Trifast plc (TRI) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining the Trifast results presentation. Before handing over to Jonathan to do his introduction, for the duration of the presentation itself, would you be kind enough to put your cameras and microphones on mute to avoid feedback because we've got quite a few people online. Questions will be taken by Mark and Clare at the end of the presentation. And at that point, we'll become live once again. Thankfully, you haven't all gone to sleep. Before asking your question, it would be helpful if you could give us your name and company. We'll take the questions from the conference line first, and then we'll come back to the participants on the platform and you can use the hand sign to ask your question. If you have anything else that you need to know, please feel free to drop me an e-mail through the presentation. Hopefully, there'll be no problems. I'll hand over to Jonathan to take over the presentation.

Thank you, Fiona, and good morning, everybody. For those you who don't know, I'm Jonathan Shearman. I'm Chair of Trifast. And if we can go on one slide, Sylvie. We're starting with our purpose. We do this in truth because it's the lens through which we approach our vision and strategy, culture and operations. And as we've done that in the past 6 months, we've added in a few words. The eagle eyed amongst you might have spotted that. We wanted to broaden out our stakeholders, so we've added in suppliers and people. We've also wanted to recognize our impact on the planet, so -- and to align with the approach that Mark is going to talk about in terms of sustainability in a few moments time. But message for me here is same core message, a better fit. And yes, with that, I will hand over to Mark and then Clare. Mark is going to run us through some of the highlights.

Great. Thanks, Jonathan, and good morning, everybody. It goes without saying that it has been a challenging year. Just when we all thought we were coming out of COVID, the knock-on impact of supply chain disruption reared its ugly head, keeping us all on our toes. So look at some of the key highlights on Page 2. Given everything going on, I'm proud of what we've actually achieved so far. Moving on to Page 3. Aside from dealing with the supply chain, our main focus has been on pricing within the group and driving the Atlas implementation. You can see that we've had strong revenue growth in the period, up 31% and up 3% on pre-COVID levels. Our underlying profit has grown over 73% with a margin increase to 7.3%, demonstrating the operational gearing flow-through. And Clare will be able to run through the margins in more detail you'll hear later. Our gross margin is down against prior period, as we expected, but we're not worried by this as the lagging effect of price increases will be realized later in the year. We'll run through Atlas, we'll run through acquisitions, and we'll run through our stock levels during the presentation later. However, I do want to draw your attention now to the global light vehicle production growth metric of 8.5%. In the same period, we actually grew 34%, demonstrating the wins that we have secured 18 to 24 months ago, as we were saying, and the market gains we're achieving. If I can hand over now to Clare to give some financial overview.

Thank you, Mark. Next slide, please. Thank you. So -- there were go. So we've got a slight time delay on what gets presented, but we've got the right one now. Thank you, Mark. Before we go into detail, as usual, what I'll just do is take us through a few of the key results in the year on the table, but you can see there on Page 5. As you've just heard from Mark, and as we all know, the first half of the year has been very exciting. We've seen some very good developments but have also been a very challenging time for the business for a number of reasons. We have seen strong revenue growth, and you can see it there, up 31.4%. And we've seen only a small reduction in gross margins, down 80 basis points against half year 2021 despite all of those well-publicized ongoing inflationary challenges in the market. Now notwithstanding those challenges, we do expect gross margins to normalize to pre-COVID levels as we pass through higher costs to our contract customers ahead of exiting this financial year. And as you can see here, we presented the pre-COVID half year 2020 numbers as well to provide you with our all-important context of what we mean by historic levels. Mark mentioned this, operational gearing has helped our underlying operating profits to increase by nearly 75%, as you see there, driving a margin increase of 180 basis points up to 7.3%. Now this does still remain below the double-digit figures we would like to see and we historically have seen pre-COVID. But as gross margins normalize, we do, of course, expect to see that positive impact of this start to feed through into our operating margins. Underlying diluted earnings per share shown very strong growth, up over 100% as a result of the trading recovery and also helped by some of the temporary reductions we've seen in our underlying effective tax rate. So overall, it's a very good set of numbers that reflect a strong post-COVID rebound as well as the success of our ongoing growth journey. And on that positive note, I will hand you back over to Mark to take us through the revenue section in more detail.

