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Edited Transcript of TRI.L earnings conference call or presentation 14-Nov-17 8:45am GMT

Thomson Reuters StreetEvents

Half Year 2018 Trifast PLC Earnings Call

Nov 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Trifast PLC earnings conference call or presentation Tuesday, November 14, 2017 at 8:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Clare L. Foster

Trifast plc - CFO & Executive Director

* Malcolm M. Diamond

Trifast plc - Non-Executive Chairman

* Mark R. Belton

Trifast plc - CEO & Executive Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Trifast plc half year results. My name is Courtney, and I'll be your coordinator for today's event. (Operator Instructions) I'll now hand you over to your host, Malcolm Diamond, to begin today's conference. Thank you.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [2]

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(inaudible) this is our fallback and the good thing is that (inaudible) shareholder value (inaudible) so far as today is concerned, I'm not going to duplicate what my friends are going to say, but just to summarize, (inaudible) figures are win-win [for the] half year, increased profits (inaudible) so I'll let you kind of tell the story and (inaudible).

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Clare L. Foster, Trifast plc - CFO & Executive Director [3]

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All right. Yes, okay. So I am – thank you, Malcolm. Good intro. If we turn to Page 5, probably a good place to start, which is our table of our high-level numbers. As Malcolm said, it has been a (inaudible) and it's particularly exciting to see that this year because we have been making a number of investments, and we (inaudible) through the presentation.

Before we go into the detail of the numbers, like I've done in previous years, I would like just to look high level. I have some things at constant currency again. Now FX translation continues to be a tailwind for us, but a lot less of an impact than it was for us last year, and you've got the normal Page 19 FX effects table in there where you can see what that impact is (inaudible) the key numbers.

I've left the comparative in for last year as well this time because it really does show, okay, we had a big kick last year, we've had a slightly smaller nudge this year in terms of our numbers. But look at that at your leisure. So on that (inaudible) it's really been, to a certain extent, a continuation of a theme this year, where the (inaudible) P&L and found consecutive growth, something to be very proud of. And if we look at revenue first of all, we can see that we've grown by 4.8% overall at constant currency, up at 9% at actual exchange rates. And that's a pretty commendable revenue growth given that that is entirely organic for the 6 months. We continue to have our acquisitive ambitions (inaudible) Mark will touch on those later, but up through this 6 months, it's all good strong organic growth at 4.8%.

[A lot] of the success is in gross margins, (inaudible) half year target of 30% in gross margins, and that's something that (inaudible) to do, despite all the purchase pricing pressures that we've seen around the world, most specifically felt today especially in Europe, because of the expected weakness of the euro and the U.S. dollar, and we'll touch on that later.

Looking ahead, we're going to carry on aiming to (inaudible) target of over 30% for the rest of the year. But I do expect that there'll be some shifting in where those gross margins (inaudible) increased pressure here in the U.K. as a result of the referendum there and the extended weakness of sterling (inaudible) pricing pressure (inaudible) a little bit more in the second half of the year in the U.K. (inaudible) and so we can have the opposite negotiations starting to happen. And I know they're already starting to happen around the business, as (inaudible) So it's an example really of how we're so well-balanced geographically and across the currencies, actually if one side takes, then there's normally something to be given on the other side.

Despite the gross margin going down a little bit, we're very pleased to say that the underlying operating profit's been able to stay steady. And that's representing 3.4% growth in the absolute number, 8.5% AER. And that's all feeding down into underlying profit before tax, up by 4.5%, 9.7% at AER and then feeding down to our all-important underlying diluted earnings per share, which has gone up by 8.1% up to 6.78p.

So in summary, it's another good set of results. Almost boring saying it again, another good set of results. And we're carrying on our growth journey, really, and I'm going to talk about the underlying operating profit, obviously, in a lot more detail in a couple pages' times, so we can get behind those numbers. But for now, I'll turn it to Mark to talk about (inaudible).

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Mark R. Belton, Trifast plc - CEO & Executive Director [4]

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Thanks, Clare, and good morning, everybody. If you turn to Pages 6 and 7, I'll run through the regional (inaudible) from Asia, up 10.7%. Within the region itself, I am pleased to say that all of the sites performed well. And if we look at China, that is growing mainly from the automotive projects within China itself as well as new projects that we're winning in Japan, which is very exciting for us. Singapore continues to see growth from its domestic appliance businesses, whereas Malaysia and Taiwan both are growing strongly in the automotive sector. And they're also benefiting from the increase in intercompany sales that we're able to push through there.

And if we look ahead in Asia, we will still continue to see growth -- strong growth but probably slightly lower than the levels we've seen at the moment, mainly down to, of course, demand in the electronics sector, falling slightly compared to the first 6 months. As you can see here and as Clare mentioned, it's about investing, we continue to invest in plant and machinery in this region, mainly in order to increase capacity and to improve efficiencies. For example, by the end of this financial year, we'll have completed the construction of a mezzanine floor in Singapore. This will cost around about GBP 1 million and will enhance that capacity by about 25%, and that will be by putting other machines in there as well. So yes, all good stuff there.

