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Edited Transcript of TYMN.L earnings conference call or presentation 25-Jul-19 9:30am GMT

Half Year 2019 Tyman PLC Earnings Call

Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Tyman PLC earnings conference call or presentation Thursday, July 25, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jason Ashton

Tyman plc - CFO & Director

* Jo C. Hallas

Tyman plc - CEO & Executive Director

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Conference Call Participants

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* Aynsley Lammin

Canaccord Genuity Corp., Research Division - Analyst

* Christen David Hjorth

Numis Securities Limited, Research Division - Analyst

* Robert Eason

Goodbody Stockbrokers, Research Division - Head of Research

* Toby Russell Thorrington

Edison Investment Research Limited - Analyst

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Presentation

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Jo C. Hallas, Tyman plc - CEO & Executive Director [1]

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Welcome, everyone, and thank you for joining Jason and me here today for Tyman's First Half Results presentation. We'll start by taking you through the slides, after which there will be some time for Q&A.

As you know, both Jason and I have recently joined the business, so we thought before we present each of our relevant sections that we would give you a little bit about our backgrounds, what we've learned about the business and our priorities for the near term.

I joined Tyman on the 1st of March and became Chief Executive on the 1st of April. My career has been in international manufacturing-based businesses, all of which have had strong brand leadership in their respective markets. I gained significant exposure to building products' markets through 5 years leading the residential heating controls' business for Invensys and almost 7 years on the Board of Norcros plc.

Since I joined Tyman, I've visited a majority of our facilities globally, getting an understanding of the business and meeting with employees and customers, and I'll share some of my learnings from these meetings.

Moving to Slide 3. Tyman has already built a solid platform for growth, with a portfolio of market-leading brands built through quality M&A and a series of investments in our footprint, especially in the U.K. and the U.S. The building addresses a market -- the business addresses a market that has long-term growth prospects. Our products make our living and working spaces more secure, more comfortable, more energy efficient and more aesthetically pleasing. And these are all valued market drivers, trends of increasing importance, among both homeowners and commercial building users.

Furthermore, these products provide a strong value-add to our customers' products. They constitute a relatively small proportion of the installed cost of the windows and doors that they go into, but they contribute a disproportionate value towards their quality, efficacy and look and feel, which in turn reduces the threat of commoditization as customers seek to match or enhance the quality of their own products.

Tyman also creates enhanced value for its customers through innovative and differentiated products and solutions. Quality is embedded in our products through our product design and manufacturing processes in, for example, how we achieve window balance that makes it feel as effortless to raise the window as it does to close it. And we innovate with and for our customers, whether that's adding value to their end products, such as developing customized seals with them or helping them run their assembly and installation processes more efficiently, such as delivering our products in sequenced crates to their production lines, which of course, creates a certain customer stickiness. These elements give us competitive advantages in the market and should help us to develop -- deliver sustainable progression in the long term.

This is all underpinned by our people. Tyman has a talented organization with a strong knowledge of our domain, our markets, our customer applications, and the products and technologies. Tyman's operating model is one that promotes an entrepreneurial spirit and agility within the businesses, and this is something that we will continue to leverage across the broader group.

Moving forward, the group has significant opportunities for both revenue growth and margin expansion. Revenue growth through new products into existing markets and vice versa, but also through simply injecting greater discipline and focus on executing the opportunities that are available to us and then providing frictionless service to -- customer service to deliver them.

There are clearly also opportunities for margin expansion through driving process excellence into our operations and especially fostering a culture of lean excellence throughout our organization.

The business began this journey 3 years ago, with its major footprint rationalization programs in the U.S. and the U.K., creating larger centers of excellence in transferring facilities from smaller, less economic sites. While a heavy lifting of these 2 programs is now being achieved, 2 issues have arisen with the -- from the execution of the U.S. program. These issues are very fixable, but they will delay the expected benefits in the near term from that program, and I'll come on to talk about this in more detail in a couple of slides.

So these are my initial observations, but they also lead to a number of near-term priorities for the business. So obviously, a first key step will be to address these North American operational issues and customer losses that are related to the footprint program, and again, I'll come back to that. The second point is that over the course of 2016 to 2018, as you all know, the group undertook a series of very successful acquisitions. And while the integration of these businesses is largely being undertaken to the extent that have been planned, activities are still underway with the more recent acquisitions. And in any case, there will always be more that we can do across these acquisitions to strengthen our platform and extract greater leverage.

We have a strong pipeline of innovative and exciting new products, both recent launches and those still to come to market. And I'll touch on examples of some of these as I review the divisions later. It's a priority for us to make sure that we get solid traction with such new products in the marketplace.

And finally, there's an opportunity to create greater cohesion across our international portfolio of products, reducing duplication of R&D efforts and leveraging our know-how and other capabilities more efficiently across all relevant markets.

