of the year covered and we have good visibility building for 2024. Profit performance was again excellent. Adjusted operating margins -- sorry, operating profit increased by 44% to GBP 13.8 million. Margins increased by 200 basis points, benefiting from the first half growth as well as pricing actions. Excluding the pass-through revenues, margins were 9.7%. These are truly best-in-class margins. And with the relatively low capital intensity of the business, return on invested capital is now in excess of 20%. We believe that both these margins and the ROIC are sustainable at these sorts of levels, significantly ahead of our expectations a few years ago. Finally, in the divisions, Sensors and Specialist Components. Here, revenue was up by 11% organically as the division delivered on its very healthy order book. This level of growth was delivered despite machinery breakdown in June, which moved some revenue into the second half of the year. There was a small reduction in adjusted operating profit in the first half, reflecting that breakdown, but overall, still a robust performance with 13% adjusted operating margin. And for the second half, we expect margins to be back to mid-teen levels. This is clearly the earlier cycle part of the group and is where we're seeing the greatest normalization of order book, but despite that, we have over 6 months of order visibility against historical norms of 8 to 12 weeks with the order book for 2024 already building. This slide on cash flow illustrates the point of inflection with operating cash generation now return to much healthier levels. Cash conversion improved to 74% in the first half of the year. Back to the kind of conversion we've normally delivered in the first half. We're still investing in the business. Investment in CapEx ran a bit higher than depreciation as we invested in efficiency projects the new Ferranti facility and in additional capacity in GMS as planned. The H1 working capital outflow is largely a reflection of normal seasonality as accruals built in H2 last year were paid out in the first half. The second half should see some improvement on this position. The real driver of course, free cash flow to inflect was the almost complete absence of exceptional cash restructuring costs and no pension contributions. With the self-help program complete, and the pension scheme buy-in done, this will remain the case going forward. As a result, we generated a free cash flow in the first half of GBP 7 million and we expect the rate of free cash generation to step up in the second half. With that free cash flow and improved EBITDA, leverage is now down to 1.8x, and again, we expect a further reduction in H2. Finally, in the first half of the year, we increased our debt facility size to GBP 162 million and exercise the 1-year extension option on the RCF, taking the maturity out to June 2027. All of this leaves us with more capacity and flexibility to invest in the business at prudent leverage levels. And lastly, before I hand back to Richard, I just want to take stock of some of what we've achieved over the last 12 months. TT is now delivering much better returns with more to come. Margins have increased by 140 basis points to 8.6%, excluding pass-through revenues, a meaningful step towards the 10% milestone. Even with investment in the business, return on invested capital has increased by more than 300 basis points in 12 months to 12% pretax. Cash flow has now inflected. We've generated GBP 17 million of free cash flow in the last 12 months and leverage has reduced by 0.6 turns in that time and again, further improvement is expected. We've extended our debt facilities. The RCF now matures in 2027. It's complemented by the long-dated fixed term PP debt placed -- PP debt that we put in place in 2021. And last but not least, we've derisked the U.K. pension scheme by completing a buy-in with Legal & General. That scheme represented a GBP 200 million plus burden back in 2016 and we now have a surplus of GBP 29 million. The business is in a really good place, and there is more to come. With that, for the last time, I'll hand back to Richard.

