TR's design & application engineering skills

The Trifast Board, management and staff take pride in reporting an impressive track record of Total Shareholder Return (TSR) since early 2009, especially when compared to the two relevant FTSE indices shown below for the same period.

Chairman-CEO-tsr-graph.jpg

In March 2009, the share price was languishing at around 8p; during this year being reported, the share price traded between 57p and 87p giving a market capitalisation at 31 March 2014 of £94.6 million (1 April 2013: £61.7m). As at 12 June 2014 the Group's share price closed at 127p, thus taking the market capitalisation from below £10 million in 2009 to over £141 million. This quantum leap in value is testament that our investors support our growth strategy and aspirations (recently underpinned with our largest acquisition in history which extends our offering and European footprint). This together with reasonable ongoing share trading liquidity has enabled Trifast shares to be promoted from the Fledgling index to be included within the FTSE Small Cap and FTSE All-share indices, from 23 June 2014. This inclusion widens the category of potential institutional investors. We consider that our enhanced profile coupled with our tangibly progressive dividend policy has positioned us firmly within the investor fraternity, whilst providing powerful motivation to our entire workforce to drive the business even harder for the immediate and medium term future.

Keith Sandells

Business overview

Whilst pleased with this year's organic growth results, we have openly expressed our objective to accelerate expansion by strategic acquisitions; we have also committed to applying strict criteria to the structure and current/potential performance of selected targets. Although at any one time there is always at least one target under scrutiny, our selectivity clearly restricts our commitment to finalising a transaction; however, there are sufficient opportunities in our market for us to remain confident that continuing our search remains entirely legitimate.

This search for the 'right' acquisition has been highly active over a two year period since acquiring PSEP in Malaysia at the end of the 2011 calendar, and post the financial year end culminated in extending our business through the acquisition of Viterie Italia Centrale Srl ('VIC') in Italy which we completed on 30 May 2014. More detail about this acquisition can be found below and in Acquisition of Viterie Italia Centrale.

Meanwhile, our ongoing 'self help' initiatives continue to make material improvements around the business particularly with gross margins — thus providing tangible impetus to our ongoing financial progress.

Where our organic growth 'Hotspots' are developing

ASEAN Region (comprises Singapore, Malaysia, Thailand, Vietnam, Philippines and Indonesia)

The ASEAN Free Trade Area ('AFTA') is now revealing opportunities for TR as new factory investments are starting to favour the region, sometimes as an alternative to China. Part of local government incentives depend on the requirement for new participating beneficiary companies to source a minimum of 40% of materials and components from within the AFTA region. TR has two fastener factories in Malaysia and one in Singapore, thus providing a steady flow of potential new assembly customers moving into the region — sometimes from China.

For this reason, TR has strengthened personnel resources by setting up a subsidiary in Thailand and has registered for VAT in order to allow local currency invoicing. Our main sector targets are automotive (two and four wheel) and electronics (mainly consumer).

Once again, we congratulate and thank all of our colleagues around the world for these outstanding results yielded with less than a 1% increase in staff numbers employed"

Taiwan

Our operation in this region, Special Fasteners Engineering Co Ltd ('SFE') is already a strategic supplier to fastener distributors in Europe and the USA plus TR Fastenings as a group. Due to competitive pricing, quality and service for manufacturing specialised components, SFE is enjoying both full capacity and sufficient Return On Capital Employed ('ROCE') to actively seek opportunities to increase capacity of both buildings and plant, and these initiatives have gained full Trifast Board support.

Shanghai

Following extensive product and engineering training from TR colleagues in Europe last year, our Shanghai team (TR Formac) is gaining increasing business from sister plants of our existing automotive Tier 1 customers who are already long established with TR within Europe. This validates one of our core growth strategies set five years ago to develop global multi-national assembly customers that we can follow from country to country. The rising cost-driven trend for the major car manufacturers to establish 'global platforms' (the most costly component to developing the main floor pan) for example, the new imminent Ford medium saloon broadens our opportunities to offer common platform components, such as reclining seat bolts on a global basis ultimately to plants in Asia, Europe and the USA where uniformity of price, quality and availability is a minimum requirement to gain orders.

