Tyman PLC

LSE:TYMN

Earnings Call Transcript 2021-Q4

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Welcome, everyone. I hope you are all well. Thank you for joining Jason and me today for Tyman's Full Year 2021 Results Webcast. As usual, we'll start by taking you through the slides, after which, there'll be some time for Q&A.

2021 was another year of unparalleled operational intensity. So, I'd just like to start by thanking our people as they continue to navigate the ongoing challenges tirelessly.

We turn to the highlights on slide 3. In the year, we delivered double-digit growth of both sales and adjusted operating profit against both 2020 and 2019. Like-for-like revenue was up 17% against 2020 and 11% against 2019, reflecting both share gains and strong underlying market demand. The demand has continued to be driven by favorable long-term structural drivers, as well as trends that arose from COVID-19. After many years of underbuild, housing starts in the US are at their highest level since the recession in 2008, 2009, supported by increased mortgage lending and low interest rates.

As a result of the pandemic, consumers are spending more time at home, have higher household savings and are prioritizing expenditure on the home. Fiscal stimulus, such as the stamp duty holiday in the UK and super bonus incentive for home improvements in Italy has also supported housing market activity. The strong demand, together with benefits from pricing actions and self-help initiatives, delivered 16% growth in a like-for-like adjusted operating profit against 2020 and 11% against 2019.

An adjusted operating margin expanded to 14.2% despite the dilutive effect of passing through cost inflation. The growth in operating profit, as well as lower interest charges, led to adjusted EPS growth of 17% to £0.321. Return on capital employed increased to 14.5%, achieving our target ROCE for the first time in Tyman's history. ROCE benefited from the profit performance assisted by the amortization of intangibles and impact of foreign exchange on goodwill.

Our strong performance was achieved in spite of the unprecedented industry-wide supply chain challenges, labor constraints, and dramatic cost inflation, which worsened in the second half. We have continued to take steps to increase capacity and alleviate labor shortages, including expanding operating hours, increasing temporary labor, implementing wage increases and incentive schemes, temporary outsourcing of processes to increase capacity, as well as implementing various productivity improvement initiatives.

We've also made capital investments to address bottlenecks structurally, and we're continuing to work very closely with customers to best service our demand and secure inventories. We've also implemented frequent pricing actions, another scale to recover the cost inflation, although there is inevitably a lag in recovery. I'm very proud of how our people have navigated these challenges.

We've also continued to progress our Focus, Define, Growstrategic initiatives in line with the plans that we laid out at the capital markets event in the year. This has led to market share gains through executing well with our customers, driving momentum with new products and continuing expanding our channels to market. I'm also very pleased with the progress on our sustainability roadmap, and I'll come back to talk on this in more detail.

The cash generation delivered a further reduction in leverage to 0.9 times. And finally, I'm pleased that we've been able to declare a record total dividend for the year of £0.129 after reinstating our progressive dividend policy.

I'll now pass across to Jason for the financial review.

[Jason Russel Gary Ashton, Chief Financial Officer & Director, Tyman Plc]

Thanks, Jo, 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 £635.7 million has increased by 11% against 2020 and 17% on a like-for-like basis. Adjusted operating profit of £90 million has increased by 12% against 2020 and 16% on a like-for-like basis.

Compared to 2019 which provides a more normalized comparator, both revenue and adjusted operating profit are up by 11% on a like-for-like basis. The operating margin increased from 14.0% in 2020 to 14.2%. And I'll come on to talk about the drivers on the following two slides.

Adjusted EPS of £0.321 is 18% higher than 2020 and 17% higher than 2019 reflecting the increase in adjusted profit after tax. Return on capital employed increased by 254 basis points to 14.5% versus 2019, largely as a result of the strong adjusted operating profit, but also assisted by the lower carrying value of intangible assets through amortization and the impact of foreign exchange movements on capital employed, partially offset by higher average working capital.

Cash conversion was 64% compared to 131% in 2020 and 132% in 2019, reflecting a significant working capital outflow and an increase in capital expenditure which I'll come onto talk about later. And we achieved a further reduction in leverage to 0.9 times EBITDA compared to 1.1 times in 2020 which is slightly below our target range of 1 to 1.5 times EBITDA.

Turning to slide 6, we show here the revenue evolution for the year. The increase in revenue is mainly driven by an increase in volumes of £68.8 million driven by strong underlying demand and favorable structural trends post-pandemic. And as you'll expect, we've had some significant price increases to recover the dramatic input cost inflation with general price increases amounting to £11.9 million and tariffs and surcharges of £13.5 million, for a total of £25.4 million, representing an increase of 4% versus 2020. Given the timing of these price rises, the impact significantly ramped up over the course of the year, with 7% pricing realized in H2, some £20 million. And within that, 9% or £14 million was in Q4.

