Lpa Group (LSE:LPA) — Investor Presentation

0:01 Good afternoon and welcome to the LPA GROUP PLC investor presentation. Throughout this quarter presentation, investors will be in listen only mode. Questions are encouraged and they can be submitted at any time just by using the Q and A tab that's situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you to CEO, Philo Daniel Tran. Good afternoon.

0:32 Good afternoon, everybody. Thank you for joining. Philo Daniel, I joined LPA as the CEO at the beginning of this year, and I'm delighted to be here. Prior to joining LPA, I worked for Smiths Group in a global capacity, and I ran their aviation and urban security division. Prior to Smiths, I worked for TELUS Group for a decade and a half in various geographies around the world, and I've worked across all of the segments that LPA currently operate in. And on that note, I'll hand over to Stuart. Hi. Good afternoon, everyone. So Stuart Stanyard. I'm the CFO. I joined LPA a couple of years ago, previously spent just over twenty years working for Rolls Royce in Civil Aerospace, and most recently working in a PVAC company that was sold in in 2022.

1:25 Okay. So why am I here at LPA? When I first saw LPA, I said, I think this company could be so much more, so much bigger. And I wanted to take LPA on that journey, and I wanted to be part of that growth story. So here I am. And the agenda today, I'll start off with what a well invested company LPA is. I'll go into the diverse capabilities of the company, how we play in the marketplace, and how we attract our customer base.

2:00 And then Stuart's gonna take us through the f y twenty four results, and I will finish off with my strategic priorities for the future, what my vision is, and how we can achieve profitable growth in the medium term. Okay. So LPA. So for those who don't know LPA, LPA boasts an impressive legacy of a hundred and fifty years as a premium design and manufacturing company. What we have done really well time and time again is we've reinvented ourselves. So we take our products, we improve it, and we deliver. We buy and acquire new products, and we do the same. So we acquire it, we design, we deliver, and we make it a success.

2:50 Our commitment to quality and innovation has positioned us as a trusted partner and as a leading, manufacturer in the marketplace. So if that has allowed us to then go into the next slide, which talks about our market segments that we're in. So we're quite well known in the rail industry, but what we've done is our quality products and that we have delivered. Once we've actually captured a market segment, we have looked at market adjacencies. We have then identified new markets, how we can improve the products, and then take it and deliver it within those markets, which has then allowed us to diversify into aviation, aerospace, and defense, and other infrastructure projects as well.

3:38 So customer centricity is absolutely key. We understand the customers' needs. We understand the market demands, and then we develop our product innovation based on that, which has then allowed us, if I go to the next slide, to become a respected market player globally. We boast a remarkable market presence. If you look at this, this is quite an impressive slide. When I first saw that for for a small manufacturing company based in The UK, I was really surprised with the breadth of the world that we actually are global reach. It's a diverse market segment range that I've just shown you in the previous slide, which brings me to my next slide, which actually talks about the customers.

4:27 And what an amazing list of customers. We punch well above our weight. When I first saw this list, I was I was really it it kind of brought a smile to my face because I said, oh, wow. There's Downer there. I worked with Downer when I was with Thales in Australia in 2010 on their train communications project. And, of course, transport for London, I worked on the first d two project bid when I was head of strategy for TELUS Transportation in The UK in 2016. And last week not last week, actually, a couple of weeks ago, there was a really great story on LinkedIn by Siemens Mobility that spoke about the DeepTube project and the collaboration with LPA.

5:16 We are providing the entire lighting systems and electronics within the DeepTube train being that's being manufactured in the North out of our Norbington site. So that's really exciting. Of course, Hitachi there acquired Thales Transportation globally last year, and I know that part of the organization really well. Kinkisharia as well in my roles within transport in different parts of the world. If I come a little bit more to the right of that slide, you've got the aviation customers. In my time with with Smith's detection, I worked with the global team on with a lot of the top leading airports. And then there's Lockheed Martin there just to in into an Airbus as well in terms of my time with Thales in the defense side or Airbus in terms of the avionics side as well out of Singapore.