Shanghai is also gaining the benefit from mobile phone base station renewals as 4G technology supplants 3G, where the hardware is substantially different.

Our forecasting for the next three years reflects our confidence in the ongoing growth from both automotive and electronics sector dynamics within China.

Malcolm Diamond MBE & Jim Barker

Our ongoing 'self help' initiatives continue to make material improvements around the business particularly with gross margins"

Jim Barker

Chief Executive

manufacturing & Distribution

group sales by sector

As at March 2014

Large Diameter Cold forging machine for PSEP

Singapore

Despite being in a high cost country, TR Formac Singapore continues to deliver strong margins, and for this reason our earlier thoughts of transferring the manufacturing facility across the border to Malaysia have been discounted as we now focus on new customer potential around the AFTA region, with particular emphasis on South Korea and Thailand.

Malaysia

Power Steel & Electroplating Works SDN (Bhd) ('PSEP') continues to expand its capabilities with high tech larger components as a key resource within TR, especially to automotive customers. Sales activity is now beginning to embrace Thailand as a key future potential market opportunity.

In order to prepare for anticipated expansion of demand for safety critical automotive components in the region, approval has been given for investing in an additional new large diameter cold forging machine to be installed.

This £1 million machine is a 'Best of Breed' multi-stage parts former weighing 42 tonnes. Manufactured in Japan this investment will provide a quantum leap in our production capability with regard to complexity and accuracy of customised components.

USA

Our relatively new Houston location for TR Fastenings Inc continues to expand its resources, both with extra personnel and enlarged warehousing; we anticipate that there will be a year of consolidation in order to service the emergence of automotive opportunities arising from the increasing globalisation of component specification where TR already is supplying sister plants in Europe and Asia.

Our forecasting for the next three years reflects our confidence in ongoing growth from both automotive and electronics sector dynamics within China"

UK and mainland Europe

Following on from an excellent performance in the year under review, all of our UK, Ireland and mainland European business teams expect this trend to continue, driven substantially by automotive new model production start dates running from mid-2014 into 2015 as a result of exhaustive work involving concept and application engineering, estimating, quoting, prototyping and component testing undertaken as far back as winter 2012. Although the development cycle of new specifications can be as long as two years or more before production invoicing commences, these types of contracts tend to run for the lifetime of the vehicle, typically five to seven years. As a result, this restricts competitive activity to a relatively limited number of fastener suppliers who have the financial and engineering resources to cope with this level of complexity and delay, and even less, who can offer support on a global scale. We believe that this limited choice of alternatives to TR has, and continues to contribute to our organic growth.

Maria Johnson, Ian Carlton, Stevie Meiklem, Dave Fisk, Helen Toole, Colin Coddington,TR UK Management Board

TR Sweden had a particularly good year in terms of sales growth, profit and cash generation. This was in both the automotive and telecoms sectors, and TR Holland likewise enjoyed sales growth both in automotive and domestic appliances, whilst TR Hungary's growth has been predominantly in electronics.

The only division that has struggled is TR Norway, mainly due to the demise of traditional business emigrating to lower cost countries. However, much preparatory work has been done both on the supply and sales side to develop our business into the oil and gas industries which are so prevalent in the Norwegian economy; this new diversification is also proving to be relevant to our Scottish and Houston teams. We expect this sector focus switch to begin yielding both revenue and profit positive results by mid 2015.

Meanwhile, the electronics and white goods sectors show tangible evidence of recovery within Europe, which TR should benefit from, due to its strong presence in the electronics sector and the recent acquisition of VIC which operates predominantly in the white goods sector.

'Continuous improvement'

In last year's Report we highlighted the focus on sales, profit and cash, and also the adoption of the 80/20 Pareto Principle by each of the 15 UK and mainland Europe business team locations. This has been a major contributor to the profitability and cash generation improvement across all of these business teams and is now a constituent part of our routine operational disciplines and processes. This concept that '80% of our results come from 20% of our activity' has been widely accepted and is part of our induction and training programmes for everyone in the business.