The key output from this near-term focus on organic revenue growth and margin expansion should be improved cash generation and a reduction in our debt position. We recognize that debt levels are a focus area for investors in the recent market climate and it is a priority for us to improve our leverage.

In parallel to tackling these near-term priorities, we'll also be evolving a plan for the medium to longer-term development of the group, and we'll be sharing these plans at our Capital Markets Day that we've reserved for the 3rd of December. And we hope to see many of you there.

I'd now like to walk you through the highlights from the first half results for Tyman. The headline performance appears very positive with 10% growth in both revenue and operating profit due to solid contribution from both the 2018 acquisitions and also currency. The underlying results, however, are weaker than expected. On a like-for-like basis, revenue was down 1% and adjusted operating profit down 4%. While market backdrop is certainly a factor in this, the main issues are related to our footprint program in AmesburyTruth, and I've got a slide on that as the next slide.

The performance of our U.K. and Irish operation ERA was strong, with slight revenue growth, but much stronger profit growth in a fundamentally weak market. And we are performing well in most of our markets in SchlegelGiesse with like-for-like revenue and profit growth across many of our major markets in this division despite a rather mixed market backdrop.

Our acquisitions are performing well, with our largest acquisitions Ashland and Zoo performing ahead of schedule, and Ashland on target to deliver the planned $5 million of synergies. Profab and Reguitti are also making progress, albeit a little slower than planned.

In February, ERA acquired Y-cam and this brings exciting new smart security capability to the group's nascent software, a smartware offering, and supporting our strong ambitions in this sector. Finally, we've raised our interim dividend by 3% to 3.85%, demonstrating how our Board is comfortable maintaining our progressive dividend policy, which in turn speaks to our confidence in the outlook.

There are also 2 key areas of new guidance that I'd like to draw your attention to. Firstly, over the medium term, we are targeting a new lower leverage range of 1 to 1.5x adjusted EBITDA. Secondly, we've also provided some guidance on the effects of footprint disruptions.

Which leads me on to Slide 5, where I'd now like to take you through the footprint-related issues at AmesburyTruth, and I will go into a little bit more detail here because there are quite a few complex aspects to this, which I'll try and make sure come across clearly.

So on the left, you'll see the 2 buckets of the footprint-related issues, cost inefficiencies and customer losses. And taking the cost inefficiencies first. During the site moves, recruitment and retention of experienced personnel was a challenge and as a result, production ramp-up to stable yield levels has been slower than expected in both Phase 1 of the project, which was the hardware manufacturing facilities, and the Phase 2, the sealed manufacturing facilities. Accordingly, production processes were initially less efficient with more downtime for machine setup and maintenance, more scrap and ultimately lower yields. And these issues compounded to give rise to poor stock availability.

In an effort to mitigate the impact on customers as far as possible, the stock outages drove more frequent line changeovers of production, expedited freight expenses and additional temporary staffing to get on top of the problems. And these compensatory measures have added to our production costs in the first half. Customer losses have followed from this. Having experienced significant frustrations with the stock availability problems that have arisen in both Phase 1 and Phase 2 of the project, some customers have now switched supply to other sources. However, this has been further exacerbated by specific issue related to the door seals product line.

Taking advantage of the relocation of door seals manufacturing from Rochester to Statesville in late 2018, AmesburyTruth introduced a new type of door seal that required a more environmentally friendly extrusion process as opposed to a molded foam process and therefore, also a different type of equipment to manufacture. With various advantages offered by the new seals product, the group, therefore, chose to invest in this new equipment for its new Statesville facility rather than transferring from Rochester, the very dated equipment used to produce the legacy product.

With the closure of Rochester last year, most of the production capacity for the foam-based seal product was exited. However, initial customer take-up of the new seal product has been slower than expected, in part due to the significant efforts required by customers to test and transition their door systems to the new products.

With continued demand for the legacy product and yet the lack of capacity now available, customers have clearly being testing alternative supply sources with a result that more recently, there's been switches. The delayed impact has been pronounced by the fact that customers stockpiled the old product in advance of transition with a consequential stronger impact on sales in the end -- in last half of 2018. Resolution of these issues is clearly a very high priority for the group and progress is being made.

So moving to the right-hand side of the chart, Status. So as previously reported, in Q1, the final move of the footprint consolidation project was completed with the closure of Rochester and transfer of production in Statesville. The Phase 1 hardware facilities, including the Sioux Falls and Juarez sites, are now stabilized with operational inefficiencies resolved and production -- productivity improvements being realized. The Phase 2 seals production facility in Statesville is not back to the service level performance we expect of our operations, but is making progress with the workforce experience gaps now largely resolved and the interim staffing levels wound down.