If we move to Europe. The European region overall showed steady growth during the period, a bit of mixed fortune. Holland and Sweden performed very well on the back of new automotive projects. However, this was partly offset in Italy as volumes fell from one of its large domestic appliance businesses when we compare it to the previous period. And if you can remember at the prelims and that when we spoke last, in Italy, it saw exceptional growth in that first half of last year despite a customer's recall program, and now it's just basically turned back to more normalized levels. So looking ahead, again we see modest growth in this region. Where Italy's fall in the domestic appliance schedule will be offset by increasing gains in the automotive elsewhere.

Pleased to say Spain is now up and running. First orders have been processed. Stock is on the shelves, and yes, the pipeline is looking good there. I'm very pleased with how that's going. Also, which is exciting, we're in the process of setting up a new Swedish Innovation and Technical Centre in Gothenburg, which is in the heart of Sweden's electric vehicle development area. We already have 3 engineers in that area, and it's going to allow us to network with some of the design centers and many of our multinationals there. So again, really exciting opportunity.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [5]

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And we're now supplying Volvo direct (inaudible) the first major manufacturer that we've been supplying, so I think it's not large amounts, but it's a great (inaudible).

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Mark R. Belton, Trifast plc - CEO & Executive Director [6]

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Okay. So thank you, Malcolm. If we look at the U.K. now on Page 8. Despite the U.K. being in a mature market, it still grew over 4%. This is mainly from an increase in our sales to our European distributors as well as an upturn in business, generally, throughout. Going forward, again, we see continual growth from our distributor sales, which doesn't seem to be slowing down at the moment. And, yes, new contracts, which we've recently secured. So all's going well there. In addition, our Belfast site is doing very, very well at the moment, winning new business in the industrial sector. And as a result, we're expanding the warehouse in Northern Ireland. So yes, all's well there.

I guess the only one which is a little bit below our expectations was America. Whilst it still showed growth, it was lower than we expected, down to Hurricane Harvey. Although it didn't significantly affect our employees, thankfully, and our office directly, it did impact our customers. For example, there's (inaudible) those, particularly in the electronics sector. The impact of this is obviously still being assessed. Still some of those places are underwater -- not literally underwater, but being repaired. But that it hold back results further to the end of this year. But that said, there are still plenty of opportunities we're seeing in America, and we are continuing to invest to capitalize on those.

So really, if you just then turn to Page 10 and 11. I've kind of spoken about it in regions, but really just to give an update on how we see the sectors at this moment in time. We're seeing the largest growth in (inaudible) in the automotive sector. And as you get a feel from what's happening, the increase in cooperation now between our manufacturing and our distribution sites is certainly helping to support this growth. A good example is Malaysia, where it's now supporting other Asian, our European and our American colleagues on the global automotive platform that we're supporting.

The electronics and telecommunications sector, there is increased pricing pressure here. As we said, whereas if you look at the automotive, there are fewer parts that we would sell in the electronics sector. You could be looking at 500 to 1,000 parts that you sell. A large representative of that would be designed in part, but just by their very nature, some of those will be commoditized parts. As we say, 25% of our business really is on the commodity, 75% of our business is on specialist parts or our own branded parts. And so because it's slightly more commoditized, you do get increased pricing pressure in that sector. And as well as the impact Hurricane Harvey had in North America, we've seen that sector remain in line really with last year.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [7]

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I'll just say something in terms of, because of the flawed section of (inaudible) negotiations, which will pull it down to a certain level, where we'll actually walk away and have done on a couple of contracts there. That's not our game. We're not into (inaudible) and we actually allow that business to drift to somebody else that are quite fixated, if you like, on maintaining that margin.

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Mark R. Belton, Trifast plc - CEO & Executive Director [8]

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No, no, that's a good point. Thank you. Also just in the electronics sector, which we're noticing there's kind of a subtle shift now with some of our electronic customers. They're getting more and more involved in automotive technology. And I guess, we're in a fortunate position to be able to give guidance and support to those electronic customers as and when they require it. So it together (inaudible) basically.

You can see that other sectors have grown. This is mainly from TR and Kuhlmann, where we've seen growth from the industrial and plant and machinery sector there. Domestic appliances, the fall in demand in Italy has basically been offset by the strong growth in Asia, and that's where we have seen some modest growth in the period. And then finally our distributor sales, we've seen impressive (inaudible) growth in this sector, which I think has been seen elsewhere within the industry. But it's also being fueled by the excellent service that we provide in our expanding product ranges that we now have put in and are offering the customer. So yes, hopefully that gives you a flavor of the sectors that we're seeing at the moment.

Okay. I'll hand it over to Clare.

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Clare L. Foster, Trifast plc - CFO & Executive Director [9]

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Thank you. Thank you, Mark. So we've heard all about the top line growth and the wonderful things that are going on there. What I want to do now, in this – these 2 pages that we're on, Page 12 and 13 for those of you on the phone, is go through how that feeds through to our underlying operating profit and the 3.4% increase I talked about at the beginning. There is a lot of detail in there. There always is. So I'll just run through it and try and make what is a thing of many moving parts make sense to you around the table.

We've got a mixture this half year. We've got a mixture between Asia and the U.K. where we're seeing very strong underlying operating profit margins, which are being partially offset by what's happened in Europe, where we're seeing a reduction. Now I'll talk about the European reduction, obviously, in a lot more detail so you can understand that. But just from the off, it's effectively made up of 2 things. It's made up of one, things that we've been telling you are going to happen or we're expecting, and I'm talking about pricing pressures and certain product mixes that we've mentioned before; and the other thing is the investments we've been making for growth in the region. Because for us, despite what the margins would seem to suggest here, Europe is still very much a key market for us, and it's one that we see a lot of opportunity in and one that we will – we're continuing to invest in. So it's not all a negative story. There's a lot of good stuff for the future that's gone into that reduction as well.

