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Edited Transcript of TRI.L earnings conference call or presentation 19-Nov-19 8:45am GMT

Half Year 2020 Trifast PLC Earnings Call

Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Trifast PLC earnings conference call or presentation Tuesday, November 19, 2019 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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Conference Call Participants

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* Henry Carver

Peel Hunt LLP, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Trifast Half Year Results. My name is Val, and I will be your coordinator for today's event. (Operator Instructions)

I will now hand you over to your host, Malcolm Diamond, to begin today's conference.

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

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Thank you. Good morning, everybody. Welcome. Nice to see so many familiar faces. And also welcome to those who are dialing in. We got Mark; and Clare; and also very pleased to have Jonathan Shearman, my successor, also with us to make sure we don't trip up.

And as -- so as the lady said, there'll be questions at the end. I just want to do a quick highlight, a run-through and then hand over to Mark.

So I'm afraid it's going to be the same old hackneyed phrase at the moment, the challenging macroeconomic environment. We're hearing it all over the place. But nevertheless, we believe we've done okay, considering what's been going on throughout the year.

2.7% reduction in revenues at constant exchange rate and then 1.8% at actual. Ongoing market share wins restrict group automotive revenue reduction to 2.5%, but this is against the global downturn of 7.3%, which shows that we are still winning new business. Underlying operating profit margins hold up, we're at 10.6%. And at CER, 11.3% at half year 2019.

Underlying diluted earnings per share reduced 9.4% to 6.52% at AER. Good old Project Atlas, our multiyear investment in our systems, policies and procedures, is on track and on budget with a spend of GBP 2.5 million in the period. Strong balance sheet and around GBP 40 million of banking facility headroom, with thanks to our colleagues here from the banks and from Clare, madam, to provide a solid financial platform. As you know, we are quite picky on the acquisitions, and we continue to pick. So we got significant flexibility to support long-term investments and in terms of acquisitions and also internal investment.

Potential M&A opportunities are increasing due to uncertain conditions. And of course, the price will come down as a result of that, always good to hear, and an increased focus on key geographies.

Interim dividend maintained at 1.2p, reflecting the Board's confidence in the long-term future of the business and our ongoing strong profitability. In other words, we are not downhearted.

So Mark, give us some reasons to be cheerful...

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Mark R. Belton, Trifast plc - CEO & Executive Director [3]

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I was going to say thank you, and I was going to hand over to...

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [4]

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Go ahead.

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

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So for the highlights...

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Clare L. Foster, Trifast plc - CFO & Executive Director [6]

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I will speak in the time of (inaudible)

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

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So I figured out I was going with the nearest (inaudible)

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Clare L. Foster, Trifast plc - CFO & Executive Director [8]

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Yes. I'll just add a few things that we will need at this point. We've obviously get a good detail on the revenue and the forecast (inaudible) in a moment. So that's usually -- it only makes sense just to get through some highlight the numbers in order to give context for the conversations to come.

I can only echo what Malcolm said, it has been a challenging [half] for the year. It continues to be a challenging place to operate at the moment, the macroeconomic environment. There's a lot of volatility and uncertainty. But we strongly believe, and we'll say this probably a number of times throughout the presentation, that the fundamentals of this business remain exactly the same. We just are obviously being impacted by what is out there as the main example in manufacturing volumes. So we strongly believe the fundamentals (inaudible), it's all the same. Our investment cases remain the same. And when we nudge out the other side of it, we'll be ready to hit the right ground running and keep moving forward.

In the context of that, the recently small revenue increase is something that we're almost sort of pleased to report. It could have been a lot worse given what is going on out there at the moment. I mean we changed it at similar levels, 2.7% down on constant currency, 1.8% down on actual exchange rate. And we have seen reductions across all of the regions, except in the U.S., which although being our smallest region, continues to perform exceptionally well for us over a 20% growth rate in the year -- in the half year.

It is disappointing to see that the gross margin has fallen slightly below our target of 30% and there are a number of reasons that I want to go through in more detail later. But really, just to pick them up, overall, we are operationally geared even at gross margin level to a certain extent. So when you do see our revenues reduced, we're over a semi-fixed cost base, we will start seeing that impact on the underlying margins.

We have actual product mixed -- mix shifts in there as well. And we have seen, as we see on the net debt, some stock holdings increase, which starts bringing that to a temporary increase in the stock provisioning. And we have seen some unfavorable FX movements, particularly in Italy, which we've spoken about before, where the guide's by about 65% to 70% their [approach] in U.S. dollars. With a strong dollar and a weaker euro, it does hit their gross margin. So there's a few things in there. But again, given the circumstances, a 28.7% gross margin is nothing to be too ashamed of.

I think we're also pleased to report that we try to do a little bit of self-help when we can. So you will see that by the time we get them to underlying operating profit and managed to maintain a sort of double digit and it may be here where you taking 70 basis points at a time. And that's because where we can, we have made short-term savings, and we have pushed that a little bit to defer some of our investment [banks]. And that's helped really appropriately and particularly in Europe to control that margin rate. So we're very pleased to get to report that.

Of course, as Malcolm said, the profit reduction will lead to lower underlying earnings per share. It has to -- it has come down by 9.4% to 6.52p. But I think, in summary, I think this is the right -- (inaudible) I'm not going to say 1,000, and it is around uncertain environment. So we really -- we're just pleased to be sitting here reporting similar trading numbers driving our profitability sales and I should say that later, good cash generation.

