Trifast plc (TRI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Trifast plc interim results investor presentation. [Operator Instructions] I'd also like to remind you that this presentation is being recorded. [Operator Instructions] And I'd now like to hand over if I may to Clare Foster, CEO -- CFO; and Mark Belton, CEO, from Trifast. Good morning to you both.

Good morning, Martin.

Good morning.

Thank you, and good morning, everybody, and thank you all for joining our half year's presentation. What I'd like to be able to do is turn off all the videos in order that we can expand the slides, which will make it easier for everybody to see. So if we can turn off the videos now, that would be fantastic. Thank you. And then we'll turn the videos on later for Q&A. Okay. So I thought it would be useful to begin with just to give a quick overview of Trifast for those that don't know us and also a recap for those that do. As you can see -- Mark, if you can forward on to the next couple of slides, this one here. We are an international specialist in the design, the engineering, the manufacturer and the distribution of high-quality industrial fastenings and category C components, principally to major global assembly industries. The fastener market actually is a highly fragmented and valued around GBP 60 billion. So plenty of opportunities for us to go for. Our core strategy is very much about being a full-service provider to our multinationals, delivering our trusted reliability service pretty much anywhere in the world. This means, in a nutshell, getting our engineers working with customers at the early stages of design and getting our parts designed in and then where we can, manufacture those parts at 7 of our manufacturing plants around the world. Once we've done that, the thing is to be able to get into a particular site, maybe in the U.K., deliver that seamless, trusted service that I talked about earlier. And then once we've built that reputation, we're able to go not only into the U.K., for example, but then to other sites with customers into Europe, into Asia and into America. And that's how we penetrate more of the customer market. We tend to steer away from commoditized products. 75% of our revenue is coming from customer-specific, branded or licensed parts. And we have a fairly well-balanced sector spread, as you can see. If we turn on to the next slide, we have 34 locations worldwide split into 4 regions to support that revenue growth across between U.K., Europe, Asia and the U.S. And from these, we supply into over 75 countries. Finally, we have over 5,000 customers. I just want to point out that no one customer is more than 7% of the group's revenue, again, giving us a good balance there. I think, if we can go on to the next slide. This gives us a good overview of the operational highlights that we saw in the first half of this year. Aside from dealing with the supply chain, which I'm sure all of you are aware of, our main focus has been on pricing and passing that on within the group and driving the Atlas implementation, which we'll hear about later. You can see we have had strong revenue growth in the period, up 31% and up 3% from pre-COVID levels. The operational gearing that we see from our revenue has allowed our operating profit to -- with its margin to increase to 7.3%, and Clare will run through the margins in more detail later. Our gross margin is down against our prior period but stabilized against the second half of the year as we expected. And we're not worried by this at all as this is the lagging effect of price increases, which will be realized later in the year. As you'll see through the presentation, we'll run through Atlas, we'll run through acquisitions, and we'll run through the high levels of stock levels deliberately that we have put in this period during the presentation. I do want to draw your attention to one of the facts there, the global light vehicle production growth metric. The market there has grown 8.5%. In the same period, we actually grew 34%, and this demonstrates the wins that we had secured 18 to 24 months ago that we were saying and the market gains that we have achieved. Okay. If we can move on to the next slide, please. Hand over to Clare.

Thanks, Mark. Before we go into the detail, I just want to take us through a few of the key results for the year using the table that you can see there. As you just heard from Mark, and as we all know, the first half of the year has been a very exciting, albeit also a very challenging time for the business. We've seen some strong revenue growth, up 31.4%. We've seen only a small reduction in gross margins, down 80 basis points against half year 2021 despite the well-publicized ongoing inflationary challenges that are operating in the market. Notwithstanding those challenges, we do expect gross margins to normalize to pre-COVID levels as we pass through higher cost to our contract customers ahead of exiting financial year 2022. And as you can see here, we presented the pre-COVID half year 2020 numbers as well to provide you with that all important context. Operational gearing has helped our underlying operating margins to increase by nearly 75% and driving a margin increase of 180 basis points 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 the positive impact of this start to feed through into operating margins. Underlying diluted EPS has shown very strong growth, up over 100% as a result of the trading recovery and helped by some temporary reductions in our underlying effective tax rate. So overall, it's a very good set of numbers and reflect a strong post-COVID rebound as well as the success of our ongoing growth journey. And on that positive note, I will hand back over to Mark to take us through the revenue section in more detail.

