Tyman PLC

LSE:TYMN

Earnings Call Transcript 2021-Q2

[Operator]

[Audio Gap] Webcast and conference call. At this time, I would like to turn the conference over to Jo Hallas, CEO. Please go ahead.

[Jo C. Hallas, CEO & Executive Director]

Thank you, and welcome, everyone. I hope you are all well. Thank you for joining Jason and me today for Tyman's interim results webcast. We'll start by taking you through the slides. After which there will be some time for Q&A. Just as a reminder, for those of you who have joined in through the webcast, for questions, you will need to dial in through the audio conference.So turning to Slide 3 and our highlights for the first half of 2021. Like-for-like revenue growth for the period was 10% ahead of 2019 due to both very strong market demand and gains in market share. This demand is driven by favorable long-term structural drivers as well as new and accelerated trends arising from COVID. After many years of underbuilt, housing starts in the U.S. and the U.K. are at their highest level since the recession in 2008, '09, supported by increased mortgage lending and lower interest rates. As a result of the pandemic, the consumers are spending more time at home, have higher household savings and are prioritizing expenditure on the home.Fiscal stimulus such as the Sand Duty holiday in the U.K. and the super bonus incentive for home improvements in Italy have also supported housing market activity. The strong demand, together with benefits from pricing actions and self-help initiatives, delivered 20% growth in like-for-like adjusted operating profit against H1 2019. This pleasing performance exceeded our expectations and was achieved despite unprecedented industry-wide inflationary pressures and supply chain challenges. As you have seen across the industry, the speed and extent of the post-pandemic demand recovery that's led to various raw material availability issues and global freight disruption. And this has been exacerbated in the U.S. by a very tight labor market, all combined, creating challenges for production and shipping operations.We have taken steps to increase capacity and throughput, including expanding operating hours, increasing temporary labor and implementing various productivity improvement initiatives. We're also making a number of capital investments to structurally expand capacity, and I'll come back to these later. We're working very closely with customers to best service demand and with our suppliers to secure inventories. In line with the rest of the industry, we've seen significant levels of inflation of commodity, freight, labor and other input costs. We've implemented price increases and temporary surcharges to recover input cost inflation, although with some customers' existing pricing mechanisms lead to a lag in recovery.The strong underlying performance led to an improvement in return on capital employed of 280 basis points against H1 2019 to 15.5%. This was also helped by lower average working capital levels and lower intangible assets. Our operating profit performance also resulted in leverage of 0.9x adjusted EBITDA compared to 2.2x in H1 2019. Finally, after pausing it during the pandemic, we're very pleased to have been able to reinstate the interim dividend at a level of 4p per share, representing a 4% increase over 2019 and reflecting the strong performance and confidence in the outlook.With that, I'd now like to turn over -- hand over to Jason for the financial review.

[Jason Ashton, CFO & Director]

