TT Electronics plc (LON:TTG) have today provided results for the year ended 31 December 2020.
Second half recovery and record order book, started 2021 well
Results Highlights
· Recovery well underway, strengthening in Q4 with increasing order intake and improved production capacity, after Q2 COVID-19 impact
· £60 million investment in R&D and acquisitions; Torotel largely integrated, performing well and bringing exciting business opportunities
· Benefiting from structural growth drivers associated with sustainability, supplying products for a cleaner, smarter and healthier world
· ESG credentials recognised through an improved ‘AA’ rating in MSCI ESG assessment
· Self-help programme on-track; yielding £2 million benefits in 2020, a further £5 million in 2021 and £11-12 million full run-rate in 2023
· Full year revenue down 9% year-on-year at constant currency after COVID-19 impact; improving trend in H2
· Strong free cash flow of £14.4 million, aided by £3.6 million working capital inflow
· Resumption of dividend payments, reflecting good recovery and positive outlook
Outlook
· Improving business performance and clear path to double-digit margins, supported by self-help actions
· Good trading momentum in 2021 underpinned by record order book
· Revenue in the five months from October 2020 to February 2021 flat organically versus prior year
· Positive structural trends in markets expected to accelerate as a result of COVID-19 impacts
| £ million (unless otherwise stated) | Adjusted1 | Statutory | |||||
| 2020 | 2019(restated)2 | Change | Change constant fx | 2020 | 2019(restated)2 | ||
| Revenue | 431.8 | 478.2 | (10)% | (9)% | 431.8 | 478.2 | |
| Operating profit | 27.5 | 38.1 | (28)% | (27)% | 6.6 | 16.9 | |
| Operating profit margin | 6.4% | 8.0% | (160)bps | (150)bps | 1.5% | 3.5% | |
| Profit before taxation | 23.8 | 34.4 | (31)% | (30)% | 2.9 | 13.2 | |
| Earnings per share | 11.7p | 17.8p | (34)% | (34)% | 0.8p | 7.6p | |
| Dividend per share | 4.7p | 2.1p | |||||
| Return on invested capital | 7.7% | 10.8% | |||||
| Cash conversion | 130% | 103% | |||||
| 2020 | 2019 | ||||||
| Free cash flow1 | 14.4 | 9.7 | |||||
| Net debt1 | 83.9 | 69.1 | |||||
| Leverage1 | 1.6x | 1.0x | |||||
Richard Tyson, Chief Executive Officer, said:
“We started 2020 with good momentum prior to the COVID-19 outbreak which most impacted our trading performance in the second quarter. Since then our performance has been on a recovering trend, which has strengthened in the fourth quarter of the year. This trend has continued into 2021 on the back of an increasing order intake across all divisions.
We believe that many of the positive, structural trends in our markets will accelerate as a result of the longer-term impacts on society from COVID-19. We see this in a number of areas, but especially in increasing demand for improved healthcare and an acceleration of digital transformation and connectivity. These factors, combined with the steps we have taken to enhance the quality of our businesses, our self-help programme and our record order book position us well for 2021 and give us confidence in an exciting future for TT.”
About TT Electronics
TT Electronics is a global provider of engineered electronics for performance critical applications.
TT solves electronics challenges for a sustainable world. TT benefits from enduring megatrends in structurally high-growth markets including healthcare, aerospace, defence, electrification and automation. TT invests in R&D to create designed-in products where reliability is mission critical. Products designed and manufactured include sensors, power management and connectivity solutions. TT has design and manufacturing facilities in the UK, North America, Sweden and Asia.
Notes
1. Throughout this announcement we refer to a number of alternative performance measures which provide additional useful information. The Directors have adopted these measures to provide additional information on the underlying trends, performance and position of the Group with further details set out on page 15 to 18. The adjusted measures used are set out in the ‘Reconciliation of KPIs and non IFRS measures’ section on pages 41 to 47.
2. The results for the year ended 31 December 2019 have been restated to reflect prior year adjustments. Further details are set out in note 2.
