Tyman — Strong end to FY20, positive start to FY21

In a COVID-19 affected trading year, Tyman’s revenue and EBIT only declined by c 6% on a like-for-like basis in FY20. Strong momentum in the United States as 2020 drew to a close resulted in PBT being over £5m above our reinstated estimates in October and £3.2m higher than our upwardly revised December estimates. In addition, core net debt (pre-IFRS 16) was c £20m lower than we had anticipated at c £99m (c 1.1x EBITDA generated in the year) and over £60m below the end FY19 level. Tyman is also resuming dividend payments, having declared a 4.0p FY20 final DPS. After taking into account FX headwinds, our PBT estimates have increased by 5–6% and by slightly more at the earnings level.

With different geographic exposures, supply chains, local market responses to the initial COVID-19 outbreak and subsequent governmental management strategies, Tyman’s three divisions were unsurprisingly affected in different ways. As a backdrop to the following divisional commentaries, Exhibit 2 highlights the scale of revenue decline experienced in each case in Q2 and variations in the shape of recovery across Tyman’s markets.

Although H1 (especially Q2) trading in North America was less affected by COVID-19 compared to Tyman’s European markets, the impact was still significant with revenue and EBIT down by 12% and 22% respectively like-for-like. This was substantially recovered in H2 – including +11% Q4 l-f-l revenue growth – such that EBIT for the year as a whole was marginally ahead year-on-year in local currency terms. Moreover, we note the bounce back in EBIT margin to 19.5% in H2; while the trading year typically has an underlying second half bias, this is the highest EBIT margin generated in North America since 2017.

In early 2019, the new group management team identified residual operational issues relating to a major footprint optimisation programme undertaken by their predecessors. Specifically, production efficiencies at Statesville were not at the desired levels, compounded by a problematic start-up of a new seals line (replacing an older product/line in a different, exited location). This affected profitability both directly and indirectly through related customer churn, and the annualised effects fed into FY20 also. The FY20 results cited a number of improvements at Statesville, and the divisional margin performance pattern, together with a degree of success in winning new business suggests that the actions taken have been effective. We should also note that costs associated with safe COVID-19 operating environments across facilities together with some temporary relocation of production lines (especially from Juarez) to sustain service levels were taken above the line in the FY20 results. There were clearly short-term savings in other discretionary areas (including marketing and travel) and the net financial benefit was in the order of US$3–4m.

In addition to the discrete items mentioned above, progress has been made more widely with initiatives to hone the product portfolio to more clearly define the customer offering and further finetuning of internal supply chains and component flows across the US footprint. Improving production efficiency and improved supply chain resilience are seen as key elements in supporting customer service excellence and business development activities. These were strong messages from the new group management team when coming together in H119; it inherited some work-in-progress in this area also. Progress has clearly been made – with costs substantially absorbed through trading performance rather than exceptional items – and a continuous improvement approach appears to have been adopted. We should therefore consider the process to be an ongoing one and this will inform future product and range development.

Outlook: Management cited current projections for the number of single family residential and non-residential commercial building starts to increase by mid to low single-digit percentage points over 2020 in the United States, with greater confidence in the first half of the year and more uncertainty as the year progresses. The re-modelling market is expected to grow by a similar percentage; Harvard’s LIRA projects the first and fourth quarters of the year to be the most positive. The Canadian residential market outlook is said to be mixed. In US dollar terms, our FY21 revenue growth expectation of 4.4% is consistent with these market comments, although a year-on-year FX headwind currently pares the sterling equivalent back to more marginal progress. Beyond the current year, we have assumed revenue growth of 3%, but in each year momentum with new business wins could provide share gains and relative upside. At this stage, our group EBIT margins are similar to that achieved in FY20 (being just 50bp higher beyond FY21); this indicates a sustained improvement versus the two pre-COVID-19 years from management actions taken but is also conservative set against reported levels (at or above 18%) between 2015 and 2017. In the near term, success in passing through input cost inflation will influence the FY21 outturn.

This division had relatively weak trading momentum coming into FY20 and its leading market exposures in Italy, Spain and China meant that SchlegelGiesse was the first to experience regional and country pandemic lockdowns, which led to sharper revenue declines in Q120. A good revenue bounce back in Q3 did not appear to follow through into the final quarter of the year, which was comparable to Q419. This trading pattern was distorted by planned distribution changes in China and the inference is that underlying market demand was more balanced between the final two quarters of the year. There was in fact a good EBIT margin rebound to 12.5% in H2 overall (from 9.8% in H1), a level that has only been materially bettered in H218 as far as we are aware.