Thank you, Joe, and good morning, everybody. Thank you for joining us on the call this morning. Turning to Slide 5, you can see the KPIs for the year. Reported revenue of GBP 312.5 million and adjusted operating profit of GBP 47.8 million have increased by 23% and 53%, respectively, against the first half of 2020. Compared to 2019, which provides a more normalized comparator, revenue is up 10% and adjusted operating profit is up 20% on a like-for-like basis. The operating profit margin increased from 12.3% in the first half of 2020 to 15.3%. I'll come on to talk about the drivers on the following 2 slides.Adjusted EPS of 17.1p is 72% higher than 2020 and 30% higher than 2019, reflecting the strong adjusted operating profit as well as lower interest charges. Return on capital employed increased by 470 basis points to 15.5% and 280 basis points versus 2019, largely as a result of the increase in operating profit but also assisted by the lower carrying value of intangible assets through amortization and the impact of foreign exchange on purchased goodwill. Cash conversion was 58% compared to 106% in 2020 and 62% in 2019 due to a higher and more normal working capital outflow and an increase in capital expenditure.As a reminder, 2020 also benefited from deferred government payments granted due to COVID-19.We are very pleased with our further reduction in leverage, which was 0.9x at the half year compared to 1.8x in H1 2020. This reflects the increase in EBITDA and lower level of net debt.Turning to Slide 6 now. We'll review the revenue evolution for the first half of the year. The significant increase in revenue is mainly driven by an increase in volumes of GBP 70.6 million due to the recovery from COVID-19 and strength in underlying demand. We have implemented total pricing increases of GBP 5.5 million through a general price increase of GBP 2.1 million and tariffs and surcharges of GBP 3.4 million in response to the input cost inflation pressures. On a reported basis, these benefits were offset by a GBP 16.2 million adverse foreign exchange movements and the disposal of the Ventrolla business in November 2020, which accordingly reduced revenue by GBP 1.5 million.These factors combined led to an increase in revenue from GBP 251.1 million in the first half of 2020 to GBP 312.5 million in the period.Turning next to the adjusted operating profit bridge on Slide 7. The biggest impact on our adjusted operating profit for the first half of the year was the volume increase with a drop-through to EBIT of circa GBP 26 million. You can see here the pricing actions totaling GBP 5.5 million are not yet fully recovering the materials and freight inflation of about GBP 7.8 million due to the impact of timing on pricing mechanisms. Labor cost inflation and other cost increases have impacted profit by GBP 3.8 million, and there was an effect of the reversal of temporary COVID-related cost savings of GBP 8.3 million. These cost savings included benefits of government job retention schemes of GBP 2.3 million, which was repaid in the second half of 2020, cancellation of the bonus scheme and curtailment of discretionary spend.Productivity improvements resulted in a GBP 6.3 million benefit, and the divestment of Ventrolla increased operating profit by 2% due to being -- due to it being loss-making. Currency fluctuations have slightly decreased operating profit by GBP 2.2 million. The net effect of all these was to deliver an adjusted operating profit of GBP 47.8 million, which is 53% higher than 2020.Turning now to Slide 8 for the divisional summaries. The performance has been strong in the first half of 2020 with revenues and operating profit up on both 2020 and 2019 across all 3 divisions. I will now take you through each of the 3 divisions in turn.The North America division had a very strong start to the year, with revenue up by 25% on a like-for-like basis against 2020 and 10% against 2019. This was driven by the positive momentum in the U.S. and Canadian housing markets as well as pricing actions and was, despite constraints, arising from the raw material and labor issues. The revenue growth, combined with benefits of the continuous improvement activities led to an increase in adjusted operating profit of 49% against 2020 and 16% against 2019.The U.K. and Ireland division also had a good start to the year with like-for-like revenue growth of 44% on 2020 and 7% on 2019, which is reflective of the strong residential market but was hampered by weaknesses in the commercial markets due to project delays, which significantly impacted the Access 360 businesses. Like-for-like operating profit is up 70% on 2020 and 5% on 2019 being impacted by higher freight costs. The International division has also performed very well with like-for-like revenue up by 45% on 2020 and 13% of 2019 with broad-based growth across the division's core market and particular strength in euro.The combination of strong revenue growth and favorable product and market mix has led to an increase in adjusted operating profit of 132% against 2020 and more meaningfully, 41% against 2019. The adjusted operating margin has also improved significantly to 15.8% at the end of June. Turning now to Slide 9, which shows the cash flow performance for the period. Operational cash flow for the period is GBP 27.6 million, which is 17% lower than 2020 as a result of higher and more normal working capital outflow and an increase in capital expenditure following deferral of expenditure in 2020.Moving further down the cash flow. Income tax payments have significantly increased to GBP 9.2 million. This was particularly low in the prior year due to payment deferrals granted by the U.S. and Italian governments in light of COVID-19. Net interest paid was GBP 2.2 million lower than 2020 due to the significant reduction in net debt and exceptional cash costs declined due to the completion of various footprint streamlining projects.The operating cash conversion has decreased from 106% to 58%, which is a much more normalized H1 level.In terms of financial guidance, we expect a moderate trade working capital outflow across the full year, in line with previous guidance given. Capital expenditure for the year to be slightly lower than previous guidance at GBP 18 million to GBP 23 million due to the level of operational intensity. Operating cash conversion will be between 75% and 85%, with a long-term target remaining at 90%.And finally, we have reinstated our progressive dividend policy and cover of between 2 and 2.5x.So finally, turning to Slide 10. We reiterated our capital-allocation policy, which is to grow free cash flow and reinvest for organic growth as well as for targeted M&A, shareholder returns and to maintain a balanced leverage between 1 and 1.5x EBITDA.And with that, I will now hand over to Jo for an update on our strategy execution.

