XP Power Limited (XPP) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us today at what is the first of the XP Power investor seminars. My name is Gavin Griggs, I'm Chief Executive Officer of XP. And over the next hour, we'd like to share our strategy, why we win and progress we've made in delivering critical power solutions to the world's most demanding sectors. We'll then take your questions. Upfront, I want to acknowledge that over the last 2 to 3 years, our performance has been somewhat disappointing, driven by the market destocking -- market stocking and subsequent destocking. Our competitors in the same markets have faced exactly the same challenges and delivered broadly similar performance. Our focus over that period has been on controlling the controllables and making XP a better business. And that is what I believe we have done, and we are now ready to capitalize on the gradual market recovery we see coming in the next few years. Let me begin by introducing our leadership team and speakers for today. Matt Webb, our Chief Financial Officer. He joined us in September 2023 and brings over 25 years international finance experience. Matt has been a great business partner for me, allowing me to focus on the operations, people, customers and product development. We then have Jay Warner, our EVP for North America, who leads our go-to-market strategy and key customer relationships. He's a bundle of energy and has been the driving force of our North American business over the last 25 years, building our enduring customer relationships. And finally, Peter Blyth, who's our EVP for Global Products and Marketing. He's responsible for product innovation and marketing across the business. He spent most of his working life at XP and brings a wealth of knowledge and experience that helps us tick. Also present are Board members, Jamie Pike, our Non-Exec Chair; and Daniel Shook, who was recently appointed as Non-Executive Director following a successful executive career. The structure of today is as follows. We're going to cover an overview of the group, then our markets, our product portfolio, some case studies to bring -- to help bring to life what we do and then conclude with our financial framework. We've not included all aspects of our business today, given we only have an hour, but we focused on what we consider to be the key drivers of our value. We'll close with Q&A and drinks and give you a chance to engage directly with the leadership team. Okay. So what do we do? XP is at the heart of electricity generation, transmission and consumption. We design and manufacture power converters that simply transform electricity into reliable, usable forms for critical applications. Our products support everything from semiconductor manufacturing and health care to industrial technology, where reliable power is critical. I don't want to dwell on this slide, but it's a useful reminder of where the group has come from and where we are today. XP was founded in 1988 in the U.K. and now operates across the globe from 7 manufacturing sites and has a total of 23 facilities. We have over 2,500 employees serving over 2,500 customers across the globe. We -- our focus accounts are around 400, but our reach, including the distribution channels, is much, much larger. While our market share is relatively small, we are one of the market leaders in what remains a fragmented market. And over time, our TAM has grown as we expanded our product portfolio. So we turn to our addressable market. Addressable market is large, with critical power solutions being a total of about $6.5 billion sector within the broader $35 billion to $40 billion power supply market. We focus on 3 large and growing sectors. Each of these require and value power as it's key to their processes or their delivery. They are left to right, the Semiconductor Manufacturing Equipment, where our customers design, build and supply the tools to support the rapidly growing semiconductor market, which is expected to reach circa $1 trillion by 2030. To support that, the market for the manufacturing equipment is expected to grow faster than the end market. Industrial Technology, an end market valued at circa $550 billion, we focus on areas where power plays a critical role, areas like smart power management, test and measurement and analytical instruments. And then Health Care, fast-moving end market of around $800 billion, where the megatrends of the aging global population, combined with innovation in medical devices and treatment technologies are the key drivers of growth. We're well diversified by region and sector. North America, Europe and Asia, all contribute to our growth, but we have a particular strength in North America, given our reputation with the customer set. From a sector basis, you can see the diversification at the global level. At a regional level, it is somewhat different with semi being a larger part of our North America business on the back of over 20 years of being very successful in this sector. Jay, our leader of our North America region, will talk to you what has driven our success and growth in both North America and the key sectors later in the presentation. I want to cover this slide in a couple of bit more detail just to talk about our strategy, key point how our consistent application of this positions XP for a strong future. We've continued to deliver on all elements of our strategy over the last few years as we and our competitors have navigated the challenges of -- but we feel we have made further progress across the board. Our focus is organic growth. We have a market-leading product portfolio, which we have further enhanced over recent years through new product launches and customer-specific products. Customer interest levels remain strong for the portfolio, and we remain confident we can deliver double-digit organic growth across the cycle. We're focused on working closely with our customers where we bring our extensive specialist knowledge to solve their power problems. We build on strong relationships, and this will drive growth over the medium term and further expand our share of wallet by delivering solutions to their needs. We've continued to invest in our business and our supply chain to ensure we can deliver