Following these transactions, Alumasc believes it has significantly strengthened the overall portfolio of businesses within the group. This should facilitate a higher quality of ongoing earnings due to the growth potential offered by Levolux, and the increased proportion of the group’s income derived from its premium products which are, in many cases, market leaders in growing or stable markets.

The group’s overall financial results in the year were strong. Total group revenue (including discontinued operations) increased by 21.8% to £163.4 million, and total group profit before tax increased by nearly 75% to £9.9million. This significant increase in profit benefited from an excellent performance at Brock Metal prior to its sale at the year end, and a prior year result which was impacted by the closure costs of Copal Castings.

Revenue from continuing operations increased by 9.7% to £103.6 million, with adjusted profit before tax from continuing operations (stated prior to property disposal gains and one-off acquisition accounting adjustments) up 3.9% on last year at £7.5 million. Unadjusted profit before tax, benefiting from gains on property disposals, increased by 4.1% to £7.8 million. Growth in profits from continuing businesses was restricted by the impact of lower social housing refurbishment market activity, and lower levels of work on the major Fjardaal metal roofing supply contract, mostly completed last year, which together reduced profits by an estimated £1.7 million. This was largely recovered by some excellent performances elsewhere within the Building Products division, where five businesses (including the two businesses acquired in 2004) reported record profits for the year.

Strategy

Over the last five years, the impact of this strategy is illustrated by an increase in the proportion of the group’s revenue relating to core Building Products and Precision Engineering activities from 56% to 89%. This proportion increases from 77% to 98% at operating profit levels. In the same period, the proportion of the group’s adjusted operating profit from the Building Products division increased from 50% and 75%, and grew from £4.0 million to £6.6 million, at an average compound annual growth rate of 13%.

On a pro forma basis, including Levolux, over 60% of ongoing group revenue is now being derived from Building Products, representing a clear evolution over recent years from the group’s origins as an Engineering Products business.

The group also seeks to grow export sales, particularly where there are opportunities to repeat successes we have enjoyed in the UK. Exports as a proportion of Group sales increased from 14.5% five years ago to 21% this year. Particular successes this year have been increased sales of precision components to non-automotive diesel engine manufacturers in Europe and the USA, the growth in sales of Gatic Slotdrain in Europe and increased demand for Gatic access covers in airport projects in the Middle East and Far East.

The group is increasingly well positioned, both through businesses that have been owned for many years, and through more recent investments including Levolux, to benefit from growing demand for environmentally sustainable products. Over half of the group revenue is estimated to derive from products that give particular benefits in the fields of insulation, energy reduction and rainwater management. The group’s major activities in this area are:

• the number one position in the UK’s intensive green roof market, which in turn “pulls-through” demand for Alumasc’s associated roofing and waterproofing membranes;
• leading market positions in the rainwater management and drainage markets, with Gatic Slotdrain systems, in particular, benefiting from software that enables engineers quickly to design bespoke solutions tailored to projections of rain and surface water flow in specific locations;
• Levolux, the UK market leader in solar shading and control systems which reduce heat in buildings through either external or internal sun shading;
• MR render systems, the UK market leading exterior wall insulation system used to refurbish social houses of solid wall construction; and the manufacture of aluminium components by Alumasc Precision which, in addition to being recyclable, reduce weight, transfer heat quickly and thereby reduce energy use and carbon emissions from the engines and vehicles in which they are used.

Health, Safety & Environment

The key performance indicator used to measure the groups improvement in its health and safety performance is the safety performance rate, which is an improvement based measure weighing risks, hazard levels and events with operational size of business unit.

The group's safety performance index for the 2006 calendar year was 68 and a 20% improvement target was set for 2007. In the six months to 30 June 2007, this target is being achieved with the safety performance index reduced to 45.

