The nuts and bolts of industry
Business & market overview
Chief Executive Officer
Group Finance Director
TR Europe Managing Director
Group Sales Director
Trifast designs, manufactures, sources and distributes a range of standard and specialist industrial fasteners together with category 'C' components. Around a third of our income derives from TR's own manufacturing. The key end markets that our products are used in are: automotive, electronics/telecoms and domestic appliances. Our customers are a mix of multinational and national companies and distributors across the world.
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As a global full service provider, we have the ability to deliver direct to the supply line on a 'just in time' basis. Combining this with high quality volume manufacturing and distribution of assembly components, gives TR a competitive advantage that we believe stands us apart from our competitors.
Our culture is to 'work smarter' focusing on marketing our added value services such as providing high levels of customer service, global support and technical expertise across the business. This approach has been very successful in winning new customers and penetrating existing relationships. We have grown our 'preferred supplier' status amongst over 40 leading, well-established, multinational OEMs. This provides a pipeline of opportunity and momentum to deliver long term growth and margin enhancement.
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Our global industry
The industrial fastener market, both nationally and globally is extremely fragmented and is estimated to be worth around £50bn per annum and growing. Of this market, we believe, £25bn is representative of our target customer sector capability.
Our objective is to provide our customers with a high quality 'one stop solution' for their fastener assembly requirements. This encompasses providing design and application engineering support, high quality/low cost manufacturing and sourcing, supported by bespoke logistics to their plants anywhere around the world.
In FY 2015, our business delivered its strongest trading performance since it was formed over 40 years ago. This excellent result was achieved through a mix of strong, organic profitable growth combined with the additional income stream from VIC in Italy, which joined the Group on 30 May 2014. It is pleasing to report that VIC has not only integrated well into the Group but has broadened our design application capabilities, strengthened our presence within the domestic appliances sector and further enhanced our manufacturing capabilities within Europe.
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The delivery of our clear simple strategy laid down in 2010 to work, develop and grow with our customers across the world has been the main driver of our growth.
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Group revenue since 2010 has increased by a Compound Annual Growth Rate ('CAGR') of 12.5%, showing continual, steady, profitable growth, from an underlying profit before tax of £0.92m in 2010 to £14.31m for this financial year. ROCE has steadily grown since 2010, rising to 18.6% for the year under review, an increase of 230bps on FY 2014. Underlying diluted earnings per share ('EPS') has also continued to rise since 2010. For FY 2015 it increased to 8.68p, a growth rate of 45.9% on FY 2014 (2014: 5.95p). Basic earnings per share improved by 21.5% to 7.39p (2014: 6.08p).
This achievement has been reflected in our Total Shareholder Return ('TSR') with Trifast outperforming the FTSE Small Cap and FTSE All-Share Industrial Engineering indices considerably over the 2009–2015 financial years.
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Solid underlying growth
Best trading year ever
Given the Board's confidence in its growth strategy, the Directors are proposing, subject to shareholder approval, a final dividend of 1.50p per share.
This, together with the interim dividend of 0.60p (paid on 17 April 2015), brings the total for the year to 2.10p, an increase of 50% on the prior year (2014: 1.40p). The dividend of 2.10p is covered c.4x by underlying earnings. The final dividend will be paid on 16 October 2015 to shareholders on the register at the close of business on 18 September 2015. The ordinary shares will become ex-dividend on 17 September 2015.
Our return to sustainable growth over this period has been impressive, however, we are also mindful that our dividend payments historically have been relatively cautious.
Returning to the dividend list in 2012 was an important milestone for Trifast and we have been able to reward shareholders with a progressive level of dividend per share since then. We now consider it appropriate to augment this by introducing a formal dividend policy. For the medium term, we believe an appropriate level of cover will be in the range of 3x to 4x. As ever, the actual level of dividend each year will take into account the working capital requirements and planned investment in the business to enable us to deliver our stated growth aspirations.
Underlying operating profit increased by £5.57m to £15.27m (2014: £9.70m), an increase of 57.5%
Revenue and margin analysis by territory:
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|Continuing operations||Revenue (AER)|
|Underlying operating profit margin|
|Underlying operating profit margin|
|Europe (exc. VIC)||26.75||7.6||25.36||6.8|
|Total underlying profit before tax||14.31||9.16|
The Group's total revenue for the year ended 31 March 2015 increased by 19.2% to £154.74m (2014: £129.78m), with growth at Constant Exchange Rate ('CER') of 22.6%.