on our medium-term potential. In recent years, we've opened our customer innovation center in Silicon Valley, close to many of our key customers, and we believe a key differentiator for us that will support growth. In 2025, we've opened a new design center in Manila. And the Malaysia facility is on track to be built completed by the end of the year, ready for commissioning in 2026. This site will support growth and business resilience way out into the 2030s. Our people are key to our strategy. Improving the skills of existing teams while adding the right talent in key areas is critical. Whilst we have reduced overheads in recent years, we have ensured we have protected the key capabilities that are critical for our success. Sustainability has been a key part of our strategy for many years. Improving the efficiency of power conversion has a meaningful impact on our customers' performance and today is a commercial imperative. Delivering this in a sustainable way is important to XP and our efforts have been recognized globally by our key customers. The key point I'd make is we've consistently applied this strategy, and this has enabled us to deliver growth ahead of the market, and we believe we remain in a strong position to deliver our ambitions in the medium to longer term. So the main theme of today is why XP wins. This page is really our investment case and it's a focal point for us. We believe it's hard to replicate and a few others have it in the industry, which creates a real value irrespective of the part of the cycle we are in. So what are the key parts? So we've talked to the key parts throughout this presentation, and we aim to showcase examples of where we've made progress. So as I said, we have a clear and consistent strategy. We focus on attractive growing end markets. We have a broad and high-performing product offering, and deep enduring customer relationships. The designed-in nature of our products provides an annuity revenue with a deep competitive moat. We offer customers market-leading technology solutions supplied from our well-invested operations with scalable capacity. This gives us attractive through-cycle financial framework. And all this is brought together by an experienced talent -- both experienced talent and empowering culture. As I said, we'll cover each of the elements of our investment case today with the exception of our supply chain and our approach to sustainability, which we included in the appendix. Okay. Let me turn to each market in turn, and then I'll hand it over to the team to go into more detail. Let's start with the Semiconductor Manufacturing Equipment sector. This is a highly specialized and strategically important sector in the broader technology landscape. Forecasts suggest AI, data, et cetera, will drive the end market to over $1 trillion by 2030. This suggests a 7% to 10% market growth. And as I said, the WFE market, semiconductor equipment should grow ahead of that. This -- and we think the customer concentrate -- sorry, the customer concentration is relatively tight, and we have long-established relationships with many of the key players and a growing profile in many of the others. Our products for this market are complex, have a long qualification, but equally long -- much longer life cycle, leading to strong customer lock-in, high barriers to entry and good levels of recurring revenue with an average best year value for each project of $650,000. This market remains a great opportunity for XP, and we are well positioned with a leading number of small players -- sorry, leading small number of players where we're seeing a step-up in new projects across the differing processes as the demand increases for our technology solutions. We remain confident that we can take share and grow ahead of the end market over the medium term as the market fully recovers. Next, the Industrial Technology market. This is a very diverse sector for us. It's a strategically important segment in the value -- global technology value chain. Latest forecasts suggest the market will grow 5% to 7% over the medium term for a market for us, which is already $3 billion per annum today. Within Industrial Tech, we also include the high service level distributors like the DigiKeys, Mousers, RS and Premier Farnells. The order intake from these distributors who are typically good bellwethers for the wider market, has grown strongly recently as end customer demand is picking up. Key driver of technology of growth in this area is innovation by our customers. Our customers' applications are becoming increasingly more complicated and connected. And our focus has been making our products digital to support our customers' requirements. Within Industrial Tech, we focus on subsectors with good long-term growth potentials and attractive niches. Typical applications in the areas are such as robotics, analytical instruments, test and measurement, additive printing, but with the average project size much smaller than the other 2 sectors. Finally, the Health Care sector. This is a long-term growth opportunity for XP, and the growth in the end market is driven by the megatrends of aging global population and innovation in medical technology. Customers demand the highest level of precision, safety and regulatory compliance. The power converter is integral to many solutions and customers see XP as a key partner. We have a reputation. The market remains strong, and our customers are seeing good levels of demand. So the underlying -- so underlying demand, which we are seeing is far greater than the -- the underlying demand, which we're seeing is growing at 5% to 7% in the medium term, has been masked by destocking in recent years. We have a strong reputation for supporting innovation in this sector, and we are seeing ongoing infrastructure upgrades and innovation for new areas in many -- in new areas such as pulsed field ablation, robotic surgery, advanced diagnostic and the innovative use of technology for patient treatment. Supporting these areas not only requires innovative, reliable power solutions, but a supplier who can be a power technology partner for the customer. On that, let me pass it over to Pete to go into our product offering and to go deeper into the sectors we focus on.

