TT Electronics plc (TTG) Earnings Call Transcript & Summary

Good afternoon, everyone. Now we're not doing very well. We're already late. And for some of you in the room will know that I end up talking a lot. So this is going to be a real task to stay within the time, but we will do our best. So good afternoon, everyone. I'd like to welcome everyone in the room and on the webcast to the eagerly awaited TT Electronics Capital Market Event. The time has flown really since joining TT last October. And as I explained at the results presentation, I have been busy traveling to our various sites, getting to know the business, noting things that have gone well and identifying things that for -- where we have improvement that we can make. So our aim today is to try and simplify the message and provide clarity on who we are and what we do and set out our path to a stronger brighter future for all of our stakeholders. This is about setting the agenda and providing clarity on where we are spending our time and efforts rather than having all of the answers at this point. But we have already started to make significant progress, and we wanted to share with you today our current plans. So without further delay, and I'm really excited, I'm pleased to share with you the agenda for this afternoon because we have some -- a really great story to share with you and some fantastic products to demonstrate later. So I'm really pleased to have our CFO, Mark Hoad, with me this afternoon along with members of the TT Management Board and other senior leaders, including our Chair, Warren Tucker. I will commence the presentation by setting out how we create value for our stakeholders and then explain how we are going to unlock further value by focusing on efficiency, growth, and innovation and introduce Project Dynamo, our internal project focused on driving change. Mark will then provide clarity on the path to our medium-term financial goals before we take Q&A initially from the room and then from those on the webcast. Then Matt, Katelyn and Stewart will demonstrate some of our products that are focused on our end markets. We've got 1 stationed here, 1 stationed here and there will be 1 in the room outside. We will split into 3 groups and rotate between the various stations, and we will finish as planned by 4:00 p.m. So I will make this point now. There is 10 minutes per station, right? This is fast-moving stuff, right? We can't spend a long time and there will be a whistle moving you around, right? So you have to move between the -- but afterwards, if you have more questions, we will be able to spend time going through those and answering more questions later on. And then it will be our pleasure to invite you to join us for refreshments, where the full team will be available to answer any further questions. that you have. So I've already said that we hope that you will leave here today with some clear messages. Firstly, we want you to understand the compelling business fundamentals that we have and why they provide a strong platform for above-market growth potential. Secondly, we will reiterate the message from the results presentation of our intention to achieve 10% margins in 2024. We also want to be clear that we are going to be absolutely focused on execution, not only because that is what I expect us to do, but because it will unlock further value and improve returns. Also that we have plans in place to drive performance. Project Dynamo that we will introduce later, not only will support us in delivering improvement across the business, but it will be the key enabler. And that our move from a divisional management model to a function led regional structure will be a significant enabler in achieving our full potential. And finally, if we think about all of those things, that all of this will help us achieve our new financial goals that we are setting out today, including a 12% operating margin target for full year 2026 within the expectation of more to come whilst maintaining strong free cash flow that will translate to a mid- to high teens ROIC. Now our strategic focus is the bedrock of everything that we are presenting today. And you will see it coming through on many of the slides, but in summary, we need to achieve operational excellence and service excellence to drive growth whilst also managing our cost base to allow us to remain competitive and achieve the returns that we need. Our capabilities are good but we can do better. We need to leverage all of our assets across the business, especially in engineering and manufacturing. And we must continue to move forward by developing our people, products, and market positioning to drive long-term sustainable shareholder value. Internally, we are focusing on unlocking the value that is clearly in the business by following a mantra of disciplined execution. I've already highlighted some of the financial goals on this slide. And Mark will go into more detail later on, on the margins, cash generation, targets and ROIC. And I will cover why we believe that we can grow ahead of the market as per our growth plans. The point, however, of this slide is to be absolutely clear that as a management team, many of them sat down here, so you can go and collar them later. We are committed to building on recent momentum, driving operational and financial performance and delivering exceptional value for our shareholders. Now to create value for our shareholders, we have to consider all stakeholders. And in this section of the presentation, we will explain our value proposition, but we must start with our purpose. In developing this purpose statement, we spent time as a senior leadership team exploring what differentiates TT from other companies and understanding the value we bring to our customers. Through the discussions, it became clear we were all aligned. We support our customers with engineering and manufacturing capability, often in challenging or highly regulated markets for electronic solutions that enable a safer, healthier and more sustainable world. To unpack that further, what is our competitive advantage. I have been really impressed with the industry experts within our site to understand our markets, they develop differentiated products and technologies, working with our customers on solutions that often lead us to be embedded on programs for many years. This is an important point that differentiates TT from other industrial companies and one I will expand on further later in the presentation. Why do we win? This is an important question and one that is relatively easy to explain. TT brings a blend of manufacturing know-how, domain IP built over many years, decades even, alongside leading engineering capabilities to serve our customers, often in highly regulated markets, and it is this deep domain knowledge and expertise across both engineering and manufacturing that sets TT apart. We are skilled engineering customers designed, adding value to components and subassemblies work that often, companies focused on high-volume commodity electronics do not want to do. The industries we operate in are often focused on reducing size and weight of product whilst optimizing the power requirements. And we've got some really good examples of this outside. This means that customers are looking to us to use our expertise to help them either by engineering a suitable solution or supporting them in the way that we package and manufacture customized solutions. This leads to a truly collaborative relationship. All of this means that TT is focused on lower volume, highly specialized and critical applications where these requirements and our capabilities differentiate us from higher volume, low complexity or common commodity players. And if we think about where we are applying our skill set, our focus on highly specialized and critical application supports our end market focus. These markets are not changing and are the right markets for us to be focused on. Not only because of the good long-term growth potential, but also because they are underpinned by an increasing focus on sustainability. You'll be familiar with some of the growth dynamics around these markets in healthcare, alongside an aging population, you have areas such as robotic surgery, implantable devices and surgical navigation devices where TT is active. And these are all driving long-term growth. And just to point out, you will be able to learn more about this and see a surgical navigation demonstration not -- you'll be pleased to know, on a human body in case any of you are a little squeamish. But in the healthcare showcase over here that Katelyn is running later. In aerospace and defence, we are active in the civil and defense markets. And one of the stats that I think is most interesting that I have seen recently from Airbus and Boeing is that they believe that there will be over 40,000 new commercial aircraft required before 2042, a huge amount. We are going to show you a video in a moment, and I'm setting out our positions on some of the platforms across the A&D sector, which will bring what we do to life. You can also see the detail on some of the boards around the room, outside and the showcase that Matt is running. Automation and electrification, the last market for us here is being driven by a number of market drivers, including the shift to use renewable electricity supporting the reduction in greenhouse gases. Stewart has a few really interesting examples in his showcase that also includes examples of products going into distribution. And for clarity, our sell-through distribution account for approximately 20% of revenue. And we serve over 47,000 different customers. Around 1/3 of this revenue goes to OEMs where we have a direct relationship. And often, we have worked directly with them on customization of the product. but they have a policy of using a certain distribution channel for fulfillment. Of the common thread across our products and end markets is the need for high-performance parts often in difficult, tough environment, which by their very nature, have high levels of regulation. And it is because of these market dynamics that we have strong visibility of future revenues and strong barriers to entry. This slide really sets out the focus and direction for TT going forward, but also underscores our competitive advantages. We have already said that we are positioned in attractive end markets and stated that these markets typically require a high specification product with significant regulation. So why is that good for us? Well, on the Y-axis, we have market regulation and product specification. And on the X-axis, we see time to market. It is not an exact science, but generally, the more regulation, complex and necessary a product, the longer it takes to come to market. This means that our investment is required in engineering resources early in the product cycle to bring value to our customers. Consequently, this time to launch in the market is longer than standard and longer than high-volume industrial products. So TT invests in this customer intimacy creating detailed understanding of products and customer requirements to bring the best solutions to market, serving the challenges of longer product life cycles. The development phase of the product life cycle is often where the stickiness originates in our customer relationships, securing long-term recurring revenues. Our focus is on securing new business that fits into the top right quadrant, where our engineering expertise is required and complexity driven by market regulation approvals provides barriers to entry, but often leads to higher margins. This focus is characterized by a number of things, but is summed up with customer intimacy and long-term relationships. Now not all of our products and our current order book sits in that top right quadrant. But with the divestment of Project Albert, a significant proportion of our revenue would be classified as having high barriers to entry and high switching costs. We estimate 70% to 80% of our current revenue is currently in this box. The key for us is to deliver for the customer and ensure the value we are bringing is properly recognized. Now in terms of our product groups, whilst we often customize our products for our customers. This slide provides an illustration of the high level product types and capabilities that TT offers down the left-hand side there. And it shows the complementary nature of the technologies across the sectors that we are focused on. So across the top, we've got the sectors. The vertical cascade illustrates how Optoelectronics, for example, on the top left of the slide, can build up to larger product types in power applications or wider electronic control cabinet complex assemblies. And there is value to be unlocked by encouraging vertical integration of product groups in solutions that we offer to our customers. This is one of the areas we will focus on in Project Dynamo. However, the common thread, again, across all of these product groups, apart from the vertical integration opportunities and customer end market applicability is that they have high regulatory requirements, are technically complex and therefore, require a combination of engineering and manufacturing expertise to support our customer. At this time, to give you a break, because I can see some people struggling already. I'm going to give you -- we haven't got any popcorn, but we're going to do a little video just to see where some of our products fit into. And this is related to the aerospace and defence markets. [Presentation]