CHIEF EXECUTIVE OFFICER’S REVIEW
Introduction
Our purpose is to solve electronic challenges for a sustainable world. We design and manufacture solutions that enable a cleaner, smarter and healthier environment. We create value through supplying products and services that support sustainability in our target markets of healthcare, aerospace & defence and automation & electrification.[1]
Environmental, social and governance (ESG) matters are central to our purpose. We have received an improved rating of ‘AA’ in the MSCI ESG Ratings assessment, recognising our progress during the year. We have worked hard to reduce our scope 1 and scope 2 carbon emissions. These have decreased by 20% to 12,518 tonnes CO2e in 2020 from 15,705 tonnes CO2e in 2019. This improvement is due to our energy efficiency actions and increased use of green electricity as well as the lower production volumes in the year.
We started 2020 with good trading momentum prior to the COVID-19 outbreak. Although COVID-19 did impact trading, particularly in the second quarter, our performance has been on an improving trend in the second half, and this has continued into early 2021. The improving trajectory is being driven by increasing order intake across all divisions, as well as our improved production capacity, as employees have returned to work. All sites are now open following a few temporary closures in the first half of 2020.
As a result of the longer-term impacts on society from the COVID-19 outbreak, we believe that many of the positive, structural trends already evident in our markets will accelerate. These include the digital transformation, increased automation, more demand for remote tracking of assets, a greater prevalence of connectivity and demand for improved healthcare. This gives us confidence in the strong prospects we see for TT.
Alongside a resilient trading performance, we have continued to execute our strategy. During the year we have invested £11.2 million in research and development (R&D), enhancing our pipeline of new products. We have also completed two acquisitions, Torotel and Covina, investing £48.7 million in total, including deferred consideration relating to a prior year acquisition. These acquisitions have advanced our power supply capabilities and market reach in the US. We are also on-track to deliver the £11-12 million of full run-rate benefits in 2023 from our investment in the self-help programme launched in the first half of the year. We are pleased with the progress made so far to deliver this significant programme, which is an important component of our path to double-digit operating margins.
Throughout the year we have prioritised the protection and safety of our employees, our customers, our suppliers and our wider communities. We have greatly appreciated how our employees have responded to the challenges presented. Their skill, dedication and hard work, which they have constantly demonstrated in uniquely difficult conditions, have resulted in them going above-and-beyond to get things done well and on-time. Their flexibility, responsiveness and ability to deliver has strengthened and deepened many of our customer relationships. Together with our critical capabilities and balance sheet strength, this has positioned us well for future work and collaborations.
Results and operations
Group revenue for the year was £431.8 million, 9 per cent lower than the prior year at constant currency and 12 per cent lower on an organic basis. Organic revenue was 17 per cent lower in the second quarter against the comparable prior year period due to reduced demand and as we shielded staff, reducing capacity. There were also temporary closures of a few sites. However, since then we have continued to see improving momentum across the business. Notably the recovery strengthened during the fourth quarter, when organic revenue was only 5 per cent lower than the prior year. We have seen further improvement at the start of 2021.
This recovery trend has been underpinned by strong order intake across the Group through the fourth quarter of the year. This has continued into 2021 across all divisions. Order intake for full year 2020 was 99 per cent of revenue, and for the second half of 2020 was 103 per cent of revenue. The order book at the end of February 2021 is at record levels.
In recognition of the improving trends we have seen through the second half of the year and our strong cash generation, early in 2021 we repaid the Coronavirus Job Retention Scheme (furlough) payments to the UK Government. The £1.1 million cost of repayment has been provided for in these 2020 results.
Adjusted operating profit for the year was £27.5 million, 27 per cent lower than the prior year at constant currency. The second half adjusted operating margin was 6.5 per cent, including the accrued cost of the furlough repayment. After the impact of adjusting items, including restructuring and acquisition and disposal costs, the Group’s full year statutory operating profit was £6.6 million.
During the year end close process, a prior period non-cash timing adjustment was identified, associated with the timing of overhead recognition in one of our sites in Global Manufacturing Solutions. As a result of this adjustment, the previously reported 2019 operating profits have been reduced by £1.9 million and the reported operating profits for 2020 are ahead of management’s original expectations by a similar amount. The reported operating profits for 2020 represent the actual performance of the business for the year and no “one-off” benefit has been derived from this adjustment when comparing against restated 2019 results.
