RNS Number : 9626B
Hill & Smith Hldgs PLC
11 March 2014
Hill & Smith Holdings PLC
AUDITED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2013
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 audited results for the year ended 31 December 2013.
Key points:
· Overall performance in line with the outlook announced in the August interim results and November IMS.
· After a subdued first half, record earnings performance achieved in the second half of the year.
· Profits from the Roads business significantly improved, with positive outlook in the UK and in newer markets overseas.
· Utilities business unable to replicate 2012 performance, due to lower levels of demand and one-off major projects not being repeated. Order books are however healthy moving into Q1 of 2014.
· Galvanizing volumes increased 4% due to acquisition and improvement in UK market; positive start to 2014 with increased capacity in US and enhanced UK footprint.
· Year-end net debt of £87.2m, materially unchanged from prior year despite investment in UK acquisitions and increased US galvanizing capacity.
· Recommended final dividend of 10.0 pence, making total dividend for year of 16.0 pence, an increase of 6.7%.
Financial results
| | 31 December 2013 | 31 December 2012 |
Change |
| | | | |
| Revenue | £444.5m | £440.7m | 0.9% |
| Underlying operating profit* | £44.5m | £44.0m | 1.1% |
| Underlying profit before taxation* | £41.2m | £40.4m | 2.0% |
| Profit before taxation | £30.6m | £35.2m | - 13.1% |
| Underlying earnings per share* | 40.4p | 38.8p | 4.1% |
| Basic earnings per share | 29.6p | 33.9p | - 12.7% |
| Dividend per share | 16.0p | 15.0p | 6.7% |
| Net Debt | £87.2m | £86.8m | - 0.5% |
*All underlying profit measures exclude certain non-operational items, which are as defined in the financial statements. References to an underlying profit measure throughout this announcement are made on this basis.
Derek Muir, Chief Executive, said:
"We achieved a record earnings performance in the second half after a subdued start to the year, and made important strategic investments and changes across the group. Encouragingly, the momentum seen in the second half of 2013 has continued into the first two months of 2014.
"The Roads division performed strongly in the second half and will benefit from the UK Government's announcement of strategic additions to the road network, from 2015. We have continued to invest in capacity ahead of this anticipated growth.
"In Utilities we made some important structural changes both in the UK and overseas and, after a more positive second half of 2013, the businesses entered 2014 with stronger order books.
"In Galvanizing Services, overall volumes were ahead, and we have added capacity in both the UK and the US. Again the current year has started well, although we remain mindful of the continued challenging economic climate in France.
"For 2014 we expect good growth at constant currencies, although reported results are likely to be impacted by recent adverse foreign currency movements. Overall, the prospects for both Infrastructure Products and Galvanizing Services are encouraging as we see signs of increased activity and future capital spend. This, along with our ambition to grow and develop through investing in markets we know, selective acquisitions, and new products and technologies, gives us confidence in achieving sustainable growth and shareholder value."
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/Vicky Watkins/Ollie Hoare | |
| | |
| Investec | Tel: 44 (0)20 7597 4198 |
| Chris Treneman/James Rudd | |
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, 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 and flood prevention barriers, 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 50 sites, principally in 7 countries.
Chairman's Statement
Overview
I am pleased to report that 2013 has produced a strong performance in the context of continued challenging economic conditions and competitive markets. The results for 2013 are evidence of the quality and resilience of the group's businesses and, coupled with the strategic and operational actions taken in the year, its prospects for future growth.
During 2013 we continued to make investments and implement operational changes to drive future growth, the highlights of which were:
- the acquisition of Medway Galvanising in the UK, which has already contributed in excess of our expectations;
- completion of the new V&S Galvanizing plant in Columbus, Ohio, USA, to provide more efficient galvanizing capacity for our US business;
- restructuring of the UK industrial flooring business and further investment in Lionweld Kennedy Flooring's site at Middlesbrough; and
- rationalisation of the pipe supports operations, with the closure of the facility in China, enabling us to leverage the cost benefits arising from the expansion of the production facility in India.