Organically during the year the Group grew steadily culminating (as reported in April) in a very strong Q4, particularly within our UK and Asian regions. Revenue growth at CER was impressive at 7.6% and at Actual Exchange Rates ('AER') was a creditable 4.2% uplift to £135.17m (2014: £129.78m). Currency headwinds played their part, with Europe impacted the most, particularly in the second half, as the Euro continued its sharp decline. Our Asian businesses, whose currencies are loosely linked to the US dollar also suffered, however, the strengthening of the US dollar in the latter part of the year lessened this impact.
The improvement in revenue dropped directly through to the margin, with gross profit increasing by 130 bps to 29.0% (2014: 27.7%). During the year procurement prices remained fairly stable, however, we are mindful that an ongoing weakness in the Euro against the US dollar could affect the Group's purchasing costs from Asia, particularly within the European region.
Distribution and administration costs ('D&A'), pre-separately disclosed items, increased by 12.7%. This is due to the acquisition of VIC and the investment in new staff and capabilities to reinforce our sales and marketing initiatives. Although Group headcount has gone up to 1,165 at 31 March 2015 (2014: 1,047), overall these D&A costs have reduced as a percentage of revenue from 20.5% in the comparable year to 19.4% in the year under review.
In addition to the currency impact on translating our overseas results, the Group also incurred a foreign exchange transactional cost of £0.56m (excluding the separately disclosed gain on the deferred consideration), as a direct result of the weakening Euro on the Group's monetary assets. This represented a negative swing of £0.95m on the previous year.
Underlying operating profit increased by £5.57m to £15.27m (2014: 9.70m), an increase of 57.5%, of which £4.43m was in relation to the VIC acquisition. Organically, the business grew underlying operating profit by 11.8% at AER or 16.4% at CER and the Group's underlying operating margin increased by 240bps to 9.9% (2014: 7.5%).
Net financing costs increased in the year from £0.53m to £0.97m, of which £0.43m was in relation to the acquisition of VIC. Interest cover, being defined as underlying EBITDA to net interest, was 175 (2014: 205).
Profit before tax
Profit before tax from continuing operations was £11.85m (2014: £8.87m). Underlying profit before tax, amortisation, acquisition costs and other separately disclosed items was £14.31m, an increase at AER of 56.2% from 2014.
Tax in the year was £3.46m (2014: £2.28m), which equates to an Effective Tax Rate ('ETR') of 29.2% (2014: 25.6%) and an underlying ETR of 27.9% (2014: 25.6%). The increase in this rate primarily reflects the acquisition of VIC, whose ETR was c.34%.
Read more on Note 2
Separately disclosed items
The breakdown of separately disclosed items is show below:
|IFRS2 share based payment charge||(741)||(67)|
|Net acquisition costs||(750)||—|
|Costs on exercise of executive share options||(511)||—|
|Release of closure provision for TR Formac (Suzhou) Co. Ltd||94||—|
Read more on Note 2
All regions show growth and are investing in the future
Regional trading performance
42% of Group revenue
Automated storage system
The UK business, the largest region within the Trifast portfolio saw revenue up 3.5% to £65.46m (2014: £63.24m) in the year, driven substantially from the automotive sector as new projects that were under development with customers in previous years came into production. This momentum looks set to continue. The electronics/telecoms sector also performed well benefitting from an increase in demand from businesses supporting 4G technology.
Operating profit improved by 6.8% to £5.83m (2014: £5.46m) whilst the operating margin increased 30 bps to 8.9% (2014: 8.6%). In addition to top line growth dropping down into the margin, further operating efficiencies have been achieved through:
- the management structure — the UK is now managed under one management team, this ensures 'best practice' is delivered across the region
- better procurement — the new commercial team structure, put in place to focus on resourcing initiatives, has been successful in identifying additional commercial purchasing opportunities
- more efficient logistics — we have invested in two automated storage systems at our Uckfield site. These have had the added benefit of more than halving the pick times in the warehouse and therefore improving productivity. More units are intended to be rolled out in the UK in the short to medium term
During the new financial year, additional investment in our people and equipment will be made to further enhance productivity and personal development. We strongly support the view that continual improvement initiatives should lead to future margin enhancements for the business in the future.