However, the further action steps were also being taken to get things fully back on track. Firstly, we have various actions underway to continue to improve the process integrity at Statesville and get the yields up to the levels we expect, which will in turn stabilize costs. We are also working to reinstate capacity for supply of the legacy seal product to meet customers continuing demand for this. Provided we have the capacity and stable service levels, we believe that customers would generally prefer to work with AmesburyTruth for their door seals given our ability to develop solutions for their complex door requirements and the locality of our supply chain.

AmesburyTruth offers our customers various competitive advantages, including these codevelopment capabilities, the strength of our footprint, breadth of portfolio and specific market-leading product features within this. We've also got a lot of goodwill with our customers derived from our long history of working together. As we address the outstanding issues, in due course, we expect to be able to leverage these competitive advantages and win back lost customers.

In terms of impact, while we still expect new footprint to yield improved margin performance in the medium term, this will not be evident to near-term performance due to these disruption issues. We continue to believe that the footprint consolidation moves were a necessary prerequisite to the business being able to execute on its growth plans for the future.

With that, I'd now like to hand you over to Jason for his introduction and the financial review of our H1 performance.

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Jason Ashton, Tyman plc - CFO & Director [2]

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Thank you, Jo. Good morning, everyone. It's a pleasure to be here, and thank you for joining us this morning.

I joined Tyman at the end of April, and like Jo, I have over 20 years experience in international manufacturing businesses, focused in the fast-moving consumer goods sector, in businesses characterized by strong brands, leading market positions and a good history of margin growth. My experience has both been at the corporate center and at the operational level. And most recently, I was interim CFO of Nomad Foods, a $4 billion listed U.S. company and owner of the Birds Eye brand in the U.K. I am presided over its return to organic revenue growth as well as sustainable margin expansion and strengthening cash conversion.

And like Jo, I can see that this business has a solid platform for growth, good margins and strong cash flow generation. And I believe, there remains significant opportunities to optimize performance and to demonstrate both organic revenue growth and margin expansion.

There are a few isolated and fixable challenges, which we are working through to resolve, while at the same time, driving a stronger culture of performance management. And through a period of focus on organic performance, this will lead to a natural deleveraging and an associated value creation for shareholders. This will be my key priority over the next few years.

I believe the former leverage target for the business of 1.5 to 2x adjusted EBITDA is too much in the current climate, and I would prefer to see leverage coming down to under 1.5x adjusted EBITDA in the medium term. And so for me, this is an exciting time to be joining Tyman. I believe it has a strong equity story and one we hope to convey much more clearly in the future.

So turning now to the financial overview of the first half. And on Slide 7, you can see the KPIs for the period. Reported revenue of GBP 302 million and adjusted operating profit of GBP 42 million are both up 10% on a reported basis, thanks largely to last year's acquisitions and currency impact from a weakening Sterling. However, on a like-for-like basis, revenue is down 1% and adjusted operating profit down 4%. Operating profit margin has been maintained at 13.9%, including the impact from IFRS 16. As you may have noticed, IFRS 16 has had an effect on our results, and we have pulled together a slide that covers off all the impacts in the Appendix.

Returning now to operating profit. We are disappointed with the performance, which was due to a combination of customer losses and operational issues that Jo has alluded to and also to the impact of softer end markets, and I will cover this in more detail in a moment.

Adjusted EPS for the period was flat versus last year. However, excluding the impact of IFRS 16, which reduced our profit before tax, this would have shown an increase of 3%. Return on capital employed fell by 1.2 percentage points to 12.7%, largely as a result again of the adoption of IFRS 16, but also a reduction in like-for-like profit and slightly higher working capital build. And excluding the impact of IFRS 16, capital -- return on capital employed was 13.1%.

Operating cash conversion in the first half of 2019, again excluding IFRS 16, was 52.1% compared to 54.2% last year, impacted as highlighted by slightly higher movements in working capital. As in prior years, given the seasonality of the business, there is a working capital build in H1, and we expect this to fully unwind in the second half.

So turning now to leverage. Pre-IFRS 16 leverage at the period end was 2.21x or 10 basis points up on the 2.11x of last year. This reflects the extra debt taken to fund the acquisitions in the second half of last year. And we are targeting a reduction in leverage through H2 to below 2x adjusted EBITDA within the historical guidance range of 1.5 to 2x.

Turning to Slide 8 now. We take a closer look at the revenue evolution. Here, you can see that we have benefited from currency in the period, in particular the weakness of Sterling against the Dollar. The disposals relate to the noncore automotive and copier business that we sold as part of our closure of the Rochester site, bringing us to a prior year H1 like-for-like revenue of GBP 281.7 million.

Looking next to the key impacts and the half year revenue performance, the footprint issues resulted in circa GBP 5.2 million of lost revenue, which we only fully identified very recently. This is largely due to market share loss in the door seals area, where we have seen much slower pickup of the newly launched product, but also some continued fallout from customer service issues associated both with the Statesville facility and to some extent from earlier problems in Phase 1 of the footprint project.

