Tyman — Focus on strategic progress and position

All three reporting divisions delivered increased profitability in FY18 through varying combinations of acquisition effects and underlying progress. Two of Tyman’s three divisions improved their underlying year-on-year revenue and profitability performances in H2, though the larger North American operation experienced some market pressures. Acquisition activity led to an increase in net debt – partly mitigated by good underlying cash flow – which stood just below 2x annualised EBITDA at the year end.

AmesburyTruth (FY18 revenue US$506m, EBIT pre-central US$83.1m, margin 16.4% -150bp)

The US newbuild housing market ran at a slower pace in the second half of the year, while its Canadian equivalent was flat overall. Against our estimates, AmesburyTruth’s (AT’s) revenues were in line though EBIT was c £2m (or c 3%) light, equivalent to c 70bp of margin. AT’s margins are normally higher in H2 but that was not the case in 2018 (ie 16% vs 17% seen in H1). Management comments did indicate that some costs tracked higher than previously expected, specifically healthcare, production scrap and freight. We suspect that the two latter points were inter-related and reflected production ramp-up issues at new facilities (similar but on a smaller scale to Juarez in 2017).

Underlying volume is said to have been flat for the year with top-line progress therefore generated by some year-on-year pricing pass-through effects. In sub-sector terms, commercial revenues grew faster than the underlying divisional rate (and to c 13% of AT overall) driven by a strong contribution from Bilco (access and egress hatches). Implicitly, residential volumes were slightly down and this is consistent with AT’s stronger presence with larger door and window suppliers who are more exposed to the newbuild market. Higher input costs in the early part of the year supported increased average selling prices. As divisional gross margins declined by 200bp (to 32.4%) we suspect that higher material costs were not fully recovered in the year, though the acquisition of Ashland Hardware may have also contributed to this outcome.

Ashland was part of the group for less than 10 months but implicitly delivered EBIT well ahead of its pre-acquisition year to December 2017 level (ie $8.25m) at an above divisional average margin. Since taking ownership responsibility, a Toronto facility has been exited using AT’s distribution capability in the vicinity and with light assembly activities consolidated into Ashland’s Monterrey manufacturing plant. Other integration steps taken included combining sales, marketing and product ranges and moving the acquired business onto AT’s own IT system. Based on capturing some of these early gains, Tyman’s original synergy target of $4m was raised to $5m (by 2020) but even before these are fully achieved, Ashland (acquired for c £73m) is on track to exceed management’s target acquisition ROCE of 15%.

The heavy lifting in the multi-phase footprint improvement programme, which started in 2015, is largely complete and collective actions to date yielded a maiden $1.7m benefit during the year. Ongoing manufacturing and warehousing facilities are now in place and limited incremental capex to complete the programme is required. That said, a further c $13m spending over the next two years is anticipated (taking the total net cash cost to c $37m) to generate the efficiency of AT’s capital base. The divisional target EBIT margin is unchanged at 20% and, in support of this, the majority of the planned $10m annualised benefit by 2020 from the footprint optimisation project is still to flow through. The incremental $8.3m on a base of c $520–530m revenue by 2020 would represent c 160bp of EBIT margin if retained. It is also reasonable to expect greater marketing and commercial focus backed up by a more efficient capital base. Expected incremental synergies from the Ashland acquisition (understood to be c $3.7m by 2020) also support margin improvement initiatives. In the near term, management planning for volume growth in 2019 and price increases in the order of 3–4% were put through at the beginning of the year. Undersupply in the US housing market remains a key macro driver, although rising interest rates and a forecast slowing in remodelling spending (to c 5% by Q419 according to Harvard LIRA) represent cautionary notes.

SchlegelGiesse (FY18 revenue €132.4m, EBIT pre-central €17.0m, margin 12.8% +120bp)

The SchlegelGiesse (SG) division does offer selected hardware and seals product ranges into the US and UK markets but substantially addresses the remaining international territories from its European headquarters through a combination of direct sales, distributor and agent relationships. Its manufacturing base is primarily in Europe, save for weatherseal facilities in Brazil and Australia and a hardware facility in China. In underlying revenue terms, year-on-year momentum improved as the 2018 year progressed and this in turn drove a strong EBIT margin uplift of 120bp on a reported basis to 12.8% (including +170bp y-o-y in H2 to 13.4%).

Based on management comments, we perceive that increasing emphasis on marketing the product portfolio’s breadth supported by high service levels with increasing efficiency is strengthening SG’s position in its markets and leading to share gains. Heartland European sales performances were generally positive with the odd exception and collectively grew underlying revenues by 6%, in line with the equivalent figure for the division as a whole. Individual country performances ranged from (unspecified) double-digit increases in some cases to small single-digit declines elsewhere. In addition, Reguitti (a complementary Italy-based interior and exterior door hardware supplier) made a four-month contribution to European sales, though these are excluded from our underlying commentary and the right-hand side of Exhibit 1. Elsewhere, growth in China was strong following distribution changes made in the prior year, although other Asia-Pacific markets together with the Middle East and Latin America saw patchy to soft demand for a number of different reasons.

Although it is difficult for us to assess externally, indicated share gains across a wide variety of markets suggest that SG is aligning its manufacturing footprint and distribution capabilities in an increasingly coherent and effective manner. While some local markets experienced lower revenues, SG appears committed to the regions outlined earlier and in the case of Asia-Pacific and the Middle East is actively putting in further resource to improve traction there. Overall, further SG progress is anticipated by management in 2019 and its previously stated target EBIT margin of 15% remains intact.