Okay. Thanks, Clare and Mark, if you can move on to the next page for me. Thanks very much. At a high level, all the regions have continued to deliver quarterly year-on-year growth despite the well-publicized chip shortages, which to be honest, I reckon, has cost us to the tune of around GBP 4 million in lost sales during the first half of the year. That doesn't mean it's lost forever. It's very much it stops for a period when an automotive closes, and then it rebounds back again. And the important thing for us is to make sure that we've got the stock around us to support that when that actually happens. I'm particularly pleased with the U.S. growth rates, which is very much a part of our growth strategy to rebalance the regions, both organically and by acquisitive means. And sector-wise, you can also see a rebalancing with light vehicles now running around 25% of our 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, I've mentioned already the market share gains we're seeing there. And if we look at health and home, all of the regions have performed well with the exception of Asia. This was hampered by government lockdown rules in Malaysia, which we'll talk about later during the presentation. 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 has helped support the rebalancing of sectors with the majority of its customers in the electronics, tech and infrastructure sectors and general industrial. If I can move on to the next slide, please, the supply chain. Now you all know the issues industrials are facing at the moment. It's a perfect storm with a ramp-up in 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 do we need to do now and what do we need to work on in the medium-term? With respect to now, we're working closely with customers and suppliers to build up the stockholding around us to ensure that we have an undisrupted supply to our customers, giving them that seamless service and also sensibly passing pricing increases on to customers, who are receptive. On a more medium-term basis, we are looking at on and near shoring some of our supply chains as well as building up our manufacturing presence by both investing in organic capacity as well as acquisitive needs. Okay. Moving on to the next slide. I'll very quickly run through some of the regions, calling out the key highlights. As you can see, 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 far outstripping our current manufacturing capacity. And in Hungary, we saw the ET&I sector grow over 31% against its pre-COVID levels. Both of these companies will need further investment, which I will expand on later. Looking ahead, growth is set to continue with a strong pipeline across all sectors and further market share gains anticipated, particularly in the light vehicle. And as you know, as part of our Brexit planning, we'll also be moving GBP 5 million worth of stock from our U.K. operations to our German operations. This starts this month -- sorry, starts next month and will be completed later in calendar year 2022. Moving on to Asia. This has seen strong growth against its prior period, up 21%, but unfortunately, it still remains below pre-COVID levels. This is the result of temporary lockdowns in Malaysia, which have particularly impacted the health and home sector, not only domestically, but also from exports going into that market. We're pleased to see robust sales growth return in Taiwan as distributor sales recover beyond pre-COVID levels. And China has delivered double-digit growth after securing the new general industrial customer earlier in the year. Looking ahead, providing the restrictions continue to ease, we are expecting to see growth strongly in the second half of the year, particularly in the distributor and health and home market. Again, moving on to the U.K. now. We've seen significant growth in this period, up nearly 40% on prior period and close to 5% up on pre-COVID levels. Distributor sales have seen the largest increase, especially in the stainless steel market, particularly with PTS, an acquisition we made recently in 2018. Light vehicle sales have recovered but are still below pre-COVID revenue due to the chip shortages, I mentioned earlier. And sales looking ahead are expected to reduce because of EU distributor business being transferred to Germany and also the continuing impact of semiconductor shortages, again, that I've mentioned earlier. However, non-EU distributor businesses is still going to remain high. And finally, with the U.S. again, we've seen exceptional growth in this region, organically up 53% and then an additional 16% via TR Falcon. Light vehicles are the largest increase organically. However, global customers from the acquisition are growing our ET&I and general industrial sectors, providing us with additional opportunities. Looking ahead, strong organic growth will continue. And obviously, we'll have a full 6 months of sales to include for TR Falcon. I can hand over now to Clare to go through some of the margin details.