We start with Asia, though, first. Here, we've had a very strong uptick in our underlying operating profit margin. We're up 170 basis points. This is predominantly coming -- well, pretty much all of it is coming out of [the growth in] sales. We are operationally geared, as you would imagine, and nowhere more so than in our manufacturing entities. And so those extra sales (inaudible) 10.7% is flowing through to an increase in underlying operating profit.

Now there's been a little bit of other movements going on as well. We've got a slight decrease in gross margins, only 60 basis points. And that's really coming out of Taiwan, where we've been seeing some weakness -- relative weakness of sterling and U.S. dollar against the new Taiwanese dollar. We've seen, for some reason, the 6 months to have been really doing very, very well.

So that's gone in there. But offsetting that relative overhead cost savings that we've had around (inaudible) as well because where we're not deliberately investing, we are still very much looking at our control over overhead costs and trying to make savings where we can. So in terms of Asia, I would almost write off the gross margin and the overheads and just think of what's actually happening here, is it's a sales-driven improvement in the underlying operating profit margin.

Turn to U.K. next and we'll stick with the good news. And the good news carries on at pace here, really. We're up by a very impressive 190 basis points in the U.K. It's a mature market, as Mark was saying, and it's a very commendable result to be able to do that. As in Asia, there's a big chunk of increased sales that is driving through to underlying operating profit. So about 110 basis points of that growth is coming through from the increased sales volumes going against the semi-fixed cost base. We got about 50 basis points coming out of several high-margin sales that we had in the period. Some of that is for the distributors that Mark's been talking about and in a number of other sort of key contracts that we have. And there is a little bit of overhead cost saving in there as well that makes up the difference. Again, as I say, we're controlling costs wherever we're able.

The one thing that you don't really see because it is, in effect, in balance and this is something we've spoken to some of you about before, is the impact of what's been happening with the FX and with the results of the referendum vote last year. Sterling has obviously maintained its weakness for a protracted period of time. We've talked to you all about this before, about how that is going to impact on our purchase price inflation. And we're having to have conversations and negotiations with suppliers to how do we manage that. And we're having to give way to a certain extent, as you would expect, because the pound simply isn't worth anything, and we can't fight that any more than any other importing industry can.

What we've seen is that the impact of that, the negative impact of that to-date has been effectively offset and balanced by the transactional FX benefit that we've had coming through as a result of our euro sales being translated and being worth more within the U.K. business. And so we've – in effect, you don't see that FX because you've got one going down, one going up. Now looking ahead, and I think I mentioned it at the beginning, I think the margin pressure is going to increase in the U.K. It will do – that purchase price and inflationary pressure will continue to increase. Less so in the fact that we're going to have new negotiations happening. We're already a good way through those now. But more by virtue of the fact that the stock's starting to wash through, and so we're starting to see that cheaper stock disappearing off the shelves now and we're moving onto the stuff that's (inaudible) more recently. As I say, though, 30% still remains (inaudible), and that should be balanced out by what happens in Europe.

Turning to Europe now. This is – a few things to talk about here. It is in very sharp contrast to what we've been speaking about in the U.K. and Asia. What we got here is a fall in the underlying operating profit of about 540 basis points. Now that is against a very strong half year 2017, for the reasons that Mark spoke about in terms of product recalls in one of our biggest customers, but it's also for a couple of abnormalities that happened at the margin level as well in the first half of the year, and I'll take you through that.

There's 4 main reasons for it. Three of them fall into the gross margin, and one of them is overhead basis. And I'm going to talk to you about the gross margins to start with because that makes up 430 basis points of that 540. So a big chunk of it is in there. The first thing I want to mention is that we had a 160 basis points reduction that was expected, and this was in Italy in our -- in VIC operations, and this was due to the coming to the end of a very favorable raw material and finished goods purchase pricing contract. It came to the end for us in the back end of half year 2017.

Now I remember sitting here November last year and telling you about the fact that we've had 150 basis points increase as a result of this wonderful contract that we've had in place. And that was the positivity. Obviously, what we're now seeing is more normalization of what we can achieve. Having said that, looking ahead, we're looking at pricing given the changes in the currencies.

The second thing I want to pull up is 120 basis points of reduction that are coming out of the investment we're making. And again, this is in our Italian operations. So (inaudible) Italian operations because of the relative size of VIC against the rest of our European subsidiaries. So there's 120 basis points there. If you remember, we had the big investment in heat treatment plant last year, GBP 1 million in great big furnace, probably twice the size of this room, that we deliberately invested in, in order to clear a bottleneck that existed within the production capacity, whereby a lot of our fastenings can go through the forging machines, but most of them, virtually all of them will then need to go through the heat treatment process in order to strengthen before we can ship.