And so I think that's probably all I can say at this point, and I'll hand back over to Mark, discussing revenue in a bit more detail.

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Mark R. Belton, Trifast plc - CEO & Executive Director [9]

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It really is now at this time.

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Clare L. Foster, Trifast plc - CFO & Executive Director [10]

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Yes.

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Mark R. Belton, Trifast plc - CEO & Executive Director [11]

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And it is.

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Clare L. Foster, Trifast plc - CFO & Executive Director [12]

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He's definitely funny as usual. I can say that now.

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

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Normally.

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Mark R. Belton, Trifast plc - CEO & Executive Director [14]

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Okay. If we can turn to Page 6 and 7. Before that, what I would really like to say, in June, when we last met, we mentioned that the world was a very volatile land and an extremely unpredictable place. We thought we would -- could predict with the trend effectively. However, in September, we recognized that there was increasing uncertainty, particularly in the downturn in automotive, particularly with the uncertainty in Brexit, and certainly, with the uncertainty on the ongoing tariff wars. This was making an impact on -- continuing to weaken the end markets. And you'll see later on that, in the slides, that impact that has actually happened.

But before we have a look at those slides, one thing I would like to say and stress, however, is that we haven't lost any business. This is all about volume reductions with our customers, and it's all about deferrals of startup reductions with them as well. So I think if we put it into that context, we can move on to Page 6 and 7.

Okay. And probably the best thing to do is to look at automotive first. As we mentioned earlier, overall revenue has fallen 2.7%. Other than general industrial, which I'll come on to shortly, you can see all of the other sectors have been adversely impacted.

Looking at automotive first. We all know about the challenges in this sector. Global automotive production levels in the first half of this year actually fell 7.3%. If you look at that compared to ourselves, we only fell 2.5%, which just goes to show the market share that we are still able to take in the market. The highest growth rates that we have seen are particularly in the U.S., as Clare mentioned earlier. And also pleasing now in Thailand, which has been historically a slower burn for us. But eventually now, we are winning more and more business there.

There continues to be a lot of talk around electric vehicles and the opportunities that we're seeing there. However, the global market is still small. It is only less than, I think, 3% of the passenger car market, but it is the fastest-growing area as well. And we are absolutely in a prime position to exploit those opportunities across all of our regions.

Okay. So I think as you can tell, automotive is still an exciting opportunity for us and the ability to take the market share.

If we move on to electronics. This sector is very dependent on portions of our key individual customers. Europe has been particularly impacted in this sector, primarily in Hungary, where we've seen one of our existing OEMs. The production volumes there fall based on existing builds prior to their newbuild, new innovations coming through, respectfully. So again, it's just delaying again before they come through. Ironically and pleasingly, that same customer has awarded us enhanced global supplier status, which now allows us to reach out more into their group spend. So it's not all negative news. We just -- it's the pent-up demand which is coming through.

As we've already mentioned before, there is very little direct impact in tariffs on -- particularly on the electronics in this area. That's the direct impact because our U.S. operation doesn't buy much in China and our Chinese operations don't buy much from America. However, the indirect impact is having an impact on some of our -- a small number of some of our large multinational OEMs, particularly in America, which are sending goods to China, which are then being assembled and incurring tariffs and then being sent back to China again, basically. So at the moment, we are looking -- they're looking at different supply routes, and we are there, monitoring that very closely to see where and when they pop up.

It's not all about negative news. And we've seen some strong growth in Singapore, which is currently supporting one of our large multinationals who relocated into India recently. Our Italian operations have picked up new OEMs in this electronic sector, which is now giving them ability to diversify away from sort of the domestic clients, customers that they've got and use some of the spare capacity that they have there. And I guess, finally, and although it's early stages, we've got some good opportunities that we're currently working on, for example, in the 5G technology, particularly in the U.K. that we're seeing there.

I think you turn to Page 8 and 9. Moving on to domestic appliances. Again, as with electronics, this sector is very dependent on some of the key customers that we have. Singapore continues to do well, particularly with a couple of its large OEMs there. However, it has been offset to a certain extent with weaker consumer confidence in Europe and the impact that this is having on production volumes with the OEMs in that market space. That said, we are working with and have secured new wins with new global OEMs. And so occasionally, it's an early start, I've been able to develop that as time goes on.

Distributor. This is a really good promise to our overall confidence in marketplace at the moment. Unfortunately, the light of Brexit is having an impact on that. And as a result, you can see that the sector fell by 5.5%. However, PTS is a distributor, and that is completely bucking the trends. Obviously, PTS is the acquisition we did 1.5 years ago. It's completely bucking the trend. It's got double-digit growth coming through. As -- really, the investments we have made are now beginning to bear fruit in that particular company.

Finally, if we look at the general industrial sector on Page 9. This sector also is bucking the trend. It's growing nearly 5%. Particularly in the U.K., we've seen some really nice wins there, skewing some wins with -- against a number of new multinationals. And also, we're pleased to announce that we've secured a significant new global multinational OEM, which is good. We're starting in America. We've got 2 sites there, but also that will go into Europe as well as into the U.K. So again, all good moves.