Thanks, Gavin. I'm going to go a bit deeper now on our product offering, our customer relationships, and I'm going to show you how our annuity model works. But before we do that, let's take a look at some of the dynamics in the target markets that Gavin talked about. Whilst the 3 markets we focus on are quite different, they all share a similarity. Our customers are OEMs who make instruments or equipment, which they sell year after year to a different range of end users. And as you will see, this is fundamental to our annuity business model. So let's start with semiconductor manufacturing. This is a critical high-precision industry rapidly developing to support latest chip innovations. The market is made up of equipment makers who are our customers and fabs who are our customers' customer. Each of these groups is made up of a small number of large companies who work together to develop new chips by collaborating on process recipes and tailoring capabilities and equipment. It is a fast-paced environment with lots of innovation, and our customers demand high levels of support and high-quality customized products. Being able to deliver prototypes quickly and support a ramp to high-volume manufacturing is essential to being successful in this market. The example of power supply products shown are a high-voltage electrostatic chuck known as e-chuck and a high-voltage electron beam power supply known as e-beam power supply. Now let's look at the health care market. This is a very different market, but no less critical. The criticality here, though, is all about patient safety and efficacy. Our customers here are medical device manufacturers covering a wide array of different applications such as diagnostic imaging, robotic surgery, infusion pumps, ventilators and oncology equipment. Our customers sell their equipment to hospitals, clinics, and there is a growing trend for portable home health care devices. Innovation is driven by our customers having to find better and more innovative ways to diagnose and treat patients. The market consists of hundreds of different OEMs, but is dominated by a few large ones, many of whom are our customers. There are also a large number of start-ups focused on developing innovative solutions. It is a heavily regulated market where safe and reliable operation of a medical device is paramount. The power supply is a critical component in the system as it isolates main voltages from users and patients as well as providing critical power for diagnostics and treatments. As there is a range -- a diverse range of medical devices, we also need to have a broad range of products that we can tailor to suit different applications. The example shown in the pictures is an AC-DC power supply that's used to power a pulsed field ablation system and a multi-output intelligent power supply used to power an imaging system. The last area we will look at is Industrial Technology. This covers a broad range of subsectors with many different applications. I can't cover all of these today, so I'm going to focus on 3 areas. Analytical instruments, specialist manufacturing and general equipment. In analytical instruments, our customers make products used for material analysis in a range of end applications. One such application that we are focused on is mass spectrometry. Here, the instruments are used in airports, food and beverage production and pharmaceutical manufacturing. The instruments rely on highly precise and stable high voltages generated by very specific power supplies. Examples are shown in the picture. The specialist manufacturing area covers applications such as electron beam welding, ultraviolet or UV curing and additive manufacturing. One such end use for e-beam welding is in the manufacturing of jet engines where turbine blades are attached using this process. So this is a very critical application. All of these applications require precision programmable voltages that provide the user with the ability to control their process. The example shown here is a 5-kilowatt programmable power supply that's used in UV curing and a custom high-voltage power supply that's used in e-beam or electron beam welding. The general equipment, which is the last area, covers a diverse range of applications such as digital projectors used in cinemas to professional catering equipment used in restaurants. All of these applications require efficient and reliable power supplies that can handle different operating conditions such as a wide operating temperature range. As you can see, we have great experience, a strong market position, and we understand the challenges our customers face during their product development. This enables us to provide the right solutions, which in turn enables our customers' success. Doing this time after time is actually really difficult. So this is one of our key differentiators. Now let's look at our product portfolio. If you look at this chart, you can see power on the y-axis and voltage on the x-axis. The voltage we're talking about here is DC or direct current. The dividing line between high and low voltage is 100 volts DC and between high and low power is 1 kilowatt or 1 kW. In the bottom left, we have low-voltage, low-power. This is approximately 50% of our revenue and is where XP started. We offer hundreds of different standard and modified standard products here from external power supplies, such as the type you have to power your laptop to onboard converters and to what's called embedded power. Input voltages here are either single-phase mains or DC from things like batteries or renewable energy. Due to the broad range of application the products can be used in, volumes in this area tend to be the highest. And we also see most competition here. The average selling price or ASP is $50. If we stick with low voltage, let's look at high power, top left. This is approximately 10% of revenue. Here, there are less competitors, and it's a more complex area. Products here tend to have a lot of functionality, which means they add a lot of value to our customers as can be seen from the higher ASP. As the power increases, products use different input voltages with the highest power products using what's called 3-phase mains. Now let's look at high voltage. High-voltage, low-power or HVLP in the bottom right, are typically printed circuit board mount products that take a low-voltage DC and convert it to a high-voltage DC. Typical uses for these products are things like radiation detectors, creating electrostatic fields, setting up bias voltages and charging capacitors. Whilst the power is low, the applications are critical, such as the electrostatic chuck I mentioned earlier. The last area to look at is high-voltage, high-power or HVHP. This is a very specialist area and many solutions here are customized. We can provide products here with hundreds of kilowatts of power and hundreds of kilovolts of voltage. These are typically used for accelerating ions or electrons, and they're used in material science and high-energy physics. A big area for us here is ion beam applications that are used in semiconductor manufacturing for changing material properties such as ion implant and for electron beam microscopes that are used to see down to nanometers in semiconductor inspection and metrology tools. There are very few players here. And with the product forming an integral part of the customer system, the ASPs tend to be high. So hopefully, you've now got a good overview of the markets and the products that we cover. So let's take a look at how we got here today. Back in 2015, we were a low-voltage business. We were operating in the low-voltage, low-power quadrant, which gave us a TAM of approximately $2.4 billion. What we saw, we could use this base that we had created in low-voltage, low-power to expand into other areas and get the growth that we needed. With our expanded portfolio, we can now grow our share of wallet by cross-selling within the same customer base. So what did we do? Well, we wanted to stay in power as we knew many of our customers already used higher voltages and higher powers. So the natural choice for us was to go up in voltage and