Then you can have roars, you can have claps. You can do anything you like at that point. But hopefully, you've enjoyed seeing the video because -- the point here is we are involved in some really important programs there that we see. And afterwards, you saw some wire frames where you could see where the parts that we make and the products that we make fit into those programs. And there's quite a few wire frame images outside, then you can have a closer look, and you can see where we are on all of those different programs. But I think it's really important to understand the fact that we do supply some critical products on some really important programs. And this has become increasingly apparent the more time I have spent in the business and perhaps something that I did not really appreciate before joining TT. The quality of our order book is fantastic. We announced at the results presentation that at the end of 2023, we had nearly a full year of revenue cover, of which 9 months relates to 2024, well above historic pre-COVID levels. We also highlighted 37 significant contract wins with potential lifetime revenues of around GBP 250 million. But the point we didn't make was that only 20% of this potential lifetime value was actually in the order book at the end of the year. 80% is still to come over subsequent years. This is consistent with many of the programs that we are on. So the order book does not really represent the value of the programs because we have not received the call-offs or the purchase orders from the customer yet. This means that we have far better visibility than indicated by our order book. Our business is very sticky and can generate revenues for many years to come based on the designed in nature of our products and the customer intimacy and strong barriers to entry that we have already discussed. This can generate multiyear recurring revenue business, varying in length by product sector. But in the most extreme cases, TT could be servicing requirements for aircraft or submarine applications that extend for 40 years or more in operation. As long as our service performance, is good, and the programs continue. But alongside this, new wins will continue to feed the hopper. So locking in our place on the program and the future returns that the early engineering and design phase is key to securing long-term revenues with extended visibility and something I will touch on in more detail later under Project Dynamo. The graph on the right here on the right-hand side of the slide is illustrative, but is directionally correct. It shows the level of visibility we have beyond the order book. So you can see that from 2024 to 2030. From our multiyear programs and our focus on driving new business, which is in the light blue on the top, ahead of the decline of previous long-term programs that are coming to the end of their life. So a really important slide as part of our understanding of the business. And if we're to understand the recurring nature of the order book, it's also important to understand the general life cycle of a program. This slide is a little busy, but we want to explain the different parts of the cycle. So we've got product development on the left, we've got product maturity in the middle, and we've got end of life to the right. The product lifecycle can vary by market or sector as shown in the table at the top, giving a view of our 3 market sectors. And across the bottom here of the life cycle, you can see the various activities that we undertake to support our customers and the programs. And these can be up -- for up to 50 years. So I wanted to give you some examples of programs that we are working on in each of the boxes so that -- for product development, if we think on the left, we've got the product development for A&E, so 0 to 2 years, which is the shortest period. We are currently working with a technology leader in high-end consumer products, that's all I can say, on some sensing technology that our engineers have been developing for well over a year. Once this moves into production, which is expected in the next quarter, we would expect a contract for 3 years, and that's the plan. If we then move to the product maturity in the middle one, think about healthcare, to give you an example there. We are in full production for mass spectrometers in series production with multimillion pound recurring revenue for one of the leading global suppliers. And if we think about the end of life in A&D, we are still supplying connectors for Jaguar aircraft that went into production in 1973, I think, that are still in service, and we are still supplying the connectors for that particular program. So we aim to manage the entire life cycle of the products to support the unique requirements of our customers. And if we just think about A&D sector for a second and think about the programs that we support. We currently are supporting over 60 commercial and military aircraft platforms. 25 missile programs, 7 radar pro platforms, 14 naval platforms, 16 space platforms, 26 land vehicle platforms just in our A&D area. And we are doing this for some real blue-chip customers, household names, people that you recognize. We have had long relationships with a lot of these customers. Our top 10 customers have all been working with us for over 15 years, and many have been with us much longer than that. As you will hear shortly, we need to make sure that we are properly leveraging these relationships to grow share of wallet and ensure in some cases that we are involved earlier in the process and that all or certainly more of our products are considered in the early stages of a product life cycle. It is the customer intimacy and long-term collaboration that leads to long-term relationships on long-term programs, giving us great visibility over long-term revenues. So we have discussed already the importance of our engineering and manufacturing capability. And I want to explain the importance of being a global manufacturer with a strong regional presence for our customers. Proximity and optionality are key and is a real differentiator for us against the competition. We have recently expanded our capabilities in Mexico and Malaysia. And this provides capacity and capability in each region to maximize the opportunities that we see to support our end markets and our customers with local support. And that really brings me to our people. During my first 100 days with TT, I visited our sites across the group and found a true competitive advantage, waiting to be unlocked. Our people and culture. In every site, regardless of location, product or even current performance, I found an open and engaged community of people, proud of what they do and who they do it for. And here's what I think makes the difference. TT people have passion. You're going to meet a lot of the team afterwards, and I'm sure you'll see that in the way that they show the products. The 2023 employee engagement survey results. They speak for themselves. 91% participation is fantastic and achieving the highest standard of a 3-star rating overall is a great place to be. This means that we have an employee base who will actively work with us to identify and make the improvements required to take TT to the next level of performance. A key part of Project Dynamo that you will hear about in a second is giving our people the tools and a common set of standards to operate under to drive efficiencies and operational excellence. I am confident our people have the ability and desire to execute on our ambitious plans. We have numerous examples of long and loyal service from our people because they want to work for TT, and this provides deep organizational knowledge of our customers, our products and our processes. I have talked about the length of some of our programs for a customer being able to speak with those intimately involved in a product development many years after production commenced on upgrades or anything else is invaluable. The longevity of our workforce and knowledge within our workforce is a real USP. We have a wealth of design and manufacturing engineering expertise across our business. And this is strengthened by our academic partnerships such as with the University of Nottingham. And the great thing is that TT people live our values. I found out that the TT values are not just stated, they are lived and celebrated across all of our geographies and cultures. They unite the team as one TT. And because of that, the people care about the sustainability of their communities. The picture showed just a few examples of sustainability initiatives undertaken over the last few years. But the great news for me about sustainability is that it's not just about doing the right thing for the world, there is also a commercial benefit with various examples of us supporting our customers in their own sustainability journey to be cleaner, smarter and healthier, which in turn drives our revenues. So we are making a difference for our customers, but we also take our own sustainability actions very seriously. And I am pleased to set out our new targets of achieving net zero for Scope 1 and 2 by 2030, 5 years ahead of the original target. And this is based on the great work and progress already made. This year, we have achieved an AA rating from MSCI, and we are working towards science-based targets reporting. So thinking that you need another break and you haven't finished your popcorn. We're going to show another video now to talk about some of our capabilities, manufacturing capabilities. [Presentation]

