TT Electronics plc (LON:TTG) has announced its results for the half-year ended 30 June 2021.
Highlights
· Record order book and continued strong order intake with good visibility building for 2022
· H1 book to bill of 134%
· Significant new customer wins, reflecting focus on structural growth markets underpinned by megatrends and ESG drivers
· Revenue up 16% for the period on a constant currency basis, 12% on an organic basis
· Successful self-help programme remains on track to deliver expected savings at reduced cost
· Adjusted operating profit up 27% benefiting from growth, self-help programme and M&A
· Adjusted operating margin improved to 6.7% and run rate margin higher at 8.0% excluding Virolens start-up costs
· Statutory operating profit increased to £9.3m, statutory basic EPS of 3.3p
· Interim dividend of 1.8p per share reflecting confidence in outlook
Outlook
· Order and sales momentum continue; 2021 expected revenues already fully covered
· Confident in medium term outlook and further modest increase in full year profit expectation
· Anticipate strong improvement in adjusted operating margin and cash conversion in H2
· Increased visibility in our path to deliver double digit Group operating margins
| £ million (unless otherwise stated) | Adjusted Results1 H1 2021 | Adjusted Results1 H1 2020 Restated2 | Adjusted Results1 Change | Adjusted Results1 Change Constant fx | Statutory Results H1 2021 | Statutory Results H1 2020 Restated2 |
| Revenue | 235.6 | 210.0 | 12% | 16% | 235.6 | 210.0 |
| Operating profit | 15.9 | 13.2 | 20% | 27% | 9.3 | (1.1) |
| Operating profit margin | 6.7% | 6.3% | 40bps | 50bps | 3.9% | (0.5)% |
| Profit before tax | 14.1 | 11.3 | 25% | 33% | 7.4 | (3.0) |
| Basic earnings per share | 6.5p | 5.6p | 16% | 23% | 3.3p | (1.8)p |
| Dividend per share | 1.8p | – | – | |||
| Return on invested capital (2020: year-end) | 8.3% | 7.7% | 60bps | |||
| Cash conversion | (7)% | 53% | ||||
| Free cash flow1 | (10.3) | (5.2) | ||||
| Net debt (2020: year-end) 1 | 107.3 | 83.9 | ||||
| Leverage (2020: year-end)1 | 2.0x | 1.6x | ||||
CHIEF EXECUTIVE OFFICER’S REVIEW
Introduction
We are very encouraged by our sales and order performance in the first half of the year, with continued improvement in trading momentum and we are on track to return to 2019 revenue and margin levels in 2021. The structural growth markets we operate in have moved back towards their long-term growth trajectory, and the benefits of our strategic repositioning and focus on building close relationships with our customers can be seen in new business wins, the order book and the financial performance of the Group.
Our partnership approach to deliver solutions based on our technical expertise has been a key component in winning new orders. Another key growth driver has been our focus on leveraging expertise across the Group to pursue cross selling opportunities, which continues to gain traction and has started to yield new orders. Much of this effort is led by the Global Manufacturing Solutions (GMS) division which is integral to converting these opportunities and increasingly GMS is able to highlight the capabilities of the other divisions. Across the Group, but especially pronounced in the Specialist Sensors and Components (S&SC) division, an increasing focus on supply chain challenges has led to customers committing to demand earlier than usual, providing greater revenue visibility.
The self-help programme continues to progress in line with expectations. During the period the Barbados and Carrollton, Texas sites were closed and the transfer of manufacturing from the Corpus Christi, Texas and Lutterworth, UK sites is expected to be completed before year end. In June we sold the Covina, California property, helping to reduce the net cost of the self-help programme and offering an opportunity to capture additional benefits.
All divisions are seeing strong top line growth and the benefits of growth and self-help are feeding through into business performance. This is most prominent in the improved margins in S&SC while in our GMS division, the work to position the business as a partner to our customers to win long-term incremental business has translated into winning new, higher value contracts. We now see scope to drive GMS operating margins higher.
We are delighted with the Torotel acquisition which completed in November 2020. The business is performing ahead of expectations – we are on track to deliver planned cost synergy benefits and Torotel has achieved material new contract wins under our ownership and is expanding the pipeline of new business opportunities by working with other parts of the Group.
