2016 Preliminary Results, 9 March 2017

TT Electronics plc

Results for the year ended 31 December 2016

1. Excluding the effect of restructuring costs, asset impairments and acquisition related costs

2.  Rolling 12 month underlying operating profit return on average invested capital

3. Underlying operating cash flow (underlying EBITDA less net capital expenditure excluding property disposals, capitalised development expenditure, working capital and non-cash movements) divided by underlying operating profit

4. Net cash flow from operating activities less net cash flow from investing activities less interest paid

5. Interim dividend combined with final proposed dividend

Good strategic progress and strong financial performance

·     Continued customer focus driving new contract wins; strong sales performance in Asia

·     Operational efficiency improvements supporting excellent profit growth

·     Aero Stanrew continues to perform well and successfully integrated

·     Entering 2017 with good momentum and a robust order book

Financial headlines

·     Robust organic revenue performance, returned to organic revenue growth in H2

·     Underlying operating profit up 26%, underlying EPS up by 19% at constant currency

·     Good underlying cash conversion at 87%, further enhanced by £12.3 million from sale of properties

·     Return on invested capital improving, up 130bps

·     Increase in dividend reflects progress in 2016 and confidence in 2017

Richard Tyson, Chief Executive Officer, said:

"We are pleased with the strong performance achieved in 2016, ahead of expectations. This has resulted in improved growth and profitability for the Group, and our free cash flow performance has been excellent.

We have a clear and realistic strategy for TT to focus on structural growth markets where there is increasing electronic content. We continue to deploy our engineering expertise and investment in areas where we see real opportunities for growth. Despite uncertain end-markets, we enter the year with good momentum in operational efficiency improvement and a robust order book, giving us confidence of making further progress in 2017."

For further information, please contact:

TT Electronics 

Richard Tyson, Chief Executive Officer

Mark Hoad, Chief Financial Officer

Emma Darke, Head of Investor Relations and Communications                 Tel: +44 (0)1932 825 300

MHP Communications

Tim Rowntree / Jamie Ricketts / Hannah Winter                                                               Tel: +44 (0)20 3128 8100

An analyst presentation will be held today at 10.00am at Numis, 10 Paternoster Square, London EC4M 7LT. A replay of the webcast will be available on the investor relations section of our website later today at www.ttelectronics.com. 

2016 OVERVIEW

We are pleased with the strong strategic and financial performance of the Group. 2016 trading was ahead of expectations.

Group revenue for 2016 was £569.9 million (2015: £509.9 million) an increase of 12 per cent and 3 per cent excluding the impact of foreign exchange (plus £43.0 million). As expected, revenue was flat on an organic basis (excluding the impact of exchange rates, acquisitions and disposals). Aero Stanrew contributed revenues of £18.3 million.  Our sales performance has been good, particularly in Asia, delivering a robust performance in markets that remained challenging throughout the year. The Group's order book is encouraging and is slightly ahead compared to the same time last year.

Underlying operating profit increased by 44 per cent to £31.3 million (2015: £21.7 million) driven by the turnaround of Transportation Sensing and Control and the contribution from the Aero Stanrew acquisition. Excluding the positive foreign exchange movement of £3.2 million, underlying operating profit increased by 26 per cent, with £3.4 million contributed from Aero Stanrew and £3.0 million coming from self-help actions and underlying business performance. Underlying operating profit margin for the Group has improved by 120 basis points and return on invested capital is now 10.3 per cent (2015: 9.0 per cent).

Cash generation improved in the second half of the year as expected and we delivered full year cash conversion of 87 per cent (2015: 136 per cent) and a free cash inflow of £13.8 million (2015: £5.1 million), an increase of 171 per cent. Continued strong underlying cash performance was enhanced by £12.3 million of proceeds received from the sale of surplus sites in Weybridge, Fullerton and a site in Werne.

Year-end net debt was £55.4 million (2015: £56.1 million). Net debt to EBITDA was 1.0 times (2015: 1.3 times).