Thanks, Clare. Sylvie, if you could go on to Page 6, please. Thank you. At a high level, all regions have continued to deliver quarterly year-on-year growth despite chip shortages, which I reckon has cost us to the tune of around GBP 4 million in lost sales during the first half of this year. I'm particularly pleased with the growth rates in the U.S., which is part of our growth strategy to rebalance the regions by both organic and acquisitive means. And sector-wise, you can also see a rebalancing, with light vehicles now around 25% of the group's revenue, whereas once upon a time, it was closer to 1/3. Moving on to the next slide. I think this is a really good graphic to show the regional growth across all the sectors. Pulling out just a few key ones at this stage. Light vehicle, as I mentioned, demonstrates the market share gains we are seeing. Health and home, all the regions have performed well with the exception of Asia, which was hampered by government lockdown rules in Malaysia, which you'll hear about later. Distributors have performed exceptionally well, up nearly 55%. And the key to this is to have the stock around us due to its unforecastable demand, which in the current environment, as you can imagine, has been no mean feat. And finally looking at the U.S., the acquisition of TR Falcon helped support the rebalancing of sectors with the majority of its customers in the ET&I and general industrial sectors. Okay. Moving on to the next slide. You all know the issue that industrials are facing at the moment. It's a perfect storm with a ramp-up of demand but with a supply chain that is struggling to cope and with increasing costs. Now we've looked at this from 2 perspectives, what we're doing now and what we need to work on in the medium term. With respect to what we're doing now, we've been working closely with customers and suppliers to build up our stockholding to ensure we have an undisrupted supply to our customers. And secondly, we are sensibly passing price increases on to our customers, again, which we'll hear about later. On a more medium-term basis, we're looking at on -- nearshoring our supply chains as well as building up our own manufacturing presence by both investing in organic capacity and by acquisitive means. Moving on to the next slide, please, Sylvie, and the one after that. I'll run through the regions now quite quickly. Looking at Europe, Europe has rebounded back strongly, growing 31% against prior period and up 11% against pre-COVID levels. The main reasons for this, in Italy, we are seeing demand in the health and home sector outstripping our current manufacturing capacity. And in Hungary, we saw in the ET&I sector grow over 31% against its pre-COVID levels. Both of these companies will need further investment, which I'll expand on later during the presentation. Looking ahead, growth is set to continue with a strong pipeline across all sectors and further market share gains to be made in light vehicle. And as you know, as part of the Brexit planning we mentioned several years ago, we will also be moving around GBP 5 million of stock from the U.K. to our German operations. This starts next month and will be completed later in calendar year '22. And moving on to Asia. This has shown strong growth against the prior period of 21%. But unfortunately, it still remains below pre-COVID levels. This is largely the result of temporary lockdowns in Malaysia, which have particularly impacted the health and home sector. At some stages, we had -- we could only allow 10% of the workforce to be in Malaysia. We're pleased to see robust sales growth return in Taiwan as distributed sales recover beyond pre-COVID levels. And China has delivered double-digit growth after securing a new general industrial customer earlier in the year. Looking ahead, providing restrictions continue to ease, we are expecting to see strong growth in the second half, particularly in distributor and health and home markets. Moving on to the U.K. This has seen very high growth in the period, up nearly 40% on the prior period and close to up 5% on pre-COVID levels. Distributor sales has seen the largest increase, especially in the stainless steel market from PTS. And light vehicle sales have recovered but are still below pre-COVID due to chip shortages. Looking ahead, sales are expected to reduce because, as I mentioned, the new distributor business is being transferred to Germany and also the short-term impact of semiconductor shortages. However, non-EU distributor business will remain high. And then finally, moving on to the U.S. We have seen exceptional growth in this region, organically up 53% and then an additional 16% via TR Falcon. Light vehicle is the largest increase organically. However, global customers from the acquisition are growing at ET&I and our general industrial sectors and providing us with additional opportunities, again, as you'll hear later. Looking ahead, there will be strong organic growth continuing, and obviously, we'll have a full 6 months to include for TR Falcon. In fact, if I can now hand over to Clare, please.

