The reader is advised to perform their own research to confirm the accuracy of the information contained in this report before relying on it for any investment decision making. This report has been prepared as a ‘class service’ as defined by the Financial Advisers Act and is general in nature. Page | 1 1 Opening Comment Dear Reader We would personally like to thank you for taking the time to read this report. We, at Armillary Private Capital, trust it provides some insights into the performance of listed NZ companies and make you think about how you can apply the methodology used in your own business.

The methodology we have used in this report was developed by Du Pont Corporation and therefore is not proprietary to us. As it is simple to apply, anyone who understands the methodology can use it. We regularly use this methodology as a tool in our client engagements and in our financial training curriculum. Useable benchmarks to compare businesses are difficult to find in NZ as there is no central database of information available about business performance in general. Accordingly we hope that this report can be used to assist with benchmarking and performance expectations.

We are certain that some of the insights from this report will make you pause and think. We see this report and analysis as an introduction to Return on Capital Employed (ROCK) over the NZ listed market and look toward to being able to extend the depth to the analysis in torture years. We believe that by using the analysis and the insights provided by it, businesses can focus upon value creation. We would like to thank David Hill, our summer intern for his efforts in compiling this information. Yours sincerely Armillary Private Capital David Wallace Managing Director Page | 2 2 Executive Summary

Every business regardless of its’ size or function needs to measure its performance and once measured, benchmark itself against its peers in the market. This, however, can be difficult as it’s hard to find a tool that not only allows for both inter-company and interactions comparisons that can also be used year-in, year-out as a consistent basis for performance measurement. Return on Capital Employed (ROCK) is one such tool that can be used for such comparisons as it is a consistent measure of performance from year to year.

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ROCK is a measure of business efficiency and is a function of profitability and activity. Profitability is a measure of how much a business is earning before interest on debt and tax (Earnings before interest and tax or BIT). Activity measures how much the business has invested in operating assets to generate that level of earnings. This report presents an explanation of ROCK and an analysis of ROCK for Issuers with primary listings on the NZ, ANZA and Unlisted for 2009, 2010 and 2011. The data has been compiled by Armillary Private Capital.

ROCK is a function of profitability, how much profit a business generates before interest on debt and tax ( BIT) and activity, how much a business has invested in operating assets to generate that level of profitability. In the sass’s Du Pont Corporation developed what is commonly known as Du Pont accounting and ROCK as a measure of business performance to enable it to compare the performance of its many different business units. The Du Pont accounting method is a powerful and relatively simple approach to determine the impact of management decisions on financial performance.

The advantage of this method is that it provides consistent form of evaluation for a business to use when measuring performance. At an individual business level ROCK. – – – – – – allows comparison between business units of different size over time; shows where to invest further and where to cut back; shows whether it is worth borrowing further to invest; shows if expectations of shareholders are being met; indicates the maximum sustainable growth of a business; and is used to track whether or not a project is performing according to plan.

ROCK can be used to test operational efficiency, balance sheet management efficiency and the adequacy of return on total capital employed to make an assessment of a business’s performance. ROCK can be used to help management improve both the profitability (BIT) and balance sheet management. Improvements in these areas will lead to improvements in the Return on Capital employed. Page | 5 calculating ROCK It is important to note that some changes need to be made to traditional thinking to gain the benefits of this dynamic approach.

To achieve this there are two concepts that need to be considered: Concepts (I) The separation of funding from operating decisions Consider the traditional formula for presenting financial statements. EQUITY = (Current Assets + Cash – Current Liabilities) + Non-current Assets – Debt In order to calculate ROCK, all forms of funding need to be removed from the right hand side of the equation. Total net assets should be void of any external funding or debt thereby representing the true value of scarce resources employed in the business.

The financial analysis format can now be structured as follows. DEBT – CASH + EQUITY = (Current Assets – Current Liabilities) + Non-Current Assets TOTAL CAPITAL EMPLOYED (ETC) = TOTAL NET OPERATING ASSETS (TAN) The movement in TAN reflects operating hinges made to the employment of scarce resources, whilst net Debt (debt – cash) and Equity reflects how these changes are funded. It should be noted that where the directors of a business elect to retain minimum levels of cash this cash should be included in TAN. It) Balance sheet efficiency – ACTIVITY RATIO. Definition: Formula: A measurement of how well the business manages its scarce resources Revenue Total Net Assets Page | 6 The Activity Ratio is a measure of how many times a business turns over its TAN in a financial year. By way of example, an Activity ratio of 2. 5 meaner that for every $1 invested in TAN the cuisines produces $2 50 in sales. It answers the question to whether or not the net operating assets are being utilized efficiently in the production of income.

The activity drivers are: – – – – Stock, Work in Progress, Inventory – the value of raw materials, work in progress and finished goods the business holds; Trade Debtors – how much the business has locked up in sales revenues receivable; Trade Creditors – how much the business owes to its suppliers for goods and services provided; Non- Current Assets – how much is invested in plant and equipment and intangible assets is required to operate the business and produce the goods sold.

Other current assets and liabilities such as prepayments and accruals are included in trade debtors and creditors. Adjusting one or more of the activity drivers will increase or decrease the Activity ratio and therefore improve or worsen ROCK. (iii) Operational Efficiency – PROFITABILITY MARGIN. Definition: Formula: A measurement of the Return on Sales purely from an operating perspective. Earnings before interest & tax Revenue The above formula ignores the impact of funding and concentrates on the entity’s ability to produce a return from revenue.

