UK: Surveying OFRs And Narrative Reporting In Annual Reports - Part 3

Article by Martyn Jones, Sarah Kershaw, Ian Krieger, Alice Patrick, Kirsty Searles, Isobel Sharp and David Viles

APPENDIX 1 – ILLUSTRATIVE OFT – DELTO PLC

This illustrative Operating and Financial Review was developed to provide good examples of the typical disclosures which will be required of a UK quoted company which is complying with Reporting Standard 1.

The Operating and Financial Review is based on a hypothetical company which is the parent of a group of companies. The wording used in this Operating and Financial Review is purely illustrative and in practice will need to be modified to reflect the circumstances of a Group and its business. Similarly, the structure of the illustrative OFR set out below will not necessarily be appropriate for all companies and therefore the structure of other OFRs is likely to be different. In places, the illustrative OFR utilises examples set out in the illustrative guidance to RS 1. It will probably also contain internal consistencies.

Operating and Financial Review

To the members of Delto plc
[Insert suitable wording to the effect that the OFR is only prepared to fulfil a statutory obligation to provide information to shareholders and that the OFR should not be relied on by any other party or for any other purpose.]

[Insert suitable wording to clarify that the OFR contains certain forward-looking statements and that (a) these statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report and that (b) these statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward looking information.]

This Operating and Financial Review has been prepared in accordance with the ASB’s “Reporting Standard 1: Operating and Financial Review”. [Add disclosures of any departures from the Standard]. This Operating and Financial Review has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to Delto plc and its subsidiary undertakings when viewed as a whole.

The Operating and Financial Review discusses the following areas:

• Long term strategy and business objectives
• Results for 2006 financial year
• Future outlook
• Operations
• Risks and uncertainties
• Resources
• Financial review

Long term strategy and business objectives
Delto is a manufacturer of products used in the X and X industries for X. The Group operates in a total of over X countries in three main geographical markets: Europe, the Americas and Asia Pacific. Its core products are X, X and X. A detailed analysis of current operations is set out in the ‘Operations’ section below.

There are three key elements to Delto’s strategy for accelerating growth and creating real shareholder value. They are:

• achievement of leading positions in markets capable of long-term growth;
• targeted investment in new product development, innovation and marketing to support strong organic growth and profitability; and
• focused acquisitions which meet strict rate of return criteria.

We implement and monitor our performance against the strategy by having the following strategic objectives:

• to attain an overall return on capital employed for the Group of X% per year;
• to achieve a total market share across our markets of X% by 2009;
• to maintain a gross margin of X%; and
• to earn X% of revenue from new products each year.

These financial objectives are supported by non-financial objectives which are:

• to minimise waste by reducing the amount of packaging used with our products to below the levels of 2000, being Xkg packaging waste per £X sales; and
• to reduce lost time injury frequency rate (LTIFR) by X% per year.

We have made significant progress in the year on the three key elements of our strategy. We have gained market share in X of our X market. We have invested £Xm (2005: £Xm) in our core products and have launched a number of new products in the year including X and X. Further new products are nearing completion and are due to be launched in the next year. We also acquired Company X in the USA to grow our market strength and have restructured this part of our business following the acquisition to consolidate our positions in this territory.

Our progress on our strategic objectives is monitored by the Board of Directors by reference to six key performance indicators applied on a Group wide basis. These same indicators are used by in executive management appraisal on a global and regional basis. Performance in 2006 against these targets is set out in the table below, together with the prior year performance data. No changes have been made to the source of data or calculation methods used in the year.