Thank you very much, Mark. So the group is in great shape as I prepare to hand over to Peter. We have a great platform to accelerate the ambitious growth strategy and support the next chapter for TT. So a quick recap on our achievements in the first half, all in line with the commitments we made when I stood here in March. We're growing our top line and executing on our order book. Mega trends and our repositioning into structurally growing end markets will continue to drive revenue growth going forward, all meaning that TT is now a sustainable organic growth business with significantly enhanced sales visibility. We're committed to drive the group margin to 10% and beyond, and we've made really good progress with 140 basis point improvement. Power and Connectivity is on track, and recent wins in the business will support further progress. And importantly, this is when TT gets back to generating strong free cash flow, GBP 17 million of free cash flow in the last 12 months and leverage to come down further by the end of the year. We have transformed the business to ensure it faces into markets with long-term structural growth. When Mark and I started at TT, our first priority was to turn around the transportation business at the time, representing 45% of group revenue. We did it and then successfully sold it for a good price. And over the last few years, we've reinvested the proceeds focusing on structural growth markets with long-term visibility such as health care, which now represents 1/4 of TT sales to reposition us for growth. On this slide, I want to show you how we have transformed the business on a number of metrics. It is this transformation that gives me confidence that TT is in a strong place with momentum across the business. We have taken TT from a no-growth business to one delivering good growth from key customer accounts and an improving share of wallet. This has come from new customer wins and the development of a strong pipeline of business development opportunities. Market growth is driven by mega trends in the segments that we operate. And as I mentioned earlier, we believe that the market growth rate of 4% to 6% is achievable over the cycle, and TT has shown that we can outperform and take share. On top of that, the business is positioned not just for revenue growth, but also ongoing margin improvement. Although the supply chain has eased a little, there remain opportunities to drive further efficiencies within the business as we bed down our new facilities and processes post the completion of the self-help program. Margins have already doubled since 2015, with GMS transformed from a business that was contributing just 4% margins. As you can see from the top right chart, recent progress shows our 10% milestone is now in touching distance and there's more opportunity from there. Our other key financial metric, the chart bottom left shows that we've improved ROIC in the group, now up 300 basis points to 12% with GMS leading the way at 24%. And finally, employee engagement has always been core to the strategy. It's at the heart of our values. And in July, we completed our latest group-wide survey. I'm delighted that we achieved an exceptional participation rate of 91%. That's up from 68% back in 2015, but even more so that we achieved the highest rating. A 3-star, world class companies to work for ranking. That makes us one of the highest engaged global manufacturing companies within the best company survey. We continue to progress our own ESG initiatives, sustainability and the need to have products that are cleaner, smarter and healthier is good for us all and good for TT. It drives revenue growth and continues to open up more opportunities. Our products and technology address key sustainability mega trends in our target markets, and we work in partnership with our customers to design products integral to their environmental goals, creating revenue opportunities for both of us. I was delighted that we met our target to halve cumulative emissions a year earlier than planned at the end of 2022, but there is no let up. We continue to push for further reductions. Our investment in solar energy in the Kuantan facility is the latest example, commissioned earlier this year. This will reduce its emissions by around 1/3. As I flagged previously, we are delighted to have delivered an exceptional engagement score, this year demonstrating a highly engaged workforce, a critical part of the strategy. The business is humming and there's so much going on. On this slide, we show a number of the latest successes. Now I'm not going to cover all of them. but I'll pick out a few examples. In our Medical Technologies segment, we have had a number of wins in the growing surgical navigation space and implantables market. And notably, these include 2 new clinical applications in surgical navigation. I mentioned the BAE Tempest win earlier. And in the automation and electrification markets following a best-in-class supplier award from AMI at the end of 2022, we have recently won a further significant contract this time out of Kuantan as we support their expansion into Singapore. So the message is we're continuing to win new programs building out multiyear revenue streams we have been targeting and giving better visibility to future growth. Our strong order book gives us great visibility as well. Our new business generation has got better and better, and it's great to be positioned in growing markets where customers are helping to deliver improved outcomes where they're cleaner, smarter or healthier. As we expected, our order intake has been normalizing a bit. But as I mentioned upfront, the first -- in the first half of 2023, we secured 15 new significant contract awards. These have the potential to deliver over GBP 150 million of lifetime revenues, working with some great customers and reflecting the fact we are designed in on long-term programs. This underlines the visibility that we have. But the order book also remains close to the peak levels seen in the second half of last year. It provides visibility to the balance of 2023. And building nicely for 2024, and visibility is still 40% higher than we operated with back in 2018 and 2019. And remember, I said it's not just about the order book, it's also about the business now having multiyear visibility on long-term projects and programs. And furthermore, we're having very constructive conversations with our customers to facilitate reassuring, which is increasing the pipeline of new business opportunities with modest incremental CapEx. We've successfully grown our Kuantan facility for the GMS division from scratch to $25 million of turnover in just 24 months and using the same low capital intensity model, we're establishing GMS capabilities within our existing Mexicali facility in Mexico. So we're in the best shape ever. The outlook is really positive. Good momentum and continues in our chosen structural growth markets, more significant new contract wins and the strength of our order book provides excellent visibility well ahead of pre-COVID levels. The benefits of the self-help program and better quality revenues coupled with operating leverage, I mean 10% operating margins are within reach. And we are back to generating positive free cash flow with great momentum for H2 and 2024. All of this giving us increased confidence in delivering full year expectations. Now we're obviously mindful of the wider macro environment, but TT is executing well and positioned in markets with strong mega trends and structural growth drivers. So as this is my last presentation, I would like to thank my excellent team for their incredible passion, hard work and support to create the business with the opportunities it has today. I'm proud to pass on to Peter. A group positioned for sustainable organic growth with excellent visibility, significantly improved margins and more to come and the best-in-class engaged workforce. I'm confident that in Peter and Mark's hands, TT has a very bright future. Thank you very much. That concludes the presentation. And but perhaps before I -- before I open it up for questions, maybe just if you indulge me in a minute, just a couple of few words about Mark. So Mark, Mark came to join me, I think, as most of you know, from a much bigger company. So Mark has taken a bit of a risk on a first-time CEO. I think it's fair to say on a promise of I think the promise was quite a lot of hard work, but we'd have some fun. I think that was broadly the way I put it. Anyway, Mark has been an absolutely fantastic business partner. He supported, and I guess, not just supported but trusted me, frankly, when we decided to take some pretty big risks with the group early on. But after that, basically been a huge part of generating a company that is significantly bigger, significantly improved profits, enhanced margins, and I would say, a much higher quality business as a result. But I guess more importantly than that, Mark has become a great friend. So like I say, thank you, Mark. It's been -- I've just loved every minute of it. And anyway, I guess the one thing I would say is it's just been fun. Thank you.