Performance highlights
| | 2013 | 2012 | % change |
| Revenue | £444.5m | £440.7m | 0.9 |
| Underlying operating profit | £44.5m | £44.0m | 1.1 |
| Underlying profit before tax | £41.2m | £40.4m | 2.0 |
| Underlying earnings per share | 40.4p | 38.8p | 4.1 |
Further commentary on these results and the performance of each division is contained in the operational and finance review sections.
Dividends
In view of the strong performance, the board is recommending a final dividend of 10.0p per share (2012: 9.2p per share) making a total dividend for the year of 16.0p per share (2012: 15.0p per share) an increase of 6.7%.
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 2.5 times (2012: 2.6 times). The final dividend, if approved, will be paid on 4 July 2014 to those shareholders on the register at the close of business on 30 May 2014.
Governance
Honest, open and accountable management of our businesses is key to the effective governance of the group, which underpins our strategy and the sustainability of our performance.
In this year's annual report we have set out further explanations of our business model, strategy, risk management and activities of the board and its committees. We trust that you will find these helpful in understanding how we can, and do, achieve increased value for our shareholders.
Remuneration incentive schemes
The rules of the group's Executive Share Option Scheme ("ESOS") and the all-employee Save as You Earn Scheme ("SAYE") expire in May 2015 and those for the Long Term Incentive Plan ("LTIP") expire in May 2017. However, with the introduction of the binding vote on directors' remuneration policy, the remuneration committee is keen to ensure that its remuneration arrangements are up to date, reflect best practice and are appropriate for the ensuing three years for which the policy vote will apply. We have therefore decided to seek shareholder approval for new sets of rules to govern the ESOS, SAYE and LTIP, at the 2014 AGM. The rules will be broadly similar to those already in place but will be updated to ensure that they include the most current governance provisions and best practice (for example, the new rules will include clawback provisions and a more specific policy around leavers). The proposed new rules are summarised in the notice for the AGM.
AGM
We hold our AGM on 14 May 2014 and it is an excellent opportunity for shareholders to meet the board and certain senior executives of the group. If you are able to attend my colleagues and I will be delighted to see you.
John Silk - Life President
We were saddened to hear of the loss of John Silk, who died on 31 December 2013, aged 89. John served as a director on the board, became chairman and was life president. John was highly regarded, not only in the local legal profession but also as a shrewd, knowledgeable businessman, known for his integrity and down to earth style. John will be missed by many people involved with Hill & Smith and we wish to pay tribute to his contribution to the company and to John Silk "the gentleman".
Outlook
Encouragingly, despite the extreme weather in the north east of the US and in the UK, the momentum of stronger trading, seen in the second half of 2013, has continued in the first two months of 2014. Galvanizing volumes to date are ahead of 2013 in all geographies although we remain mindful of the continued challenging economic climate in France. The order book in the Utilities division remains healthy and we expect margins to improve through recovery in both Bergen Pipe Supports and Access Industrial Flooring, following the actions taken in 2013.
The UK Government announced a new vision for its strategic road network in June 2013 and as a result the Highways Agency unveiled its largest upgrade of the road network, which includes a £10.7bn investment for twenty-seven new schemes. Accordingly, we have confidence in the short and medium term growth prospects for our UK Roads businesses.
We expect good constant currency revenue and profit growth with group margins slightly ahead of 2013 levels, although our reported results are likely to be impacted by recent adverse foreign currency movements. The overall prospects for our infrastructure products and galvanizing businesses are encouraging as we see signs of increased activity and future capital spend. This, along with the board's ambition to grow and develop through investing in the markets we know, selective acquisitions and new products and technologies, gives the board confidence in achieving sustainable growth and shareholder value.
Bill Whiteley
Chairman
11 March 2014
Business Model and Strategy
Business Model
To hold leading positions in the niche markets of infrastructure and galvanizing, diversified over different geographies, with a focus on service, margins and product development.