On a reported basis, these benefits were offset by a £28.5 million adverse foreign exchange movement and the disposal of the Ventrolla business in November 2020, which reduced revenue by £2.8 million. These factors combined led to an increase in revenue from £572.8 million to £635.7 million in the current year.

On slide 7, we've also shown up revenue evolution from 2019. Against 2019, we delivered volume growth of circa 7% and pricing growth again of 4%, which is a pleasing result. And again, on a reported basis, these benefits have been offset by an adverse foreign exchange movement of £32.5 million and a reduction in revenue of £6.2 million relating to the disposal of Ventrolla.

Now turning to slide 8, where we show the adjusted operating profit bridge. You can see here the drop through of the volume growth of just under £30 million. The numerous pricing actions across the divisions that we took totaling £25 million didn't fully recover the dramatic materials and freight inflation of £32 million due to the quantum and frequency of these increases. This, as well as certain customer pricing mechanisms being based on a

[ph]

look-back index (00:08:49), resulted in an inevitable lag in recovery.

However, with a carry-forward of 2021 price rises that I've highlighted, and additional recent pricing actions in 2022, we anticipate the gap between cost inflation and pricing to further reduce over the course of this year, assuming, of course, that the current levels of inflation remain. I also want to highlight here the effect of just passing through cost inflation is dilutive to operating margins, as effectively, we're earning the same profit, but on an inflated revenue base.

Labor cost inflation and other cost increases have impacted profit by £2.5 million, and there was an effect of the reversal of temporary COVID-related cost savings we had in 2020 of £12.9 million. These cost savings primarily relate to cancellation of the bonus scheme and curtailment of discretionary spend.

Productivity improvements resulted in a £4.9 million benefit, driven largely by the various footprint and continuous improvement initiatives, partially offset by the operational inefficiencies we've suffered as a result of the high employee turnover and component shortages in the US.

On a reported basis, the divestment of Ventrolla increased operating profit by 3% as it was loss-making. And the adverse currency movement decreased operating profit by a further £4.6 million. The net effect of these were to deliver an adjusted operating profit of £90 million, which is 12% higher than 2020.

On slide 9, I'll just give a bit more context to the scale of the input cost inflation that we've seen this year. We've shown here the trending cost of our top four commodities, as well as container freight indexes. You can see here across all of these categories how dramatic the increases have been, particularly through the second half with our largest exposures to stainless steel, which on average was 16% higher and polypropylene which was up on average 86% with a year-end spot being up 46% and 113%, respectively, which just gives you a sense of the trajectory and cost impact into 2022.

As we've said, we've took significant pricing actions in 2021 and already in 2022. We remain vigilant on material and freight inflation and we'll continue to take further pricing as necessary. We're also taking further actions to enhance our buying strategies and secure pricing ahead, where it makes sense to do so.

Turning now to the divisional summaries on slide 10. The performance has been strong in 2021, with revenues and operating profit up on both 2020 and, more importantly, 2019 across all three divisions. I'll you through of these divisions in turn.

The North America division performed well with revenue up by 14% on a like-for-like basis against 2020 and 11% against 2019. This was driven by the positive momentum in the US and Canadian housing markets as well as pricing actions and net business wins.

This growth was achieved despite constraints arising from the raw material, logistics, and labor availability issues. The revenue growth combined with benefits of the continuous improvement activities led to an increase in adjusted operating profit of 8% against 2020 and 9% against 2019. You'll note however that adjusted operating margin deteriorated by 90 basis points to 16.4%, and this is largely due to the significant dilutive effect of passing on the cost inflation as well as the lag in recovery of cost inflation in the year.

The performance of the UK and Ireland division was robust with like-for-like revenue growth of 18% on 2020 and 5% on 2019. This is reflective of the strong residential RMI market with some constraints due to stock availability. But performance was weighed down by the commercial access business which suffered from a lack of large infrastructure projects in the year. Like-for-like operating profit was up 35% on 2020 and 1% on 2019.

On a reported basis, revenue was up 15% and operating profit up 68% reflecting the impact of the disposal of the loss-making Ventrolla business which obviously had a positive effect on operating margins.

The International division had a very strong year, with like-for-like revenue up by 27% on 2020 and 15% up on 2019, with broad-based market growth across the division's core markets, share gains, and pricing increases to compensate for the input cost inflation. The share gain was achieved through further momentum with our system house partnerships, NPD, aided by a robust supply chain and capacity management.