power. We entered the high-voltage market through acquisition as this was the quickest and lowest risk way to enter this market. Through this process, we acquired knowledge and capability in HV engineering or high-voltage engineering, which then ultimately enabled us to design our own products. For low-voltage, high-power, this was close to what we already knew. So developing products ourselves was seen here as low risk. In 2015, we acquired a company called EMCO, which actually took us into the high-voltage, low-power space. This gave us access to the onboard high-voltage products and allowed us to enter the e-chuck PSU market that I talked about earlier. We consolidated this with Comdel in 2017 and then entered the high-voltage, high-power market with Glassman in 2018. The most recent acquisitions we've made have expanded the types of products and know-how we have, which has enabled us to tackle a wider range of applications. Our portfolio now enables us to offer high voltages to 500 kilovolts or 500,000 volts and high powers to 600 kilowatts as well as high voltage with low noise and high precision. We are now one of only a handful of companies who can tackle all high-voltage applications. In the low-voltage area, through understanding the needs of our customers, we developed a range of digital programmable high-power products. This now allows us to power more process-related and critical applications. It also gives us a foundational platform to build all of the high-power solutions off of. Over the last 10 years, our R&D spend has grown fairly consistently at approximately 15% CAGR per year. This has been driven by the growth of our business, especially where we've added know-how and capability through acquisition. As we've expanded our product offering and moved into critical applications, we have needed to add specific skills in high-voltage, digital high-power and software to support our customers and stay competitive in the market. Today, we have 4 R&D teams in the U.S.A., 2 in Germany, 1 in Singapore and 1 in the Philippines. These are multi-discipline teams with specialist skills in high-voltage engineering, digital power and communications. The teams collaborate to deliver different types of products. To create value for our customers and be competitive, we strive to make sure our products have some or all of the key attributes shown on the top right. The trend in power is for products to get smaller, which in turn drives power densities up, resulting in efficiencies needing to increase. This, in turn, drives the need to develop new circuits using different materials and devices such as silicon carbide and gallium nitride. As we play in critical markets, product quality and reliability are a must. We also need to tailor our products to specific customer requirements and deliver prototypes quickly. So our philosophy is to design platforms with flexibility built in. This means we are not designing products for customers from the ground up, but building on existing platforms and technology. Controller monitoring of power supplies is a developing area, especially where the process -- where we're powering the process. Here, the power supply forms a central part of the control system, so the customer wants data to know what is going on and have the ability to make adjustments, which ultimately affects their process. Depending on the end application, some customers require high levels of precision on the power supply, especially when measurement is critical, such as in mass spectrometry or tools for inspecting chips. To enable many of these attributes, we have employed digital architectures in our products. This advancement means that power supplies now have embedded firmware as well as external graphical user interfaces. 15 years ago, this wasn't the case. Let me take you back to 2009. In this year, we launched the fleXPower XM10, which is shown on the left -- right-hand side of the screen. This was an analog product with limited control and monitoring. It was a good product, though. In 2015, we launched the nanofleX. So this was smaller than the XM10, but still bigger than the new product what I'm going to talk about in a minute. This year, we have launched a brand-new product, the FLXPro. This is roughly two -- this is roughly half the size of the XM10. It's a fully digital power supply that gives customers access to control, monitoring and configure various parameters as well as providing high-value features like event capture and password protection to comply with the up-and-coming EU Cybersecurity Act. It's a class-leading product and an example of how power supplies have evolved over the years. We believe that the FLXPro sets a benchmark for configurable power supplies, and we've had some very positive feedback from customers and electronics industry press. Now I'm going to talk to you about how our annuity revenue model works. As I mentioned earlier, one of the attractive things about the markets we target is that they give us an annuity. This is because our customers sell the same equipment to their markets for many years and the cost of changing the power supply is very high. What we have to do is get designed into their products to enjoy this annuity. So our sales team are focused on designing in and winning programs with these customers. Let me take you through the process. Step 1, our sales team would identify a project and through a process of qualification with the customer, would decide on the best solution. Once that's decided, in step 2, they would move to quotation stage where they submit a quote to the customer. Step 3, which we call sample and it is the longest stage, so if the customer is happy with the quote, they will either buy a product from us on the low-power stuff, we will give them a free of charge sample. And this is where the customer starts to test and evaluate our products. It's an iterative step, and it can be very long depending on the application that the customer is designing. Close cooperation with us and our engineers is very critical in this stage. Once the customer has gone through this step, they enter what we call the approval step. This step is where the customer would go through their compliance, covering things like safety, electrical noise, software and a whole range of other standards. And this is where we would provide expert support to help them achieve compliance and get their product on the market. Once this is done, the customer will then approve our product and they will use -- say they will use it, and it will add it to their bill of materials. This means we are now approved. The last step is when the customer launches their product to market. And this is when we would receive production orders for our products. And this is where the project would stay in production for a long period of time, and this is where we get the repeat business year after year. The average time for this design-in process is 18 to 24 months. We will be longer for some and shorter for others, depending on the complexity of the customer's product and our product. The level of repeat business we get depends on how successful the customer is in their market. So to mitigate this, we aim to get designed into as many projects in a single customer as possible or at a product level, getting designed into as many projects from as many different customers as possible. The charts on the right give an example of this. The chart at the bottom shows sales to a single customer, which is made up of multiple projects and products that stay in production for a long time and drives the revenue build year after year. The top chart is a product perspective, and it tells a similar story. Here, we're designing the product into multiple customers, but the same thing happens. The fleXPower, which I talked about earlier and is our most successful product, which I spoke about, is one of the most -- as you can see, the revenue builds over the years. Like most of our products, the fleXPower is a family covering different powers and voltages. And this is how our annuity model works. I'm now going to hand over to Jay, who's going to try and bring this to life.