Right. If we then move on to revenue by region on Pages 10 and 11. I've put some of the sector information into perspective as it fits into the regions. The U.K., as expected, did fall slightly by 1.9%. Automotive has had the biggest impact, falling 5.4%. As mentioned, this is a result of start-up production deferrals as well as production volume slowdown on existing builds.

What I would like to say is if you look at U.K. manufacturing in the first half of this year as well, calendar year, you can see that actually in the U.K., the stats are saying that manufacturing in the U.K. fell 20%. So for us to fall 5.4%, it is -- we haven't done too bad. So really, yes, Brexit also had an impact on -- certainly on the distributors, as I mentioned, with Q1 destocking after destocking of it before the year-end. And there has been more cautious ordering in Q2, although we do see a slight tickle up in October, again, probably because everybody's been thinking, "Oh, are we going to leave at the end of October?" So we just have to watch.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [15]

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(inaudible)

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

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Yes.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [17]

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(inaudible)

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

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Exactly. So yes. Well, I guess, really, the message is end markets are down. We haven't done too bad there.

Looking ahead, automotive volumes will probably continue to be depressed in 2021. However, the pipeline remains strong. The opportunities are still exciting. We've got new wins with existing and new multinational OEMs coming through, particularly in the general industrial and particularly in some of the new platforms in electric vehicles as well as early stages, as I mentioned, in the 5G technology.

Okay. Then if we look at Asia. I don't think this is particularly surprising. Asian economies are struggling at the moment with the impact of trade tariffs and lower growth rates. This was our lowest growing region at 6.8% down. In particular, we were hitting Taiwan where they sell to our European automotive distributors. Some of these are actually our competitors as well. And it's usually been very, very high, but they have been hit with the lack of confidence in Europe at the moment. And so we have followed suit because of that. Also, in China, it has been impacted by the lower domestic automotive market with Jaguar Land Rover-related builds being particularly affected.

Okay. Trade tariff, I've already touched on, have had an impact. On the positive however, I mentioned about the exceptional growth in Thailand, which we've seen. And looking ahead, we will probably be investing more into Thailand to exploit some of those opportunities as well as the strong trading, which continues in Singapore. So in the medium term, we've got a strong secured pipeline and should really be able to return to year-on-year growth in, say, the more of the medium term. Okay.

Moving on to Europe on Page 13. Europe fell by 3.1%. Realistically, you've seen reduced volumes on existing builds, which is in Holland within the automotive, Hungary within the electronics and Italy within the domestic appliance sectors. We have seen further deferred start-up production dates, which have hampered the shorter growth aspirations, particularly in Italy, Hungary and Spain. However, I don't want to say that Spain is going -- do not so good because it's doing very, very well. It continues to take market share and has delivered double-digit growth in the period. So again, very little investment, which is growing nicely.

And also, to end on some good news. Despite the recessionary environment in Germany, again, it's great to know that TR Kuhlmann is still making profit, double digit -- sorry, not double digit, but maintaining growth there. Yes. And as I mentioned, we will continue to push more into company manufacturing into Italy. We are planning on warehouse expansions into Hungary into next year because there are a lot of potential opportunities that are there, currently taking. And we've got a solid pipeline, which will just point to more growth in the medium term, effectively.

And then finally, the U.S. Again, it was an exceptional growth, as Clare mentioned, over 21%, which is great to see. Automotive is the biggest driver there, and we see that set to continue going forward. I think as most of you know, the U.S. is certainly a key geography for us to not only grow organically, but certainly from acquisition point of view. And we have looked at taking -- utilizing some advisors there to really understand that market in a lot more detail.

Does that give you a fairly rounded picture on the sectors in the [interim]? Okay. I'll hand over now to Clare.

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

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Thanks, Mark. Mark, your favorite pages. Yes. Every time there's pages 14 and 15, obviously, Mark knows more about what is on the top line and what's been going on there and all the challenges and opportunities that we're facing. And I think you should see that [revenues] growing like that. It's also important to understand how that [speeding] which will add 10.6% of underlying operating profit I mentioned and Mark had mentioned right at the beginning.

If you look at the 2 pie charts, I think that's the place where [our sales is] Europe. And even there, when you look at those pie charts, that's the one that sort of stands out, as our biggest reduction. And so I want to make sure that you guys understand exactly what is behind that fall.

We've gone down 320 basis points to 8.7%. We were running at 11.7% at this time last year. Before I go into the detail, I just want to put a little bit of context around there. The first half of last year was very good for us in Europe. And actually, by the time we got to the full year, we'd already seen 70 basis points come off that underlying operating profit. So I would say, reaching 11.7% starting from the [cushion], we were actually 11% by the full year, but that's possibly a more sensible comparative.

But I will go into the reasons. The main focus there are in the gross margin. So after that 320 basis points, 260 has come out of the gross margin. And there's 2 main reasons for this, and neither of them are surprising they're things that we've talked about before. About 120 basis points of it is to do with a very favorable product mix that we had, particularly in Hungary and in Sweden in the first half of last year. This just sometimes happens. Other guys are able to suddenly shift to particularly high-margin product. There's just something about the production lines and how they're running, we are coming to the end of the build and people are stocking up in maybe anticipation of that. It was already reversed by the time we got to the full year. But it is based on that 120 basis points in the comparator.