We are particularly pleased with our strong cash performance, delivering operating cash conversion of 130 per cent. This was driven by continuing tight control over costs and capital expenditure. In addition, there was a working capital inflow of £3.6 million, which included £4.2 million from a reduction in inventory. On a statutory basis, cash flow from operating activity was £28.2 million (2019: £35.9 million). Our strong operating cash performance helped us deliver increased free cash flow of £14.4 million (2019: £9.7 million), despite the impact of COVID-19 on our profits.
We ended the year with net debt of £83.9 million (2019: £69.1 million), including IFRS 16 lease liabilities of £15.9 million (2019: £17.6 million). We have a strong balance sheet, and this includes a defined benefit pension scheme fully funded on an actuarial basis. At 31 December 2020 leverage was 1.6 times (2019: 1.0 times), within the Board’s target leverage range of 1-2 times.
Our return on invested capital has declined to 7.7 per cent in 2020 due to the volume driven profit reduction and this will recover as business momentum increases.
Dividend
Given the good recovery we are seeing and the positive outlook for 2021 and beyond, we are resuming dividends as planned, with the Board proposing a final dividend of 4.7 pence per share. The total cash cost of this dividend will be approximately £8.2 million. Payment of the dividend will be made on 21 May 2021, to shareholders on the register at 30 April 2021.
Our markets
We focus on creating value through our sustainable products in our target markets of healthcare, aerospace & defence and automation & electrification, where there are advanced technology requirements. We believe that many of the positive, structural trends already evident in our markets will accelerate as a result of the COVID-19 outbreak.
In healthcare (25 per cent of Group revenue) growth is driven by increasing global incomes leading to demand for improved healthcare, alongside ageing populations and new preventative care technologies. In 2020 the usual market trends have been impacted by the pandemic and we have supported new and existing customers to provide products to counter the virus. Pent-up demand for deferred elective surgery and for large installations for hospital or life science applications are expected to be supportive of growth over the next few years. COVID-19 has also reinforced the need for a number of TT specialisms, including interventional healthcare devices, patient monitoring and laboratory equipment.
In aerospace and defence (22 per cent of Group revenue), growth is driven by increasing electrification of platforms, which supports fuel efficiency and safety as well as, over the longer term, increasing passenger numbers. Currently, with less passenger-driven demand due to COVID-19, commercial aerospace production has found a new, lower level. Rates are now largely re-set and we have proactively reduced our cost base to match. We anticipate a gradual recovery in aircraft production over several years, as long-term growth resumes. The defence market has been seen by governments as an essential business activity through 2020. It has continued to show strong growth, with heightened global security tensions also remaining a driver behind spending. Our ability to design and manufacture smaller, lighter and more efficient products helps our customers improve efficiency and reduce carbon emissions, positioning us well in the market.
In automation and electrification markets (37 per cent of Group revenue), growth is being driven by factors including demand for sustainable solutions to improve energy efficiency, the use of robotics to improve productivity and the increasing use of remote asset tracking. There has been an improving demand trend in the second half of the year, with orders and visibility increasing. The positive long-term growth drivers in this market give us confidence that demand will increase for our power, sensing and connectivity solutions.
Creating value through technology investment
R&D is one of our top capital allocation priorities, given its critical contribution to the ongoing health of the business. Our investment in R&D is focused on bringing higher growth, more sustainable products to market. These typically yield higher returns and development is often undertaken in partnership with our customers. Our investment strategy includes leveraging acquired complementary capabilities targeted through mergers and acquisitions (M&A).
During the year, we have continued to invest in line with our target of 5 per cent of product sales. Our R&D cash investment was £11.2 million (2019: £13.5 million), representing 4.8 per cent (2019: 5.1 percent) of the aggregate revenue of our product businesses.