Thank you, Mark. We've heard about the top-line and all the exciting opportunities that we're seeing here. But of course, it's not just about revenue. And therefore, what I want to do now with the help of this slide is provide us with an overview of what has happened to our underlying operating profit in half year 2022, which has gone up by that 73.7% we mentioned at the beginning and by 180 basis points to 7.3%. And whilst we see a significant improvement on half year '21, 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 going back to our half year 1 graph you see here, 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 had some further year-on-year movements. We have seen the negative transitional impact of the higher freight and raw material costs. Now gross, that is 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 you see there. On the overhead side, unsurprisingly, normalization from a lower half year '21 base has led to net additional costs of around GBP 1.6 million. And that's things like bonus, travel, other discretionary spends and of course, inflationary increases. Although it is worth noting that in the half year, this increase has been reduced by a nonrecurring net of about GBP 400,000 IFRS 2 credit due to the lapsing of the last equity award schemes granted pre-COVID. The last key point to note is the removal of the government support schemes. This has increased our cost base by a further 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 '21, we do not expect the negative impact of this to repeat into half year 2. So overall, we've seen a strong underlying operating profit increase, albeit with a lot of moving parts, and most importantly, with further margin recoveries still expected to come in half year 2. But what is happening beyond the income statement? Well, if we turn over the page now, we can take a look at the balance sheet side as well. And I thought the best way to do that is to look at our adjusted net debt position. At a high level, we can see 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. Now, 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 talk us through that in a bit more detail in a few slides' time. Outside of Atlas, which I'll touch on later, we've seen GBP 1.7 million of plant and machinery, routine maintenance spend across our manufacturing sites, whilst 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. Turn over to the next slide. 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. This continues to provide us with the capacity and the confidence to make the most of the organic and acquisition opportunities that surround us. And if we turn over to Page 20, that leaves me 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 do remain committed to maintaining a progressive dividend policy in line with profitable growth. And with that in mind, if we turn over to the next slide, we have declared a half year '22 interim dividend of 0.7p. We do still believe that an appropriate level of dividend cover is in the range of 3 to 4x. However, it is worth noting that we're expecting to target payout at the top end of this range for the medium term to allow for these exciting organic growth, strategic investments and acquisition ambitions. And on that positive note, I will hand back over to Mark, who's going to talk you through our strategic update.

Thank you, Clare. As you can see on this slide, clearly, our aim is to be a much bigger company than we are now, not only by revenue but also obviously by increasing our gross and operating margins. But how are we going to do this? One, obviously, is investing in our organic business, implementation of 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 through each of these in more detail next. Okay. If we can go on to the next slide, please, Mark. The core strategy is all about growing with and further into our multinational OEMs and our 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, we have seen significant growth from several of our key strategic global customers across all the sectors. And by significant, I mean, over 100% growth rates. 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 of the recent examples we've done over the few years, Magna, Rotork and more recently, Itron and TR Falcon. In a period alone, we've added close to 300 new customers. If we move on to the next page, providing reliability is one thing, but also, obviously, we need to add value. And that is where our engineering function really comes into play, starting from the designing section all the way through the supply cycle of the part. This is definitely becoming more prevalent with new emerging technologies and the drive for greater sustainability such as electric vehicles, where we believe the fastener opportunities around double that of a traditional internal combustion engine. In addition, during the period, we introduced -- we've introduced new product ranges. These will be additional to existing customer parts and opens up the door for new emerging technologies. To put it into some form of perspective, we've traded around 8,000 new parts during the period, of which 80% are classed as specials. And we've added 5,000 new parts to our website for our customer engineers to review. With the opportunities that lie ahead of us as well as onshoring pressures, we are seeing significant capacity constraints at several of our locations. In particular, in Italy, where we have approved a large investment in our manufacturing plant 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 over a phased approach over the next 18 months and payback will be just over 3.5 years. In addition, on our distribution side, as you've heard, we need to move into larger buildings to support the organic growth at 2 key sites: PTS, the acquisition I made earlier, specializing in stainless steel and Hungary. Both of these moves will be completed in calendar year 2022. If I can move on to Project Atlas now, Clare?

