Hill & Smith Holdings PLC

 

PRELIMINARY AUDITED RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2012

 

 

Hill & Smith Holdings PLC, the international group with leading positions in the manufacture and supply of infrastructure products and galvanizing services to global markets, announces its preliminary audited results for the year ended 31 December 2012.

 

 

Performance highlights

 

	2012	2011	% change
Revenue	£440.7m	£406.2m	8.5
Underlying* operating profit	£44.0m	£41.5m	6.0
Underlying* profit before tax	£40.4m	£37.4m	8.0
Profit before tax	£35.2m	£25.4m	38.6
Underlying* earnings per share	38.8p	34.5p	12.5
Basic earnings per share	33.9p	20.9p	62.2
Full year dividend	15.0p	13.2p	13.6
Net debt	£86.8m	£103.8m

 

* All underlying profit measures exclude certain non-operational items, which are defined in note 1, "Basis of preparation", to the attached financial statements.  References to an underlying profit measure throughout this preliminary results announcement are made on this basis. 

 

 

Key points:

 

·     Revenue growth of 8.5% with strong performance from both Infrastructure Products and Galvanizing Services

 

·     Underlying profit before tax up 8.0%

 

·     76% of profits generated from overseas operations, including 50% from the USA, one year ahead of plan

 

·     Significant reduction in net debt, down £17.0m to £86.8m

 

·     Dividend increased by 13.6%

 

 

Derek Muir, Chief Executive, said:

 

"I am pleased to report another strong performance from the group's infrastructure products and galvanizing services businesses.

 

"Our strategy of complementing organic growth with selective acquisitions, combined with our significantly greater international spread, resulted in the continued generation of increased earnings, dividends and shareholder value.

 

"Overall 2013 has started slowly, which will lead to earnings being weighted towards the later part of the year, nevertheless the board remain confident that our international diversity will continue to provide resilience in the short term and significant organic growth in the medium to longer term."

 

 

 

 

 

 

For further information, please contact:

 

Hill & Smith Holdings PLC	Tel:   44 (0)121 704 7430
Derek Muir, Group Chief Executive
Mark Pegler, Group Finance Director
MHP Communications	Tel:   44 (0)20 3128 8100
John Olsen / Barnaby Fry / Vicky Watkins

 

 

Notes to Editors

 

Hill & Smith Holdings PLC is an international group with leading positions in the design, manufacture and supply of infrastructure products and galvanizing services to global markets.  It serves its customers from facilities principally in the UK, France, USA, Thailand, Sweden, China, India and Australia.

 

The group's operations are organised into three main business segments:

 

Infrastructure Products - Utilities, supplying products and services such as pipe supports for the power and liquid natural gas markets, energy grid components, "GRP" railway platforms, plastic drainage pipes, industrial flooring, handrails, access covers and security fencing.

 

Infrastructure Products - Roads, supplying products and services such as permanent and temporary road safety barriers, street lighting columns, bridge parapets, gantries, temporary car parks, variable road messaging solutions and traffic data collection systems.

 

Galvanizing Services which provides zinc and other coatings for a wide range of products including fencing, lighting columns, structural steel work, bridges, agricultural and other products for the infrastructure and construction markets.

 

Headquartered in the UK and quoted on the London Stock Exchange (LSE: HILS.L), Hill & Smith Holdings PLC employs some 3,600 staff across 51 sites, principally in 8 countries.

 

 

 

Chairman's Statement

 

Overview

I am pleased to report another strong performance from the group's infrastructure products and galvanizing services businesses.

 

The group's strategy of complementing organic growth with selective acquisitions, combined with the reshaping of the group over the last five years, has resulted in increased earnings, dividend and shareholder value in 2012.

 

Our international businesses have been the foundation of the performance in 2012, providing a diversity of markets and income streams.  The group has now achieved its target of 75% of profits derived from its overseas operations, one year earlier than the target of 2013. 

 

The innovative and entrepreneurial culture of the group continues to drive our success in competitive markets and challenging economic conditions and I would like to thank all our employees for their support and efforts during the year.

 

Performance highlights

 

	2012	2011	% change
Revenue	£440.7m	£406.2m	8.5
Underlying operating profit	£44.0m	£41.5m	6.0
Underlying profit before tax	£40.4m	£37.4m	8.0
Profit before tax	£35.2m	£25.4m	38.6
Underlying earnings per share	38.8p	34.5p	12.5
Basic earnings per share	33.9p	20.9p	62.2
Full year dividend	15.0p	13.2p	13.6
Net debt	£86.8m	£103.8m

 

Further commentary on these results and the divisional performance is contained in the business review section.