The combination of strong revenue growth, agile pricing to offset inflation and the beneficial impact on fixed cost absorption led to an increase in adjusted operating profit of 66% against 2020 and 37% against 2019. The adjusted operating margin has also improved significantly to 14.7%, just marginally behind our target return on sales.

Turning to slide 11, which shows the cash flow performance for the period. Operational cash flow for the year is £57.9 million, which is 45% lower than 2020 as a result of significantly higher working capital outflow and an increase in CapEx. This working capital outflow of just under £40 million is due to a significant and deliberate inventory build in order to meet high levels of demand, as well as to provide a buffer ahead of the extended Chinese New Year period and to protect us against ongoing supply chain and global freight disruption. The inventory build was also significantly magnified by the impact of material cost inflation.

CapEx is also up after two years of deferred expenditure, although down versus our initial plan. This increase in CapEx is in order to drive organic growth, including capacity, as well as fine-tuning systems and processes. This also includes spend on our IT upgrade in North America.

Moving further down the cash flow, income tax payments have increased to £17.7 million, mainly due to the higher profit levels and some deferrals from 2020. Net interest paid was £3.7 million lower than 2020 due to the reduction in net debt and average cost. Exceptional cash costs declined significantly due to the completion of our various footprint streamlining projects. The operating cash conversion, therefore, has decreased to 64%, as we had planned, with the last two years being abnormally high. The five-year average has been 101% and our long-term target remains at 90%.

Just touching quickly on slide 12, which shows our net debt bridge. Overall, our reported net debt, which includes IFRS 16 lease liabilities of circa £55 million, has decreased by some £7 million since 2020. In addition to the movements in free cash flow discussed on the previous slide, net debt has increased by £7.2 million due to new leases and by £15.6 million due to the resumption of dividend payments. These factors have been offset by a £2.6 million foreign exchange benefit.

And finally, turning to slide 13, which shows the guidance for 2022. We expect underlying demand in 2022 to remain strong, benefiting from favorable housing market fundamentals, albeit set against rising macroeconomic and geopolitical pressures, supply chain and labor constraints, and continued COVID-19 disruption. High input costs are expected to persist for most of the year, and we will implement further pricing actions where necessary to recover cost inflation.

Consequently, we expect top line growth to be driven by the mix of underlying strength in demand and pricing to recover inflation. This revenue growth, combined with benefits from execution of strategic initiatives, is anticipated to benefit profitability for the full year. Operating margins will be broadly flat due to the dilutive effect passing through cost inflation.

Working capital will remain high due to the impact of inflation and to support supply chain resilience but with a minimal net cash flow impact year-on-year as we improve our processes to structurally reduce inventory levels.

Capital expenditure in the 2022 financial year is expected to be between £25 million and £30 million, reflecting catch-up of expenditure deferred from 2020, and investment in new product development, operational excellence and systems upgrade.

Operating cash conversion, therefore, is expected to increase to between 80% to 90%, reflecting the elevated levels of working capital and the increased capital expenditure. The group's long-term target remains at 90% per annum. Leverage is expected to remain below the target range of 1 to 1.5 times adjusted EBITDA absent of any M&A activity.

I will now hand over to Jo for an update on our strategy execution.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Thanks, Jason. I'll now spend a few minutes on our strategic progress. Firstly, slide 15 is just a reminder of our strategy. Our Focus, Define, Grow 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 our stakeholders.

Turning to slide 16. We've continued to make good progress in executing on our strategic plans. In terms of the Focus pillar, which aims to drive margin expansion, benefits from the various initiatives underway to streamline operations across both 2020 and now 2021 are being realized. Further footprint optimization work was completed, including inter-site line transfers in North America. We've also made good progress in our project to optimize the distribution footprint in the Western US, with consolidation of two warehousing sites in Dallas completed and conversion of space in the Sioux Falls facility to distribution in progress.

The portfolio harmonization activities are progressing to plan, with sliding patio door rationalization now complete and work underway on the hinged patio door and casement product groups. We've made investments to expand heavily constrained seals capacity with new Q-Lon urethane lines installed and commissioned in the UK in late 2021 and now already operating at full capacity with 20% better throughput than existing lines. Further lines will come on stream in both the UK and US this year. We commenced activities to develop lean excellence capabilities, and we undertook a range of continuous improvement activities which were directed towards increasing capacity and throughput.

The program to drive greater levels of automation in our hardware and manufacturing facility in Italy has progressed well, leading to improvements in safety, efficiency and throughput. Work is also well underway on implementing our new integrated ERP platform in North America, which will enable a more streamlined ordering process for customers, enable efficiency gains and shared services, and improve on decision support capabilities.