Thank you, Pete. It's an honor to be here today and be able to provide some deeper insight specifically to our business in North America. For those of you who don't know me, which are most of you, my name is Jay Warner. I've been with the business for 25 years. I'm based out of our headquarters in Northern California, Silicon Valley. And I'm really honored and proud to be part of this amazing journey from distributor to world-class designer and manufacturer of the broadest and the freshest power conversion technology in the world. I'm responsible for the North America business and specifically responsible for the revenue growth and our Advanced Systems Engineering Group. So today, I'd like to give you a closer peek inside XP as a technology solutions business. Customers are no longer just buying power supplies. They're evolving, and we are evolving into a process power side of the business, essentially powering their IP and what makes their products different from their competitor. This requires digital capabilities that are not available in conventional power supplies. Integrated hardware and software is critical. This trend from North America customers in semiconductor manufacturing equipment and health care sectors is expanding into other markets and regions. Our customers, they're seeking technical solutions from long-term partners who understand their engineering and their operational challenges. So an in-depth understanding of end-user applications is a must. And this is a key strength of our Advanced Engineering Group, where customer-centric partnerships really develop, they're not transactional engagements, right? This cross-functional global team collaboration in order to accelerate time to market. As far as I see it and the way I explain it, we're not designing power supplies. We're designing sensors, sensors that provide the necessary power conversion for safe, reliable power, but also using the power supply as an EKG of sort to monitor, detect the current state of the device, provide diagnostics, proactively respond to changes in behavior and virtually communicate to change the function of the power supply with a touch of a button. So on the bottom right-hand corner, you can see a very basic illustration of an Advanced Systems Engineering product. Customers are looking for a full power system solution. To put it simply, you can see 3 of the large blocks there, they're 5,000-watt HPT power supplies. They're mounted in a customer-specific enclosure with input and output controls, communications via custom interface boards, resulting in a turnkey plug-and-play solution for the customer. XP is one of the very few companies in the world that can provide this capability. Opened on January 1, 2024, the XP Power Silicon Valley Innovation Center, located in San Jose, California, has market-leading capability and resource. This is home to our Advanced Systems Engineering team. 40-plus multidiscipline engineers, firmware, electrical, mechanical, product management team, all dedicated and experienced in customer-specific designs. The innovation center has a 10,000-square foot state-of-the-art engineering lab, a 5,500-square foot new product introduction, NPI prototype and production floor. We have 80 staff in assembly, test, planning, quality, NPI supply chain with extensive high-power and high-voltage test capability. The center was designed for a seamless transfer of NPI to our high-value manufacturing, HVM production in Asia. The test equipment in San Jose matches the same exact test equipment at our HVM factories in Asia. We also have a 35,000-square foot warehouse that serves as a major advantage as we are essentially a stocking manufacturer to provide the same levels of service that a distributor would, when needed, for specific customer requirements or markets. And lastly, we have an on-site service center to rapidly respond to root cause and corrective actions on spot. Silicon Valley Innovation Center, it is. It's driving the ultimate experience for our people and our customers with a first time right approach to quality and performance. Our technical resource advantage, all under one roof. It's a major reason why we win. As pictured in the 2 upper right-hand corners, right pictures, you'll find our 3-meter anechoic chamber for radiated emissions, the outside on the left, the inside on the right. On the bottom, you'll find the regulatory compliance, EMC. This gives us extensive in-house capabilities, including radiated emissions testing, one of the biggest challenges when designing in power conversion products into the end customer application. In the bottom left is our reliability lab. This is our in-house lab with environmental and vibration testing capabilities. We have multiple HALT chambers for us to perform highly accelerated life testing, HALT, and HASS chambers for highly accelerated stress screening. We also have drop test shipment. The center has an actual customer etch plasma chamber. We use that to simulate the impact of plasma on our products while we're in development. Not shown is our mechanical R&D shop. This is where we can perform fast turnaround of custom components using our 3D printing capabilities, CNC machining, laser cutting and engraving. Historically, before the innovation center, we needed to outsource these services, and it would take resource, delays and added cost. With the implemented lessons learned, following many years of moving up the value chain and vertically penetrating our largest semi-fab, health care and industrial customers, thus far, we've achieved some outstanding reviews. We dramatically improve the customer experience with our dedicated multidisciplinary team. The Advanced Systems Engineering team, they run autonomous from our global standard product teams. However, they serve as a vital adjunct between the standard product teams and our customers. Our philosophy is pretty simple, fast to solve, fast to prototype, fast to high-volume manufacturing. Fast to solve. We have an in-depth experience in semi-fab and health care-specific applications. We are in very close proximity to many of our customers' design centers, which facilitate interactions and collaboration through the entire development process. Fast to prototype. We develop and remotely operate digital workbenches. This gives us a world-class follow-the-sun process via our Advanced Systems Engineering team in the Philippines, essentially working on projects around the clock. Fast to high-volume manufacturing. Sustaining engineering activities to support Silicon Valley to Asia production transfers and ongoing production support. The end result is customer focus. We start with the user experience, then work backward to integrate the technology. This approach, it's essential for creating lasting impact in large-scale success. We believe that we must start with the customer experience and work backwards to the technology, not the other way around. This approach has enabled us to climb the value chain from controls and signals to powering the customers' process, powering their IP. Occurring on just about a daily basis, I added some pictures of customer collaboration visits to the innovation center. On the left and the right, you will see customers coming in. They're in our facility 2, 3 times a week. In the middle, it's vice versa. It's our customers invite us to their facilities to get a user experience on their products. Thank you. Thank you for the opportunity to share more about our business. It was an absolute pleasure. At this point, I'll turn it over to Matt to discuss the numbers.