Thank you, Mark. Thank you, Sylvie. Well, you've heard a lot about the top line and, of course, all the exciting opportunities that we're seeing there. But it isn't just about revenue. And therefore, what I want to do now with the help of Slide 14 is really provide an overview of what's happened to our underlying operating profit in half year 2022, which, as we mentioned at the beginning, has gone up by about 73.7% and 180 basis points to 7.3%. And whilst this sees a significant improvement on half year 2021, it is again worth reminding ourselves that we do expect this positive trend to carry on building over the course of the second half of the year as our global pricing programs act to normalized gross margins. But back to our half year 1 graph. As you can see here and as you would expect, the biggest underlying operating profit impact in the period in absolute terms has been that significant increase in sales equating to GBP 9.7 million. Looking beyond this, on the gross margin side, we have also seen some further year-on-year movements. We have seen the negative transitional impact of the higher freight and raw material costs. Now growth, that's about GBP 4 million. However, as we said at the beginning, we have already seen this offset to some extent in the period due to the more immediate flow-through of sales price increases in our transactional business. And that gets us down to the net GBP 2.8 million that you see on the graph there. On the overhead side, unsurprisingly, normalization from a lower half year 2021 base has led to net additional costs of around about GBP 1.6 million. That's things like travel and other discretionary spend, bonus, inflationary increases. Although it is worth noting that in this half year, this increase has also been reduced by nonrecurring net GBP 400,000 IFRS 2 credit due to the lapsing of the last equity award scheme that we granted pre-COVID. A bit of technical chart there, but given the size of the impact, it's worth bringing your attention to. The last key point to note is the removal of the government support schemes. This has increased our cost base by around GBP 2 million, split almost equally between cost of sales and overheads. But as the vast majority of these schemes are only in half year 2021, we do not expect the negative impact of this to repeat in the second half of the year. So overall, we're seeing strong underlying operating profit increase, albeit with a lot of moving parts and most importantly, with further margin recovery still expected to come in the second half of the year. But what does this look like from a regional basis. Well, for that, let's -- if we turn over to Slide 16. And as you can see here, these are our normal regional pies that we present to you. I'm not going to go through these in a whole lot of detail, largely because as you can see on the next slide, the reason for the underlying operating profit movements in each region are actually pretty consistent as trading recovers. And what we're really talking about here is just differing degrees of the same 5 key things. That's the positive impact that an increase in sales has on the semi-fixed cost base: the transitional impact of under-recovered freight and raw material cost increases, the positive offset of more immediate higher transaction and sales pricing, some regional product mix shifts and overhead normalization, including the impact of the removal of government support schemes. But if we turn over to the next slide, then we can rattle through some of the detail. Taking a look at Europe first. Here, we can see a net reduction in underlying operating profit margin of 80 basis points. Despite the big increase in sale driving margins up by around 600 basis points, the transitional impact of under-recovered freight and raw material costs has been higher in this region than elsewhere as freight rates to Europe have increased steeply and raw material price increases are fed through more quickly into our manufacturing business in Italy. In Asia, we've seen an overall decrease of 150 basis points, although margins remained comparatively high at 12.7% due to the regional manufacturing focus. We have seen a smaller positive sales increase impact of around 500 basis points as trading levels have been restricted by those temporary lockdowns in Malaysia that Mark mentioned. And like in Italy, raw material cost increases have impacted more quickly, but counteracting that, freight increases have been minimal on this side of the world. However, what is noticeable is the impact of the removal of the more generous government support schemes in this region, and that has been more marked, as you can see there, running at about 350 basis points. Turning to the U.K. Underlying operating margins have increased significantly by 850 basis points to a much more normalized 10%. Again, it is a significant increase in sales that's caused the biggest increase here, around 900 basis points. This has been further supplemented by the relatively high fall-through of sales price increases in our transactional business. It is worth noting that our U.K. region has the highest distributor sector, weighting in the group at around 36%. But partially offsetting this is overhead normalization, including the removal of government support schemes. In our smallest region, we've seen an improvement of 140 basis points, although this region remains loss-making at underlying operating loss of 3%. That very strong increase in trading of nearly 70% has driven a large margin gain of around 1,200 basis points. However, steep increases in freight costs to this part of the world have offset some of this, and the increased proportion of light vehicles versus energy, tech and infrastructure sales as a result of market share gains has reduced regional markets due to product mix. We do continue to see North America as a source of strong organic growth for the group and acquisitions, as Mark will touch on later, and expect this region to return to profits in the second half of the year. So that is the income statement. Let's turn over the page now and we can take a look at the balance sheet side as well on Slide 18. As ever, the best way to do this is to look at our adjusted net debt position. At a high level, we've seen a decrease in cash of GBP 18.4 million, taking us from a net cash position of GBP 13.3 million to a net debt position of GBP 5.1 million. And there are a number of very good reasons for this. The first is the successful acquisition of Falcon on the 31st of August 2021, and Mark will take us through this in a bit more detail in a few slides time. Outside of Atlas, which I'll touch on later, we have seen GBP 1.7 million of plant and machinery routine maintenance spend across our manufacturing sites. Plus the key working capital movement relates to an additional GBP 16.3 million investment in stock, which has been specifically made to support sales growth and also to protect supply. We are very proud to report that we have not let a single customer down despite the huge supply chain challenges we are all currently facing. And one of the very tangible ways we've been able to do that is by investing in additional inventory as you see here. We are expecting the inventory position to stabilize over the course of the second half of the year, but it is worth mentioning that this is expected to remain significantly higher than historic levels for at least the short term until things settle. If we turn over to Page 19. On the banking side, I won't go through this in a great deal of detail, but suffice to say that we have around GBP 50 million of available headroom with an April 2024 maturity date and a low leverage of 0.27x, which continues to provide us with the capacity and the confidence to make the most of all the organic and acquisition opportunities that surround us. And if we turn over to Page 20, maybe just one more thing to talk about dividends. The Board absolutely recognizes the role that dividends play in forming part of our TSR, and we are very pleased to be able to say we're returning to an interim dividend position, and we do remain committed to maintaining a progressive dividend policy in line with profitable growth. With that in mind, if we turn to Page 21, we have declared that interim dividend of 0.7p. We do still believe an appropriate level of dividend cover is in the range of 3x to 4x. However, it is worth noting that we are expecting to target payout at the top end of this range for the medium term to allow for all of our exciting organic growth, strategic investment and acquisition ambitions. And on that positive note, I will hand over to Mark who's going to take you through our strategic update.