In line with its focus on environmentally sustainable building products, the group manages its businesses within sound environmental principles. During the year, a fourth facility, at St. Helens, achieved ISO 14001 accreditation. In addition, businesses are encouraged to conserve energy and to use recycled and recyclable materials from sustainable sources. Progress in this area is also monitored.

Acquisition of Levolux

Alumasc acquired Levolux, the UK’s leading supplier of solar shading and control systems for buildings, on 1 May 2007, for a total consideration of £13.5 million (excluding cash acquired).

Levolux designs, manufactures and installs internal and external shading systems which are used to control the impact of sunlight on a building’s internal environment. These systems, which include Brise Soleil, Aerofoil Fins, Louvres and External and Internal Blinds, are increasingly specified in new buildings and refurbishment projects in order to improve energy performance and the comfort of occupants. As a result of working closely with architects and other specifiers, Levolux systems are frequently an integral part of a building’s functional and aesthetic design.

The acquisition of Levolux fits right at the core of Alumasc’s strategy, described above, to develop the group’s high performance building products activities. Levolux will spearhead the group’s growing presence in sustainable “green” building products and will also grow the opportunity, believed to be substantial, for developing markets for these products outside the UK.

With the introduction of the updated Document L building regulations aimed at improving the energy efficiency and reducing the UK's carbon emissions in commercial buildings, Levolux is in a strong position to assist architects in meeting such important demands as well as contributing to external and internal design aesthetics. In addition, the introduction in June 2007 of energy performance certification (required for each building by 2009) will further focus the construction industry on reducing energy consumption in buildings.

In the year prior to its acquisition by Alumasc, Levolux generated revenues of £20.7 million. Levolux has made a good start in the group, contributing revenues in the two months to 30 June 2007 of almost £3 million, and operating profit, prior to acquisition accounting adjustments, of nearly £0.4 million, giving a return on sales of 11.9%.

Detailed synergy reviews are currently underway that should result in benefits to both Levolux and other group companies. In particular, opportunities to combine aluminium purchases are being reviewed, whilst the sharing of market information will undoubtedly benefit the division as a whole.

Operating Results: Continuing Operations

Operating Review: Continuing Operations

Group revenue from continuing operations increased by 9.7% to £103.6 million, of which approximately 2.3% was attributable to selling price increases, 3.2% arose due to the acquisition of Levolux, and 4.2% was attributable to underlying organic growth. The major contributors to organic growth were the group's rainwater and drainage businesses, particularly Gatic Slotdrain, together with increased export sales of Gatic access covers. This was offset by reduced revenues from the MR renders and Pendock brands which suffered from significantly lower social housing refurbishment activity after a buoyant prior year. Despite a disappointing year in this market segment, government funds remain committed to upgrading social housing under the Decent Homes Initiative in the medium-term, from which Alumasc should derive future benefit.

Adjusted group operating profit (prior to gains on disposal of properties and acquisition accounting adjustments) of £8.7 million was £0.2 million higher than in the prior year, after benefiting from a £0.4 million post-acquisition profit contribution from Levolux. However, non-cash acquisition accounting adjustments eliminated most of Levolux's profit contribution and reduced reported operating profit, prior to property disposal gains, to £8.4 million (2005/06: £8.6 million). Prior to these accounting adjustments, both Building Products' and Engineering Products' divisional profits were each almost 2% ahead of prior year comparators.

Group operating margins in 2006/07 were slightly lower at 8.4% (2005/06: 9.1%) due to the impact of continued cost inflation, particularly aluminium and energy costs. Whilst much of this inflation was passed on to customers through selling price increases, no incremental profit was made on the pass through.

The profit impact of organic volume growth during the year was offset by changes in sales mix, with exports, in particular, having lower margins on average. Whilst the group was not able to pass through all cost inflation to customers due to market pressures, a good cost saving performance added £1.5 million (1.4% of revenue), which more than recovered the shortfall. Capital expenditure in the prior year contributed to the volume growth and cost savings, but added £0.4 million to the depreciation charge.

