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Edited Transcript of TTG.L earnings conference call or presentation 4-Mar-20 9:00am GMT

Q4 2019 TT electronics PLC Earnings Call

Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of TT electronics PLC earnings conference call or presentation Wednesday, March 4, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Hoad

TT Electronics plc - CFO & Director

* Richard Tyson

TT Electronics plc - Group CEO & Executive Director

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Conference Call Participants

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* Andrew Douglas

Jefferies LLC, Research Division - Equity Analyst

* Harry Philips

Peel Hunt LLP, Research Division - Analyst

* Mark Davies Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Mark Lewis Fielding

RBC Capital Markets, Research Division - MD & Head of Capital Goods Research

* Michael J. Tyndall

HSBC, Research Division - UK MidCap Equity Analyst

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Presentation

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [1]

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Joining on the webcast this morning.

So 2019 really was a very good year for TT. The numbers are good, reaping the benefits of the strategy we set out in 2015. And we're continuing to make big strides to improve the quality of the business. So 4% organic growth, fueled by the success in new customer wins and plenty of activity in aerospace, defense and medical markets partially offset by some softening in the industrial area, which were impacted by some destocking. But a clear highlight was in aerospace, defense and medical, where we achieved 22% organic growth. And this success is not just for 2019, but it increased our future year visibility and with customers that are the right fit for our business. And a combination of recurring multiyear revenues and new contract wins not only boosts the level of our order book, but gives us improved visibility for the third year in a row. And we continue to extend our product and technology capabilities through R&D investment and the 2 U.S. power product company acquisitions in the year. This has all meant revenue up 9% and profits up 17%. So strong profit growth and a further improvement in the margins, now up to 8.4%, clear evidence that TT is becoming a higher quality, technology-focused business. This position of strength in the order book puts us in good shape to make further progress in 2020 and beyond.

The medium-term picture is really encouraging. But we, like everyone, have some near-term challenges to deal with regarding the coronavirus. We'll pick up on that later and cover how we are managing the situation, and Mark will give you our best estimate of likely impact right now.

So first, let's cover the medium-term picture. Turning to strategic progress of the group and where we're going next. Since 2015, when we launched our strategy, we've transformed and improved the quality of the business. We've really changed the makeup of the group through M&A and focused investment, and we're no longer exposed to the cyclical automotive market. We've been able to self-fund GBP 137 million worth of acquisitions with a balance sheet strong enough to do more. We built the power and connectivity from a sub GBP 50 million business to a division with GBP 140 million in revenues and margins into double digits already. And investing in aerospace, defense and medical has moved the share of group revenues from 25% to 47% today, and we're growing strongly. So the result, we've returned the group to organic growth, we've doubled the margins to 8.4%, and we have done that with strong cash generation.

The right strategy is important, but the real measure of success of a strategy is in its implementation. Now we couldn't have done that without a terrific performance from the people across the group. They have really made it happen. And I'm proud to say that they now rate us as a 1 star Great Place to Work. And we, together with them, have refreshed our ambitions for the group, and they're now working to our updated purpose to design and manufacture electronic solutions for a sustainable world.

So what does that mean for TT from here? And where is the next 5 years of performance going to come from? Well, we don't need a big new plan, it's going to be about more of the same, just better, and we're really excited about it. All of the building blocks we have put in place give Mark and I, the Board and the wider team confidence that we can deliver growth ahead of the market, progress to double-digit margins with strong cash conversion and a continued improvement in ROIC.

So we've set the business to grow ahead of the market with our power, sensing and connectivity solutions to address a strongly increased demand for products for a more sustainable world. Recurring and new revenue from existing customers, new customers, new products and new solutions, so we're set up for even better margins, and you'll see us continue to improve the business and its operational leverage as we grow.

And to support that ambition, we've also launched a new self-help program to underpin that journey to double-digit margins. We'll be driving automation, eliminating fixed overhead and reducing our carbon footprint. The self-help program will have an attractive payback, too. We'll see GBP 5 million to GBP 6 million worth of benefit by 2022 from a GBP 14 million investment in the program. And we're going to top this up with acquisitions, adding complementary products and technology with greater customer reach and cross-selling potential. We've shown that we can integrate new businesses and generate cost efficiency in TT, and we're going to do it again.

So lots of potential, and we have a real platform for the future, and we're excited about what's coming next. And I'm going to come back to give you more on that great opportunity ahead and our ambition for growth as we improve the margins.

