Finance Review

How do we measure value creation?

We continue to focus on creating value for our shareholders. In this section, as last year, we will review our performance for the year just ended and present our expectations for value creation in future years.

It is our view that long-term shareholder value comes from:

1. Market Competitiveness and Reputation;
2. Operational Excellence.

In assessing whether the Group has created value, we recognise the importance of a return to shareholders. For this reason we have chosen to measure Return On Capital Employed (ROCE) and Total Shareholder Return (TSR).

What is ROCE?

ROCE is the profit before interest and tax (and preintangible amortisation, associate impairment, IFRS 2 charges and restructuring costs) shown as a percentage of the average total assets of a period less the current liabilities (excluding cash and short-term debt).

It is a measure of management’s utilisation of the net assets at its disposal and therefore a measure of the increased value being created within the business.

What isTSR?

TSR shows the return on investment a shareholder receives over a specified time frame. It is shown as a percentage and includes both the changes in share price and dividends received.

It is a total measure of management’s ability to return over time both share price increase and dividend growth to the shareholders. It is an absolute measure. An increased TSR year on year means that value has been created.

So have we created value in 2007?

We are pleased to report that we have continued to grow the returns achieved from the capital employed in the business. However, we also have to report that as with the stock market in general this year we have seen a reduction in our share price, which although mitigated to some extent by our increased dividend levels has led to an overall reduction in our total shareholder return.

	Year end 31 March 2008	Year end 31 March 2007	Percentage change
ROCE	16.26%	15.97%	Up 2%
TSR	(23.15)%	44.33%	n/a

We believe that as our recent management initiatives continue to take effect, we will improve on these percentages and therefore continue to create value in the future for our shareholders.

So how did we perform financially during the year ended March 2008?

	31 March 2008 Actual	31 March 2007 Actual	Percentage change
Revenue	£122.4m	£131.9m	Down 7%

 

• Natural attrition within the business offset to some extent by new business won during the period.
• Revenue lost due to customers closing sites within Europe in the early part of the year, mainly in the electronics subcontract base.
• Revenue that we have exited from customers who did not meet Trifast’s profitability levels.

 

	31 March 2008 Actual	31 March 2007 Actual	Percentage change
Gross profit margin*	27.6%	26.3%	Up 5%
Operating margin*	8.2%	7.5%	Up 9%

* Before intangible amortisation, associate impairment, IFRS 2 charges and restructuring costs.

Principal reasons for margin improvement in 2008

• Ongoing change of mix in business to higher margin type products.
• Improved purchasing initiatives including increased spend in Asia and more importantly in our own factories.
• Reduction of business in lower margin accounts;
• Increased operational efficiency throughout all our sites.
• Reduced central Group running costs.
• Continued focus on quality assurance and customer service levels

	31 March 2008 Actual	31 March 2007 Actual	Percentage change
Profit before tax, intangible amortisation, associate impairment, IFRS 2 charges and restructuring costs	£8.81m	£8.81m	same

Principal reasons for same profit in 2008

• Decreased revenue, see above.
• Gross margin improvement, compensating for thereduction in revenues, see above.
• Impact of FOREX on the consolidation of our profitsfrom overseas subsidiaries, impact in period £0.2 million.

	31 March 2008 Actual	31 March 2007 Actual	Percentage change
Operating costs as a % of turnover*	19.7%	19.1%	Up 3%

* Before intangible amortisation, associate impairment, IFRS 2 charges and restructuring costs.

 

Principal reasons for decreased overhead efficiency in 2008

• Decreased revenue, see above.
• Over £0.5 million spent on training staff for the benefit of TR’s future (2007: £0.1 million).
• Continued investment in the recruitment of new high calibre sales staff.
• Increased marketing costs around Mainland Europe and USA to raise the TR profile, including attendance at exhibitions.
• General inflation of salaries, especially in locations such as China, Taiwan and Hungary.
• A number of delayed restructuring costs that got charged in the year but were not provided for in the prior year provision (£0.20 million).

We are comfortable that Trifast has made satisfactory progress in most of the areas above as shown by the results. Having reduced our operating platform and improved our efficiencies over the last two years, our focus remains firmly on profitable sales growth.We currently have no sites going through any form of restructuring programme and so have all our teams focused on sales development. At this time we have an enquiry log which is greater than it has been for the last five years. This represents a substantial interest from our market in our products and services.

Restructuring Costs

During the period, we completed the final part of the planned restructuring programme and have not shown any restructuring costs in this set of reported accounts. The main impact to us in the year was the time taken to get the teams back up to speed and adapted to the new structure and the impact of the cash flow from the prior three years’ restructuring provisions, which meant a cash outflow of £1.7 million.

Investments

Having spent the prior year and the first half of this year focusing on Europe and the USA, the Board spent the second half of the year looking into the Group’s businesses in Asia. During this review it was concluded that the investment that Trifast has in Techfast Bhd, Malaysia (a publicly quoted company in Malaysia) had suffered what the Board considered to be a permanent diminution in value against its holding costs in the books reflected by the significant decline in Techfast’s share price. To reflect this, and in line with IAS 39, the Board has decided to permanently impair £2.2 million of the value of the investment in the current period, reducing the carrying value to £0.5 million. The Company continues to work closely with the Techfast team and hopes that the Techfast business can produce stronger results in the future.

The effects of these results on Shareholder Value?

Earnings per Share

We are presenting an adjusted earnings per share measure that adds back the affect of material restructuring costs, goodwill charge and impairment and any related tax effect.