So as I've traveled around to all the different sites, I've been really impressed by some of the things I've seen as I've gone around and some of the capabilities in our different manufacturing sites -- and I hope -- I'm not sure it does it justice, right? But I hope that gives you a sense of some of the sites and some of the things that we do and why it's important. And I hope you can also get a sense from the things we've already talked about that we have some really great people with real knowledge and expertise who work extremely hard and do some great things. However, on that tour, it also became clear and even in recent reviews that there is an opportunity and requirement to improve our execution, strengthen our commercial focus and refine how we think about innovation to unlock the significant value that is still in the company. And so we have introduced Project Dynamo. And Project Dynamo for us is there's 3 pillars. And this is a company-wide program under the leadership of Matt Yeates, who you will meet in the showcase on the right over here. And we -- as I said, we're going to focus on efficiency, growth and innovation. As I have spent time in the business, I have seen numerous examples of inefficiencies, complexity in the business that often hinders our ability to succeed. I have witnessed opportunities for growth, not explored because of internal perceived constraints. And we have not harnessed all of our technical engineering and manufacturing know-how to maximize the product development opportunities that we see. So what are we going to do differently to drive improved outcomes and better return for shareholders. Well, the first thing we have already done is move from a divisional model to a function led structure across 3 regions. We have a good footprint aligned to our global customer base, as we've already discussed. But we need to leverage this better. As I highlighted in the March -- at the results in March, I believe that our structure has hampered some of the opportunities to share best practice by being focused on the division at best, or even down at the business unit level, working in silos rather than maximizing the resources that we have within the company. So that is the reason we have moved to a function led structure with regional management focus. It will allow us to set out what operational excellence, commercial excellence, service excellence looks like. We will hold ourselves to account and strengthen our customer relationships and have consistency across the regions and maximize the resources we already have in the company. I am excited by the conversations that we have already started having across the business and the focus on collaborative working. And on the next few slides, we're going to set out where we are focused on and followed by what we are going to do. So here, we have efficiency. We have examples of duplication of activity because of each site or division, as I said, working in this isolation. We have people doing similar roles across the division and our move to a functional led organization will mean that these roles can be consolidated at the group level. It will also unlock talent management opportunities, procurement savings and deliver lower SG&A costs. It will also allow us to drive best practice across the business. We need to be clear what standards we are working towards, and we want to remove any ambiguity and provide a clear path to an efficient operation. So by bringing the commercial team together, we will be able to provide a one TT approach to our customer over time. And this will really help when considering new business opportunities in particular because we will think across the full breadth of the products and not just 1 product group. And with this being regionally focused, we will also be able to use our team and resources more efficiently and have earlier conversations in the product development cycle. It will also help us to ensure that the value we bring to the customer from across the business is better recognized. So in terms of asset utilization, this is simple. We need to remove any constraint that stop us maximizing the assets that we have to improve our return on investment and our ability to support other parts of the business. We need to decide if it is better to make the part versus buy the parts because in a number of cases, in some parts of the group, we have already invested in the machinery that can manufacture the required item. And we should be leveraging our internal capacity better. For example, I have seen occasions where we are going externally to get a small batch of printed circuit boards manufactured outside rather than from a TT site that has the capacity and the capability to support them because the business has not communicated their needs or the process of placing an internal order is more difficult than going outside. This is something that we need to fix. We believe that by strengthening the region's focus, we'll be able to use the resources we have locally to support the customer far better. Rather than having to travel into different regions, this will allow us to strengthen the vertical integration, opportunities to talk about the product portfolio with those customers, driving our growth in share of wallet within clients. So bringing all that together, we do believe that there are a lot of reasons to move to the function led regional structure that will, if we execute well, when we execute well, deliver considerable value. So what are we doing? And in some cases, what have we done? Mark will also explain some of the benefits of our actions on later slides. However, I wanted to pull out some actions that have already commenced under the efficiency pillar, the first of our 3 pillars of Project Dynamo. We have identified GBP 5 million to GBP 6 million of annual cost savings already. These are already being actioned and we will start to see the benefit coming through in the second half of the year. Whilst there are a lot of levers to pull and some of the benefits are still to be quantified, clearly, some of the factory productivity opportunities and sharing of resources are already providing positive upside. Our factories are at different stages of progress in terms of operational efficiency and productivity, but our new structure will allow us to harmonize standards and drive best practice from top-performing sites across the rest of the group. And that action, again, is already starting. On sharing resources, you've already heard 1 example where we can be more efficient, but let me share another one. In a recent regional meeting, it became clear that our site in Sheffield provide complete temperature, pressure and flow calibration services to a wide variety of customers, but not to any of our own sites. So in the U.K., this would add GBP 150,000 to our bottom line, and this has already been actioned. This is really about a more disciplined approach to execution. And the function led organization are already setting out standard and reports for us to identify opportunities for simplification and therefore, efficiency gains. But that continues to keep the customer because that's the most important thing, keeping the customer very much at the center of everything that we are doing. We have talked about inventory and the fact that currently it is higher than we would like as we've come through the well-documented supply chain issues, and I'm not going to repeat those. But our aim is to improve the stock turns and reduce inventory levels. And we have introduced a task force that has been formed to drive this and report back to the Management Board on a regular basis to drive down the levels of inventory. And if we are to continue to grow and deliver on our ambitions, we need to perform at the highest levels. We need to set ourselves higher expectations in terms of operational performance, outperforming client expectations across their key performance measures. In order to do this, we need to use the strong relationships and the regular conversations we have with our customers to better understand their requirements including value for money and delivery and ask the right questions. This, in turn, will help drive further client penetration and grow share of wallet. The strengthening of the commercial process, including a more robust tender approval process as well as firming up our terms and conditions will provide more certainty on the pricing for new business. With the regional structure, our sales and BD teams have been reorganized to maximize the opportunities across our targeted end markets, and ensure a more regular dialogue with our key customers in the regions. The structure will also allow our sales teams to have earlier technical engagement and better leverage our engineering resources to build customer intimacy and broaden our customer base. There is a real opportunity to do more with our existing customers, increasing share of wallet for some currently may only have a relationship and be focused on 1 division or 1 product. If we can break down, we are breaking down those silos that will allow us and provide us with the capability to sell all of TT's products to a wider population. A very recent example of this was when we had a meeting in the U.K. again for our site leaders, and we discussed a number of customers. And 1 customer in particular stood out as every site was supplying that customer different products. And yet, we were not joined up in our approach. It is clear to me that there is an opportunity to drive efficiencies and better pricing as a group. The regional team are now able to get their hands around situations like this and close them out in an efficient manner. And in time, still thinking about growth -- in time, once leverage is further reduced, we will continue bolt-on M&A to bring either a new product into the portfolio or increase our presence in a market. So when we think about innovation, we have significant engineering resource -- and we need to unlock the value of this capability to drive our innovation agenda and increase the value of IP in the business. We want to drive collaboration across this particular function. And Stewart, who is heading this up, and you'll see Stewart outside, in the showcase outside, is making real in fact, fantastic progress in mapping our capability and resources to build a technology roadmap that can support our longer-term growth expectations and help unlock our efficiency program and optimizing our vertical integration. Now many of these things have already been mentioned already in efficiency or growth as they are all linked, right? So that's why they've already been mentioned. But the point is that if we drive these various work streams through Project Dynamo, we believe that we will be able to unlock significant value across the whole business. So what does this mean? Well, you'll be pleased to know that I'm now handing over to Mark, who is going to talk us through some of the financials about what this means.