(1)ROCE = Operating result as a percentage of Capital employed
Operating result as per financial statements.
Capital employed being Intangible assets plus property, plant and equipment plus investments plus trade accounts receivable less noninterest bearing provisions and liabilities.
(2)Market share = Revenue as a percentage of Market revenues
Revenue as per consolidated income statement in financial statements.
No external verifiable source for market share exists. Accordingly data for market revenues are internal estimates based on information available in each market.
* - target is to achieve this share by 2009.
(3)Gross Margin = Gross Profit as a percentage of Revenue
Gross profit and revenue both as per consolidated income statement in financial statements.
(4)% Revenue from new products = Revenue from new products as a percentage of Revenue
Revenue derived from new products is per internal company data.
Revenue as per consolidated income statement in financial statements.
(5)Packaging waste rate = Total packaging in kg x X/Revenue
Total packaging in kg as per internal company data.
Revenue as per consolidated income statement in financial statements.
(6)Lost time injury frequency rate (LTIFR) = Number of injuries x X hours/total hours worked

Source of underlying data: Injury and hours data per returns from 100% owned facilities only.

The results in the table show that we met our targets for three of our six objectives. One objective (market share) is to be achieved by 2009 so is ‘in progress’ and the two objectives for which we did not meet our targets were gross margin and packaging waste rate. The directors believe that, having achieved a market share of X% in 2006, the group is still well placed to achieve the 2009 target for market share. Each of our financial objectives is discussed in the ‘Results’ section below and the non-financial objectives are discussed in the ‘Risks and Uncertainties’ (Packaging waste rate) and ‘Resources’ (LTIFR) sections below. Whilst other performance measures are discussed in this Review, it is the above six measures that the directors utilise and apply as the Group’s KPIs.

Results for 2006 financial year

A summary of key financial results is set out in the table below and discussed in this section. A detailed review of each division’s operations is included in ‘Operations’ on page X.

*Underlying Operating Profit is profit before interest, tax and one-off items and is reconciled to the financial statements as follows.

Delto made further progress towards its stated objectives in 2006. In last year’s OFR we predicted that the performance of the Group (in terms of both profit and market share) would increase due to the launch of new products and this has been borne out in the year. Total group revenue was up X% on 2005 to £Xm. Despite a decline in gross margin percentage in 2006 by X percentage points to X%, underlying operating profit before interest, tax and one-off items increased by £Xm to £Xm.

Eliminating the effect of currency movements, revenue growth was strong. The Group sees market share as a key performance indicator as it allows us to assess how the company is growing in relation to its competitors. We stated in our previous annual report that the Group aims to achieve a market share of X% within 4 years (i.e. by 2009). During the year we achieved a market share of X% which was up from X% in 2005. We are therefore making progress in this area although the growth in 2006 was not as high as previously expected due to the fall in sales of product X in the year, price pressures in Europe and to the problems experienced in the American division. There are a number of new product launches scheduled in 2007 and therefore the directors expect that our market share will increase and that the target of X% within four years is still achievable.

The Group launched X new products in 2006 which contributed revenue of £Xm.

Percentage of revenue from new products
To continue to grow in the fast paced market, the Group needs to ensure that it is continually renewing its product portfolio. We measure our success in this area by a KPI that looks at the percentage of revenue generated by new products. Percentage of revenue from new products = revenue from those products launched over the past two years over total revenue for the year.

Our target was to achieve X% of revenue from new products per annum. We have achieved this target for the first time in 2006 with a result of X%.

Applying a constant currency basis, Europe and Asia Pacific achieved a growth in profit of X% and X% respectively. The growth in Europe was partly attributable to the acquisition of Company X in France early in the year which had an immediate effect on our market share. Growth of X% in Asia Pacific was almost entirely organic growth with only X% of this increase being attributable to acquisitions. A small loss was made in Americas due to weaker sales, continuing delays in the integration of several small acquisitions made in 2004/5 and to problems in the management of the US offices in Boston.

Cash levels were down by £Xm from £Xm at the end of 2005 to £Xm at the end of the current financial year. Although profits increased in 2006, cash inflows from operating activities were offset by restructuring costs and higher interest payments on debt that was drawn down to fund further acquisitions in the year. Net interest payable was £Xm (2005: £Xm).

Return on Capital Employed
The Group’s key measure of the effective use of resources is Return on Capital Employed (ROCE). ROCE demonstrates the effectiveness of our managers in utilising the assets of the business to deliver profits to provide a return to our shareholders. ROCE is calculated as the operating result [explain which figure and reconcile to FS] divided by total capital employed (invested) in the business and is expressed as a percentage.