The Virolens COVID-19 screening device achieved its first important regulatory milestone in H1, gaining registration with the MHRA in Great Britain. We have now established a product with commercial potential and remain encouraged that active dialogue is continuing with a number of regulators and that commercial potential exists with a range of customers subject to further approvals.
Results and operations
Group revenue for the period was £235.6 million, up 16 per cent on a constant currency basis and 12 per cent on an organic basis. The Group’s adjusted operating profit for the period was £15.9 million, 27 per cent higher than the prior year on a constant currency basis.
There was a strong improvement in financial performance in the first half despite incurring start-up costs to establish the Virolens product line. In common with many others we also experienced a tightening in the supply chain leading to some cost inflation. This has been largely mitigated through price increases, although there is a lag effect here and we will continue to see the benefit of this action in the second half of the year.
The adjusted operating margin in the first half was 6.7 per cent and we remain on track to deliver a full year margin in line with market expectations. The adjusted run rate excluding Virolens was higher at 8.0 per cent. After the impact of adjusting items, including restructuring and acquisition and disposal costs, the Group’s half year statutory operating profit was £9.3 million and operating margin was 3.9 per cent.
Cash conversion was impacted by a working capital outflow totalling £18.9 million. This investment in working capital was driven by the high levels of growth we are experiencing and our decision to invest in additional inventory to support the customer order book for the second half. We expect to see improved cash conversion in the second half of the year. Adjusted operating cash flow during the period was £6.1 million. On a statutory basis, cash flow from operating activity was an outflow of £5.0 million (2020: inflow of £2.8 million).
At 30 June 2021 net debt was £107.3 million, (31 December 2020: £83.9 million), including IFRS 16 lease liabilities of £20.9 million (31 December 2020: £15.9 million), and leverage increased as expected to 2.0x (31 December 2020: 1.6x), within the Board’s target range. We expect leverage to reduce over the course of the second half.
Momentum across the Group has been strong with the order book for 2021 fully covering expected revenues and we are now starting to build good visibility of revenues for 2022.
Dividend
Against an improving market backdrop, combined with the strong trading momentum, the Board is declaring an interim dividend of 1.8 pence per share. The total cost of this dividend will be approximately £3.1 million. Payment of the dividend will be made on 14 October 2021, to shareholders on the register at 24 September 2021.
Our markets
We create value by providing advanced technology solutions to customers in our target markets of healthcare, aerospace & defence and automation & electrification. These markets have strong long term growth potential underpinned by structural drivers as we move towards a more sustainable world. Demand is strong as we emerge from the pandemic, with customers restarting projects, new products coming to market and significant new wins helping us deliver orders and growth above market rates.
Healthcare
In healthcare (26 per cent of Group revenue), our customers are gradually returning to ‘business as usual’ which is expected to lead to the need to catch up on non-COVID-19 related treatments, supporting future growth through new investment. As hospitals begin to return to normal we expect the focus will move from COVID-19 treatments to catching up on elective procedures and improving the efficiency of healthcare provision through increased use of technology and automation. This is where TT has a compelling offering and we have already started to see strong growth in the order pipeline.
Aerospace and Defence
In aerospace and defence (19 per cent of Group revenue), we have started to see a stabilisation of the commercial aerospace market following COVID-19 related disruption. Whilst confidence is slowly improving, we believe it will be some time yet before we see a meaningful return to growth, however we believe that this will be a growth market over the longer term. Defence remains a key market with governments continuing to place a heightened focus on technology innovation and security, which we expect to lead to increased government spending. TT’s ability to design and manufacture more efficient, highly reliable military products, along with our expanding platform exposure will remain a competitive advantage.
Automation and Electrification
In automation and electrification (38 per cent of Group revenue), we are seeing the quest for sustainable solutions driving growth. Technologies such as robotics, remote asset tracking, monitoring and inspection are in strong demand with good visibility of current year revenues and improving visibility into 2022. A number of new customer wins provide long term growth opportunities and underpin our confidence in the future outlook for our power, sensing and connectivity solutions.