Thank you, Peter, and good afternoon, everyone. So as you've heard from Peter, TT is a good business with strong fundamentals, but there's lots more to go for. The results we delivered in 2023 demonstrate the considerable momentum we have in terms of financial performance and adjust the start. Margin improvement is underway with a 110 basis point improvement in 2023 and as I'll explain, there's a clear pathway to further progression. After a period of investing to improve the business, we've reached an inflection point in cash generation with an end to both large cash exceptionals and pension deficit payments. This combined with strong operating cash conversion resulted in GBP 24 million of free cash flow in 2023 and 2024 is expected to be another year of GBP 20 million plus of free cash flow. The improvement in operating profit, along with high cash conversion translated to improved return on invested capital of 12% pretax in 2023, above our cost of capital and we expect ROIC to improve further. Finally, leverage is coming down. And by the end of the year, we expect to be down to the lower end of our target range, which will mean we have investment capacity and optionality on capital allocation. This is a reminder of the slide we showed you with the year-end results. Having delivered 8.6% adjusted operating margin in 2023, we are confident of delivering 10% margin for 2024. There are 3 key items which we have clear line of sight to. Zero margin pass-through revenues started to unwind in the second half of 2023, and we expect a further reduction of around 20 -- around GBP 12 million in 2024, and this adds 20 basis points. The divestment Project Albert has now completed and we will get 40 to 50 basis points of the margin accretion benefit this year. And finally, as we said with the results, the Plano HVAC issue is now resolved, and this adds another 50 basis points. That leaves a relatively small gap to 10% to close. Clearly, we need to offset cost inflation and the expected reduction in S&SC revenues this year, but our order book gives us good visibility over the remaining revenue growth to hit that milestone. Now Peter just laid out a few of the changes we're making to drive efficiency and to improve execution under Project Dynamo. This gives us a clear path to deliver 12% adjusted operating margin in 2026. Like the path to 10% margin in 2024, we have visibility over more than half of the step from 10% to 12%. The remaining GBP 8 million of pass-through revenues will be delivered this year. And once they are gone, that adds 20 basis points. The full year effect of the divestment adds a further 20 to 30 basis points. With the move to a regional structure, along with the wind up of the pension scheme, we've identified GBP 5 million to GBP 6 million of SG&A savings, which will add 60 to 80 basis points of margin improvement over 2024. There's a modest benefit within our forecast of 2024, and we expect to realize around 2/3 of the savings in 2025. Again, like 2024, that leaves a relatively modest amount for us to find between 70 and 100 basis points over the course of 2 years to get to the 12% in 2026. There are inflationary costs that we need to overcome, but we're confident that the combination of growth and additional factory efficiencies will underpin this. And for the avoidance of doubt, we are not planning on taking large exceptional costs to deliver Project Dynamo. Other than in the period over COVID, where supply chain is extended, order books grew and we took the decision to invest in inventory, TT has consistently delivered strong operating cash conversion. Even taking those couple of years of investment into account over the period from 2015 to 2023, cash conversion averaged 87%. And we expect performance to remain in line with this average as we move forward into a growth phase and as we continue to focus hard on discipline around invested capital. The table here gives you an indication of what level of conversion of operating profit into operating cash flow, you can expect over the next few years. This year, we expect capital and development spend to DA to be around 1.2x allowing us to invest in growth and efficiency. But even then the excess of CapEx over depreciation would only consume 10% of cash from operating profits. The business does consume some working capital. This would typically be around 20% to 25% of the organic revenue increase and is therefore manageable. In addition, we continue to see some opportunity for structural inventory reduction, as Peter highlighted just now. Overall, this means we should convert operating cash into operating cash flow at 85% plus. And as I said before, last year, there were significant drags on free cash generation from the pension deficit contributions and large exceptional cash costs, but the pension burden is behind us, and we are clear that the footprint we have is fit for purpose, so large cash exceptionals are also not going to reoccur. That means we are confident in the repeatability of the kind of cash -- free cash flow performance we delivered in 2023. And with growth in EBITDA, that should translate to around 0.3 to 0.4 turns of deleveraging every year. And with that kind of cash flow -- future cash flow profile, our capital allocation policy will take on increased importance. Our #1 priority remains investment to support the organic growth profile of the business. We understand the importance of the dividend to our investors. We intend to continue with our progressive dividend policy. We expect to grow the dividend, but would not want to see dividend cover drop below 2.5x for any extended period of time. Earnings cover for 2023 was 2.8x and this gives us some flexibility to manage FX headwinds if we saw some strengthening in sterling. With the deleveraging profile I've just set out on the prior slide, we will have investment capacity as we get to the end of 2024 and leverage moves towards the lower end of our 1 to 2x net debt-to-EBITDA target range and we expect, as I said, to create more capacity each year. This will give us flexibility. For 2024, our focus is on the organic opportunities in front of us. But from 2025 onwards, M&A will again form part of our strategy, and our focus will be on adding product and technology capabilities and improving customer reach and geographic presence. This will though be balanced against the relative returns offered by returning that capital to shareholders. So to recap, we're operating in markets which are expected to grow by 4% to 6% compound over the medium term, and we expect to be able to grow faster than that. Organic growth ex pass-through this year is expected to be at the lower end of that range, but that comes on the back of compound organic growth of 9% over the prior 3 years. We have a clear plan to improve margins to 10% in 2024 and then to 12% in 2026. The business is expected to convert profits well into cash with 85% plus of cash conversion, and that will translate into strong free cash flow generation. And the combination of growing profits and higher cash generation will translate to improving return on invested capital increasing from 12% in 2023 to the mid to high teens by 2026. Overall, a compelling set of financial returns for shareholders. Peter?

