Good morning, everyone, and thank you for joining this call at such short notice. I'm here with Mark Hoad, our CFO. I'm deeply disappointed that we need to provide this unscheduled trading update. Trading results in August have been weaker than expected as a result of two factors in our North American business. Firstly, we are experiencing ongoing operational efficiency issues in two of North American sites, resulting in the requirement to significantly rework certain complex products. We have been aware of the problem. I mentioned this as part of the Project Dynamo work streams in August, but execution of the order book is now taking longer than expected, and we are incurring greater than anticipated costs of production, which is impacting both revenue and profitability.
Clear plans have been put in place to rectify the issues, which we expect to continue for the remainder of this year and potentially into the first quarter of 2025 , including root cause corrective actions, improved factory planning, and factory layout. However, these are not expected to sufficiently mitigate the impact in 2024 . Secondly, over the course of August and so far in September, whilst our overall order intake has continued to show the positive trends we described at the interim, the order intake for execution in 2024 in our higher margin components business has been materially weaker than anticipated. The orders received in Q3 have been more weighted for delivery throughout 2025 , and recovery is slow and steady.
Overall, given these two issues, we now expect North American revenue for 2024 to be around GBP 15 million-GBP 20 million lower in the second half. With the impact of high drop-through and significant product rework costs, the North American regional operating profit is expected to be around GBP 13 million-GBP 18 million lower than previously forecast. The rest of the group continues to perform broadly in line with expectations. However, taking into account the impact of the performance of our North American business, group adjusted operating profit for full year 2024 is now expected to be in the range of GBP 37 million-GBP 42 million.
With a lower operating profit, there will be a reduction in free cash flow for 2024 , resulting in net debt to Adjusted EBITDA, which is now expected to be around or marginally above the top end of our one to two times range at December 2024 . This setback is very frustrating, particularly given the scale of the opportunities under Project Dynamo, to improve our execution, as I shared with you recently. As you might expect, we are very focused on remedial and mitigating actions. The operations team had already identified a number of improvements that are required as part of Project Dynamo, and based on the current performance, implementation of these improvements will now move at a greater pace to deliver the operational change required. The board remains confident in the group's medium-term targets, which include 12% operating margin in 2026 .
I will now hand you back to the operator, and Mark and I will take your questions. Thank you.
Sure, thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We'll pause for a moment to allow everyone an opportunity to signal for questions. We will take the first question from line, Stephan Klepp from HSBC. The line is open now. Please go ahead.
Yeah, morning, gents. Thanks for taking my call. I hope you can hear me.
Yeah, thanks.
It's true. I mean, you, as you said, very frustrating, particularly in light of the last update. Is it as simple as you fix those issues and return back to your organic sales growth path? And what would that sales growth path be, given those issues you have encountered in 2024 and beyond? And then is it as simple as that, you fix those, you get back to 12% margin, but at a much lower top line level because everything is pushed out further?
I think the 12% actually is a mixture of different things as well. We said, even at the interims, that we anticipated the components business would be a longer recovery and a slower recovery, and we had expected that into next year. Other parts of the business are performing well, and if we think about these operational issues, there is a high drop-through because it's a high margin, this is high margin work, and therefore, the impact on profit is high when it's not, either you use the revenue or you have issues with it in terms of rework. But of course, if you fix those problems, that will also come through.
So fixing the problems, making ourselves more efficient and a recovery, not to about 2022 levels necessarily for the components, but in improving performance in the components business will get us to the 12%. So, again, you know, the visibility is there of the things that are in our capability to fix, but it takes time to fix them.
Yeah, my question was rather related to the top-line level.
Yes.
I get it, that obviously things are impo- Mm?
Stephan, I think perhaps the way to think about it is that the split of the revenue miss is pretty evenly weighted between the operational execution issues and the component shortfall. The operational execution issues, that's for existing order book, and therefore, that revenue does move to the right, and it's obviously just a question of how long it takes us to address the issues. The component stuff clearly means we're coming off a slightly lower base, and then it becomes a question of you know the rate of recovery. And clearly, at the moment, the order intake, as we've said previously, it is pointing to a slow and steady recovery because we need to see the inventory burn down.
Thank you.
Thank you. We will take the next question from line, Mark Davies Jones from Stifel. The line is open now. Please go ahead.
Thank you very much. Morning, both. Firstly, can you tell us a bit more detail in terms of what these operational issues actually are, and what the customer response to that is? Because obviously, if this is a performance issue on your part, the risk is that business doesn't stick around, or it goes elsewhere, or, you know, the customer relationship damage, and then in terms of the incoming orders, obviously, this is happening pretty real time, but do you have any sense whether this is destocking, deepening, lasting longer, or is this really end demand beginning to show through?
Let me start with the last one. I think nothing's really changed, I suppose, from the message we gave at the interim, in as much that the order intake is still not where we would like it to be for the components, but it's an improving trend. So it's the timing. What's different is what's in for this year and what we expected in terms of, 'cause it's a short cycle, and what's in for next year. So it is improving, but actually it's improving much slower than we had wanted. So that's the same message we gave at the interim. So nothing's really changed. It's just the timing. And we-
Pacing and delivery, yeah.
