Tyman — Successfully navigating market challenges

Against the pre-COVID-19 pandemic FY19 trading year, group revenues and EBIT both rose by c 11% on a like-for-like basis. Over this timeframe, volume/mix progression accounted for almost two thirds of top-line growth and pricing just over one third. Although these years were very different, we note that margins at the gross and EBIT levels were broadly similar (33.3% and 14.2% respectively for FY21) on a reported basis. Given increasing input cost pressure as FY21 progressed, this was a creditable performance. Tyman ended FY21 with gearing below 0.9x (net debt:EBITDA on a pre IFRS 16 basis) following positive net cash inflows despite investing strategically in working capital over the year. The company also announced an 8.9p final dividend (making 12.9p for the year as a whole, a record level).

After initial lockdown periods in H120, market volumes recovered strongly in the second half of that year and continued into H121 before flattening out against the tough prior-year comparator in H221. This rapid pick-up in demand, especially following the global pandemic economic shock, resulted in stretched supply chains across building, construction and other sectors internationally. Consequently, materials input costs have risen progressively over the last twelve months or so and have been exacerbated by tight transport and labour markets. In our view, the rate of post-lockdown recovery and price inflation should be seen as inter-related to some extent.

While pricing mechanisms exist to pass through higher input costs (both directly and through tariffs/ surcharges), over such a sustained upward trend there is an inevitable lag in recovery. All three divisions saw a sharp pick up in revenue and EBIT margin in H220 back to or above H219 levels. Revenues were broadly maintained in H121 and UK/Ireland and International both improved margins again, although those in North America saw a downward movement. Sequentially, all three divisions experienced a tightening of margins in H221 as the lag between higher input costs and increased customer prices became more noticeable. Looking at H221 directly against H220, reported group revenues were broadly similar at c £320m, but EBIT was c 10% lower in the latest period. Divisionally, North America felt labour availability and cost inflation challenges most keenly.

Gross margin showed a similar progression to, and was obviously a key driver of, the EBIT margin profile described earlier. We should mention there were other factors at play in making direct year-on-year comparisons difficult, including an adverse FX headwind, the absence of government financial support and the return of staff bonus payments in FY21 compared to the prior year but also the exit from some loss-making operations at the end of FY20. Nevertheless, in underlying terms, we feel that good opex control was achieved in FY21 and this aided the group profit outturn in the face of the input cost pressures described above.

Compared to pre-pandemic FY19, FY21 divisional revenue grew by 11% like-for-like, in line with the group average, while EBIT progress on the same basis was modestly behind at 9%; the reported EBIT margin was 16.4% (-30bp compared to FY19).

AmesburyTruth entered the year with good demand momentum in residential sector channels that was sustained in H121. As the year progressed against tougher H220 comparator periods, the volume/mix effect tapered somewhat, which was softened to some extent by increasing price inflation. At group level, the H1:FY price effects were stated as +2:+4% (a higher exit rate) and our sense is that these effects would have been stronger in North America.

Looking again at the more representative FY19 base year, like-for-like revenue growth was c 10% in H1 and c 11% for the full year. This infers that H2 like-for-like was slightly stronger even than H1 and suggests that rising prices more than offset any softening in volumes, although we are unable to quantify these effects in each half year. Product price inflation was substantially driven by higher input costs including materials based on metals commodity prices, freight and staff. It is important to note that these were economy-wide issues driven by a combination of faster-than-expected post-pandemic recovery (in North America and globally) and some short-term labour market distortions arising from government support measures.

In addition to pricing, AmesburyTruth undertook a number of operational actions during FY21 to support service levels and manage costs:

As noted above, the FY21 EBIT margin was only modestly lower than in FY19 albeit with a different half yearly profile. FY19 margins were broadly similar in both half years (and 16.7% overall) while FY21 included a 17.7% reported H1 margin followed by 15.1% in H2. We believe this substantially reflected the pattern of higher input costs as the year progressed and the overall lag nature of price pass through reflected in selling prices. It should also be noted that relocation costs mentioned above were all taken above the line and not as exceptional costs in the year. Hence, the AmesburyTruth P&L absorbed both the direct cash costs of these moves and the indirect short-term productivity effects that resulted. In addition, compared to FY19, we estimate that a weaker US dollar and stronger sterling (c 7% movement on average rates) represented a c £13m revenue and c £2.5m EBIT headwind in the latest reported year.

