TT Electronics share price, company news, analysis and interviews

TT Electronics plc (LON:TTG) Chief Executive Officer Richard Tyson and Chief Financial Officer Mark Hoad caught up with DirectorsTalk for an exclusive interview to discuss the fantastic momentum across the business, how they expect margins to develop going forward and what the future looks like for the company.

Q1: This looks to be a fantastic momentum across the business, could you just tell us what’s driving it?

A1: We’re delighted with a really strong first half performance, as you know, where TT Electronics has positioned itself into structural growth markets that have moved back towards their long-term growth trajectory underpinned by the mega trends for sustainability and ESG drivers and the markets are coming back strongly.

We’ve got really good momentum across the whole business, on top of the market’s rebounding, we’re winning new customers, new multi-year contracts, and that in the first half has resulted in 12% organic growth.

Really the standout is the order intake performance on top of that intake has been incredibly strong, with a book to bill of 134%. Our order book is at record levels, giving us full visibility in 2021 to improve organic growth expectations for the year now. Also the order book building nicely for 2022 with again, visibility better than we’ve ever had before, supporting confidence in good growth for next year, too.

Q2: Mark, underlying margins look to be back to 2019 levels. Can you just give us some detail on what’s behind this and how you expect margins to develop going forward?

A2: We’re really pleased that run rate margins have got back to 8% so quickly and so we’re getting some really good operational leverage on the revenue growth that we’re delivering and we’ve got the self-help program where the benefits are coming through as expected and we’re on track to deliver the full benefits of the project. Not just that, we now know that we can deliver those benefits at a lower cost than we had originally planned.

Then there’s acquisitions, the total acquisition is performing really, really well and it’s already delivering mid-teen margins. Those run rate margins are after removing the start-up costs associated with the Virolens project but they’re a good proxy for the future performance of the business as those Virolens costs come down significantly in the second half of the year.

So, the growth in the order book that Richard just talked about, the self-help actions and the growth that’s coming through, give us improved visibility and confidence in our path to deliver double digit margins.

Q3: Just talking about confidence, you’re making good progress Richard, what does the future look like for TT Electronics?

A3: The future looks great. Mark touched a little bit on the help from acquisitions, we’re delighted with the performance of Torotel that came in only eight months ago and we’re on track to hit ROIC hurdles there with opportunity to go further.

Having upgraded our expectations at the AGM in May and, as we just talked about, the strength and momentum building as we enter the second half, order book already covering upgraded revenue expectations for the year.

The self-help programme is on track to be largely completed in the second half of the year and we expect to deliver that now at a lower cost and as a result, adjusted margins will improve in the second half and we expect to deliver overall improved full year results.

So, really the business is in great shape and we could not be more excited about the future we’ve got in front of us.

TT Electronics plc (LON:TTG) Chief Executive Officer Richard Tyson and Chief Financial Officer Mark Hoad caught up with DirectorsTalk to discuss how the company performed in 2020, their approach to ESG, improving margins to 10% plus, key drivers for future growth and how the company is positioned for the future.

Q1: Richard, how would you summarise for 2020 for TT Electronics?

A1: Well, 2020 really was quite a year. Our team noted really really well to deal with the pandemic, most of the impact for us came in Q2 and business really has recovered very well as the year went on.

We got a grip of the challenges that COVID presented us and frankly, pressed on with actions to grow and improve the business so I have to just have to take a moment to give a huge thanks to the team. They kept everyone safe and kept delivering our products, in particular our critical products, to our customers.

No doubt though, we definitely benefitted from our early experience in China, the team were quick to respond, understand the challenges and get COVID protocols in place. Learning from these experiences was really invaluable and we got that spread right across the group quickly and helped us to get to grips with things.

In terms of improvements overall, we’ve invested heavily in growth this year, £11 million on R&D in markets that are driven by sustainability, underlying structural growth drivers in healthcare, aerospace and defence and automate electrification. We also spent £49 million on two  acquisitions, most recently Torotel and at the start of the year Covina, both of those bring new technologies to the company, they’re moving us further up the value chain which means higher margins and they’re embedding well.

Overall, frankly, a year where we continue to improve the quality of the business and we feel we’re really really well placed for the future.

Q2: Being a responsible business with a clear sustainability strategy is increasingly important to investors, what’s the company’s approach to ESG and can you point us to some progress and results?

A2: We’ve always been passionate about getting our people engaged, it’s fundamental to what we do and this has been recognised by our survey results this year where we’ve been benchmarked amongst the very best companies for employee engagement worldwide. It was great to see big improvements, exceeding our ambitions and becoming what is a 2-star company against our rated goal of being a 1-star, 3-star being the best you can be.

Doing the right thing for the environment as well, we’ve talked about the importance of our strategy positioning us in parts of the market that benefit from demand from sustainability. Internally, we made a step change towards our goal of becoming carbon neutral by 2035, we’ve delivered 20% reduction in CO2 emissions and we’re confident that the project’s ongoing across the group will reduce this further. That’s been recognised by external agencies so an improved rated from CDP and we achieved an improved AA rating from MSCI.

Q3: Mark, how will the company improve margins to 10% plus?

A3: We see a very clear path to get to 10% margins and beyond. That margin improvement will come from four areas:

First, we see recovery from the temporary acts of COVID coming through over the next 12 months or so.

Second, we’re making good progress with our self-help programme, that’s going to deliver £11-12 million of run-rate benefits by 2023 and there’s £5 million of incremental benefits going to come through this year, helping the margin progression.

Thirdly, we’ve got good momentum in the business and we expect our markets to grow around 3-5% a year so we’ll get benefit from growth and moving up the value chain.