	31 March 2008 Actual per share	31 March 2008 Actual per share	Percentage change
Adjusted diluted earnings per share	6.85p	7.29p	Down 6%
Basic earnings per share	4.23p	4.70p	Down 10%

The diluted weighted average number of shares outstanding at the end of the period was 85,053,209 (2007: 84,584,980).

The reduction in the Earnings per Share calculations above was predominantly caused by the slight increase in our tax rate as a result of the movement of dividends from our Asia group to the UK.

Dividend Payment

The Board continues to maintain its progressive dividend policy (an average increase of 6% per year for the last 5 years) and this year, as reported in our financial statement, will declare a full year dividend growth of 15% on the prior year, which reflects the Board’s confidence in the Group’s prospects. Although on the face of it taking our dividend cover slightly below our targeted 3 times (2.7 times), once adjusted for the one-off associate impairment costs, it represents cover of 3.8 times.

	31 March 2008 Actual per share	31 March 2008 Actual per share	Percentage change
Final dividend payment	1.87p	1.66p	Up 13%
Full year payment	2.80p	2.43p	Up 15%

Have We Managed Our Assets Successfully?

As shown, we have grown ROCE by 2% with the successful management of our working capital.

The stock level reduced slightly to £25.26 million (2007: £25.61 million) reflecting an underlying decrease in customer specific stock held and an increase in own branded product ranges held for the growth of the Master Distribution Programme (sales to distributors in the area of the world where we do not have a strong physical presence).We continue to focus on this area and drive initiatives to increase the return we generate from our stock asset using our strong Asian supply chain solutions. The stock reduction programme this year has been hit by the reduction in revenues from some larger customers and the increased stock holding of raw materials in the factories to protect us from the raw material price increases that have been ongoing during the last quarter of the year.

Capital expenditure was in line with depreciation levels during the period at £1.11 million (2007: £0.70 million). This slight increase reflects a period of investment in our sites following a period of low investment during the restructuring process.

Our gross debt figure has reduced by £2.73 million to £16.46 million (2007: £19.19 million) and our net debt figure has reduced by £4.51 million to £8.21 million (2007: £12.72 million). This is a result of continued tight controls on customers’ cash collection and suppliers’ payments and a slight reduction in the cash outflow relating to restructuring costs from previous years relative to the prior year.

Cash generation from operating activities was strong with £11.40 million (2007: £10.88 million) being generated before the cash impact of the prior year’s exceptionals of £1.70 million, an increase of 5%.

At the year end the Group held net cash of £8.25 million (2007: £6.47 million). This has resulted in a reduced gearing level of 16% (2007: 26%), which leaves the Group with the capacity to pursue its strategic plans.

Our £8.62 million gross cash balance at the year end was held in foreign currencies. As a Group, our policy is to monitor exchange rates and buy or sell currencies in order to minimise our open exposure to foreign exchange risk, but we do not speculate on rates. During the year we have managed this exposure well with the net impact of our trading FOREX at a loss of £0.2 million for the year (2007: nil impact).

Depreciation charges were similar at £1.15 million (2007: £1.17 million).We expect this to remain relatively constant for 2009.

Funding our operations

The business continues to generate cash for investment in both organic growth and future acquisitions.We will continue using some of the cash to strengthen the balance sheet by paying down debt. Some £2.38 million (35% of free cash flow) will go to shareholders by way of dividend to give them a return on their investment.

To finance our operations the Board continues its policy of using a combination of retained earnings and external financing raised principally in the UK by the Parent Company, either in the form of debt or on the equity markets.

The net interest payable increased this year to £1.28 million (2007: £1.03 million) due to the increase in the interest rates and the increased average debt during the period as a result of the impact of the increased debt in 2007.We continue to regularly review all of our loans (which are currently all at variable rates) to ensure that we are getting a competitive interest rate level and that we are comfortable with the exposure to interest rate movements.

	March 2008	March 2007	Banking covenants
EBITDA: Net Interest*	8.8 times	10.7 times	> 3 times
Net Debt: EBITDA*	0.7 times	1.2 times	< 3 times

* Being earnings before interest, tax, depreciation and goodwill amortisation, associate impairment and also before restructuring costs.

The banking facilities are adequate for the current business requirements and offer headroom for future growth. We continue to review our banking facilities on an annual basis.

Taxation

The net charge for the year was £2.41 million (2007: £1.45 million) which, after adjusting for associate impairment, represents an effective tax rate of 29% (2007: 27%).

During the period, the Group generated greater profits in its lower tax regions but also suffered an increased tax charge as a result of the level of profits paid up by dividend from the Asian group to the UK. Although this increases our tax rate by 11 percentage points this is still the most effective way to repatriate funds to the UK Parent Company and means that our expected effective tax rate moving forward is 30%.

Pensions

Trifast plc operates Defined Contribution schemes (e.g. Stakeholder) and so has not had to report any valuation shortfalls. All scheme payments are up to date and we see no financial exposure to the Group with these schemes.

Our Summary of 2008

We remain committed to our long-term objective of profitable sales growth, with the focus being on the quality of business won.We have targeted particular growth areas and the business has been restructured so that we can provide the flexible solutions and excellent service levels that our customers demand. We have a strong management team and a highly motivated and experienced workforce and the breadth and spread of our customer base, both geographically and in industrial sector, gives the Board confidence that Trifast will effectively manage the challenges ahead.

Steve Auld Chief Executive Officer	Stuart Lawson Chief Financial Officer

18 June 2008