It was also indicated that more sales applications engineers would be recruited; since then, we have added four new and experienced experts to the global automotive team. With clear geographic segmentation and targeted product category sales activity these developments and strategy rollout are reflected in this year's results. The product launch of plastic fasteners as a stand-alone new sector has proven very successful and has become a meaningful part of our growth strategy that is measured and reported to the Board on a monthly basis.

With clear geographic segmentation and targeted product category sales activity these developments and strategy rollout are reflected in this year's results"

Parteo principle triangle

source: John Winkler
cost model example shows, if:
sales of £100m: +1%
variable costs of 50%: -1%
fixed costs of 40%: -1%
= +20% in profit

Hayley Neilly

Promoting the TR brand is essential

Matthew Swainback

Ongoing margin improvement has been achieved by innovative Group sourcing policies, key vendor consolidation and freight and packaging efficiencies. Further software enhancements to our global sales enquiry portal during last year is enabling all new major Group potential contracts to be monitored at Board level at the time of quoting. This is a risk management process to ensure that our teams resist any price pressure that could result in them being tempted to apply sub-optimal margins in order to gain an order more easily. This direct 'power of veto' has been the main driver behind cost modelling enhancements and improving buy/sell margins with major OEM customers. Our mission is to sell 'total installed cost reduction', whilst the actual component price is usually only a small part of that equation.

It is for this reason that our marketing strategy for large volume OEM assemblers has been focused on senior management who are in a position to calculate the indirect costs of 'Goods In' processing and storage, deployment of components to the line, the cost of shortages and quality issues to production continuity, and the benefits of TR engineers assisting in new product optimum design and application. Whereas the procurement personnel are invariably only measured on price, which during the recent prolonged five year downturn has forced many component producers out of business. The irony that is developing, as recovery now slowly builds momentum, is that there are clear signs of restricted capacity in some component sectors, thus inevitably replacing the focus on lowest price with best availability. It is for this reason that the Board consider further investment in production capacity is timely.

Management development and succession planning is progressing on two levels. The TR Fastenings UK Board that was established in June 2013 has met regularly and proven effective in co-ordinating the key functions of sales, inventory management, finance, quality, HR and IT. The Management Development Programme for all UK and European Business Unit Managers is providing the dual benefit of improving overall business skills and awareness whilst at the same time enhancing the teamwork across numerous locations, an essential requirement for effectively supporting sister plants of multi-national OEMs where consistency of service, quality and price is a minimum in gaining preferred vendor status.

Group strategic overview

The global fastener market has been estimated to exceed £25 billion per year and growing at a CAGR of 5% until 2022; therefore, current market share for Trifast is not a fundamentally relevant metric, but nevertheless clearly points to the huge opportunities ahead for growth by marketing our relatively unique combination of low cost/high quality manufacturing, global logistics resources and engineering design and application — predominantly to global OEMs.

Although supplying multi-national OEMs is our foundation business model that currently yields 40% of Group revenue, this strategy is underpinned by five additional target markets (previously described as 'strings to our bow').

Engineering close up

Sophisticated automated component inspection

Lee Turner

Production of a Hank Bush

TR's high quality manufacturing in Asia

Steve Rex

Plastic fasteners now a core product

These are:

  • TR Brandedproducts
    (specialised components for sheet metal, PCBs and plastic mouldings) supplied mainly to distributors in the UK, Europe and the USA
  • TR Direct
    standardised 'off the shelf' fasteners for next day delivery to OEMs in the UK
  • Lancaster Fastener Company
    expanding range of catalogued standard and specialised fasteners for next day delivery to distributors in the UK, Europe and beyond
  • Plastic fasteners and spacers
    for global OEMs — available both from inventory and to customer specification
  • Manufacturing licences
    acquired for specialised highly engineered large volume fastener applications for automotive and electronics OEM multi-nationals

The Management team is confident that this combination of strategic and dynamic business streams is not only driving our current organic growth, but will continue to do so for the foreseeable future; moreover, as the fastener supply sector remains highly fragmented, there is ample scope for consolidation by acquisition.

