Okay. All right. Good morning, everyone. Thank you for joining us today, whether in person or via the webcast. I'll start with the highlights from the first half and the key takeaways that underpin our confidence that we will emerge stronger from what has been a tough 12 months. Matt will then cover the financial performance, and I'll give more information on our trading performance by sector and update on progress we have made across the business. Finally, we'll then move to Q&A. If you are watching via the webcast, you can ask a written question by using the toolbar at the bottom of the webcast platform screen. Just select the question icon, and you'll be able to type it in. Thank you. So in March, we stated our focus for 2024 was on controlling the controllables for XP. Thank you. Good spot.
Focusing, controlling the controllables for XP Power while we waited for the market recovery, and that is what, exactly what we've done. Our overall performance for the first half was better than our expectations we set in March. This is against a backdrop of unusually challenging trading. We have seen a slowdown across all three sectors. Semi revenue is down in the period, but orders are back in growth and the impact of destocking on industrial tech and healthcare, which we do see easing during the second half of 2024. Despite this, we've delivered revenue in line with expectations, with profit ahead. We took internal actions to support our trading results, which has right-sized our business to the market conditions we are seeing today and expect over the next 12- 18 months.
This will ensure we are set up to benefit from the market recovery when it comes. We've also managed our inventory tightly and reduced it by a further GBP 10 million, which brings the total reduction from the peak levels by a reduction of GBP 25 million. So we've traded well in this, these tough conditions, maintaining double-digit margins, which reinforces the resilience of the business and clear potential for when the market does recover. Looking at the wider market, there is no doubt that trading has been difficult for all of us, and our competitors are seeing exactly the same thing as we have in the first half. While we're not seeing the recovery in orders as yet, we are seeing early signs that the markets are recovering, and we are well positioned to benefit from this.
I just want to take a couple of minutes to talk about our strategy and how our consistent application of it positions XP for a strong future. We've continued to deliver on all elements of our strategy as we've navigated the challenges of recent years, and we've made further progress in 2024. Just focusing on key points, our focus is on organic growth. We have a market-leading product portfolio, which we have further enhanced in the year through new product launches and customer specific products. Demand remains strong for our portfolio, and we remain confident we can continue to deliver double-digit organic growth across the cycle. We're focused on working closely with our customers, bringing our specialist power knowledge as well as the want to solve their problems. Building on these strong relationships is driving our growth.
We continue to invest in our business to ensure we can deliver on our longer-term potential. During 2024, we opened our Customer Innovation Center in Silicon Valley, close to many of our key customers, and we believe a key differentiator for us that will support our growth. Our people are key to our strategy. Improving the skills of existing teams while adding key talent in the right areas is critical. While we have reduced overheads in 2023 and 2024, we have ensured we have kept the capabilities critical for our success. We continue to make progress on sustainability, which I will cover later. The point I would add is that we've consistently applied this strategy, and this has enabled us to deliver growth ahead of our markets, and we believe remain in a strong position to deliver ambitions in the medium to longer term.
We continue to focus on structural growth markets where we have leading positions. This is a key part of our strategy, and it is working. As you know, each of the semi, healthcare, and industrial tech sectors have faced challenges in recent times, but we see them poised to resume their long-term growth trajectories. The semiconductor industry is at, is at an inflection point. The end market has returned to growth, and this will translate into wafer fabrication equipment growth later this year. The destocking in healthcare and industrial tech is easing. It will turn customer by customer, and some are returning to normal, more normal, more normal order patterns, while others will take more time. When the markets recover, we are well positioned to benefit from the tailwinds with recent customer wins and new products coming to the market, adding to this.
We believe the market recovery, combined with the delivery of our strategy, will yield strong financial returns. Our model, outlined on this page, is intact and valid. As a reminder, over the medium to longer term, we are targeting to deliver 10% revenue growth across the cycle, driven by the market growth, new customer wins, and new products coming to the market. We're confident margins will improve, driven by the business and market recovery and the operational leverage associated with this, combined with our ongoing cost and productivity focus and transferring further production to our low-cost sites in Asia.