STRATEGIC PROGRESS

We have achieved a significant amount in 2016:

·     We have turned around the Transportation Sensing and Control division. We have returned the division to profitable growth by positioning the business around structural growth drivers including safety, emissions and power electronics.

·     We have repositioned and invested in Industrial Sensing and Control (IS&C) and Advanced Components and will continue to do so. We have increased the cash spent on R&D in these divisions by 13 per cent compared to 2015.

·     We have increased the level of penetration within our key customers and opened up new channels of business. We have strengthened strategic account management across the Group and increased sales in Asia by 12 per cent at constant currency.

Our strategy is to build leading positions in markets with structural growth drivers where there is increasing electronic content. Our core capabilities are developing highly engineered electronic components and assemblies for harsh, often regulated environments. Our organisational agility is allowing us to respond quickly to changing customer and market dynamics.

Increasingly going to market as a unified business has helped unlock customer opportunities, including new business won with an existing consumer electrical equipment supplier, increasing revenues for this strategic customer account by over 50 per cent in the last two years. As a result of a collaborative 'One TT' sales effort, we secured a new contract with a global engine manufacturer, already an Aero Stanrew customer, for Application-specific Integrated Circuit (ASIC) solutions from our clean room in Bedlington.

We continue to strengthen our capabilities in markets that are strategically important due to their size or high growth rates. This includes Asia, where Group revenue has increased 12 per cent at constant currency, and in the US, where we won an important development order with a large automotive OEM.

We now have an established R&D management framework with a gated approval process and clear prioritisations for efficient R&D spend in alignment with our strategy. During the year, we spent £22.6 million on our focused R&D efforts. We are creating a culture of collaboration for innovative thinking and supporting the investment in R&D initiatives that will help drive growth for TT in the future. During the year, we launched 29 new products as a result of our R&D capabilities, an increase from the number of products launched in 2015.

Lean initiatives have been a continued focus across the Group with four lean projects undertaken throughout the year. We have trained a community of Master Lean Practitioners ('MLPs') who are in turn training colleagues in lean methodologies across our sites and functions. We have run a number of 'Be Lean' projects across the business; on production lines where we have focused our efforts, we have seen significant improvements, including an example where stock turns improved by more than 30 per cent. Across the pilots, lead times were cut by between 40 and 60 per cent.

We have taken sensible steps to improve our procurement practices including focusing on our freight and logistics supply chain. Reducing the number of suppliers has improved the simplicity of our operations and created savings. For air and sea freight, our actions have seen identified savings of over 40 per cent.

Safety is of paramount importance to us and we have seen clear progress in our zero harm measures which have gained momentum. Our employees continue to manage and prioritise health and safety and 2016 saw a 55 per cent improvement in safety performance over the prior year.

Aero Stanrew was acquired in December 2015. In our first full year of ownership the business has been successfully integrated, has performed well, achieved strong order growth, and is on track to deliver return on invested capital in excess of our cost of capital this year. We continue to explore inorganic opportunities to accelerate growth in attractive markets where we can leverage our expertise to expand market presence and enhance our offerings to customers.

DIVISIONAL REVIEWS

TRANSPORTATION SENSING AND CONTROL

The Transportation Sensing and Control division develops both sensors and control solutions for automotive OEMs and tier one suppliers including powertrain providers for passenger cars and trucks. TT develops a wide range of products for multiple applications on a vehicle, from power controls, gear position and pedal sensors to fluid and emission sensors, with almost all of them focused on the safety and driver assistance features required by our customers.

1. Excluding restructuring costs, asset impairments and acquisition related costs.

The Transportation Sensing and Control (TS&C) division has performed strongly, making a step change in performance with the division returning to profitable growth faster than expected. Revenue for the division was £237.2 million (2015: £205.8 million) up by 15 per cent. There was a positive foreign exchange impact of £22.6 million. Revenues increased by 4 per cent on an organic basis as a result of market demand in both Europe and China, together with new contract wins in China to service the growing domestic market.