Strategic drivers for sustainable profitable growth
- Organic revenue growth
- Geographic diversification
- Target returns and leverage
- Active portfolio management
- Entrepreneurial culture
Strategy in action 2013
- In depth review of strategy in 2013.
- Acquisition of Medway Galvanising and disposal of London site.
- Integration of 2012 acquisition of Expamet, continuing to deliver improved ROS and ROCE.
- Closure of Access Design site in Telford and development of "super site" at Lionweld Kennedy Flooring in Middlesbrough.
- New V&S Galvanizing plant at Columbus, Ohio, USA. Further investment in another new US plant commenced Q4 2013.
- Leveraging of products, with Zoneguard temporary barrier being rented in the UK and sold in Australia.
- Rationalisation of pipe supports manufacturing in China and expansion of production in India.
Strategy Implementation
Balanced profitable growth
Our strategy is to deliver sustainable profitable growth through the supply of Infrastructure Products and Galvanizing Services. Our objective is to achieve at least mid single-digit 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. An excellent example of this is Zoneguard, our own developed temporary road barrier which is now in use in the UK and Australia. As a result of the UK Government's recent announcement on its vision for the strategic road network the Highways Agency has unveiled a £10.7bn investment in twenty-seven new schemes. This funding certainty has enabled us, as part of the HA supply chain, to commit to £8m of capital expenditure for additional Zoneguard temporary road barrier which will increase our rental fleet and utilisation for the foreseeable future.
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 fell short in 2013 with 67% of operating profits coming from overseas, mainly as a result of improvements in UK profitability. 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, France and USA.
UK Government spend is now at 10% of group revenue compared to 11% in 2012.
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 through product mix and value-added customer-focused solutions, as well as high levels of operational efficiency.
Our target operating margin for a business unit is 10%, although a lower margin profile may be acceptable if that business's return on capital employed (ROCE) 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 ROCE.
Our objective is 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, such as Medway Galvanising, which was acquired on 30 April 2013.
Active portfolio management
Our strategic objective is to develop more substantial businesses in each of our chosen sectors through both organic and acquisitive growth. Consequently, this leads us to continually examine the smaller and lower performing units within the portfolio, along with rationalisation of production facilities and business transfers. In 2013 we took the decision to close the manufacturing plant in China, for our pipe supports business, and to move that capacity to India, where our new factory has a more cost effective production capability. We also closed the industrial steel flooring platform and hand rail business of Access Design, located at Telford. The business has been transferred to our site in Middlesbrough, where we have invested in new production space and machinery to develop our already successful Lionweld Kennedy Flooring business, which we acquired in 2004.
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 effective businesses within their markets. Overseas acquisitions must have a high quality 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 market 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 and through the international spread of the group, opportunities are identified and taken, through group collaboration.
Priorities in 2014
- Selective acquisitions to consolidate our market position or increase our geographical representation.
- Investing in increased capacity and product development to capture potential opportunities.
- Continuation of the structural and operational improvements in both Infrastructure Products and Galvanizing Services.
Operational and Financial Review
2013 overview
The overall performance of the group for 2013 was in line with the outlook statement given at the time of our interim results in August 2013 and reiterated in our November 2013 interim management statement.
After a subdued first half performance, due to a lack of large projects, the group achieved a record earnings performance in the second half of the year. Underlying operating profits were split 45% H1 (2012: 52%) and 55% H2 (2012: 48%). Overall Infrastructure Products delivered a similar result to last year, with the Roads division performing above our expectations, while the Utilities division was disappointing. Galvanizing Services performance was marginally below the prior year due to a weaker market in France, partially offset by a stronger performance in the UK, which included the acquisition of Medway Galvanising.
The international diversity and strength of our businesses within their respective markets allowed us to deliver a robust performance despite the challenging economic environments seen globally. Profits from USA operations represented 46% of underlying operating profits (2012: 50%) and in total 67% of profits were generated from operations outside the UK, which was lower than the previous year (2012: 76%) due to an improved performance in a number of our UK business units.