6:11 So

6:12 why am I saying all of this? For me, this is a really exciting top tier list of customers, and it gets me super excited because I I know these players in the marketplace, and it allows me to reengage with them and to deliver to them. And I'm really super pleased that LPA are operating in this space, And, we have an impressive list of customers because we have an impressive product range and product delivery capability. So, yeah, this is really nice for me to be able to work in this space again.

6:50 So if I get if I now touch a little bit on, our capability as an organization, we pride ourselves in LPA, for our excellence in engineering, in design, and in manufacturing. We have three really well established and well invested facilities and manufacturing sites around The UK. And each of these sites specialize in different capabilities. All our properties are freehold. Stuart, did you wanna cover on the freehold topic? Sure. So the the three the three sites have been recently valued when we re refinanced our bank facilities just over a year ago at 5,100,000. In in the books, which I'll show you later, they're actually at the net book value of 3.7.

7:37 Okay. Great. So we know how to leverage our IP and our know how, and we are really able to establish our installed base. We as I've mentioned, we improve our acquired products. We enhance the existing product range that we have, and that's how we maintain our incumbency with our our customer base. So I'll get a little bit more into each of the capabilities of each of these organized parts of the organization. Just before I start, for those of you who are familiar with LPA, you would know them as divisions previously known as so I'm calling it LPA electromechanical based on the capability. It was previously called connection systems. I'm moving more towards a one LPA vision, and I'll touch on that a little bit more towards my last slide, which is looking forward.

8:30 But I'll I'll I'll go a little bit more into Safran Walden. So Safran Walden is about an hour away from London. It's a 140,000 square feet, of agile manufacturing capability. By that, I mean that the the factory can be reorganized. It's got cells which can and we can make different subsystems within the same cells, and it can be reconfigured quite quickly to meet either building an aviation product or a rail connector or an a or an aerospace sorry, aviation connector. It's an impressive vertically integrated site. So if you walk into the factory, you find copper and brass that gets manufactured into connectors, which then gets assembled into cable harnesses and wiring looms, which then gets assembled into our various subsystems that that we deliver to our end customers. So if you look at the slide that you've got there, you've got our aviation connector there that's connect for ground powers ground power. You've got the red box, which is for kick starting a smaller plane.

9:42 You've got industrial applications of connectors to the bottom right, and the top right is the jumper cables and the connector boxes under the car of a a a railway. So these are all really nice subsystems that we make out of our Safran Walden site. If I go to the next slide, previously known as LPA Lighting. Lighting, and we are so much more than a lighting and seat electronics business. So I think on really appreciating the electronics capability within this facility is is quite key. And for me, it's a very it's a very exciting offering that we can deliver out of this site. What we do is we take the various we're able to develop the different electronics within the compartment of a train.

10:36 So interconnecting all those electronics into a central control unit that can be controlled with a graphical user interface either within the cabin, at the seat of the car, railway car, or at another centralized location. They're all the possibilities. And this modernization of the railways and modernization of the train carriages, we're part of that story and we're part of that journey with the customer. And I'm super excited because the digital capability that we've started with the embedded software is something that we can drive further, and we can do so much more beyond the current train carriage electronics that we do. We, of course, also do deliver to other infrastructure like the hazardous environments, like the Hubble that you can see to the right there as well on the picture.

11:29 The very last one is LPA value add distribution, previously called LPA Channel Electric. This is a sixty year old business, and we are not just a distributor. We are a value add distributor. By that, what I mean is we understand the customer's pain points and the customer's needs with the of what they need within that space we work in. We understand the supplier's products. And together with our electronics capability, Normanton, and our machining and electromechanical capability out of Safran Walden, we are able to come up with a subsystem that we then deliver to the customers. And, we have added more partners, because we are the customers love us and the partners love us. And, because it's it's something that we are able to drive yeah. It it it's it's really something that because we're small, we're agile, we're able to really respond quickly to both sides and both their needs.

12:35 Last year, we were the supplier of the year award. We got supplier of the year award from Amphenol, which was one of our first suppliers, and and we are their second largest distributor. There are some fabulous new projects such as the Hill helicopter that you can see here. What we do here is we have got ours our design embedded into this prototype. So if this takes off and that that is the design that is finalized, we will be part of that design and sales for the next

13:09 five, ten years for the duration of that particular design of the helicopter being sold. There are so many further adjacencies. We have immense growth opportunities in this area, and this is a super exciting field to be in because it really takes me back to my systems integration days and, yeah, my background in systems engineering as well. So it's an exciting proposition here.