Creating value through technology investment
Working in partnership with our customers to bring new, innovative products to market that provide sustainable solutions is key to driving future growth. Investment in R&D is therefore one of our top capital allocation priorities. During the period we invested £5.8 million (2020: £5.7 million) in R&D spend, representing 5 per cent (2020: 5 per cent) of aggregate revenue of our product businesses.
We are developing with customers a pipeline of new products to bring to market. A selection of notable examples from H1 include:
· Following investment in our S-2CONNECT platform we have been selected as hardware partner to Telenor, a leading communications and IoT provider ranked among the top 10 IoT operators globally and the top three in Europe. One of the near-term opportunities will be provided by the sunsetting of 2G and 3G cellular technology which will create a requirement for devices to be upgraded or replaced. We will initially work with Telenor in the Nordic region with the potential to expand the scope of work into the wider European, Southern Asian and North American markets in a project that could generate multi-million pounds a year of additional revenue.
· We have also been investing in the surgical navigation and robotics market. This segment is experiencing sustained double-digit growth and is driven by several emerging clinical applications that provide the physician with exceptionally accurate catheter placement, often eliminating the need for harmful radiation. The miniaturised and highly accurate characteristics of our technologies enable access to parts of the anatomy that in the past were difficult to navigate including the lung, brain, and heart. Additionally, new applications for improved navigation needs have emerged to diagnose breast cancer.
· We are currently investing in a combination of AC-DC and DC-DC power conversion technologies in direct response to demand from aerospace and defence customers, as well as ruggedised wire harness and magnetic capabilities. These investments build upon our existing capabilities and give us a wider platform to support major aerospace and defence customers, many of which are requiring power solutions that feature higher voltages and/or efficiency improvements from legacy designs.
· Our work in developing our first ever European-designed power convertor is progressing well supporting a world recognised defence prime contractor with a DC-DC converter solution for next-generation fighter jet power and control applications. Our first deliverables were recently supplied to our partners having successfully passed functional acceptance testing, clearing the way for further progress and critical design review in the second half of the year.
Creating value through margin enhancement
We have made good progress with margin enhancement in the first half, returning to 2019 levels on a run-rate basis. This, together with the order intake momentum is increasing visibility to delivering double digit Group operating margins. A number of factors are driving margins higher as we return to significant growth:
· Operational leverage from organic revenue growth: The benefits of strategic repositioning to build closer, more embedded customer relationships and completing more design led work with an increased focus on cross selling is supporting strong growth;
· Reductions in overheads: The self-help programme which will be completed during 2021 and is expected to generate full run rate benefits of £11-12 million per annum from 2023 onwards
· Acquisition-led expansion of technology offerings and market positions: The Covina and Torotel businesses acquired in 2020 are both contributing strongly to the Group’s margins and absolute profit improvement.
A noticeable characteristic of the new orders we are winning is the number from customers wanting more integrated, design led solutions. We are winning new higher quality orders from existing customers and have won work from fourteen new customers in the first half of the year.
We continue to make good progress with the self-help programme. The Barbados and Carrollton sites were closed during the first half and we are working towards the transfer of manufacturing from the Lutterworth and Corpus Christi sites before year end. We have opened our new facility in Plano, Texas which will house the former activities from Carrollton and Corpus Christi and manufacturing is expected to commence in Q4 2021, although high demand levels have caused us to keep Corpus Christi open longer than originally planned.
In June we completed the sale of the freehold property of the Covina business (acquired in January 2020) as an extension of the self-help programme. We have agreed to lease the site back for a period of 12 months while we prepare for relocation.
The cash cost of the Group self-help programme is now expected to reduce from £18 million to £16 million as a result of the funds raised from the sale of the Covina plant net of move costs and an increase in the cost of the Plano build. Having incurred £4 million of programme spend in 2020, and with £12 million to be spent in 2021, we will complete the vast majority of this programme this year and are on track to deliver £5 million of incremental benefits in 2021 (2020: £2 million) taking the annual run rate benefits in 2021 to £7 million. We remain confident of achieving the programme’s £11-12 million of run-rate benefits in 2023 and see some potential for additional benefits from the re-location of Covina to a more suitable facility.