Underlying operating profit was £3.2 million (2015: £(1.4) million), an increase of £4.0 million at constant currency due to the realisation of benefits from the Operational Improvement Plan, together with the impact of organic growth. There was a £0.6 million foreign exchange benefit. Operating margins improved by 200 basis points to 1.3 per cent (2015: minus 0.7 per cent).

The strong financial performance reflects the faster than expected turnaround in the business. We have gained momentum in our strategy by focusing on areas of the market where there are structural growth drivers including safety, emissions and power electronics. We have maintained our strong position in Europe while driving growth in China in the sizeable domestic market, and securing our first major win in the US earlier this year, marking our re-entry to the large US market where we see opportunity to grow market share over the medium term.

We have seen good growth in China with five new customers won during the year for position sensors in chassis applications in addition to further revenue growth with a number of existing customers. We have seen the ramp up of a new pedal platform and global crankshaft platform which has increased volumes sold in China. Our European operations have also performed strongly with significant ramp up of new contracts during the year including for remote lights, LED lighting solutions and a chassis height sensor solution.

During the year, we also launched a new automotive actuator to deliver significant improvements to our next generation haptic accelerator pedals offering power-efficient transmission and a significant weight reduction from previous generation offerings, improving our customers' fuel efficiency.

We have positioned TS&C in the right areas of the automotive market to benefit from increasing electrification, additional sensors on cars, and the market trend towards electric, hybrid electric and autonomous vehicles. New changes in emissions legislation have refocused industry efforts on turbo charged engines, where we have won a new contract during the year for our high temperature sensors for a leading German OEM. We also have a wide range of products for exhaust after treatment including fluid quality sensors which we offer in Europe, India and Korea.

INDUSTRIAL SENSING AND CONTROL

The Industrial Sensing and Control division addresses challenging sensing requirements in terms of precision, speed of response, reliability or the physical environment in which the products operate. Its position, pressure, temperature, flow and fluid quality sensors are used for critical applications in a range of end markets including industrial automation and process control, medical and aerospace.

1. Excluding restructuring costs, asset impairments and acquisition related costs.

Industrial Sensing and Control (IS&C) revenues increased by 6 per cent from £61.0 million to £64.4 million. There was a £6.4 million positive foreign exchange impact, with revenues decreasing by 4 per cent on an organic basis. The decrease in revenues was in large part a result of challenging North American industrial markets, although the division returned to modest growth in the second half of the year.

The division maintained strong profitability despite the decline in revenues and an increase in R&D expense to support future growth.  Underlying operating profit was £11.9 million (2015: £11.4 million) up by 4 per cent. Operating profit margin was 18.5 per cent, down 20 basis points from 18.7 per cent in 2015. There was a £1.5 million foreign exchange benefit.

Our optoelectronics offerings, that combine the use of electronics and light, have seen good growth throughout the year, improving the mix of business towards higher reliability and precision offerings which have a higher margin profile.

During the year IS&C launched a number of new products to support future growth including a component that transfers electrical signals between two isolated circuits using light, to support satellites, and spacecraft. We also launched a high-performance industrial pressure transmitter for a range of industrial applications including chemical plants, mining, power generation and plastics manufacturing. Our R&D efforts will continue to provide our customers with high precision, high reliability components for industrial, medical, and transportation markets.

During the year we won a contract with an American computer hardware, software and electronics customer to design and deliver circuit board assemblies to be used in ATMs for detecting currency, cheques and deposit envelopes. We have a longstanding relationship with this customer for delivering individual infrared light emitting and detecting components as well as cable assemblies which are all core components in the new circuit board assembly contract.

ADVANCED COMPONENTS

The Advanced Components division creates specialist, high performance, ultra-reliable, highly engineered electronic components for circuit protection, power management, signal conditioning and connectivity applications in harsh environments. It serves customers in the industrial, automotive, aerospace, defence and medical markets and focuses on creating value by developing innovative electronic solutions to challenging problems for our customers' electronic circuits or systems.

1. Excluding restructuring costs, asset impairments and acquisition related costs.

Advanced Components revenues increased by 27 per cent to £121.3 million (2015: £95.3 million). The division returned to growth in the second half of the year and for the year as whole revenues increased by 3 per cent on an organic basis. Aero Stanrew contributed £18.3 million of revenues and there was a positive foreign exchange impact of £5.0 million.