 

Dividends

In view of the strong performance, the board is recommending a final dividend of 9.2p per share (2011: 7.8p per share) making a total dividend for the year of 15.0p per share (2011: 13.2p per share) an increase of 13.6%.

 

We continue to perform at levels that enable us to maintain a progressive dividend policy that has increased dividend payments by an average of 10% in each of the last five years.  Underlying dividend cover is a healthy 2.6 times (2011: 2.6 times).  The final dividend, if approved, will be paid on 5 July 2013 to those shareholders on the register at close of business on 31 May 2013.

 

Governance

Key to the management of our international group is effective corporate governance.

 

As chairman I aim to ensure that the board and our governance are as effective as possible.  I have a strong experienced board, with a balance of skills appropriate to the scale and nature of the group and with a clear focus on:

 

-      strategic development

-      the risks involved in achieving that development

-      the international diversity of the group

-      a good understanding of the group's operations

-      performance at all levels

 

We have continued to make progress on the effectiveness of our governance with a greater focus on time dedicated to strategy, operational site visits, risk management and the compliance programme for an internationally diverse group. 

 

Outlook

Trading in the USA remains strong with good order backlogs in our Utilities businesses.  USA galvanizing is expected to perform at similar record levels to 2012 plus additional revenues from the increased capacity of the new plant in Ohio.

 

With the UK Government spend on roads now expected to increase and without the adverse impact of the Olympics this year, we expect to benefit from up to six managed motorway projects running throughout 2013.  Furthermore, the number of UK water industry AMP5 projects for large diameter pipework, outfalls and attenuation tanks to prevent flooding, continues to be encouraging.   

 

The prospects for our Bergen Pipe Supports businesses are mixed with good levels of demand in the emerging markets and ongoing weakness in the USA.

 

We retain an element of caution about the level of economic uncertainty within Europe which is impacting our galvanizing and lighting columns operation in France.

 

Elsewhere in the group we have seen a reduction of large project work, as many of the orders for such projects were in place in 2012.  However, we continue to tender for new projects and anticipate these being awarded and delivered in the second half of 2013. 

 

Overall, 2013 has started slowly, which will lead to earnings being weighted towards the later part of the year, nevertheless the board remains confident that our international diversity will continue to provide resilience in the short term and significant organic growth in the medium to longer term.

 

Shareholder communication

We hold our AGM on 15 May 2013 and it is an excellent opportunity for shareholders to meet the board and certain senior executives of the company. If you are able to attend my colleagues and I will be delighted to see you.

 

 

Bill Whiteley

Chairman

12 March 2013

 

 

 

 

Business Review - our strategy

 

Balanced profitable growth

Our strategy is to deliver balanced profitable growth through the supply of Infrastructure Products and Galvanizing Services.  Our objective is to deliver at least mid, single-digit balanced organic revenue growth which, combined with selective acquisitions, will deliver growth in earnings per share. A strong focus on cash generation supports this growth strategy and enables a progressive dividend policy.

 

In the Infrastructure Products division, our focus is on businesses which supply into the Utilities and Roads markets, both of which enjoy long term growth dynamics.  Our businesses have niche positions, high margins and provide us with access to global markets. 

 

In Utilities, our focus is on the power generation, oil and gas and water sectors, capitalising primarily on the growing demand for new power generation in emerging markets and the replacement of ageing infrastructure in developed economies.

 

In Roads, we will continue to strengthen our position as an international supplier of road safety products into markets with strong infrastructure spend and regulatory controls, leveraging our products developed to European and US standards.

 

In the Galvanizing Services division, which serves external customers as well as our own Infrastructure Products businesses, we are focused on our existing geographies of the UK, USA and France.  Growth will be achieved through increasing our geographical footprint in the USA and through potential consolidation opportunities in the UK and France.

 

Geographic diversification

Our target was for operating profit from manufacturing plants located overseas to reach 75% by 2013 and then to remain at or close to this level; this target was exceeded in 2012.  Our overall geographic mix will be dictated by a focus on further growth in emerging markets, whilst recognising that opportunities still exist in our major developed markets of the UK and USA.

 

We also aim to continue to reduce our dependence on UK Government spend, now at 11% of group revenue compared to 24% in 2010. As our focus is on international growth, this percentage is now likely to remain stable despite the anticipated recovery in UK roads investment in 2013.

 

Target returns and leverage

Operating margins are an integral measure of the group's success and one which we will continue to drive for improvement.  Improved product mix and value-added customer-focused solutions, as well as high levels of operational efficiency, are important drivers of operating margin improvement.