Building Products Division

Building Products' divisional revenues grew by 7.9% to £59.6 million. This growth was assisted by two months of post-acquisition sales from Levolux which added 5.4%, with average selling price increases of some 2% also contributing. Underlying activity levels were marginally up overall, but varied significantly by business, with rainwater and drainage activities growing strongly and Gatic access covers benefiting from buoyant export demand, largely offset by significantly lower sales of MR renders and Pendock profiles to the social housing refurbishment market, and lower metal roofing sales to the Fjardaal project. The modest increase in activity levels, taking the division as a whole, is broadly consistent with the UK construction market, which grew by just over 1% in 2006, according to Experian.

Divisional operating profit increased by 2.2% to £6.6 million, prior to Levolux acquisition accounting adjustments. Excluding Levolux, like-for-like divisional operating profit was £0.2 million lower than the prior year, due to an estimated profit reduction of £1.7 million arising from lower social housing refurbishment activity and reduced Fjardaal sales. Excellent performances elsewhere in the division, including five businesses which reported record profits, helped to eliminate a substantial part of this shortfall. Divisional operating margins, also prior to Levolux accounting adjustments, remained strong at 11.0% albeit a little reduced from the previous year's 11.6%, mostly due to cost inflation.

Alumasc's building products activities span a number of end user markets giving a portfolio effect which allows the group to absorb both rises and falls in the activity of individual sub-segments. Relative to the UK construction market as a whole, and consistent with the group's range of high quality specification products, Alumasc has a greater weighting of sales (approximately 58% of the divisional total) to major commercial property and public projects, both of which have been buoyant sectors recently. Alumasc's income from these markets has now further increased following the acquisition of Levolux. However, through its MR Swisslab brand and Pendock pipe-boxing products, Alumasc also derives a high proportion (currently approximately 11%, 2006 15%), relative to the UK construction market as a whole, of its revenue from the social housing refurbishment market.

Revenue growth rates in 2006/07 varied significantly by activity within the Building Products division, as described in more detail below.

Revenues from rainwater and drainage activities grew by 15.1% to £17.8 million, driven by strong demand and market share gains for Gatic Slotdrain in both the UK and Europe , growth in soil and waste drainage sales which benefited from a product launch and a number of large hospital projects, and a robust performance from the rainwater business. Gatic Slotdrain has been a particular success for the group. The relatively narrow throat to the drain reduces surface exposure and helps prevent damage, thereby improving durability. The flexibility in sizes of Gatic Slotdrain systems, combined with market-leading design software, mean the product is adaptable to a variety of applications and weather conditions, making it the increasingly popular choice for specifiers and engineers. Success in the UK was repeated in a number of European export markets, and there are further opportunities to grow export sales of this product. Investments have recently been made to increase Gatic Slotdrain manufacturing capacity, which also reduced the operational risk of over-dependence on key machines. Alumasc has recently introduced an internal drainage system for use in wet environments, Linearis, which is a similar product in style to Gatic Slotdrain. Initial interest in this product is promising.

Roofing revenues reduced by 4.2% to £10.7 million, largely due to a £1.8 million reduction in metal roof sales from lower activity this year in completing the major Fjardaal roofing project in Iceland . This was mitigated by good performances in other roofing activities, in particular waterproofing, where revenues grew by 13.5% to £6.2 million. Growing demand for market-leading ZinCo green roof systems had a “pull-through” effect on waterproofing membranes such as Hydrotech or Derbigum. Green roofs are being increasingly specified by architects because they provide thermal benefits, absorb rainwater, and reduce run-off and have attractive aesthetic characteristics. Alumasc's “green product” range within the roofing area was widened through the introduction of Derbigum Brite, a white-coated waterproofing membrane, which reflects heat from flat roofs. Roof-Pro, the business acquired by Alumasc in 2004, had a very good year. Specifiers and building owners are increasingly recognising the benefits of Roof-Pro's modern support systems that elevate building services such as air conditioning and cooling units above the waterproofing layer on flat roofs, thereby enabling lower maintenance and refurbishments costs over the lifespan of the roof.