Thank you, Mark. Well, I've done really well because I stayed on script, right? So I haven't gone off piste, which is really good. Now to summarize where we are. We, this team, are laser-focused on disciplined execution to drive shareholder value. We're not waiting to get going. The business is driving towards improved performance and there is good momentum. But this is just the beginning. So it's a very exciting time for TT. And we've got some fantastic things to show you in the showcases. Here, we've got the healthcare, over here, we have our aerospace and defence and outside, we have automation and electrification and distribution. So that's the 3 different groups. Now because we're not sure who is going to come today and why you're thinking of your questions, which we're going to have in a second. I just want to set out that we're going to go into groups, okay? And so after the Q&A, I would like -- I felt like a school teacher, but up to here, Mark, you can go whichever side you want, okay, but it's down there. And that can be Group 1, then we have Group 2 and Group 3, okay? If we do it in that. And we'll have Group 1 start here, Group 2 start here and Group 3 will be outside. And then after 10 minutes, we'll swap our end. And we'll do that for half an hour, and then we'll have refreshments at the end. So thank you. And before we take questions, I just want to thank you all for attending the CME today. It's really important for us that we explained the story. We're very proud of it. We're very proud of what -- and we're excited about what the opportunities are, and we wanted to share them with you today. And we'd like you to join us for refreshments at the end so that you can ask further questions and we can -- you can meet the team and we'll do that later. But for now, we'll have Q&A. Thank you.

It's Stephan from HSBC. I have 3 questions, if I may. First of all, looking into the margins, and I take my questions one by one. 12%, how ambitious is that? Because if I probably would sit in front of Richard 1.5 years ago, he would tell me the company will reach 12%. It's 12% in P&C, 10% in GMS and 15%, 16% in Sensors and Specialist Components. So what has changed? I mean is this just like a relabeling to get to 12%?