The Define strategic pillar, which centers on building cultural cohesion across the group, has continued to gain momentum with the deployment of the group's purpose, values and Code of Business Ethics now substantially complete. Development of the Tyman Excellence System has also continued to gain momentum with a focus on IT and lean excellence in the period, and collaboration between the divisions continues to gain traction with more frequent and substantive touch points and a series of cross-divisional initiatives undertaken.

The activities to Grow market share have also continued to yield positive results with our channel expansion and new product development activities delivering strong market share gains in core international markets. We've also had further net customer wins in North America. A series of new products were successfully launched in the period, and a strong pipeline of launches is scheduled for 2022.

As an example, the picture on the right side of the slide here is the Reguitti Obliq handle, which addresses the minimalist aesthetic trend while maintaining high quality corrosion resistance and ergonomics. It has also been recognized for its sustainability credentials due to the use of 94% recycled aluminium and its reduced material weight, which gives it a carbon footprint 63% lower than a standard zinc alloy handle.

We've also begun to prepare for disciplined return to M&A by defining areas of focus for acquisitions, candidate characteristics, and developing the pipeline of potential opportunities that meet our commercial and strategic objectives. The strengthened platform and Tyman Excellence System should generate greater synergy extraction from acquired businesses in the future.

Moving now to slide 17. Overall, I'm very pleased with the progress we're making with our sustainability road map. In terms of our sustainable operations activities, we completed the deployment of our safety leadership program as well as deploying four new safety standards. Our safety performance, on the other hand, disappointingly deteriorated in 2021. If we include the workplace transmission COVID-19 cases, our lost time incident frequency rate increased to 4.4 incidents per million hours worked. Half of these incidents in 2021 were with personnel with less than one year service, reflective of the high levels of workforce turnover, especially in the US and the high proportion of temporary staff in our facilities.

Safety improvement plans have been implemented at the plants with the highest incident rates. While the 2021 result is disappointing, the lost time incident frequency rate excluding COVID cases still shows strong progress from the 2019 baseline of 4.0 incidents per million hours worked. And we remain committed to our target of achieving an LTIFR of less than 1.0 in 2022.

Our two-year program to define science-based targets is well underway with the detailed analysis of carbon footprint across the value chain undertaken. As part 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 progressed well.

In 2021, we developed a best practice playbook to support our energy, water and waste reduction goals. A new water recirculation system at our most water-intensive plant was commissioned in 2021 and led to a reduction of 45% in the group's overall water consumption. Initiatives to reprocess scrap were also successfully implemented. And so, we achieved a 7% reduction in our scope 1 and 2 carbon emissions in the year.

The One Tyman culture provides the basis for our sustainable culture initiatives. During the year, we launched a global employee assistance program to ensure our employees are well supported. We also commenced work to develop metrics for employee engagement and retention and establish an integrity champions network. And I'm also very pleased to say that as of the 1st of January this year, we became a UK Real Living Wage employer.

In terms of sustainable solutions, the proportion of revenues from positive impact products increased to 22%. Various initiatives are underway across the group to improve the sustainability of packaging and reduce the use of hazardous substances in production, with 6 tonnes per annum of single-use plastic packaging eliminated during the year through investment in new technology and the use of alternative materials such as bioplastics. Finally, Cradle-to-Cradle certification was extended to the Giesse aluminium hinges and the Brio handle during the year.

Turning then to the summary and outlook on slide 19. So to summarize, our performance in 2021 was strong due to continued market momentum and market share gains. We were very pleased with our performance, albeit that it was constrained by industry-wide supply chain challenges and dramatic cost inflation, and we continue to take action to manage the impact of this. Our Focus, Define, Grow strategy continues to yield positive results with momentum building on sustainability initiatives.

In terms of the outlook, we expect underlying demand in 2022 to remain strong, benefiting from favorable housing market fundamentals, albeit set against rising macroeconomic and geopolitical pressures, supply chain and labor constraints, and continued COVID disruption. High input costs are expected to persist for most of the year, and further pricing actions will be implemented where necessary to recover cost inflation.

Consequently, we expect top-line growth from a mix of underlying strength in demand and pricing to recover inflation. This revenue growth, combined with benefits from execution of strategic initiatives, is anticipated to benefit profitability for the full year. Operating margins will be broadly flat due to the dilutive effect of passing-through cost inflation.

Before we conclude, I'd like to say how saddened we are by the horrific crisis evolving in the Ukraine, and our thoughts are very much with all those impacted. In terms of our operations, we have no local facilities or employees based in either the Ukraine or Russia. Sales in these markets are only 1% of group turnover and managed via local distribution partners. We're monitoring developments and we'll adapt as appropriate.

In summary, the group is 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.