Okay. Thank you, Jay. So now let's turn to more familiar territory for most of you, namely our financial framework. And you'll be pleased to know that none of my slides require any of your GCSE physics. So if you're familiar with XP, you'll be familiar with this table. We -- it summarizes our through-cycle financial performance. We see ourselves as a high-growth, high-margin and high-returning industrial, with strong cash generation, which the metrics reflect. Why are we so confident that we can hit these metrics? Well, I'll explain why slides. But before I do that, there is, of course, a simple answer, and that is that we achieved them consistently for years prior to the pandemic and in the highly unusual but temporary evolution of the marketplace since. As you can see, for the 10 years from 2010 to 2019, our average performance was at or above our ambition across the board. So to achieve this level of performance does not require the achievement of something new. It requires the reestablishment of something that we used to consistently deliver. We are not reaching these levels today, except for cash generation, which has been consistently strong over the last couple of years. But this is not because we or our markets have changed fundamentally since 2019. It is because we are emerging from a highly unusual simultaneous down cycle in all 3 market sectors that has been experienced by all market participants. I will explain why we believe we can return to our financial framework in normal market conditions over the next few slides, starting with our organic growth ambition. Okay. So we aim for through-cycle organic growth of 10%. We expect this because we play in the right markets, and we have the means to outgrow them. As shown on the left, we see the general power supply market as growing GDP+ due to increasing electricity use, which all requires conversion, particularly to support the proliferation of electronic devices. We see critical power as growing GDP++ supported by long-term megatrends. Market selection gives us most of the growth that we need, averaging 7%. As shown on the right, we expect market outperformance to add a further 3%. And I've listed the 3 main drivers of this on the slide, which form 3 of the strategic pillars set out by Gavin earlier. Pete talked about the impact of broadening and infilling the product portfolio earlier through M&A and organic product development. So I won't spend more time on this now, but there is more organic infilling that we can still do. I will spend time on the other 2 drivers, namely key accounts and growing share of wallet. We believe that we can continue to grow our share of wallet with existing customers. As shown on the left, we cover the majority of our target market with the customers we already have and our share of the power supply spend of our customers is still relatively low. Getting a foot in the door with customers is the toughest step to take, particularly in this industry where reputations are critically important. Our foot is already in. We can achieve most of our growth ambition by fully leveraging the long-standing relationships we already have. I mentioned that our growth strategy targets key accounts. There are 30 of them. They are selected for their size, growth potential and fit with our high-touch tailored approach. You can see how important these customers are to our future, accounting for roughly 1/3 of our addressable market and half of our current revenue. We have 7% of their business today. One way to get more is to sell the full breadth of our current portfolio to them. As you can see on the right, we do this with 6 of the 30 today. We can do more, therefore, with the remaining 24. We explained earlier that nearly all of our revenue growth -- sorry, revenue comes from the sale of power supplies into a defined customer project. If we win the project, we are designed into the customer's equipment and can expect annuity-type revenue for the lifetime of the customer's product, which averages 7 years. Our revenue from the project typically follows a bell curve as the customer's product goes through early life, peak demand and in the end, withdraw from the market. We call the peak best year value. Our sales funnel is the sum of best year value for all live projects, namely those that we have won and the customer's product is still in the market. New project wins increase the funnel. Withdrawals obviously reduce the funnel. If the funnel is growing, new project wins exceed project withdrawals, which should lead to revenue growth over time. The chart on the left shows that the funnel has grown by 12% per annum since 2019, supporting our organic growth ambition. Clearly, margin improvement is a key focus for us right now. At present, our operating margin at the market trough is mid-single digit. We aim for through-cycle adjusted operating margin of circa 20%. Our progress back to 20% is dependent upon 2 factors, increasing our gross margin to at least 45% and continued tight control of overheads. Gross margin improvement will come from 3 main sources, operating leverage, mix enhancement and supply chain enhancement, as shown in bottom left. Regarding operating leverage, we have well-invested manufacturing facilities with spare capacity, leveraging the fixed cost of these facilities as demand returns to mid-cycle should add margin as shown. We expect our mix to get richer as time progresses, particularly from increased sales of technology solutions, which command a higher margin. Regarding supply chain enhancement, we have a global manufacturing footprint. The model is for low-cost mass production in Asia with some responsive short-run production in the West. Optimizing how we use this network will improve our margins. Our sourcing and lean manufacturing methods get better every year, and this should continue to contribute to margin improvement over time. Collectively, we are confident that these levers will drive higher margin as demand improves. I thought it might be helpful to give you an illustration of how I view our cash generation model. Fundamentally, our sources of advantage are our intangibles, namely our people, our customer relationships and our technical know-how. Our focus on intangibles naturally means we have a relatively light capital model. Our bricks and mortar are generally not costly in aggregate and our production process is light. Our products can be made to order and not held in stock. Our light capital model means with operating margin at target, we should achieve a 10% free cash flow margin in normal circumstances. The final part of the framework I want to cover is return on capital. Our operating margin and ROCE ambitions are both circa 20%. This means we need to maintain a capital turnover of 1. In other words, we can have capital employed of up to GBP 230 million to support revenue of GBP 230 million. The good news is that, as you can see at the bottom, we are pretty much achieving that ratio today and growth will only make it better. So as our operating margin returns to 20%, we are confident that our ROCE will do so also. A quick word on capital allocation. We invest in the business first. With a free cash flow margin of 10%, there should be ample cash for dividends, and we look forward to reinstating them once our leverage is well progressed to our target of 0 to 1x EBITDA. Once we are within that range, we then have the option to return any excess cash to shareholders or invest in M&A, albeit I would highlight that M&A is not required to deliver our strategy, but could be an accelerant. So that's it for me. I'll hand you back to Gavin for the wrap-up and Q&A.