This, combined with strong cash conversion, will enable us to reduce debt levels to the 1x-2x EBITDA range in the short term and below 1x in the medium term, which we believe is the right level for us. On that, I will hand over Matt, hand over to Matt to cover our financial performance.
Okay. Thank you, Gavin. Morning, everyone. So let's just turn to the numbers, starting with the headlines. Order intake totaled GBP 87.9 million and was 22% lower year-on-year. This reflects a degree of normalization after particularly strong performances in 2021 and 2022, as well as continued destocking within the sales channel. First half revenue was in line with our expectations at GBP 127.1 million, which was 18% lower than the comparative period. The year-on-year decline was driven by an unusual simultaneous slowdown in all three of our market sectors, which I'll describe in more detail in a moment. Gross margin was 40.6% and was 120 basis points lower than the comparative period, as lower activity led to an under recovery of factory overheads.
But our performance also benefited from input cost savings and underlying production efficiency gains. The slowdown in revenue inevitably led to a year-on-year reduction in operating profit, but the size of it was significantly narrowed by a broad program of cost reduction to rightsize our overhead base to the demand conditions. Actions on cost left first half adjusted operating profit slightly ahead of our expectations at GBP 13.5 million, slightly de-risking, but not changing our full year expectations. Our efforts to maximize our performance in challenging conditions also extended to the balance sheet. We achieved record operating cash conversion of 259% by reducing working capital, helping us to pay down debt. In summary, these numbers reflect the proactive management of an unprecedented slowdown.
Our long-term prospects are clear and compelling, but it is inevitably hard to be exact about the timing and path to market recovery. This places a premium on organizational proactiveness and agility, attributes that I believe that we have demonstrated in the first half. Okay, so let me just describe the profit performance in a bit more detail. As I mentioned, revenue reduced by 18% in constant currency and by a further 3% due to currency movements as a result of the recent strength of sterling. The slowdown in revenue occurred across all three market sectors, but particularly within healthcare and industrial technology, as customers in these sectors switched from restocking in the first half of 2023 to destocking in the first half of 2024. We were pleased with our gross margin performance.
Gross margin of 40.6% was 120 basis points lower than the first half of last year, but only 60 basis points lower than the second half of last year. Lower activity levels led to lower utilization of factory overheads, reducing our gross margin by circa 200 basis points, but we offset a good proportion of this with lower input costs and better underlying production efficiency. Another positive element of our performance in the half was overhead management. So we responded to an 18% reduction in revenue with a 16% reduction in overheads. This reflects the actions set out in our funding plan as announced in the fourth quarter of last year, as well as a further round of cost reduction implemented during the half.
Our actions have protected our short-term performance but leave us with the resources that we need to deliver our strategy. Actions to protect our profitability resulted in adjusted operating profit of GBP 13.5 million, and operating margins were resiliently in double digits. Net finance expense was lowered by our efforts to reduce borrowing, but increased by IFRS 16 lease interest relating to our new world-class Silicon Valley facility, leaving interest costs in total broadly flat year-on-year. We committed to lowering our effective tax rate in 2024 through better tax structuring, and we're pleased with the progress that we've made to date. Our effective tax rate reduced from nearly 13, sorry, 37% for full year 2023, down to 22% for this half. All of this resulted in an adjusted EPS of 24.4p.
Okay, so turning to orders, we saw intake reduce by 22% to GBP 87.9 million. As you can see in the top left, our order intake has remained fairly consistent since the third quarter of 2023, at circa GBP 45 million per quarter. As can be seen in the bottom left, this consistency is a function of an improvement in order intake within the Semifab sector, offset by slower ordering within healthcare and industrial tech, as customers destocked in response to normalized supply chain conditions. We have said before that it's difficult to precisely predict the end of destocking due to the broad range of markets we serve and the unprecedented nature of the industry cycle that we have seen. Others in the capital goods sector have faced similar challenges.