And with that, I'd like to thank you all for your attention and open the floor to questions. So I think we'll start with people in the room. Hi, Charlie. Great to see you again, by the way, Charlie.

[Charlie Campbell, Analyst, Liberum Capital Ltd.]

Good to see you, too. Thank you. Yeah, it's Charlie Campbell at Liberum. A couple of questions if I can just to start with. You've given, I suppose, quite a positive outlook on US demand. I suppose we've seen kind of mortgage rates go up

[ph]

100, 120 (00:30:31) basis points so far. If we go back to 2013 when the same thing happened, that did slow residential activity quite markedly. So I just wonder what's different this time and why people are quite upbeat given mortgage rates moving up quite significantly.

And the second question just to help us out with our spreadsheets a bit. If you sort of froze all the prices where they are now and, obviously, they could move in either direction between now and the end of the year, but if we just froze them now and we think about a mark-to-market effect, what would be the best thought or guide for selling prices in 2022 versus 2021?

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

So let me take the first question first on the mortgage rates. I think the mortgage rates are something that we are continuing to monitor. The fact remains that there is a huge undersupply in North America and home purchase still remains a cheaper alternative to renting. Secondly, the mortgage rates are still below those long-term average rates at which they contribute to the affordability dynamic. And I think those longer-term structural points that we've talked about before include things like the millennials coming onto the housing market and so on.

So, all of those aspects have very much contributed to – in post-COVID, the millennials wanting to get out of their parents' basements even more than ever. People that's really contributed to this momentum in terms of underlying demand and there's a huge shortage in both primary housing and secondary housing in North America right now, which in turn is then driving a lot of momentum in the RMI side of things as people choose instead to upgrade their existing properties. So we're seeing it on both dynamics. If anything, it continues to be supply chain constrained rather than underlying demand constrained, so that – hence, that's driving all our continued positivity about the outlook.

[Jason Russel Gary Ashton, Chief Financial Officer & Director, Tyman Plc]

In terms of cost inflation being frozen at these levels, so as I mentioned, we took pricing of 7% in H2 and that ramped up actually to 9% in Q4, particularly in the US and UK. So with a carry forward of that, plus new price increases that we've actually implemented in February, one would expect for this year net sales revenue to be high single digits of which the majority obviously is coming through price increases.

[Charlie Campbell, Analyst, Liberum Capital Ltd.]

Okay.

[Jason Russel Gary Ashton, Chief Financial Officer & Director, Tyman Plc]

Okay.

[Donald Tait]

Hi. Good morning, guys. Donald Tait from Berenberg. First was just around organic growth. Talked a lot about strategic initiatives that are in this, anything you can point to in terms of specific work that's been done again to address whatever the key customer drivers are in each market, exactly what drives market share gains and effect, and what you've done to address that. Any sort of KPIs you can point to around that?

And secondly, just a reminder of hedging policy, so, Jason, you mentioned you'd been selectively hedging

[indiscernible]

(00:34:07). So, just a reminder of the policy and exactly how that can move the P&L, that'd be great.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Great. Thank you, Donald, and again good to see you. So, in terms of market share gains and what drives them, there's several initiatives we've got underway across the group as we talk to the Capital Markets Event in May last year. If I just touch on a couple of those. In North America, it has been very much about how we execute with our customers, that intensity of engagement with our customers. And we have – because it's a very much an OEM-dominated business over there, it really is about securing that incremental business.

Now, clearly, again, with the intensity, customers have been less open to switching business than they have done historically, but nevertheless, we did gain

[ph]

– made (00:34:55) positive net wins during the year. They were biased towards the first half than the second half, and that activity continues.

The other thing that then drives the ability to get those wins is also new product development. So, new products launched in the year. We continue to gain strong incremental revenue with products that have been launched in late 2020, things like the safeguard product, and then the Pinnacle balance, which we featured at the Capital Markets event in May. Again, that's had good momentum with customers, and progressively customers are switching from their heritage balances over to that new balance product for the benefits it brings to them.

If I turn to, for example, the International division has a different flavor of what drives those market share gains. It's been very much about the activity with the channel there. So, we talked at the Capital Markets event about system houses and the importance of system houses. We have gained new commercial arrangements with six new systems houses in the year. And we have furthermore got a pipeline of other systems houses who are evaluating product, testing it. There's quite a long lead time from the very first engagement with the new system house through to converting that into a new commercial agreement. So, that momentum again has continued and we are definitely taking share in the system houses channel.

Equally in the International division with distribution, again, if you think that we obviously got a good chunk of business in Italy, a market like Italy is very fragmented in terms of the distribution market. There's a lot of small distribution outlets. We've done a lot with distribution in terms of showroom activity and so on. And again, we are taking share of wallet there.