[Jo C. Hallas, CEO & Executive Director]

Right. Thank you, Jason. I'll now spend a few minutes on our strategic progress. I'm conscious that we held a Capital Markets event very recently, where we covered the strategy in debt. So I'm not going to go into great detail here.Firstly, Slide 12 is just a reminder of our strategy. Our focus defined growth strategy is guided by our purpose, underpinned by our values and has sustainability at its core. It seeks to deliver margin expansion, sustainable growth, engaged people and a positive societal impact, thereby creating long-term value for stakeholders. Turning to Slide 13 then. We've continued to make good progress in executing our strategic plans in spite of the operational intensity. In terms of the focus pillar, the product part portfolio harmonization initiative in North America continues on track with the current focus being on the rationalization and repositioning of the sliding patio door and casement lock portfolios.Footprint work included various activities in support of optimizing the distribution footprint with consolidation to a single warehousing site in Dallas and the transfer of certain equipment to create space in the Sioux Falls facility underway. Benefits from the various initiatives to streamline operations completed over the last couple of years are also being realized as planned. In line with our plans to upgrade the IT landscape, we've also begun a multiyear program to progressively migrate to a single ERP platform for North America, allowing customers to place orders and receive shipments from a single point as well as enabling enhanced business decision support and other efficiencies. In H1, the ERP selection was completed, project team was put in place and good progress made toward developing the standard reference solution. The defined strategic pillar, which centers on building cultural cohesion across the group has continued to gain momentum with deployment of the new onetime and purpose values and code of business ethics now well progressed.Development of the time and excellence system has also continued now with a focus on IT and lean excellence in the period. The activities to grow market share have yielded positive results. Albeit operationally a challenging period because of the material freight and labor availability, we have worked very closely with customers, proactively engaging to best service their demand priorities. We've also taken several actions to improve productivity near term as well as structurally increasing capacity to meet both current and longer-term demand. This includes investments in additional urethane seal capacity, new hardware production equipment and further footprint work to optimize the network and improve resilience. Overall, we have performed well relative to competition. And this, in turn, has enabled us to win business in many of our core markets. This has included net customer wins in North America of around $1.9 million of annualized revenue. Channel expansion activities also continue to progress, including increased systems house partnerships in the international division, which is creating long-term business opportunities through development of bespoke or customized products. A series of new products were successfully launched in the period and a strong pipeline of launches is scheduled for the second half.I'll just touch on a few of these products pictured here at the bottom of the slide. So the image -- the first image on the bottom left is the new Pinnacle balance, which is designed to enhance performance, minimize SKU complexity for customers and reduce ROM in the -- reduce space in the window jam, enabling customers to add features or remove material costs from the window. This has achieved encouraging levels of early sales through development partners.The second image here is the innovative GOS Pull & Slide system, which combines the benefits of a lift and slide window system with a perfectly flush glass surface when closed, minimal framework and a new generation roller system with excellent load-bearing ability and clearly something a product which will be important as households continue to move to larger windows for their patio doors.The next 2 images are products, which are due for launch in the second half. Firstly, fire-retardant Q-Lon urethane seals providing the existing -- provide the existing acoustic thermal performance and durability benefits of Q-Lon combined with higher rate performance. And this is to address the growing market for fire-rated products in line with enhanced safety regulations.Then lastly here, the adjustable rise door frame product, which addresses an industry-wide challenge, whereby installers typically need to use separate packers to align the frame and these packets can impact the fire integrity of the overall door. So this product here removes the need for such packers, and it also integrates an intumescent strip avoiding the need to apply plastic. The solution, therefore, reduces door installation time by up to 50%, giving significant productivity and efficiency savings to customers as well as improving the overall fire integrity of the installed solution.Moving now to Slide 14. Here, we set out a reminder of our sustainability road map, which, again, we presented at the Capital Markets Day in May. This sets out our long-term targets and plans to positively impact the UN SDGs, and we've continued to progress this road map over the first half. In terms of sustainable operations, this has included fully commissioning a new water recirculation system at the most water-intensive plant, and that's delivering good reductions in municipal water consumption. A 2-year program to define our science-based targets is underway, in line with our commitment to the science-based targets initiative, and this includes initiating a detailed analysis of our carbon footprint across the value chain. As part of the task force for climate-related financial disclosure of the TCFD compliance journey, an in-depth review of the risks and opportunities of climate change on our operations and supply chain has also been initiated. The sustainable culture in the work in the period is focused on the deployment of 1 time was already discussed. And then in terms of sustainable solutions, our new product development activities have continued to include a focus on developing such sustainable solutions to grow the proportion of revenues coming from positive impact products.Building on the work previously in achieving the cradle-to-cradle certification on Q-Lon seals, further testing to extend the certification to additional product lines is underway. Various initiatives are also underway across the group to improve the sustainability of packaging and reduce the use of hazardous substances in production. This includes testing the use of bio-based and 100% recycled plastics and evaluating the use of more environmentally friendly alloys in hardware products.So finally, turning to the summary and outlook on Slide 16. To summarize, the strength of demand has continued to exceed expectations due to the strong market and also market share gains. We're very pleased with the performance, albeit that was constrained by industry-wide raw material and labor availability issues and also global logistics disruption, and we're continuing to take actions to manage these impacts. Our focus defined growth strategy continues to yield positive results with momentum building also now on the sustainability initiatives. So in terms of outlook, the momentum that we've seen in the first half of the year is expected to continue through the remainder of the year with structural growth drivers remaining positive, supported by new and accelerated trends arising from COVID.Availability of labor and building products as well as house price inflation and cost and renovation work may lead to a slowing in demand later in the year, particularly in North America. Further out, some uncertainty also remains over the impact of the eventual ending of government support measures. In addition, benefits from executing our strategic initiatives will continue to come through, including the activities underway to expand capacity to serve current and future demand. Where necessary, further pricing actions will be implemented to recover cost inflation headwinds. And this leads to our expectations for full year adjusted operating profit to be slightly ahead of the top end of the current range of analyst expectations of GBP 88.6 million to GBP 90.7 million.In summary, the group continues to be well positioned for future growth, benefiting from long-term structural industry growth drivers, our strategic initiatives and building on our portfolio of differentiated products, market-leading brands and deep customer relationships.So with that, I'd like to thank you all for your attention and open the floor to questions.