But before I hand over to Mark for the numbers, I want to explain how we've been handling our business activities in China and what we see as the current impact from the coronavirus situation. Following 3 years of strong targeted growth in China, 25% of our group revenues are now manufactured out there. Now our main priorities have been all about the safety of our people and continuity of supply for our customers. In fact, under strict government observation, our Suzhou facility actually remained open through the holiday period to manufacture critical equipment being used on the front line to fight the virus. We opened both of our manufacturing facilities fully on day 1 after the extended break on February 10. And since then, they have managed a swift return to almost full capacity, in fact, this morning, around 99%. In addition, we've been working with our local supply chain to minimize impact.

Now this has been an extraordinary situation. I would like to take this opportunity to thank our teams in China who have responded in an exemplary way to implement our health, safety and business continuity plans. Everyone has remained safe. The operations are back to capacity incredibly quickly to minimize business impact.

So for now, I'd like to hand over to Mark to take you through the detail of the 2019 results.

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Mark Hoad, TT Electronics plc - CFO & Director [2]

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Thank you, Richard, and good morning, everyone.

So as Richard said, we've delivered a strong performance with good revenue and profit growth, further margin improvement and very good cash conversion. Revenue increased by 9% at constant currency and by 4% organically. Operating margin increased another 60 basis points to 8.4%, and underlying earnings per share increased by 13%. Cash conversion ended the year a very healthy 98%. And our main value creation measure, return on invested capital, improved on a like-for-like basis. With these strong results, the Board is recommending an 8% increase in the final dividend.

Okay. So looking at a summary of the group's performance. We delivered organic revenue growth of 4%. This was driven by good growth in Power and Connectivity and excellent growth in Global Manufacturing Solutions, which more than offset a reduction in Sensors and Specialist Components due to softer market conditions. Operating profit increased by 17% at constant currency, and operating margins increased by 60 basis points to 8.4%, with all of the margin improvement organic. Organic growth did slow in the second half as comparatives become much harder and the tougher market conditions in Sensors and Specialist Components continued, but margins improved as a result of efficiency and self-help actions. Exceptional one-off items increased to GBP 21.2 million. This includes GBP 13.2 million of restructuring related to footprint change to drive efficiency and deliver synergies, including the closure of 4 facilities in the year, with 1 more to come this year. Acquisition-related costs were GBP 8 million, and total cash exceptionals amounted to GBP 9.2 million.

Cash generation improved in the second half as expected, and as I said, we ended the year with cash conversion of 98%. Net debt is up from last year, but GBP 18 million of that increase is explained by the adoption of IFRS 16. And as you can see from the leverage metric, which excludes the impact of IFRS 16, in line with our bank covenants, the balance sheet position remains very strong. IFRS 16 also impacts the calculation of return on invested capital as it brings more assets onto the balance sheet. And for this year only, we've shown the calculation on a pre- and post-IFRS 16 basis, so you can see the like-for-like comparison, which is up 10 basis points compared to last year. So for the group overall, a really good performance with good revenue and profit growth, coupled with strong cash conversion even with more mixed market conditions.

So moving on to the divisional performance and starting with Power and Connectivity, where revenue increased by 18%, with 2% organic growth and a GBP 19.5 million inorganic contribution from the acquisitions. Organic growth in aerospace, defense and medical was 14%, and these markets now account for more than half of the revenues of this division. The underlying profit performance here was very strong, up by 45% to GBP 16.5 million. More than half of the increase was organic, partly from operational leverage, but more so from operational efficiency following last year's investment in capacity and efficiency and from delivery of the synergy plans, which include the closure of 3 facilities in the U.K. and China.

As we said at the half year, this division is now reaching critical mass and is becoming more efficient. Margins increased by 210 basis points. And at 11.9%, margins are now at the top end of the short to medium-term target range that we've set previously. In the short term, there may be a small amount of margin headwind due to the industrial portion of revenues being softer. But as growth strengthens, we expect margins to move up.

As you know, this division has been the focus for most of our acquisition capital since 2015, Aero Stanrew, Cletronics, Precision and most of Stadium. This year, we added Power Partners. And the acquisition of Covina was completed immediately after the year-end. With return on invested capital in this division at 11.4%, we're basically at our acquisition hurdle rate, which is now set at 11.5%, updated to take account of the impact of IFRS 16.

This year, we won 2 new aerospace and defense customers in this division. We're working on R&D projects focused on new technology for cleaner, greener and quieter aircraft. And we're making good progress with our connectivity offering, including asset tracking and medical wearable devices.