Following the successful acquisition of Malaysian based PSEP in December 2011, the Board has committed to the ongoing search for additional earnings enhancing acquisitions that deliver both a cultural and strategic fit with TR. During the year, we engaged closely with two opportunities, one a European distributor and the other, a US based manufacturer.

Although both were eminently strong culturally and strategically, unfortunately, after due diligence was undertaken, we failed to complete the transactions on the basis of current profitability and inadequate strategic and tactical resources for forward profit growth.

Agim Nela

Agim Nela

We are very clear in openly declaring that we do not want to risk investor funds with turnaround requirements where either there is a lack of current operational profitability or competent incumbent management in order to financially justify growth by acquisition. Our search has continued for targets that 'add value' for minimal risk.

Post year end acquisition

Following extensive research and individual assessments of potential targets as explained above, shareholder approval was granted on 30 May 2014 for completion on the Class 1 acquisition of Viterie Italia Centrale Srl in Italy (normally referred to as 'VIC'). Summarising the key facts relating to VIC, below is an extract from our RNS announcement released from the London Stock Exchange on Tuesday, 6 May 2014:

  • VIC is complementary to the Group's business model and significantly strengthensTR's presence in the domestic appliance market whilst also offering TR additional opportunities in existing electronic and automotive Tier 1 markets
  • Funded from a new bank facility and minimal dilution arising from the allotment of consideration shares to the vendor
  • A technological innovator, VIC is utilising its 'know-how' and customised approach in fastening applications gained from its leading position in the white goods industry and taking it into different markets, including the automotive and electronics sectors
  • VIC has grown rapidly through integration and diversification of its product since its formation in 1964
  • VIC offers tailor-made solutions and a highly efficient logistics service to a strong customer base
  • Long-standing relationships and key customers encompass Europe's leading manufacturers of white goods, including Indesit, Whirlpool, Electrolux, Elica, BSH Bosch and Siemens
  • VIC's operational management team will benefit from Trifast's global sales and marketing resources
  • Acquisition will extend the Group's customer base as well as increasing TR's overall business with limited overlap
  • Significant opportunity to grow the enlarged business consistent with Trifast's strategy and grow the combined businesses by selectively investing in new facilities, plant and machinery
  • VIC will form a key additional part of Trifast's future expansion by providing an additional competitive manufacturing facility in Europe to complement the Group's existing resources in Asia
  • VIC will be earnings enhancing, self-managing without the need for synergies

The feedback on this transaction has been extremely positive, with highlights being the logical strategic fit, the immediate earnings enhancement, the broadening of our domestic appliance customer sector and the introduction of major manufacturing capability into Europe — thus offering short lead times and protection from EU anti-dumping threats in the future.

This clearly had a positive impact on the share price.

It's all about our people

The Board of Directors is under no illusions as to what is driving us forward in size, capability and profit, and so for that reason, we are in awe of what our TR management and their teams are achieving, and so offer our heartfelt appreciation and thanks for their unflinching efforts and 'can do' attitude.

We welcome also our new colleagues in Italy to the TR portfolio — we were delighted to receive resounding support from our investors at the end of May to enable us to complete the acquisition — we look forward to working with the team, sharing ideas, skills and resources.

TR Direct – 24 hour delivery

Lancaster constantly adding new products

VIC resourced for further growth

TR and VIC now working as one

Continuing investment in automated inspection for zero-defect in Asia

Outlook

The Directors are pleased to report that the business is continuing to benefit from the uplift in economic confidence and manufacturing output, this is being seen across a number of our key sectors and across our business units. TR's focus on overhead control remains key whilst also balancing our investment for future growth; cash management continues to be highly effective and the balance sheet remains strong. We will continue to pursue opportunities to add geographic coverage, product range and customers to the TR footprint.

The Group entered this new financial year with confidence and enthusiasm; to date, underlying organic growth has been encouraging and this has been bolstered by the introduction of VIC into the Group and the opportunities that this brings.

Management remains confident that we can continue to deliver another strong performance and we look forward to keeping all stakeholders updated with our progress.

We will continue to pursue opportunities to add geographic coverage, product range and customers to the TR footprint"

Malcolm Diamond MBE

Executive Chairman

Jim Barker

Chief Executive

16 June 2014