The other part or the vast majority of the other part of that 260 basis points is Italy, and this is something I touched on when I was doing the higher level numbers. In Italy, we do purchase about 65% in U.S. dollars, and we saw a vast majority by which I think at last count was 94% of our sales in euro over there. Therefore, a strong dollar against a weaker euro is expensive on the margin in Italy. And we've seen a rate this year of around 1.10 generally on average, which has cost us about 100 basis points of that region's gross margin. It is arguably particularly low at the moment, and the U.S. dollar is particularly high. So one would expect in the fullness of time some kind of reversal of that situation. But I'm not fool enough to try and predict when that's going to happen.

And outside of the gross margin, we really see a little bit of extra for 60 basis points. That is revenue, reducing revenues against that [spending] fixed cost base. As I said at the beginning, we are operationally geared. If you take our revenue away, we can't cover our costs to quite the same extent.

On the overhead side, they actually look reasonably uninteresting and that we stood still, but we are still investing. And so what that spending still actually reflected additional investments, particularly the same, which is, obviously, our newest greenfield site that we've been investing and continue to do so. That site (inaudible) this year. And so we are continuing to support that. But those investments have been offset by some of the short-term cost savings and some other deferrable which is getting in the cash flow. So we're trying to save our money where we can so that we can put it where we still really want to put it.

If you look at the U.K. next, here we're broadly level we're about 50 basis points down, that's 20.4%. A few things going on here. The gross margin is one of them. We've lost about 100 basis points to the gross margin in the U.K. There's a mixture of things in there. We've got some change in product mix. Mark told you that some of the distributor sales have been lower this year. We remain pretty good. I hope there's no distributor customers on the line. We made pretty good margins on the distributor sales because you know that they'll stock it, buy it in small quantities, and they need it very quickly. So we tend to make very good margins there. We probably lost about 25 basis points of our U.K. margin just because of that shift in product in the sector mix.

We lost another 25 basis points, harking back to the stock provisioning I mentioned at the beginning. You will see in the net debt that the U.K. has stocked up, partly because we predicted it, it normally does at this time of the year, partly because sales actually come in under budget and long lead times and volatile and [indiscernible] and customers are quite a difficult mix to manage. And that has to start then provisioning.

And we have also -- this is something we've spoken about before on the purchase price inflation side. We have also seen just a little bit of residual purchase price inflation. Last year, we were talking to you about 150 basis points. For this half year, it's more like 50. And then I think I did say last year, there might be a little bit more to come, but it's likely to be a lot less significant and actually effectively where we rounded up. I would see that carrying on that 50 basis points for the rest of this full year, but I wouldn't really imagine there'd anything else to come after that, unless sterling really does have further issues depending where we get to on the never-ending Brexit today.

Outside of gross margin, we have a reduction in sales of a little bit of sort of push down against that [76] cost base. So we have managed to offset that. And U.K. is probably one of the biggest places that we'll be able to get some cost savings and [defer some margin investments that we were going to make. And so overall at an overhead level, we'll be able to grab back 50 basis points [unless] of course, gross margin so that we end up just net down by the 50 basis points.

Asia actually looks consistent. And therefore, we might want (inaudible) about that with a job done. But I do want to talk a bit of that back here because there's actually seeing good things in timing in there that I just want to share with you. And this is really the positive impact of some of the previous investments that we've been making. So if you consider Asia, there's 2 recently negatives at their underlying operating profit margin for the 6 months. One is the reduction in sales, and Mark already talked about that, 6.8%. They've gone down faster than any of the other regions. That's obviously had an impact again on their underlying operating profit.

The other thing is they've had quite a big shift in the foreign exchange translation gains. And again, this is something we've talked to you about recently, regularly. When we were at the end of last half year, we were sitting on a balance sheet retranslation gain of about GBP 0.5 million. This year, we're sitting on just under GBP 100,000. Now obviously, the difference between those two, that GBP 400,000 of missing gain, whatever you want to call it, has increased overheads. And so we've got both those two things working against the operating margin here. The fact we've only gone down 10 basis points really is a reflection of an improvement in gross margins that we've seen, particularly coming out of Singapore and largely attached to the mezzanine investment purchase program that we did over the course of 2018 and 2019, which has allowed us to get those growth promotions up and they have allowed us to then go on and offset that overall reduction. So a really good bit of good news hiding in what looks like a very, very consistent position.

USA, smallest region for us, but it doesn't -- arguably, the most exciting. Growth strong rate there, as Mark mentioned already, so that over 20% growth has clearly backed that down into underlying operating profit in a positive way. It has gone up about 300 basis points on the back of that [half sales] increase. We have seen a little squeeze in margins. We knew we were going to because we're starting to focus more on some growth areas where the gross margins are lower, but the costs tend to be easier to supply less parts and higher volumes. So it's not about -- I would say, about 120 basis points on the gross margin. We have also done some more investing. Again, we spoke about this before. If you put a business that's growing double digit and 38% last year, 21% this year, you need to invest to continue to allow the momentum to carry on. And so we have made some investments largely into headcount to support -- I'm sure (inaudible) anyone on the ground to deal with the customer demand. And that's really probably cost us about 200 basis points and gets us to the position that you see at the end of that.

So overall, I think that probably paints a mixed picture]. The margin has been under pressure, mainly due to that sales reduction. And if you won a bid, so there's new and good news in there, and I think it was worth run-through to say that we understood that, especially in Singapore, especially in the U.S.A. And we have got as far as possible to do some self-help in terms of the costing (inaudible), in terms of the negative impact of some of the gross margin it brought. And so that's underlying operating profit.