The Group has a target ROCE of X% per year. We again met this target in 2006, achieving a ROCE of X% which represents a small increase on the 2005 figure of X%. This improvement was largely due to the strong performance in the Asia Pacific market which drove Group profits up by £Xm.

Future outlook
While the external commercial environment is expected to remain competitive in 2007, we have good momentum across both Europe and Asia Pacific and we believe that we have now taken the necessary actions, and put in place processes, to implement the restructuring of the American business.

In Europe, we expect continued price pressure from our competitors in the more developed markets. This will push gross margins downwards, a trend that is likely to continue for the next two to three years until the current consolidation activity in the market slows. We anticipate that, despite our efficient manufacturing process, our margins in Europe in 2007 will decline. In unit terms, we expect continued sales growth for the year as a whole and we are now aiming to launch new product X in this market in the second half of the year. This launch was delayed by the regulatory approval process which took longer than anticipated due to the testing of new product features. The Group acquired X% of Company X in the Czech Republic after year end, representing only our second investment in Eastern Europe. We view the Eastern European markets as critical to maintaining our competitive strength across Europe and we expect to make further acquisitions in these markets and to achieve high growth rates as a result over the coming years.

In Asia Pacific, we expect our portfolio to perform well but sustaining the outstanding growth rates we saw in 2006 will be challenging. We have not identified further acquisition targets at this stage but will continue to watch closely the emerging players in our existing and other related markets.

We expect that the benefits of restructuring our business in the Americas may take one to two years to be realised and we therefore anticipate that like-for-like sales in this division may decline further in the first half of 2007 before recovering to 2006 levels for the second half of the year. Gross margins should benefit from the faster and more efficient manufacturing process at our new facility in Texas and costs across the American business should be lower in 2007 following the restructuring of the business including the consolidation of our east coast operations into one head office (rather than two offices previously) for that division. We anticipate that this business will return to profitability in the second half of 2007 so that it should break even for the full year.

We believe that the Group has an advantage in terms of its business model within the sector as we are positioned in the more attractive, growing product markets and a significant portion of our unique product portfolio is sold through higher margin distribution channels. We have a strong management team committed to winning in the market place and have clear goals and priorities which focus the business on delivering improvements in growth and efficiency. Our efficiency programmes implemented across the business in 2005 are now providing the necessary additional funds to enable us to invest in our commercial programmes and capabilities so that we can better exploit the full potential of the portfolio we now have. This should enable us to deliver superior business performance which will in turn drive shareholder returns.

Operations
Delto manufactures innovative, high quality products for the X and X industries. These products are used by our customers in a variety of systems which perform functions such as X and X. Our product portfolio includes lines such as the Product X range and the Product X range and our key brands include X, X and X. We are a global player in our market and we are in the top 5 players in X of the X countries in which we operate. We distribute our products via our cross border sales offices and also through distributor agents in some markets.

Competitive environment

Many of the specific markets in which Delto operates experience a high degree of competition. Globally, Delto’s key competitors are X, X, and X. Over the years we have developed a creative, innovative, competitive culture and a reputation for advanced functionality and superior product quality. However, we continue to experience price pressure from our competitors in the more developed markets which impacts our products at the top end of the market range. There has been much consolidation occurring in the newer markets as the key players seek to gain market share by acquiring smaller, local operators.

Regulatory environment
The key regulations which affect Delto and its products are the X regulations and the X regulations. The proposed European Directive on X means that we anticipate further regulatory requirements to be enforced in our EU markets although the Directive is not due to be implemented until 2008 at the earliest. Delto monitors developments in the regulatory environment to stay abreast of any changes and acts in a timely and efficient manner to comply and to avoid infringing law or regulation and incurring fines as a result. There are no changes expected in the coming year which would influence Delto’s ability to continue to supply its products worldwide.