Thank you, Clare. Sylvie, if you can go to 23, please. Perfect. Thank you. I think as many of you know, clearly, our aim is to be a much, much bigger company than we are now, not only by revenue but also by increasing our growth and operating margins. And providing the world doesn't fall off a cliff. It's not unreasonable in the medium term for us to double our operating profit. So how are we going to do this? One, investing in the organic business, implementing Project Atlas, accelerating the acquisition journey and doing all the right things to ensure the business is sustainable for the long term. And I'll go to each of these now. So if we firstly move on to Page 24, looking at organic growth. As you know, the core strategy is all about growing with and further into our multinational OEMs and Tier 1 customers. The success we are seeing is because we are delivering that trusted reliability even when the supply chain is so challenging. In this period alone, we have seen significant growth from several key strategic global customers across all the sectors. And by significant, I mean over 100% growth rate. Customers are still rationalizing their supply chain, and to have a trusted partner is opening up a very strong pipeline of new opportunities. And you can see here some recent examples being Magna, Rotork and more recently, Itron from TR Falcon. In the period alone, we've added close to 300 new customers. On the next page, I think this explains providing reliability is one thing, but we need to add value. And that is where our engineering function clearly comes into play, starting from the design inception all the way through the supply cycle. And this is definitely becoming more prevalent with new emerging technologies and the drive for greater sustainability such as electric vehicles, where we believe the fastest spend is around double that of a traditional internal combustion engine vehicle. In addition, we're introducing new product ranges. These will be additional to customers' parts and opens up the door for new emerging technology. To put that into some form of perspective, we traded around 8,000 new parts during the period, of which over 80% are classed as specials, and have also added 5,000 new parts to our website for engineers to review. With all the opportunities that lie ahead of us as well as on-shoring pressures, we are seeing significant capacity constraints in several of our locations, as I mentioned earlier, in particular, in Italy, where we have approved a large investment between GBP 4 million and GBP 5 million to extend their facilities and install extra machines to keep up with the sustainable demand. This will be a phased approach over the next 18 months, and payback will be just over 3.5 years. In addition, it's not just manufacturing on our distribution side. We need to move into larger buildings to support the organic growth at 2 of our key sites: PTS, which, as you know, distributes stainless steel products; and in Hungary. Both of these moves will be completed in calendar year 2022. Obviously, another investment is Project Atlas, and Clare will now talk us through that.