Our culture is to 'work smarter' focusing on marketing our added value services across the business
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Being local but operating globally underpins our competitive advantage
25% of Group revenue
Our Singapore and Taiwan businesses delivered the largest growth in the region.
The Singaporean manufacturing plant, which specialises in high quality, small diameter fasteners has seen strong growth from its customers within the domestic appliances and electronics/telecoms sectors. Our new territories of Thailand and India are overseen by the experienced Singapore management team. Trading within these areas has been in line with expectations and we are continuing to identify potential opportunities for further growth at these sites.
In Taiwan, following the surge in growth experienced over the last few years, our local manufacturing site is close to achieving full capacity. In January 2015, the Trifast Board approved a capital investment project to extend an existing building on site and purchase new plant. This investment is expected to become operational in Q3 of this financial year and will increase capacity by a further 15%.
China has done well to recover from the setback we reported upon a couple of years ago, when one of its largest customers went into Chapter 11, resulting in a loss of business. Our business refocused its efforts and has subsequently been able to develop relationships with existing and new customers which is giving us a more evenly spread sector base. Going forward, we have already secured a strong automotive 'pipeline in waiting' whilst also preparing ourselves for new 5G technology, which is on the horizon.
In Malaysia, our operations experienced a slight softening in their key markets during the year under review. However, in the short to medium term, we see this trend reversing as the development work that PSEP has put in with some major automotive OEMs bears fruit. As part of our quest to further drive operational efficiencies and share 'best practice' initiatives, we have pooled the skills and technical know-how of our two Malaysian management teams to create a more effective self-managing group able to take the business forward over the next few years. They will benefit from working as one team enabling them to share ideas and work together more effectively.
In addition, at PSEP, as part of our capital investment programme last year and covered in our review in 2014, we anticipate taking delivery of a state-of-the-art large diameter cold forging machine weighing 42 tonnes and costing £1m, with the intention of it becoming operational during the latter part of this new financial year. This multi-stage former is being manufactured in Japan and will provide a quantum leap in our production capability, in particular with regard to the complexity and accuracy of customised components.
Asia's revenue was up 4.9% in CER terms although on AER it increased to £38.65m (2014: £38.36m), up 0.8%. Overall, the operating margin in Asia improved 110bps to 14.8% (2014: 13.7%) and the region delivered an operating profit of £5.73m, an increase of 13.1% at CER and 8.7% at AER over last year. This increase clearly demonstrates the operating leverage that our manufacturing sites enjoy.
30% of Group revenue
Overall, Europe produced revenue of £46.32m and an operating profit of £6.46m at a margin of 13.9%.
Europe's organic revenue grew 5.5% in the year to £26.75m (2014: £25.36m) and at CER saw excellent growth of 16.3%.
This top line growth has dropped directly down to the bottom line increasing operating margin to 7.6%, up 80 bps (2014: 6.8%). Operating profit increased 17.7% to £2.03m at AER (2014: £1.73m) and 29.7% at CER demonstrating the large impact that the weakening of the Euro has had on our results for FY 2015.
During the year, Hungary continued its strong growth, further increasing our presence in the electronics/telecoms sectors. Holland witnessed its prior years' momentum continue with a number of new automotive projects, where production has commenced. These are providing a platform for this encouraging trend to continue.
Our performance in the Nordic countries, particularly Norway, despite all our efforts has been affected by the challenging economic conditions in the oil and gas industry.
The acquisition of VIC was completed on 30 May 2014. It is pleasing to report that its results have exceeded our expectations producing revenue of £19.57m and an operating profit of £4.43m, representing a very respectable 22.6% operating profit margin.
This strong performance has triggered the maximum adjusted post-tax profit earn out of €5.00m, detailed in the Acquisition Agreement in May 2014. These monies (less the agreed indemnity claims) will be paid from the Group's cash resources during the first half of the current financial year.
3% of Group revenue
Our US business grew 53.0% at AER, producing revenue of £4.31m (2014: £2.82m) with an operating profit of £0.33m (2014: £0.25m). This growth, although from a small starting position, reflects our stated Group strategy to grow our presence within the multinational OEM arena in the automotive sector. As we carry 'preferred supplier' status with a number of multinational OEMs, we have been able to respond quickly to their demands to supply locally as the European automotive platforms gradually transfer to the US.