Shall I answer that one first? Okay. All right. Just so we remember the questions. It's a very good question. I know that this -- that we've had a target for 10% for a long period of time. And there's been a lot of good work that's been done in repositioning the business. But as we set out today, this is about disciplined execution, right? This is about how we do it, how we go about it and delivering on -- and all understanding and as we think about the future, what should we be doing and how we should be doing it, okay. And that will drive through a much improved performance across all of the business. So we believe that we can get to 2026. That's what we're -- we can see that. We can see the work that we're doing until 2026. And that's why we've come up with the 12% because -- and as Mark has explained. Long term, this business, and you can see you'll be able to see from the different products and go around. This should be a higher-margin business than that. But we're on a journey. And so what we set out today is 2026. At some point in the future, we'll set out future targets.

Okay. Then second one, M&A. I mean, the bar is very high in terms of multiples. Everything that you would probably look at is trading higher than 6x EV EBITDA. So how realistic is the M&A component, what would you be looking for? And what are your criteria for acquiring?

Well, there's quite a few people in here that know me of old, and I mean. So I like a bargain, Stephan, so as we go around. But you've got to try and find one, right? But a lot of the time with M&A, you have to have a plan, and that's why we're not looking at the moment because it's going to take a while to set out what does that plan look like, what fits -- what do we need and how do we fill the funnel in terms of looking at the whole picture. So there's 2 parts of it, right? So 1 can we find those right things that will help us to expand what we do, broaden the portfolio, broaden the markets that we serve. That's 1 question. And then can you find it for the right price? But this is about an organic play. We've got lots of opportunities for growing. The bolt-on acquisitions are only there if it makes sense to do that and if it's the right valuation. Now right, currently, if I was going to buy any business, I'd buy TT because it's good value, right? So that's what I would do.

Okay. Last one, and it's about doing the right things. And obviously, there's a lot of things behind the scene because as people doing the right things, wanting to do the right things, accountability. So how much changes there in your leadership, how excited are people to change the way of doing things and change the harmonizing, going for the function led and all these changes? So how's that going?

There's a lot of change, right? But I think, look, people are working hard in TT. But for whatever reason, we haven't always been as successful as that hard work as you should have delivered, right? So I think actually, everybody understands that we need to do something different here, and we need to think about this differently than we have been doing. And right now, there's a lot of enthusiasm, there's a lot of excitement, and there is real engagement about driving the business forward. And actually, it's empowering to me because as you go around and you listen to people and they're talking about it is really encouraging because they're excited about what they are able to do now that they couldn't do before, not because anybody was trying to stop them from doing it, but the structure just did not encourage it. So now by unblocking that by just taking away some of those hurdles, actually, it unlocks a lot of value. So it's very exciting.

Two quick ones from me. One is you used was like barriers of entry and recurring revenues and defence solid programs. And one would intuitively think that the business could easily have higher margins. So historically -- and I'm deliberately asking you this question, Peter, because obviously, fresh pair of eyes here, have we been pricing too low? Or it's just competitive pressure that we are not able to price higher because we are doing some great engineering work but we are not able to translate that to financials.

Yes. I mean what -- it's one of the reasons I'm here, right? Because when I started looking at TT, I couldn't understand why the margins were where they were with the type of products that we're making. And I think as you go around the showcases, you will see some of the really high-end engineering capabilities that we have. And listen, across all of our products, we do make good margin on some products. Do we really make the right margin on all of our products? No. And is the value that we get for the products that we manufacture, is it the right in all cases? No. In some cases, it is and in some cases, not. So bringing this together with 1 team to say, right, the discipline of doing the right thing all the time, will solve some of those problems going forward, especially on new contracts, right? Because we'll price it properly, we'll review it properly. We'll put all of the good things that we do. I mean, we do some great things, but we don't do it across the whole piece. And so that's what we need to do.

And my next one was, did you -- did I hear correctly when you said we have 21 manufacturing sites?

21 sites, 18 manufacturing sites.

Is that one too many and is manufacturing our real capability?

Well, manufacturing is a real capability. I think if you were drawing -- if we're honest, if we were drawing TT and said, what would you -- how would you draw it? We wouldn't draw it as we've got with all the facilities that we've got. That's true. The cost though of moving some of those sites and the regulation and the approvals for manufacturing on that particular location make that very expensive and very difficult to do. And that capability that we've talked about, you lose some of that along the way. So there's a number of challenges to redo it exactly as you want. However, a lot of good work is being done by Mark and the team before, right, in terms of narrowing that down. I think where we are now, we can work with what we have. Over time, when we deleverage, when we improve the margin, we'll be able to sort some things out as we go along as time elapses to make sure that we've got the fit for purpose manufacturing capability in each of the regions. But right now, we don't need to make any further changes in terms of major exceptional charges or things like that. We can work with what we've got. What we now need to do is do what we currently do, but better.

Vanessa Jeffriess from Jefferies. Just following on from Stephan a bit. Some of the examples you gave of how siloed the businesses are were quite amazing. And you said that a lot of employees are really excited to go into the new structure. But presumably, a lot of people thought that TT was doing a good job before, and a lot of these attitudes are pretty firmly entrenched. Do you think there's a lot of risk of operational disruption over the next 2 years as you work this out?

I think it's a fair question, right? Because I think will everybody go along the journey? Possibly not, right? Because we're making changes and some people don't like change. Why I'm seeing at the moment, though, it's not that people are against the changes. They were working hard before, and they thought what they were doing was okay. And it's now setting a different tone about what is okay. And that is not okay. This is the level we want to be working at. And if you set the different level, that's just a different parameter of where we want people to be working in. It wasn't they were doing a bad job. They were working out, they were doing what they were meant to be doing. What we're saying now is there is a different standard. And that's what we're trying to impose.

And then you mentioned 70% to 80% of your sales are in that niche area that you want to be. Where is that 20%? And are there any kind of Project Albert type plans?