We had assumed that destocking would largely be complete by the end of Q2, which would be prefaced by improved order intake during Q2. As can be seen in the top left, we have not seen that improvement yet, meaning destocking is likely to carry on until the end of Q3, based on the latest information we have from our customers. Our cost reduction plan anticipated this outcome, meaning that our full-year profit expectations remain unchanged despite the later recovery. I would also highlight that we continue to shorten delivery lead times, allowing customers to order progressively later.... This inevitably reduced order intake during the half, but this should normalize in H2. Okay, so let me add some color, color to the revenue performance. Our H1 performance was fairly consistent by quarter, as shown in the top left. This suggests a degree of stabilization to demand conditions.
Our performance by sector, shown in the bottom left, underlines that we saw a slowdown in all three sectors. They are distinct, geographically diverse, and economically independent markets. This, combined with our annuity revenue model, makes a simultaneous slowdown like this unprecedented. It reflects the final economic echo from the pandemic and is, I believe, unlikely to repeat. So where does that leave us in terms of the order book? Well, it reduced by GBP 42 million in the half, down to GBP 150 million. The order book that we have now is equal to about seven months of forward orders, and it's slightly higher than historic norms. We are likely to see a further reduction in order book size in H2 as lead times continue to reduce, meaning book-to-bill will remain below one during this period before increasing thereafter.
Okay, so turning to the profit performance, the chart on the left illustrates not only the impact of the market slowdown, but also our robust response. As the market slowdown became apparent, we acted decisively. Overheads were GBP 7.1 million lower than the comparative period. Our total headcount, including factory operator positions, has reduced by approximately 20% since the start of the market downcycle last year, and this includes the elimination of 120 overhead roles. Our cost base is now right-sized for current activity levels, but we remain vigilant and ready to respond to whatever circumstances we may face. Okay, organizational resilience and agility is also evident within our cash performance. We converted GBP 13.5 million of operating profit into very nearly GBP 35 million of operating cash by reducing working capital, particularly inventory.
We have now reduced our inventory by GBP 25.3 million or 24% since the start of the funding plan. I would expect progress to slow naturally as we get into the second half. CapEx of GBP 7.8 million largely consisted of residual payments relating to our new Silicon Valley facility and for construction of our Malaysia facility prior to the suspension of work. Malaysia remains part of our long-term manufacturing plan, but will not be restarted until 2025, as the capacity is not currently required. Maximization of operating cash and tight control of CapEx allowed us to reduce net debt by GBP 8.5 million in the period. Okay, so this slide shows how the program of actions that I, that I've referenced throughout this presentation have improved the resilience of our balance sheet despite the market trough.
One year ago, at the end of the first half of 2023, the business was operating with about GBP 150 million of net debt, equivalent to 2.3x LTM EBITDA at that time. Over the last 12 months, the group has experienced an unprecedented market slowdown, which has reduced LTM EBITDA by 26%, down to GBP 47.9 million, as you can see. In response, a funding plan launched in the second half of 2023, which included new equity, equity, and a sharp focus on maximizing cash from operations, has reduced our net debt by 30% in the same period. In addition, our EBITDA has been supported by significant cost reduction, as I've mentioned. Through these actions, balance sheet leverage has been maintained in the low twos, and borrowing liquidity has increased.
We expect our balance sheet strength to continue to improve over time, particularly as our markets recover. This means we expect increasing levels of borrowing liquidity and covenant headroom. But needless to say, we must also ensure the group's balance sheet is fully resilient to downside risks, whether expected or not, as we navigate this period of deleveraging during a market downturn. We have therefore successfully negotiated a temporary relaxation of our interest cover covenant to ensure full covenant compliance, even in the event of a severe but plausible downside case. These changes, which include a facility extension, were made at modest cost and with unanimous bank support. Okay, so just some quick comments on 2024 modeling, which Gavin will expand upon when covering the outlook. So for Q3, we expect revenue to be similar to Q2 as destocking continues.