The heat treatment plant has gone in, it's absolutely successful. It is now up and running and has provided all of the relief in terms of bottleneck that we wanted and we were looking for. We have also invested in ancillary machinery now that we have that bottleneck removed, and we've invested in additional production staff in order to support our anticipated increase in production volumes and sales that go through our Italian business. That's wonderful. But right now, we're investing ahead of those sales, just like we have in other places and just like you would expect us (inaudible). And so right now, we're seeing 120 basis points reduction in the margin. But in the sort of medium term, that's going to reverse as the volumes catch up, and we'll be better positioned at the end with better gross margins.

I've also got within there, last thing on the gross margin, I've got product mix change, mostly coming out of Hungary in their electronics business. And again, this is something I spoke to you about in November last year. We had a very favorable product mix, and it was particularly with 2 of our biggest customers [TR] and Philips last year. That inflated our gross margin in the region. And now we're seeing the more normalization of the product mix in this half of the year, and so there's about 100 basis points gone there.

The overhead impact that I wanted to draw attention to you, again, is an investment story. 80 basis points on this one, and this is TR España that Mark's already mentioned. We've got the thing up and running, and the warehouse going and the people where we need them to be, pipeline and all those good things. But again, inevitably it's a greenfield site, we're having to invest operating expenses into the thing before the sales revenue can come through to support. So you've got about an 80 basis points fall there. So as I say, it's a real mix of things. There's a couple of things in there that we knew about and effectively were the profit reasons why last half year was abnormally good for us for Europe. And then we've got a couple of investments in there, which we've been able to cover with profits elsewhere, and we'll see it very, very well for the future, but at the moment are temporarily depressing margins.

And I'll very quickly touch on the U.S.A., because I realize I've probably gone on some. (inaudible) region, underlying operating profit margin looks like it's done something horrible with a reduction of 190 basis points. I would like to point out that, that 190 basis points equates to GBP 56,000, and so therefore, it's perhaps less interesting than one might originally suspect. It is down to Hurricane Harvey and really to nothing else. It's the fall in the higher-margin electronic sales. It's HP's factory and some of its (inaudible) being underwater. And that reduction in sales has caused that margin decrease. We've been talking to (inaudible) anyway, we continue to invest in the U.S.A. We plan to continue to invest in the U.S.A. It's a big market for us, and we need a foothold in there. And so there's no expectations that the underlying (inaudible) profit margins are going to be high for the foreseeable future as we continue to do that. So not a surprise, but a temporary pickup.

Turn over to Page 15. See how it all feeds through to EPS. I don't think there's an awful lot I can say here. EPS has gone up by 8.1%. The bridge speaks for itself, to be fair. I think the only thing probably that's worth mentioning is you can see the FX impact in there again on those 2 -- that last pink and that last green/blue column..

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Unidentified Company Representative, [10]

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Yes.

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Clare L. Foster, Trifast plc - CFO & Executive Director [11]

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Yes (inaudible) And what is nice to see is just like when we were talking to you last year, the FX impact is less than what we're doing on the underlying business. So it does continue to be positive for us. It's a smaller number, but it's nice that we're (inaudible) to outstrip that with our own underlying growth. So I don't think there's much else to add to that one.

If you flip over to Pages 16 and 17. I'm not going to take you through what's been going on in the balance sheet via net debt, which is what we've done the past few presentations. There's a few things on here I want to pick up. But first and foremost, and I'm not going to shy away from it, I want to concentrate on the cash conversion at 52.3%. This does stick out, especially when you consider it against what we've seen in recent years, most memorably – well, certainly to me most memorably, the 97.3% that we had at the end of the last year. So it's obviously a long way off that. Part of the reason it's so low is because of the high conversion that we had last year. When that come out in June, 97.3% is a lovely number, isn't it, and it was a very nice one to present. But when that came out in June last year, made it very clear that actually, there's a big chunk of underinvested stock in the balance sheet that went into that. We've got a [marked and notably] unsustainable reduction in our year-end stock balance. Our stock weeks running at 21.8 weeks, and they normally run around 23. So it was lovely to see the cash conversion in last year, but it wasn't going to be able to stay. And actually, we've had to invest $2.5 million into stock in this half year just to bring us back up to normality and back up to the position we can operate comfortably from.

Now if I take that out of the equation, the quote stuff at the bottom, then on back up to 73.1% cash conversion. Now that is still a long way off some of the cash conversions that we've seen previous full years. It's actually about in line with where we're going to be at a half year. But I guess, the message -- and I know I've spoken to some of you, the message I would really like us to give out now is the fact that – or really the reminder that (inaudible) a period of growth (inaudible) continuous growth, consecutive years of growth, what was that I said, eighth year of consecutive growth, 73.1% of cash conversion isn't actually bad. It's not a bad achievement. You cannot continue to grow unless you're some kind of magician without at some point investing in your balance sheet. And I just wanted to (inaudible) those realities of the (inaudible) as well. Now [I am] completely reserving the right (inaudible) various subsidiaries around the group in terms of their working capital balances at the end of the year. I completely reserve the right to actually say I'm pleasantly surprised and we're back up at 90%. Now I just wanted to get that expectation out (inaudible) let's be realistic (inaudible) investing CapEx between (inaudible). The only other thing just to pick out here is you can see the CapEx that Mark will talk a bit more about in the strategy section (inaudible) for us, we've used our (inaudible) trust to put some of our own shares. We've [invested] $1.1 million in that over the course of the first half of the year. That's obviously affected the [net debt]. But all of that and everything that I've said still leaves us in an incredibly (inaudible) available to us (inaudible) we need with the headroom that we've got, just over $16 million with one accordion (inaudible) with HSBC for another $20 million. We've got everything we need. Really (inaudible) to continue to invest organically or acquisitively and keep the growth story going as we move forward.