Thanks, Matt. So what we try to cover is why does XP win. Our view, we have a well-proven strategy. We offer market-leading technology solutions to the winning customers in attractive end markets. We have broad, high-performing product offering to support our many customers, and this brings the annuity-esque revenue with strong barriers to entry. We are becoming increasingly a technology solutions business, driving market-leading customer solutions. We deliver this through our well-invested operations and scalable capacity, and we expect our financial framework to deliver attractive returns through the cycle. And this is delivered by our talented team with a can-do customer-centric attitude. On that, I'd like to open the session to Q&A. [Operator Instructions] If the guys can come up, I hope you are. Please direct the questions to myself, and then I'll direct to the team to give the answer. Okay. Questions?

So a few questions from me, mainly just kind of clarifying some points you mentioned. So the first, the semiconductor market reaching $1 trillion. Could you kind of give us an idea of the pipeline? And I guess, given the context you've given us that it takes 18 months -- 18 to 24 months, should we be thinking about the recovery kind of picking up a bit stronger in the next 3 to 4 years? So that's the first one.

Okay. Let me take one for clarity. The $1 trillion is the end semiconductor market, which is expected to be $1 trillion by 2030. Bank of America came out with 2027. Semiconductor market as a whole has been growing double digits for the last 18 -- since the beginning of January 2024. We supply the WFE market, wafer fabrication equipment, that to deliver to $1 trillion or circa 10% will have to grow faster than that end market. So we do expect the market to pick up from where it is today. Yes, the trend is very much up to the right. It won't be a straight line. I can tell you that much.