Thanks, Mark. Thanks. Okay, let's talk about Project Atlas, which really is our greatest example of continuous improvement. As many of you already know, Project Atlas is a hugely important part of our growth strategy as it is via this investment into our IT business platform and our underlying processes, policies and procedures that Trifast will become a fully integrated global player that our multinational customers are looking for to support them on their growth journeys. And it's not just about how we interact with our established and developing customer base. Project Atlas is about real tangible benefits, an engine for continuous improvement that will see us generating noticeable margin improvements as we get more and more rock sites rolled out. I'm not going to take us through everything in that table in detail as you can read faster than I can speak. But I do want to pull out 4 of the more key points that stand behind the Atlas benefits case. Firstly, a greater integration and automation at inquiry level will facilitate increased in-house manufacturing levels. If you ask Mark and me, do we make the right make or buy decision at site level, then we're going to answer, in the vast majority of cases, yes, yes, we do. But if you were to ask us, do we always make the right make or buy decisions as a group? When an inquiry comes in into distribution world, do we always push this to the right intercompany manufacturing site? Then the honest answer is no. But with an integrated system, we can do this, meaning that we can increase the spend that our distribution businesses make with our internal manufacturing sites, lowering our external spend, keeping that profit in-house and allowing for a greater volume of double-margin business within the group. Secondly, the specific investments we're making into warehousing infrastructure with full WiFi and scanning technology and dynamic product placement would drive down picking errors and speed up our warehouse operations to save costs. And we're pleased to report that this is something that we've already seen evidence of at our initial pilot site, in fact, to levels higher than we were originally expecting. The third point is that a fully integrated understanding of our global purchasing spend with improved demand planning and forecasting capabilities will exponentially change the way that we interact with our supplier base. Instead of going to suppliers from individual silos and asking for the price on, say, 0.5 million parts, for the first time, we will be able to use our group purchasing power to negotiate for a group price based on the combined spend and backed up by an improved demand forecast of what our short- to medium-term needs looks like. And if we couple this with the recent investments that we've made into our global supply chain resource and the changes we have made into how those teams are structured with a more centralized focus, you can see why we expect to be able to make significant input cost savings as we develop and rationalize our global supplier base. The final point I will pull out is from the acquisition side. Having an adaptable, scalable and stable environment will support an accelerated acquisition journey, allowing us to move quicker and potentially integrate larger targets more efficiently and effectively into the wider group. Project Atlas, and we have spoken about this before, has always come with a medium-term benefits case that is very compelling at more than 25% return on investment. And the further through this project we get, the more confident we are that we will see these benefits coming through and that our underlying growth and, therefore, operating margins will improve. If we can flip over. Thank you, Sylvie. So how far have we got? And more importantly, are we on track? Well, as you can see on Page 27, we've already come a long way. A lot of the hard work is already done. Our global processes, policies and procedures have been established. The integrated IT system that supports our new way of working has been designed, built and tested, and we are now firmly into rollout phase. Now we're not going to say that this doesn't still involve a lot of hard work. But on some level, at this point, the mountain has been climbed and we are on the downward slope to the finish. Financial year '22 is still a big year as we get our largest trading subsidiary onto the system via our phased process that has already begun, and there are bound to still be some challenges along the way. But on many levels, the project is already done, the benefits are starting to be proven, and we are there far for the passage of time. This is always going to be a multiyear investment, and we're not going to tell you that the timeline was not tripped up by the global pandemic and specifically by the related travel restrictions we've all endured because it was, and this is something that we spoke about in June. However, as we sit here today, we consider that we are now firmly back on track. We have a sensible timetable to complete enough mitigating plans to see of anything that COVID can still throw at us and the confidence, the expertise, the resources and the determination to get to the finish line. This is an incredibly important and exciting project for the group. There are always challenges that have to be overcome with projects of this scale, but we continue to view this project and the journey we are on as, first and foremost, a real success story and the cornerstone that will underpin all of our other strategic goals. And on that note, I'll hand back over to Mark to take you through our accelerated acquisition journey.