At the same time as managing immediate supply chain challenges, AmesburyTruth continued established programme initiatives for the medium and longer terms. In addition to the relocation activity mentioned previously, investment to expand capacity for volume increases (eg seal products) and to automate other functions took place in the year and new product development spend was not constrained either. The implementation of a new ERP system is also underway and this is designed to support enhanced customer engagement, building on work in the last two years to deliver consistent service levels, as well as improve internal operational capabilities.

We should remind investors that Tyman’s strategic target for AmesburyTruth’s EBIT margin under normal market conditions is 20%. Clearly, with ongoing input price challenges this is unlikely to be achieved in the near term. We have modelled a divisional EBIT margin of, or slightly better than, 16% in our estimate years. As AmesburyTruth is Tyman’s largest division, achieving its strategic target margin, say on c £400m annual revenue, would represent an incremental £16m EBIT at current exchange rates (ie a c 25% uplift on FY21 divisional profitability, or c 18% at group level, after central costs).

This division delivered the strongest growth performance in both revenue and EBIT terms against both FY19 and FY20 comparators, achieving record levels under Tyman’s ownership, we believe. Italy was among the first European countries to be disrupted by the COVID-19 pandemic in early 2020, affecting divisional profit performance through lower volumes and unrecovered manufacturing overhead in that year, although a more normal outturn was achieved in H2 of that year.

Against pre-pandemic FY19, like-for-like top-line progress picked up in the second half of FY21 (ie +13% in H1, +15% for the year as a whole) and while EBIT growth slowed, this was still a very strong performance (+41% in H1, +37% for the year on the same basis). As in North America, the patterns for both line items were influenced by rising input prices, which supported progressively higher customer pricing, albeit with a modest lag. Similarly, our sense is that H1 volume growth was stronger than H2, which was more than compensated for at the revenue level by rising selling prices. For the record, adverse FX translation, reduced reported growth for the year by c 500bp for both revenue and EBIT for the full year. At the reported level, the divisional EBIT margin rose to 14.7% (up 240bp versus FY19), a record level and close to the division’s 15% strategic target.

Management stated the growth delivered in the International division was broadly based, citing good demand in core European markets and Australia. The Middle East and South America also made progress. When Tyman acquired Giesse in 2016, Italy became the division’s largest market, its key European hardware manufacturing base and home to its headquarters in Bologna. Italian sales rose by 18% in FY21; in addition to price inflation, revenues were said to have been boosted by the super-bonus incentive scheme (which, among other things, promoted renovation activity), some share gains and a degree of customer re-stocking.

We think the market share gains are significant given some price-led competition in certain territories had been noted occasionally in pre-pandemic years. Having a strong internal supply chain, new product development and a programme of intensifying partner relationships with door and window system houses supported by product availability and service levels will all have been factors in achieving this, we feel.

Management also commented that labour shortage pressures were less acute than seen elsewhere, especially in North America, and coupled with supply chain stability, this allowed greater market agility and faster responses with regard to pricing. This benefitted margins, although a smaller lag was perhaps still evident in H2 and previous actions to streamline warehousing and manufacturing operations in Asia and Australia will have enhanced operational gearing from higher sales volumes. In addition, SchlegelGiesse is investing from a position of strength into automated assembly and foam seals capacity for future periods.

Year-on-year pricing effects on their own suggest FY22 should show revenue growth over FY21 and volumes are also likely to show growth, expected to be in low single-digit percentage points. So the task is to retain the excellent margin performance delivered in FY21 and perhaps improve it, although the upside is seen as more limited than in North America. Russia represented c 1% of group sales in FY21 inferring that it is c 5% of International division sales. The exposure of the Italian and German banking system to Russia may have some impact on domestic economic growth at some point, but this remains to be seen.

Strong underlying demand from the residential repair, maintain and improvement (RMI) market was tempered at divisional level by exposure to commercial building1 segments (around one quarter of sales), which were soft. On a like-for-like basis,2 UK/Ireland revenue rose by 5% compared to FY19; taking into account a 15% reduction in commercial sector sales, this suggests that residential sector revenues rose by almost 8% in FY21 versus FY19.

For the division as a whole, sales growth was skewed towards the first half, which increased by 7% against H119, inferring that second-half progress was in the low single-digit percentage range. There are several factors to take into account here:

The pattern of profitability followed revenues with EBIT ahead by 5% in H1 versus H119 and up 1% at the full-year stage. Supply chain challenges were a feature throughout the year and the pass through to higher selling prices occurs with a lag, explaining why like-for-like EBIT progress was slightly behind that for revenue in both half years as input costs continued to rise. Note that the reported divisional margin rose by 110bp to 14.0%, its highest level since 2016, partly due to the sale of the loss-making Ventrolla business. On a like-for-like basis, EBIT margins were down by 50bp for the continuing businesses; given the upward COGS pressure and commercial sector weakness, this still represents a very creditable performance in our view.