And I think other than that (inaudible), maybe one last thing to say (inaudible) we've got continued (inaudible) even though we're now investing, and that's around (inaudible) an increase the dividend up to 1.10p. (inaudible)

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Mark R. Belton, Trifast plc - CEO & Executive Director [12]

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(inaudible) Okay. Can we turn to Page 23? (inaudible) A summary of how the strategy is developing over the -- certainly in the next 6 minutes. Okay, so around 65% of our revenues (inaudible) earlier, they still have delivered the strongest absolute growth for us during the period. Looking ahead to really exploit some of those opportunities, we're carefully looking for strategic account managers to support the global (inaudible) and that's where we're going to find gaps. We want to fill those positions accordingly. Okay.

If we then turn to Page 24. As Clare mentioned, acquisitions are very, very much part of our growth strategy. And what we do is we (inaudible) on a regular basis to become more proactive, and we have recently (inaudible) acquisition team to identify a pipeline of technical, geographical and product opportunities. That said, we will not acquire a company just to bolt on revenue. And in fact, during the period, we turned down 2 good companies really on the basis of the risk of potential future growth. So we do a lot of our own internal commercial due diligence first to be able to assess it before we then move onto the next stage.

Okay. Looking at Page 25, continuous improvement. (inaudible) striving to continuously improve. And I think as you can see from the results, what we're really trying to do at the moment is bring the group much closer together, getting our the manufacturing sites working with our distribution sites. And our spend on our own manufacturing has now increased by 20% during that period. And that gives us the double benefit of (inaudible) manufacturing and distribution. We're also looking ways to improve customer service. And whether that is through direct digital intervention with the customer or in industry (inaudible) or integrating 3D technology at the design stages, which is 3D CAD modeling, digital animation, as well as the ability to print 3D parts from these drawings. What this does, it enables the customers to know what (inaudible) stage, so they can visualize that. I've got a good example, it's a new fastener that we have developed in Italy, and it's now been patented. And it's called the EPW screw, which I (inaudible) I won't tell you what it means. If I pass that around there, apologies for those on the telephone. There's an example on the picture on Page 25.

This has been printed on our 3D printer. So obviously, it can come in different metals, different finishes, different sizes. But the exciting thing about this is it creates its own female thread, basically, on thin sheet metal. So if you can imagine, that is the thin sheet metal and there is a hole -- a pre-punched hole there, and let's think of an example. If you think of a fridge, and it's going to be on a manufacturing line, and you've got a fridge and you've got the metal chassis, for example, and you need to put the rubber strip that goes around, and you know you've got the fasteners that go into the rubber to secure it. Well, beforehand, people would have to put nuts or other forms of fasteners behind that metal. Well, not anymore. With this type of screw in here, it can go in and effectively create its own female thread without the need of putting a nut behind. And if you can imagine that, that drastically reduces cost and assembly time. So it's just some of the things that we're looking at. And if you go onto the website, you can see a lot of the 3D drawings that we're using, which is supporting engineers and our large OEMs, basically.

Okay. So then moving on to investment driven growth. Clare mentioned the investment during the period of GBP 1.3 million. The majority of it has been with our manufacturing site to increase efficiency and capacity, as I mentioned earlier. Looking ahead, this is likely to continue. I've already mentioned about the investments in Singapore and also the Innovation and Technical Center in Sweden as well as the investment Clare mentioned in Spain. Also as part of the investment for further gross -- growth, we're also embarking on a longer-term project to significantly develop and integrate the IT global infrastructure. It's at scoping stage at the moment, the purpose of which is really to bring the group closer together and to better share common information, which is going to be a huge benefit for us. It also goes without saying that it's not just about CapEx, it's about investing in people. That's training as well as resource, and the group prides itself on its family feel, and you (inaudible) that is one of the location that you can visit, basically, and a little bit more of that on Page 28 and 29, just on our core values and about the (inaudible).

Finally, you'll be pleased to hear, on Page 34. Really, yes, I'd just like to summarize. It has been another good 6 months, really across all the regions. The second half of our year has started well and, as we said, there is a strong pipeline behind this. Hopefully, you can tell from the presentation and as Malcolm said at the beginning, it's a win-win, we have been investing, but at the same time preserving that profitable growth, and we will continue to invest to support the opportunities that we see ahead. It's very much about investing and trying to bring the group closer together to get the efficiencies and not work so much in the silos, investing in people and, as we said, acquisitions is very much part of the growth strategy. But we've got to find the right one, and we're not going to come to the table with a bad one. And so really just to reiterate the quote below, we do remain confident of delivering our expectations for this current financial year. So thank you.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [13]

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(inaudible) we're now welcoming any questions you might have. (Operator Instructions).

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Questions and Answers

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Unidentified Analyst, [1]

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Can I just ask about the investment of the – your continued investment (inaudible), you've guided to about $3 million a year for the next sort of couple years. What type of things (inaudible) just people and equipment. And on the people side, where (inaudible) are they in training or is it in headcount or is it...