[Jason Russel Gary Ashton, Chief Financial Officer & Director, Tyman Plc]

Yeah. Good morning, Donald. So, if I read correctly, the question was about our hedging policy. So, I guess that's – we have, firstly, hedging currency. We do have a policy and that's mainly appropriate for the UK, which imports a lot of goods from – most of their goods from China. And that typically looks ahead six months. And the reason we do that is only to get certainty of costs so that we can incorporate that into various pricing actions with customers.

On metals, we don't have a formal policy and that's mainly driven by this. It's not like global commodities such as cocoa, where you can buy forward for 12 months without certainty. What we have been doing and we have certainly improved our processes through last year where we learned a lot in terms of trying to get as much visibility and agility, where it's appropriate to go slightly longer than we would have done normally, we do that. So typically, we may go and secure pricing for the next three months, yeah, again, to give us certainty for those three months.

In terms of how that impacts on the P&L, really what impacts the P&L is the market pricing. So any hedging or pricing ahead will give you a benefit or conversely a cost for the next three months. But everything is driven by the market price. And if that market price is increasing and we've seen on some commodities that it has post 2021 and particularly in the last few weeks with the horrendous situation in Ukraine, then we'll go back to the market and price again.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

So I think now we'll go to questions on the line.

[Operator]

[Operator Instructions]

We'll take the first question from Toby Thorrington from Edison.

[Toby Thorrington, Analyst, Edison Investment Research Ltd.]

Hi. Morning. Hopefully you can hear me.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Yes, we can, Toby.

[Jason Russel Gary Ashton, Chief Financial Officer & Director, Tyman Plc]

Good morning, Toby.

[Toby Thorrington, Analyst, Edison Investment Research Ltd.]

Yeah. Good. Thank you. So one for Jo, two for Jason, I think. So in that order. Just wondering if you could give us some sense, Jo, of where OTIF metrics are currently in the main production sites at the moment. That's obviously a question framed by supply chain challenges, no doubt been variants and variations throughout the year. Just wondering what the sort of trend rates and the exit rate was. So that's the first question.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

So great. On the OTIF metrics...

[Toby Thorrington, Analyst, Edison Investment Research Ltd.]

Shall I continue?

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Yeah. Well, let me – continue, you can give all three out, Toby, yes, that would be great.

[Toby Thorrington, Analyst, Edison Investment Research Ltd.]

Thank you. Okay. All right. We'll do. So, the two for Jason, thank you, was just interpreting a couple of earlier questions, actually. Is the penetration of that sort of volume expectation overall for the group, putting pricing to one side, is sort of marginal low single digits, just wondering if that's correct and if there's any regional variation around that?

And the third question relates to the balance sheet, the gearing, just

[ph]

below 0.9 (00:40:27) times EBITDA for the year. It looks to be heading lower. Just wondering if there's any trigger level we should think of for a special dividend on that basis, or should we perhaps be expecting some M&A activity this year?

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

So let me take the OTIF question first. So we don't have a consolidated OTIF number across the group, but OTIF has definitely improved. So the UK as an example, the UK division, which brings in about 85% of its volume from China, the UK division had pretty poor OTIF levels earlier this year. But it's ended the year at around the sort of the 98% OTIF level, which is where we historically would be targeting to be. So in a much stronger place and the – as you've seen in working capital, we've put a lot of inventory in across the year focusing on that service level and recognizing the continued disruption has been a key focus area across the group.

And in general, backlogs where we've had backlogs have come down across the group. There continues to be areas where we have capacity constraints and, therefore, we're on extended lead times but we're managing that well with the customers and we're certainly in no more challenged position than any of our competitors.

[Jason Russel Gary Ashton, Chief Financial Officer & Director, Tyman Plc]

Toby, in terms of volume for this year, as I said, the main contributing factor for revenue growth is pricing, so I'd expect volume to be in that low-single-digit range with mainly broad – spread across all three divisions, I guess. But the International division continues to have momentum. It's got the government initiatives in that division which will underpin that demand and as Jo said that we see continuing strong underlying demand in the US as well.

In terms of leverage, we are just under our target range. And I think at the moment with the fact we are actively engaging in our M&A pipeline and as we say, tolling up, it would be rather remiss at the moment to give a special dividend while M&A remains as an opportunity for the coming years.

And hence, we were at this point in time, we would not either do a special dividend or a share buyback but, that may change over the next two years.

[Toby Thorrington, Analyst, Edison Investment Research Ltd.]

[ph]

Sure (00:43:27). That's clear. Just could you give us some sense about these things that's difficult to flag externally at this stage? Could you give us some sort of sense of how well-developed or progressed the M&A pipeline is?