[Operator]

[Operator Instructions] We will now take our first question from Harry Philips from Peel Hunt.

[Harry Philips, Analyst]

Just a couple of questions, please. Just in terms of the bar in the profit bridge, Jason, you've looked at sort of other cost savings turning around of GBP 8.3 million. You mentioned obviously that the furlough payment of GBP 2.3 million was repaid in the second half of last year. Is there anything else to unwind beyond that in the second half of the current year? And then secondly, just in terms of the additional capacity you're bringing on, is that physical capacity or is that just additional shifts? Or is that not really -- the latter not really an option given the shortage of available labor?

[Jo C. Hallas, CEO & Executive Director]

Great to hear from Harry. I'll let Jason take the first part, and then I'll come back to you in the second part there.

[Jason Ashton, CFO & Director]

Yes, I mean, so there are obviously some significant cost savings that we took not only in H1 but also for the second half as well. So you're right in the fact that we did repay the government furlough money back in the second half. But we also had no bonus running through 2020. So that's obviously going to be an impact in the second half along with other discretionary spend that we curtailed in the first half of 2020 and couldn't really reinstate in the second half, so that will be -- that will continue to be a headwind into the second half.

[Harry Philips, Analyst]

And obviously, all of that is included within the guidance you've given around profitability, et cetera, yes. So that sort of variable there?

[Jason Ashton, CFO & Director]

No, not at all. It's all incorporated in the guidance that we give.

[Jo C. Hallas, CEO & Executive Director]

So the second part of your question there, Harry. It is absolutely physical structural capacity as well. So we have CapEx projects underway for additional seals capacity in Europe, for additional seals capacity in North America, for additional die casting capacity as well, which is a fundamental process to our hardware in North America. We've already implemented 2 of those die casting machines, and we've got some others coming on stream. And then the distribution optimization project that we talked about as well that by the freeing up of that capacity in twofolds, that will also allow some rejigging of distribution operations that are currently in co-located with plants such as [ Owatonna ]. And in turn, that will again relieve the pressure on those plants. So it is both structural as well as obviously doing everything that we can in terms of the labor shift patterns, temporary labor and so on.

[Operator]

We will now take our next question from Christen Hjorth from Numis.