We continue to bring a pipeline of exciting new products to market, including in areas where we have extended our technical capabilities through acquisition. Examples include:
· Following two years of development, we received qualification orders at our Minneapolis, Minnesota site (Precision Inc, acquired in 2018) from a healthcare customer for a miniature high voltage transformer/inductor power assembly for an implantable defibrillator programme. Initial qualification examples are expected to be delivered in the second quarter of 2021. The product has been developed in close collaboration with the customer with work undertaken at the customer’s engineering laboratories;
· As a result of investment in a power supply for a ground-vehicle laser warning system, the product has been selected for a US military programme. This followed an initial approach from a long-standing customer. Deliveries will start in late 2021, as a result of successful live-fire demonstrations, having been developed at our Covina, California site (acquired in January 2020). The product is based on an existing, proprietary TT design used across a number of airborne applications;
· We have launched a new range of metal foil sensor chips which offer improved surge tolerance and self-heating characteristics. These are intended to service the market for products that require control and monitoring of energy consumption, including healthcare and automation and electrification applications.
During the year we were appointed exclusive manufacturing partner by iAbra for Virolens,® a rapid COVID-19 screening device. Evaluation trials of the product are continuing, and iAbra is making good progress with the regulatory approvals process. There continues to be a role for COVID-19 screening to complement vaccination programmes in the UK and elsewhere. Revenue to TT from the sale of Virolens® are dependent on potential end customers converting expressions of interest into firm orders and regulatory approval in each relevant territory. There continues to be a wide range of potential commercial outcomes and hence no certainty as to the financial impact on TT.
In addition, TT is part of the UK’s Project High-T Hall, alongside Rolls-Royce, Paragraf and CSA Catapult. This project is intended to demonstrate how graphene-based Hall Effect sensors can operate reliably at high temperatures. This paves the way for more efficient electric engines for aerospace and other applications. The project, which started in July 2020, is expected to run for one year and is funded by UK Research and Innovation.
Creating value through margin enhancement
The pursuit of higher margins through organic and inorganic growth remains core to the Group’s strategy. Notwithstanding the short-term impact of COVID-19 on 2020 margins, we have a clear path to delivering double-digit operating margins with an improving trend expected in 2021 and beyond. The actions we have taken this year bring the business closer to realising this, with key contributions expected from:
· Operational leverage from organic revenue growth;
· Reductions in overheads; and
· Inorganic expansion developing technology offerings and market positions.
Our significant self-help programme, which will reduce our footprint and fixed cost base, commenced in the first half of 2020. This has made very good progress. Initial programme benefits were £2 million in 2020, and these have helped to mitigate the slowdown in our end-markets. Incremental benefits of £5 million are expected in 2021, supporting margin improvement. There is a clear path to achieving the expected full run-rate benefits of £11-12 million in 2023.
The programme comprises a number of different activities. Given the COVID-19 related weakness in certain end-markets, we expanded the original programme to include additional headcount reductions across a number of sites. By the end of 2021 we will have closed three primary operating sites, further improving efficiency. In addition, we are taking certain products end-of-life in 2021, as well as relocating the manufacture of other products within our existing footprint. This will enable us to serve customers better, as well as achieve an improved level of profitability. Total net headcount reductions of around 500 employees are expected on completion of the programme. At the end of 2020 c. 70 per cent of the planned headcount reductions had been delivered.
We continue to anticipate total cash spend for the self-help programme of £18 million, of which £4.1 million was spent in 2020, including £2.5 million of capital expenditure. Restructuring spend of £1.6 million is net of the accelerated disposal for £3.0 million after costs of our Lutterworth, UK freehold property. The total anticipated programme P&L expense remains at £24 million, with £12.9 million incurred in 2020. In addition to the cash costs, the P&L expense incorporates non-cash items, primarily asset and inventory write-downs and the impairment of intangibles.
Our acquisitions also contribute to higher margins. The acquisitions completed in the year, Torotel, Inc and Covina, the power supply business of Excelitas Technologies Corp., have brought with them operating margins above the TT Group average and we have reconfirmed our expectations for cost synergies.
Environmental, social and governance (ESG)
Not only do we develop, design, engineer and manufacture products that enable reduced environmental impacts, but we are also optimising our own operations to reduce our impact on the environment.