There was an improvement in underlying operating profit to £10.3 million (2015: £6.0 million). The increase was due to the Aero Stanrew profit contribution of £3.4 million, together with drop-through on the organic growth. There was a positive foreign exchange benefit of £0.2 million. Operating margins increased by 220 basis points to 8.5 per cent (2015: 6.3 per cent), reflecting good efficiency improvements and the incorporation of the higher margin Aero Stanrew business.

Advanced Components released 11 new products during the year, further enhancing its position as a global leader in circuit protection, detection and power management across aerospace and defence, transportation and industrial markets. These product launches will position the division to benefit from structural growth drivers in these markets. We continue to see strong demand for wire wound resistors targeted at the smart metering business, as a result of European legislation.  

We are experiencing good growth in automotive electro-magnetics due to increasing demand for high quality components for power management as our customers manage the increasing power requirement and increasing electronic content in cars. Our electromagnetic capabilities have been enhanced by the acquisition of Aero Stanrew and additional product launches including two power inductors and a transformer targeting demanding high temperatures in automotive and industrial applications. 

This year we launched mag-Net®, a new connector which forms part of a soldier system for the digital battlefield. The system is for the next generation digital battlefield which enables communications for the connected solider. mag-Net® is currently being used in equipment trials with a large customer in the defence industry.

Aero Stanrew was acquired in December 2015. In our first full year of ownership the business has been successfully integrated, has performed well, achieved strong order growth, and is on track to deliver return on invested capital in excess of our cost of capital this year. As a result of a collaborative 'One TT' sales effort, we secured a new contract with a global engine manufacturer, already an Aero Stanrew customer, for Application-specific Integrated Circuit (ASIC) solutions from our clean room in Bedlington.

IMS

The IMS division draws on its manufacturing design engineering capabilities, global facilities and world-class quality standards to provide highly complex electronic manufacturing solutions to customers in the aerospace and defence, medical, and high technology industrial sectors. The business has broad capabilities ranging from printed circuit board assembly to environmental test and full systems integration. This global suite of end-to-end solutions is focused exclusively on low volume, high mix business.

1. Excluding restructuring costs, asset impairments and acquisition related costs.

IMS revenues were down 1 per cent at £147.0 million (2015: £147.8 million). There was a positive foreign exchange impact of £9.0 million and on an organic basis, revenues declined by 6 per cent. Revenues in China were strong, with new customers won in transportation and medical markets. The division was faced with challenging industrial markets in the US which resulted in a volume reduction as project revenues ended as expected.

Underlying operating profit increased from £5.7 million in 2015 to £5.9 million in 2016. There was a positive foreign exchange benefit of £0.9 million. In China good progress with operational efficiency measures supported a strong contribution to the divisional performance. The impact of the reduction in volume in the US was mitigated in large part through a 22 per cent headcount reduction and other cost reduction actions. Operating margins were increased to 4.0 per cent (2015: 3.9 per cent).

IMS provides services to customers primarily in aerospace and defence, medical and industrial markets, all of which are responding to the need for increasing electronic content. In the medical market, we have seen strong growth in life sciences, ophthalmology and direct patient care, including winning a new contract with an Australian optometry equipment provider.

During the year, there continued to be good collaboration across IMS sites and between IMS and our other divisions. Within IMS, our UK site in Rogerstone and our Chinese site in Suzhou collaborated on a cabin lighting project for a customer. In addition, IMS has been supporting the good growth in Advanced Components by providing specialist manufacturing capabilities for engine test equipment.

During the year, we won a number of new customers in Asia in addition to expanding existing customer relationships. Sales in Asia increased by 17 per cent at constant currency. In particular, we have seen strong growth in the Chinese rail market where new business included a three year contract to provide design and manufacturing services for the Chinese metro lines. We have also started to win new customers across Asia Pacific as a result of focused sales efforts to meet growing regional demand which includes a Korean semi-conductor customer won during the year.