No, there's no more Project Albert type plans, but they're all -- there's products that we would have in a portfolio that would not necessarily fit into that space. But there are things that you have to have if you're supplying the customer across the whole thing. It doesn't mean to say they're bad, but they just don't fit quite in that upper right quadrant. So there's no more -- the Project Albert has dealt with what we feel is the focus. Now we can put our energies into growing and improving what we've got left.

It's Andy from Jefferies. Can we just have a quick chat through the change of structure from the divisions to the regions? What's happening with management, who's heading up the 3 divisions? And are you, in essence, creating a bit of a matrix structure where you start from the region and then you kind of work down by divisions? How does the -- how does that work?

Yes. So it's a matrix function, okay? So you will have a Head of Commercial, Head of -- which I think you can see in the pack for the back, Head of Operations, there will be Head of Innovation. They'll be Head of HR, they'll be Head of Finance. So those there are setting the standard across the whole business. And then you've got a regional team, a regional management team that is managing the -- are managing the sites within their region and making sure that those standards are the same across each location.

And how do you create the focus on the 3 divisions by regions? You're almost quadrupling?

Well, no, because we're not having the divisions at all, okay? So it's just regions. And we are selling all of these TT products. These are just those product groups that you saw we're selling these products across to our customer base, we're really focused on end markets. So it's about aerospace and defence, it's about healthcare and automation and electrification. So those are the -- there's more end market focus. It will be regionally reporting because that's the easiest thing for us to do. But really, the drive is to do more in each of the end markets.

And then just going on to the new regional structure. You've got no sites, manufacturing sites in Europe, ex U.K., you've got 2 in China and 1 in Malaysia. The previous question, is that actually the right structure? And do you need to have a bigger European and Asian footprint.

I think in time, that's an opportunity, right? But that's whether you do that with M&A, whether you do that organically, whether you -- but there has to be a need and a demand. So what we have to build from now and as I said right at the beginning, which you may have missed is we haven't got all of the answers to all of these points at the moment. This is about setting the direction. And 1 of the things that we have to think about is where are we located, where are our customers, having a strategy for our customers and having a strategy for our operations, and that needs to be built and developed. I would expect there to be some more European presence at some time and some more agent presence over time as we continue to grow.

It's Harry Philips at Peel Hunt. Just sort of continuing that division, new divisional structure, just thinking about the cost savings and how they can sort of express themselves. And will the sort of central cost line get absorbed into divisions and it will be a sort of cleaner model, if you like, in that context. The second is just on the pricing in the order book. Obviously, you highlighted the enormous visibility you've got. But at the same time, as this model sort of unfolds, clearly, you've got long-term pricing in those contracts. So how do you sort of get better margin through by '26, which strikes me as being quite a stiff target? And then lastly, just again coming back to the 20% sort of outside the box, so to speak, and sort of no project out, but when you're looking at the growth rate of sort of above market, et cetera, is that going to be including that 20%? Or are you going to ex that out?

So on structure, Harry, so the way that we have been reporting, the central cost line essentially represents the cost of running the plc, any costs that sitting group were in the center that are supporting the divisions are already allocated to the divisions. And so my expectation is that going forward, we'll end up with a similar answer so that GBP 8-ish million will still sit as the central cost number. And then I said the cost get allocated into regions. The plan right now is to we're about to embark on sort of doing the internal work on restatement, the plan will be to get something out probably during June on restatement.

And the sort of cost savings, how much.

So well, so obviously, today, you can only really sort of model it based on the divisions because we need to give you some more information. I guess it's worth saying that based on some high-level work we've done, actually, we think that the margins between the regions there won't be a great variation between the regions. But the savings are likely to be relatively proportionate to the size of the revenues, frankly, is probably the simplest way to think of it.

Sorry, cash cost of sales.

That's all being absorbed within the adjusted operating profit. So the benefits will really start to come through in the second half of 2024, because we're taking some hits and costs in H1.

Mark Davies Jones at Stifel. You just answered 1 of my questions is the timing and the margins across the regions. But the broader question, I guess, is moving away from the divisions. You can see the advantages in terms of removing silos. What are the risks in terms of leasing a bit of focus? And the idea that you can cross-sell between those units, I mean, some of them are pretty specialized in what they do and very much tied into sort of very specific customer sense. So how translatable is that in reality in a commercial sense? And to what extent can the factories be interchangeable in terms of what they supply.

Well, I think you've heard a lot from me. So I'm going to hand that question over to Mike, who's responsible for actually making sure how we sell across all of those different things and what -- and how we're thinking about it.

Thanks, Peter. I think the focus for us is to take some of the best practices that we've enjoyed over the past couple of years in some of the divisions and make that a global best practice. The margins, your point about the margins and the inflexibility to be able to change parts and products, I think we look at that as an opportunity as the product evolves as we move from lot 1 into lot 2 or into the next version of the product that opens a great opportunity for us to suggest and implement new parts, new processes. And those parts and processes will be TT processes. So I think that's the main opportunity for us.

I think maybe, Mark, your question about the risks of going to a regional structure. I guess for me, the risk is that you create a whole new bunch of silos in the regions, but that's why having the functions being the lead and the disciplines around commercial or operational best practice, that is going to be nonnegotiable going forward.

Say, GMS has had a big healthcare focus. The power side is very A&D-related. It's quite a different world to cross those barriers and make them more broadly TT served isn't it?

It is. But I think if you think about the regional activity, there are a whole range of things that you can do. So the skills that we have -- some of it will require training. Some of it will require development. Some of it require expertise that we don't currently have in each of the regions to do it. And whether we have that internally developed or externally we bring it in, we'll see. The point though is there are customers in each of the regions for aerospace and defence, for healthcare and for automation and electrification. We are not maximizing the ability to go and see them even though we've got the right products because our resources is not in the right locations. So we've got to try and do some mapping and bring some together. We're not going to be able to do it completely. Everybody is not going to be able to sell everything, but we have a team and it's how you bring all of that team together and use that resource together. And there will be maybe 1 and 1 doesn't equal 2, but 1 and 1 might equal 1.5 and 1.5 is better than the 1 it is at the moment, right? So we're going to work that, and there are some challenges in it. There's no question about it, but there is a plan, and there is things that we can do. And we're already starting to see the benefits and people go in I can sell that as well. And I can do that. So do you mean I can go into this customer because they keep asking me about this product. And I just keep saying I can't do anything about it because it's not my business, it's in a different business. So they just walk away. And it's to stop that sort of thing happening. That's what we're trying to do Mark.