Creating value from mergers and acquisitions
M&A is an important part of our growth proposition as we look to add higher margin businesses that enhance TT’s capability in our key markets. The Torotel business, acquired in November 2020, continues to perform ahead of our expectations. We have started to realise benefits from integrating the products across the Group and are capitalising on the cross-selling opportunities that are being generated with new tier one OEMs. The Torotel business has benefited from fresh investment and it can now partner more closely with clients and expand the product offering.
We have secured a number of new contract wins including an order for complex cable assemblies with a major US defence supplier that will be delivered in 2021, and a win in the radar electronics space that will be delivered in 2022. These wins support higher organic growth than originally set out in our acquisition business plan.
With the integration of Torotel complete and the business performing well, this serves as a great example of how we can improve the quality of TT through acquisition. We continue to look for further acquisition opportunities to expand TT’s technology capabilities and customer reach.
Environmental, social and governance (ESG)
TT is positioned to benefit from megatrends that are driving sustainable growth. Our cleaner, smarter solutions improve energy efficiency, addressing climate change and resource scarcity. These solutions include power controls for aerospace and defence markets which contribute to lighter and more environmentally friendly aircraft, reducing fuel consumption. Our smarter solutions include sensors and controls that ensure accuracy and drive automation, improving productivity and addressing resource scarcity. Our sensing and control technology can improve efficiency and therefore reduce energy consumption, resulting in a lower carbon footprint.
We remain at the forefront of delivering technologies that meet the ever-increasing demand for cleaner energy, smart monitoring systems and home automation. Our products can be found in a range of applications including:
· Renewable energy generation and smart grid metering
· Power management and energy control systems
· Water and wastewater measurement and monitoring
In addition to the products we design and manufacture for our customers that enable a more sustainable world, we are also optimising our own operations to reduce our impact on the environment. Our environmental strategy is focused around the areas we have assessed to have the greatest environmental impact, namely energy usage and waste management.
TT’s top three environmental sustainability priorities are to:
1. Reduce our carbon footprint, with an aim of being carbon neutral by 2035 (Scope 1 and 2 emissions)
2. Cut single use plastic packaging purchased
3. Reduce waste to landfill
Since the start of the year, we have made good progress, with 5 additional sites transitioning to renewable energy contracts. We have embarked on a range of initiatives with our customers, suppliers, and employees to address our energy, waste and plastic usage including changing waste providers, reusing rather than recycling and adopting environmentally friendly packaging options.
Outlook
The momentum from the first half of the year has continued with expected revenues for 2021 fully covered and order book visibility for 2022 is building nicely and ahead of where it would normally be at this stage of the year. Whilst there are clear constraints in the supply chain leading to longer delivery times, we are working closely with customers to plan further ahead with ordering so that we can meet delivery requirements. We are seeing industry wide cost inflation but we have largely been able to agree with customers on price increases across our product range that will protect margins.
In addition to our strong order book, our new business opportunity pipeline is as buoyant as we have ever seen it and we believe that the Group is well placed to deliver both top line and margin growth.
Overall, our self-help programme and strategic repositioning have meant that TT is emerging from the pandemic-related slowdown very well positioned and with the flexibility to capture both organic and inorganic opportunities to grow the business and create value for shareholders.
Cash conversion is expected to improve in the second half of the year, and the spend on the self-help programme is due to be largely completed in the second half.
With 2021 expected revenues already fully covered by orders, continuing demand momentum and the benefits of our successful self-help programme being realised we are confident of delivering a further improvement in full year 2021 results and have increased visibility in our path to double digit margins.
FINANCIAL OVERVIEW
Group revenue was £235.6 million (H1 2021: £210.0 million) and is back at pre-COVID levels on a constant currency basis. Group revenue was 16 per cent higher than in the same period last year on a constant currency basis. Sales volumes in all key markets, with the exception of aerospace, have rebounded and the order book and forward pipeline of new business opportunities gives us confidence that this momentum will continue.
The Group reported an adjusted operating profit of £15.9 million (H1 2020: £13.2 million) with the improvement driven by revenue growth and benefits from the Group’s self-help programme. Statutory operating profit for the period was £9.3 million (H1 2020: loss of £1.1 million) after a charge of £6.6 million (H1 2020: £14.3 million) for items excluded from adjusted operating profit including:
· Restructuring costs of £2.6 million (H1 2020: £11.4 million), comprising £2.0 million relating to the restructure of the North America Resistors business; £0.8 million relating to the closure of our site in Lutterworth and £0.5 million relating to the closure of our site in Tunis, Tunisia, along with £0.6 million of other pension restructuring costs, partially offset by a gain of £1.3 million from the disposal of the Covina property.