We have been successful in implementing price increases to offset any cost inflation that we saw last year, which contributes GBP 10.1 million. Volume declines were driven mainly by market softness in both the U.K. and U.S., and offset in part by the growth in some of our other key international markets. This yielded a like-for-like performance down overall by just 1%. And then finally, our acquisitions of last year then contributed GBP 22.2 million or 8%, taking our reported number to GBP 301.9 million, up 10% on previous year.

So turning next to the adjusted operating profit bridge on Slide 9. As you can see, the currency and disposals metric reflect similarly on adjusted operating profit as they did for revenue. And again, the biggest impact to our adjusted profit performance in the period relates to the U.S. footprint project. As identified, both customer losses and operational issues caused a drag of circa GBP 4.7 million net of the footprint gross savings. This will carry on into H2, but we do expect some moderation as we continue to get on top of the productivity issues.

Turning next to pricing. You can see that our actions here fully recover cost inflation, and as always, there is a lag between realization of price and the impact of cost inflation and we are therefore, benefiting this half from price rises taken at the end of H1 2018, which should not repeat in H2. And at the same time, we have seen some moderation on input costs, with only steel prices rising. As you can see, half of the cost inflation is related to the effect of U.S. tariffs, and we've recovered this in full.

Productivity generated around 6% improvement in profitability and this related to the benefits of consolidation into the ERA i54 site in the U.K. as well as synergy benefits from acquisitions and other manufacturing efficiencies. So the net effect of this was to deliver a like-for-like performance, 4% down on H1 of last year, with acquisitions and IFRS 16 leading to a reported adjusted operating profit growth of 10% versus last year.

Turning to Slide 10. I will now take you through the divisional performance. AmesburyTruth revenues and profits were boosted by the Ashland acquisition and currency. But on a like-for-like basis, revenue fell by 3%, driven by the customer losses we have already highlighted. And on a like-for-like basis, adjusted operating fell by 5%, driven by a combination of those footprint issues, but partially offset by the realization of Ashland's synergy benefits.

Both the operational and customer loss issues related to that footprint program are fixable and actions are already underway to get the business back on track. But we do expect this disruption will continue to hamper performance in the near term. ERA posted very strong revenue and adjusted operating profit growth. The revenue growth is clearly benefiting from acquisition, but also pleasingly reflects a resilient underlying performance in a challenging and declining market.

Adjusted operating growth of 43% is driven by the acquisition, but also by margin progression in the base business. The strong margin improvements at ERA reflect savings from consolidating to the i54 site as well as the benefits on timing of price rises and cost inflation.

SchlegelGiesse had a decent half and we saw a strong Q1, but growth rates did slow in Q2, and there was a mixed picture across the markets, which Jo will come to later in the presentation. So overall, SchlegelGiesse like-for-like revenues grew 4% from a combination of volume growth and price rises. Reported revenue grew 11%, benefiting from the Reguitti contribution. Operating profit at SchlegelGiesse grew 2% on a like-for-like basis, slightly less than the revenue growth due to increased overheads to support future growth in the division.

Turning next to Slide 11. Here, you can see the performance of our recent acquisitions, where on the whole, we are happy with progress. All our acquisitions are either on target or already achieving the required 15% return on acquisition investment apart from Reguitti, which is a relatively recent acquisition and now realizing synergies.

Turning to Slide 12, which shows the cash flow performance for the period. Adjusted operational cash flow of GBP 21.4 million is slightly above last year, driven by an increase in adjusted operating profit, but offset by a slight increase in working capital build. And working capital management remains a key focus for the group. This leads to an adjusted operating cash conversion of 52.1%, a very slight decrease from last year.

Moving further down the cash flow. Income tax payments were GBP 2 million higher, driven by a refund received in 2018 and timing of payments on account, whilst net interest paid was GBP 2.4 million higher due to an increase in debt to fund the 2018 acquisitions, but also due to a slightly higher cost of borrowing. An exceptional cash cost of GBP 6.9 million mainly relate to restructuring payments associated with the closure of the Rochester and Amesbury, Massachusetts facilities.

Finally, I would like to take you through the key changes to our outlook and guidance this half on Slide 13. Firstly, the disruptions at AmesburyTruth will impact both revenue and profit. On adjusted operating profit, the disruptions are expected to more than fully negate the cumulative benefits of the footprint program in 2019 and largely negate the accumulative benefits in 2020.

As previously announced, cumulative savings related to the footprint project were $5 million in 2019 and $10 million in 2020, but these will only be evident in the group P&L in the medium term. Full year exceptional costs are now expected to fall within a range of GBP 11 million to GBP 15 million, which reflects the write-down of fixed assets and associated costs related to the new seals product.

Trade working capital is once again expected to fully unwind in the second half, delivering cash flow benefits in a range between GBP 25 million and GBP 30 million. And we expect full-year CapEx should fall within a range of GBP 12 million to GBP 15 million, driven by some timing effects. In the medium term, we have issued new guidance for our group leverage target of between 1 and 1.5x adjusted EBITDA. But as a reminder, at the year-end, it will be below 2x.