The four key profitability drivers are: – Price how much a business receives for the goods it sells; page | 7 – Volume – how many goods the business sells; Cost of Goods Sold – how much it costs the business to produce the goods it sells; and Expenses – the overhead expenses of the business. Adjusting one or more of the profitability drivers will increase or decrease the profitability ratio and therefore improve or worsen ROCK. (iv) Return on Capital Employed – ROCK The link between the Balance Sheet and Profit & Loss is dynamically reflected in ROCK.

Definition: The percentage return yielded from the employment of scarce resources in the form of profit before interest and tax Formula: BIT TAN OR profitability x Activity The interactive nature of this ratio is seen in the alternative formula as the product of Profitability and Activity. Operational and Balance Sheet efficiency are brought to life in one single ratio. This should be the first area of review in the process of corporate performance assessment, and it should be determined as to whether or not ROCK is adequate and which to its components weaknesses of the financial strategy.

Page | 8 contribute to boot the strengths an Irrespective of the type of industry ROCK should at least be equal to or greater than he weighted average cost of capital (WAC) in order for a business to create shareholder value. Example: Revenue BIT Profitability Ratio TAN Activity Ratio ROCK 100,000 10,000 50,000 XX x 2 = It is worth noting that average TAN for the period over which Revenue and BIT are derived will give a better result that Just considering TAN and the end of the period being measured. It should also be remembered that ROCK does not change when EQUITY is substituted for DEBT.

This highlights the impact of a true operational performance measurement. (v) Interfacing Profit and Loss/(Cash) with the Balance Sheet The Balance Sheet is Just a snapshot of the assets and liabilities of a business at a point in time. However its interaction with profit and loss, through Earnings Before Interest and Tax (BIT), provides the platform for developing a totally dynamic analytical structure. Two businesses, producing the same sales and return on sales can be viewed from an operational point of view as being identical even if one were funded by debt and the other by equity.

This is because the cost of borrowing is purely a financial issue. Page | 9 ROCK Uses ROCK can be used in many ways by organizations and management names as a performance measure and as a tool when preparing budgets and valuations. One of these ways is that the management team may set ROCK goals for either the entire organization or its sub-units and decision making in respect of investing in new projects to ensure that the business is performing at a level that is greater than WAC. ROCK is also able to be used to set up a performance remuneration plan for management and employees.

As it is simple to calculate, ROCK provides a transparent model for such programs. Budgeting and Valuation Businesses and analysts often make an underlying error in budgeting or forecasting business ordnance and hence a business valuation . When under retaking a valuation the biggest error usually arises from utilizing overly optimistic forecasts. Discount rates are generally less susceptible to such errors. Consider the following 4 charts which simplistically compare Profitability, Activity, Cape to Revenue and ROCK ratios for a mature business and a growth business.

The underlying issue is that most budgets for mature businesses more than often assume expanding profitability, increasing activity, reducing levels of capital expenditure for every dollar of sales and therefore increasing ROCK. More often than not a mature business is unlikely to see these improvements on an ongoing basis. While some improvement is always possible continuous expansion is unlikely to be experienced on an ongoing basis and the art of getting the forecasts correct is challenging such ongoing expansion assumptions. Forecasts for growth businesses often have the opposite issues.

It is rare to find a business in NZ that can achieve BIT margins in excess of 20% on an ongoing basis. At those levels competitors are likely to enter a market and customers generally start looking elsewhere or in-housing the supply. Revenue growth will also demand lock p in working capital and additional fixed assets to support the growth. Therefore to create robust forecasts for a growth business at some Juncture these charts are likely to level out and this leveling is usually earlier than anticipated generally because the business becomes loose with expenditure. Page | 10 Profitability 1 23456 Mature Growth Activity 4. 3. 0 2. 0 1. 0 0. 01 23 Mature 4 5 6 Growth Cape/Revenue 1 23 ROCK What is a “Good” ROCK ROCK is a measure of a company’s profitability and its activity. Quite simply a good ROCK is a level that exceeds the weighted average cost of capital for the business. Where this is the case the business will be creating value for its shareholders. Page | 11 4 Discussion of Results The following tables and charts summaries the findings of our ROCK analysis for Issuers on NZ, ANZA and Unlisted. Interestingly, the overall results were negatively impacted by a small number of Issuers that had large negative BIT margins.

Therefore, on a number of occasions we have reduced the impact of these Issuers by identifying them as outliers and adjusting for their impact. 2011 Top 10 The following table sets out the top 10 Issuers based on 2011 ROCK and includes an interesting mix f retailers and service entities across a variety of sectors. Top 10 – 2011 Performance Kisser Fronded Hailstone Brioche Opus New Image Mainframe’s Scott Technology Vehicle Inspection Restaurant Brands Stack Market Unlisted NZ NZ NZ NZ NZ NZ unlisted NZ unlisted ROCK 2009 ROCK 2010 ROCK 2011 9. % 46. 1% 23. 8% 45. 3% 428. 1% 42. 0% 21. 3% (27. 0%) 21. 2% 18. 8% (84. 8%) 82. 1% 47. 6% 57. 0% 142. 4% 34. 4% 36. 1% 50. 8% 32. 3% 22. 0% 124. 7% 61 55. 8% 52. 4% 51 42. 8% 40. 4% 38. 2% 38. 1% 37. 7% Fronded presents an interesting top performer that had a xx Activity Ratio in 2011 (up room xx in 2010) with a 4% Profitability ratio, whereas Brioche had a 2011 Activity Ratio to 7. Xx Witt a 7 page | 12 Looking at the top 10 on a three year average basis again shows a high proportion of service related issuers featuring.

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