· Acquisition and disposal related costs of £4.0 million (H1 2020: £2.9 million), comprising £2.5 million of amortisation of acquired intangible assets, £1.1 million of costs to integrate Torotel and the aerospace and defence power supply business of Excelitas Technologies Corp based in Covina, California, along with £0.4 million of costs of unannounced and terminated acquisitions.
The Group generated an improved adjusted operating margin of 6.7 per cent (H1 2020: 6.3 per cent), despite incurring start-up costs to establish the Virolens product line. This improvement was delivered whilst dealing with increased costs to execute on high levels of growth and increases in input costs linked to supply chain constraints, the latter which we are in the process of recovering through price increases. We are seeing much of the business back at 2019 levels.
The net finance cost was £1.8 million (H1 2020: £1.9 million). The Group’s overall tax charge was £1.7 million (H1 2020: £nil). The tax charge on adjusted profit before tax was £2.8 million (H1 2020: £2.1 million), resulting in an effective adjusted tax rate of 19.6 per cent (H1 2020: 18.6 per cent).
Basic earnings per share (EPS) increased to 3.3 pence (H1 2020: 1.8 pence loss) benefiting from the improved operating performance and reduction in adjusting items set out above. Adjusted EPS increased to 6.5 pence (H1 2020: 5.6 pence), reflecting the improvement in adjusted operating profit.
Adjusted operating cash flow was lower with a £6.1million inflow (H1 2020: £11.5 million inflow) which was primarily due to a £18.9 million working capital outflow (H1 2020: £11.2 million outflow), due to strong growth and the decision to build inventory levels in response to the tightening of the supply chain and growth in order book for H2. This resulted in operating cash conversion of -7 per cent (H1 2020: 53 per cent). On a statutory basis, cash flow from operating activity was an outflow of £5.0 million (H1 2020: £2.8 million inflow).
There was a free cash outflow of £10.3 million (H1 2020: £5.2 million outflow), including £0.6 million of restructuring and acquisition related payments (H1 2020: £4.7 million) . Pension contribution payments in the period were unchanged at £2.7 million. The total net accounting surplus under the Group’s defined benefit pension schemes was £61.2 million (31 December 2020: £30.5 million) with the increase mainly due to strong returns on scheme growth assets.
As at 30 June 2021 the Group’s net debt was £107.3 million (31 December 2020: £83.9 million), including £20.9 million of lease liabilities (31 December 2020: £15.9 million). Leverage, consistent with the bank covenants, was 2.0 times at 30 June 2021 (31 December 2020: 1.6 times).
In August 2021, TT agreed a debut issue of £75 million of private placement fixed rate loan notes with three institutional investors. The funds will be received in December 2021 and the issue is evenly split between 7 and 10 year maturities with an average interest rate of 2.9% and covenants in line with our bank facility. The private placement complements at an attractive rate the Group’s existing bank revolving credit facility, diversifying our sources of debt funding and providing us with a stable, long-term financing structure.
DIVISIONAL REVIEW
POWER AND CONNECTIVITY
The Power and Connectivity division develops and manufactures power application products and connectivity devices which enable the capture and wireless transfer of data. We collaborate with our customers to develop innovative solutions to optimise their electronic systems.
| H1 2021 | H1 2020 | Change | Change constant fx | |
| Revenue | £68.2m | £60.0m | 14% | 17% |
| Adjusted operating profit1 | £3.6m | £4.4m | (18)% | (16)% |
| Adjusted operating margin1 | 5.3% | 7.3% | (200)bps | (210)bps |
1 See note 1c on page 27 for an explanation of alternative performance measures. Adjusting items are not allocated to divisions for reporting purposes. For further discussion of these items please refer to note 5 on page 32 of this document.