[Christen David Hjorth, Analyst]

I've got 3 questions, if that's okay. The first one, more for Jason, just looking again at this EBIT bridge and looking at the price versus cost dynamic in the dotted square box, it sort of looks like costs were about 2 million ahead of price. All else being equal, is that something that we should expect to catch up over the sort of coming months or at least by 2022? And aligned to that, just outside the box is labor inflation and other cost increases. Is that a figure that we should also expect to be mitigated through price at all as we look forward? So that's the first question.The second one is you have referenced sort of the impact of labor availability in the U.S. It would just be great to get a little bit more color on what's happening on the ground there and whether that's impacting volume, impacting margins? Just a bit more color around that. And then thirdly, obviously, with the Capital Markets Day, you set out a target for North America to get margins to -- EBIT margins to 20%. Just wondering over for an update there and how you feel about the path of achieving that over the medium term?

[Jason Ashton, CFO & Director]

Great. Christen, maybe if I take questions 1 and 3, and then Jo can talk about the labor availability. So as you can see on the bridge, we did have a shortfall of GBP 2.3 million with price and inflation. I guess just to give a little bit of concept with the group -- the size of the group and the geographical coverage, there is a myriad of pricing mechanisms, as you could imagine, and if I went through all of them, it would probably take the rest of this call.But just to say, the pricing mechanisms are through a variety of different levers. So we have a general price increase. We have surcharges, which some are more immediate than others and some of our larger customers are on a look-back test in the U.S. So all that says, we've always said that we are confident of offsetting all cost inflation but inevitably, there will be a lag. And I guess, in the environment that we're in, it's exacerbated by the fact that both commodity and particularly freight inflation are very dynamic, and will remain agile. We have taken some pricing all through the divisions, some in February and March, so you don't get the full 6 months effect. We're also with the dynamic nature of pricing, we're also taking further price increases in the U.S. in July and the U.K. in August. So that said, there'll be more of a contribution of pricing in the second half. And depending on the evolution of the costs, I would expect that shortfall to shorten by the full year. But obviously, some of the mechanisms that I've talked about with a 6-month look back, some of that will also be in 2022. So I guess in short summary, Christen, by 2022, I would expect that to be offset.And then the third point on U.S. margins. It's quite funny that maybe people gloss over the tremendous margins that we have on international and U.K. and focus quite rightly on the U.S., given the scale. You can see very good margin progression versus 2019. I think if you take H2 2020 is not a normal comparator because there was a significant cut in expenses bonus. And I think we never -- we didn't have the extent of the labor issues that we do in the U.S. at the moment and also commodities. But we're pleased with the progression that we've seen in the period. And these elements that we talk about, which are offsetting the volume absorption and drop-through are more temporary in nature. We're obviously running with high -- much higher direct labor costs in some of our factories given labor availability, lots of overtime and full shift patterns and recruitment, et cetera. But we do anticipate that these are more short term in nature and hopefully, with Biden lifting the governments -- the support measures that will create incentives for people to come back to work. So we do think that these are more short-term measures. And structurally, we have the programs in place in terms of line optimization, continuous improvement, but we will see good progression in '22 and remain confident of the pathway to that 20% margin target that we set by the end of -- by '23, '24.

[Jo C. Hallas, CEO & Executive Director]

So I think, Christen, Jason slightly covered the points on labor there in that answer on the North American margin target. It's very clear that it is a across-the-board issue. Our customers are having the same problems. And there are -- there is a range of the hotspots across the U.S. where it is more pronounced in other locations. But fundamentally, I think that the general view is that once this $300 a week unemployment supplement comes off when that's due to come out in September, once that comes off that, that will provide any much-needed impetus for some labor in a labor availability situation to improve.So as Jason touched on there, we've been doing all sorts of things in terms of additional retention incentives, recruitment bonuses, referral bonuses. We have a summer labor program in any case. We've really stepped that up this year. So this is typically student labor, but we've extended it more broadly this year to try and cover the summer period. We've got all sorts of actions underway in terms of shift patterns, how we're obviously using ship patterns and trying to manage through a certain level of fatigue as well. And again, our customers are very much recognize the same issue and themselves have taken action in spite of the demand to actually create some space for people to take some weekend days and holiday days that they haven't been able to take for many months. So it's an intense situation, but we do believe that the $300 a week supplement coming off in September should be a step forward in helping free up the situation.