Next, Global Manufacturing Solutions, which had a great year, delivering organic revenue growth of 12% with growth across Europe, the U.S. and Asia. As we've said before, it's here that we're benefiting from our business development approach, targeting the right customers who value the complex engineering solutions that we increasingly provide. Although the rate of growth slowed in the second half, this is only because the comparatives are getting more and more difficult. Momentum remains. Operating profit increased by 34% at constant currency to GBP 15.4 million as a result of operational leverage on the revenue growth and efficiency improvements, in particular, in our main U.K. facility. Margins increased by 90 basis points to 7.2%. We've sustained and improved the higher margins we first delivered last year. And although this division has the lowest margins in the group, it has the highest return on invested capital at 16.2%. As I said, we continue to benefit here from our approach to business development, growing with existing customers, with medical customers this year up 19%, as well as adding new customers. Two new customers in aerospace and defense and medical with multiyear, multimillion-pound revenues are supporting growth as well as adding to visibility.

And Global Manufacturing Solutions' customer base is also offering value to other TT businesses. A great example of this is a collaboration with Power Partners that we acquired last year, who have had a power supply approved for use in lab equipment for one of GMS' largest medical customers.

Finally, Sensors and Specialist Components. Following 2 years of high single-digit organic growth and a backdrop of strong market conditions, here, we experienced a softening of end market demand, which was compounded by destocking in the supply chain. As a result, revenues declined by 7% organically. Operating profit declined by 19% to GBP 15.3 million, but we took swift action to address the cost base which yielded immediate benefits, and so margins improved from 11.7% in the first half to 12.5% in the second half. One facility has been shut, more than 10% of the headcount in the division has been taken out, and another facility will close in 2020. Further run rate benefits will come through this year. Return on invested capital in this division of 13.6% is well above our cost of capital. We've also had some good business development success here this year, including a nice cross-sell win with the U.S. defense prime which came from selling into one of Precision's customers as well as winning new aerospace and defense customer contracts related to aircraft avionics and engine controls.

Okay. So taking those divisional performances, you can see here how we've driven the improvement in operating profit. There was a GBP 0.9 million foreign exchange tailwind with weakness of sterling against the U.S. dollar. Operational leverage on the revenue growth, combined with efficiency improvements, added GBP 3.8 million to operating profit and accounted for all of the underlying margin improvement. Acquisitions added a further GBP 1.9 million to operating profit.

So moving on to cash flow and net debt. We've continued to invest to support growth, although we did reduce the level of spend compared to our original plans given the more mixed conditions. Total spend on capital and CapEx expenditure and development expenditure was GBP 18.2 million or 1.3x owned depreciation and amortization. Working capital levels were higher than normal through the year both because of carrying Brexit buffer stock as well as holding inventory to support growth. As expected, we did see improvement in the second half of the year and, as a result, delivered full year cash conversion of 98%.

As I highlighted earlier, cash exceptionals totaled GBP 9.2 million and related to footprint reduction to support efficiency and synergy programs as well as acquisition-related costs. Net debt has increased in the period, although, as I said earlier, GBP 18 million of that relates to the adoption of IFRS 16, for which there was no prior year restatement.

The net debt to EBITDA is shown here in line with the way we calculate it for a bank covenant test, so excluding the impact of IFRS 16 and with a pro forma adjustment for the full year contribution from acquisitions. As you can see, at the year-end, the leverage was below 1x, giving us lots of flexibility and good capacity to support organic and acquisition investment.

We've also had a busy year on the pensions front as well as completing the merger of the Stadium scheme into the TT scheme at the end of March. We completed the triennial valuation of the U.K. scheme, and I'm pleased to say we've made great progress. As at the 5th of April 2019, the scheme was fully funded on an actuarial basis. That's a GBP 46 million improvement compared to 3 years ago. And that's driven by strong asset returns, our proactive liability management exercises such as the 2018 pensions increase exchange and our planned deficit contributions. Going forward, we'll continue with the agreed contribution plan and continue to derisk the investment strategy over time as we target self-sufficiency as the next step on the journey to ultimately get the scheme off the balance sheet completely. We'll also continue to look at what other actions we can take to improve scheme funding, including cleansing scheme data and looking at follow-on pie exercise.