So in summary, while it has been a disappointing half in terms of trading and financial performance, these issues are eminently fixable, and I believe beyond that, there are further opportunities to drive margin expansion and strength cash generation.

And with that, I will now hand over to Jo to take us through the divisional reviews.

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Jo C. Hallas, Tyman plc - CEO & Executive Director [3]

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Thank you, Jason. So turning to Slide 15. U.S. residential and commercial markets were both soft in the first with general macro uncertainty exacerbated by a continued overhang from the earlier, in 2018, high mortgage rates, but also some exceptional weather in the first 4 months of the year, which disrupted our customers' activity in the market. I won't cover the detail presented in our statement on the specific market statistics other than to note that in the near term, we expect the new build market to be, at best, flat, even though new build activity in the U.S. continues to be materially below long-run average levels on both an absolute and per capita basis. In RMI, the LIRA index suggests modest improvement in the second half, which accords with our own experience with customers. We've already talked about the operational issues and the customer losses arising from the footprint, so I won't touch on that again.

Moving then to Ashland. Ashland was acquired, as you know, in the first of last year, performing in line with expectations. Revenue fell just 1% due to the softer market conditions, but adjusted operating profit increased by 13%, largely as a result of the synergy benefits coming through and other production efficiencies. As already talked, the synergy plans are on track with $1.8 million of benefit realized in the first half.

Our Access Solutions business, Bilco, also delivered a strong performance, which came in 4% ahead of last year on revenue and 7% ahead on adjusted operating profit, benefiting from price increases and strong growth in reach -- roof hatch sales to wholesale distributors and sidewalk door products despite a weaker commercial construction market.

Finally, in early June, Bob Burns was appointed to lead AmesburyTruth. Bob had joined the Tyman Group through the acquisition of Ashland Hardware last year. He's over -- he's got over 25 years experience in the building products industry and most recently, he led the turnaround of the Ashland business under its private equity ownership from 2013 to 2018 when he drove significant improvement in the financial and operational performance of that business. We've already touched on both of those priorities for the business in the second half.

Turning just to the right-hand side of the slide. New product launches that bring relevant differentiated value to customers are the lifeblood of our business, and here are a couple of examples. The photo on the right is a smoke vent. Bilco has developed 2 unique products, which are set to launch this quarter; a thermally-broken smoke vent to address a new energy code in the States and a smoke vent that limits outside noise, for example, rainfall, for application in theaters, auditoriums and schools.

Moving then to the next slide and ERA. ERA is our U.K. and Irish business and delivered a strong -- a solid performance in particularly challenging markets. The market contracted significantly versus H1 2018, with FENSA data for door and window installations pointing to the first 5 months being 8% down on prior year. This is driven by a contraction in RMI investment, which constitutes the majority of the market. New build construction grew but only very modestly, and we expect the market to remain subdued for the balance of the year.

Our performance was then largely down to share gains in hardware sales, both direct into OEMs, but particularly via the distribution channel, where our performance was up 11% like-for-like. In February, ERA completed the acquisition of Y-cam, a smart home security business, which offers a proprietary cloud-based platform, together with a range of award-winning security cameras, alarms and sensors. And this acquisition provides ERA with a market-leading technology that will enable the provision of value-added services, such as security monitoring. Since acquisition, the business has been integrated into ERA and a second-generation range of smartware products is now due for release in the second half, harmonizing ERA's existing smartware range onto the Y-cam platform. This will be launched under the ERA Protect brand, which you can see in the first photo on the right there.

With regards to the 2018 acquisitions, Zoo, the architectural hardware business acquired in May last year, posted revenue growth of 6% and adjusted operating profit up 17%, reflecting realization of synergy benefits. Profab, acquired in August last year, has had a challenging first half, but really down to project timing and with order wins improved towards the end of the first half and a stronger second half expected.

During H1, we brought together the division's commercial access businesses, so that's Bilco, Profab and Howe Green, with the launch of the Access 360 brand, providing a single go-to-market identity for holistic offer. These well-established companies all serve the same market, working with architects, specifiers and building service professionals to provide trusted high quality and safe access solutions that respectively cover the roof, the wall and the floor.

In the first half, the combined businesses posted 2% like-for-like revenue growth, which was slightly behind expectations, but reflective of the timing of key projects with the large cross rail project coming to an end and the Battersea Power Station project slightly delayed.

Our priorities for ERA are threefold. Firstly, we need to drive the growth of the Zoo hardware sales through further product portfolio extensions. Secondly, we need to expand the smartware installer network, our new channel for smart security products. We've already trained some 250 installers to date, but we are seeking to double this by the end of the year. And thirdly, we need to drive improvements in our -- both our sash windows renovation business, Ventrolla, and our integrated access portfolio, Access 360, especially around lead generation and conversion.