Macro-economic environment
In the X, our biggest single market in both revenue and profit terms, the economic environment over the last year has been relatively stable, with a high level of growth. GDP growth is estimated to have been X% in 2006, the highest for four years. However, this is forecast to drop back slightly in 2006 and 2007. In the rest of Europe, growth has been lower at an average of X% for 2006 and this rate of growth is not expected to change significantly in 2007. In the Americas, the economy strengthened during 2006 after three years of poor performance. The Asia Pacific market continues to grow at a fast pace driven largely by growth in China and India.

Review by division
We are organised around three regional units supported by the group global functions. Each region has an operating director who is responsible for meeting the key targets set for the region.

The performance of each region in terms of 2006 revenue growth and contribution to Group revenues is shown in the charts below.

Europe
Europe is our strongest market contributing over X% of our total Group revenues for 2006 (2005: X%). We are now present in X markets in Europe having added Hungary and the Czech Republic to our territories since the end of the 2005 financial year. Our key brands in Europe are X and X and our main products are X and X. Our product X is the fastest growing new launch in our portfolio having contributed £Xm to revenue since its launch in the first quarter of 2006. We also continue to grow the share of this market achieved by Products X and X. However, the replacement of Product X globally by its updated version (which adds the X functionality) was delayed when the regulator X imposed further testing requirements on the new version. This impacted our European business with sales of this line down X% from 2005 to £Xm. The new launch is now expected to occur in the first quarter of 2007.

Our position within the largest six markets in Europe within industry X together with our 2006 market share of revenues is set out below.

Our businesses in the European sector achieved record revenues of £Xm during 2006 despite an increasingly competitive environment dominated by multinational players. Underlying profits were also slightly ahead at £Xm.

Revenue growth was largely a result of an increase in unit sales and of the major acquisition made in 2005 of Company X in France which moved us from 4th in the market to 2nd and which contributed £Xm to revenues. We achieved double-digit growth of X% in France. There has been significant price pressure in the more developed markets (UK, France, Germany and Spain) resulting in little growth in like-for-like sales in these markets and a drop in gross margin from X% in 2005 to X% in the current year. Despite such market pressures, we maintained our market share in most markets by aggressive marketing of existing products and through the launch of Product X.

We will continue to experience pressure on margins but expect that we will maintain if not grow market share through further acquisitions, largely in Eastern Europe.

Asia Pacific
The Asia Pacific sector is our newest but fastest growing division and we now have operations in Australia, India, Japan, China and Malaysia. We are the market leader in Australia and India and rank 3rd and 4th in Malaysia and Japan respectively. We acquired Company X in China 2005 in order to sell Product X and this gives us an important foothold from which we plan to launch products X and X in the next two years.

The Asia Pacific sector reported underlying operating profit of £X million on revenue of £X million.

Overall, 2006 was an excellent year for the Asia Pacific business, with very strong growth starting in the second quarter and continuing throughout the second half. Like-for-like sales growth of X% was driven by Product X and Product X where sales were X% and X% ahead respectively. We restructured the production facilities in our Chinese business, which was acquired in 2005. These facilities now meet our rigorous internal standards for efficiency and for environmental and social impact. We expect this to benefit gross and operating margins from 2007.

Reported operating profit for the Asia Pacific business was up X% on 2005 to £Xm. Exchange rate movements reduced revenues by X% to the reported figures of £Xm and similarly underlying operating profit was reduced by X% to £X million as reported in the financial statements.

Americas
The Group’s operations in the Americas are based in San Francisco (sales office), Boston (sales and back office functions) and Texas (manufacturing facility). The Board believed that the two Boston offices (one of which was acquired with Company X in 2004) were not run efficiently and that the potential synergies identified as critical to the success of various acquisitions made since 2003 had not been achieved. The directors therefore appointed a new Operations Director for the American division and the two Boston offices have now been consolidated into one head office at a cost of £Xm.

We purchased a new facility in Texas during the financial year at a cost of £Xm and fitted it with the latest technology for manufacture of Products X, X and X at a cost of £Xm. Where it did not compromise the quality of the new factory lines, equipment from the old facility was refurbished and transferred to the new factory. This upgrade of facilities was vital to recover our product quality and reliability and the new facility is also closer to the airports that are key to our shipping channel. We made a small loss of £Xm on disposal of the old facility.