So before I wrap up, a few items to help with modeling for the coming year. So in terms of market dynamics, clearly, the wider potential economic impact of the coronavirus isn't unknown at the moment. But putting that to one side, some thoughts on demand patterns for our end markets. The long-term growth drivers for sensing and power management devices in the industrial space remain attractive, but there is still inventory in the channel which needs to unwind. Once this has happened, we fully expect demand to start to improve but think this will at least take until midyear. In aerospace, defense and medical, on the other hand, we see the strong growth dynamics continuing.

Richard has already touched on the more direct impact of coronavirus on our output and supply chain. As we said, we've been incredibly impressed with the response of our teams in China, and our business continuity plans have worked as well as we could have hoped. Clearly though, there has been some disruption, and we currently estimate this could have a one-off impact in operating profit in 2020 of up to GBP 3 million. Obviously, we're working hard to mitigate that impact, but our #1 priority is looking after our employees and our customers.

You can digest most of the other items for yourselves, but I just wanted to highlight the 2020 impact of the efficiency program that we've announced this morning. Of the total cash spend of the program of GBP 14 million, around GBP 11 million to GBP 12 million of that is likely to be spent this year, GBP 7 million on restructuring and, at the bottom of the slide, GBP 4 million to GBP 5 million on capital expenditure. And as Richard said, we expect run rate benefits of GBP 5 million to GBP 6 million by 2022.

So before I hand back to Richard, I just wanted to emphasize that we continue to work on making TT a higher-quality, higher-margin business. Our key financial metrics for 2019 compared to 2015 show the benefits of shifting the portfolio towards structural growth markets, enhanced by our approach to business development to support growth and ongoing operational efficiency actions. We're growing revenue consistently and increasing absolute profitability and operating margin, and we're enhancing return on invested capital. I've said it before but I will say again. TT today is a fundamentally different business, and there's more to come.

With that, I'll hand back to Richard. Thank you.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [3]

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Great. Thanks, Mark.

So TT really is in great shape. And now as promised, I'm going to go show you what is coming and how we're going to get there. We have a clear opportunity for both organic growth and higher margins, supplemented and enhanced through selective acquisitions. So we'll start with organic growth.

Making the world a better place for the future is important for everybody, and it is rightly risen to the top of everyone's agenda. It matters to us. It matters to our customers. It matters to our employees and those in the communities where we work. And it's already embedded in what we do. And it's going to be a key driver of future growth because our customers are addressing exactly the same things. And we are solving electronics challenges for a sustainable world. We are helping take our customers take cleaner solutions to the market. So take aircraft electrification, better power management enables improved fuel efficiency. And we're helping our customers work smarter.

Productivity is and will continue to be a key growth driver. From sensors that enable robotic automation in factories, to wearable devices that facilitate more efficient remote patient monitoring, we are developing smarter and more efficient solutions in a variety of different applications. And our products also contribute to improve well-being, including radiation therapy and oncology equipment. And I mentioned upfront our response to the coronavirus in China, where we maintained production activity to deliver critical blood analysis equipment for one of our medical customers for use in Wuhan on the frontline tackling the virus. These are good examples of how sustainability issues become structural market drivers for TT's future growth.

So working in the right markets with the best growth dynamics is one thing, but you have to have both the right products and the right business model to succeed. And we're investing in R&D and our new approach to business development and the customer, and it's producing great results. The top 3 medical accounts grew 18% last year; 7 new customers added to the group, all having potential for multimillion-pound recurring revenue streams; and an exceptional 22% organic growth in aerospace, defense and medical markets, with cross-selling benefits from the integration of acquisitions and some great early success with Power Partners and Global Manufacturing Solutions, which Mark touched on earlier. We've picked the right customers with good growth potential for us.

So next, I'm going to take you through the growth dynamics in 3 of our key markets and why we are well placed to win in each one. So first up, aerospace and defense. This is a big market, and we are really just scratching the surface of the potential for our solutions here. It's also exciting to have the new platform to address the North American market with the Covina power solutions business. And one of the main structural growth drivers in this market is electrification. The industry has been in transition for a number of years focused on the need to reduce CO2 emissions and operating cost for the airlines. The electrification of aircraft both reduces the size and weight and drives efficiency and power consumption.

TT's products and solutions help our customers achieve these goals. We have good levels of exposure on a number of platforms where production rates have been growing. And we get chosen not only because of the quality of our products today, but also because we've been doing it for the customer to a high standard and crucially reliably for years. We see the same challenges in designing and packaging electronics across multiple locations on the aircraft, from flight control actuation systems to engine controls. And we're investing in R&D, and we apply our know-how to help solve a myriad of challenges for our customers, increasingly driven by sustainability goals.