While supply chain management was the key operational issue in FY21, ERA continued to develop new product lines in both residential and commercial sub-sectors. Moreover, the three companies that came together to form Access 360 are moving to a common system, a logical step from both internal (finance, operational co-ordination) and external (marketing combined offer) perspectives.

We expect input price and supply chain pressures to continue in FY22, although they should be more manageable due to steps taken in FY21. Assuming no further major or sustained upward cost moves, margin recovery from higher selling prices should follow. The exceptional market growth over the last 18 months is unlikely to continue at the same rate, although we believe residential RMI spend will remain well supported. Tyman operates in different product segments but we note that Genuit and Eurocell recently commented on an improving outlook for the UK commercial sector.

Tyman ended FY21 with £91m net debt on a bank covenant (pre IFRS 16) basis, comprising c £58m cash and c £149m bank borrowings, having started the year with c £99m on the balance sheet. In broad terms, two-thirds of the £9m year-on-year reduction resulted from net cash inflows and one third arose from a positive FX translation effect.

Pre IFRS 16 EBITDA of c £104m converted to c £68m at the operating cash flow level on the same basis. A total absorption of c £34m into working capital over the year was dominated by the £54m inventory investment. A combination of a low start-year position, increased activity levels and price inflation all contributed to this as did a sensible strategic decision to raise stock levels to provide a buffer against ongoing supply chain strains. The total investment here was part funded by increased payables (c £29m uplift), while receivables understandably also rose overall (c £9m outflow), after a small reduction in H2. Otherwise, we note that pensions cash payments stepped up to almost £3m. Lastly, it is worth commenting on the marked reduction in exceptional cash flow leakage over the last couple of years, which have been very challenging from a business perspective. The major footprint changes have been completed now and as mentioned earlier, the cost of operational line moves was absorbed above the line in FY1.

Net bank interest costs (c £6m) have been trending down with the group net debt profile, while cash tax payments (c £18m) have moved in the opposite direction as profitability has risen. There was also a step up in net capex (to c £20m, 1.6x depreciation/internal amortisation, roughly three-quarters on tangible assets, one-quarter on intangibles) after a couple of relatively subdued years. There was an element of catch up here and the initial budget was actually higher than the actual cash outflow; no fixed capital projects were highlighted but the start of a multi-year ERP system implementation was the main driver of spend on intangibles.

After the above line items, free cash flow (pre IFRS 16) came in at almost £24m, of which c £16m was applied to the resumption of cash dividend payments (ie the FY20 final and FY21 interim). The net cash impact of IFRS 16 leases in the year was an outflow of just below £2m. For the record, IFRS 16 leases recorded on the balance sheet at the year-end were c £55m, the majority of which are non-current.

Cash flow outlook: Core net debt has more than halved over the last three years and stood at 0.9x EBITDA generated in FY21 at the end of that year. Moreover, on our estimates we expect Tyman to generate between £25m and £38m net cash in each of the next three years on a rising trend, by the end of which the company would be ungeared. The borrowing facilities that were put in place during 20183 represent considerable headroom both now (including c £124m undrawn of its RCF) and obviously on an increasing level to the current 2024 term of these arrangements. Management commented with the FY21 results that additional group M&A resource was in place and an active pipeline is under review for all three divisions. High US market shares already suggest the other divisions, especially International in our view, are likely to have more deal opportunities. That said, where IP-led acquisitions that which facilitate improved access to developing, higher growth segments, and electronic home security is an obvious example here, North America could also benefit. No acquisition activity is assumed in our estimates.

Trading momentum at the end of FY21 carried over at the beginning of FY22. Recent events such as interest rate rises and the Russia/Ukraine conflict may have direct and indirect impacts on consumer behaviour in due course, so there is naturally more caution regarding visibility in and beyond H2.

Management guidance is for increased revenues and a broadly flat margin in FY22. At this stage, the former is likely to be dominated by higher average selling prices as input cost inflation is passed through to end customers. This is reflected in our revised estimates with a 5–6% increase in our group revenue expectations for FY23 and FY24, largely driven by uplifts for North America (c 7% in US dollar terms, or c 12% in sterling after a favourable FX adjustment). We have elected to take a cautious view on the rate of margin recovery in North America as supply chain issues were more acute there in H221 than elsewhere. Overall, we have modelled flat group EBIT margins over our estimate horizon just below 14% with the components also stable at individual divisional level.