On the right of the side -- slide, you'll again see some examples of our important innovation growth engine. We've talked about the ERA smartware products. The middle picture shows an example from the new heritage range developed for leading composite door manufacturer, Solidor. ERA has achieved this finish using advanced tooling design rather than hand forging, which in turn achieves a more aesthetic, repeatable and ethical result. The picture on the right is the new ERA lockdown emergency barricade device, which launched in H1 and is developing a strong pipeline of sales leads. With such capability increasingly demanded for public building, such as schools and event centers, we believe ERA lockdown has a strong potential for the future.

Turning then to SchlegelGiesse. Our international markets presented a rather mixed picture over the period. European markets were broadly flat, with market growth in Italy, France and Spain, but momentum slowing in both Italy and Spain across the period. Germany was broadly flat and Russia continued to decline. China's residential RMI market grew strongly. Meanwhile, in the Middle East, Latin America and Australia, macroeconomic conditions subdued the window and the door markets. Against these markets, SchlegelGiesse posted a solid performance in China driven by our growing position in the retail channel and a solid performance in the Middle East.

The business also grew in Italy, France, Russia and the U.K. Our performance in Australia and South America continued to be hurt by the challenging macroeconomic backdrop. Integration of Reguitti business, which was bought in August 2018, continued to progress the first -- in the first half of 2019. Synergy benefits from cross-selling activities are being realized, but increased penetration by low-cost competitors in the German and [REIT] Italian markets has offset some of these synergies in the first half. A number of actions are underway to respond to these pressures, including our first priority being to drive the combined offer of SchlegelGiesse and Reguitti in the co-markets.

SchlegelGiesse are also pursuing some further manufacturing efficiencies, including being currently in the process of exiting their small-scale production facility in China, where they're going to leverage instead the strength of our supply base in this region. The business is also exploring opportunities to achieve greater efficiencies out of our seals manufacturing footprint, including driving lean excellence.

In terms of new products there on the right, the evolving trends for narrower window frames and a wider expanse of glass continues to drive strong sales growth of the concealed hardware product, such as concealed hinges and rosette-free handle shown here. SchlegelGiesse is continuing to invest in developing and expanding its range of innovative products with further product launches planned this year and next.

Turning finally then to the summary slide. Fundamentally, it's clear to both Jason and me that the business is in reasonable shape. There are some near-term challenges in the U.S., but these are confined and very fixable. In overall terms, the business has a solid platform for growth derived from its leading international brands and recent footprint investments. The strengths of the business lie in its deserved reputation for security, comfort, energy efficiency and design. It's ability to capture margin through disproportionate value creation for our customers and our ability to bring relevant differentiation in our offer.

Our priorities are focused on improving the organic performance of the business. We need to digest and better leverage the skills, products and capabilities that we already have within the operating businesses across the group, including addressing the operational and customer issues in the U.S. The key outputs of this focus in our organic performance should be improved cash generation and reduction in our net debt, and we've issued new guidance on this medium-term leverage target today.

Altogether, this adds up to a story of near-term deleveraging and creating the foundations for long-term sustainable growth. We'll bring you more information on this as well as our medium and longer-term priorities at the Capital Markets Day at the end of the year. And with that, I'd like to thank you all for your attention and open the floor to questions. And we're going to have a roaming microphone, which is...

We've got a roaming microphone there. So please, wait for that to come around.

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Questions and Answers

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [1]

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Aynsley Lammin from Canaccord. On the U.S., the seals business, historically, can you give us an idea of what the total sales were in that area in kind of dollars millions or pounds million? And where you are seeing and customer losses, is it just really related to that product or if you've got some big customers, that have stopped buying that product and there is a risk they may stop buying other products in -- from the group?

And then secondly, just on the reduction in the kind of leverage guidance 1 to 1.5x, is that just really reflects less appetite generally for M&A and deals going forward? Or is there expectation of lower CapEx, working capital improvement? What's driving that mainly?

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Jo C. Hallas, Tyman plc - CEO & Executive Director [2]

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Okay. Great. So to the door seals, the first one is size.

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Jason Ashton, Tyman plc - CFO & Director [3]

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Yes, the sale -- the size of that business, at least when it was at Rochester, was around $27 million.

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Jo C. Hallas, Tyman plc - CEO & Executive Director [4]

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And so in terms of the losses then, where we've seen the losses, we've seen the door seals business, there was a loss of large customers in that business. Obviously, tail is well, but some large customers. They've stepped away for now, but they've been -- anecdotally, they've been quite clear that this is really just because we can't deliver the product that they would like to have, and as I said earlier in the presentation, giving a strong indication that if we get that capacity back and have strong service levels that we should have then they would be very keen to looking -- working with us again.