Okay. Sylvie, if you can turn to, please, Page 30. Perfect. Thank you. As I mentioned earlier, we want a more balanced geographical spread, and we can only go so far organically. North America is the largest fastener market in the world, yet for us, it only represents 6% of revenue, even with compound annual growth rate, excluding FY '21 COVID year, over the last 5 years running at 15%. As you've heard, we've already started this journey, acquiring TR Falcon at the end of August. We're really pleased with how it's going. You're never quite sure until you peeled back the onion what lurks beneath the company. But I can tell you, this is one very tasty onion. The main benefits are it's earnings enhancing. It improves our presence in North Carolina, which is home to 29 of our existing top customers. It gives us access to 2 large key multinational OEMs who are looking for a global supplier. It diversifies us outside of the light vehicle sector as well as margin enhancements that we can see through sourcing and logistic opportunities. Moving on to the next slide, please. I just want to make this clear. It's not just North America we're looking at. We are reacting to opportunities, for example, to accelerate our digital evolution, to localize for more in-house manufacturing capacity and to rebalance our sector spreads and also to add new product ranges. Momentum in the pipeline is building, and we are at various stages of discussion with several. Rest assured, Paul, our Head of Acquisitions, is certainly not twiddling his thumbs at the moment. So moving on to sustainability. This is something I head up and I'm very passionate about. I really, really do see this as an opportunity, allowing us to work with customers and suppliers to develop new innovative solutions and actually become one of the fastener leaders in this field. I believe we already do [indiscernible]. Morgan Stanley MSCI have given us a rating of AA, and EcoVadis has given us a silver award this year. And this is only given to the top 25% of companies. We'll also be very pleased to hear that we have published our first sustainable statutory report today. And a link of this, hopefully, would have been attached to the RNS and can be found on our website. As you can appreciate, this is a huge subject with a lot to do. And on Page 33, I just want to give you an idea of some of the areas we're focusing on, 4 key areas: acting on the environment and climate change, building a sustainable supply chain, enabling sustainable innovation and creating value for our people and the communities around us. And all of this needs to be underpinned by our good governance and a fair and ethical culture which we adopt. Moving quickly on to Page 34. You'll see here that what we're trying to do is improve governance with the group to ensure that sustainability is embedded within the whole business. And then moving on to the next page, 35. I want to -- I do not propose running through this, you'll be glad to hear. But really, what I want to do say is that the commitments and targets that we are showing are all based on practical and realistic time lines. And I want to reiterate again that, in case anyone's forgot, fasteners actually allow products to be repaired, products to be opened up, repaired rather than thrown away. And that is a key proposition for a circular economy. And then finally, moving on to the summary. Really, to summarize, following on what we signaled at the prelims in June, as with many other industrials, it is difficult environment at the moment. But we've delivered strong revenue growth across all sectors, and the high levels of activity that we are seeing gives us the confidence for the future. The supply chain has been and is still challenging, but we are effectively managing it. The top line growth has enhanced our operational margins, and this will improve further as price increases are realized in the second half of the year. Atlas is on track. We've started our acquisition journey in North America. You've heard from Clare that we have significant facility headroom to support investment. And finally, we've published our sustainability strategy, demonstrating our commitment in this area. So in my opinion, we are heading absolutely in the right direction along towards our medium-term plan. Thank you, and over to questions. If there are any questions [indiscernible].

Unmute and then put your -- any phone -- any people on the line?

I think Christian got in there just before you, Henry. And David.

[indiscernible] on the conference line [ if there are any questions ].

Christian Hinderaker here from Liberum. I suppose if we can start with the very strong growth across the business, but particularly within the U.S. As we know, automotive was a key driver. Just interested in the M&A priorities within the Americas, whether you expect to focus on diversifying the end market exposure away from auto or whether you plan to further leverage strength within that segment. And I've got 2 more, but happy to jump back in the queue.

That's a good question, Christian. I mean, to be honest, first and foremost is to get the pipeline of opportunities around us. It's all very well trying to narrow things down and say that's exactly what we want, but the key and what we are binding is to get targets that we are beginning to talk to. Ideally, for us, it would be great if we could get a manufacturing company in -- out there as well to support onshoring, and that's an area we're looking at. But first and foremost, it's about finding exactly the right business to work with. To be able to rebalance light vehicles is great. I think we can also do that through our own organic means, to be perfectly honest as well. But I think, first and foremost, it's been able to find the right company to work with, with the right culture and to be able to either, one, yes, diversify balances or to be able to do manufacturing. Or also, the other element is America is so large that we want to be able to have the ability to be able to sell across a vast country. And in that case, we wouldn't certainly not take on a distributor company as well with sites in America and North America -- and also Mexico, Canada as well.