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

So, we're very active on it. We've got – conversations are underway. At this point, though, we've got a pipeline in place for each of the divisions. We've got somebody dedicated to managing the process of M&A at the group center, and so, it is a series of conversations underway with different potential opportunities. But I wouldn't like to say at this point, sort of what would be the likely timing for anything coming to fruition. I think it's important to recognize it is a very dynamic marketplace for M&A at the moment, and we will stay very disciplined in our – how we look at valuation of assets and so on. And so, that's what we're navigating.

[Toby Thorrington, Analyst, Edison Investment Research Ltd.]

Understood. Very clear. Thank you very much.

[Operator]

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

[Christen Hjorth, Analyst, Numis Securities Ltd.]

Thank you. Morning, guys, and apologies I can't be there in person today. I've got two questions, if that's okay. First of all, I mean, you've obviously set out the medium-term margin targets, but progress being disguised by some of these cost price dynamics

[indiscernible]

(00:44:56) perhaps the surcharges, which is the

[ph]

peer pass-through (00:44:59). But maybe you could provide a little bit more color on the work that's going on behind the scenes to structurally improve margins and just how you are measuring success, given that dynamic – sort of dynamic on margins?

And the second one, obviously, is the second half of last year, labor availability and supply chain issues were a major theme. Just where are we there with – now with those dynamics and what actions Tyman put in place to deal with those? Thanks.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Great. Thank you, Christen and good to speak. So, in terms of the – what's going on behind the margin, you're absolutely right, Christen. It's very – there's an awful lot of work going on behind the scenes. And we're confident that the structural actions we're taking very much keep us on the glide path to achieving those margin targets. But nevertheless, with all of the muddiness in what's happening, it's difficult to clearly be able to point to that externally, as you say.

The way we're – the way we are looking at this, we've got – we look at the gross margins of our different facilities. So for example, Statesville, which was a topic of a lot of discussion a couple of years ago, has improved their gross margin, another 4 percentage points in 2021 through continued efficiency activities. I mentioned already that we've put in additional seals capacity into our UK facilities and that has got – that operates at a 20% higher throughput and that's already within only two months of start-ups. So, there is more to come there as well. But the fact – you've got a 20% lift there is important.

We've talked about the continued inter-site line transfers going on in North America that is partly to relieve intensity in sites which are more labor-constrained. But in doing that again, we're moving things to more operationally-efficient locations as well. So, for example, we've taken a lot of lower skilled activity out of Owatonna in the core of the States and move that down to Monterrey and Juarez in Mexico and a little bit of activity up to Brampton in Canada as well.

So, there's a lot going on across the group. I mentioned also the automation activities in Budrio. We're very much converting Budrio into a factory of the future with robotics, automation in place there. And again, we see that coming through in the gross margins for that facility.

So, there's an awful lot going on. But the challenge as you say is just – is peeling it back at this stage in a clear way. And while this level of exceptional is not just about the level of – it's not just about the higher costs, but it's the volatility of that inflation. And therefore, even with best efforts keeping pricing in synced with that volatility is challenging. Until we're in a more stable inflationary situation, it will be difficult to pull that out, as well as the dilution that Jason's referred to as well.

In terms of the labor issues, so, fundamentally, labor remains pressured in North America. As we've talked before, structurally, what – it was pressured pre-COVID. It just wasn't as stark as it was then through COVID. I think through COVID, what happened was there was a band of people who were closer to retirement, who left the workforce. And there were other people in the workforce who with dual income, who took the option that one of them wouldn't work during the COVID pandemic to manage all of the domestic disruption that was also going on. So, progressively, we've seen that improved and absenteeism has also dramatically improved in the last handful of weeks here. We were – again, the Omicron wave came through in January. But it's improved since then.

So, the backdrop has improved. Actions we've taken, again, I talked about we've taken lower skilled activity out of facilities. We've also taken labor content out of products as well. So, what I mean by that is rather than having to coat a raw steel product, bringing in a stainless steel-coated product component at the start and using that, it's taking operations out. It's, therefore, making our operations more efficient, and putting automation in. So we're – I'm mentioned in Budrio, there's a lot of automation activity underway there. We've operated with a very high number of temps during the year in Budrio, putting that automation activity in. It's allowing us to get a better, more balanced labor mix there.

[Christen Hjorth, Analyst, Numis Securities Ltd.]

Excellent. Thank you very much.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Thanks, Christen.

[Jason Russel Gary Ashton, Chief Financial Officer & Director, Tyman Plc]

Thanks, Christen.

[Operator]

The next question comes from Robert Eason from Goodbody. Please go ahead.

[Robert Eason, Analyst, Goodbody Stockbrokers]

Good morning, everyone. Can you hear me?