And on to medical, an increasingly important growth market with strong fundamentals. It now accounts for nearly 1/4 of our revenues and represents a huge opportunity. An aging population and the growing demand for innovative diagnostics and new treatments, these drivers are resulting in market growth. We support our customers with radiation therapy equipment used to cancer treatment, for laboratory analysis used for analyzing blood and other bodily fluids, and we design our own products for innovative surgical procedures.

Our ongoing success in this safety critical environment is principally down to a couple of factors. We have long-standing relationships with these customers, built on our industry-leading technology which enables the utmost precision in life-critical surgery. And our manufacturing facilities are world-class and have a reputation for quality and reliability that makes us a trusted partner.

Finally, our industrial markets. This is a very large and broad market, but the trends for sustainable growth are clear, it's the drive towards greater productivity. Be it in factory automation, industrial IoT and artificial intelligence or smart city infrastructure as 5G rolls out, it's all about how we can use our resources more efficiently. The systems need to capture data from sensors, use connectivity to drive efficiency and deliver efficient power to all parts of the infrastructure. TT now has capability in all of these areas.

So to summarize these last few slides that I've been through here in the building blocks for growth. They're unashamedly not built on new untested plans, but have solid foundations with proven results and the plan to develop new products, adapt existing technology and continue to serve a loyal and growing customer base. All actions focused on organic growth to make TT a higher quality and more profitable business.

So on to acquisitions. Firstly, as we've said before, the areas of focus for deployment of capital have been aerospace, defense and medical markets; getting more critical mass in the U.S.; and extending our technology and product capabilities to higher-margin areas.

So what is the new business that we just acquired and why is it such an exciting step for us? Well, Covina has largely sole-sourced positions on attractive defense programs, giving us long-term visibility that will drive future growth as well as access to key U.S. defense primes. We can now leverage these relationships with the rest of TT. And the capabilities take TT up the value chain to entire product solutions with an opportunity for us to incorporate some of our component technology into these power supplies. It's a really great business. And when I was there in January, the enthusiasm of this team to be part of TT, knowing that they will be invested in to maximize their potential, makes me feel really excited about the potential for this business.

So now let's move on to a reminder of how we're going to get to double-digit margins. On the left, we've shown here we have significantly enhanced our margins already. We've made good progress. So we know what needs to be done, and we know how to do it. The journey to double-digit margins is going to be more of the same. Organic growth will be driven by customer success and market positions and will increase margin from operational leverage. Margins will be enhanced through the introduction of new products at higher margin as we deliver more value, plus we are yet to see some of the annual run rate benefits from the efficiency actions we've taken to date. And more specifically this morning, we've announced a new self-help program that will reduce the fixed cost base of the business as well as improving the group's environmental impact towards our carbon neutral goal by 2035. And finally, acquisitions that we've already made and future acquisitions will complete the picture. All of this pointing to a clear path to double-digit margins and beyond over the medium term.

So it's been another great year for TT. Again, we've delivered on all of our key metrics, showing the transformation that we're undergoing is making TT a higher-quality business. And I'm really proud of the way the team in China managed the current issues, which we are continuing to do globally. Another demonstration that we have a really strong platform for the future. I've set out how we see the group continuing to grow and add value over the next few years, a clear route to double-digit margins, underpinned by our newly announced self-help program. And we've got the benefits of our recent acquisitions to come and a balance sheet with firepower to do more. So we're well positioned to make further progress in 2020 and beyond. Thank you.

So before we move on to questions. I'd just like to take a moment as today is Emma's last day in the office, if this is the office. Last day in the office and to wish Emma and [Paris] all the very best on their new journey ahead. Don't go too red, Emma. But also to welcome Julian, who's joined us and will be helping us while Emma's away. Julian -- most recently, Julian Wais is at Cobham. So welcome, Julian. Good luck, Emma. You'll be great.

Right. With that, let's move on to some Q&A. Thank you. I think there was a microphone going around, right? Yes, yes, great.

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Questions and Answers

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [1]

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Mark Davies Jones from Stifel. Three things, if I may. Firstly, I saw that you're pulling back on the UniRoyal deal that we were talking about on the previous meeting. Can you just give us some background on that?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [2]

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Yes.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [3]

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On the new self-help measures, could you just give us a few more tangible indications of what that consists of in terms of where you're looking for those savings?