 

Our target operating margin for a business unit is 10%, although a lower margin profile may be acceptable if that business's return on invested capital (ROIC) is above 20%.  A period of grace will be granted to business units which can demonstrate a plan for margin improvement to the targeted level.

 

We aim to create value by consistently exceeding this 20% benchmark for ROIC.  There is currently an increased focus across the group for all individual business units to improve working capital and ROIC.

 

We aim to operate with an efficient balance sheet by maintaining debt at between 1.5 and 2.0 times EBITDA, which in turn allows us to complement balanced organic growth with value enhancing acquisitions.

 

Active portfolio management

Our strategic objective is to develop more substantial businesses in each of our chosen sectors through both organic and acquisitive growth.  This, consequently, leads us to continually examine the smaller and lower performing units within the portfolio.

Our acquisition strategy is to buy businesses in markets we understand through our existing activities. The majority of targets are likely to be privately owned.  We will also look at acquiring distressed businesses in the UK which complement our existing operations and therefore enable us to consolidate our market position.  This in turn will allow us, in some instances, to develop our smaller business units into larger and more dominant market players.  Overseas acquisitions must have a high quality existing management team in place and a proven earnings stream as it is more demanding to manage distressed businesses effectively from a distance.

 

We will continue to dispose of or rationalise operations that are either non-core to the strategy set out above, or incapable of achieving our target returns, or insufficiently cash generative.

 

Entrepreneurial culture

We encourage an entrepreneurial culture in our business through a decentralised management structure. We provide our management teams the freedom to run and grow their own businesses supported by the resources available through being part of a larger group, whilst adhering to the levels of governance and controls appropriate for a quoted company.   This culture ensures that decisions are made close to the market and that our businesses are agile and responsive to changes in their competitive environment.

 

Review of 2012

 

Overview

The overall performance of the group for 2012 was in line with the outlook statement given at the time of our interim results in August 2012 and reiterated in our November 2012 interim management statement.

 

The year on year comparatives reflect strong organic revenue growth within Infrastructure Products particularly in the Utilities division where we have an international footprint, offset partly by a weaker performance in the Roads division due to the London Olympics.  Galvanizing saw a robust performance from France and the UK and an outstanding performance from the USA.

 

The international diversity and strength of our businesses within their respective markets, especially in the USA aided our performance.  Profits from the USA operations represented 50% of underlying operating profits (2011: 32%) and in total 76% of profits were generated from operations outside the UK (2011: 65%).

 

Revenue for the year increased by 8% to £440.7m (2011: £406.2m).  Organic revenue growth, at constant currency, was 7.4%.  Adjusting for the net £9.2m revenue arising from acquisitions and disposals, revenue increased by £25.3m to £431.5m (6% higher than 2011).  Underlying operating margin was relatively constant at 10.0% (2011: 10.2%).  Strong organic growth resulted in underlying operating profit increasing by 6% to £44.0m (2011: £41.5m).  Acquisitions accounted for £0.9m of the growth in underlying operating profit.  Underlying operating profit before taxation was higher at £40.4m (2011: £37.4m).

 

Infrastructure Products

The division is focused on supplying engineered products to the roads and utilities markets in geographies where there is a prospect of sustained long term investment in infrastructure.  In 2012 the division accounted for 73% (2011: 68%) of the group's revenue and 43% (2011: 48%) of the group's underlying operating profit.

 

Revenues increased by 16% to £319.8m (2011: £276.1m).  Margins declined by 140 basis points to 5.8% (2011: 7.2%) due primarily to higher than anticipated costs and operational difficulties for our new lightweight gantries and lower profitability in roads, due to the Olympics.

 

Utilities

The requirements for new power generation in emerging economies and replacement of ageing infrastructure in developed countries, provide an excellent opportunity for the group's utilities businesses.

 

Revenues increased to £205.7m (2011: £167.0m) which after adjusting for acquisitions and currency impacts, reflects 13% organic growth of £22.5m.  Underlying operating profit increased by £1.9m to £13.4m (2011: £11.5m) with acquisitions contributing £0.9m of the growth.

 

The organic growth was driven mainly by our US based businesses V&S Utilities and Creative Pultrusions, which benefitted from a more active USA utilities market.

 

V&S Utilities manufacture substation structures which are in demand due to the long awaited upgrade to the USA power grid together with the requirements placed on the grid to connect through to the solar and wind renewable sectors.  During the year we supplied complete substation packages to the North Bloomfield project for Northeast Utilities and, as part of the Texas CR62 project (Competitive Renewable Energy Zones), also supplied substation structures to AEP.  There remains good visibility in this arena and we have entered 2013 with a strong order book.