For Q4, we expect revenue to increase as destocking begins to slow. To illustrate the progress on cost, we have previously guided to high single-digit reduction in full-year overheads. We're now guiding to a circa 17% reduction. Progress made on tax structuring allows us to guide to a full-year effective tax rate of circa 25%. We should continue to convert more than 100% of our operating profit into cash in the second half and keep full-year CapEx, including product development, to between GBP 20 million and GBP 25 million. I continue to expect leverage at or below 2.5x by year-end, subject to FX. So now with the numbers done, I will hand you back to Gavin.
Thanks very much, Matt. Okay, so at the outset, I just wanted to cover... To remind you all of what XP Power is today. You know, we design and manufacture a comprehensive portfolio of power supplies and power solutions and provide our customers with unrivaled customer service and support. We focus on sectors where power is mission-critical and failure is not an option. Our enduring customer relations, relationships are built on hard-earned reputation for quality and support. We're committed to invest in innovation, both in power supplies and with our customers, as we support their development journeys with the next generation of technologies. We work across the globe with over 4,500 customers, either directly or indirectly, and our products add value through the functionality they bring, be it leading-class power density, interconnectivity, efficiency, ease of use, or built-in intelligence. So that's XP Power today.
If we look at the sectors we focus on, it's clear why they are the attractive parts of the power market. So in turn, this industrial tech forecast suggests the market will grow at circa 7% to $6 billion in 2027. The semiconductor end market has already returned to growth, growing at 18%-20% in 2024, and this is expected to continue to deliver double-digit growth from the 2024 point of inflection to over $1 trillion by 2030. That's the end market. To deliver this will require similar growth in WFE spending, but with a lag. And finally, the medical device market, end market, is also showing strong growth, which is forecast to continue above 6% out to 2030, using the external data we have.
The destocking we've seen during 2023 and 2024 in industrial tech and healthcare are atypical, and as you can see from the see, the markets are expected to return to more normal growth patterns going forward. With our order book resetting to more historic levels of three to four months that we operated at pre-COVID, as our lead times have now reduced, we expect more consistent order patterns in line with the market for market growth going forward. This market growth combined with our proven ability to gain share will propel our growth in coming years. Now, let me take you through what we're seeing in each of the sectors, starting with industrial tech. Industrial tech is such a diverse sector for us. It's a cross-section of accounts with no large individual programs, even though we work with many blue-chip industrial customers.
Within industrial tech, we focus on sub-sectors with good long-term growth potential and attractive niches. We spend a lot of time analyzing the opportunity before we commit, and we commit, we intend to qualify it hard and then to win. Typical applications are in such sectors, areas as robotics, analytical instruments, test and measurement, and 3D printing. But these applications are becoming increasingly more complicated and increasingly connected. Our new products that we bring to market are much more digitally controlled, allowing us to provide the complete power solution, and we are increasingly becoming part of the customers' ecosystems. As I've said, 2024 is an atypical year for the market, where we've seen destocking.
This is coming to an end, customer by customer, and we expect this sector to recover by 2025, but at different speeds, with North America leading Europe and then Asia. Looking at the semiconductor manufacturing equipment sector, this remains an exciting and important area for the group. Semiconductors are the foundation of the digital economy, making them more strategically and economically important than ever before. Artificial intelligence and data is driving the market to more than north of $1 trillion by 2030. Now, the market's been going through a well-documented down cycle, but the end semiconductor market, as I said, has now returned to growth in 2024.