Mark Fielding from RBC. Just talk a bit and this is a slightly convoluted question. But in terms of -- because there's 2 bits to it. But in terms of specifically GMS and the new structure and how do we think about how it fits. There has obviously been on this evolution away from what we would generally think of as a build-to-print business, but by nature, it has less of its own IP. So do we think that there's a continued shift towards it supporting other -- what would have been other divisions before, but obviously aren't now. Does it develop more IP? And then the second part of this convoluted question is, therefore, in that margin bridge, how do we think about mix because historically, GMS has grown faster than the rest, but was, on average, lower margin [indiscernible]. So just how do all those parts move together?

I mean that's the big issue, right? But I think the fundamental of the message going today, we are an engineering and manufacturing business. And the manufacturing expertise that we have and our engineering expertise. So on some of these opportunities, it's the engineering expertise that helps us win. And in some of the cases, it's our manufacturing expertise that helps us win. But they are all -- everywhere we are focused at the moment is in highly regulated or things that take a long time, either testing or approvals to get to a point of a solution. And that's the way to think about it. So if you think about an EMS business, which is high volume, very simple, very low regulation, that's not what we're in. That's not where we're focused in. And then if you start to think about, okay, these are higher level solutions that we're doing that we're pulling all this together, it's regulated. There are approvals. There's a lot of interaction. You're talking about size, you're talking about weight, you're talking about power. You're doing all of these things, there are components in there, and you will see examples in each of the showcases of things that we're doing, where we can actually vertically bring all of those things together to put more TT content in what was perceived as GMS before. Because actually, if we have that conversation earlier in the process, we can build more of our own content into the solution. Right now, some of those sites, they don't need to do that because they are just doing, as you say, a build-to-print, doesn't matter what components that are on there. Now in this new world, they want to make sure that they're maximizing the content of TT on the solution. That was a missing piece in that discussion in that conversation with the customers. So when we talk about the engineering expertise earlier on, when we think about -- these are complex solutions. How can you make it smaller? How can you fit into a certain amount of space? How can you reduce the power on this or get more power but with a smaller power unit. All of those things, that's what we're bringing to this, and you'll see that in the showcase. So it's not what we traditionally thought. And you've got to remember the engineering and manufacturing expertise -- that is the difference. And often, it's lower volumes. It's not -- it's highly regulated, lower-volume specialist solutions. That's what we're doing.

And just following up on that. So as you think about that chart in terms of the margin improvement is 12%, there is no, at this point, price mix portion to it. So is that the upside beyond it? Is that how you think about the first question about the pricing in the business and this side of things, is that that's like an extra component that's not yet, but something you're still on the work in progress on.

I mean, I think fundamentally, the getting to the 12% comes from the SG&A savings that we've identified and some operational leverage on growth. There is an element of pricing there to recover cost inflation, but we're not assuming more margin expansion from pricing. And clearly, with the kind of the dynamics we talked about, some of that will take time to get at, but it does -- I think it does offer more opportunity over time.

I think that the thing to think about when we put on the life cycle, often we're talking about projects that we're working on for 5 years from an engineering point of view, testing for multiple years before we actually get approval to actually manufacture the part. So things that we're working on now will take time to come through to fruition. So even if we turn on all of the benefits of the commercial team and doing stuff, we're not going to get all of those things because they take time to work our way through. We've got things we're already working on. They will come through. And what we want to put is more into the hopper over time to get that growth rate over the longer term to why we think we can be a higher-margin business. But right now by 2026, you can pull some levers, but most of the levers you can pull are your cost levers and driving that, making sure that you're selling -- you're getting your recovery for your inflationary increases and things like that on your commercial part -- but the real benefit is going to be going forward, getting that right over many years. And that's the strength of TT.

Richard Paige from Numis. Just following on from that. I guess, there's 2 parts on the pricing equation. One is, you've mentioned several times getting in earlier to the customer contracts. How do you do that in terms of the R&D and get your teams earlier in that process? And then secondly, bringing in the more TT content coming back to the regulation. So how easy is that from a customer perspective of them enabling that and signing those sort of components through in terms of time frame?

I'll answer that first. I think it's easier. The earlier you do it, okay? Because it's all about your bill of materials. So if you have in that compensation engineering design, but I don't know whether Stewart, you want to think about the -- if you want to answer this. But I think for me, you've got that content part. How we get the customer to go, yes, you can use that part. You have to say we want to use that part. So you have to be thinking about what's the bill of materials. So the earlier we -- so we want to be proactive in that process. Now there's 2 sides of that, I would say as well. There's the existing customer base that we have. We've got really good relationship with some really good people. And that allows us to have those conversations on new programs a little bit easier. If you break down those silos and go, look, we're looking at the whole thing, and it's really important that we get that sensor on there and rather than, okay, we just want to put it all together. Now we say, well, we actually want that sense we actually want that resistant. We actually want to do that as part of it. That is helpful because you're starting that conversation earlier. And with existing customers, that's most probably a bit easier. What we also want to do is proactively go out and find new customers and our structure with the business development and everything else is going. Well, what else can we do? Which new companies can we go out and see. And that may be a longer-term thing, but that's actually activity that we need to do, not just sit back and wait for customers to bring us the next -- what's the next part, the next program that they're working on. We need to go out and seek that as well, right? So there's a -- that's a change in culture a little bit in terms of our approach. Stewart, do you want to add anything there on the product?

I think the only one is when you see the showcases, you'll see some technology road maps and platforms. What we're trying to do is take our product road maps and platforms and map them into our future technology so that from a component product and support view, we are getting those in the design phase right at the front.

Right. There's no other question, thinking about the time because we're going to do our 10 minutes per site. So what we're going to do is split into groups. Now this is a test to see if you remember, which group you are in, but we have one this side, when it was up to Mark, I think, so this will be Group 1, which will start here. Group 2, which will be here and then Group 3, which will be outside with Stewart. So if you -- so Group 3, if you can follow Mike. Group 2, if you go with Mark, so he will corral you. And Group 1, you come with me, right?