[Operator]

We will now take our next question from Robert Gardiner from Davy.

[Robert Gardiner, Industrials Analyst]

I will ask -- I'll ask 3 shortish ones. So one, I was wondering could you give us a sense of exit sales rates in the business. So you're talking about momentum from H2, H1 with a confidence continuing into H2 assuming you're seeing that from your customers. Again, on the labor issues, I'm just wondering do those issues and the strength of demand prevents you from delivering on some of your longer-term targets in North America? And I guess the question is, if you're running flat to the boards and short staffed, does that hinder your efforts to deliver structural improvements? And then three, obviously, I see the business wins, which is great. So again, against the backdrop of that steep cost inflation and price inflation that a service offering or a product availability, what's driving that for you or is it a bit of everything?

[Jo C. Hallas, CEO & Executive Director]

Sorry, Robert, your line is breaking up quite a bit. Can you just repeat the third question?

[Robert Gardiner, Industrials Analyst]

Just wondering what's driving that. Okay. Well, the first was on exit rates, exit sales rates.

[Jo C. Hallas, CEO & Executive Director]

I got the first one.

[Robert Gardiner, Industrials Analyst]

The second was on just labor issues potentially hindering your efforts in kind of structural gains in North America. And the third, I was just wondering on the business wins. What's driving that, given the expense of the cost inflation and price inflation in the channel?

[Jo C. Hallas, CEO & Executive Director]

Right. Okay. So I'll take the second and third question and then hand over to Jason to talk about the exit sales rates. And thanks, Robert. Good to hear from you. So if -- starting with the running flat out and is that hindering our efforts in terms of the structural activity. It certainly meant that the efforts are more focused on navigating the current situation. And as part of that, putting in, again, as we just talked in the answer there to Harry, putting in structural capacity as well and doing further projects that expand capacity. But I think there are also actions underway like the distribution facility, the distribution optimization program, which were anyway planned and we are accelerating that again, in fact, and also lean excellence activities as well, really trying to drive productivity improvements again where we're just redirecting those more to where the hotspots are again. So there is a reprioritization rebalancing underway but the actions that are being taken fundamentally are still in line with the projects that we wanted to do structurally in the business. And I think in terms of then the question on what's driving the net wins? It comes back to we have over the last couple of years, we've really got a lot closer to our customers again in how we engage with our customers. It's fundamentally underlying in terms of the value proposition, the product portfolio is very strong in AmesburyTruth in North America. But what we lost our way on a little bit back in the previous footprint project was that customer engagement and how we manage and communicate with our customers. And that partnership has very much strengthened again customers did take a little bit of a pause here in cover in terms of some of the new product development type projects, and that's where they will often look to their supply base and think about potentially resourcing supply that work is starting to pick up again now. And then there are other spaces where -- other places where, again, particularly on the seal side, I think we are really proving our reliability and just how we've managed through this with the crisis and the recovery from the crisis in terms of our serving of the customers. So it's across a range of different areas, but again, I think it really fundamentally comes down to we are much better connected with our customers than we were a couple of years ago. Jason, do you want to take the question on the sales rates?

[Jason Ashton, CFO & Director]

Yes, that was one I heard most clearly as well. Robert, yes, just on exit rates, we're anticipating that revenue will be broadly flat in the second half versus the first half, and you do have a bigger benefit from pricing. So we are still suffering from some of those labor issues short term as we spoke about. But equally, that second half performance is another meaningful increase on a like-for-like basis versus 2019, but in all 3 divisions, probably more meaningful in the U.S. and international U.K. Obviously, you've got a bigger part of the commercial projects, but in total, meaningful like-for-like increases in 2019. And also in the U.S. versus 2020, the second half was particularly strong in the U.S. as we recovered through after the COVID crisis.

[Robert Gardiner, Industrials Analyst]

Okay. That's great. Do you mind if I just ask 1 very quick follow-up on the look back contracts. Does that just mean that when you come to pay the contract that they make you whole if you're behind on cost, is that what that means?