I should, of course, say on behalf of the Board, and the whole team, a huge thank you for your amazing leadership over the last 9 years. And I think the engagement score that Richard talked about absolutely speaks to that in spades. Perhaps on a slightly more personal note, although he has got weird dislike of reasons. Rich is one of the -- Richard is probably the nicest guy I've ever worked for and [indiscernible] what you said we've been on a tremendous journey together. It's been a huge amount of the fun. I'll miss working with you. I wish you every success for the future, and I look forward to winning -- continue my winning streak on the golf course.

Thank you very much. Anyway, Mark, very much, and kind words. So with that, we will open the floor and the webcast to questions. So please, there is a mic going around, can you say your name and your question for the benefit of the webcast, and then we will answer.

Well done. And I'm really excited to see [indiscernible] Vanessa Jeffriess from Jefferies. Maybe if you could just talk a little bit about pricing dynamics in each of the divisions this year. It seems like in GMS you're saying volumes flat to maybe slightly down and pricing holding up. Is there any way you're seeing pricing pressure? Or do you expect kind of that dynamic?

So I suppose the way to think about the dynamics in GMS is firstly, in terms of the sort of pricing and value from the capabilities we have in GMS, you can see the expansion in margins. That's going really well. So I think, if you like, the pricing is holding, it's ahead of any of the inflation dynamics and we're getting more value out of the services that we're providing. The main dynamic on the revenue stream is all about the pass-through revenue. So -- and that is linked to pricing, right, because we are passing through the cost increases transparently. Those are definitely starting to work their way off so that the bookings going into the order book are way lower than they were, and that's why we sort of guided to that revenue kind of coming off as we go through H2 and into '24. That's really the main thing in terms of price, pressure, and nothing out of the ordinary at all. We're continuing to sort of mainly plan to price appropriately for 2024. But I don't think it's going to be like the last year was kind of in the various businesses sort of sometimes once a quarter, even or once every 4 months doesn't feel like it's going to be like that this year.

And then Power and Connectivity, a really good recovery. But what do we need to get to that 10% to 12%? Is it just volumes? Or is it a bit of supply chain easing.

Yes. I think it's exactly that. So obviously, you can see from the chart that we just showed you, the momentum is there in both the growth dynamic now and in the margin step-up. We -- as I said, order book has grown beyond -- so the intake is higher than the high increase in revenue we've got. So it's absolutely in front of the business. It's all about execution. And I think the sort of time is probably 12 months around 12 months' worth and getting back into that 10% to 12% range.

Harry?