We will turn over to Page 16. I would suggest there's nothing -- nothing to say about it. (inaudible). This is our EPS growth. As Mark has said, there's at the beginning earlier as well. But inevitably, the fall in profit feeds down to this metric, and that's exactly what you see on this graph.

So I'll leave you to [do that] later afterwards.

If we had at (inaudible) in '18 and '19, this is our adjusted net debt bridge. We've talked a lot about the income statement. You can't just talk about the income statement, and you also just sort of touch on the balance sheet at this point to understand what we've been doing. The best way for us here is still to look at net debt when you're trying to consider the (inaudible) get a handle on what we're doing on the cash generation side. The eagle eye (inaudible) that is adjusted net debt this year from last year at the end for the first half. This is because IFRS 16 came in this year, which caused all sorts of merriment and interest in many spreadsheets. And so we've decided -- I think there's a lot of (inaudible) plans on we're actually going to continue talking about net debt before the impact of IFRS 16. Certainly, I'll look at the bankers around the table. That's how the covenants are set. And I think for as long as that continues to be the case, it's the most appropriate metric to talk about. So all adjusted net debt is before IFRS 16 and the lease liabilities that, that brings on.

There's a little note at the bottom of that draft that tells you what's happened. If you do want to go post IFRS 16, we would increase our net debt from GBP 15.7 million right up to GBP 31.8 million. It's a reflection of accounting rather than anything else at all. So we will start talking about that one when it's the appropriate thing to do. But for now, it's GBP 15.7 million.

Overall, we have gone up, and we're up about $1.5 million. There's a number of reasons for that. I will ignore Atlas deliberately. You can see, there's a big chunk of (inaudible) here, we're going to talk about that later. It's not because it's not important.

In terms of what we have spent our money on, we have done some [capturing] over that (inaudible) but it's a lot less than it has been in previous years, and we were averaging around a sort of GBP 3 million CapEx spend a year. We've only done to GBP 600,000 in the first half of this year. And that's almost the deliberate one piece, the deliberate plan, not always. And we've done a lot of the big more obvious investments before we started getting into Atlas deliberately. We're now going to focus on that as our sort of core CapEx project for the next year or so. The GBP 600,000 is largely [a loan] where we've put some more machines in, following the site extension that they started right at the back end of last year. So that's finished that off. And there's a couple of hundred thousand in there as well that relates to the very exciting new technical and innovation center that we've got in the Midland, which is -- I'll let Mark fill in more in due course.

We have to abstain very willingly, I have to say, GBP 0.5 million have gone to our final payment for the PTS acquisition. That reflects that the guide that (inaudible) did first of double digit and we now have double-digit growth. And so we've quite happily handed over that money. And we have had some working capital investments. And I touched on this when we're talked about the USA gross margin. We've got an investment in stock. We do have some Brexit stock, we've sort of talked to that with you about on previous occasions. We do think we've got that with a separate balance sheet until we really have got clarity that we're not going to fall off the cliff at some point.

So that will just stay there is the intention. But we do have some further investments in stock that sits on there. A big chunk of that GBP 4.5 million, GBP 3.4 million of it is in the U.K. And this is that sales have this immediate impact, first is investment in growth to the second half of the year, which is what we always do, but there's also the impact of sales being lower than budget, and therefore, extra stock coming in. So it's not going to work to go in, in the short term other than the warehouse.

I would love to see that unwind. I would normally say, while I was sitting here, high stock levels at the half year will definitely unwind by the end of the year because that's just the way our [share in the plan] have worked. We stock up for September, we sell that by the end of March. In the current conditions, I'm not going to say that with absolute certainty because I think I'd be a fool. We do have a few likely turn problems (inaudible) and a few step places to get to people driving focus in there to make sure that we do, do what we can in terms of our stockholdings, but it is incredibly uncertain. And there is just a horrible mix, it's in those long lead times and volatile volumes that makes it incredibly difficult to actually manage the stock. Eventually, you can keep it as low as possible.

On (inaudible), I just wanted to talk a little bit about the banking, as we've talked about this a number of times. And number two, you understand, we know the banking realm very well. (inaudible) but we knew it was (inaudible) we got there. But it's a very, very good position for us to be, and I'm very pleased and I'm very grateful to a number of people around the table.

Finally, to Phillipines in April, it does mean we have GBP 40 million of [accommodated pressure]. And Mark will talk more about M&A in a while. And this really does give us that higher power, if you like, to get out there and find on the next successful acquisition. We do have a GBP 40 million accordion, as well attached to it, we've spent just a third of the benefit. And I think the only other thing I would say is that the net debt -- adjusted net debt in our new paper for September is saving (inaudible) So we've got a lot of good flexibility we're to play with, and it is very nice for this and we think that we are still in control of our investment and can still carry on investing where we want to while still [safe] being of course very secure in an unexpecting world.