Revenue for the year increased by 1% to £444.5m (2012: £440.7m). Adjusting for beneficial currency impacts of £6.1m and revenue of £12.6m arising from acquisitions, underlying revenue fell by £14.9m. Underlying operating margin was constant at 10.0% (2012: 10.0%). Underlying operating profit increased by 1% to £44.5m (2012: £44.0m) with acquisitions and currency movements accounting for £1.1m and £1.0m respectively. Underlying profit before taxation was 2% higher at £41.2m (2012: £40.4m).
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 2013 the division accounted for 71% (2012: 73%) of the group's revenue and 43% (2012: 43%) of the group's underlying operating profit.
Revenues fell by 1% to £316.9m (2012: £319.8m). Underlying margins improved by 20 basis points to 6.0% (2012: 5.8%) due to a stronger margin in Roads offset by a weaker margin in Utilities.
Utilities
The requirements for new power generation in emerging economies and replacement of ageing infrastructure in developed countries, provide excellent opportunities for the group's utilities businesses.
Revenues fell to £202.9m (2012: £205.7m) which, after adjusting for acquisitions and currency impacts, reflected an organic decline of £11.8m primarily due to a combination of lower revenues in Bergen Pipe Supports, the large contracts in Creative Pultrusions in 2012 not being repeated in 2013, and the actions taken to reduce our exposure in UK contracting. Underlying operating profit fell by £6.0m to £7.4m (2012: £13.4m) with acquisitions contributing £0.4m and currency movements £0.2m.
Our USA based transmission structures and substation business performed well due to the continuing demand for upgrades and the connection to the USA power grid of renewables projects. This market remains robust and we have good visibility on demand and a strong order book as we enter 2014.
Creative Pultrusions, our US based composites company, whilst lacking the one-off ballistic panel order it enjoyed in 2012, was successful in supplying piling for coastal protection to the Statue of Liberty, New York and the Boardwalk at Long Beach, New Jersey as part of the rebuilding taking place in the aftermath of Superstorm Sandy. In the second half we delivered coverboard projects for the new metros in Hawaii and San Francisco. We entered 2014 with a good order backlog and strong pipeline of potential projects for our piling and rail products. We are also experiencing an upturn in enquiries from our OEM customers for custom pultruded products.
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 plants and petrochemical installations around the world.
Our manufacturing plants in the USA saw levels of enquiries for gas fired power stations improve in the second half of 2013 after a slow start to the year. We were also successful in delivering the supports on two gas fired power stations in the final quarter and enter 2014 with an improving order book. The spin-off from shale, oil and gas is not only creating a market for natural gas fired power stations but also LNG terminals, petrochemical and fertilizer plants.
Our pipe supports business in the rest of the world entered 2013 with a strong order book buoyed by emerging power demand. However, capacity constraints in Thailand forced some larger projects to be manufactured in the UK facility thus increasing costs and depressing margins in the first half of the year. We entered the second half with a reduced order book for delivery in the final quarter of 2013, versus that for the prior year, which although disappointing has allowed us to begin to put systems in place to achieve operational improvements across the pipe supports group.
During the final quarter we closed our Chinese facility to consolidate our production capabilities, reduce site overheads and improve overall profitability. The group's manufacturing plant in Chennai, India, achieved the ISO 9001:2008 quality assurance standard. This ensures and promotes quality assurance to business recognised standards and stamps a mark of distinctive quality on the group's product. Power projects for the Indian market were supplied in the second half, with encouraging levels of order intake in the fourth quarter.
During the year we signed global supply agreements with METSO for the supply of supports for power plants and paper mills, and with JGC for the supply of cryogenic supports. We enter 2014 with an order book for engineered pipe supports of £15m (2013: £16m).