Just a couple of questions. Just on GMS, I mean, obviously, the transformation has been substantial. And -- what I'm trying to get a handle on is how much -- when we look at GMS today, how much is sort of value-add training, testing, proprietary? And how much is still contract manufacturing? Because clearly, that's changed quite a lot. And then notwithstanding where the order book goes, how does that evolve? And then I always had in mind that GMS was predominantly a China for China business. And then I look at the very helpful segmentation of geography at the back end, and it's 27% Asia, 26% U.K. So I'm sort of -- if we could just marry that up, that would be quite helpful. And then just in terms of the sort of medical -- broader medical exposure, health care exposure, there's been a sort of big theme in this result -- well, is there already, but it's been manifested again in this result season sort of parts of the sort of medical equipment supply chain, big destocking, et cetera. The Thermo Fisher is even of this well being caught up in that process. How -- what's your experience there? And whether you sort of running a different channel to that?

So just on the medical stuff, we said, we're now running with that over quarter of revenues. So for us, we've seen, I think it was 18% growth. Is that right? Anyway, 10% for the group. So it's going -- it's positive. I highlighted a few of the reasons for the positive performance. And I think some of that is in Power and Connectivity with the implantable and stuff and some of it is in surgical navigation, some of it is in GMS. So I guess the dynamic that you've obviously read about and listened to with some of those other companies -- that one particularly is -- as you know, is one of our customers. We've seen that dynamic play through the order book and the revenue stream. So it's in our outlook, if you like, whatever impact it is as far as their total segment is the areas that we're working with them is built into our outlook and that 10% -- about 10% growth number for the group. So honestly, it's positive. It's healthy. It's got good dynamics underneath and the order book looks good.

On the value-add versus sort of contract manufacturing, we don't split out the sort of revenues from the services you described, it's all part of -- it's a bundled package. This actually has absolutely been fundamental to the whole shift in strategy, and it underpins everything that you've seen in the transformation of the numbers. GMS was a pure-play contract manufacturer, principally printed circuit boards, which frankly, anyone can do to industrial companies who would rebid it every year to [ 7 cent in the dollar. ] The shift was to health care and aerospace and defense markets, higher end industrial company -- blue chip companies that valued a manufacturing partnership, more complex equipment, more of those value-added services in terms of design for manufacture upfront and testing at the back. So it's just -- it's integral to everything that GMS is about. So if you're going to be really uncharitable you could still describe it as a contract manufacturer, but it does manufacture product to someone else who designs, but that's not what that business represents them. That's why you see the margins and the return on invested capital that you see.

And then in geography?

Yes. So well, I mean, sort of footprint is North America and as Rich said, now expanding into Mexico to accommodate some of that reshoring, we have a facility here in the U.K. and one in China. So it is a blend, and that's all about being able to offer the customers the manufacturing where they want it.

Around capacity utilization, particularly in China. Have you -- how much headroom do you have with?

So there's plenty of headroom in China. I mean the other point I would say about that business is the agility that they have demonstrated to adjust their strategy to meet global geopolitical situation has been really impressive. That really is, if I point to the Kuantan 0 to 25 million in 2 years. That's all part of meeting that dynamic, creating more capacity and getting an increased business development pipeline to deliver growth from. We believe that opportunity exists in Mexico as well, and that's why we're doing it. And it's sort of what I was referring to is the pipeline of opportunity from reshoring, which is incremental, right? It's not just moving stuff around. So overall, we were quite rightly challenged a few years ago about GMS in the portfolio at 4% or 5% in contract manufacturing, as I said. It's a different business now. People need to think of it differently.

Mark Davies Jones from Stifel. Richard, it's a kind of strikingly upbeat outlook you gave, given the state of the world and the state of the PMIs out there. And I can see the tie-in to the long-term contracts in your key verticals, but there's still a big chunk through distribution within the Sensors business. Can you give us an update on what that looks like and the risk of a sort of bigger contraction there.