 

Creative Pultrusions, our composites company in the USA, achieved a record performance delivering a number of large projects in the transmission, rail and cooling tower markets.  Over the year we further developed high value products for niche markets.  These products are lightweight, corrosion resistant and offer improved installation times, thereby substituting traditional materials.  There is a growing demand for composite products and this was evident in the supply of 85 railway platform extensions for the upgrade to the Wessex Line in the UK.  The first half performance was assisted by two large projects, one of which, the supply of ballistic panels to the US Department of Defense, is unlikely to be repeated. 

 

Bergen Pipe Supports is the largest business within the Utilities division, with a global manufacturing footprint.  Bergen designs and manufactures large industrial pipe supports for gas, coal and nuclear power plant applications around the world.

 

Manufacturing plants in the USA were successful in growing their business supplying support to petrochemical plants, power station upgrades and a major MOX nuclear weapons decommissioning plant under construction in South Carolina.  There remains a hiatus on the decision of fuel type for new power plants in the USA due to the abundance and low cost of shale gas.  We expect more enquiries for large gas power plants later in the year.

 

In August 2012 we completed the construction of our Indian factory near Chennai, which was built to supply the growth markets of power generation in India.  During the year we supplied supports to three large coal-fired power stations in India from our plants in the UK and Thailand.  This created operational challenges in the second half of the year as we worked through a record order book.

 

We ended 2012 with an order book of £16m (2011: £10m) which has continued to grow in the first two months of 2013.  New orders have been particularly encouraging from our Global Supply Agreements for key projects in Australia and the Middle East.

 

We have strengthened the international experience of the Bergen management team with the recruitment of Andrew Logue from Siemens.  This will also assist the integration of our acquisitions as we harmonise our routes to market.

 

The UK Water Industry's Asset Management Programme (AMP5) is now in its third year and our order book remains strong for large diameter plastic pipework, storm attenuation tanks and sewage outfalls.  The increased risk of flooding and improving housing markets will see demand for our products remain strong for the foreseeable future.

 

Access Design, which manufactures and installs secondary steelwork, industrial flooring and handrails to AMP5 projects, started with a record order book, but the UK contracting arena has proved very challenging. We have taken action to reduce our exposure in contracting and concentrate our efforts in manufacture and supply only of industrial flooring.  This has resulted in a cost reduction exercise, including a number of redundancies announced since the year end.

 

Large orders were received for our enhanced security products Stronguard and Bristorm to a gold mine in the Dominican Republic and an aluminium smelter in Saudi Arabia, which demonstrates our products are specified by clients who are required to protect their strategic assets.  This is a growing international market where products from the UK are being specified for major projects.

 

Demand has continued for our newly developed solar panel mounting system which was supplied to projects in Germany, Belgium, Greece and the UK.  Whilst the feed in tariffs have been reduced, lower solar panel prices have assisted the viability of the projects.  We expect the UK to be our main market in 2013 as a number of large schemes are planned.

 

Our acquisition of Expamet Building Systems, a company based in Hartlepool supplying expanded metal products through the major builders' merchants and DIY retailers, has been integrated into Birtley Building Products, also based in the North East. The synergies of the two businesses are now being realised and the acquisition is already earnings enhancing.

 

Roads

Primarily in the UK, but with an increasing international presence, our Roads division designs, manufactures and supplies temporary and permanent safety products for the roads market.

 

Revenues increased by 5% to £114.1m (2011: £109.1m) representing 36% of the Infrastructure Products segment.  At constant currencies and adjusting for the effects of acquisitions, annual growth was £1.7m (2%). Underlying operating profit of £5.3m was £3.1m lower than the prior year (2011: £8.4m) with no material effect from acquisitions or currency movements.

 

As anticipated, a number of major roads schemes were completed ahead of the London Olympics.  There was reduced roadwork activity during both the Olympics and Paralympics which led to low utilisation of Varioguard, our temporary vehicle restraint system, in the second half of 2012.

 

Since the beginning of 2013 we have secured a number of long term rental contracts for Varioguard on major Managed Motorway Schemes and lane widening contracts.  The largest of these schemes is on the M25 where there is currently 30km of Varioguard, which will rise to 60km in the second quarter.  We anticipate the utilisation of Varioguard to return to more normalised levels in 2013.

 

To compensate for the reduced activity in the UK we promoted our European and USA tested road restraint systems into Australia, the Middle East and Scandinavia.  As a result a number of large projects were won and completed in 2012.  Our newly formed company in Australia provides an excellent foundation for future growth where we are awaiting final approval for Zoneguard and where is it already established in the rental market for temporary steel barriers. 