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Mark R. Belton, Trifast plc - CEO & Executive Director [2]

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It is in both, it really is. I think the key area that we're developing at the moment is on the strategic account management side of things, it's that sales growth. That's where we're seeing -- that's our core strategy, basically. That is where we've got the large multinational sort of strategic accounts, which are global. And we have global account directors, which are managing that at a high level, but when any accounts are in development stages, you need to have people that (inaudible) in Asia. That could be in Europe. That could be in (inaudible) or in America to serve those continents, and that is where we're seeing the growth. With that, to support them, you also need a back (inaudible) and so that's going to be filling some of those gaps there, but mainly it is on the strategic account management.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [3]

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Yes, (inaudible) maybe Mark was talking about trying to bring together our data in a more sort of refined way. Because we're supplying parts (inaudible) in China, in Japan, in Spain, in the U.K. and in America. And if you don't you have consistent data, you can very easily lose the trust of the customer because we don't appear to be big-picture orientated. So there's very sound reasons for these investments. At the moment, it's quite steam driven to make sure we get the -- all the data shared among that's relevant to our location. We've got the automatics, it comes up straightaway. Again, speed of reaction to customers is absolutely paramount. People can't wait 2 days for a quote. Just to reaffirm, we've actually got that part in stock and we know the costings on it. It's got to be much, much quicker. And without that, we're going to be left floundering. So very good reasons for these investments.

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Unidentified Analyst, [4]

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And on the strategic capture, I mean you're talking (inaudible) about 100 -- couple hundred (inaudible) what's the sort of concentration at the moment (inaudible) is it still the 40 that are really (inaudible) or how is that (inaudible)...

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Mark R. Belton, Trifast plc - CEO & Executive Director [5]

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No, no, exactly. What we have is honestly locally for some of those strategic accounts they'll be handled, but there is probably 25 to 28, at the moment, strategic accounts, those ones that you can see the opportunities to really develop. The other accounts continue, and we have the support on the ground to develop those, but those where we see the strongest areas of opportunity would be about, yes, 25 to 28. On the back of that, we have in excess of 10 to 15 accounts, development accounts, which are in the embryonic stage at the moment where we are. You can see the...

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [6]

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(inaudible) is one.

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Mark R. Belton, Trifast plc - CEO & Executive Director [7]

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Yes. You can see the opportunities. We are dealing with them at a local level, for example, and now we need to push that more on a global scale.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [8]

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Bearing in mind, these strategic accounts, many of them have (inaudible) even more than a dozen plants around the world. So you've got to multiplier (inaudible) duplication of plants, making very similar or identical products.

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Unidentified Analyst, [9]

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You've got tracked on a couple of acquisitions and I think you've (inaudible) [pulled out on revenue the] potential grounds rather than value grounds. Have you reviewed the likely areas or geographies following that process on those 2 acquisitions? Can you just give me a bit of why the revenue growth when you looked in the (inaudible) did support (inaudible)?

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Mark R. Belton, Trifast plc - CEO & Executive Director [10]

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Yes, absolutely. I would say both are very different businesses. Both had products pan the world, effectively. Both were saying they were niche products. But when you look at it and you can identify other sources that actually, for example, in China, we can get out the parts similar in China at a better price. And therefore you think although very good companies, the actual revenue forecast and the competition in China, you can kind of go, no, this isn't going to work here. And so that is why great companies, but if you're going to invest that money, you want to make sure that they truly are niche products, basically.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [11]

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Now this company had almost admitted they've saturated the market for the lower-cost machine. And then we found where they claimed that they are the prestige brand. We found 2 substitute manufacturers in China who were 1/3 of their priced. And the customers' perception was that they do the job, so that's why we ran away. Yes, yes.

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Unidentified Analyst, [12]

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And if you still got (inaudible) pipeline on the back of the machines (inaudible).

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Mark R. Belton, Trifast plc - CEO & Executive Director [13]

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Yes. No, absolutely, I mean, as I say, from an M&A (inaudible) point of view, we get them on a regular basis. Some are very easy just to turn down immediately and say, no, that really doesn't fit. Others, you start delving into a bit more detail and, again, it's a case of we assess it internally, (inaudible) and then you can kind of realize, yes, this is may be worth going or may not. So it's a case of, yes, really is when the time's right, we'll be here (inaudible) this is what we're presenting, basically. And from a strategic point of view, you know exactly sort of the sites, when you get things in from a reactive point of view, you don't always know -- you look at it and go, actually, that could be quite interesting. I didn't see that one coming on the market. So we keep a very open mind, assess it accordingly.

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Clare L. Foster, Trifast plc - CFO & Executive Director [14]

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Yes, also one point with the acquisition team, I mean, it is embryonic. Don't want to go too overboard with it. But they -- we are in a process there of actually building up a pipeline. So we no longer have to just be reactive to what's coming through from M&A and (inaudible) other sources. We now can actually say, well, do you know what, there's sort of 20 companies here that we want to keep an eye on. This one's in this position, this one's in that position and we're keeping in contact in a much more organized way, I guess, is the best way at looking at it. I mean, we've always had guys around the world, but we're (inaudible) that automatically, it's that bringing that all together in one place and exploring what else we can find out there to generate that pipeline. But it's early days with that, but that's the other side of how we're investing in acquisition process, that sort of allow us to build that (inaudible)...

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Unidentified Analyst, [15]

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(inaudible) look like what they used to.