Revenues from businesses where products are sold mostly into the social housing refurbishment sector fell by around £3.5 million to £11.8 million, due to delays in funds being released by local government. Whilst the recovery in demand hoped for in the second-half of 2006/07 did not materialise, there are signs of a modest uplift in activity early in the new financial year. Demand weakness in this sector led to increasing competitive pressure, particularly for Pendock profiles, following the entry of new competitors into the market in recent years. Alumasc has responded by re-focusing its sales activity and commencing in-house production of profiles in order to reduce costs and to protect margins.

Revenues from Timloc products, which are sold primarily in the new house building sector, showed good growth, increasing by more than 10% to over £5 million. This business, acquired by Alumasc in 2004, achieved its improved revenue performance against a flat marketplace by expanding its product distribution and increasing its market share. During the year Timloc was also successful in broadening its product range, whilst improving cost efficiency through investment in further automation.

Export demand for Elkington Gatic's access covers was exceptional, particularly as a result of orders from a number of major airport projects in the Middle East and the Far East . The latter benefited Elkington China , the marketing company based in Hong Kong . Scaffold and Construction Products had a good year, with strong underlying demand for core products such as props and jacks and additional growth from products added to the product range such as ladders.

Engineering Products Division

Engineering Products' revenue grew by 12.3% to £44.0 million, of which some 4% related to selling price inflation, principally the pass-through of increased aluminium costs, and around 8% was underlying growth. Divisional operating profit improved by 2.0% with both businesses in this division, Alumasc Precision and Alumasc Dispense, ahead of the prior year. Operating margins reduced from 5.4% to 4.9%, mainly due to cost inflation, which it was not possible to recover fully from customers.

Alumasc Precision had a strong start to the year, with first-half performance resurgent following the ramp-up of new projects with non-automotive diesel engine manufacturers that mitigated the impact of the collapse of MG Rover in 2005. With some older established projects, such as for Land Rover, coming to an end during the year, and not being replaced at the same rate by new projects, the second half-year was tougher. Management continued to focus on quality, customer service and cost reduction, with encouraging progress on all three measures in the second half. Some of the business transferred from Copal Casting last year has proved not to be sufficiently profitable and this, along with other lower valued added work, is being increasingly outsourced to the Far East .

Nonetheless, some exciting new projects are coming on-stream, including a complex windshield surround for Aston Martin and a number of aluminium and zinc components for the same customer. New components for Caterpillar, which are being shipped to the USA , are also due to come on-stream in 2007/08. Alumasc continues to win work outside the diesel engine market. Examples include high-performance hi-fi speaker components for Bowers & Wilkins, and components for Siemens and Rotork. Investments have been made in new machines and cells, where needed, to support new work and in equipment that will reduce overall energy use in the foundry whilst also improving health and safety.

Alumasc Dispense, a supplier to the drinks industry, had a relatively quiet year, albeit both revenue and operating profit improved despite no new major bespoke projects. Sales of decorated glassware were much stronger, but this work has less value added and has a lower margin. A particular highlight was the winning of a decorated glass contract for the Magners cider brand. Alumasc Dispense continues to be innovative in the design of new products, particularly in wireless illumination of point of sale display and in high performance niche beer coolers. There are plans to strengthen the sales team to ensure these new products realise their potential.

Discontinued Operation: Disposal of Brock Metal

On 29 June 2007, Alumasc disposed of the Brock Metal business to Chelyabinsk Zinc Plant (“CZP”) for a final cash consideration of £8.9 million, higher than originally envisaged due to a greater level of working capital at completion. The consideration was equal to the net book value of the assets being transferred. Alumasc retains ownership of Brock's freehold factory near Cannock , which is being leased for a 15 year period to CZP. All of Brock's existing management team and employees transferred with the business.