Yeah. For the production issues, I think, you know, these are a s I said, these are complex parts. These are difficult things to make. It's impacting the customers maybe from a delivery time, but actually it's, you know, we're working with the customers, and we're working with things. So I don't really believe that that's going to be a major impact. It's moving it out. But the rework costs, clearly, are. So the timing issue when we deliver is an impact to the customer, but the rework cost is our issue, and so that's not impacting the customer at all. So the inefficiencies of actually getting the customer the part is the issue. So they may have a you know, a delivery time concern.
I mean, some of the issues are customer related as well in terms of some of the challenges that we've got. So, you know, we're, they're part of the discussion. These are complex things to manufacture, but we are working our way through that. So I don't think it's a major issue, it's just we need to fix it and get it and improve the performance.
Okay. And, you understand what's gone wrong, and so there is a decent amount of clarity on how long it will take to fix it, or is it still sort of investigation time?
As I said at the half year, you know, we recognize we had these certain issues, and we are putting work together to try and really understand the root cause rather than just accepting those inefficiencies going on and on. So we are finding more out as we're going. As I said, we're gonna accelerate some of that disclosure, but also improvements that we need to make. So some of them we thought were easier to fix than maybe that they are in these particular sites. So we need to do more work on that, and the team needs to be focused on that to deliver the improvements.
Okay, thank you.
There's a range of things, Mark. It's not one thing, it's-
Right.
It's a range of different things, so it's, it's more complex than that.
Okay.
Thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the next question from line, Vanessa Jeffriess from Jefferies. The line is open now. Please go ahead.
Morning, guys. Can I just expand on Mark's question? I mean, what's your degree of confidence in fixing these by mid-2025? I just. You're talking about finding more issues, and I guess we're in September already. And you talk about, you know, 1Q25 in the update. So what's the degree of confidence there?
Yeah, we've got more work to do, Vanessa. I think it's fair to say. I think we understand from the work that has already been going on, where some of the inefficiencies and focus needs to be, but we need to work on how you know, making sure that, and we have plans in place to improve some of those, so we need to accelerate that, but we also need to just make sure that we're covering everything. We have got a new leadership team in North America that's focusing on this.
Of course, as we change the functional leadership with the operational team, they're also embedding and getting focused on some of these things, which have been long-lasting, some of them are long-lasting, but it may be we haven't seen the full impact of those because of the performance in other parts of the business. So focusing on them and improving them is very much part of the new functional and the new regional team as well.
So, I feel more comfortable, but you know, and I think we've given a range on revenue and profit, and the reason for that is that if on the you know the high end, we would expect to improve the performance of some of those operational issues, and we will be focused on trying to do that. So, I believe from what I understand at the moment that they are all fixable, but some of them just will take time.
Okay, and then just wondering if you could talk about trends in the rest of the business. I think you say they're broadly in line. Is there anywhere else you're seeing kind of more deterioration or improvement, maybe?
I mean, so in each region, we've got different product mix and things like that. So where we've got some similar products, like for instance, in Europe, which has got some of the components business, obviously, there is some impact there as well because it's not just impacting North America, but the factories where we're making the majority of the products is North America, so they're seeing a bigger impact. But there's other parts of Europe that are doing better. So you've got the ups and the downs. So broadly, between Asia and Europe, we still believe that they will be in line with our expectations, and, you know, the issue about why we're missing is really a North American issue.
Okay, thanks.
Thank you. We will take the next question from line, Harry Philips from Peel Hunt. The line is open now, please go ahead.
Good morning, everyone. A couple of questions, please. Could you just elaborate as to which sites, or can you tell us which sites these are? And particularly interested in the products. Are these new products, recently launched products, where the issues are, or are these products that have been in the portfolio for a while? And then just in terms of the order book commentary, just wondering, is the delivery for 2025 a consequence of customers recognizing there are issues within your plant, and therefore, not wanting to take delivery or seek delivery in the balance of this year and putting it into 2025, simply recognizing there could be a delay if they were to put that order on for the balance of the current year, please?
Harry, can you just repeat the first question again for me, please?
Yeah, no, the first question really is. I'm just curious if you can say which sites you are having the issues at, and if you can't, I sort of understand that, but more of the products in components where you are having these particular issues. Are these new, new-ish product launches, or are these mature products where something has gone sort of awry in the sort of manufacturing process?
In terms of the products that we're manufacturing, these aren't new products. It's not a new issue. These are issues that we had before. I think there's mix in terms of volume and different things going on within that, but we are seeing a higher impact, or we saw a higher impact in August, and the forecast is that that will be a higher impact in the remainder of the year than we had anticipated. We had expected some improvements in some of that operational performance, and we've not seen that coming through yet, and so we need to double our efforts on that for those particular products.