 

In the USA we ended the year with the strongest utilisation of Zoneguard to date.  This is a result of our activities in the Southern States where construction is carried out throughout the year.  We are continuing to establish distributors for Zoneguard in States where full approval has been granted and we anticipate a combination of sales and rentals going forward. The utilisation levels in 2013 have so far been encouraging and we expect to benefit from a two-year USA Roads Bill put in place at the end of 2012, which calls for the use of additional barriers in work zones.

 

Profitability in our lighting column businesses in France and the UK benefitted from our investments, the additional volumes from five lighting column PFI's secured in 2011 and a further PFI project for Sheffield was won in the first half of 2012.  In France we are experiencing lower domestic demand due to the economic environment, however, further investment in a large automated press will reduce manufacturing costs and allow us to target more export projects.

 

Our first major motorway contract for new lightweight gantries was completed in 2012.  As previously reported at our interim results, the costs of the design, manufacture and installation for this project exceeded initial expectations.  A second project was manufactured later than the initial programme which resulted in sub-contracting the fabrication work, consequently leading to additional costs to complete the contract.  The experience and knowledge gained through this new programme has resulted in improved design and more robust contract controls.

 

Techspan, our electronic signage business, supplied £4m of road signage for the approaches to the new Forth Bridge Crossing.  We also supplied Varioguard, gantries and traffic data collection equipment to this project, which is similar to the managed motorway projects in England.  The Highways Agency have placed a small order for supply in the first quarter of 2013, however, there is currently no indication of a large bulk purchase order as the design and layout of the signs continue to evolve and are yet to be finalised. 

 

ATA, our Swedish roads business acquired in 2011, had a disappointing first half in 2012.  Market conditions however, improved in the second half when we were successful bidders on larger roads projects.  We expect a stronger performance in 2013 as our highway products from the UK become more established in this geography.  During the year we established a branch of ATA in Norway to further penetrate the Scandinavian market.

 

Galvanizing Services

Offering corrosion protection services to the steel fabrication industry with multi-plant facilities in the UK, France and USA, Galvanizing Services now accounts for 27% (2011: 29%) of the group's revenue and more significantly 57% (2011: 52%) of the group's underlying operating profit.

 

At constant currency, revenues increased 5% to £120.9m (2011: £118.5m) whilst operating profit was higher at £25.3m (2011: £21.6m).  Margin improvement in the UK and USA resulted in an overall margin of 20.9% (2011: 18.2%).

 

Overall, galvanizing volumes were 5% ahead of 2011 primarily due to a strong performance in the USA.

 

USA

Located in the North East of the country, we are the market leader with six plants offering local services and extensive support to fabricators and product manufacturers involved in highways, construction, utilities and transportation.

 

Volumes increased 16% year on year, led by increased demand from utilities, transmission, bridge and solar sectors and a more positive trend on industrial production.  Zinc prices remained stable throughout the year and due to the additional volumes, operational efficiencies and lower cost base we were able to improve our profitability by 34%.  The construction of the new plant in Columbus, Ohio, was completed on time and on budget and will be fully operational in March 2013, providing improved operational efficiencies and adding an additional 40% capacity to the existing site.

 

A location for the next greenfield plant has been identified and is planned to be operational in the second half of 2014.  This is part of our organic growth strategy in the USA where galvanizing is a young market growing through specification and design, encouraging architects and engineers to move from painting to galvanizing.

 

France

France Galva has ten strategically located galvanizing plants each serving a local market.  We act as a key part of the manufacturing supply chain in those markets, and have delivered a high level of service and quality to maintain our position as market leaders.

 

Volumes remained stable at prior year levels assisted by a twelve month contract for galvanizing transmission and lighting poles for a manufacturer which is re-building its galvanizing plant.   Excluding the contribution from this one off contract, underlying volumes in France would have been lower by 6%.  Energy and employment costs were higher which resulted in a slight reduction in profitability.  We expect reduced volumes in 2013 due to the ongoing challenging economic climate in France.

 

UK

Our galvanizing businesses are located on nine sites, four of which are strategically adjacent to our Infrastructure Products manufacturing.

 

Compared to 2011, volumes improved by 4%.  The improvement took place in the first quarter of 2012, due to a mild winter and increased volumes of our own infrastructure products.  Later in the year we were encouraged by an improvement in the volumes of structural steel for car parks and waste to energy plants.  Volumes were also assisted by the Beauly to Denny transmission tower project which will run through 2013.  Operational improvements, together with the additional volumes resulted in improved profitability.  The market remains stable and volumes are expected to be similar in 2013.