13:41 Right. So let me just touch a little bit more on the operating highlights. So you've seen a few announcements recently if you're familiar with LPA. We had an RNS last week or the week before, which spoke about our 1,300,000 win. This is for cross rail project. It's for new builds. The beauty here is that we're already part of that design. And if that design if there's future builds, not only will it be this 1.3, there will be further win and orders to benefit from as well. Last year in December, you saw the RNS, which was about 4,000,000, which is a great win for us because it's quite a big a couple of contracts together there. These large wins are really great because it secures our order book. And I like the big project projects, and you and Stuart's gonna talk a little bit more about how the forecast is in terms of the order. But we are looking to diversify.

14:36 We are looking to get more product sales in as well, which will then allow us to balance balance that order book.

14:44 And we will continue to do that, and you'll see a little bit more of how we're doing that within the diversification away from large whale projects and the and looking at more value add business work as well. If I touch on Red Box, so in terms of acquisitions, we acquired Red Box a year ago. That business has been fully integrated into our operational site in Safran Walden. If you walk in now, you'll see a sea of Red Boxes there ready to be shipped out to our customer base. Here, we are already we we acquired, we improved, and we've delivered. We will continue to we are continuing in parallel to come up with the next generation of products, and we're also consolidating the product portfolio.

15:31 We're now really reenergizing the sales force to go out there and market the product. We're also reassessing our distribution that we acquired by Red Box and looking to see whether they can sell more of our aviation connectors as well as, you know, are they really a a good extension of our Salesforce and leveraging that a little bit more. In terms of Martech, you would have seen the RNS that came out in January about our of our recent acquisition, which is very close to being finalized. So Martech is really exciting because it they make power supply. And with the power supply, the electronics within the power supply, at the moment, it gets made out of Poland, but we will insource it. Our Normanton site will make the electronics for that power supply. In terms of the power supply itself, it can be used within the red box, and that can also be in source. So you can see that there's already lots of synergies, and we can leverage our own existing business to make that a success, and we will do just like we've made Red Box or the previous acquisition with the jumper cables.

16:44 If I just touch quickly on the certifications, you can see a big long list of certifications here. And this is an envious list for me because it gives us a right to play with our top tier customers. And our customers operate in safety and mission critical environments, which is really exciting for and and in terms of aerospace, we've just got the the aerospace quality standard for 9,100, which then allows us to do more in that value add distribution space, such as what I've shared with in in the previous slide with the helicopters and the aerospace side there. In terms of the DAC market, which is a German speaking market, a year ago, we employed a business development manager. He's fully embedded now. He's he's driving that part of the business really well.

17:38 He is making really good progress with customers and opportunities within the German speaking market so much so that now he's expanding into Eastern Europe. He's got some good customers and good opportunities in Poland, which he's pursuing. And yeah. So that's really exciting, and it gives us an opportunity to to do more in in in outside The UK in for and sort of build on that distribution network, build on our ability to go further into the international market as well. The last part is really pivotal to our transformation journey, and I think it's only right for Stuart to actually touch on that. So last year, we were we were quite ambitious. We we implemented a new ERP system on both of our main sites.

18:30 Both sites previously had different systems. One was coming through end of life and the other was was almost there. So this, we believe, will massively help our transformation and it'll give one one source one one source of truth into the label collaboration between the two sites and and and the offload and the inter interaction that Fido was just talking about there. So we're really pleased this was successful. That's you know, notoriously, these are are long gone cost and long gone time. So this this this came in on time and was fully implemented at the start of this financial year. Thanks, Stuart. So if I I think we can go to the next slide. Okay. Great. So in terms of sales growth, I think my focus initially is we really need to deliver on our current orders.