While we still remain in a quiet period, we are seeing improving utilization of fabs as semiconductor demand picks up, which is driving increasing demand for spares and services, and we have seen orders for some of our products for the first time in 12 months as that market recovers. This is always the precursor to an upcycle in this market. Now, the end market growth, combined with CHIPS Act spending across the globe, is fueling investment, and the global industry is adding more fabs. 70 new construction projects will start between 2023 and 2025, and this, combined with the 92 fabs that started construction from 2020 to 2022, will dominate fab equipment spending out until at least 2027. So our view, we are through the trough and now expect the markets to recover with increasing confidence in 2025.
This market remains a great opportunity for XP, and we are confident we can take share and grow ahead of the end market over the medium term as the market recovers. And then healthcare. This is a long-term growth opportunity for XP. The end market remains strong, and our customers are seeing good demand levels, so underlying demand is stronger than our reported results. What's driving it? Growth driven by the mega trends of aging global population and innovation in medical technology. We are seeing ongoing infrastructure upgrades and innovation for new products in many areas, such as robotic surgery, automated monitoring, advanced diagnostics, and the innovative use of technology for patient treatment. We're at the start of the AI impact on medical imaging and patient treatment devices, and we expect this to be a significant growth area going forward. But...
We're also seeing growth in new treatment technologies driving real innovation... Supporting these trends not only requires innovative, reliable power solutions, but also customers need a power technology partner, and that's a very attractive area for XP with both new and existing customers. We expect demand to recover as inventory is used up and growth to return during late 2024 or early 2025. In summary, we're seeing temporary market challenges in each sector. We expect each market to continue to recover during the second half, ahead of 2025. Timing of this remains unclear, but we do expect H2 2024 order intake to be stronger than the first half. At this point, I just want to step back and cover why we will continue to win in the markets going forward.
We've not covered this before, but it's important to remind our stakeholders of why we win. First, it's our DNA. Speed, flexibility, customer focus are three of our core values. Combining this with a right first time mentality and approach is very hard for our competitors to replicate. We have highly experienced teams across the globe, and they're able to provide customers with a range of solutions, from standard power products to customized solutions, to solve their challenging power problems. We have proven capabilities to quickly go from prototypes to volume manufacturing, and we can get our customers to market quickly with low risk, proven solutions. We continue to make progress in this area, working closely with our customers on many new projects. Having a market-leading product set and strong customer relationships is only part of the story.
It's critical we can deliver on our innovation, and we have invested in a new Customer Innovation Center in the heart of Silicon Valley, the heartland of technology and home to many of our customers. The new center is a world-class design and engineering facility to enable effective customer collaboration. We've invested in tools and infrastructure to address all the challenges we have seen, and so we can ensure we can effectively partner with all of our customers. We've invested in in-house reliability and environmental testing. We have our own plasma chamber and EMI chambers to test new products and replicate field and technical challenges. We have on-site production and warehousing to provide rapid prototyping and support rapid customer deployment, and we have room for capacity increase to support the future growth.
We're receiving very positive customer feedback, and we are confident this will drive future growth at XP. We have the right mix. We believe we have the right mix of high volume manufacturing sites in Asia and local resources close to our customers to ensure we can deliver the right solutions. Turning to sustainability, our commitment to sustainable principles is a key part of our strategy, and we continue to lead our market in this area, and we've made further progress in 2024. We published our net zero transition plan in August 2023, and our targets were approved by Science Based Targets initiative in February. We continue to make progress on our sustainability agenda and reducing our carbon footprint. Our 2023 carbon footprint reduced ahead of target, driven mainly by lower sales and purchases, but since then, we've made further progress.
Our European business is now purchasing 100% renewable energy, and we've eliminated single-use plastics from our operations. Customer feedback shows we are still ahead of our market, and we believe leading our industry in sustainability is not only the right thing to do, it will bring significant benefits in both cost reduction and customer engagement to XP. And finally, turning to our outlook, which remains unchanged for 2024. The markets are definitely stabilizing, but it remains difficult to predict exact timing of the recovery. The cost reductions we've done have helped underpin our 2024 expectations, which have been de-risked by the first half's performance. Looking forward, we are well prepared for market recovery. We are confident the end markets will resume their long-term growth trajectories.