The disposal of Brock was a strategically important step for Alumasc, and enables the group's management to focus further on growing higher margin core premium building and precision engineering products businesses.

Whilst Brock was never loss making under Alumasc's ownership, operating margins were low, and return on investment over the last few years had been at, or below, the group's cost of capital on average.

Nonetheless, Brock had an exceptional final trading year in Alumasc, benefiting from worldwide zinc prices that peaked at almost three times their levels in the previous year. This, together with high volatility in market prices and relatively high premiums for physical zinc supplies, allowed Brock to increase its operating margins from 1% to 3.6% and to generate operating profit before tax of £2.1 million (prior year £0.4 million). Towards the end of its period under Alumasc's ownership, conditions in the zinc market were beginning to become less favourable and, with it, Brock's profitability began to reduce from levels experienced during the winter.

As Brock is fundamentally a commodity business, its operating margins were much lower than those for the rest of the Alumasc Group. Consequentially the classification of Brock as a discontinued operation in our accounts this year increased the return on sales from the group's continuing operations in 2006 from the 6.7% published last year to 9.1% published in this year's comparative figures.

Prospects

The Group entered the new financial year with stronger order books than a year ago. In particular, the Building Product companies are ahead of the prior year.

Rising interest rates globally and in the UK , and their impact particularly on activity levels in the UK building and construction sector, are a key concern, although demand does not appear to have been affected to date.

Whilst aluminium costs on the world markets have become more stable recently, duties on imports of aluminium and steel from the Far East are on the rise, and other material cost inflation, for example zinc, lead, polymers and insulation, remains persistent. General inflation in the UK has also risen. However, the group has largely locked in its energy costs for most of the current year at lower rates than in 2007.

The market environment for the Engineering Products businesses is demanding, with customers insisting on ever-increasing quality standards at lower cost. The focus in the new financial year is on continued cost reduction and efficiency, including outsourcing lower value added work to the Far East , whilst working hard to ensure the successful introduction of new contracts, especially components for Aston Martin and Caterpillar, and seeking to win further new customer accounts and contracts.

Alumasc will benefit from a full year's Levolux profit contribution in 2008 although in the current financial year, after incremental financing costs, this might not fully replace the exceptional level of profit generated by Brock in 2007. Nonetheless, the early signs from Levolux are encouraging, and order books have strengthened since its acquisition in May. Levolux is anticipated to be earnings enhancing in 2008.

The Building Products division more generally is well positioned to benefit from a number of industry-specific and public policy factors in the UK which could drive demand in the coming year and beyond, including:

• A growing awareness of the importance of sustainability and life-cycle cost in building decision-making;
• Building regulations, including Document L and energy performance certification requirements, which encourage the construction of more energy efficient buildings, including superior insulation and acoustic performance;
• The government's Decent Homes and Building Schools for the Future initiatives. However, as we have seen this year, the timing of the release of funds to these initiatives can be unpredictable;
• The government's objective to build more homes in the UK ;
• Extremes of weather, whilst disruptive to construction sites and leading to greater lumpiness or seasonality of sales in the short-term, could drive increasing demand for Alumasc's solar shading, rainwater, drainage and roofing products; and
• Construction activity in London will increase ahead of the Olympics in 2012.

Summary

In the last few years the group has worked proactively to focus on higher added value and sustainable niche markets. It will continue to move forward through investment to achieve organic growth while supplementing this with the acquisition of building product companies which have strong market positions. Sustainable building products are of particular interest to the group. More generally the characteristics of premium building products with high levels of specification and the ability to differentiate through excellence in service and technical support, combined with good cash generation and low levels of capital requirement, are attractive features that fit the group's more clearly defined profile.

Following the acquisition of Levolux, the sale of Brock, and developments elsewhere in the group during 2007, Alumasc's current portfolio of businesses is stronger and has greater medium and long-term potential than those of a year ago.

G P Hooper
Chief Executive

Published Wednesday 12th September 2007