OTHER FINANCIAL INFORMATION

There was a £1.9 million increase in the net interest expense to £4.4 million (2015: £2.5 million) primarily as a result of the increased debt associated with the Aero Stanrew acquisition.

The underlying effective tax rate was 27.9 per cent (2015: 27.0 per cent) and basic underlying earnings per share increased by 36 per cent to 12.0 pence (2015: 8.8 pence), and by 19 per cent at constant currency.

Profit for the year improved to £16.7 million (2015: £10.4 million) after a charge for items excluded from underlying profit of £3.7 million (2015: £5.4 million). Included within this charge were restructuring costs of £4.2 million relating to the OIP and other footprint change, a £4.3 million gain on the disposal of surplus properties, in part linked to the footprint change projects, and acquisition costs of £3.8 million relating mainly to the non-cash amortisation of acquisition intangibles.

Net debt at the end of the year was £55.4 million (2015: £56.1 million). In May 2016, the Group signed a new five year £150 million multi-currency revolving credit facility to replace the £75 million multi-currency and $60 million US dollar facilities which were due to expire in August 2016. The Group had available £65.2 million of undrawn committed borrowing facilities and £57.6 million of undrawn uncommitted borrowing facilities, representing overdraft lines (£27.6 million) and the accordion facility (£30.0 million).

The triennial valuation of the UK pension scheme as at April 2016 showed a deficit of £46.0 million against the Trustee's funding objective compared with £19.1 million at April 2013. The Company will continue with the previously agreed schedule of deficit contributions. These planned contributions amount to £4.7 million in 2017, £4.9 million in 2018, £5.1 million in 2019 and £3.9 million in 2020. The total accounting deficit under the Group's defined benefit pension schemes decreased to £5.7 million (2015: £21.1 million).  The reduction was due to deficit contributions to the UK scheme, together with positive asset returns and experience improvements which more than offset the impact of a reduction in discount rates and increase in inflation rate.

DIVIDEND

The Board is recommending increasing the final dividend to 3.9 pence. This, when combined with the interim dividend of 1.7 pence, gives an increased total dividend of 5.6 pence per share for the full year (2015: 5.5 pence per share). Payment of the dividend will be made on 2 June 2017 to shareholders on the register on 19 May 2017.

OUTLOOK

We are pleased with the strong performance achieved in 2016, ahead of expectations. This has resulted in improved growth and profitability for the Group, and our free cash flow performance has been excellent.

We have a clear and realistic strategy for TT to focus on structural growth markets where there is increasing electronic content. We continue to deploy our engineering expertise and investment in areas where we see real opportunities for growth. Despite uncertain end-markets, we enter the year with good momentum in operational efficiency improvement and a robust order book, giving us confidence of making further progress in 2017.

GOING CONCERN

The Directors have reviewed the budgets for 2017 and the projections for 2018 developed during the 2016 annual strategic planning cycle. The Directors have assessed the future funding requirements of the Group and compared them with the level of available borrowing facilities, recognising that the main committed facility was re-negotiated in May 2016 for a period of five years to May 2021.  Based on this, the Directors are satisfied that the Group has adequate resources to continue in operational existence for at least 12 months from the date of the Audit Report. For this reason they continue to adopt the going concern basis in preparing the financial statements.

RESPONSIBILITY OF THE DIRECTORS

We confirm that to the best of our knowledge:

·     The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

·     The Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

We consider the Annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

By order of the Board

Richard Tyson                                                                     Mark Hoad

Chief Executive Officer                                                  Chief Financial Officer

8 March 2017                                                                       8 March 2017

Cautionary statement

This report contains forward-looking statements. These have been made by the Directors in good faith based on the information available to them up to the time of their approval of this report. The Directors can give no assurance that these expectations will prove to have been correct. Due to the inherent uncertainties, including both economic and business risk factors underlying such forward looking information, actual results may differ materially from those expressed or implied by these forward-looking statements. The Directors undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Consolidated income statement

for the year ended 31 December 2016