The Americas branch of the business had a poor year with revenue down by X% to £Xm for the year. Our market share fell from X% in 2005 to X% for 2006. This, together with increased operating costs contributed to a divisional loss of £Xm being made for the first time (2005: profit of £Xm). Operating costs were up by £Xm of which £Xm is attributable to restructuring of the east coast business including the integration of several small acquisitions from which we expect to achieve annual cost synergies going forward of £Xm.

The acquisition of Company X in America last year helped us increase our market strength in the supply of products in the X market where Company X was a market leader. However, gross margins were X% which is down on 2005 (X%). The replacement of our manufacturing equipment in Texas will benefit margins next year. Company X was acquired in November 2006 and therefore the full impact of the acquisition will be seen in 2007.

With the ongoing effects of new management, the benefits of the restructuring now implemented and the full year effect of Company X’s results, we expect a return to profitability in the second half of 2007.

Risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group’s long term performance.

Competitor risk
The Group operates in a highly competitive market with significant product innovations. We are subject to the threat of our competitors launching new products in our markets (including the updating of their existing product lines) before we make corresponding updates and developments to our own range. This could render our products out-of-date and could result in rapid loss of market share. To reduce this risk, we undertake market research to ensure that our own products continue to meet the needs of our customers and we invest heavily in new product development to ensure that we have products at various stages of the product life cycle.

Competitor risk also manifests itself in price pressures which are usually experienced in the more developed markets. This results not only in downward pressure on our gross margins but also in the risk that our products are not considered to represent value-for-money. Our sales teams therefore monitor market prices on an ongoing basis and we have delegated full responsibility for pricing to local management for orders less than a total value of £Xm. Our bonus scheme for sales employees includes an element based on gross margin percentage achieved as well as on sales volume.

Finally, in certain markets, there is a risk that our competitors beat us to key strategic acquisition targets which results in high lost opportunity costs and reduction in market share. To mitigate this risk, we have a dedicated mergers and acquisitions team which assists local management in identifying, negotiating and completing acquisitions according to strict returns criteria. In certain markets (e.g. X) we only consider deals where we can acquire overall control because we believe that in most cases, due to cultural issues, joint control is not workable.

Commercial relationships
The Group benefits from close commercial relationships with a number of key customers and suppliers. Damage to or loss of any of these relationships could have a direct and detrimental effect on the Group’s results and, as some of these relationships span several markets, the impact of losing one relationship can be material to the Group as a whole. To manage this risk the Group hosts local supplier and customer reviews to ensure that we continue to meet their respective needs and members of the Board meet with individual management from our strategic partners on at least an annual basis.

Manufacturing
The Group’s manufacturing facilities could be disrupted for reasons beyond the Group’s control such as fire, work force actions or other issues. As such the Group prepares detailed recovery plans for the most likely situations so that at all our facilities business continuity procedures are in place and staff are appropriately trained to implement them should these situations occur.

Due to the rapid advancement in manufacturing technology, facilities can also become outdated affecting efficiency and product quality which in turn has a detrimental impact on cost of sales and profit margins. Our production management team keep the Board up-to-date on the availability of and need for new manufacturing technologies and this is an area in which the Group invests heavily.

Environmental risk
The manufacture of our products has a direct impact on the environment, especially in terms of the packaging used in both the raw materials entering our production lines and in the finished goods that we dispatch to customers. There is a risk that, if packaging levels increase or indeed remain at the current levels, we will breach government regulations which may lead to heavy penalties in terms of both cash fines and damage to the Group’s reputation. Although the Group is not currently in breach of environmental standards, we have put in place a programme to monitor and reduce our known impact on the environment, particularly the packaging waste that results from our operations.

We are seeking to reduce our packaging waste rate (see ‘Long term strategy and business objectives’ above) to the 2000 levels (Xkg per £1,000 sales) or below. This programme includes a requirement that each of our production facilities and each supplier of raw materials worth over £Xm per annum completes an environmental return outlining the weight of packaging used, the extent to which they utilise recycled materials and the steps that they are taking to reduce the levels and environmental impact of packaging materials.

