Tyman — Managing well in the recovery phase

Reductions in revenue and profitability in H120 reflect the varying impact of the COVID-19 outbreak across Tyman’s three divisions. The 17% reduction in group volumes was in line with the like-for-like sales performance. Actions taken to control costs and manage cash flows mitigated downward pressure on profit to some extent, contributing also to good net debt reduction, prior to adverse FX effects.

End-2019 momentum and timings of COVID-19 affected divisions in differing ways. North American manufacturing facilities largely remained open throughout the period (the primary exception being two in Mexico). Following local lockdown guidance, production sites in Italy halted in early March before restarting halfway through April, while those in the UK closed at the end of March and remained so until a partial restart in May. Disruptions to the Chinese supply chain – most relevant to ERA and, to a lesser extent SchlegelGiesse – are not thought to have had a material impact on sales given the volume reductions seen and carried inventory. All operations are being scaled with an appropriate level of staffing and cost for the prevailing levels of demand, and any redundancy requirements are likely to be at low levels according to management.

Having previously flagged that the first four months of its financial year were down 12% yoy, Tyman provided sequential monthly updates for FY20 to date. All three divisions have seen improvements in activity levels from earlier lows, with AmesburyTruth and ERA currently in positive year-on-year sales territory in July at the time of reporting. (SchlegelGiesse’s June/July trading pattern is influenced by lumpy orders in the prior year in particular and underlying sales are otherwise also trending better.)

AmesburyTruth: Revenue £168.2m (US$212m) (-12% l-f-l), EBIT margin 14.7% (-210bp y-o-y)

Of Tyman’s three divisions, its North American operations had the best start to FY20 and experienced the shallowest monthly dip (though still material at 37% down in May) amid less stringent lockdown conditions than in the main European countries where the other main company manufacturing facilities are located. It also continued to earn the highest operating margin in the group at 14.7%. Nevertheless, the 12% headline revenue and 22% EBIT reductions portray a challenging six-month trading period. Sales volumes were down by c 10–11%, with a small negative year-on-year price impact and net customer churn (ie new business wins not quite offsetting previously flagged losses including FY19 annualising effects) together explaining the revenue performance. After COVID-19 was declared a pandemic in March, North American manufacturing facilities largely remained open, although the Mexican facilities at Juarez were an exception to this seeing strict lockdown conditions prior to reopening at the beginning of June. Collectively, they operated at below optimal volumes reflecting prevailing market demand and the relocation of some component lines (from Mexico into the US) was undertaken maintain customer service levels throughout.

Notwithstanding the above, management actions taken to improve manufacturing efficiency at the consolidated Statesville centre of excellence are said to have resulted in better operational performance. The previously announced exit from a production unit in Fremont was also successfully completed in the period, with retained lines relocated into several of the ongoing operational sites. While the benefits of these actions are not visible currently, they should feed into improved profitability in firmer market conditions. As shown in Exhibit 2, monthly sales moved into positive territory year-on-year in July, although management is taking a cautious view on the outlook for consumer confidence and the commercial sector as well as potential US election market distractions.

ERA: Revenue £39.1m (-28% l-f-l), EBIT margin 9.7% (-330bp y-o-y)

As noted above, UK/Ireland sales are more reliant on proprietary products sourced in China (c 70% of the total) versus the other two divisions but our sense is that the initial lockdown there earlier in Q1 had a minimal effect on reported results. Management reports that pre-UK lockdown sales were running 8% ahead year-on-year and the wider Chinese supply chain had begun to normalise by the time UK lockdown occurred in March. Manufacturing sites were closed at this point until reopening from early May and ERA retained a reduced distribution capability during this time. Unsurprisingly, sales contracted sharply to very low levels in April followed by a strong rebound over the two remaining months of H1. Reported profitability was buffered by the receipt of £2m from the UK government employment support scheme (with 80% of UK employees furloughed at the peak) but also recognised £0.5m of bad debt from a small number of customers entering administration.

Hardware sales collectively account for c 70% of the total and as one might expect saw a very similar profile to the division as a whole. Variances around this pattern included a relatively stronger start with orders on hand aiding a good close to the half also from Commercial lines (internal/external hatch, access and panel products), while the developing smartware security offer gathered momentum during the period. The nature of COVID-19 severely restricted residential home access for the standalone Ventrolla business (sash window renovation).

The decision to relocate multi-point lock manufacturing from China to the i54 facility pre-dated COVID-19 considerations and other third-party supplied items are also being reviewed to further strengthen local supply. Businesses with strong transactional e-commerce platforms (such as Screwfix and Toolstation) have generally traded well throughout the COVID-19 lockdown period and ERA’s product sales through these trade distributor channels also benefited. This experience is likely to be relevant to the roll-out of an extended smartware range in H2 and beyond, with market share gains expected on the back of new customer agreements. While divisional sales have clearly started H2 in positive year-on-year territory, general UK economic uncertainty – chiefly regarding prospective rises in unemployment, which tend to dent consumer confidence – suggests that caution is warranted for prospects for the remainder of the year.

SchlegelGiesse (SG): Revenue £46.8m (-22% l-f-l), EBIT margin 9.8% (-280bp y-o-y)

With its main manufacturing base in northern Italy and some product sourcing and sales in China, SG had a challenging start to FY20 as the coronavirus pandemic developed, compounding weak trading momentum from the end of the prior year. While sales in both Q1 and Q2 were down by double-digit percentages year-on-year, the half ended on a firmer note.

