Tyman — Update 27 April 2016

In mixed market conditions, Tyman delivered increased PBT (+7.9%), EPS (+3.4%) and DPS +9.4%, c 2.2x covered) and a reduction in net debt to c £82m in FY15. Management’s focus on continuous improvement and corporate development will be clearly visible again in FY16 through the execution of plans to optimise the footprint of its three divisions including, in the case of Schlegel, the integration of a sizeable acquisition (Giesse, March 2016).

North America – AmesburyTruth (AT): Sterling weakness against the US dollar had a beneficial translation impact on reported results throughout the year, contributing to increases of 4.4% and 15.9% respectively in revenue and EBIT. In US dollar terms, revenues were flat but after allowing for an exit from non-core extrusion activities (Ontario, CA site closed, retained lines relocated to Cannon Falls, MN and Fremont, NE), underlying progress from continuing lines was +1.8% in FY15. H2 started with a good order position (reported as +11.9% as at the end of June); implicitly this did not follow through in the remaining months of the year. While trading was perhaps not up to earlier best expectations, AT still made good y-o-y progress again in H2 despite flatter market conditions. Gross margin improved by 190bp to 32.5% with a bigger y-o-y uplift achieved in H2 compared to that in H1. Exiting non-core lines will have contributed to this but there were also progressive pricing benefits in the year, particularly from action taken on non-standard line items. In sales development terms, progress was made with larger customers, which may also have reflected their relative market performance. We note that virtually all the gross margin improvement was retained at EBIT level (margin +180bp to 18.3%) and that both half years saw a y-o-y EBIT increase in excess of $3m. This is significant as the tail of the Truth Hardware integration benefits (c $3m incremental in FY15, making c $8m annualised in total) were reported in H1. This means the H2 increase – on fairly flat revenue – was generated entirely organically.

Continuous improvement is a well-embedded characteristic of Tyman companies and a number of operational initiatives were in evidence in AT in FY15. The previously announced new ERP system is now in the implementation phase with three manufacturing sites moving across in the year and total spend on intangible assets of £2.6m. Additionally, AT again invested in capex ahead of depreciation (of £7.3m and £6.0m respectively) with selective process automation to improve factory efficiency and this process is expected to be ongoing. Two further manufacturing sites are to move across to ERP during FY16 and a further site closure, at Canton, SD is scheduled to do so before the end of the year. The bigger picture here is the strategic footprint change programme (as announced in March 2015) that is ramping up now. Recall that this project is designed to deliver at least US$10m annual restructuring benefits by FY20. Tyman has now identified (but not specified) AT’s intended four manufacturing centres of excellence, two of which are understood to be on existing sites with two newbuild facilities being planned. The first phase will be carried out in FY16 with a flagged cash cost of US$11.5m and expected Q117completion. P&L benefits are expected to start to accrue in FY17, being in the order of US$2m in that year, building progressively thereafter.

UK – ERA (formerly grouphomesafe): The disposal of EWS – a non-core reinforcer business – in September distorts relative performance. Even allowing for this (eg a part year, £0.4m lower EBIT contribution compared to £1.7m in FY14) ERA’s EBIT from continuing operations was c £1m lower at £10.3m on continuing revenue of £66.7m in FY15. UK operations started H2 with a flat order book and, similar to other companies in the UK RMI space, ERA experienced tougher trading conditions as the half developed. While H1 saw a mix driven y-o-y uplift in EBIT, this was less evident in H2. The UK basket of materials costs declined in H2. In part this was due to relative sterling strength, although this also benefitted Europe-based exporters to the UK. Management estimates that FX had a £1.5m overall negative impact on ERA’s reported profitability y-o-y. In market sector terms, ERA grew revenue with OEM customers and through Ventrolla’s sash window renovation business. The laggard then was the distribution segment (c 14% of ERA sales) where the share is understood to have slipped in the year. We believe that there have been staff changes servicing this channel in recent years which has been a contributory factor here. ERA has externally recruited senior staff in a number of areas of the business and, by the end of FY15, some new distribution listings in both the merchant and DIY channels had been secured.