19:23 I'd like the team to secure the next secure what's in the pipeline. We've made three acquisitions in under two years after a twenty year break. So I would really like to make sure that we fully embedded Martech as well similar to what we've done with Red Box, and I really wanna drive growth and maximize the sales out of these new acquisitions that we've made. Once I do that, then it would be about taking stock and then understanding what the next strategic list of the potential opportunities is for growth, and that will allow me to double the size of the company in my first three years with an LPA. So that's the ambition at the moment. And I'll just leave you with just to rehighlight, you know, that we are a well invested company with assets and capabilities worth more than double the market cap.

20:20 We have certifications that allow us to access our high tier customers globally in safety and mission critical environments. We develop and deliver world class products, which are highly reliable. And we have a strong order book with repeat business. And, yeah, I think at the at the moment, I'll I'll hand over to Stuart so that he can take us through the FY '24 numbers, and then I'll come back to talk about the future.

20:48 Thank you, Fila. So firstly, I'll construct the income state income statement. And key key first thing to notice that the underlying results were in line with market expectations. That we have a solid order book, we've got solid order entry, and we had an percent revenue growth during the year. Looking down the income statement a little bit further, you'll see that the gap between underlying operating loss and loss before tax this year was because of some exceptional costs to do with acquisitions and reorganization.

21:18 And in FY '23, the naught point nine gain was a result of the first acquisition of the negative goodwill there. You notice our net debt is up slightly. That's a result of investing in the business and we've refinanced our bank facilities during the year. The operating loss is flat across the two years as we continue to invest in the business for future growth. Moving on to the balance sheet. I touched on the freehold property previously.

21:49 So market value just over a year ago at 5.1. They are in the tangible assets there at 3.7. The growth in the intangible assets during the year was a result of the Red Box acquisition and the ERP system that I that I briefly touched on. The pension asset is is is a very interesting one, and that is a defined benefit scheme. That's a surplus net of 25% tax. And this would, under current legislation, come back to the company if if if the scheme was the scheme was to close now. Logistically, there's about a 110 people in the scheme. It was closed twenty years ago. We the assets are matched to the liabilities.

22:34 This is not something that we intend to hold longer term, but currently, it it it helps it helps the balance sheet. We see there's minimum downside and potential upside gain there. You'll notice the net working capital was down slightly during the year as we as we managed cash very well. The gross debt in turns includes bank loans and leases and and the gearing at 13.1% slightly up from last year at 7%, but remains pretty low. Moving to the cash flow. There's a net cash outflow of naught 500,000 full financial year, which is lower than last year's 1,000,000. The key aspects here are the investing activities,

23:22 which would be the Red Box acquisition, the second half of the the first acquisition we made, and the ERP system, basically offset by the improvement in working capital. Financing activities are slightly less because we had the incremental bank loan during the year. The exceptional item towards top in FY '23 was again the the the negative goodwill from last year. We intend to have a progressive dividend policy in due course when we when we get the business growth. But currently, our main focus is to reinvest the cash into the business. Moving on to a little bit more detail on the order book. You can see a strong order book there of 25,000,000.

24:12 You can see it's split by segment, and you can see it's split by delivery. A little bit more detail on this. Of the order book, 90% is rail currently, and about 10% of that is aftermarket. Looking at the delivery profile, you'll see that 34% of that moved into f y twenty five,

24:36 slightly up from the previous year of '32. Moving on to revenue, three little bits to pull out here. You can see that rail at 69% remains the the largest portion of our revenue, albeit that's down from 75% last year. The revenue is split about two thirds project and a third aftermarket. Looking at the next slide there is is the the the change in I think the change in strategy coming through over the last two or three years, the aviation, aerospace, and defense has moved from 13% in in f y twenty two to 20% f y twenty three and now 25% in f y twenty four.