And in terms of other customers, it's a mix, really. We've -- there's some customer fallout from Phase 1. That's only happened even though Phase 1 has been stabilized earlier last year. The -- we've still had the fallout only hitting us from that earlier -- in this year.

So again, there's a mix of in that in terms of service-level impact as typically happens. Customers have suffered a service-level problem. They are anyway buying a basket of products from us and I think that causes them to in time obviously go and look at alternatives and that takes time for them to make decisions put in place. But that's why we're seeing some of these notifications now.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [5]

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And how quickly can you get the current capacity back to the (inaudible).

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Jo C. Hallas, Tyman plc - CEO & Executive Director [6]

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It's quite -- we've got 2 options, one is external, one is internal. The internal is a longer time frame, so it's probably sort of 12, 15 months if we do it by building it ourselves. But there are options to use other people's technology outside of the industry and to source that way in the near term. So we've got several conversations going on both of those fronts to try and get this resolved as quickly as possible.

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Jason Ashton, Tyman plc - CFO & Director [7]

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On leverage, can I answer that?

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Jo C. Hallas, Tyman plc - CEO & Executive Director [8]

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Yes, Jason. You can take the leverage question, Jason?

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Jason Ashton, Tyman plc - CFO & Director [9]

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Yes. You mentioned around pausing M&A, that's so -- never say never because you never know when these bright strategic opportunities arise. But looking at the next 12 to 18 months, that is our assumption. But also working capital, as I said, remains key focus, and I do think there are opportunities to optimize our working capital performance, particularly around when we resolve the issues around the footprint project. That should also yield the savings that we talked about in the medium term, but also a better performance on working capital, particularly in inventory levels.

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Toby Russell Thorrington, Edison Investment Research Limited - Analyst [10]

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Toby Thorrington from Edison. Just a couple of cash questions and one on the U.S., please. So with your cash guidance, can you just give us a feel for what you are excepting -- expecting in terms of cash exceptionals for this year, Jason, please?

And also on working capital, just clarify the points that you made on the guidance slide, please? I think working capital outflow in the first half is about GBP 22 million. I think you're suggesting working capital inflow of GBP 25 million to GBP 30 million. Are they on the same basis? Are you going to more than recover the first half?

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Jason Ashton, Tyman plc - CFO & Director [11]

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Yes. So the first question around the exceptional cash costs, we expect in the region of GBP 8 million to GBP 10 million. Some of the exceptional P&L costs were obviously noncash costs. And secondly, on working capital, we are setting a target above last year because we had a slight increase in the build on H1. So we are setting that target for the second half.

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Toby Russell Thorrington, Edison Investment Research Limited - Analyst [12]

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Okay. And the other question on the U.S. relevant to pricing. Obviously, it's a slightly soggy market, you might say, on the RMI side. At the moment, you benefited from price increases from last year. So far this year, some of the input prices seem to be coming off a little bit. What's the market like in terms of pricing? Is it firm? Are people coming to you for lower pricing now, looking into the second half?

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Jo C. Hallas, Tyman plc - CEO & Executive Director [13]

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There's definitely -- I mean there's definitely sort of -- we're not having a lot of that, but there's definitely competitive pressure out there in the marketplace. And we are being sort of -- we're trying to be very targeted in how we respond to that. So I think previously when we put the price increases in, it was quite flat across the board and now what we're doing is, we're just -- we're looking at our product lines and just being a little bit more targeted in terms of what the right pricing is on each of those product lines. But I think, overall, we are still -- are -- our price position is still offsetting very much the material cost position that we -- that's been -- and including the recovery in the towers as well.

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [14]

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Chris Hjorth from Numis. Just there's a few really, maybe so focusing on the 2 issues with the footprint rationalization. I suppose the productivity issue sounds a little bit like what happened in Juarez and I suppose you can get a bit more comfort on perhaps where you are with that now and the improvement going forward. So maybe just touching on where you are now with it and whether you've seen an improvement from the bottom in that trend? And then just the second side of it, the customer one is obviously a bit more difficult to bottom out. So could you just talk through us perhaps the phasing of customers leaving, is it sort of increasing, decreasing? And actually, how long do you think it will take to really bottom out that issue?

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Jo C. Hallas, Tyman plc - CEO & Executive Director [15]

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Super. I was just talking there about the performance improvement first with Statesville, and you're absolutely right, Christian. That's -- we got the performance of Juarez and Sioux Falls back last year and it was through very focused activity driving both -- sorting out the personnel side there and just stabilizing yields. And we've got this -- broader the same activities underway with Statesville. As I already said, we have the experience gap that is pretty much close now and we've actually been able to take out all the additional staffing we've put in. There were 40 heads that have gone into the business as additional staffing and all those heads have come out over the course of H1. And this, in turn, is reflective of the fact that month-on-month, the delivery performance to customers is improving and also the gross margin out of the facility is improving as well. So the progress is very much there and being made and we're monitoring this very closely. But we're not back to where we need to be just yet.