Revenue increased by £8.2 million to £68.2 million (H1 2020: £60.0 million). Revenue included a £9.7 million contribution from the acquisition of Torotel, which has performed ahead of our expectations. Organic revenue was 1 per cent higher with growth in defence, healthcare and automation & electrification offset by lower commercial aerospace demand compared to H1 last year, when the first quarter was not impacted by COVID-19. Overall order intake remains strong and is well ahead of the prior year. Establishment of the Virolens product line is now complete, it has received its first important regulatory milestone with MHRA registration in Great Britain and a limited number of units have been sold, however it is still at an early stage of commercialisation.
Whilst the majority of our sites have been operating at full capacity, the Kuantan facility in Malaysia has been impacted by COVID-19 restrictions and at end of June was only running at 60 per cent of capacity.
Adjusted operating profit decreased by £0.8 million to £3.6 million (H1 2020: £4.4 million). The adjusted operating margin was 5.3 per cent (H1 2020: 7.3 per cent). Run-rate margins were 9.5 per cent, excluding the start-up costs incurred in relation to the Virolens project. Going forward we expect these costs to be significantly reduced.
There have been some significant awards during the period, including:
· Selection by Telenor as its key hardware partner as it sunsets existing 2G and 3G technology resulting in the need for devices to be replaced.
· In aerospace and defence, a cross selling opportunity originating from the Torotel business has generated over $2 million in orders in the first half of 2021 for complex, ruggedised wire harness assemblies. The orders will be executed this year and were won through partnering with a major customer and investing in the capabilities needed to succeed in this market. We are now positioned to partner with other aerospace and defence customers to provide this product. With a second aerospace and defence prime, TT used its supply chain expertise to significantly reduce lead times and was the only supplier positioned to secure critical materials and meet programme requirements.
· An excellent example of our focus on cross-selling is evident in our recently launched partnership with Radwave Technologies, an innovative surgical navigation tracking technology company based in Minneapolis, Minnesota. Producing a magnetic sensor that, when paired with Radwave’s hardware and software, delivers superior accuracy to a physician. As the partnership expands, TT will also be providing complete system manufacturing from additional facilities, including Cleveland, Ohio.
GLOBAL MANUFACTURING SOLUTIONS
The Global Manufacturing Solutions division provides manufacturing services and engineering solutions for our product divisions and to customers that often require a lower volume and higher mix of different products. We manufacture complex integrated product assemblies for our customers and provide engineering services including designing testing solutions and value-engineering.
| H1 2021 | H1 2020 | Change | Change constant fx | |
| Revenue | £109.6m | £95.5m | 15% | 18% |
| Adjusted operating profit1 | £8.5m | £8.3m | 2% | 9% |
| Adjusted operating margin1 | 7.8% | 8.7% | (90)bps | (60)bps |
1 See note 1c on page 27 for an explanation of alternative performance measures. Adjusting items are not allocated to divisions for reporting purposes. For further discussion of these items please refer to note 5 on page 32 of this document.
The results for the period ended 30 June 2020 have been restated to reflect prior year adjustments. Further details are set out in note x.
Revenue grew by £14.1 million to £109.6 million (H1 2020: £95.5 million). We have seen organic growth of 18 per cent, partially driven through the opportunities created by establishing Kuantan as an alternative site for our customers to support growth.
Outstanding progress has been made in growing the order book at record pace. All sites are fully booked for the year and the order book growth has been underpinned by multiple wins which generate higher quality, higher margin orders. We are increasingly seeing that our power customers, in particular, require manufacturing capability and GMS and Power and Connectivity are increasingly partnering to offer this. We are constantly improving our understanding of how to leverage these opportunities from the customer perspective.
Adjusted operating profit increased by £0.7 million at constant currency to £8.5 million (H1 20: £7.8 million at constant currency). The underlying operating profit margin was 7.8 per cent (H1 2020: 8.4 per cent at constant currency). The strong overall performance was held back by reduced recovered hours in our Cleveland operations. Here we have undertaken work to realign the cost structure to fully capitalise on a full order book. Consequently, we expect to see enhanced margin from the GMS division in the second half of the year.
The considerable sales momentum has resulted in customer awards across our key markets from new and existing customers. Notable wins and growth areas include:
· A global leader in specialist diagnostics was introduced to TT through an existing customer. We have worked with the customer to provide complex electronics assembly to their Hemostasis product line. The order involves our Cleveland and Suzhou , China, sites and is worth c. £1 million per annum.