We have set ourselves a target to be carbon neutral by 2035 and we are undertaking a range of actions to deliver like-for-like reductions in our annual emissions. In 2020 we reduced our scope 1 and scope 2 carbon emissions by 20%. In addition, we are focusing on reducing single-use plastics within the business and on reducing the amount of waste we send to landfill. Our continuing progress on ESG matters has been recognised externally, having received an improved rating of ‘AA’ in the latest MSCI ESG Ratings assessment.
Creating value from mergers & acquisitions
We use M&A to enhance TT’s technology capabilities and market access, consolidating fragmented but valuable niche areas within the Group. We create value by realising revenue synergies, including leveraging customer access, and by optimising operations and the supply chain. We invest in attractive, growing and higher margin segments that the Group knows well, and where we have competitive advantage.
This year we have bought two power supply businesses, the Covina, California based power supply business of Excelitas Technologies Corp. (completed January 2020) and Torotel, Inc (completed November 2020), based in Olathe, Kansas. We have rapidly and effectively integrated these businesses and we are engaged in the robust pursuit of synergy opportunities.
Our most recent acquisition, Torotel, is another particularly strong fit with the Group’s strategy. The acquisition has increased our scale and capabilities in the very large and attractive US defence market, and it has enhanced our US power electronics presence. Torotel has a track-record of strong revenue growth and brings opportunities to apply our proven operational improvement and integration capabilities to the business.
Following the successful integration of Covina earlier in the year, the integration of Torotel’s systems and processes into TT’s Power and Connectivity division has also been largely completed. Utilising our well-defined business integration model, this has integrated major business processes including operations, procurement, finance, legal, IT and human resources. This was completed against a backdrop of COVID-related travel restrictions and other constraints. We are proud of the team and our new Torotel colleagues for undertaking this complex task so quickly and in really difficult conditions.
Our attention is now focused on creating value from improving operational performance and integrating the Torotel customer proposition more closely with our other businesses. This includes customer cross-selling, the integration of products from across the Group to provide higher-value customer offerings and leveraging our business development capabilities. Examples of the exciting opportunities we are seeing already are as follows:
· As a result of a Torotel customer introduction, TT is actively pursuing two significant new opportunities with a US defence prime;
· The newly combined TT and Torotel teams are working with a customer on a specific opportunity to expand the power supply work currently undertaken by TT’s recently acquired business based at Covina, California;
· Utilising it as a centre of excellence, Torotel has been introduced to an existing TT customer to expand the magnetics we currently provide.
The Precision business (acquired in 2018), based in Minneapolis, Minnesota, has also secured a long-term contract with a US defence prime for an alternator assembly. This order is the single largest in Precision’s history with production from October 2020. We continue to work on several other new and existing programmes with this customer.
We are continuing to look for opportunities to extend TT’s technology capabilities and market reach.
Outlook
We started 2020 with good momentum prior to the COVID-19 outbreak which most impacted our trading performance in the second quarter. Since then our performance has been on a recovering trend, which has strengthened in the fourth quarter of the year. This trend has continued into 2021 on the back of increasing order intake across all divisions.
We believe that many of the positive, structural trends in our markets will accelerate as a result of the longer-term impacts on society from COVID-19. We see this in a number of areas, but especially in increasing demand for improved healthcare and an acceleration of digital transformation and connectivity. These factors, combined with the steps we have taken to enhance the quality of our businesses, our self-help programme and our record order book position us well for 2021 and give us confidence in an exciting future for TT.
FINANCIAL OVERVIEW
Group revenue was £431.8 million (2019: £478.2 million). This included an £11.1 million contribution from acquisitions and adverse currency translation of £1.4 million. Group revenue was 9 per cent lower than the prior year at constant currency and 12 per cent lower on an organic basis. There were lower sales volumes from commercial aerospace, automation and electrification and healthcare markets, although defence remained strong.