Having launched a new e-commerce platform in Q116, OEM customers are now being migrated across to electronic ordering. This is designed to reinforce ERA’s product offering and service proposition as well as improve the company’s administrative efficiency and reduce cost to serve. Some consolidation of support functions was undertaken in FY15 (c £0.9m exceptional cost partly offset by property provision release) as a precursor to moving three operations – ERA, Fab & Fix and warehousing space on to a new, purpose-built, mixed-use facility in the West Midlands costing c £4m and scheduled for H117. The expected benefits of the consolidation have not been quantified yet. Separately, Ventrolla will be moving to larger premises during FY16. Tyman also announced the acquisition of Response Electronics on 8 March for initial consideration of £0.9m. This distribution business broadens ERA’s offering, enhances the company’s development of electronic and electromechanical products and fits in with an established cycle of new product introductions

Other – Schlegel International: Mixed market conditions have been a feature of this division which is likely to be the norm given the diversity of geographies served. Individual countries also displayed variable quarterly y-o-y performances over the course of FY15 which is smoothed out somewhat at the divisional level. Within Europe, Poland and Norway both achieved double digit revenue growth in FY15 and were generally encouraging throughout the year as was Australia. At the other extreme, Russia and Brazil experienced very difficult local market conditions, though the latter is understood to have made a good profit contribution having acquired Vedasil and combined two sites on one in FY14. Our other observation is the improved performance in several of the other European countries in the second half experiencing more stable trading environments. Despite the overall underlying revenue decline of 4.6%, Schlegel achieved a small increase in profitability on the same basis. Increased hardware sales are understood to have contributed to this as did the closure of a Belgian facility at the end of 2014. We believe there would also have been some business disruption relating to the planned closure of Schlegel’s Barcelona facility towards the end of the year. Management commented that 2014 profitability was affected by bad debt provisioning so the true underlying profit performance is somewhat obscured. Our sense is that the business is now better positioned with regard to its product offering and has a more appropriate cost structure for the existing operations having taken steps to exit marginal locations.

The most significant development within Schlegel happened after the year end with the acquisition of Giesse, announced along with the FY15 results. We cover this c £61m EV deal in more detail later but, on an annualised basis, it lifts divisional revenue to almost £100m with an EBIT margin around double that reported for FY15.

Tyman ended FY15 with IFRS net debt of £81.6m (gross borrowing of c £112m and cash of £30m), a reduction of just over £7m over the year. The actual cash movement was a £12.5m inflow, partly offset by adverse translation effects on US$ denominated debt. Note that the acquisitions of Giesse and Response were made after the year end and the consideration paid therefore is not included within these figures.

Excluding exceptional cash items, trading cash inflow was a very creditable £55m representing a conversion rate in excess of 90% compared to EBITDA. This was similar to FY14 but on a higher level of profitability and slightly lower revenue base for continuing operations. In working capital terms, there was a smaller outflow in FY15 compared to the prior year – arising entirely in the inventory line, where there was a small inflow – which to us was consistent with group revenue development, a reduction in the number of sites and some timing effects at the end of 2014. Below this, Tyman saw expected increases in net interest, tax and dividends (full year bank facility effects, higher profitability and paid DPS respectively). Net capex was slightly higher y-o-y at almost £11m, representing 1.3x depreciation and amortisation (of internally created intangibles). The spend on tangible assets was slightly below our anticipated level though we believe that this was down to timing and the expectation remains for a significant ramp up for the next few years. Including all of the above items, we estimate that Tyman’s underlying free cash flow was in the order of £29m in FY15, sufficient to cover cash dividend payments twice.

Other than the above, Tyman incurred a net c £2.3m cash outflow on non-trading items, comprising:

At the end of FY15, Tyman had a committed £180m multi-currency RCF in place to June 2019 plus a £60m accordion agreement with the same duration. Additionally, the company had US$100m private placement debt in place with terms extending to 2021 and 2024. The acquisitions of Giesse and Response for a combined c £62m consideration were funded from existing cash and committed borrowing facilities. Adjusting for this lifts the pro forma FY15 year-end net-debt position to c £144m, which is just over 2x our projected EBITDA for FY16. The current financial year will also be characterised by a material step up in cash outflows relating to corporate projects and in the footprint re-shaping in particular. Our model includes:

Hence, we expect the total group capex (including core spend) and exceptional cash outflow to be in the order of £40m in FY16; spend here is subject to progress across a range of projects and guidance should be considered an upper estimate for the current year in our view. With a further c £4m share purchases indicated also, we see an increase in net debt from the indicated pro forma figure to c £156m by the end of FY16. (Note that the end H1 position will swing higher than these two end points due to normal seasonal working capital effects.) Nevertheless, our projections suggest FY16 net debt: EBITDA of c 2.3x and interest cover of 8x which are well within banking covenants (of less than 3x and more than 4x respectively). Our period-end net debt projections in all years will be influenced by the timing of project spend, however.