This policy has already resulted in a reduction in waste from Xkg per £1,000 sales in 2005 to Xkg in 2006 but we have not yet reached our target of 2000 levels. However the Group is committed to reducing this further in 2007 and beyond.

Foreign exchange and treasury policy
The Group has significant operations outside the UK and as such is exposed to movements in exchange rates. To protect cash flows against the high level of exchange rate risk, the Group enters into forward exchange contracts to hedge foreign exchange exposures arising on forecast receipts and payments. The Group’s treasury policy is to keep X% of borrowing at fixed rates to provide long term protection against fluctuating interest rates.

The Group’s risk management policies and procedures are also discussed in the Corporate Governance statement.

Resources
The Group has the following key resources which assist it in the pursuit of its key objectives:

• patents over a number of its main products including X and X which account for X% of Group revenue;
• employees who have extensive knowledge of the key markets and therefore can assist in research and development of new products; and
• strong corporate reputation for quality products which is based upon our advanced manufacturing technology.

Product patents
The Group maintains a significant number of patents to support its businesses and to protect its competitive advantage. Much of the intellectual property and product innovation developed by our research and development function results in new patents being secured. We monitor market developments closely to identify any potential violations of our patents and take appropriate legal action where considered necessary.

Our people
We have consistently sought to recruit and retain the best employees in our market and this has contributed to our success in developing, manufacturing and selling our products across the globe. To achieve our long term strategies we need to continue to implement this recruitment policy and therefore, in addition to using conventional recruitment channels such as the press and search agencies, our business have responded to the significant importance of the internet in marketing positions. Each division has its own approach to identifying and attracting the skills and expertise it needs, in line with both its own and the Group’s strategy and requirements.

The Group has a policy of equal opportunities which applies in relation to recruitment of all new employees and to the management of existing personnel. We offer all of our staff training relevant to their roles and we believe that this has contributed to an increase in employee motivation and satisfaction as evidence by an overall improvement in the Group’s employee retention rate in 2006 and recent years (an increase from X% in 2002 to X% in 2006).

The Group also encourages its employees to give something back to their local community. Our policy in this area is that all employees can have up to X days per year to invest in community projects. As such over X employees took part in local community projects in the year. We also operate a payroll giving in Europe and America and are seeking to introduce a similar scheme in Asia in 2007.

As Delto is involved in the manufacture of our wide product range, and the industry involves large and complex production equipment, safety is a core value of the Group and is a major priority for management. As such, one of our KPIs is the ''lost time injury frequency rate'' (LTIFR – the number of lost-time injuries per million hours worked) which we monitor across all of our businesses. We aim to reduce our LTIFR by 10% per annum through careful selection of the suppliers of our manufacturing equipment and ongoing training of all our production employees. In addition, our Production Managers in each facility are assessed partly on the LTIFR at their facility. As a Group, we achieved our target reduction in 2006 with LTIFR falling by 16% from 10 injuries/million hours worked in 2005 to 8.4 injuries/million hours worked in 2006.

Manufacturing technology
A key differentiator for our products is our manufacturing technology which not only maximises the efficiency of our production processes but also means that we have a reputation for high quality products with a relatively low level of product returns in the market. To reinforce this competitive advantage, in 2006 we refurbished our facilities in China and bought a new modern facility in Texas which has been custom fitted with the latest technology.

Financial review

Revenue
Group revenue, as reported for the year, was £Xm, up X% on 2005 (£Xm) with growth achieved in Europe (X%) and Asia Pacific (X%) but a decline of X% in Americas. Excluding the net impact of foreign currency effects (-£Xm) and acquisitions (+£Xm), underlying revenue was higher at £Xm representing like-for-like growth of X% on 2005 (£Xm).