 

Financial review

 

Income statement phasing

	First half	Second half	Full year
2012
Revenue £m	223.8	216.9	440.7
Underlying operating profit £m	22.7	21.3	44.0
Margin %	10.1	9.8	10.0
2011
Revenue £m	195.1	211.1	406.2
Underlying operating profit £m	18.2	23.3	41.5
Margin %	9.3	11.0	10.2

 

Revenue of £440.7m was £34.5m or 8% ahead of the prior year with acquisitions/disposals completed during both 2011 and 2012 contributing a net £9.2m additional revenue and £0.9m underlying operating profit. Organic revenue growth amounted to £30.0m, some 7% ahead of 2011. Underlying operating profit of £44.0m included organic growth of £2.3m, representing a 6% improvement on the previous year. Further details of the organic performance of the business are provided in the business review. The translation impact arising from changes in exchange rates, principally the US Dollar and Euro, reduced total revenue and underlying operating profit by £4.7m and £0.7m respectively.

 

As expected, in contrast with the second half weighted results in 2011, the phasing of revenue and underlying operating profit was more first half biased in 2012, principally reflecting the impact of the London Olympic Games on our Roads activity.  The performance in 2013 is expected to revert to being more weighted to the second half, as noted in the business review.

 

Cash generation and financing

The group again demonstrated its cash generating abilities with strong operating cash flow of £58.4m (2011: £35.3m), including a reduction in working capital of £3.7m (2011: £16.1m increase). The impact on working capital of zinc and steel commodity prices year on year was not material.  Working capital as a percentage of annualised sales improved to 14.7%, from 15.5% at December 2011, an underlying reduction of c.£3.5m taking into account the higher revenues. Debtor days were broadly similar to the prior year at 61 days (2011: 60 days).

 

Capital expenditure at £18.3m (2011: £12.6m) represents a multiple of depreciation and amortisation of 1.3 times (2011: 0.9 times). During 2012, the group expended £5.2m on a new build galvanizing facility in Columbus, Ohio, with a further £2.5m expected to be spent in 2013.  Other significant items of expenditure included £1.6m in respect of the new pipe supports manufacturing facility in India and £1.5m of new manufacturing equipment for the French lighting column operation, in furtherance of the group's organic growth plans. The group continues to invest in organic growth opportunities where returns exceed internal benchmarks.

 

The group measures its operating cash flow performance based on its underlying cash conversion rate, defined as the ratio of underlying operating cash flow less capital expenditure to underlying operating profit.  In 2012 the group achieved an underlying cash conversion rate of 101% (2011: 67%) and over the past five years has achieved an average rate of 95% despite a number of major capital projects being undertaken during that time.

 

Group net debt at 31 December 2012 was £86.8m, a decrease of £17.0m against 31 December 2011 (£103.8m) principally driven by the strong operating cash flow performance during the year. The group's net debt remains principally denominated in US Dollars and Euros which act as a hedge against the net asset investments in overseas businesses. Net debt decreased year on year by £2.5m due to exchange rate movements.

 

Change in net debt

	2012 £m	2011 £m
Operating Profit	39.2	32.9
Depreciation and amortisation*	16.4	16.8
Working capital movement	3.7	(16.1)
Pensions and provisions	(2.0)	(4.3)
Other items	1.1	6.0
Operating cash flow	58.4	35.3
Tax paid	(11.6)	(7.5)
Interest paid (net)	(4.3)	(7.7)
Capital expenditure	(18.3)	(12.6)
Sale of fixed assets	0.5	0.1
Free cash flow	24.7	7.6
Dividends	(10.2)	(9.8)
Acquisitions	(0.5)	(36.2)
Disposals	-	6.2
Net issue of shares	0.5	(0.7)
Change in net debt	14.5	(32.9)
Opening net debt	(103.8)	(70.6)
Exchange	2.5	(0.3)
Closing net debt	(86.8)	(103.8)

* Includes £2.4m (2011: £2.2m) in respect of acquisition intangibles.

 

In May 2011 the group announced the refinancing of its principal debt facility by entering into a new £210m five year multicurrency revolving credit agreement. The facility, provided on competitive terms, is funded by a syndicate of five leading banks which include existing and new relationships.

 

Maturity profile of debt facilities

 

	2012 £m			2011 £m
On demand	£15.7m		On demand	£12.8m
2013-2015	£3.1m		2012-2015	£7.1m
2016	£211.5m		2016	£215.4m

     

The principal facility matures in April 2016, which affords the group significant certainty in terms of its funding requirements for the foreseeable future. At the year end the group had committed debt facilities available of £214.6m and a further £15.7m in overdrafts and other on-demand facilities.