Sure. I mean that is where the -- we expected a bit of normalization in that part of the Sensors business. That's happened kind of as expected. So the order intake has just come off a little bit. But if you -- I think what we'd point you to is that business run with a 3-month order book, majority through distribution back in pre-COVID time, right? It's sitting now with 6 months to double that with the normalization of intake in the first 6 months sort of built into it. It's got incredible visibility in booking into '24. Of course, there's some specific bits that may be a lot softer than other bits, but some very strong bits as well. So -- and distribution dynamic in totality for the product suite that we sell through distribution. We've got point of sale as in their sellout to the market. tracking where they've got inventory to and tracking our growth rates at the moment. So they've got a bit more inventory, but they've got a lot more growth, and it's tracking at the growth rates that we're expecting. So -- the pattern of all of that seems very close to the way lead times have moved generally without any big chunks of ups and downs. So we're feeling like it's playing out as we anticipated at the moment. And I guess when you look into sort of '24.

Yes, I think perhaps one way to think about it is, so if you get economic industrial softness, this is the division where it becomes most obvious. And when that happened in 2018 and '19, it had 6 months where it was soft, and then it bounced back quite quickly. So I think as we look into next year, that's probably how we think about things. The problem balance the chances are that it will be softer in H1, but then see growth going into H2 is probably flat for the year in that division, but the other 2 divisions are positioned really well. The capacity is going into GMS. They've got the order book, they've got the new wins, same for Power and Connectivity. So I think that positions the group for growth when you strip out that nonprofit impacting headwind from the pass-through revenues.

Okay. Great. And can you give us a little more help on the second half revenue outlook because there's quite a lot of moving parts. Obviously, FX has turned a little less helpful --flattening off in terms of the pass-through in the price, but it's not going negative yet. There's still some volume, but.

So first of all, pass-through revenues. If I talk in the whole years, first of all, so there was GBP 32 million of pass-through revenues in 2022. At the moment, our estimate is that it will be GBP 22 million in 2023. So that actually means a GBP 12 million headwind in the second half of the year. And then in 2024, it's going to go to something like GBP 4 million or GBP 5 million. So won't have gone completely, but most of it. So that's about GBP 18 million, give or take, headwind to 2024. FX, clearly, it depends where rates are. But it's probably on the revenue line with spot rates where they are right now, it's probably a 2% to 3% headwinds to revenue for the full year and 5% operating profit. And I think -- so when you strip out FX and when you strip out pass-through, I think that, that means that probably the second half will show a little bit of sequential growth over H1 and is probably like -- and it's probably a similar number to last year's second half on an FX adjusted basis.

It's Jonathan Hurn for Barclays. I just have 2 questions. The first one was just on the pension surplus of GBP 29 million. How much cash do you think you can take out of that surplus? And at what point do you think you will see that? Would that be H2 '24? Or could it come sooner than that?

So yes, so the surplus sits in the scheme. We're now going through -- the scheme is going through the process with L&G tuning up all the data, L&G get into their systems. When that's all done, there will be another -- there is all going [indiscernible] up as they sort of refine all the final benefits that could cause a little bit of movement in the number. The scheme is also in funding its running costs out of that surplus. So the surplus is going to reduce, and then it will be subject to tax. But I mean, to the timing point, in particular, the timing would be on wind up of the scheme. So we're getting to the point where we will be outlining decision about moving to buy out or just buy in. And once we make the decision to move to buy it, we can trigger a wind up. The wind up process will probably take about 12 months. So it probably means that takes us through to Q4 of next year. But at that point, yes, there it is quite possible that there could be some kind of surplus subject to 35% tax coming back from the scheme.

Very clear. And the second one was just on the balance sheet, M&A and so forth. Obviously, the focus right now is paying down the debt. But at what level does M&A come back when net debt hits 1x? Or do you think it needs to -- in terms of leverage to go below that before that starts coming back on to the agenda?

I think that once we are into the lower end of the range, so this year's number just will be probably around somewhere around the midpoint of the range by the end of the year. And then next year, EBITDA is going to continue to grow. We're going to continue to generate cash. So probably then getting to the bottom end of the range by the end of next year. I think once we're in that zone of somewhere between the midpoint and the low point, I think we would be looking at and saying, okay, we've now got the flexibility and capacity to invest.

Maybe just squeeze one more. Just in terms of that GMS facility in Mexico. Obviously, the other one that you expand, you've got GBP 25 million of incremental revenue. Is that the same kind of number you're thinking about GMS in Mexico over the next sort of 24 months, could they?