As a regionally diverse division (with FY19 sales split broadly 65% Europe, 27% Asia/Australasia, 8% Americas/other) the timing, duration and extent of lockdown impacts varied across SG’s served markets. Management identified Italy, Spain and China – in that order – as SG’s largest country revenue generators and in simplistic terms they all endured relatively early and significant COVID-19 disruption. The latest two months sales performance (-2% y-o-y in June, -8% in July) appears slightly out of step with the recovery profile elsewhere, but this is attributed to timing effects with some lumpier commercial projects and a weaker June 2019 comparative.

This division has changed its business model in China and Australia by exiting direct manufacturing operations (mainly hardware and seals respectively) in these countries during H120 and switching to a distribution model. In addition, the Singapore distribution hub is to be vacated by the end of July, with ASEAN markets to be accessed as export markets going forward. Prevailing and expected volume levels in some areas, together with the need to otherwise replace or upgrade existing manufacturing equipment, appear to be the key drivers behind this shift. Margin implications are unclear at this stage, although the reduction of local fixed costs should feed into profitability from H2 onwards.

At the same time, divisional management has been focused on a more integrated sales approach including the Reguitti product range (business acquired in 2018) on a common ‘all in one’ platform. As well as streamlining the marketing function, the aim is to increase cross-selling to leverage individual channel strengths more widely across the portfolio and, in support of this, continue to introduce complementary ranges to build out channel presence.

At this stage, it is difficult to call ongoing sales momentum into H2 for SG. In addition to commercial project timing effects, with later but growing incidences of coronavirus infections in other countries (eg Brazil) and some localised secondary outbreaks (eg Spain), we would expect to continue to see variability in sales performance across SG’s sales territories. In reality, its markets tend not to move in step anyway, so flexibility in the supply chain with a focus on stronger demand areas is the norm for this business. European summer holidays may also have a bearing on near-term sales run rates.

Tyman reported total debt of £219.8m at the end of June versus £222.8m at the start of the year (and £289.8m in mid-2019) and this was after £15.9m adverse FX translation effects, around a quarter of which related to leases. Adjusted core net debt – excluding amortising fees – reduced by £4m to £160.5m, while IFRS 16 lease liabilities were £60.8m, little changed from the year end.

Operating cash flow (before tax payments) actually rose by over £11m to almost £35m in H120 compared to its prior year comparator and was achieved despite the year-on-year earnings reduction. The primary features were:

As a consequence of the above movements, management noted that cash conversion in the period was 106% versus 62% a year earlier.

The combination of reduced debt on hand and lower debt costs compared to H119 drove lower interest payments in H120 (just below £7m, including lease interest). We assume that the low cash tax payment (c £1m) was partly due to government COVID-19 support scheme deferrals; an increase in tax payable on the balance sheet supports this assertion. Understandably, capex (c £4m) was also at low levels in the period pending greater clarity on post-lockdown volume recovery levels. The company was able to manage US footprint pinch points by moving some lines between facilities (ie from Mexico – where operations lockdown restrictions were stricter – into the US). Taken together, Tyman generated free cash flow of c £23m in H120, a marked improvement on c £4m a year earlier. It should be noted that this included some items which were of a one-off nature, including government employment support of £3.3m and temporary salary reductions of £2.1m (both of which were included within EBITDA/EBIT) as well as the tax payment deferral (c £2.5m).

The absence of a final dividend payment for FY19 retained c £16m within the business. Final deferred consideration for Zoo Hardware (ERA company, acquired in 2018) of £1.5m, finance lease capital repayments of £3.3m and modest treasury share purchases made up the remaining cash flow movements, resulting in an overall group net cash inflow of c £18m in H120.

Liquidity: For the record, the group cash balance at the period end was c £80m. The company has previously flagged cash on hand in excess of £120m during April so, implicitly, a higher cash/gross debt position was run during the six-month period, in Q2 in particular. It is reasonable to assume then that improvements in trading noted in Exhibit 2 boosted management confidence in the outlook sufficient to trigger partial repayment of the RCF, which was substantially drawn at the end of Q1. Note that the scale of existing banking facilities remained unchanged at end H120 compared to the start of the year (which we covered in a FY19 results note), so available group liquidity remains healthy at c £159m, broadly double reported net debt levels. Save for U$55m of private placement notes due for repayment in FY21, the majority of banking facilities do not mature until 2024. Tyman did agree a tweak to its covenant ratios for the next two periods, however – rising to 3.5x net debt: EBITDA at the end of FY20 and 4x at the end of H121 – prior to reverting to 3x thereafter. As stated by management, this provides increased headroom in the event of a slower recovery. The provision for the H121 uplift is sensible in our view, acknowledging the normal seasonal working capital cycle in the business noted earlier. Lastly, in addition to the above, Tyman potentially has access to a further £170m of borrowing facilities from an existing accordion arrangement and the UK government-backed CCFF scheme, both of which are uncommitted at this stage.

Cash flow outlook comments: Tyman’s use of government employment support schemes will have stopped at the end of July, so this and the temporarily deferred tax payment should wash through in H2. Senior management salaries will also revert to previous levels from 1 August, following temporary reductions taken at the beginning of April. Our sense is that the management team is keen to carry out projects identified through business improvement programmes where returns still stack up. Therefore, an increase in capex is likely, albeit with full year spending below the originally flagged c £17m level, with some of this shifted into FY21.

The key driver of cash flow to the end of the current year will of course be the rate at which profitability recovers in the traditionally stronger H2 trading period. For Q3 at least, this might be partially offset by a supporting working capital requirement, which should then unwind again by year end. As company guidance and our estimates remain suspended for now, we are unable to provide net debt projections currently. However, the company has reiterated a medium-term target net debt:EBITDA ratio range of 1–1.5x, which could be attained in FY21.