 

The principal debt facility is subject to covenants which are tested semi-annually on 30 June and 31 December. The covenants require that the ratio of EBITDA (adjusted profit before interest, tax, depreciation and amortisation as defined in the facility agreement) to net interest costs exceeds four times and require the ratio of net debt to EBITDA to be no more than three times.

 

The results of the covenant calculations at 31 December 2012 were:

 

	Actual	Covenant
Interest Cover	16.1 times	4.0 times
Net debt to EBITDA	1.5 times	3.0 times

 

 

Appropriate monitoring procedures are in place to ensure continuing compliance with banking covenants and, based on our current estimates, we expect to comply with the covenants in the foreseeable future. The facilities available to the group provide significant headroom against its expected funding requirements.

 

Finance costs

		2012 £m		2011 £m
Underlying net cash interest
- Bank loans/overdrafts	3.4		3.7
- Finance leases/other	0.2	3.6	0.4	4.1
One off financial expenses relating to refinancing
- Bank and legal fees	-		2.9
- Termination of interest rate swaps	-	-	0.4	3.3
Non cash
- Change in fair value of financial instruments	-		(0.1)
- Net pension interest	0.4	0.4	0.2	0.1
		4.0		7.5

 

Net financing costs decreased by £3.5m to £4.0m (2011: £7.5m).  Net financing costs in 2011 included one-off costs of £3.3m associated with refinancing the group's principal debt facility. The net cost from pension fund financing under IAS19 was £0.4m (2011: £0.2m) and given its non-cash nature continues to be treated as 'non-underlying' in the consolidated income statement. The underlying cash element of net financing costs decreased by £0.5m to £3.6m (2011: £4.1m) directly as a result of lower margins incurred on the principal debt facility triggered by lower levels of Net Debt : EBITDA, falls in LIBOR over the period and lower levels of average net debt generally. Underlying operating profit covered net cash interest 12.2 times (2011: 10.1 times).

 

The group has approximately 39% (2011: 30%) of its gross debt of £95.7m at fixed interest rates, either through interest rate swaps or finance leases. Interest rates are predominantly denominated in US Dollars, with smaller tranches of Sterling and Euros, and closely reflect the group's debt profile.

 

Return on invested capital (ROIC)

The group aims to maintain ROIC above its pre-tax weighted average cost of capital (currently around 9%), with a target return of 20%.  In 2012, ROIC increased to 15% (2011: 14%) as a result of improved profitability on a relatively stable asset base.    The group measures ROIC as the ratio of underlying operating profit to average invested capital.  Invested capital is defined as net assets excluding current and deferred tax, net debt, retirement benefit obligations and derivative financial instruments. 

 

Exchange rates

Given its international operations and markets, the group is exposed to movements in exchange rates when translating the results of international operations into Sterling.  Retranslating 2011 revenue and underlying operating profit using 2012 average exchange rates would have reduced the prior year revenue and underlying operating profit by £4.7m and £0.7m respectively.

 

Non-underlying items

The total non-underlying items charged to operating profit in the consolidated income statement amounted to £4.8m (2011: £8.6m) and were made up of the following:

 

Ø Business reorganisation costs of £0.8m (2011: £1.2m) - principally relating to redundancies and other costs associated with site restructuring, of which £0.5m were cash costs;

Ø Non-cash amortisation of acquired intangible fixed assets of £2.4m (2011: £2.2m); 

Ø Acquisition related expenses of £0.8m (2011: £0.7m) - costs associated with acquisitions expensed to the consolidated income statement in accordance with IFRS3 (Revised);

Ø A curtailment loss of £0.4m arising from the UK Defined Benefit Pension Scheme ceasing future accruals in November 2012; and

Ø Losses of £0.4m (2011: gains of £0.4m) in respect of the fair value of forward foreign currency contracts.

 

Non-underlying items in 2011 included:

Ø A loss of £5.9m on the disposal of Ash & Lacy Building Systems Limited, a non-core business, on 22 July 2011, including £5.0m of capitalised goodwill;

Ø A gain of £1.6m in respect of the group's UK defined benefit pension obligations following amendments to the inflation assumptions to reflect CPI rather than RPI (£1.1m) and a curtailment gain (£0.5m) on the cessation of future accrual in respect of the UK Executive Scheme. In addition, a loss of £0.4m was recognised in respect of the group's French defined benefit pension obligations following changes in local legislation to equalise benefits across various member categories; and

Ø Losses on sale of properties of £0.2m.

 

The cash impact of the above items was an outflow of £0.9m (2011: £1.6m) with a further £0.4m expected to be spent in 2013. The non-cash element therefore amounted to £3.5m, principally due to the amortisation of acquired intangibles of £2.4m noted above.