Absolutely. We do think of it as North America, don't be wrong, than just the U.S. I think I agree with everything Mark said, quite obviously. But the -- I think the one thing that would be helpful if it were possible will be to get auto manufacturing in America, but which doesn't mean we're focusing purely on auto. This is a mixed requirement list. But to get onshore manufacturing for automotive to help support what is already a very strong organic growth would help us. And so certainly, that does make a feature on the list. But as Mark says, there's an awful lot of flexibility on that list because we have an awful lot to go for in that particular region.

Do you want to do my other 2 questions now? Or should I jump back into the queue?

Go on.

Yes. Go on, Chris.

Yes. So turning to Slide 17, and puts and takes for regional margins, I think, really helpful. I guess 2 questions there. Firstly, on the U.K. Double-digit margins for the first time since pre-COVID. And indeed, you historically delivered 10% plus in that business, again, prior to the COVID effects. Just wondering how we should think about the margin profile for the U.K. in the coming halves. And then my second question for that slide links again to the U.S., where obviously small scale has been a hindrance to profitability, hence, the M&A ambitions, which are well understood. Just interested in what sort of scale you think you'd need to see to get the U.S. towards group-level profitability.

Absolutely good questions, Christian. Thank you. You're right to pick up on the U.K. The first half of the year has seen it go back to double digits. And obviously, we're very pleased to see that. There are a couple of things, I guess, for the longer short term, if that's even a term, to understand with the U.K. One is that transfer of EU distributor business from the U.K. region into Europe. That is higher margin business. And so when that does go over, we would expect to see a dent to the product mix margin that we have in the U.K. So we will see that fall off a little bit. I think the other thing is to bring back that slightly annoying technical point, the U.K. does see a fair amount of costs attached to IFRS 2. So when that comes back through, we will see, again, a little dent against the 10%. But really, the real trick, and this is the same for any of the regions, is just to keep the growth coming. If we keep the growth coming, if we get all those price increases in, which are on the cards for the second half of the year, as I think myself and Mark have both mentioned, then they're all pushing in a positive direction, but the U.K. specifically has got those couple of funnies that will create something of a bumpy ride as we go forward for the next sort of 6 to 12 months. On the U.S. side, again, it's an interesting question. The real thing the U.S. needs is critical mass in our Houston operations to become profitable. And they haven't quite reached that. But if they can continue to grow at rates of 70%, then it's not going to be a very long time before that critical mass does come through. I sit here and very confidently say the region will become profit making in the second half of the year, but that is because we sit here knowing that 6 months of Falcon are going to go into those numbers and allow that to happen. That won't be led by Houston and our original site in the U.S. It's difficult to second guess when and what volume is needed to make that site profitable because there are a lot of moving parts at the moment. One of the biggest things that would be good to see that would help our profitability is a reduction in the freight costs because they have been eye-wateringly expensive trying to get stock into our U.S. region. As soon as that abates, where we are able to improve our onshore sourcing and suppliers, which is part of what the acquisition journey is about, as we've mentioned, we will see a marked turnaround in the profitability. So in normal circumstances, I think me and Mark would sit here and say, we're not far from a profitable business. And in any other times, when inflationary costs haven't gone through the roof, we would have expected Houston to be turning a profit at this point.

I think that's the key thing. The freight costs that America has been hit with this period has been eye-watering, to be perfectly honest. And that -- obviously, we put things in place now, so that won't happen going in the second half of the year.

I think -- Henry, I think next.

Henry Carver from Peel Hunt. Just a couple for me, please. The first was on the revenue growth versus the prior -- H1 2020. Is that mostly volume? Or is there a bit of pricing in there? Because, presumably, the price increases as well have sort of pushed through by that point. I'm just trying to get a feel for if there's a bit of pricing volumes there. And then the second was just -- sorry, just the second was just any sort of more anecdotes about the rollout of Atlas so far? Clearly, you've done a couple of some more reasons you're ready to bring forward the U.K. Just any other sort of color. On a people level, how are the guys receiving it, how much the larger teams are looking forward to implementing? Any color you can give, that would be great.