I would say -- so look, it's not an unreasonable ambition, let's call it, and there's pipeline potential out there. I think the other factor is in our current GMS footprint, the one plant that is kind of running capacity. And this is a bit more linked to defense and commercial aerospace is the U.S. plant. So if we can add more capacity in North America, regardless of reassuring that's a good thing for growth opportunity.

Stephan from HSBC. I have 3 questions. Let's start with the first one, maybe. Sensors again, while margins down, sales up, I understand that there was a machine breakdown, but -- is that all related to the machine breakdown? Do you want us to see it as a last month that you can't recoup or how do we think about that?

Yes. So I mean, honestly, it was just -- you've got that it's just factual what happened mid-June, and it's one of those kind of blips that just -- it was an HVAC machine that feeds 1 of our plant that has a clean room. You cannot produce when you've got an unstable air in the clean room. So we lost 2 to 3 weeks' worth of production in June in that 1 plant. And a week or 2 of July until we've got a temporary solution in place. There will be a permanent solution in H2. So those revenues should catch back up in H2, and that's what we're expecting. Roughly 1 to 1 point something of profit was kind of would have been there if we got those revenues. So that just slot straight into H2, and that's -- I think Mark said mid-teens margin for the year for Sensors, so it just get it straight back really.

And then let's talk about the order book again and the margin quality. I mean, you have great visibility. Is the margin quality increasing at the same level? Is it all about volume coming to drive your margin uptick or pricing as well in the auto helping?

Well, I think you're seeing a bit of margin expansion through the current numbers that we're anticipating continue and that's a blend of clearly operational leverage and some of that pricing that's ahead of the inflation rates. So we're expecting based on the order book for that dynamic to continue, right?

Yes, I mean in the first half of the year, gross margins are up by almost 200 basis points compared to last year. If you strip out the pass-through and to put on [ line-loss ], I think that's indicative.

And last one, the EUR 150 million contract that you won. Can you talk about the phasing? Can you talk about what sectors? And can you talk about as well how that drives into your order book actually because it's not added in the order book yet.

Yes. So there's only a small part of that in the order book. So I mean, I'd say circa GBP 15 million perhaps is in the actual order book, which is why I'm pointing all the time to everybody about we deliberately had a strategy to get into markets and customers and products that give us long-term visibility. And that's a completely different business model than TT had 5, 6 years ago. So those contracts are -- the main ones with that visibility are in defense, in health care, and there is 1 particular 1 that's in kind of high-end semiconductors and the visibility ranges from -- I mean, 1 of them is -- I mean, honestly, it's going to be probably 20 or 30 years, but we've given 10 years' worth of the possible revenues in that number. The one is going to be -- well, is there for the next 2 buys in a big defense program, which will last about 5 years and maybe even less than that, maybe 4 years, and then there'll be another set of buys after that, which aren't in that number. So it's that gives enough of an indication.

Yes. So the drop was like GBP 15 million per annum now, what you're saying, more or less?

In different phasing, yes, probably yes, yes.

Mark Fielding from RBC. Yes, typically 3 questions again. Can we start actually with Sensors where you've talked about the -- that potential for a softer first half of next year, just -- how do we think about the operating leverage in that business? And do we therefore think that if demand is a bit softer versus that 15% more normalized margin mid-teen normalized margin, do margins drop a bit in the first half of next year? Or are there other factors playing a part there.

Yes. I mean, all other things being equal, probably the margins would drop a bit in the first half and recover in the second half with the growth. And for the year, we should still be held, I would think.

And then sticking on margins. I mean, obviously, P&C, the first thought is the 10% to 12%. How do we think about the time line for that? And then you have been higher than that before. So how do we think about the medium-term potential of that business?

Yes. Well, I think, as I said before, it's all there in terms of order book and prospects for us to execute on. And I think that gives us visibility to getting point of the range in a sort of 12-month time frame. In terms of how we then kick on from there it will clearly depend on exactly what's in the order book. But if you look at what happened between 2018 and 2019, when this business reached that critical inflection point, it went from 10% to 12% a year. So it has the ability to do that, whether it will move quite that quickly. Clearly, no guarantees, but it's cope of doing it. And I think we've been pretty consistent over the longer term, the IP-rich nature of that business means it should absolutely be capable of getting to the sorts of margins that S&SC delivers.