Great. The next one again is kind of on market size. The pulsed field ablation, it said it was just approved, FDA approved. So the details you've given to us on the market size there, is that just the U.S.? Or is that globally? And if it's globally, does that mean -- or if it's not globe, if it's just the U.S., does that mean there's a much larger opportunity in the future?

Do you want to cover that, Jay?

Sure. The PFA market is a brand-new market, and we were very proactive at identifying that market and getting in with the leader. We won that business. I shared with you the vertical integration part of it, where we have 8 converters, 2 AC to DC, 2 DC to DC but we weren't done there, right? Once we won that, you got to target who are all the competitors. So we're very good at that. And we've done it. We're talking and we're excited about the opportunity.

Okay. Great. One more on, again, a bit of clarity. You mentioned memory and logic exposure in the semi market, both at very different points of the cycle. But could you kind of give us an idea as to which one you're more exposed to at the moment?

Again, Jay, do you want to answer that?

It's an interesting question. I hear that question a lot. And to me, it doesn't matter so much. I control what we can control. And what we control is to be on the right tools for all markets. When they go, they go. You just want to be on it when they go.

David Farrell from Jefferies. Two questions. Thank you for the presentation in terms of why you win. But could you explain why you lose when you do lose? What are the factors there? And then just trying to break down the 10% organic revenue growth a different way. If you go back to Slide 16 and 17, you got 50% of your revenue growing in a market which I work out is growing at less than 2% over the last decade. What are the other areas outside of -- what are your growth rate assumptions outside of low-voltage, low-power to get you to that 10%?

Do you want to cover why we lose, Jay?

I don't want to cover why that -- cover that. Next question. You can't win everything. And our core values, our value proposition is speed, agility, flexibility. We are built for speed, and that is how you lose if you're not fast enough. In most cases, first on a tool or on an application wins. So those moments when we lose, it's because we didn't get out fast enough, in most cases.

Do you want to?

Yes. So just in respect of the implied 2%. I mean just keep in mind, David, that we've had, not only us, but the entire industry has seen destocking over the last few years. So the growth you've seen is net of that destocking phase. If you looked a couple of years ago, the market size would have been a lot bigger and the growth rate overall would have been much more consistent with the long-term growth that we're quoting.

Tom Elgar at Deutsche Numis. I think just the one question from me. I think thinking about the through-cycle growth model, just the 10% organic growth target here, just trying to collate this to what is the most impactful use of your capital. So if we're talking about the annuity model that you have here, is it quoting? Is it the design engineering? Is it the account execs to grow wallet share, see those projects earlier. You've emphasized the importance of speed. So I guess as a central team, deploying growth capital into your business, ensuring that you can drive up win rates, et cetera, outperform the markets as you guys have emphasized, just think about taking that annuity model that you guys have talked about and actually applying the capital decisions that you're making to accelerate that.

The area we can invest in most that would accelerate most is customer-facing engineers but you still need the supporting infrastructure team behind it. So you still need engineers developing the platforms that the customer-focused engineers will then use to deploy with the customer solutions. So it's almost, behind Jay's team, there's another team that do the development of product supply. And that -- those 2 areas, customer-facing engineers and those engineers are our most critical resources. That's where we want to invest. But you have to invest gradually to expand the overall delivery mechanism.

Just to add to that, I mean, just to reinforce that point, I mean, obviously, that was the -- one of the key areas that we did not take any cost out of effectively at all over the last couple of years that recognizes how important that is to achieving new objectives and converting them.

It's Adam from Montanaro here. I guess the first one was you talked a bit about the evolution in terms of customization, more complexity, more solutions-based products. Can you talk about what that means for sort of ASP going forward? And I guess how that feeds into the model?

Could you cover that, Jay?

Sure. I guess I would explain that as more of a value priced type solution. More and more of our customers, the ones we're focusing on, they just don't want a power supply, right? They want something fully turnkey. When you give them that type of service and you give them a turnkey, one part number, you add a lot of value because you reduce their overall BOM, what they have to be responsible for, the end-to-end fulfillment from supply chain to quality. And then when you're essentially an extension of their engineering team. That's how close we are in the types of relationships that we have with our customers, and they see real value in that. And that, in turn, helps with the ASP.

Okay. And in terms of those are the sort of 3 segments, would you be able to rank how you see your competitive strength across the 3?

Again, Jay?

Equal, when it's all said and done. The most complex is semiconductor manufacturing equipment. Next, health care, then industrial, but it could flip on its head if it's the right industrial customer. So it all depends on the customer and the application really.