Now just on the revenue, Henry, the majority, the vast majority is volume, absolutely. In the half year, I would say you're looking at price of around about -- price increases of just over GBP 1 million. The vast majority is now coming into the second half of the year. And as we said, so that will hopefully get back to more normalized levels in Q4. So yes, that's the revenue side of things. I think one of the nice things -- well, not a nice thing, the practical thing that we've heard, certainly, anecdotally, is when you're looking at our Mallow site in Ireland, they've grown on revenue terms 130%, for example. We knew there would be benefits in the warehouse. But I think one of the real positive things that came out of this recently is when somebody -- or the warehouse guys were saying, it's Friday afternoon, we know we've grown around 130%, but we've finished absolutely everything. And that just goes to show many efficiencies that we're seeing. And again, in that -- the finance team, obviously, who are the messengers of the operational finances kind of thing and how it gets recorded, again, are just thinking it's freight at the moment. I know that's only small, but that's anecdotally what we are expecting to see going forward.

That's great. So do we get a sense that the guys in the U.K. and the larger regions are -- they're looking forward to getting it rolled out?

I think they're looking forward -- things rolling out and [indiscernible] of getting through rolling out is very different. There's a lot of training. There's a lot of change management to go from an older system to a much more future-proof system. So yes, there's a lot of work involved in doing that. But I think the output from that at the end will be -- there'll be smiles on people's faces next year, let's put that way. The buildup, there is a lot of work to do to get people on board at the moment. Yes. I think it was David next.

Yes. Well done on the payments of the dividend. That's great to see. And good results in clearly difficult circumstances. Those are statements rather than questions, by the way. Starting with the questions. The lost sales that you alluded to earlier in Malaysia because of lockdown -- first of all, have the lockdowns completed, finished there? And how much extra would you anticipate to see in the second half because of a normalized run rate of sales in Malaysia? That's the first question. Previously, you always mentioned the number of OEM and Tier 1 customers that you have. Clearly, when you speak about record order books, one assumes that not only has that number increased, but also you spread from several factories to a greater number of factories globally for those OEMs, Tier 1s. And if you could give a bit of color to that, please. And finally, when you talk about normalized margins, if I look at the 5-year average of gross margin, we're looking at about 28.9%. Is that sort of ballpark figure that you're steering us towards? Obviously, that won't be enough reach for the year, but rather one hopes there or thereabouts and average for Q4 and into next year.

Just on the margins, yes, you're not too far away from that [indiscernible], David, absolutely. Regarding lockdowns, yes, it has been frustrating for us. Not only does it affect our Malaysian plant directly but also Singapore operations who make parts for a very large home and health customer of ours that gets shipped -- the parts get shipped over to Malaysia to be assembled by subcontractors. And again, that has an impact. So that's in the [indiscernible] part. Have lockdowns eased now? Yes, it's been a very gradual ease. As I mentioned at the beginning, it was around 10 -- well, first of all, nobody could get in, then it was 10%. That is -- that then went to 25%. And now it is back to full capacity. So that is back on track. The normalized run rates?

Well, I think perhaps the easiest thing to say, David, is if that Malaysia lockdown hadn't happened, then Asia would have grown to a similar tune as [ the rest ] of the group. So it probably lost about 10% of its growth as a result of those lockdowns for what ended up being about 2, 2.5 months of the 6-month period.

Yes. It's grown. Thank you. Regarding OEMs funds. Yes, absolutely. I mean I mentioned earlier on 3 particular cases, which is Magna and Rotork for example. We started those, yes, 2, 3 years ago. Again, purpose is to get in at site level and then expand throughout their sites, which is going well, particularly in Rotork, for example. I think the other example that I gave was Itron as part of our due diligence when we were doing the acquisition. We sat down and spoke the procurement person, the head -- or the procurement director at Itron just to explain to them that we are hopefully acquiring TR Falcon. And the smiles on Giovanni's face, our Managing Director, because they had approached him and said, look, we love the service you're doing. You're doing so well, but we really needed growth [indiscernible] and you can do it regardless. And following that call, I think it was very clear to say that the procurement manager knew that [indiscernible] to have a global supplier, which is excellent. I think, certainly, new OEMs and Tier 1s that we're seeing are exciting, particularly on the electrification side of things. And that, again, is where we've been able to use -- help and support them in some of the new technology that we're seeing. Thanks, David. Are there any more questions or anybody on the phone?

No more questions as far as I can see. I haven't had any come in on e-mail.

Okay. Well, I hope you found that informative guys. As I say, if there is anything else, you can always reach out to us, and we'll answer as best we possibly can. Thank you for your time this morning, and have a good day.

Thank you, guys.

Thanks very much.

Bye-bye.

Bye then.