ERA (FY18 revenue £96m, EBIT pre-central £12.5m, margin 13.1% +40bp)

2018 was a busy year for ERA in markets that were generally unhelpful, though better in H2 than H1. In Q1, the move to a new divisional head office took place also involving the consolidation of two warehousing, distribution and light assembly sites. This i54 facility is now the focal point for divisional sales, marketing and new product development especially for residential repair, maintain and improvement, or RMI, product groupings (around two-thirds of annualised sales). The commercial segment (built around the acquired Howe Green, Bilco UK and latterly Zoo Hardware and Profab businesses) represents the other third of annualised revenues.

Management considers that its UK door and window market was down 4% over the year as a whole; given that H1 was down 8%, this indicates that year-on-year comparatives improved and moved into positive territory in H2. ERA’s underlying trading pattern mirrored this and the small revenue decline – with price increases not quite offsetting lower volume – suggests small market share gains overall. Within its market channels, OEM volumes were slightly down while those through distributors were approximately flat. In both cases, the equivalent outturns in value terms were flat and modestly positive respectively, factoring pricing uplifts. Underlying profitability also improved modestly in H2, most likely reflecting better input cost recovery and benefits from site consolidation flowing through.

The in-year acquisition of Zoo Hardware (a Carlisle-based supplier into the distributor and commercial channels) was the primary driver of headline divisional progress. It maintained the c 11% y-o-y growth rate seen at the interim stage (ie versus the pre-ownership period) at the full year stage and, we estimate, delivered above-average EBIT margins to make a material contribution to the divisional outturn from just over eight months of ownership. The smaller Profab (interior access panels and steel and riser doors, acquired in July) also chipped in and helps to build out ERA’s commercial Access Solutions offering. Sales into this sub-sector tend to be more project-oriented and, hence, subject to lumpiness and timing variability and, as a result, revenues here were slightly below the prior year.

During 2019 to date, ERA has expended its existing electronic security product offering (ERA Home Smartware) with the acquisition of Y-Cam Solutions, a cloud-based security system platform provider for the domestic market. The initial consideration was £1m but the capped three-year earn-out up to £10m indicates prospective growth rates in this space. Otherwise, management has maintained its medium-term sustainable EBIT margin target of 15% for this division. Notwithstanding a fairly flat near-term UK residential market outlook and potential Brexit uncertainty, further operational benefits from i54 together with acquisition momentum suggest that ERA will continue to do relatively well in 2019.

Net debt increased by £46m over the course of 2018 to £209m at the year end. Of this movement, c £12m related to adverse year-end FX translation of overseas funding.

On our definition, underlying operating cash flow (before pension and exceptional cash outflows) of c £95m was £17m above the prior year level; higher EBITDA profitability explained c £7m of this and a much smaller working capital outflow the remainder (at £3.9m in 2018). Inventory investment was around half the level seen in 2017 while the creditor movement switched from an outflow to an inflow. Non-trading cash outflows of c £10m were at a similar level year-on-year in 2018 with the majority relating to restructuring activities with smaller amounts for M&A and pensions cash contributions. (The net restructuring cash movement was somewhat lower, noting that c £3.5m of exited property disposal proceeds were received in the year, which we recorded under fixed asset sales/net capex.)

Cash interest and taxation payment outflows were both slightly below their P&L equivalents. Gross capex at c £17m was marginally above the 2017 level and compared to c £14m depreciation and amortisation (of own intangibles) in the year. Spend increased in AT and SG, while that for ERA stepped down as the cost of its new facility was substantially incurred in 2017. As mentioned above, property disposal receipts netted capex spend for 2018 down to £12m. After all of the above items, Tyman’s 2018 free cash inflow was c £52m (or c £57m underlying).

The cash acquisition consideration paid during 2018 totalled c £106m, comprising Ashland (c £73m), Zoo Hardware (c £14m), Reguitti (c £14m) and the remainder, net of cash acquired, was on Profab. (An additional £1.4m shares were issued as part payment for Zoo, where there is a similar amount of deferred consideration.) This M&A activity was partly funded by c £47m new equity funding. A small dividend uplift and the increased number of shares in issue led to higher cash dividend payments in 2018, to around £22m.

Cash flow outlook: Year-end net debt to 2018 EBITDA was just above 2x on a reported basis or just below 2x on an annualised basis (ie allowing for acquisition full-year effects). We anticipate that this multiple will decline to c 1.6x by the end of 2019. This is despite the higher AT operating exceptional spend flagged earlier. Including this we project positive group free cash flow of £56m in 2019 – more than twice our expected cash dividend payment – rising to almost £70m in 2020 and a little more beyond that. IFRS 16 accounting effects from 1 January 2019 (see below) will inflate both balance sheet debt and P&L depreciation charge/EBITDA but banking covenants will continue to be calculated on the pre-IFRS 16 basis (so-called frozen GAAP).

Slowing economic growth globally and in Tyman’s primary trading regions is the widely reported backdrop narrative at the beginning of 2019, overlaid with some cross-border trade uncertainties. Tyman believes that it is not unduly exposed to the latter risks, being either outside current tariff focus areas and/or with an ability to manage its supply chain to manage potential short-term disruption.

Our pre-results estimates were slightly above consensus and, having trimmed margin expectations in AT, we believe that we are now more in line. This EBIT reduction is partly offset by lower expected finance costs, leaving our earnings estimates for FY19 and FY20 down by 5.5% and 2.6%, respectively.

Note that we expect 2018 results to be restated for IFRS 16 – Leases during the course of 2019. Management’s illustrative analysis indicates that this will result in a c 5.5% reduction in reported 2018 underlying EPS and a 90bp reduction in ROCE (to 12.5%). The former effect is a result of higher combined depreciation and interest charges (versus the lease cost previously), while ROCE dilution reflects a change to deferred lease treatment.