They are complex products, so you often can get some variation in activity and so on, is my understanding. But we have to make it a more robust situation in terms of the delivery of that. In terms of the components, you know, the- you've got a mix of different components. There's a lot of different types of parts and variables, you know, that are in there from what the customer needs. I think in essence, we're seeing some of those product lines improving faster than others within the components business. So, you know, there's signs of an improvement in some and others are slower recovery.
Again, that mix plays a part in what we're trying to say, and we're trying to keep it a relatively simple message, but of course, there are a number of moving parts.
Harry, I guess on your comment on your question about, you know, is these customers effectively anticipating that our lead times will be longer than they say we are? I don't think we know that for sure, but that would not be normal behavior. If we quote a lead time, the customers would typically order to that lead time and hold us to account, but I don't think we have that level of insight.
We haven't seen any issues related to that, to be honest, Harry. It's just that that's their request date, so they're ordering it, and that's the requested date.
Yeah, and then, I mean, on the site, Harry, to be clear, the order-related volume, that is related to our component sites. The operational execution issues are not in the component sites. They're in a couple of the other North American sites.
Right, so sorry, just to be clear, so the operational issues are not in-
Not in components.
In components. Okay, and then I suppose that just coming back to cross-reference that with Stephan's, one of the answers to Stephan's questions, which is the revenue being sort of evenly split between this execution issue and the sort of-
Yep
Rework issue. Okay, now I've got it now. Thank you.
Yeah, so the execution issues relates to the businesses where we have much longer order book visibility. So this is stuff where we have the orders, and therefore, you know, as we execute, the products will ship.
Yep, got it. Lovely. Thank you very much indeed.
Thanks, Harry.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the next question from line Mark Fielding from RBC. The line is open now, please go ahead.
Yeah, morning. Can I just elaborate a bit more, or ask you to elaborate a bit more on a couple of things? I suppose firstly, and I think I started to feel like not with that answer to Harry, but I'm just curious if any of the operational impacts actually have been made worse by anything that you've been doing. And I don't mean that in a bad way, but obviously there's a lot of reorganization and restructuring trying to happen across the group, big reduction in workforce, et cetera, you know, whether that's made it harder to actually deal with stuff in the short term. Maybe just talk about that first, then I've got another question.
Yeah. No, I think that one is relatively easy to answer. We haven't changed anything in the sites where these issues are in terms of the reorg and what we're doing. In fact, what we've done is with the reorg and the function with moving to the function, what we're actually doing is targeting where the issues are and what we need to do to improve them. And so we are uncovering some things that we need to do better and we're finding more things that we need to do better, and that's the thing. The reduction in workforce is actually in the component side of the business, which is not the same as where we're having the operational efficiency.
In the components part of the business, it's just revenue related rather than performance related in the majority of the sites. And that's not what the major issue is. No, I don't think any of the restructuring is impacting that or the reduction in staff is impacting that. I think it's simply, if anything, this move to a function is giving us some visibility on some of the ongoing challenges that we have.
Great. And then can I ask about, I suppose the path to the reiterated 12%? I mean, you know, 'cause we're gonna be talking a margin here this year at sort of nearer to 7%. And, you know, does that obviously, the target for this year, you know, before we even talk about the 12, was initially the 10% margin. You know, are we comfortable that we should be able to get things fixed and be, you know, a 10% or better margin business, you know, next year, or are we leaving even more of that progression to the 12 out to sort of 2026?
As Mark said earlier, I mean, we see some of these issues, and the component side of it will take longer to recover through 2025. We need to fix some of the operational issues, but that was part of the plan anyway to get there. We've got the identified savings in Project Dynamo, which we are working, so that all helps. We're anticipating that the you know the normal kind of growth level, so without a you know a very aggressive view of the future, we believe that by taking the actions that are in our control to take and doing things in a better way, that we can get to the 12% medium target, so we are still confident that we can do that.
I guess, Mark, clearly there will be some impact of this from you know into 2025. But as we said, as we fix the execution issues, that revenue comes back and the reversal of the issue will be of a similar magnitude to what we're feeling now. And then we are looking at additional cost action as well, that would benefit 2025.
Order intake, I suppose, is the other point to just add, which we said at half year, which is still positive versus the prior year and in terms of the growth rate, but you know, that continues and so that supports, but that... and so even though in the components, which is slightly better than last year on order intake, is still not where we want it to be, so that will come up, but the other parts of the business is strong.
Thank you.
Thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. There are no further questions at this time. I'll hand it back over to CEO Peter France to conclude today's conference. Thank you.
Thank you very much, and thank you for your questions, and thank you for your time this morning. Clearly, a disappointing message that we've had to give, but we are committed to working through the issues that we've identified and achieving the shareholder value that we believe is there for everyone going forward. So, we will continue to make those improvements and do what we need to do, but clearly, we are available for conference calls or for meetings if people would like. So, for that, we'll let you go. Thank you very much for your time this morning.