To your question then on how quickly does the customer recovery come. I think again you need to separate it into the 2 buckets. One is the door seals piece. I'm fairly confident that once again, we have got the door seals capacity sorted out. We have a series of customers who are telling us that they would like to come back to using our supply. Now obviously, there is transition timing barriers that needs to be worked through, but that's the block there. The service level losses, it's really about reestablishing our credibility with those customers in the marketplace. Some are more open door to us than others. And again, we're targeting accordingly. We're going after the customers where we believe we are going to be able to more quickly regain those customers than the ones that are going to be harder to regain. So that is -- the plan going forward is that we address both the 2 pieces of the seals capacity and recovering the Statesville performance situation. And from that, that gives us the basis that can go out and recover customers.

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [16]

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And just on that final point. It doesn't so feel that (inaudible) July on the service level, that we had to the deceleration of customers coming (inaudible) which is something relatively [steady] much of phasing of that?

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Jo C. Hallas, Tyman plc - CEO & Executive Director [17]

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So I think the door seals piece has been quite compact in terms of when it's hit, and that's because the hard transition for door seals was a certain point late last year. And since then obviously customers have been trying to go and get other supply sources and that's all come to a head around the same time as they've managed to do that. In terms of the other piece, I think, we had a particular customer loss that was related to Phase 1 in March and that was quite a significant customer, and there's been discussions with other customers more recently where actually, under Bob's leadership, we've been able to recover some of the situation already. But it is a very live issue that we're working through.

And you also asked, I think, about phasing in terms of just, I think, the impact. So realistically, in terms of those customer losses, I think, we're going to be seeing, from what we know today, the impact we see today, about half of it will come this year and annualized, it's averaging out for be about twice what we'll see in 2019. So you'll have a further impact of that in 2020.

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Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [18]

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Robert Eason from Goodbody. Forgive me if the brain's a bit slower in the heat. So just pointed to clarification, just on the GBP 5 million and GBP 10 million of cumulative savings that were going to come from the footprint that are not there or going to be more than offset. So everything else being equal, and this is where the heat might be coming in, everything else being equal, we are talking about profits are going to be at least GBP 5 million less this year than original expectations and GBP 10 million less for 2020 due to the annualization effects of what Jo has just said. Is that the right interpretation?

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Jason Ashton, Tyman plc - CFO & Director [19]

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Yes, absolutely. The net cost that we saw in the half of GBP 4.7 million is net of the savings that you alluded to there, and that will also we'll see in H2, but not to the same extent but there will be an increase, the net cost impact in H2. And I think it's now it's better to view what, and this is how we're looking at it, is what the like or what the bounce back will be next year versus the performance this year. And Jo mentioned about the customer losses will continue in 2020. But as we are putting plans in place to resolve the production issues, we should see a small bounce back from the productivity issues in 2020.

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Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [20]

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And just going back to the seals. You said you're looking at an external sourcing about using someone else's technology. How close are you to a decision on that?

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Jo C. Hallas, Tyman plc - CEO & Executive Director [21]

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I think it's quite binary. So in terms of whether that's -- that route is a viable route or not. So I wouldn't like to comment in terms of, sort of, when we're going to be able to get this lockdown. Beyond saying, we have several -- we are exploring several different routes for it in terms of solving the challenge and those conversations are very active and live at the moment.

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Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [22]

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And I'm assuming a parallel, you're implementing your own 12- to 15-month project of getting it back up and running?

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Jo C. Hallas, Tyman plc - CEO & Executive Director [23]

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We are doing the groundwork for that, absolutely.

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Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [24]

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Okay. And does a decision have to be made on that, that you have to go ahead with that definitely? Or is it...

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Jo C. Hallas, Tyman plc - CEO & Executive Director [25]

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Probably in the next 2 to 3 months. I mean there's groundwork to be done because again it's not just the old technology that was being used. It was very, very dated. So what you're doing is, you're designing effectively those new lines from scratch. So that again, that groundwork is underway. It will probably take, sort of, 3, 4 months before you'd be in a position that you'd be putting CapEx out there to -- if you're going to get it, we're going to go down that route.

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Jason Ashton, Tyman plc - CFO & Director [26]

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I think it's fair to say the focus of the team at the moment is to get the capacity as quickly as possible from external sources to enable us to get the customers back.

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Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [27]

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Sorry, just one point of clarification given that it's just being kicked under the table there. Just a point of clarification on your leverage target, that's pretty IFRS?

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Jason Ashton, Tyman plc - CFO & Director [28]

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It is. Yes.

We have time for one more question. And as there are no more questions in the room. Okay.

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Jo C. Hallas, Tyman plc - CEO & Executive Director [29]

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Great. Thank you very much, everybody.

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Jason Ashton, Tyman plc - CFO & Director [30]

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Thank you.