Of our four biggest contributing products (in revenue terms), Product X delivered X% comparable sales growth for the year, with Product X and Product X contributing growth of X% and X% respectively. However, Product X’s sales were X% below last year due to the delay in the launch of its replacement version following prolonged regulatory testing. This launch is now expected to occur in the first quarter of 2007.

Gross margin and underlying operating profit
Good comparable unit sales growth was impacted to an extent by price pressures so that overall, the gross margin declined to X% (2005: X%) with gross profit of £Xm. Group operating profit for the year was £Xm, X% ahead of 2005 (£Xm). Underlying operating profit rose in both Europe (X%) and Asia Pacific (X%) but the Americas division made a small loss of £Xm (2005: profit of £Xm) as a result of operating costs increasing by £Xm to £Xm in the year.

Revenue, gross margins and underlying operating profit are discussed in more detail on a group and divisional basis in ‘Results for 2006 financial year’ above.

Interest
The net interest cost for the Group for the year was up to £Xm compared with £Xm for 2005, due to higher average net debt levels resulting from the new debt drawn down in the year (see further ‘Capital Structure’ below).

Profit before tax
Group profit before tax for the year was £Xm, £Xm ahead of 2005 Profit before tax.

Taxation
Taxation was £Xm for the year, £Xm above last year reflecting the higher profit achieved. The effective tax rate for the Group reduced slightly to X% (2005: X%).

Earnings per share
Basic earnings per share for the year were Xp, compared with Xp in 2005. Diluted earnings per share were Xp compared with Xp for 2005.

Dividend and dividend policy
The Group’s dividend policy is that dividends should represent about one third of net profit before one-off items including goodwill impairment. In line with this policy, the Board has recommended a final dividend of Xp, to bring the total dividend for 2006 to Xp (2005: Xp).

Research and development and capital expenditure
The Group invested £Xm in the year on research and development and £Xm on capital expenditure. There were two major parts of this expenditure. The first was further development of new products X and X. The second related to production with a new manufacturing facility purchased in Texas and a refurbishment of the facilities acquired last year in China to bring these up to our rigorous internal standards. This updating for our facilities should improve our product quality and reliability, and crucially our gross margins, in China and America.

Capital structure
The Group has net debt of £Xm (2005: £Xm). During the year additional loans of £Xm were drawn down. The Group continues to be able to borrow at competitive rates and therefore currently deems this to be the most effective means of raising finance. Acquisitions have therefore been funded by debt financing of £Xm in the year.

The Group expects that an additional £Xm will be drawn down in 2006 to replace funds spent on the acquisition of Company X in France (see post balance sheet events below).

Cash flow
Net cash inflow from operating activities for 2006 was £Xm, £Xm below 2005. Higher trading profit for the Group was offset by higher cash outflows in support of the restructuring programme. Interest received and paid resulted in a net outflow of £Xm which was £Xm higher than 2005, due to additional interest payments on net debt which increased in the year. Investing activities for 2006 resulted in an outflow of £Xm which was £Xm higher than the corresponding outflow last year. This was due to higher spend on property, plant and equipment and to acquisitions expenditure of £Xm, up from £Xm last year. Net proceeds from disposals were £Xm in 2006 compared with £Xm in 2005.

Liquidity and investments
At 31 December 2006 the Group had at its disposal £Xm of undrawn, committed borrowing facilities. These comprised £Xm maturing in October 2006 and £Xm maturing in May 2008. The Group’s net debt position has changed over the course of a year, and in particular, short-term debt increased in the early part of the year to fund working capital requirements. These requirements arose principally from the seasonality of the business, which experiences increased sales during the summer months. At 31 December 2006, the Group had £Xm of short-term borrowings outstanding.

Post balance sheet events
After the year end the Group purchased Company X in France. The deal was completed for a total cost of £Xm and represents a major acquisition for the European division. This purchase will mean that the Group now have a X% share of the market for selling product X in France.

Change in accounting policies
During the year, the company adopted International Financial Reporting Standards for the first time. Full details of the adjustments on transition and of the related accounting policies were published in July 2005 and can be found at www.websiteaddress.com.

Going Concern
[Insert going concern statement]

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