A Hard Look At Techtronic Industries Co. Ltd.

Techtronic Industries Co. Ltd. (TTI) (HKG:0669) is a fast-growing world leader in power tools, accessories, hand tools, outdoor power equipment, and floor care for Do-It-Yourself (DIY), professional and industrial users in the home improvement, repair, maintenance, construction and infrastructure industries. 

In this article, we will take a closer look at TTI’s business profile, management, and financials, to assess whether the company is suitable to invest in. 

Global footprint

TTI has a global footprint. Its operations around the world include manufacturing factories, R&D facilities, as well as sales, marketing and administrative offices in North America, Middle East and Africa, Australia and New Zealand, Asia and South America.   

(Source: company website)

Geographically, North America and Europe are the TTI’s largest customer locations, accounting for 91.76% and 92.22% of total revenue from external customers in 2018 and 2019 respectively. 

	Revenue from external customers
	2019 US$’000	2018 US$’000
North America	5,909,781	5,371,768
Europe	1,160,614	1,071,056
Other countries	596,326	578,358
Total	7,666,721	7,021,182

(Source: 2019 annual report)

Home Depot is TTI’ largest sales channel and the largest home-improvement chain store in the US. This customer contributed total revenue of US$3.59 billion to TTI in 2019 which represents 46.78% of total group revenue. No other customer contributed more than 10% of total revenue.

Business divisions

TTI segments its business into two main divisions: 1) Power Equipment Division and 2) Floor Care and Appliance Division.

The Power Equipment Division includes industrial power tools, accessories, hand tools, storage, layout and measuring tools, outdoor products, and professional, consumer, and trade power tools. The vast array of products in this division provide a complete line of products for household, construction and infrastructure projects.

The Floor Care and Appliance Division includes upright vacuums, canisters, bagged and bagless vacuums, stick vacuums, broom vacuums, and a complete line of carpet and floor cleaners. Each product line contains specific designs for both home and commercial use.

In addition to its own brand names, TTI also designs, manufactures, and supplies products under a contract manufacturing basis for other leading brands, reputable distributors and retailers worldwide.  

	Power Equipment US$’000	Floor Care and Appliances US$’000	Consolidated US$’000
2019 segment revenue	6,791,514	875,207	7,666,721
2018 segment revenue	6,009,495	1,011,687	7,021,182

(Source: 2019 annual report)

The Power Equipment Division is a much larger division, accounting for 85.59% and 88.58% of total revenue in 2018 and 2019 respectively. The Floor Care and Appliance Division sales declined by 13.49% in 2019 from the prior year as the group made a strategic exit from the German floor care business. 

Cordless leadership

TTI brands like Milwaukee, Ryobi and Hoover are recognized worldwide for their high-performance and high-quality emission-free cordless power products. 

While cordless power tools have existed for decades, TTI was one of the first companies to transition to lithium-ion technology. Compared with the legacy nickel-cadmium technology, lithium-ion offers primarily two main advantages: 1) they are smaller in size and lighter in weight, and 2) they typically offer longer run times as they have virtually no self-discharge and suffer from no memory effect. 

TTI leads the industry in terms of lithium cordless power tools, as the group continues to invest in technologies and product innovations that are disrupting its industry. Of TTI’s portfolio of brands, Milwaukee is by far the group’s most important brand.

(Source: company website)

Improve customer stickiness

The importance of cordless power tools extends far beyond simply better and more efficient tools for customers. A battery ecosystem (such as Milwaukee’s RedLithium platform and Ryobi’s ONE+ system) drastically increases the customer stickiness to the brand. Given that TTI’s batteries are interchangeable across a particular brand’s products, it would be shrewd for most customers to stick with one brand across all of its power tool needs. The sale of different capacities of batteries also serves as a new revenue stream for the group. 

Update on coronavirus situation

Given the global coronavirus situation, TTI recently provided an update on its performance. The group has shared that after a period of minimal disruption, its supply chain is functioning well. 

TTI is delighted to see a resurgence in demand for its DIY tools and outdoor products, particularly in its global e-commerce business. The group will continue to aggressively invest in exciting, breakthrough new products and believe it is uniquely positioned to continue to outperform the market. 

Founders

Mr. Horst Julius Pudwill (75) and Prof. Roy Chi Ping Chung (67) founded TTI in 1985. Despite their advanced ages, both gentlemen remain active in TTI and own equity stakes of 20.13% and 4.73% respectively. 

Currently, Mr. Horst Julius Pudwill serves as the Chairman and focuses on the strategic planning and development of the group. On the other hand, Prof. Roy Chi Ping Chung serves as a non-executive director.  

(Source: 2019 annual report) 

Key Leaders

Mr. Horst Julius Pudwill’s son, Mr. Stephan Horst Pudwill (43), serves as the Vice-Chairman of TTI. He is mainly responsible for managing, improving and monitoring internal operations and identifying synergistic business opportunities within the group. He has a 2.27% equity stake in TTI. 

Mr. Joseph Galli Jr. (61) is TTI’s current Chief Executive Officer and Executive Director. He is responsible for integrating acquisitions in North America and Europe, and enhancing the global sales potential of the group’s strong brand portfolio. He is also responsible for leading the management team in the group’s daily operations. Prior to joining TTI, Mr. Galli Jr. held high-level management positions in Black & Decker, Amazon.com and Newell Rubbermaid Inc. He has a 0.48% equity stake in TTI. 

We like managers to have ownership in the company that they run as their interests would more likely be aligned with those of minority shareholders.

Financials  

Measure 1: Growth in revenue and profits

TTI has achieved growth in revenue and profits at compounded annual growth rates (CAGR) of 10.03% and 15.42% from 2014 to 2019. As the growth in profits is faster than growth in revenue, TTI has demonstrated disciplined cost management and operational efficiencies. 

Measure 2: Profitability

Overall TTI’s gross profit margins, net profit margins and return on equity ratios have improved every year which is admirable. Clearly, management is able to use and allocate shareholder funds competently.  

Measure 3: Liquidity

TTI has consistently maintained its gearing level at a healthy level and hence, the group should not face liquidity issues. Further, the group has generated ample free cash flow from its operations every year within the past six years.    

Round 4: Dividends payout

TTI is a consistent dividend payer. In fact, its dividend per share has increased from US$0.04 in 2014 to US$0.13 in 2019.  That is a respectable CAGR of 26.58%.

Conclusion

With a closing share price of HK$65.45 as at 22 May 2020, TTI is trading at a price to earnings (PE) ratio of 25.17, with a market capitalisation of HK$119.85 billion. TTI is a quality business run by competent management and would be a worthy addition to the watch list of value investors.

(Source: Google Finance)

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