25:24 Looking at the revenue by segment, the main change in the year is that the value distribution

25:32 got back to pre cove pre COVID levels and was the main change during the year. On the right hand side of the chart, you can see that our exports now constitute 41% of revenue. That again has been nudging up the last few years from 35% in FY '22 to 39% last year and then to 41% for the current results. I'll move back to Filip for the last couple of charts. Thanks, Stuart. If you just pause there for a second. If you just go back. Sorry. I just wanted to pick on this picture here. So this is our

26:11 cable our Crocodile cable carrier solution, which we provide to airports. And what this does is it provides ground power to the plane. So this is a picture of the new next generation essentially, and it was it's taken from Heathrow. It's connected to an Air Canada plane. So Heathrow have had this the predecessor of this product for over fifteen years, and they really like it because what it does is it stops the cables getting worn out by being dragged on the tarmac. And this allows you to take the power from the terminal through to the airport to the plane, sorry, within the airport. And so they were really keen to get the you know, to get some to buy some new ones. And what we've done is we've worked with the customer in this case and understood their pain points and of of they love it, but there's some little tweaks that we could still make with the product.

27:08 And this is really about listening to the customer's needs and developing the next generation of product to actually, you know, be be a win, for both sides. So, this has been in trial in Heathrow since December. The customers love it already, and the trial's usually gone for a year, but we are hoping to get some orders much sooner. And yeah. And and we'll speak to customers in other parts of the world very soon about it as well. So, yeah, it's just

27:34 a nice little story. So I just wanted to touch on that before we I go to my final slide. Right. So One LPA. So when I started with LPA, I said to the board, I want to lead LPA with purpose to succeed. And I want to do that and to drive accelerated growth. I feel I could do that via my one LPA vision with a one team. So I've done away with the divisions, and we're we've reorganized relatively quickly because we've got our existing executive team that will lead the various functions. So yeah. So modernization is adopt you know, we have to adopt and adapt for growth. And part of that is by the transformation that we've already started that LPA embarked on last year where and Stuart spoke about the ERP system that is well embedded now.

28:29 We've we're using a CRM tool collectively across the organization as well. So what will this do? The one LPA team will give us operational efficiencies, improve collaboration, it promotes innovation, and we, you know, and we can deliver, excellence in delivery as well. And and so customer centric new product innovation and new product rationalization is quite key for me. And I've done this before. I've done this with Smiths before in terms of the aviation depart division where we, reorganized and we drove, rationalization and delivery of new products to drive, unprecedented growth in the last couple of years before I left. Our factories and sites have plenty of capacity for us to grow and achieve our strategic vision. So, yeah, I I feel, you know, we are in the right we're setting ourselves up correctly for for the potential growth that we're more than capable of delivering.

29:28 And, yeah, and, you know, I think it's it's a great opportunity, and I'd love to have some new investors come on board and and, you know, come on this journey with us. I I think it's it's super exciting, and I'm very excited to be here with LPA. So I think over to Alessandro. Fila and Stuart, thanks very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab that's situated on the top right hand corner of your screen. Just while the company take a few moments through the questions that have been submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard. Phil, as you can see, we have received a number of questions throughout today's presentation.

30:14 If I could hand over to you to read out those questions and give responses where it's appropriate to do so, I'll pick up from you both at the end. Yeah. Do you want me to try and ask the first one? Yeah. So we've a we've got a question. How how is LPA diversifying its revenue streams to reduce reliance on large rail infrastructure projects? Excellent question. I I think we touched on it during during during the slides there. We have moved the aviation, aerospace, and defense significantly from 13% to 25% of total revenue over the last two or three years. The acquisition of Red Box Aviation helps helps that.

31:03 This is it is not a strategy away from large large rail infrastructure projects. Though, those are excellent projects to have. Just Just that we use other things to supplement those as well. Hopefully, that covers that question. Thanks, Stuart. I'll take the next one. It says, what are your immediate priorities, and how do you plan to accelerate growth and profitability? So I've touched a little bit on the one LPA vision. So I think operational savings in terms of, there's so much more growth that we can deliver if we, work better internally within our organization. So there's operational savings to be gained by, by the teams working cross functionally together. So that is my immediate focus.

31:50 And in parallel, I want the team to deliver and hit the current years numbers as well that we have committed to with the city. So, yeah, that's that's essentially it. It's just really about reenergizing and driving that growth. I can touch on the next one as well. I'll just read the next question out. With a focus on engineering led solutions, what are the key r and d investments currently being made? So, our primary focus is really the first part is we've got existing products, and then we look to innovating and coming up with the next generation of whether that is our connectors or whether it's our electronics capability.