[Jason Russel Gary Ashton, Chief Financial Officer & Director, Tyman Plc]

Morning, Robert.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Morning, Robert.

[Jason Russel Gary Ashton, Chief Financial Officer & Director, Tyman Plc]

Yeah. We can.

[Robert Eason, Analyst, Goodbody Stockbrokers]

Morning. Sorry, I can't be in person there. Just two broad questions from me. Just around the whole area of sustainability. Firstly, what type of discussions are you having right through your supply chain in terms of getting them to help in terms of embedded carbon that's in the product that you receive from them or whatever other discussions that need to be had? And at the other end, what sort of

[ph]

poll (00:50:50) are you finding or change in the

[ph]

poll (00:50:53) you're finding from the customer base in terms of ensuring that you're doing the right thing?

And in relation to that, do you – given your scale and your global scale, do you see sustainability being a competitive advantage for the likes of time and given the amount of attention that you can apply to it? Sorry. That's a few questions around the one area.

And my second kind of area of questions just around M&A, and I'm not looking for precise answers because I understand it's a very dynamic process. But you did say in the presentation that you're defining areas.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Yeah.

[Robert Eason, Analyst, Goodbody Stockbrokers]

[indiscernible]

(00:51:33) specific characteristics. Maybe can you just highlight areas that definitely won't be going in into or how should we think about the opportunities? That's maybe a better way to place the question.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Great. Let me just take both of those. So, on sustainability, I think some really nice examples of customer engagement. So, if I take one of our largest customers in North America, our sustainability, our head of sustainability at Tyman, is engaged with their head of sustainability and has had at least three conference calls conversations with the head of sustainability.

I've met that individual as well when I was over in the States in November and had a dinner with that customer. And there are conversations underway, sharing both best practices in that situation, but also work – looking at actual co-projects we can work on together to improve the end-to-end carbon footprint of the products.

Other examples of that in the UK where we go into the wholesale trade merchant channel, where historically, they've used those plastic clam packs, the ones that are impossible to open. We've been working with the trade channel to look at alternative ways for that – to have that packaging set up that is much more sustainable. And in general, we've got a huge sustainable packaging initiative underway across the group looking at everything from the wrap that goes around the pallets through to that consumer packaging itself.

But many of these initiatives, to your point there is that customer engagement point, and there is definitely customer pull coming through not only in the UK and the International divisions where there is momentum. Again, in the International division, it's customers that are pulling for this cradle-to-cradle certification that we've been driving as well. But what's interesting is that, although people think that the US is a bit further behind on sustainability, we're certainly seeing customers in North America very active in that conversation with us. So the fact we are front-footed about this, to your point, I think is going to give us a competitive advantage.

And equally, with many of these activities as well, we are absolutely working back up through the supply chain. That is both in terms of as we look at our science-based target development, we are in the process of doing the Scope 3 action planning and that entails looking at the highest uses of – the highest carbon footprint suppliers we have and working with them to reduce their carbon footprints. We're also through, TCFD is driving that engagement with suppliers in terms of the risks with our suppliers, flood risk, and so on.

And then again on the actual product side of things, packaging is one topic area, but things like coatings as well. And hazardous material elimination from components, from the coating of product. We talked about that oblique handle and the very high recycled aluminium content to that. A lot of these projects involve end to end collaboration with suppliers to achieve. And again, we really do see it as a competitive advantage for us.

In terms of M&A, as we – I already answered in response to the earlier question. We are focused on the areas that we articulated back at the capital markets event. So it is a geographic dimension to our focus in terms of we're already high – in sort of mid-high 40s market share in North America, so, we'd be looking at rounding out in other parts of the world in terms of the existing portfolio where there is natural adjacency of other comp – from other businesses.

Secondly, there is a technology bent to it, so where there are particular – where there is technology, and there are more niche businesses that actually could be additive to us, that could be on the electronic electromechanical side. But it could also be a gain on very specific development, very specific pieces of IP that would be of interest.

And then sort of more mid-term, there are adjacent areas to what we do. Again, it comes back to your question on sustainability, Robert, areas where we can see there's going to be disproportionate growth, and would be interesting areas from an adjacency point of view. But our immediate focus would be our existing portfolio, and then stepping into those adjacencies more midterm.

Do we have any other questions?

[Operator]

[Operator Instructions]

There are no further questions at this time. I'd like to hand back over to your host. Thank you.

[Jo C. Hallas, Chief Executive Officer & Director, Tyman Plc]

Great. Well, thank you, everyone, as always for your questions and for joining us this morning. I hope everyone stays safe and well. And with that, I will close the session. Thank you very much, everybody.