Lastly, M&A can also play a part as we look to add higher margin businesses and deliver synergy benefits from acquisitions.

Q4: Richard, you’ve transformed the portfolio of the group over the last few years, what are the key drivers for future growth for the company?

A4: Having done all the work on really shifting the portfolio from being focussed on passenger car, automotive business, and general industrial customers, it’s great to be able to say that the company is now all about the need to make the world cleaner, smarter and healthier to live in.

So, those megatrends such as climate change, digital transformation, demographic, and social change are so fundamental that they’re going to continue to support growth for many years to come.

It’s been all about, for us, aligning the technology solutions we deliver to support these trends so:

• Cleaner is all about energy efficiency, reducing CO2 emissions,
• Smarter is about accuracy, automation, and productivity,
• Healthier is about improving patient outcomes.

So, our power technology helps aircraft and vehicles become more electric and we provide smart technology solutions to reduce energy reduction in homes, offices, and factories and in healthcare, we’ve got products to improve lab analysis, minimally invasive surgery, and improved diagnostics.

Overall, we believe the pandemic has really accelerated these trends and is going to drive the addition of new technology to underpin our future growth.

Q5: Finally, Richard, how is TT Electronics positioned for the future?

A5: We see pace of the recovery taking hold in the second half of last year and the trends improving into 2021.

As we talked, we are positioned in structural growth markets, we will be able to grow revenues of 3-5% a year over the medium term and we’re going to keep improving margins to 10% and beyond.

The cash generation will be strong and that’ll support continued investment in technology and acquisitions for growth.

So, we’re excited about our future and we’re very well set for 2021 and beyond.

TT Electronics plc (LON:TTG) Chief Executive Officer Richard Tyson and Chief Financial Officer Mark Hoad caught up with DirectorsTalk for an exclusive interview to discuss the acquisition of Torotel and how it fits in with the company’s strategy and future evolution.

Q1: Now, you’ve recently
announced the acquisition of Torotel Inc. Richard, can you tell us more about
the business that you’ve agreed to buy?

A1: Well, we’re delighted to have been able to announce
the acquisition of Torotel, a deal that should close in Q4, I’m sure we’ll come
on to that.

Torotel is an excellent fit for the business, they design and
manufacture high reliability power electronics and electromagnetic assemblies
so that’s very much moving up the value chain in the sort of products that TT Electronics
do.

The price of the business is going to be $43.4 million worth of EV
and the business itself is very much a US market defence-focused busines so the
next 12 months of revenues should be around 85% defence, 12% commercial
aerospace and the balance into other industrial markets.

The business itself has largely sole source positions, set in the
US defence market which is the largest defence market in the world so we are
delighted to get the opportunity to press TT’s business into that market area. They
have program-related multi-year revenues on programs like the Patriot missile defence
system and the F35 joint strike fighter bringing new customers into TT like
Lockheed Martin and Raytheon and expanding our presence in Collins Aerospace
and Northrop Grumman.

So, clearly, commercial aerospace has come down recently and we’ve
factored that into the future because your revenue streams and the projections
of the business but we do anticipate good growth and I guess, upside potential
from the acquisition in four to five years’ time when commercial aerospace
starts growing again.

The business itself is based in Kansas and that’s the main site, they have about 170 employees in another site in Pennsylvania and they’ve got really good strong track record of organic growth over the last few years so double digit organic growth track record. The business itself is just super complimentary to our existing business, giving us a real foothold into the North American market to press on with.

Q2: Mark, what’s the financial
impact from this acquisition and why did you decide to fund the acquisition
partly with equity and partly from debt?

A2: Today, Torotel is a
low double-digit EBIT margin business, under our ownership, we expect margins
to move into the mid to higher teams. As Richard says, it has also got
multi-year program positions so that gives us good visibility of recurring
revenues and it’s a business that’s highly cash generative.

We expect revenues to be flat in
2021 but to grow thereafter and a combination of the growth plus cost synergy
benefits and revenue synergies that we expect to be able to deliver means that
we expect Torotel  to exceed our 11% pre-tax
return on capital hurdle in year three of our ownership.

As Richard said, the acquisition
price is $43.4 million so roughly £34 million and we funded that partly through
a placing so the placing raised £20 million and that’s a placing of 6.1% of our
equity, the £14 million balance coming out of our existing debt facilities. We
took that approach to funding so that we could maintain a prudent balance sheet
position so post-completion, the transaction leverage will move to around 1.8
times on a proforma basis and as I say, that just prudent balance sheet
position and means we can continue to invest in the rest of the business.

Taking account of the placing, the acquisition is modestly earnings accretive from the first full year of ownership.

Q3: Richard, how does it the
acquisition of Torotel progress TT Electronics strategy and the future
evolution of the TT Group?

A3: As we’ve spoken over
the last few years, TT’s strategy is very much since the disposal of the
automotive division has been to deploy our capital and organic growth
investment into more attractive target markets that can give us a better chance
of long term organic growth, increasing our differentiation higher value added
product solutions as well, moving up the value chain and we’ve always been
looking to increase our US market exposure.

So, over the last few years, we’ve
been looking to build our position in medical and aerospace and defence and so,
from our perspective, bringing in Torotel providing an opportunity to deliver
high reliability engineered products to the US defence market is really
exciting. Selling into a US blue chip customer base and adding some real scale
to our engineering and operational capability in North America that we can
share with our UK businesses too.

So, we anticipate some really
exciting cross selling opportunities between customers, the sharing of technology,
leveraging that to accelerate our product roadmap. For us, that just really
means we anticipate an exciting time for growth going forward and to be able to
do that in that in a post-COVID environment has been really, really good for
the team to get onto the front foot and looking to progress the strategy for
going forward.