· In healthcare, we have improved our offerings through the expansion of our Kuantan facility, with a primary focus on medical customers. Through this expansion and an overall demand increase in the medical industry, GMS has been able to increase healthcare sales by 38%.
· In automation and electrification, we have expanded our relationships with two different long-standing customers supporting semiconductor products. In the first instance, TT was awarded a new 5-year contract worth £2 million per annum beginning in 2022 for high-level assembly which will be built in our Kuantan facility. A second long-term customer awarded TT a contract for 16 interface assemblies for a semiconductor product built in Suzhou. The five-year contract was awarded in June, and will have an annual run rate of £1 million per annum from 2022.
· Aerospace & Defence – North America defence order intake continued to grow compared to a year ago, driven by a long term contract agreed with a key defence supplier on missile products. In addition, we have started receiving new orders for a large defence company in June on a three-year agreement, worth c. £5 million per annum.
Overall, the GMS division is in excellent shape, the order pipeline is stronger than ever and our self-help and cross selling initiatives are delivering material growth. We now see scope to drive GMS operating margins higher.
SENSORS AND SPECIALIST COMPONENTS
The Sensors and Specialist Components division works with customers to develop high specification, standard and customised solutions, including sensors and power management devices. Our solutions improve the precision, speed and reliability of critical aspects of our customers’ applications.
| H1 2021 | H1 2020 | Change | Change constant fx | |
| Revenue | £57.8m | £54.5m | 6% | 13% |
| Adjusted operating profit1 | £7.4m | £3.8m | 95% | 100% |
| Adjusted operating margin1 | 12.8% | 7.0% | 580 bps | 560 bps |
1 See note 1c on page 27 for an explanation of alternative performance measures. Adjusting items are not allocated to divisions for reporting purposes. For further discussion of these items please refer to note 5 on page 32 of this document.
Revenue increased by £3.3 million to £57.8 million (H1 2020: £54.5 million). Organic revenue was 13 per cent higher. Despite usually having short order visibility in this division we are already covered for the balance of this year’s revenue and are starting to build the order book for 2022. We are seeing very strong demand from the automation and electrification market. Whilst aerospace has not yet returned to growth, we are encouraged by the new contracts awarded in the period.
Adjusted operating profit increased by £3.6 million to £7.4 million (H1 2020: £3.8 million). The impact of the initiatives put in place as part of the self-help programme have started to benefit the performance of the division and is reflected in a significant step up in adjusted operating profit margin to 12.8 per cent (H1 2020: 7.0 per cent), above the adjusted operating profit margin delivered in 2019.
Under the self-help programme, the Barbados and Carrollton sites were closed in H1 and the transfer of manufacturing from the Corpus Christi site is on track for completion before year end. Our new plant at Plano is due to commence manufacturing before year end which will drive further efficiency throughout the division.
Price increases are being put through to reflect the recent cost inflation and we are already winning material new orders at the higher price points. There have been a number of key developments during the first half of the year including:
· Development of an optical emitter and detector pair to be used in an ocean sensing satellite that will predict weather conditions. The customer needed a supplier who could develop a solution that would pass space level requirements with custom testing levels and specific documentation related to radiation tolerance;
· To improve fuel economy, safety and comfort in modern vehicles, our customer introduced additional functions to the electric vehicle system to ensure a reliable and stable power supply at all times. We provided a tight tolerance current sense resistor to meet these requirements;
· Orders received for a potentiometer made to measure linear travel in the landing gear of second-generation E-Jet commercial jets.
Richard Tyson, TT Electronics Chief Executive Officer, said:
“We are really pleased to have delivered a strong performance in the first half with a record order book and strong growth as a direct result of the steps we have taken to reposition and improve the quality of the business. This growth together with the benefits of our self-help programme and higher margin acquisitions have resulted in improved margins.
With 2021 expected revenues already fully covered by orders, continuing demand momentum and the benefits of our successful self-help programme being realised we are confident of delivering a further improvement in full year 2021 results and have increased visibility in our path to double digit margins”.