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Mark R. Belton, Trifast plc - CEO & Executive Director [16]

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Yes.

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Clare L. Foster, Trifast plc - CFO & Executive Director [17]

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Yes. Yes, I should say so.

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Mark R. Belton, Trifast plc - CEO & Executive Director [18]

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But they can photocopy them.

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Clare L. Foster, Trifast plc - CFO & Executive Director [19]

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Yes, we've put it all in a spreadsheet.

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Mark R. Belton, Trifast plc - CEO & Executive Director [20]

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Yes, yes.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [21]

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(inaudible).

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Mark R. Belton, Trifast plc - CEO & Executive Director [22]

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Yes, yes, absolutely.

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Unidentified Analyst, [23]

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Given the growth in the business, do you think the acquisitions are going to be more (inaudible) in terms of bolt on (inaudible)?

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Mark R. Belton, Trifast plc - CEO & Executive Director [24]

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It really depends. And I know that's a (inaudible) word, cop out sort of thing. But it really just depends, because you -- once you start these things, there can be ones which are small, bolt on, don't have to worry about it, earnings in hand from day 1, new products or products that we're aware of, specialist products that can support the group (inaudible) worldwide. To other ones which could be transformational. And so I think we are in a good position, as Clare mentioned, from a financial point of view, to be able to look at all. But I can't say at this moment, it will either be this one, this one or this one. And we'll just keep going, basically. Yes.

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Unidentified Analyst, [25]

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(inaudible) in terms of the quality, what that might be? Is it fair (inaudible) and electronics or what you have to ask for? And over the (inaudible) it kind of, you've got to ask for more, basically, just given the pricing and (inaudible) the global teams make that negotiation easier?

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Mark R. Belton, Trifast plc - CEO & Executive Director [26]

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The global team -- having a global team is easier, absolutely. And from an automotive point of view, it's -- because as I mentioned earlier, you're only – you're dealing with more volume, but fewer parts. A lot of those parts are actually designed in. So (inaudible) working with the customer during that period, and therefore you know what the margins are and you start off with kind of a higher price, because it's the first year of research and development. And then it kind of tweaks and tweaks and tweaks, and cost out, and then you go onto the next project. So it's always (inaudible) the electronics sector is where you see more of the pricing pressure because, as I mentioned earlier, you have an element of that, which is commodity pricing, and that is where you can – they send it out. And you -- it's not that any Tom, Dick and Harry can support it, but that's where (inaudible) greater pricing pressure. And as Malcolm says, if you -- it doesn't work, and we know it's (inaudible) then we just say I'm sorry. And it's interesting when you do that, they do come back and say -- because it's a service that you give on a global basis, and I think sometimes you can be dealing with a purchasing manager who just wants that commodity price, that ABC, 1, 2, 3 product and won't (inaudible) down, but doesn't see the active benefit. And that's when you kind of – you see that later on they say, no, sorry, can you support us now in this. So that's where you see the greatest pricing pressure.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [27]

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(inaudible) at least 30 years since we started [JRT,] and (inaudible) idea. We say that prior to notion on pride, directors are made on (inaudible) so we've always sold the in place cost benefit of having (inaudible) talking about. Because at end of the day, you say look, before you go onto price, go find somebody that doesn't carry this level of care. And it sounds a little bit revengeful, but when they come back (inaudible) pride but not the overall sort of commercial measurement used in businesses.

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Unidentified Analyst, [28]

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And so because of the (inaudible) et cetera, it's you're not seeing an increase in kind of (inaudible) like when you're asking for a price rise (inaudible) timing of that still fairly consistent?

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Mark R. Belton, Trifast plc - CEO & Executive Director [29]

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So what do you mean?

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Unidentified Analyst, [30]

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So if you ask for a price rise, does...

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Mark R. Belton, Trifast plc - CEO & Executive Director [31]

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If we ask the customer for a price rise.

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Unidentified Analyst, [32]

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Yes, they will come back and (inaudible)

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Mark R. Belton, Trifast plc - CEO & Executive Director [33]

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No, they'll always come back.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [34]

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(inaudible) run back home.

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Mark R. Belton, Trifast plc - CEO & Executive Director [35]

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Yes. It's a nice – instead of going and doing a blanket sort of, right, 10%, you know what I mean, it's about picking the moment and choosing those parts which you can work with the customer to say, look, you know this. And also, for example, FX has had a big part in negotiations, as you can appreciate. And so same the way, for example, customers will say, well, look, it's – they're saying well, come on, reduce your prices or increase your – we will be doing the same to those suppliers as well, saying, we'll talk about that in about 3 months' time or something (inaudible). So it's about honest negotiations with both the customers and the suppliers, basically.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [36]

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(inaudible) customers are starting to realize there are now outside pressures on cost that no amount of efficiency in the company that can obliterate. So they're slightly more open to negotiations and certainly (inaudible) on that. But there's an (inaudible) on distributers. Distributers love a price increase (inaudible) margin.

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Unidentified Analyst, [37]

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(inaudible) back to margin as well, maybe in terms of CapEx, 10%, or is that more than (inaudible)?

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [38]

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It has. It has been delivering those sort of margins. So it's not certainly on the realms of impossibility. I think what we're finding at the moment is it really is a small investment -- sorry, the investment that you do has such a large impact on the margin. So I would say, at the moment, it's probably a 2-year sort of window...