And we turn over, as [property get] (inaudible). We're committed to have a progressive dividend, evidenced, [GBP 17.12 million], and you can see that on the graph, all the numbers surrounding (inaudible). The half year for us, we feel is the same in 2019. And I think what we've done with the dividend is maintain it. And this really is just a very strong reflection of the Board's confidence in our long-term future. As I said right at the beginning, nothing has fundamentally changed here because those market conditions and stable volumes increases. We've got complete confidence in what we're doing and our profitability. And therefore, we're not happy to hear that dividend, just like the [bank shops] in corporate at the 1.20p. That keeps us firmly within a 3 to 4x target range. And obviously, a little bit closer to 3x now.

And then on that very positive note, I will hand back over to Mark (inaudible).

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

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Okay. And that introduces 20, 21, 25. I think most of you are pretty on page with that strategy. Nothing was damaged, nothing fundamentally has changed. The business model is still exactly the same. The only thing, as I said, production volumes are down, and start-up productions have been pushed back. Our top 100 customers now represent around 66% of the group's revenue.

As I said earlier on, we have a number of new multinational relationships that are under development at the moment, which is exciting. And also, we are continuing to invest in sales and engineering, which is a key aspect with the customers. And again, I'll talk about that in a bit more detail a bit later.

I think one thing I would really like to stress that -- I mean, given the unpredictability out there at the moment, I'd like to stress that it's very important to have the flexibility of our global supply chain, whether that's through external sources that we're aware of or through our own manufacturing, it gives us stability to be [fleet to firm] for the ever-changing tariff conversations that are going on, which keeps things rather interesting, to say the least. So it's that flexibility for customers which I think is certainly very key.

If we then go on to investment because -- continuous improvements on Page 26 and 27. Again, most of you have seen this before -- just a couple of comments I'd like to highlight. Atlas, Clare already expounded on that in a little bit more detail, but you can see some of the benefits that Atlas will bring there.

As I mentioned earlier in the engineering, I'm pleased to report during this period, we were able to secure a small office in Clemson University in South Carolina, America. This is allowing us to, again, set up a mini technical innovation center. And the Clemson University is really like the hub for vehicles, design and research there. This hub will complement some of the other hubs that we've got now on Technical and Innovation, particularly in the Midlands and also in Gothenburg. And it's quite an exciting way of actually getting to the customer and letting them know exactly what we are capable of. So that's really on continuous improvement.

Clare touched on this on investments, a little bit on Atlas on Page 27. We are continuing to invest. It is scaled back for the obvious reasons that Clare has also mentioned. Investment has gone into warehouse expansions. It's gone into the plant and machinery into Taiwan, but we have invested more into the Midlands. What we're doing here is inviting customers to visit the sites, basically. And we're breaking down certain applications. For example, car seats, which is just stripping it all down. Customers come in, they've got sometimes no idea of what we actually can produce. And so when they see it, you show how that we've designed this for a different customer, et cetera, et cetera, and it really opens up their eyes. And we've had maintenance who've had some great feedback on that. And so that is a way that we can interact closely with the -- with our customers.

That's really a snapshot on the capital investment there from an operational point of view. If I hand over to Clare, just to update a little bit more on Atlas now.

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Clare L. Foster, Trifast plc - CFO & Executive Director [21]

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Yes. Thank you. I think we've mentioned a lot of details (inaudible) and not a lot about Atlas. I could declare a (inaudible) not any more than that. (inaudible). Over the last 6 months, as we are planning to do working on our assumption the teams have put together, the Atlas project team and our implementation partner, finished off the end and launched it aligned to what we were doing and started to design and start at the very beginning of the (inaudible) somewhere in the end there is a new design. As I said, the cost is always IT. So we got that done. What we're planning to do over the next 6 months is actually very exciting for us because that's when we start to see that build come together. So all of that hardware that's in the area going all around the world is going to turn into proof of concepts and training and testing so that we very, very much hope that before the end of the year, we will be able to have a pilot (inaudible) on one of our clients. And so that's the current plan. It is -- I'm an architect, the riskiest part of the project (inaudible) from what we're seeing at the moment, it's going very well (inaudible) from the shareholders and I'll wait with much anticipation. (inaudible) Yes, yes. (inaudible). And we spent GBP 2.5 million in the first half of the year. But half of that is capitalized because we're starting to build something, about half of that is going through as expense. And I would put my guess, what is my best guess, is big, big projects to shuffle around a little bit. We're building a spend between GBP 6 million and GBP 7 million now this year, and I think we've probably capitalized about GBP 3.5 million and GBP 4.5 million of that, just to give you a sense of scale.

Next year, we're probably going to spend somewhere between GBP 4 million and GBP 5 million, and we'll probably have (inaudible) GBP 1.5 million and GBP 2 million of that. So you can just sense where we are. By the time of the next financial year '22, we're down into the sort of around GBP 1 million, at the most, [GBP 2.5 million] depend the position (inaudible). But this is a big year, or the rest this year and next year. All we've got is (inaudible) and we're all down.

Okay (inaudible) moving forward. I think for now probably back tonight, just to let you know before going well.

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

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If you move on to Page 30, I'll just give you a little bit update on the acquisitions and how we're looking at it from, not only from a reactive point of view, but also from a proactive point of view.

Acquisitions are still a very important part of our strategy. I think we touched on it earlier on that one of the interesting things of being in a more uncertain world at the moment is we're seeing an increasing number of opportunities more from a reactive point of view coming across the desk. But we've also turned down an increasing number of opportunities. We do look at things very, very carefully. It would be easy for us to add on revenue and profit, but we want to maintain that good track record. You've seen in the comments (inaudible) and we want to ensure that 2 and 2 is going to make 5 at the end of the day. It is frustrating for us. We do turn down a lot, but we want to, as I say, make sure it's right.