32:38 For me, it's really about so we've got this right certifications to work with a large range of market segments. I would like to see us focus a little bit more on our electronics business in terms of our software capabilities. There's some great ideas there. We're coming up with a pipeline of new innovation topics that the techno technical team are presenting. So we will look at that collectively and then work on additional areas of which electromechanical systems and which electronic and software systems we will focus on as well as systems integration capability with the value add distribution as well.

33:25 So, yeah, some some interesting opportunities there. So I'll take the next I'll I'll take the next one. So the question one is your acquisition strategy. So I think we've we've we've discussed that. We've made three acquisitions in the last eighteen in the last eighteen months. We we we we need to make sure that we fully embed those and get the value from those. Doesn't mean to say that we're not looking at anything else or won't look at anything else. We'll look at things on an opportune basis where there's, you know, in in innovation, there'll be growth, where they're complementary as as Filo mentioned with the the recent acquisition of the Martech. We're We're gonna gonna insource some work and and and the and the the acquisition will also feed feed some work there. So we're very keen to to develop a a proven track record of integrating acquisitions that that will help us going forward.

34:16 So I guess we're, you know, we're open. They they may be larger. They may be joint ventures. Who who knows where they go? But we're we're certainly looking into going in due course. Stuart, do wanna take the next one as well? I'll take the next one as well. So with no proposed dividend, what are your priorities for reinvesting cash? And when do you anticipate the company will bring back a dividend? So I touched on that briefly, I think, in that we will look to introduce a progressive dividend again in due course once the growth allows allows us to do that. But certainly, in the intervening period, we're looking to reinvest the cash in the business like we did last year on the new ERP system and the acquisitions.

35:07 So it will be in in in due course, but our priority at the moment is for investing it back in future growth. K. I'll take the next one. It says, how do you see your customer and sector sales mix changing in the coming years? So I think Stuart presented the slide which demonstrated that, you know, we have we we want to remove the reliance on rail, but it doesn't mean that we wanna get away from rail. So for me, it's it's really good to have those large sales, as I said, get the large contracts, which gives us that forward vision. With trying to increase more product sales rather than programs, it will give us more recurring revenue and that rebalancing. And that could be it's a combination of rail and non rail segments as well, aviation and aerospace and defense.

35:59 So you can see that we're starting to diversify based on the numbers that Stuart's already shared, and I you know, we will continue to do that in in the in the coming years as well. And yeah. So there's definite definitely a refocus on the non rail segments, but with with the anticipation for growth with a much more diversified portfolio of sales. Let me take the next one for you. So so good good question here. So what what are the projected numbers for for this year and next? The the numbers that we're projecting for FY '25 are revenue of 25.9 and an underlying profit profit before tax of more point three. And then then for for FY '26, we've got a revenue of 28.5 and then line profit of nil point five.

36:55 The next question on do you see opportunities in any new geographical markets? I think there's you know, obviously, we've we've got a global spread in terms of our install base. I think there's some really good opportunities of growth in places like in The Middle East, in in in wider Europe, The US as well, and in Asia. So there's there's quite a lot of, you know, different opportunities, I mean, in terms of where those new projects for rail projects are, but that's also for things like red box sales. So, yeah, I I wouldn't say that we're gonna focus only on one. We depending on the product type and the portfolio, we will identify which area we will target a little bit more.

37:49 Okay. Think about that. Think I've done that here. Yeah. Perfect. Filo, Stuart, thank you very much for answering those questions from investors. Of course, the company can review all the questions submitted today and we will publish the response out on the Investor Meet company platform. Mhmm. Just before redirecting investors to provide you with their feedback, which is particularly important to you both, if you like, could I just ask you for a few closing comments? Yeah. Sure. Yeah. So for me, you know, I've I've come in, you know, obviously, I've been with the company for seven to eight weeks now. Fresh eyes, you know, there's great capability. I am so excited about what the future holds, and I'm yeah. It it's it's it's looking promising in terms of what we have and what we can do with with our existing install base and with our customers.

38:44 So, yeah, I'm I'm super excited and and really looking forward to what the future holds. Philo, Stuart, I'd like to thank you once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, so it should be greatly valued by the company. On behalf of the management team of LPA GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.