[Jason Ashton, CFO & Director]

Yes. It's a look back test over -- and again, it depends on each customers. But on average, it's a look back over the last 6 months, and then you push forward over the next 6 months, what that pricing adjustment would need to be to recover those costs. So -- and that's why you get some of that benefit in '22 as you look back on the second half of '20, 2021. I mean it's probably pertinent to say, actually, there is a huge amount of different pricing mechanism and the team, it's one of those things on the list of things to do around trying to create some more consistency across customers.

[Operator]

[Operator Instructions] We will now take our next question from David O'Brien from Goodbody.

[David A. O'Brien]

Firstly, if I could follow up just on Robert's question just past. Just to be clear on the outlook for volumes, they're going to be a little bit lighter in the second half. Is that capacity constraint on your side or are you seeing signs of slowing demand in end markets? And in that context then, can you give us some color on what market share looks like in the first half, what dynamics you're seeing in either the U.S. business into the U.K., Ireland and then international? And then finally, maybe to give the U.K. and Ireland business and the international business a little bit of line like given the margin performance, can you talk us through the drivers of both? And maybe particularly in international that it surpassed the targeted margin from the Capital Markets Day, how sustainable that is over the year and on medium term?

[Jo C. Hallas, CEO & Executive Director]

Great. Thanks, David. I'll talk to -- I'll talk a little bit to the outlook in terms of the volumes and market share, and then Jason can also just add some comments on that as well as talking to the the margin drivers on the international and the U.K. So let me, first of all, start with the market share piece. So as we were just talking there on those net wins, the way we try and unpack market share in North America is we do very granular tracking of our wins and losses by product line within customers. So in other words, this isn't always about winning new customers. This is about winning a piece of business with a particular customer or losing a piece of business with a particular customer. So we track that at a very granular level. And that really gives us the best proxy to what's happening in terms of when we get are we winning share or losing share. In terms of the other 2 markets, I think particularly, we've seen some very clear share gain in the International division, where we've got a weak competitor in Italy, who's only been getting weaker and this has been ongoing for the last couple of years. And then the other thing that's happening is there's also been some trading up in the market as well. And we've seen this in North America where people who historically might have bought PVC windows have been trading up into wood windows where we have got that plays into our portfolio really plus also there is more hardware on those windows as well. And it's the same also in some of the other markets in the international markets, again, where we've seen some trading up in terms of both the quality of the aluminum windows that people are using and that then leads into again our Jesse range or the types of seals that people are using.And this is really, I think, on the back of these government incentive programs that are encouraging people to drive up to do upgrades in their homes. And accordingly, as I say, what they're doing is choosing to use that benefit to actually trade up a bit in quality. And so this, again, is just helping us with share. In terms of the outlook in North America and what's happening there, I think there is a lot of commentary in the marketplace in terms of is this a demand-constrained market or a supply-constrained market in terms of sort of the slight softening that's been seen in May and June. I think we subscribe at the moment to the -- that it's supply constrained. So if you go -- if you look at some of the homebuilders, and there was a particularly interesting 1 last week with D.R. Horton and look at some of the commentary that the housebuild is saying, what they're saying is that they are holding back inventory, they're not selling it as early in the cycle. They're waiting further through the build process before selling it, and they are actively constraining supply so that they can essentially manage pricing into the market as well. So -- and we're being told again by our large customers that there is absolutely getting that they're not seeing any an exit -- any softening in terms of that end demand. But yes, it's just -- it is the labor constraints again and just navigating through that. Jason?

[Jason Ashton, CFO & Director]

Yes, David, I think I might have vertically prompted you to ask a question on international. So I'll try and answer it. We are really pleased with, well, the margins in both the U.K. and international. I guess, with international, a couple of points to note, I mean, fantastic drop-through and fixed-cost overhead absorption at [indiscernible]. And I think the international division, we're probably the fastest on price increases with the surcharges because, quite frankly, they had to, given the massive increases on polypropylene products. And I think the other thing that differentiates international is the extent of the other issue -- some of the other issues that the U.S. and the U.K. have had, the labor and freight, which have not been as pronounced in the International division. I guess just cautioning on the margin there, the one thing that across all divisions really is that if you look back on 2019, our SG&A cost base is pretty flat. And that doesn't tell the whole story because we've obviously got full of bonuses in '21. We've got higher activity, we've got higher volume. And it's one of those areas that we continue to look at is around commercial investment, R&D to fuel the growth for the future. And obviously, we're still in times where we can't travel. So we do want to get those sales guys in Italy moving and thinking about how we further develop the business. So I would expect in International, a slight deterioration with that spend going back in. But nevertheless, we feel pretty good at the total margin in there, and it's aligned with the target margin. On the U.K., obviously, we've got the impact of Ventrola coming out. But we've just got some price increases in. We will do, sorry, for August, which will benefit H2. But we're having well-publicized issues from the global freight disruption. Just as an example, we were -- in 2019, the 40-foot container from China was costing around $2,000. And now it's up to $17,500. And that is expected to continue into early 2022, which is why we've gone out with pricing mechanisms. But that said, we've got productivity programs in place, and we feel good about the progression of the margin in the U.K. to those target rates. And clearly, we've made some very good progress in the period.