I think also, as we've said before, there are certain key jurisdictions which is very difficult to find information on. In the U.K., if something comes up, we pretty much get known about we get told about it. In Southeast Asia, the network there is very good, and we've probably told about. China is more difficult to find that information, and certainly, in the U.S., it's more difficult to find that information. As a result of that, we are using external M&A advisers to help us, really, in those searches. So it's an ongoing part of the journey, effectively.

I think we -- there's a slide there on Trifast culture we're quite unique I like to think, but I'll leave that you'll read that at your leisure. What I'd like to do now is summarize the presentation on Page 35 and 34. And I'd like to reemphasize that we are a well-balanced business in terms of sector and geographical spread, and we're not highly reliant on just 1 or 2 customers. We have a lot of customers there. It has been a challenging 6 months, as I think you've heard throughout the presentation, a high degree of uncertainty and volatility across a number of our sectors. But despite this, we have remained at similar levels on revenue. Profit margins have been remained healthy at over 10%, and cash conversion has been solid.

If we look on the outlook, we have assumed a slightly better second half than the first, which is in line with some of our other years, albeit last year, but it is so, so difficult to predict. I think that's really the message to get out. The macro conditions are likely to remain challenging in the short term, but our pipeline is solid. We have, as I -- hopefully has come across, we have some exciting opportunities that we're working on. We have a strong balance sheet. And as Clare has mentioned, we have new banking facilities, which is providing us significant flexibility and security to allow us to support those opportunities as and when they come our way.

I mentioned at the beginning, we haven't lost a customer. It's all been a case of production volumes down and delayed start of productions. Eventually, that consumer pent-up demand will need be met, and we are confident in the strong term -- long-term fundamentals of our business model to enable us to remain optimistic for the long-term future.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [23]

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Thank you. Excuse me, you're absolutely welcome to ask absolutely piercing questions (inaudible) not.

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

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Can I also just say it before then, there was also another announcement that was made earlier today. Malcolm was in the business well over 40 years. He has done...

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [25]

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I've done very...

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

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You've done very well -- has -- is looking at retiring at the end of March this financial year. Just firstly, for myself, I'm talking on behalf of Clare and the staff from Trifast. It's been an absolute privilege working with you.

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

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Thank you.

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Mark R. Belton, Trifast plc - CEO & Executive Director [28]

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You have been a great mentor and throughout the period, also a great friend and a great support in what we are trying to do. So on behalf of us, I would say thank you very much.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [29]

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Thank you very much. Thank you. Thank you.

Can I just add? I had quite a few non-executives over the many years, and I've always pulled out when there was no added value coming from me, and that's the case now, which is a reflection of how well you guys have picked up the ball and are running with it. And I know the strategy stays roughly the same, but all the shifting footwear underneath is quite skilled and then rapid. So well done.

I shall continue to be a shareholder, not an aggressive one. And I will obviously carry on the supporting discovery (inaudible) who are in a different stage of their development. So thank you, all.

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Mark R. Belton, Trifast plc - CEO & Executive Director [30]

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And I think also, just to finalize, we've gone through a process. And we're delighted to announce that Jonathan Shearman, who has been on the Board for us for about 10 years, is -- has finally accepted to become chair-elect. So he is the young man sitting in the naughty corner. Thank you.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [31]

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Thank you, Mark. As I say, questions are welcome. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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

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Henry.

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Henry Carver, Peel Hunt LLP, Research Division - Analyst [3]

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Just looking through this downturn, which is obviously temporary, is there any way we should be thinking about in terms of operational gearing going forward? Anything that you have had to do in the last few months that will change after the medium term, I guess, outlook on margins and...

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

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Not really. I think, as Clare mentioned, there have been some deferrals of investments that we have said. It's a nice to have rather than a must to have. Now next year, they may become more must to have. But I think it's more around we'll invest where it's -- the opportunities are clear. So for example, Thailand, is creaking at the seams now because of the growth that we've seen there, we're going to have to invest a little bit. It's not going to be huge, but it will be something to support the growth there. In America, again, that will be more operational investments that we will have to do. Spain, again, another one, which is growing nicely. So it's in those areas where there are opportunities that we need to give them the support that they need to carry on. I think overall, I can't see things fundamentally changing that much.

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Clare L. Foster, Trifast plc - CFO & Executive Director [5]

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Yes. I think we're probably -- I mean most of us have a history, certainly around this table. We haven't invested as much as previously before myself and Mark came on to the Board in these roles. And so we have, if you like, being tuck-in gaps that I'll give arguably were good to plug. I think we've been able to make further reinvestments of funding those cost savings that we can make without it starting to fundamentally sort of affect what available longer-term strategy of investing to carry on growing. So I think you've probably seen what you're going to see. I'm not going to say absolutely, definitely. There's always cupboards to raid, but I would say you're probably seeing sensitively what we can do on the cost savings. And now it's a case of if we really sit here and tell you we believe in the investment and its growth strategy, which we do, then we have to carry on as we go forward investing. So...