And then on the China impacts, divisionally, is there any standout in that? Is that mostly at GMS, for instance?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [4]

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Okay. So UniRoyal's relatively simple. So obviously, we talked about through last year -- I think we might have indicated during the last year with the market softening there, our potential JV partner had a more significant issue with demand reduction, so quite consumed with those challenges. And given the market backdrop, we felt like we should just pull back on any investment into that for now until we see the market recover. So that, we just put it on ice for the time being.

Self-help program, I think that our plan will be to provide more detail as we develop through the year, as things become more obvious, more broadly across the group, but it's basically around taking down the fixed cost base of the group and digging into the sort of more legacy footprint of the TT operation. So with -- we've got a clear path that we can see through to the cost that we would like to take out over the next couple of years and a lot of confidence given what we've done over the last few years with those -- that kind of stuff that we can see the benefits come through in 2022.

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Mark Hoad, TT Electronics plc - CFO & Director [5]

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And then on the impact of coronavirus, actually, it's spread across the 3 divisions. So the main impact would be in GMS, probably not in revenue terms because the expectation is that any revenues that are currently slipping because there has been some reduction in capacity would be recovered in Q2, but there'll be some cost inefficiency in delivering those revenues. In the other 2 divisions, it's because we buy product from China and resell it outside of China. So there we -- obviously, it comes back to capacity in the supply chain. So there, there could be some revenue and profit impact.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [6]

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Andy?

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [7]

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It's Andrew Douglas from Jefferies. I'd just like to follow up on the restructuring plan. I know you don't want to go get into too much detail. Can I just quadruple check the GBP 5 million to GBP 6 million run rate is for 2022?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [8]

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Correct.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [9]

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And we shouldn't expect any benefits in '20 or '21?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [10]

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So yes, you are correct for '20, Andy. So in '21, we anticipate some benefits coming through, but those early benefits will get offset by probably some reductions in revenue where we maybe lost -- some product lines will be going end of life. So that's kind of the way we're thinking about it. But yes, 2022, you see the run rate benefits.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [11]

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And then if we look at the Sensors division, clearly, destocking is continuing into current year.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [12]

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Yes.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [13]

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I think your assumption is it kind of ends as we get towards the kind of the end of the first half, and the second half is kind of a better run rate. What gives you that confidence?

And if we do get that kind of destocking come into an end, whether it's restocking or whether it's just kind of normal behavior, do we then have to put cost back in, in '21 as we kind of recover? Or are you guys happy with where your cost base is for recovery in 2021 and beyond?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [14]

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Okay. So the first question is effectively the answer. But yes, your assumption is right. So demand there has been -- I described it's kind of bumping along for the last few quarters. So it's not been dropping off underlying demand. It's been basically flattish, but destocking has been happening. So destocking has just taken -- is taking a bit longer than we would have hoped, let's say, so there's a bit more to run. And yes, around the half year is our assumption. At which point, we'd expect to come back to a bit of growth in demand. I guess more importantly for us, as Mark was indicating, when you look through 2020 in that dynamic, 2021 and '22, as that recovers to growth with the strength in medical, aerospace and defense and the other areas, we think, are really well placed for '21 and '22 in terms of organic trajectory.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [15]

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And costs are going to go back in? Or can you just [get rid of it]?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [16]

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Yes. So I think in Sensors and linked to sort of what we talked about, the efficiency program, I think we are -- this is a strategic program for us now. We feel like we've -- given that we've just made a couple of small acquisitions last year, we've got the project and management bandwidth to tackle that right now and really set up the operation strategically with the right level of fixed cost base and ability to flex for the future. So I think reading into that, we don't think we're going to have to add too much back in.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [17]

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And then last from me. Just on the GMS margin, it's kind of now at a level where you guys [are looking historically would likely to get to].

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [18]

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[From the Street level, yes].

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [19]

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Is this now a 10% margin business going forward? Or are we still happy with 7% as a ceiling? Just give us a little bit of help there because the top line growth looks -- the opportunity looks great. So are we now moving that margin target up?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [20]

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Yes. Well, I think -- I mean, firstly, absolutely delighted with the performance. The organic success there has been fantastic and also the way in which they've managed to continue to embed themselves with more engineering capability and adding more value to the customers as a strategic partner. So yes, we think the business is in great shape. And as you kind of alluded to and we've talked about before, really strong benchmark margins because they're adding more value, we think, though, and with the right fit customers there for us and that business. So there's more we can do there. And the initial goal was to try and sustain those margins, and we've managed to move them on again. So he'll kick me if I don't say sustained margins, and then let's see where we get to, but we're very optimistic for that business. I don't think we're shifting the target yet, but certainly, we think we can sustain it.