Management had already flagged an intended exit from a Singapore distribution hub and a move to an export model – and away from local manufacturing – in China and Australasia before the COVID-19 outbreak and these actions were successfully executed in the first half of the year. We see this as part of a resource allocation strategy to address the division’s larger markets more effectively. SchlegelGiesse probably has the broadest product portfolio across the three divisions with hardware for wood, aluminium and PVCu doors and windows – and for residential and commercial use – and a higher proportion of seals revenues. So, following a full integration of Reguitti (acquired in 2018), the new ‘All in one’ marketing strategy and website encapsulate the divisional one-stop shop proposition for its customers. Selective range extensions have been made particularly in more value oriented, lower price point subsectors where competition has been noted in the past.

Outlook: As ever, it is difficult to generalise across this division’s broad market exposures, but management messaging perhaps indicates more market uncertainty here beyond Q1 than elsewhere. We expect SchlegelGiesse to intensify its focus on core markets through new product launches and business development initiatives. In this way, the division should be able to capitalise on footprint/business model changes undertaken in FY20 to the benefit of profitability. Our estimates factor in further revenue recovery in excess of 5% in FY20 followed by +2–3% in the two subsequent years and EBIT margin uplifts of c 100bp this year and next based on a rebalanced, lower fixed cost base.

A good start to FY20 in revenue terms was masked by the onset of COVID-19 restrictions prior to the end of March, which flattened Q1 like-for-like overall. This division then experienced the sharpest revenue contraction (to around half of Q219 levels) in second quarter trading. In H2 – with the exception of an 8% y-o-y uplift in September – monthly sales were comparable to their prior year equivalents according to previously published data. There would have been some sub-sector variation behind this with digital channels (pure online and click/collect) and DIY retail performing better than traditional trade ones.

In the residential sector (around two-thirds of divisional sales), ERA’s exposure is heavily weighted towards the repair, maintain or improve (RMI) sub-segment. For this reason, we might have expected a firmer H220 trading performance; industry supply chain challenges and greater restrictions on tradespeople visiting end customer premises (versus, say more DIY-oriented products) may have contributed to this. Some dilution of underlying progress may have also come from more sluggish demand pull through from the new housebuilding and social housing sectors. Ventrolla (a standalone, sash window renovation/installation business) was sold in November realising nominal proceeds. Commercial sector door and window hardware and Access 360’s access products account for the other third of ongoing divisional sales. After a hard lockdown on building sites in Q2, market activity levels recovered gradually in H2 and project phasing would have influenced the type of materials required to progress or complete work. Overall, reported H2 divisional revenue recovered well from the H1 trading shock and reached the same level as H219. That said, the EBIT margin did not rebound in the same way and broadly matched the 9.5% achieved in the year as a whole (over 300bp lower year-on-year). Management cited both P&L investment in further developing its Smartware (cloud-based security solutions) range and a higher bad debt experience and UK furlough monies were repaid in H2 with a combined margin effect at or above 200bp.

Outlook: Residential RMI activity is said to have good momentum at the beginning of FY21, which chimes with other sector commentary. Quoted new housebuilders are also sounding optimistic, though the number of new starts is expected to be below 2020 levels. Commercial sector demand is more difficult to call. It may take time for new project confidence to rebuild but Morgan Sindall has indicated that its fit-out work prospects are strong with activity to renew/refresh spaces ahead of significant returns of staff to workplaces post pandemic. Changing office space requirements could also lead to relocation activity – some of which is already apparent – and fit out work. Given that the UK/Ireland commercial portfolio is weighted towards building interior products (including wall/floor access panels and covers, riser doors, hardware) this may be why its project pipeline is described as strong. Our estimates now exclude Ventrolla and this provides a year-on-year headwind to revenue progress in FY21 but also an EBIT tailwind. We currently project revenue growth in the order of 4% in each of our estimate years and faster EBIT progress as margins rebuild to historical levels by FY22.