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

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Yes. The easiest thing in the world when things get down is to start cutting people. And the best time to sell is when everyone else is reducing their overheads and, therefore, their resources. And certainly, in my longest duty, we've done that twice, kept on going, we're not just cutting back, and it does pay off. Also, Clare, you're best to comment on this. The input from Atlas starts to kick in, what, 2022 or '23?

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Clare L. Foster, Trifast plc - CFO & Executive Director [7]

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Yes, it does start -- it really kicks up '23, '24. And I guess, '22 is when we start seeing some of that come through, albeit with additional costs (inaudible) yet, but absolutely, absolutely.

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

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Yes. So back to your question, we're only covering really quite a narrow medium windows as far as I can tell.

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Unidentified Analyst, [9]

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Mark, let's [talk some] in the U.S. Obviously, it's a small part of the business environment, it is a part of the expansion strategy. In terms of the competitive situation, both locally and globally, in terms of you taking market share then penetrating that a bit more, who is on the ground there already? Or who do you see competing for the business you're after? And how does Trifast compare in terms of its offering as well?

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

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So I guess, you've got to promise (inaudible). You've got your -- let's call them the local mom and pop shops. Effectively, they have always doubt we see some of the customers. However, when you're looking at some of the builds, which are coming out from your, say, from a VW build, it's no longer imperial. They want metric. They want to be able to have the supply already sorted. They want all those parts already that have been [prepacked] with lead quality documentation, and they want the price about the same. And so what you can do is, they know that we're already on those platforms, and so it gets transferred over. And it's easier then not to start again with somebody who is going to have to go through that whole process. And that's very much how you win there. Also, as we're dealing and getting into more of the Tier 1s now, they are asking that some of the -- they really want to deal with more of the big global players. Our name is getting more and more out there in America. Clare and myself, when we went -- we took the Board to Houston to see the new site earlier in September. Clare and myself then carried on, and we're trying to get more of a, I guess to charm offensive out there because it's important to be seen out there effectively. And so the -- I'd say the Tier 1s are going to love what you're doing in Europe, love what you're doing in the U.K., love what you're now doing in the U.S. carry on, but we may need you now to do more sites, basically. And I think that's where we're looking at different ways to be able to support that. Yes.

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

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Yes. Can I just support that? There's a lot of mom-and-pops, and they're very parochial. Many years ago, we went to (inaudible) manufacturer just outside Chicago, supplying GM and Ford, and we've got to an advanced stage, and I invited them over to wait a few weeks until we got a passport. Whereas we're addressing, as Mark is saying, an international market. And the big boys like Black & Decker, they are not as focused in on automotive as we are. We're not a one-trick pony, but we've made this play for this ultra high-quality, reliable supply, and that's what the major OEMs require. They don't just want it. They need it.

I hope that answers your question.

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Unidentified Analyst, [12]

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Yes. I've got a question on the -- so these kind of things where, clearly, there's a huge market potential out there being able to get to that, and really understand there's a better content on these fixtures. Just wondering in terms of the sort of the near term, where you've seen some old deferrals? Actually, if you sort of put it in a slightly more rounded context, how many different projects or programs you're actually working on? At what stage are they at in terms of sort of winning them? And then what we're sort of close to sort of prospects are for that area?

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

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I would say a lot of the changes at the moment are obviously moving away from the diesel, particularly this is more in the U.K., effectively, moving away from the diesel platforms and going more into the petrol and hybrid platforms at the moment. There are certain things that are being worked on (inaudible) more medium to longer term. I think it's documented at JLA.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [14]

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JLA?

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Mark R. Belton, Trifast plc - CEO & Executive Director [15]

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JLR and working on an [NLA] platform, which is kind of a standard platform for all electric vehicles, including plug-in hybrids, fully electric hybrids and mild hybrids. So you've got 1 platform that can -- they can put their ranges on. So they don't need to change something around if there -- again, you're working with the Tier 1s into that environment, effectively.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [16]

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That's a good point. We have -- we're using the same platform. They told me you're big on it earlier. They're all doing it, sharing platforms, (inaudible), and they're all sharing these platforms to try and reduce costs. And the more we get specified on each platform, the better it is for us.

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

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I think the only thing I would bring into the mix in terms of the details was that we have got pipeline wins in every single region around the world. And there's a big space, [Himalayas] is a very good example and the UK where we actually filled and we recently saw the development (inaudible) with that. We, obviously, were going into JLR anyway, so this is the next stage. But I look at this in terms of [checking off the list now] when everything we do, which is quite nicely is what I'd rather have been more and more commentary here in financial year '21 and '22. (inaudible) actually happens everywhere across the business where we are (inaudible).

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [18]

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And we're also supplying a Tier 1 that's making the seats for Tesla, and how secure we see that return (inaudible).

Okay. I think any questions from you listening in on telephone? Or are we ready to close up?

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Operator [19]

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There are no questions coming through the line.

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Malcolm M. Diamond, Trifast plc - Non-Executive Chairman [20]

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Thank you very much. Thank you. Well, once again -- sorry. Yes, once again, thank you for coming. Also, we have [stylish-type pastries there]. Please feel free, and help yourself, and we'll be here for a little while longer. But we've got to do some conference calls just before 10. So if we vanish, please excuse us. Thank you very much, and I'll see you, I'm sure, for a discovery.

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Operator [21]

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Thank you for joining today's call. You may now disconnect your handsets. Hosts, please stay on the line and await further instructions.