Our well-established customer relationships in the right sectors provide clear growth opportunities, and we have a healthy pipeline of new product launches and design wins. Our supply chain and manufacturing teams are focused on driving operational efficiency and cost reductions. So in summary, we're positioned, we're well positioned for growth as the market and order levels recover. On that note, we'll take your questions. We'll start with questions in the room before taking questions online. For those in the room, please could you use the microphone, state your name and company before your question to benefit from those via the webcast. As a reminder, if you're watching online, you can ask a written question by using the toolbar at the bottom of the webcast. So Chris, opening. Go on, Jay. Oh, sorry.
Morning, both. James Bayliss from Berenberg. Two questions, if I may. Just on the cost savings, you talk about the guidance going up from high single digits to about 17% of the overhead base. How should we be thinking about that in terms of variable cost savings in response to the market conditions versus a permanent layer of fixed costs coming out, and then ultimately into a recovery, what can you sustainably hold on to versus what do you need to give back to ensure you're meeting demand?
Yeah. Sorry, do you wanna do one more question?
Then second question, on the Malaysia plant, can you just remind us how far through the program of work you were before you paused spend, and how we should be thinking about how much incremental CapEx needs to go in to get that fully commissioned in 2025? Thanks.
Do you want to take those?
Yeah. So, on the cost saves, there's no sort of variable elements really included in that, so these are sort of permanent reductions in cost. I mean, we're gonna try as best we can, as we recover, to stick to 2024's overhead. I mean, there will naturally be some inflation, but we're gonna try as best we can not to add overhead back in. I think that's a key component of us getting back to the kind of operating margins we achieved before. In respect to Malaysia, we have basically GBP 10 million still to spend.
Tom?
Good morning. Thomas Rands from Davy. Three questions. First one just following on from James' question. 120 people headcount taken out, I think that's slightly up on the original 100. Could you just remind us where those heads came from? 'Cause that's quite a big percentage of your, of your total kind of group headcount. Shall I come on to the second-
Yes, just do all three and we'll-
Okay.
Wind them up.
And then the second question, just around semi fab growth. Obviously, you've got two big customers there. What have you seen those customers versus the longer tail of growth in orders through the recent months? But also, how have conversations gone with those customers for the trajectory through the second half? And then third question, order intake trends in July. Like, maybe you've got the data from July. How has that trended, assuming-
Let me get one and not two.
... it's kind of similar to Q2, but are there any kind of signs of positivity, maybe? Thanks.
On the headcount, it was 100 in the original funding plan. 40 of those were within COGS, so they were factory related. There were 60, 60 that was overhead related. So effectively, what we've done is double the number of overhead-related headcount reductions from 60 - 120. In respect to where, I would say everywhere except for product development heads that are engineering in nature and everywhere except for customer-facing roles. When you deliver a headcount reduction like that, it needs to be kind of everywhere, except for those areas that are long-term strategic in nature.
Yeah. So as to semi customers, they're all talking the market up. They're all wanting to focus on when the recovery will come, and they're making sure we're ready. They're auditing our recovery plans, auditing our ramp plans. Most of them don't quote order intake publicly. The two that do, ASMI, who in Q2 were up 56% in orders, and ASML, who are up about 30% by recollection. So that's the general sentiment of what they're seeing in the market, and it's all, you know, AI and data is the is big comments. SEMICON West was a recent show in July in San Francisco, and some things coming out of it, you know, just the amount of data center requirement is expected to double to be able to support the AI requirements in the by 2030.