Tyman ended FY20 with core net debt of c £99m, a year-on-year decrease of c £63m (after c £1m adverse year-end translation effects). Exposure to IFRS 16 lease liabilities also reduced to c £54m, which was 10% lower than end FY19 levels.

EBITDA was c £5m below FY19 levels consistent with the EBIT movement shown in Exhibit 1, but the absence of the separately disclosed cash exceptional items (ie restructuring and provision movements) more than compensated for this dip. FY21 saw the usual working capital pattern (ie an H1 outflow and H2 inflow) though the movements were less pronounced than the prior year given that activity levels were well below normal at the end of H1, while strong US trading in Q4 pushed some receivables into the new financial year. For the year as a whole, the group working capital inflow was c £8m. As a result, available operating cash flow of £110m was almost at the same level as seen in the prior year.

Other cash line items largely exhibited expected outflow levels, with lower bank interest (from lower average debt and finance costs), cash tax approaching but slightly below the underlying P&L charge for the year and net capex only slightly below FY19 (but more H2 weighted). Together these categories absorbed c £37m of cash (£3m lower year-on-year) leaving group free cash flow of £73m in FY20.

IFRS 16 lease repayments of just over £6m was the largest single remaining cash outflow item with a further £2m accounted for by share purchases and deferred consideration (as seen in H1). The absence of any cash dividend payments in FY20 of course retained £20m+ cash within the business based on pre-COVID-19 payout levels.

Cash flow outlook: End FY20 net debt to EBITDA was 1.1x. Based on our revised estimates (see below) and absent any material M&A activity, we continue to expect positive cash generation and further leverage reduction to very modest levels by the end of FY23. In the new financial year, we expect to see some investment in working capital, especially inventories to rebuild from relatively low end FY20 levels. Some catch up capex has also been flagged with spending likely to be more than double FY20 levels including the first phases of new ERP system implementation. In addition, we expect that resuming dividend payments – starting with the FY20 final – will absorb c £14m cash in FY21, with a further normalisation in FY22 under the company’s progressive payout policy.

In headline terms, our group revenue estimates for FY21 and FY22 are effectively unchanged with c 2% EBIT uplifts for these years. This is the net result of larger underlying upgrades being partly offset by FX headwinds (of c £15–20m revenue and c £3m EBIT) compared to our previous estimates. Note that we had previously factored in some adverse FX movement based on rates prevailing towards the year end, so the actual year-on-year headwind for the company is greater than this updated adjustment (now using US$1.3950/£). We have also introduced FY23 estimates for the first time. Following these revisions, our estimates show modest earnings progress in FY21 – which we think is consistent with the cautious management outlook statement regarding H2 – with incremental progress in the following two years (including FY23 for the first time).

When the current executive Board members were appointed in 2019 (CEO Jo Hallas in April, CFO Jason Ashton in May) a period of focus on improving the existing business portfolio organically was clearly flagged. Ironing out some inherited teething US footprint issues was an important early challenge and then the onset of the COVID-19 pandemic at the beginning of and throughout 2020 have taken the attention of investors more than the underlying strategic direction we feel.

While Tyman’s re-set ’Focus, Define, Grow’ strategy was formally introduced with the FY19 results (5 March 2020) first phase actions addressing operational performance were already under way and planned for 2020. By the end of FY20, in North America a small Fremont facility had been exited and hardware production efficiencies had improved (both at Statesville and through some other line relocations). As mentioned earlier, the International division ceased some regional manufacturing activity (in China and Australia) and also closed its Singapore distribution hub, sourcing and supplying products from European operations in their place. Towards the end of FY20, disposal of the non-core Ventrolla sash window business in the UK represented a further discrete footprint change. Taken together, these are tangible examples of increased business strategy ‘Focus’ and other actions to more fully integrate previous acquisitions – through portfolio alignment, business development and common platforms – are further ongoing workstreams.

Sustainability – across employees, operational performance and product offering – features in each of the three strategic pillars. We expect FY21 to have increased emphasis on the ‘Define’ element of strategy which is designed to extract more group synergy benefits through increasing divisional linkages. Some examples of this include shared best practices, lean manufacturing techniques, new product development and goal alignment. A capital markets event is currently being planned for May and this would be a logical platform to elevate strategy - its direction, implementation and perhaps some financial targets – in our view. This would also provide some useful signposts and context for our estimates out to 2023.