Balance sheet & cash flow
As at 31 March 2015, the Group's shareholder equity amounted to £71.68m, an increase of £10.01m on 31 March 2014. Of this, £7.70m came from retained earnings less dividends paid in the year and £2.86m from the issue of new shares, being a mixture of options exercised and shares issued with respect to the acquisition of VIC.
Property, plant and equipment increased by £3.80m and intangibles by £15.20m predominantly as a result of the acquisition of VIC. The intangible assets purchased on the acquisition were made up of goodwill of £9.26m and customer related and technology based intangibles of £8.11m, which will be amortised over a weighted average life of 13.11 years.
Inventories, receivables and payables have largely all increased due to the VIC acquisition. Net inventory weeks have remained relatively stable at 19.4 weeks (2014: 19.1 weeks).
Net debtor days have increased from 65 days in FY 2014 to 72 days (H1 2014: 71 days) reflecting both the general increase in business, particularly in the final quarter, and VIC's receivables, which historically have a longer collection cycle. Although VIC has the ability to factor receivables 'without recourse', we are consciously not currently using this facility to full effect. Elsewhere, cash collection remains effective with minimal bad debts during the year under review. The increase in payables includes the contingent consideration relating to VIC of £3.62m which is payable at the end of June 2015.
Capital expenditure rose in the year to £1.41m (2014: £0.84m) and we would expect to see higher levels of investment in the current financial year.
Cash generated from operations (before separately identified items) was £8.27m (2014: £11.83m) giving a cash conversion rate of 50.2%. Although this was below the prior year's rate of 109.5%, it was considerably up on H1 2015 (4.7%), where cash was being used in operations to both supplement growth and absorb the reduced factoring in VIC.
Banking facilities & covenants
Group net cash balances as at 31 March 2015 were £15.01m (2014: net cash of £15.50m).
Outside of acquisition loans, the Group has combined banking facilities within the UK of £27.18m, made up of a £17.18m Asset Based Lending ('ABL') facility of which £8.61m was utilised as at 31 March 2015 and a £10.00m Revolving Credit Facility ('RCF'), which to date still remains unutilised.
In May 2014, the Company drew down in full a €25.00m five year loan, which was used to fund the acquisition of VIC. Interest on this is at EURIBOR plus a margin (initially 2.40%) and is ratcheted from six months after drawdown based on the ratio of the Group's net debt to underlying EBITDA. By Q4 this led to a reduced interest rate margin of 1.65%. The additional loan resulted in gross debt increasing to £28.43m as at 31 March 2015 (2014: £13.47m), whilst net debt also increased to £13.42m (2014: net cash £2.03m) and gearing was 18.7% as at 31 March 2015.
Read Note 26
|Year ended |
|Underlying working capital changes*||(£8.22m)||£1.03m|
|Underlying operating cash flows*||£8.27m||£11.83m|
|Cash paid out on separately disclosed items||(£1.50m)||—|
|Cash generated from operations||£6.77m||£11.83m|
|Net capital expenditure||(£1.39m)||(£0.83m)|
|Adjusted free cash flow||(£0.23m)||£8.66m|
|Acquisition consideration (net of cash acquired)||(£16.24m)||—|
|Proceeds from shares issued (net of VIC issue)||£0.49m||£0.08m|
|Net change in net debt||(£17.55m)||£7.87m|
|Net cash/(debt) as at 1 April||£2.03m||(£5.20m)|
|Effect of exchange rate on net cash/(debt)||£2.10m||(£0.64m)|
|Net (debt)/cash as 31 March||(£13.42m)||£2.03m|
* Before separately disclosed items, see note 2
The impressive results in 2015 are stronger than originally expected. They reflect the operational improvements implemented by management over recent years which are now delivering growth in both revenue and profitability, together with the upturn in confidence as we progressed through the year.
There are some macroeconomic influences that we cannot control which may affect future results. This being said, as a business we remain confident in our ability to deliver our strategy and are excited about the future.
At this early stage of the year, the forward order book remains solid and the Group's trading performance has been good as it continues to benefit from the positive momentum witnessed in the second half of last year. There continues to be many opportunities, both across our key sectors and with new and existing customer partnerships, and we believe that the Group will go from strength to strength. We remain encouraged by the future growth profile of the business and our commercial progress looks set to continue positively during 2015/16.