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Clare L. Foster, Trifast plc - CFO & Executive Director [39]

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Yes, I would think so.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [40]

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Where you've got this investment in people, in the site itself, and that it will be, yes, certainly below 10% and then the top line starts to come through. Yes.

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Clare L. Foster, Trifast plc - CFO & Executive Director [41]

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Yes, the same reason (inaudible), it can operate in the same way as our other distribution businesses and achieve that same margin. But you've got to get the sales volume in there and you've got to cover the extra costs (inaudible).

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Unidentified Analyst, [42]

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(inaudible)

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Clare L. Foster, Trifast plc - CFO & Executive Director [43]

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No, no, absolutely.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [44]

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That's a big market, right, we've really got to (inaudible). Also what's interesting on CapEx requests from around the group, I've never seen (inaudible) I've never seen a payback period of more than 3 years. It's seemed to run between 1 and 3 years. So we're not looking at far out big investment (inaudible) pay back.

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Unidentified Analyst, [45]

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(inaudible) when you were talking about electronics earlier, and you were saying there was a subtle shift in the OEMs moving into new automatic technology. Can you just explain that a bit more?

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Mark R. Belton, Trifast plc - CEO & Executive Director [46]

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Yes, it's for like subcontractors, for example, electronics and they're working in America, for example. And they're just – you're just seeing a little bit of...

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [47]

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(inaudible)

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Mark R. Belton, Trifast plc - CEO & Executive Director [48]

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Crossover, I think is what we're looking at, where -- and what you got to be careful of is – and this is where we're kind of supporting them is in automotive, it's a lot more quality-driven, which is obviously talked about PPAPs beforehand. And with electronic customers, they're very much -- well, it's again price dependent, as we talked about. You've got to say, if you want that price, remember, it's going into a car, for example, therefore, you need to make sure there is still the PPAP for the process behind it, and that's where you have the negotiations.

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Unidentified Analyst, [49]

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Right. And you're on a learning curve, aren't you, with the electronics (inaudible).

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Mark R. Belton, Trifast plc - CEO & Executive Director [50]

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Yes. And we talked about in Sweden, for example, the innovation in technical center dynamics and there's a good example there which is based in that area. And it's just really a case of people now sharing new technologies, basically, yes.

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Unidentified Analyst, [51]

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How much of the investment in the IT infrastructure (inaudible)?

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Mark R. Belton, Trifast plc - CEO & Executive Director [52]

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(inaudible) and it's a case – it's very much of a case of looking at the best options that we can do to bring that data, that common data together. So we'll have a better figure, I think, at the year-end.

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Clare L. Foster, Trifast plc - CFO & Executive Director [53]

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Yes, I think that's probably right. The one thing we can say is when (inaudible) but there's 2 things we're definitely going to invest in, and we know that already, and that would be in the CRM System in order to support what's going on (inaudible) strategic account management and all of that good stuff. And dragging off-label accounts, managers and teams together more. And the other thing is we have a global inquiry portal, which is absolutely imperative for us to operate as a business, where we control effectively all of those big inquiries that come into the business, who's the right person to do the logistics, have we got the right vendor in place, have we – all of these kind of things. It's a wonderful system that gives a good idea of pipeline as well, that when we say we've got a strong pipeline, effectively, we're looking within that system. And we've also committed that we will be investing in that system to make sure that we can spread it out more globally because some of our locations still don't use it, and allow us to look at more of the business through that microscope. So there's 2 things that we're definitely going to do, and I guess the rest of it is up to (inaudible) and where are the benefits. And that's effectively what it's going to be. There's a cost-benefit analysis of, if I invest this amount of money, whatever that may be, what am I going to get back from it? And that's the process we're going through. And we're hopeful that by June, we can give you a little bit more information about what that particular future look like. But there's clearly – there's a prize to be won out there, if we can get the technology in to integrate it.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [54]

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And each business has been looking (inaudible).

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Clare L. Foster, Trifast plc - CFO & Executive Director [55]

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This is including (inaudible) yes.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [56]

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(inaudible) their location, it's (inaudible) work on the new system, switch on (inaudible) very, very analytical and looking at each business and (inaudible) common strategy (inaudible) careful consideration. But it's a very long (inaudible) into that process (inaudible) brought in a new – a complete new system. And very dangerous.

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Mark R. Belton, Trifast plc - CEO & Executive Director [57]

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I was actually looking at one 3 or 4 years ago.

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Clare L. Foster, Trifast plc - CFO & Executive Director [58]

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Gets pushed down from on high and, yes, no one's involved in it. And actually, there's a whole heap of integration and everyone coming together just in the process of the scoping. Because we're doing it in that (inaudible) way, yes.

I've been in companies where they brought in the near complete (inaudible) system just was down from (inaudible) and actually, that support integration coming together just in the process of scoping because we have been doing

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [59]

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(inaudible) yes, unless you give a sense of ownership, they'll reject it.

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Clare L. Foster, Trifast plc - CFO & Executive Director [60]

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Yes.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [61]

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(inaudible) But easy does it. Good. Are there any more questions from outside on the phone? No? I think we (inaudible) Thank you very much.

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Operator [62]

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Ladies and gentlemen, thank you for joining today's call. You may now replace your handsets.