And then finally, just curious about your supply chain lead times. I mean, you've talked earlier in the year about a large portion of supply chain having sort of 6-month type lead times, your order book hasn't come down that much because there's come down a bit more. What's your ability to -- or not that we're in a mindset where people are thinking about ramping up growth. But you know what I mean, how does the supply chain support you now?

Well, I think as we said, supply chains have eased a bit, but lead times are still for particular more challenging components in some designs still long, they are in the 40 to 52 week lead time in some cases now. As you know, we invested in inventory last year to support the growth. So some of that helps us and as lead times reduce, generally, that enables us to lower in growth in a shorter time period, but you can see the order visibility is long, and it's long for the reasons of sort of that collaborative management between our customers and what they really need over the next sort of 12 months and what we can manage in the supply chain to deliver it. So it's coming back a little bit, but that's why we kind of say we expect it to normalize higher than it used to be before.

Rich?

Richard Paige from Numis. Hopefully, just the one for me. I might make it 2 parts to me. Just -- could you just elaborate a bit more on that order visibility, please? And then aligned to that, obviously, you talk about multiyear contracts. What level of opportunity you leaving on the table for Peter?

So on order visibility, I think the way to think about it is go back to sort of the 2017, '18, '19 time frame, we were running at sort of on average across the group, about 6 to 7 months of visibility. That peaked at just over 11 months last year, and we're now down to around 10 months. We think it's going to come down a little bit more than that, but it's probably going to settle somewhere around the 9 months level. And then we also -- in that, I'm only taking out what's in the order book for this year and next year. We actually have a bit of order book sort of GBP 50 million or so that's for 2025 plus, but I'm not counting those numbers. But some of those long-term programs, and we do get some orders into the order book as well.

And sort of multiyear contract opportunities...

Well, I guess let me sort of try and answer it in a couple of ways, Rich. The first thing is, as hopefully I've conveyed to you all, I'm incredibly proud of where we've got the business to in terms of its performance over the years through difficult times and where we are now with the momentum that we're showing. And the team do a fantastic job. I think we've got a great team and I know sometimes engagement scores sound a bit trite or a bit cliched and stuff, but it's absolutely fundamental to have an engaged workforce behind where you're trying to take stuff. And it's brilliant that we're in that position. It really is. We're delighted about it. So I guess I kind of think I'm handing over a position that has got some good momentum. It's a great team, and I'm sure Peter will do a great job with that. I've highlighted, as I see the opportunities. And certainly, those the pipeline and the things that have been won, hopefully, those customers come through with the volumes that they've talked about and the potential. But we believe the structural growth in those markets that will support that. And they are -- they're the guys, they're the players in those markets. Nobody else new coming into them. They are the players. So I think hopefully, Peter finds an opportunity Rich set, and I'm sure he'll decide which ones he wants to prioritize.

Yes. Just a bit of a follow-up question actually on capacity utilization. I mean, Harry touched on it earlier, but on a wider basis, could you maybe talk about the capacity utilization by division. But then specific to GMS, about something like this new investment what amount of capacity does it actually incrementally add just to give us a sense of the growth runway that, that puts there.

Well, I mean, that investment we're making at moment probably does offer the sort of opportunity that Richard has talked about that we've delivered for Malaysia, but there's also space to put follow-on investment in as well.

So then after that, it's just a bit of incremental CapEx depending on how much growth comes through. The same is true of the Kuantan space as well. we've gone to 25 really quickly. So clearly, as you would imagine, we're making sure we can keep going in Kuantan. And as we've said, there's still, China is still doing actually really well regardless of that. So there's capacity in China as well. So I think it puts GMS on a really, really good global position to have what it needs to continue its growth.

And I think the other division, the -- they all have the footprint that they need as they grow, it's all about -- the -- there's a bit of incremental CapEx that's -- that would be covered in the sorts of numbers that we talk about in investing at 1.1, 1.2x DAR and then bringing direct labor in so.

All dried up in the room. Okay? Well, anyway, look, thank you all very much for your attention coming along this morning. And just a special thanks to you guys for all the support for me while I've been here at TT and I look forward to seeing you in another life sometime soon. All right. Thanks a lot, guys.