So you just look at the investments going in. So there is very positive rhetoric. They're all talking, you know, when it's, when it turns and, you know, we're seeing the early signs at this point, but not that sustained recovery. And it's the same if you look at some of our competitors. They're seeing exactly the same thing. Then order intake for July. Yeah, we have had order intake for July. It was, we were pretty, as Matt said, we were pretty steady through order and revenue through the first half. July was slightly ahead from an order perspective, but you know, it's not able to say a trend yet.
Okay. Thank you.
Hi, thanks. David Farrell from Jefferies. First question for Matt. If I look at the R&D spend in the first half of 2024, it looks like it was down GBP 3 million year-on-year. Just wondering how structural that is to have at a lower level, whether or not that compromises growth going forward. Second question, also to Matt. Just as you look at the ramp up into 2025, should we actually expect inventories to go back up, in anticipation of that? And then, final question, thanks for providing a bit of color on why XP Power wins. It sounds very much service driven. Is there anything inherently better in the product itself which could cause you to win? Thanks.
Yeah, so R&D, David. So the headcount that we have taken out, there has been heads, some heads that have come out of product development, but they're not engineering in nature. So they're sort of project management, they're management roles. I don't believe we've taken any heads out of R&D that would, you know, in any way slow down the rate of product development long term. That's the first thing. Second thing is, last year, our R&D activity was unusually focused on sustaining work. That's what, you know, that's, that is what our customers wanted from us at the time. So therefore, proportionally less of it was capitalized. Now, we're back to a normal sort of activity, such that more of our R&D, of, of sort of R&D time is being spent on new products and therefore is more capitalizable.
So that's one of the reasons why you end up with the cost, the cost reduction there. In respect of inventory-
... If we were to get back to normal inventory days for this group, you would expect to see a further GBP 10 million reduction in inventory from here. That is not what we're targeting for the second half. I'm expecting more like GBP 0 million-GBP 5 million. One of the reasons is because I do expect there to be a recovery. I don't want to take the inventory out and then have to put it back in again. So I think that means it's less likely that we're gonna see an increase in inventory next year, if that makes sense. Of course, in time, there will be an increase in inventory as the business grows.
Yeah, and then on our competitive advantages and balance.
For standard products, it's, you know, they're more common, consistent things. People get more, things like efficiency, power density, cost do become a driver. Where you get more complex products, in high power, low voltage and high power, high voltage, then there's much more points of difference. Things like size. So in a for a semi customer, size is critical. So if you can provide the same power product with a smaller product, that is a massive point of advantage because they've got limited space. The other area where I do think is a real point of difference is our ability to work closely with the customer on power problems. That's exactly what the Silicon Valley innovation center is about.
We've had customer on site coming with their problems, and we'll do essentially multi power supplies in a unit that will solve multiple problems or become more connected to the customer's requirements. And so it becomes more of a using standard products that are proven, you can then build a solution to tailor to the customer. And that just builds so much closer relationships, and you get so much more involved with the customer's projects and technology earlier, which then gives you the other advantages. But service and support, don't underestimate how important that is when most people have outsourced their power, so they're reliant on someone else to do it for you. And we're, you know, we have a reputation of having very good service and support.
Thank you.
Kevin Fogarty from Deutsche Numis. Just a couple of questions, if I could to you. Just one in terms of and sort of on the, on the point of innovation, and I appreciate it's been sort of quite inward focused over the last nine, 12 months, but can you talk about sort of product development? You know, where we should be seeing kind of next gen products or where the biggest impact of the kind of recent innovation should be seen? And just secondly, in terms of the gross margin, I think you've talked about a 200 basis point kind of negative impact from underutilization. I guess, where do we need to see either volumes, you know, recover to, to start to either get some margin stability here?
Should we think at the gross level, I guess, and should we think about any sort of inflation or deflation that might kind of impact that in the second half of the year, particularly?