Thank you, Mark. 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's via this investment into our IT business platform and our underlying processes, policies and procedures that Trifast will become the fully integrated global player that our multinational customers are looking for to support them on their growth journeys. It's not just about how we interact with our established and developing customer base. Project Atlas is also about real, tangible benefits, an engine for continuous improvement that will see us generating noticeable margin improvements as we get more and more sites rolled out. I'm not going to take us through everything in that table in detail because you can read faster than I can possibly speak. But I would 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 a 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 decision as a group? When an inquiry comes 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 our warehousing infrastructure with full WiFi and scanning technology and dynamic product placement will drive down picking areas and speed up our warehouse operations to save costs. And we're pleased to report this is something that we're already seeing 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, say, the price on 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 a combined spend and backed up by an improved demand forecast of what our short- to medium-term need looks like. And if we couple this with the recent investments 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 this to be able to make significant input cost savings as we develop and rationalize our global supplier base. And the final point, I would draw out from here is on the acquisition side because having an adaptable, scalable and stable environment will support an accelerated acquisition journey. It's going to allow us to move quicker and potentially integrate larger targets more efficiently and effectively into the wider group. Project Atlas, and we've spoken about this before, has always come with a medium-term benefits case, which 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 turn to the next slide, Mark. How far have we got really is the question and are we on track? Well, as you can see on this particular page, 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 that 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 a phased process that has already begun, and there are bound to still be some other 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 was always going to be a multiyear investment, and we're not going to tell you that the time line is not tripped up by the global pandemic and specifically by the related travel restrictions we have 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 back firmly on track. We have a sensible timetable to complete, enough mitigating plans to see off 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 to Mark.

Thank you, Clare. As I mentioned earlier, we do want a more balanced geographical spread, and we can only go so far organically. The North America is the largest fastener market in the world. Yet for us, it only represents 6% of our revenue. Even with a compound annual growth rate, excluding COVID year, over the last 5 years of running around 15%. You've already heard that we've started this journey acquiring TR Falcon at the end of August, and we're really pleased with how this is going. You are never quite sure until you've peeled back that onion what lurks beneath, 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 that we're not servicing from that region. We have access to 2 new large multinational OEMs, who are looking for a global supplier. It diversifies us outside of the light vehicle sector, as we mentioned. And as well as having 2 companies now in America, we can enhance margins through better sourcing and logistical opportunities. However, if I can move on to the next slide, I want to make it clear. It's not just North America. We are reacting to opportunities as well. For example, accelerating our digital evolution, localizing for more in-house manufacturing capacity, rebalancing our sector spreads, introducing new product ranges. And I think what we're trying to get at here is certainly having a Head of Acquisitions now using third-party advisers, the momentum is building. And the pipeline we're seeing now is increasing. And we're at various stages of discussion with several. And I think that's what's really exciting. I think rest assured certainly, Paul, our Head of Acquisitions, is certainly not twiddling his thumbs at the moment. If I can move on to the next strand of the strategy. It's this -- on sustainability or ESG. I mean, this is something I head up and I'm very passionate about. I really see this as an opportunity, which is allowing us to work with customers and with suppliers to develop new innovative solutions and actually make us one of the fastener leaders in this field. I believe, we already punch above our weight. The Morgan Stanley MSCI rating has given us an AA. And EcoVadis has given us a silver award this year, and this is only given to the top 25% of companies in this area. You'll be very pleased to hear that we have published our first Sustainability Strategy Report earlier this week, and a link of that can be found on the RNS and will go on to our websites as well. As you can appreciate, this is a huge subject and with a lot to do. And if we move on to the next slide, you can see there that we're focusing on really 4 key areas: acting on the environment and the climate change, building a sustainable supply chain, developing and enabling sustainable innovation, and creating value for our people and communities. And all of this is underpinned by good governance and fair and an ethical culture, which is already embedded within the business. I think, if we go on to the next slide, you'll see here that what we're trying to do is improve a good governance already within the group. And this is to ensure that sustainability is embedded within the business from top down to bottom up. I think the final thing I'd like to say on this, and as I say, if you have any questions, please have a look at the sustainability report that we've created. But what I want to be able to say is we have created commitments and projects and targets that we want to achieve. And these are all based on practical and realistic time lines. And one of the things that I would want to reiterate here that often gets forgotten, fasteners allow products from a customer to be opened up and repaired rather than just being disposed of because you can't get inside them. This lends itself to a much more circular economy. I think now, if I could summarize, which is on the next slide. Next slide, please, Mark. Really summarizing on really what we -- and following on what we signaled at the prelims in June, as with many other industrials, it is a difficult environment, we're not saying that. But we've delivered strong revenue growth across all sectors, and the high levels of activity has given 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 the acquisition journey in North America. We've got significant facility headroom from the banks to support further investments. And finally, we've published our sustainability strategy, demonstrating our commitment into this area. So we're certainly heading along -- heading in the right direction along that medium-term plan. And as I said beforehand, it's not unreasonable for us to double the profit in the medium-term. So I hope that's given you a good insight into certainly the business and what we've seen in the first half of the year. Are there any -- well, -- thank you for those that have done questions, and we're happy to answer some of those now.