 

Tax

The group's tax charge for the year was £9.1m (2011: £9.3m). The underlying effective tax rate for the group was 26% (2011: 29%). The international nature of our operations does mean that the mix of profits in a particular year can impact the group's effective rate of tax. The income statement tax charge was lower than tax paid of £11.6m (2011: £7.5m) due to the beneficial impact of prior year credit following the satisfactory resolution of certain historical tax matters.

 

The group's net deferred tax liability is £11.2m (2011: £17.0m). A £9.2m (2011: £10.5m) deferred tax liability is provided in respect of brand names and customer relationships acquired. A further £2.0m (2011: £2.3m) is provided on the fair value revaluation of French properties acquired as part of the Zinkinvent acquisition in 2007. These liabilities do not represent a future cash tax payment and will unwind as the brand names, customer relationships and properties are amortised.

 

Earnings per share

The board believes that underlying earnings per share (UEPS) gives the best reflection of performance in the year as it strips out the impact of non-underlying items, essentially one off non-trading items and acquisition intangible amortisation. UEPS for the period under review increased by 12.5% to 38.8p (2011: 34.5p). The diluted UEPS was 38.5p (2011: 34.2p). Basic earnings per share was 33.9p (2011: 20.9p). The weighted average number of shares in issue was 77.0m (2011: 76.9m) with the diluted number of shares at 77.8m (2011: 77.7m) adjusted for the outstanding number of dilutive share options.

 

Pensions

The group operates a number of defined contribution and defined benefit pension plans in the UK, the USA and France. The IAS19 deficit of the defined benefit plans as at 31 December 2012 was £16.3m compared with £16.4m at 31 December 2011. The impact of lower discount rates (as a result of falling gilt rates) used to value the pension obligations was broadly offset by increases in value of the underlying assets.

 

The Hill & Smith Executive Pension Scheme and the Hill & Smith Pension Scheme (the 'Schemes') remain the largest employee benefit obligations within the group. The IAS19 deficit of the Schemes as at 31 December 2012 was £13.8m (2011: £14.3m). In common with many other UK companies, the Schemes are mature having significantly more pensioners and deferred pensioners than active participating members. The group has recently completed negotiations with the trustees regarding the triennial valuation dated 5 April 2012, agreeing deficit recovery plans that require cash contributions over and above the current service accrual amounting to £2.5m for the three years to April 2016, followed by payments of £2.3m for a further seven years. The date of the next triennial review is 5 April 2015.

 

The Schemes are closed to new members.  Future accruals in the Executive Scheme ceased in December 2011 and in the Main Scheme in November 2012. 

 

Revisions to IAS 19 will become effective in 2013 that will have the impact of increasing the net financing cost of the Schemes by around £0.5m.  It should be noted that the change has no impact on the group's underlying earnings, as the non-cash net financing cost on defined benefit pension schemes is treated as a non-underlying item.

 

Acquisitions

On 23 May 2012 the group acquired the trade and certain of the assets and liabilities of Expamet Holdings Limited and subsidiaries (In Administration), a company operating in the UK, manufacturing and distributing expanded metal products into the building and infrastructure markets. The consideration was £0.5m in cash.

 

Treasury management

All treasury activities are co-ordinated through a central treasury function, the purpose of which is to manage the financial risks of the group and to secure short and long term funding at the minimum cost to the group. It operates within a framework of clearly defined board-approved policies and procedures, including permissible funding and hedging instruments, exposure limits and a system of authorities for the approval and execution of transactions. It operates on a cost centre basis and is not permitted to make use of financial instruments or other derivatives other than to hedge identified exposures of the group. Speculative use of such instruments or derivatives is not permitted. Liquidity, interest rate, currency and other financial risk exposures are monitored weekly. The overall indebtedness of the group is reported on a daily basis to the chief executive and the finance director. The group treasury function is subject to an annual internal and external review of controls.

 

Going concern

The directors have assessed the future funding requirements of the group and the company and compared them to the level of committed available borrowing facilities. The assessment included a review of both divisional and group financial forecasts, financial instruments and hedging arrangements, for the 15 months from the balance sheet date. Major assumptions have been compared to external reference points such as infrastructure spend forecasts across our chosen market sectors, Government spending plans on road infrastructure, zinc, steel price and economic growth forecasts.

 

The forecasts show that the group will have sufficient headroom in the foreseeable future and the likelihood of breaching banking covenants in this period is considered to be remote.

 

Having undertaken this work, the directors are of the opinion that the group has adequate committed resources to fund its operations for the foreseeable future and so determine that it is appropriate for the financial statements to be prepared on a going concern basis.