Okay. On innovation, part of the reason we're very positive about it is we're in London bus territory. We've got it coming in all of our sectors. We've got new market, we've got new products in low voltage, low power, which we haven't had for some time. New products in low voltage, high power, RF, and in high voltage, high power. So right across the piece and across all three of the sectors. So you can see. It's often we've historically quoted a number of new products we've launched. That can be somewhat misleading because one can have a $500,000 potential, and one can have a $20 million potential. We've got more of the higher value opportunities that will come to market in the next 12 months.
So sort of RF power effectively-
No, no.
High voltage?
I would have said high voltage, high power. So that on the back of the Glassman acquisition and FUG acquisition. The low voltage, high power, which we introduced in 2019, that's been very successful, and we've got further additions to that. In low voltage, low power, we've got some new products coming to market with market-leading power density that will stimulate the demand there, and then RF as well.
Sure. Okay, that's helpful. Thanks, Gavin.
Gross margin. Yeah, so, I think what I said in reference to the second half of last year is that there was a 200 basis point headwind from, you know, factory under recovery. Fundamentally, a hundred and forty basis points worth of input cost savings, underlying product production efficiency gains to give you a 60 basis point headwind overall. The hundred and forty we get to keep. That's the first thing I would say. So as volumes recover, we should end up with better gross margin than we had before. In respect to the 200 basis points of volume-related headwind, I think it's important to note that the sort of starting point, so last year, clearly that benefited from some restocking of the sales channel.
Sure.
So therefore, it's probably fair to say that we don't get all of the 200 basis points back quickly, because it's, you know, take a while for us to get to back to that level of volume. In respect of inflation, deflation, et cetera, in the second half, first starting with the first half, no change in selling prices, so there was no influence of that on gross margin in H1. So we've held on to the selling prices we had before. We are seeing some deflation within raw materials. So, you know, we are still washing through COVID-driven peak pricing on componentry, and that is now coming down. So there should be some deflation.
Whether that materially changes in the second half, I doubt it, to be honest with you, but over time, we should see continued deflation in input costs.
Okay, great. Thanks for the color. Thank you.
Hi, thanks. Andrew Humphrey at Peel Hunt. Just an end market question, particularly on industrials and healthcare. I wonder if you could give us a bit more detail to characterize some of the destocking you're seeing in customers. Is this, you know, a few large customers destocking aggressively? Is it kind of across the piece? Is there any difference in terms of specific types of products or regions that you're seeing in terms of that destocking? And has that changed in the last three months?
Yeah. Hi, Andrew. Good to meet. So destocking is pretty universal across the piece, both some large customers and small customers. I think during 2021, 2022, when the market was getting really tight, some just placed a lot more orders on us and our, our competitors in the industry. And we're seeing... It's been a probably a mixed bag of progress across all industries, you know, almost depending on project type, their demand, their risk tolerance on extending orders. You know, during the pandemic, we, we saw exposure to raw materials and long lead time. Everybody got very focused on it. Some put inventory much to, much to higher levels of inventory, and some of those are our larger customers and some of our contract manufacturers.
And some of them were late to place orders, so they'd had the where we and then we shipped them last year to them, and then they're still sitting on excess. But I think I point out, it's going through customer by customer, so our largest U.S. industrial customer is through it. And they've burned through it. And they're expected now to be steady, and that's literally just happened, so there'll be steady flow now from August onwards. We've had one customer got, site got hit by a tornado, ironically, wiping out their inventory levels, so they're back to normal, normal order, order patterns. But then you've got others who are saying they'll have no new orders till mid-2025. So it is really customer by customer and market by market. Other customers had no impact at all.
I think it is down to their attitude to risk, and now they're much more tolerant to risk. Whether that continues, you know, is we shall see. You're up.
Questions.
Hmm?
Questions online.
Okay. Okay. In that case, we'll finish up there. So in summary, we, we do think we're well positioned in our market, to deliver on the growth that the market will deliver, and as, as our order levels recover, that should drive significant financial improvements to our recent trading. On that note, thank you very much.
Thank you.