[Operator]

We will now take our next question from Toby Thorrington from Edison.

[Toby Russell Thorrington, Director & Analyst]

Just a couple of questions from me, please. One on gross margin and the other on the U.K. Given the well-flagged input cost pressures, labor, freight and materials as well, pretty impressive to see an improvement in gross margin against 2019. Just trying to understand how much of that is kind of volume operational gearing related? And how much is mix related, I think, historically, I know you don't report at the interim stage. But historically, I think the international gross margin has been the highest in the group. So I'm just wondering what the sort of differences between those 2 drivers, volume and mix, regional mix? And the second question on the U.K. is the growth rates against 2019 obviously look a bit slower compared to the other 2 divisions. You mentioned commercial being dragging its feet a bit in the U.K. I wonder if you could give us a feel for the change in the Access 360 revenues against 2019?

[Jason Ashton, CFO & Director]

So if I take the question on gross margin versus 2019, very good expansion versus 2019. And actually, we took a reclassification at the end of 2019. There were certain expenses that was -- we're going through SG&A in 2019 that we rebadged as gross margin. So actually, the expansion is better than just on a reported basis. The -- I guess, the other part of that question is more difficult to answer in terms of the component parts because you've got a lot of calls on pods. But I think, let's say, international for it, as an example, the main contributions of that gross margin expansion will be volume, but there's also a big contribution from mix, not only in product but also from the market. So the core markets of -- in Europe, particularly Italy and Spain and also further afield in Australia are growing really nicely, and they're the markets with above-average gross margin. In the U.S., obviously, a big contribution from volume, but it is being offset to some extent by the impact of labor availability. Direct labor has increased as a percentage as we've paid over time, recruitment costs, et cetera, but also the lag of pricing and material costs. So that probably didn't answer your question, Toby, because it really is a mixed bag in those divisions.

[Jo C. Hallas, CEO & Executive Director]

Let me just give you a bit of color then on the Access 360 business, Toby. So there are a few different moving pieces here with this. If you recall, back in 2019, the profab element of that business was somewhat underperforming on revenue. Now the market has gone backwards in the meantime. But our pipeline and on projects, we've turned that business around from a revenue performance point of view. On the other hand, what we were benefiting from back in 2019 was a lot of the -- a couple of big infrastructure projects, so specifically Crossrail and Battersea, which were really benefiting the Howe Green business and that lumpy -- that is very lumpy by definition. That's -- those projects have come to an end now. And we're waiting for really the next round of projects, which is the station [indiscernible] to come through on that business. So you've got a mix of different -- I think, really 3 different things going on there. The general backdrop of commercial, which has clearly softened over the last couple of years. The fact that, on the other hand, the profab, we've got that business in a stronger place than what it was. And then the third thing is, is that general lumpiness around the projects and what that's doing to the business.

[Operator]

It appears there are no further questions at this time. I would like to turn the conference back to Jo Hallas for any additional or closing remarks.

[Jo C. Hallas, CEO & Executive Director]

Super. Thank you, as always, everyone, for your questions. As I said, we're very pleased with our performance in the first half of the year. And in particular, the continued exceptional response from the time and team in dealing with the supply chain challenges and servicing our customers. The manner in which our people have tackled the situation is testament to our values and has really enabled our strong performance. We'll continue to execute on the strategy laid out at our Capital Markets event in May, strengthening our platform, cross-leveraging our inherent capabilities and driving sustainable growth. And through that, creating long-term sustainable value for all of our stakeholders. With that, thank you, again, for joining us this morning. I hope everyone stays safe and well, and I will now close the session. Thanks very much, everyone.