The Group’s statutory operating profit was £6.6m after a charge for items excluded from adjusted operating profit of £20.9 million (2019: £21.2 million) including:
· Restructuring costs of £14.5 million (2019: £13.2 million), primarily related to the Group’s self-help programme of £14.8 million, within which £6.3 million related to severance costs and provisions; £3.4 million to intangible asset write downs; £2.0 million of right of use asset and plant, property and equipment write downs; £1.6 million relating to stock write downs and £1.5 million of other costs, including prior year projects completed in 2020. Also included was a property disposal profit of £1.2 million (2019: £nil) and pension costs of £0.9 million (2019: £1.0 million, with £0.4 million relating to past service charge and £0.6 million relating to other pension restructuring costs) primarily relating to UK pensions schemes having to equalise male and female members’ benefits in respect of guaranteed minimum pensions (‘GMP’);
· Acquisition and disposal costs totalled £6.4 million (2019: £8.0 million) and included amortisation of intangible assets arising on business combinations of £4.2 million (2019: £4.5 million), a £1.0 million credit (2019: £nil) due to the release of the warranty and claims provision relating to the Transportation business divestment and other acquisition and integration related costs of £3.2 million (2019: £3.5 million).
Adjusted operating profit was £27.5 million (2019: £38.1 million), with the reduction a result of the COVID-19 outbreak, with an operating margin of 6.4 per cent (2019: 8.0 per cent).
The net finance cost was £3.7 million (2019: £3.7 million). The Group’s overall tax charge was £1.6 million (2019: £0.8 million), including a £2.7 million credit (2019: £4.6 million credit) on items excluded from adjusted profit. The adjusted tax charge was £4.3 million (2019: £5.4 million), resulting in an effective adjusted tax rate of 18.1 per cent (2019: 15.7 per cent).
Basic earnings per share (EPS) was 0.8 pence (2019: 7.6 pence) being impacted by the reduction in operating profit and the adjusting items set out above. Adjusted EPS decreased to 11.7 pence (2019: 17.8 pence), reflecting the lower adjusted operating profit in the period.
The total net accounting surplus under the Group’s defined benefit pension schemes was £30.5 million (31 December 2019: £16.6 million). The main driver of this was an increase in the fair value of assets due to investment performance, part of which relates to interest rate hedges. This offset an increase in the Scheme’s benefit obligation, mainly due to a fall in corporate bond yields. The surplus also increased due to company contributions paid of £5.4 million, as the deficit contribution plan continued, targeting self-sufficiency and further de-risking.
Adjusted operating cash flow was £49.0 million (2019: £57.4 million). This was impacted by lower profitability, although this was largely mitigated by the Group’s proactive cash management, including capital and development expenditure lower at £13.2 million (2019: £18.2 million). In addition, the Group generated a working capital inflow of £3.6 million (2019: £1.2 million outflow), including a £4.2 inflow from inventory reduction. This resulted in very strong adjusted operating cash conversion of 130 per cent (2019: 103 per cent). On a statutory basis, cash flow from operating activity was £28.2 million (2019: £35.9 million).
There was increased free cash flow of £14.4 million (2019: £9.7million), net of £8.1 million of restructuring and acquisition related costs (2019: £9.2 million), relating to the new self-help programme and acquisition costs associated with the Covina and Torotel acquisitions. Pension contribution payments in the period were lower at £5.4 million (2019: £8.6 million), with the prior year including a one-off payment of £3.4 million relating to the merger of the Stadium Group Retirement Benefits Plan (1974) pension scheme into the TT Group scheme.
Investments in acquisitions totalled £48.7 million (2019: £2.3 million), reflecting the acquisition of Covina, the power supply business of Excelitas Technologies Corp., the acquisition of Torotel, Inc, including, £3.0 million of debt acquired with Torotel, Inc and £3.8 million of debt like items, as well as £0.5 million of deferred consideration relating to a prior year acquisition. Partially offsetting this was £20.2 million (2019: £0.9 million) of equity issuance, which primarily related to the Torotel acquisition placing. There was no dividend payment in the year (2019: £10.9 million).
At 31 December 2020 the Group’s net debt was £83.9 million (31 December 2019: £69.1 million), including £15.9 million of lease liabilities (31 December 2019: £17.6 million). Leverage, consistent with the bank covenants, was 1.6 times at 31 December 2020.