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Harry Philips, Peel Hunt LLP, Research Division - Analyst [21]

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It's Harry Philips at Peel Hunt. Three questions as well, please. Just continuing on the Sensors division, organic revenue growth in the second half looks like it was down about 8%, 10%, yet margins have gone up, which obviously is pretty impressive. Appreciate the destocks ongoing, but where do we -- where do you think about margins for the current year given you were expecting it to be a bit flat? So you've done better, which I say is great.

The second question is on China. Can you -- is there a sort of revenue number you can give us? I appreciate you're just saying on GMS you think you will recover lost revenue, but that leaves you with an overhead issue...

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [22]

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Yes, sure. You mean potential impacts on revenue. Okay.

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Harry Philips, Peel Hunt LLP, Research Division - Analyst [23]

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Yes, please. And then just finally, just to be doubly sure, in terms of restructuring cash this year, is GBP 13 million in total across the 2 programs?

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Mark Hoad, TT Electronics plc - CFO & Director [24]

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So first one, in terms of Sensors and Specialist Components, yes, what you've just said about the H2 organic rate is about right and probably the assumption is that, that would continue for H1, and then you'd get back to some level of growth in H2, which means, overall for the year, S&SC in 2020 is still down. But there is more cost benefits to come through. So the benefit you've seen in H2 is from the actions we took in the first half of the year. We've taken some more action in the second half, so those benefits are still to come through. So probably even with a reduced top line, operating margin percentage should improve a bit in 2020.

In terms of the China revenue impact, we think that if you assume the GBP 3 million that we sort of talked to as the top end of the range, that's probably something like GBP 5 million of revenue associated with that.

And then the third question was on restructuring. So the GBP 13 million is total restructuring spend in the year across the new self-help program, plus some cash is still to go out on those S&SC actions that we took in 2019, some ongoing pension activity and also some acquisition integration costs.

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Mark Lewis Fielding, RBC Capital Markets, Research Division - MD & Head of Capital Goods Research [25]

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Mark Fielding from RBC. Just in terms of looking out over the next couple of years, obviously, the cost savings alone could pretty much get you to the 10% margin. But how do we think about the other parts of the profit bridge in terms of your natural cost inflation you're seeing and maybe the pricing dynamics and particularly growing medical a lot. Medical is historically a sector where there is more consistent price-downs in the wider equipment market. So how are you seeing that?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [26]

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Well, so we're not seeing any particular difference in pricing dynamics, firstly, from that market for us. So we -- in terms of our sort of cost base inflation, we've got a track record over the last few years of offsetting through the supply chain operational activities that we've had ongoing, frankly, since 2015, '16. That's been offsetting or improving compared to material escalation. And clearly, you've got labor inflation generally to manage. So our efficiency programs and lean activity across the group has managed to offset that and keep margins moving forward.

The part of the self-help program is to put ourselves in an even stronger strategic position from that perspective. So we -- as you rightly say, I think, if the top line dynamics play out as we've sort of talked about through the next few years, the savings get you to the double-digit number. So I guess that either gives you potential beyond with acquisitions, or if there's some different dynamics in revenue, you still get there.

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Mark Lewis Fielding, RBC Capital Markets, Research Division - MD & Head of Capital Goods Research [27]

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And just a little clarification. One, in terms of the 2020 factory closures that you flagged that you still got to do in things like sensors, is that in the GBP 5 million to GBP 6 million? Or is that actually still -- that's from the run rate or the [fast-changing rate]?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [28]

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That's the run rate.

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Mark Hoad, TT Electronics plc - CFO & Director [29]

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That's the run rate in the actions we took in 2019.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [30]

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Yes, yes. Okay.

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Michael J. Tyndall, HSBC, Research Division - UK MidCap Equity Analyst [31]

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It's Mike Tyndall from HSBC. A couple from me, if I can. Firstly, just in terms of visibility, I wonder if you could give us just a bit of a rundown in terms of divisions where we stand today.

And then the second one on operational excellence, can you give us a sense of where your best and worst facility is at this point? I mean you've done quite a lot of work already. Are we in a narrow band now? Or is there still some low-hanging fruit? How hard does it get to keep squeezing?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [32]

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Okay, yes. Okay. So visibility by division, do you want to go with that?