[Operator Instructions] Clare, Mark, I haven't given you a lot of time, but perhaps if I could ask you to open the Q&A tab and just take a look. And where possible, if I could ask you to read out the question and give a response where it's appropriate to do so, and I'll pick up from you at the end.

Thank you, Mark. Thank you. Our first question we've got here is from David B. What do you see as a normalized gross margin? It was 30% plus in financial year '17, '18 and '19. It's a very good question, David. What we see as a normalized margin, and there's 2 parts to this. So the first thing I would say is obviously is a normalized margin really looks to the historic trend. And if we look back over the last sort of 5 to 6 or 7 years, we run high 28s, which is why when you look at the Slide 5 that we brought together, you can see we've put the half year 2020 numbers in there, which really reflect what we think of as a pre-COVID normalized margin. So it's up there at the high 28. We absolutely understand your comments about 30%. We did achieve over 30% in those years. There were some very, very good headwinds helping us out there as we -- in terms of FX and a variety of other things that were going on. I think to reassure you, we have not lost sight of 30% as a target. That absolutely remains the target that we want to make sure we're able to exceed. And actually, if you have a look at what we're planning to do with the price increases, you think about the operational gearing gains that are going to come through from all the organic opportunities in front of us and then look at the Atlas benefits case, you'll see that we are in a situation where we are very much planning to exceed that 30% target in the medium-term.

Thanks, Clare.The next question is on from Michael D. Great progress. Thank you, Michael. What is the view on future M&A? I assume the pandemic may have provided some exciting opportunities. Hopefully, when I went through the presentation, it gave you that feeling that, yes, there are certainly lots of opportunities happening. And I think you're probably right, actually. I think the pandemic makes companies stop and think and think, actually, particularly owner-managed companies. And I think this is key. We're not -- we don't want to compete against PE houses or anything like that. We're very much around being a strategic buyer. We deal with the owner-managed companies and the owner. And generally, they want the company to go to a good home. For us, it's about looking at a company and knowing does it fit strategically with us? And if we continue to invest in it, 2 and 2 make more than 4. So for us, I think it's now people are thinking, oh, we want to now sell. We're looking for a company to support us in that. We want to hand the company over to somebody who's going to look after the staff and invest. And I think the pandemic, you're absolutely right, has probably accelerated that in people's minds. Yes. What's the next question? Yes, and the next question again is from David B. How much pushback are you getting on price increases? And will you have to be able to maintain them with freight and raw material costs will -- yes, be able to maintain and when freight and raw material costs normalize? Again, a very good question. I think just to put it into perspective, the cost of a fastener is tiny when compared with the whole application or product of a customer, a car, a washing machine, for example. That said, you still have to deal with the person and procurement director, procurement manager, who has KPIs set on obviously cost. However, customers are a lot more receptive at this moment in time, and they understand the issues because they are seeing much larger vendors to them have much more higher absolute costs being passed on. So when we're coming knocking on the door, they understand that. In fact, some have said, "I'm glad you have because otherwise, we'll be wondering what margins you actually are making." I think it takes 2 things here. One, certainly on transactional business and distributor business. With the stock coming in, we can pass that on straight away. It's much easier. With contractual business, it takes time to have sensible negotiations and conversations with customers. And as I say, they are receptive to those conversations.