Schlegel’s footprint realignment actions to date have been more site-specific and less all-encompassing than in the other two regions. The acquisition of Giesse in March 2016 was strategically important and significant on several levels especially product range, geographic presence and sector exposure. We have outlined the group cash flow and financing impacts above and we now consider the implications at divisional level also.

Company description: Based in Bologna, Giesse is a design-led manufacturer of a range of branded door and window hardware (ie handles, hinges and locking mechanisms) primarily for aluminium systems. The business was established in 1965 and has developed in a number of markets outside Italy. Giesse’s regional and market split is shown in Exhibit 2 and we believe it has had a presence in all of the countries listed for at least 10 years.

Giesse’s primary manufacturing facility is in Bologna with a second in Beijing (a third, in Brazil, was closed during 2014). The other locations are distribution hubs which, in some cases, also undertake light assembly and packaging functions.

Business fit: Until now, Schlegel revenues have been dominated by pile and foam sealing products in its markets, with less than 10% coming from hardware supplied by other group companies. We estimate that, on a full year basis, around two-thirds of sales will now come from the hardware category (AT and ERA are already in excess of this.) Additionally, Giesse’s focus on aluminium systems complements the existing group strength in timber and PVCu. This system type is more commonly associated with commercial building applications, a segment which accounted for c 23% of Giesse’s FY15 sales. Hitherto, Tyman group companies have had limited exposure outside residential, though this segment is being targeted for growth in the US.

Synergies: The significance of the Giesse deal to Schlegel is evidenced by the relocation of its divisional head office functions to Bologna. We are aware that the enlarged business already has combined marketing materials available and see scope for multiple synergies in a group context.

The chairman and largest shareholder of Giesse will remain as a consultant with the business for an unspecified period to support the business integration.

Financials: On a cash-free, debt free basis, Tyman is paying €78.9m (or c £61m) for Giesse of which up to €1.5m (£1.2m) is deferred to be paid in May 2018, subject to business performance. This compares to FY15 revenue and adjusted EBITDA of €80.8m and €10.8m respectively. Based on these metrics, Tyman’s initial consideration represents almost 1x revenue and c 7.2x EBITDA. Giesse generated an adjusted operating margin of 10.4% in the year.

Following the acquisition, Tyman intends to implement an integration plan over the next 12-18 months to realise some of the synergies outlined above (eg reducing costs, sharing best practice and fully aligning sales and marketing). The anticipated cost to do so is c €4m for annualised benefits of ‘at least’ €4m. Tyman expects to achieve this annualised run rate from FY18. Factoring in this uplift for illustration, suggests that the c 7.2x EBITDA entry multiple – assuming that the deferred consideration element is paid - would be reduced to nearer to 5.3x FY18 EBITDA.

In general, management comments on 2016 market conditions were largely a continuation of those seen in 2015. Tyman’s primary focus in its regions is on residential RMI spending and expectations are for modest progress in the leading US and UK markets, with newbuild somewhat better. Weak Canadian demand looks set to be a drag on AT progress while Schlegel is likely to again see a variable mix of activity levels across its markets. Hence, footprint restructuring, the integration of acquisitions and operational improvements made through investment will be the key drivers of group progress in FY16 and, more so, in FY17.

Compared to our previous estimates, we raised our underlying (ie pre-acquisition) PBT expectations by c £0.9m for FY16 leaving FY17 unchanged and introducing a new FY18 estimate. The regional composition of these changes is:

Including the acquisitions of Giesse (Schlegel) and Response (ERA) enhances these underlying PBT estimates by c 5% in FY16 and c 7% in the first full year of ownership in FY17. Specifically, FY17 includes revenue and EBIT contributions of:

All of the above changes are reflected in our estimate revisions in Exhibit 2.