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Mark Hoad, TT Electronics plc - CFO & Director [33]

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Yes. I mean so we referred in the announcement to the fact that visibility has improved every year for the last 3 years. So I think where we now sit is that, in terms of order book visibility for the current year, in Power and Connectivity, it probably -- it's probably around the 6-month level for the Power side, and it's more like 3-months visibility for the Connectivity side. GMS is around 6 months or so order visibility for the current year, but when you take the overall order book, we've got visibility into future years. And Richard referenced to the multiyear recurring revenues that we're now getting. Sensors and Specialist Components has moved back because of the demand levels to the kind of 6- to 8-week order visibility we used to talk about rather than the 10 to 12 weeks that we saw during the sort of global component shortage.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [34]

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And sort of operational excellence, sure, I think we've been incredibly impressed with the level of improvement in our best facilities, let's say. And it might not be a surprise for you to hear given what I said earlier on about China, that they are an example of fantastic operations. So the range is in a place where we still have some that have a decent way to go. So I think what you can read into that is that that's sort of why, when I talk about a plan that says more of the same and more of the same opportunity to improve, there is still some places that we know that we can bring up to a level that we would consider good to great. So there's still a bit of work to do in, let's call it, sort of 5 to 7 plants, something like that, out of the 20. And that is obviously part of the journey I've just been talking about. That's obviously provoked something.

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Michael J. Tyndall, HSBC, Research Division - UK MidCap Equity Analyst [35]

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No, no. Just quickly on the [NOK 3 million], is that a China number? I noticed you've got 7 plants in Italy. Just trying to make sure we're kind of...

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Mark Hoad, TT Electronics plc - CFO & Director [36]

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We don't have 7 plants in Italy.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [37]

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You must be reading somebody else's release there.

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Michael J. Tyndall, HSBC, Research Division - UK MidCap Equity Analyst [38]

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It would appear that I'm reading [somebody else's website]. I mean how many places -- how many did you have in Italy? And is this just a China number?

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Mark Hoad, TT Electronics plc - CFO & Director [39]

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Zero.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [40]

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Yes, we don't have any...

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Michael J. Tyndall, HSBC, Research Division - UK MidCap Equity Analyst [41]

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Probably TTI Europe has got loads in Italy.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [42]

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Yes, TTI would probably have some plants in Italy. No, we don't have any plants in Italy.

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Michael J. Tyndall, HSBC, Research Division - UK MidCap Equity Analyst [43]

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This is the China number, and there's nothing else we would need to worry about globally?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [44]

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So our footprint is Asia, which is a couple of plants in China, plus some small locations for engineering and logistics. We have one in Malaysia. And then we're in the U.K. And we're in the U.S. and Mexico.

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Michael J. Tyndall, HSBC, Research Division - UK MidCap Equity Analyst [45]

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Okay. So those were about Italy.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [46]

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So in principle, the efficiency point is a China point. Yes.

I didn't realize we got something in Italy I don't know about.

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Unidentified Analyst, [47]

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Yes, a moment of panic. A slightly longer-term mix question. Obviously, it's loud and clear that the focus is on aerospace, defense, medical and on contracts which are more visible longer term, more engineered, more integrated, whatever it might be.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [48]

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Yes.

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Unidentified Analyst, [49]

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Clearly, there's still quite a lot of the Sensors and Specialist Components business that doesn't really fit within that. So would you expect the mix to continue to evolve organically? Are there parts of Sensors and Specialist Components that might not be core longer term? How do you think about that?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [50]

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No, I mean I think as Mark just said and sort of Harry's question pointed to, that is a good business with good positions, with strong long-term drivers, we think, for growth. So there's nothing not to like about that. It's just it moves a bit more with global demand patterns and the margin is really good. So yes, I mean it's a business that we still think we can improve with growth, margin and profit improvement. So we don't think of any of that particularly as noncore.

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Unidentified Analyst, [51]

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So if those target markets are 47% of sales at the moment, is there any goal for what that might be as a percentage of sales longer term?

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [52]

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So it's not a firm goal, but it's a direction of travel. We would -- if you think about deploying capital as well as the organic position, I think we would be comfortable sort of assuming that we can move it more towards the sort of 60% to 2/3 over time, something like that.

You're looking at other websites, [Andy]?

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Unidentified Analyst, [53]

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Probably by TTI.

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Richard Tyson, TT Electronics plc - Group CEO & Executive Director [54]

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Okay. Well, everybody done? Great. Thanks, everyone, for turning up this morning, and we'll see you around.