Okay. Right. We've got a question from Abby R. What lessons have you learned from Project Atlas? And would you have done anything differently? It's a very good question. We've learned an awful lot of lessons from Project Atlas. It is the biggest organic investment and probably project we've taken on as a business in our history. So every single day of the week, we're learning lessons. And we're improving the way that we're doing things and dealing with things to move forward. I think the -- I think we were very, very sensible at the beginning of this process and did an awful lot of background research to work out how these projects go wrong. What is it that trips them up? What is it that makes them take twice as long as they were meant to take and cost twice as much and really use that process to underwrite how we were going to set up the project from a governance point of view, taking into account the very important change management side of the business, the training and all of those good things. So we did an awful lot of learning out front. And because of that, I think we probably sit here today and say, "Look, there's nothing significantly different we would have done as we sit here at this point in the project." Do we wish we could have done it in half the time? Absolutely, we do. But was it right to do it in the amount of time we have taken? Yes, it absolutely was because this is a very, very serious investment and one that takes that amount of time to make sure that we get to the right completion and the right conclusion on. So lots of little lessons along the way, but nothing really majorly that we would have done different, Abby.

Again, another question from David B. Are you seeing material labor cost inflation? Yes, the answer is absolutely yes. From a material point of view, it is important to point out that, yes, obviously, our parts are made, for example, with steel or stainless steel. But the actual cost of that in the cost of a fastener is, on average, around 25% of the fastener cost. And that's because of all the engineering expertise that we put in, the research and development, the buildings, the machinery and the labor as well. So it's not as high as you actually -- as people necessarily first think. Part of what we are doing, and as I said before, when we're passing pricing on, it's being transparent with the customers and explaining these are the costs that we are seeing, and this is what we need to maintain. So it's key that, that is passed on.

We've got another question. What is the approximate mix between transaction and contractual pricing? That's actually a very easy one to answer. Our transactional business is almost exclusively our distributor business. And so it operates at between 15% and 20% of the overall global revenue. So we're at 20 -- 15%, 20% to an 80%, 85% split.

The next question is from Matt G. Could you comment on the current lockdown situation in Malaysia? Absolutely. So as I say, in the first half of the year, the lockdowns imposed meant that customers and ourselves could only have 10% of the workforce actually in. This gradually increased. Now the restrictions have been completely eased, so we're back to normal again.

Absolutely. And we've got one more question from Matthew B. Are your global competitors in M&A mode to which the answer is yes. Yes, some of them are. We are seeing them out there in the marketplace. We haven't come up against them in a competitive environment yet it's a big marketplace out there, particularly where we're looking in the U.S. But yes, we are aware that deals have been done and are likely to continue to be done in the short to medium-term. Yes, we can do with one final one come through from Chloe. How much extra capacity will the investment in Italy bring? It's significant. I mean, you heard the sums that Mark talked about. It's probably a 50 -- around a 50% capacity increase. And so, it will substantially increase our manufacturing capabilities in Mainland Europe.

That's great, Clare, Mark. Thank you very much indeed. And thank you also to all the investors that have taken time to submit questions this morning. If any further questions do come in, Mark, Clare, I will obviously make those available to you after the meeting. But I guess before I redirect investors to provide you with feedback, which I know is important to you, if I could perhaps ask you, Mark, just for a few closing comments to wrap up with.

Now, first and foremost, thank you all for your time today and the great questions that have been asked. I hope the 2 of us have given you a flavor of what the business is about and the good things that we're working on and certainly the aspirations that we have going forward. So now, once again, thank you very much, and hope to speak to you again in 6 months' time.

That's great. Clare, Mark, thank you once again for updating investors this morning. [Operator Instructions] On behalf of the management team of Trifast plc, we'd like to thank you very much indeed for attending today's presentation. That now concludes today's session, and good afternoon to you all.