The UK water industry Asset Management Programme (AMP5), now in its fourth year, saw the completion of interconnecting pipework for a number of sewage treatment plants in the first half of 2013. The second half saw delivery of the £2m Lee Valley sewer outfall project, using 3.0m diameter pipes sunk to the seabed of the Thames. Enquiries for large AMP5 flood alleviation tanks were strong in the second half and we expect a surge of orders in 2014 as problems associated with the recent flooding begin to be addressed. Demand for storm attenuation tanks for use in the housing market also looks encouraging for the foreseeable future as the housing sector continues to recover and as the focus on flood risk increases.
Access Design, which manufactures and installs secondary steelwork and industrial flooring and handrails for AMP5, was downsized earlier in the year to reduce exposure to the highly competitive UK contracting arena. As we progressed through the year the volume of work won with higher margins was not enough to sustain the business on a standalone site in Telford. The decision was therefore made to transfer all production and manufacturing activity to the main manufacturing site at Lionweld Kennedy in Middlesbrough. This business continues to flourish in the manufacture and supply only, of industrial flooring and handrails, with further investment at the site in a new open steel flooring machine, designed to service the growing offshore refurbishment market and to increase export opportunities. Whilst the decision to close the Telford site was not taken lightly, the actions further demonstrate our commitment to active portfolio management to improve return on sales and capital invested. The transfer was completed at the end of February 2014 and since the end of 2013 we have successfully won a number of projects for Crossrail for flooring and handrail platforms in train maintenance depots.
Acquired in May 2012, Expamet Building Systems based in Hartlepool, which supplies expanded metal products through builders' merchants and DIY retailers, has been successfully integrated into Birtley Building Products. The combination of Birtley and Expamet has seen increased demand for its products as the housing sector recovers. The enlarged business had a record year and trading continues to exceed our expectations.
Bromford Iron & Steel, our specialist steel rolling mill, had a disappointing year due to subdued demand and a less favourable exchange rate.
Roads
Our Roads division designs, manufactures and supplies temporary and permanent safety products for the roads market, with an increasing international presence.
Revenues were unchanged at £114.0m (2012: £114.1m) representing 36% of the Infrastructure Products segment. Underlying operating profit of £11.7m was £6.4m higher than prior year (2012: £5.3m) due to improving returns in our growing international businesses, better utilisation of our Varioguard product in the UK and the impact of the onerous gantry contracts on the prior year results. There was no material effect from currency movements.
In 2013 our traditional UK roads market for permanent and temporary road restraint systems returned to more normalised levels and Varioguard utilisation increased in the second half as the roads programme started to regain momentum.
In June 2013 the UK Government announced additions to the strategic roads programme with schemes scheduled to start in 2015. Schemes announced previously are now on track to start in 2014 and as a result the group made a £4m investment to increase its rental stock of Zoneguard by 25km, which has been manufactured locally at our factory in the West Midlands. The first project of 11km for the A14 upgrade was installed in January 2014 and due to the level of demand we have committed to a further 25km (£4m investment) which will be available for the second half of 2014.
In the USA we made progress in identifying and appointing distributors for the Zoneguard product in States where full approval has been granted. Sales to these distributors have enabled them to develop local rental markets and, when required, cross-hire additional Zoneguard from our rental fleet. We continue to benefit from the two year USA Roads Bill put in place at the end of 2012 and achieved record utilisation (90%) of our rental fleet in the year.
Approval for Zoneguard in Australia was granted and an agreement has been signed with a long-term partner for supply to the Australian market. The first shipments took place in the second half of 2013. This is part of our strategy to strengthen our position as an international supplier of tested road safety products to geographies where there is an increased requirement for safety.
ATA, our Swedish roads business acquired in 2011, had a strong performance in 2013 as they established themselves as suppliers of our fully tested European Standard highway products from the UK. They also made progress in Norway where we established a branch of ATA to further penetrate the Scandinavian market.
During 2013 we were approved to supply the Brifen wire rope safety barriers to the Indian market and subsequently opened a manufacturing facility near Delhi. The demand for road safety in the region is increasing, especially on the new toll road projects and we had an excellent second half, shipping over 132km of product. Our order book is encouraging for 2014 and after a long approval process momentum is building in what looks to be an exciting market.
Our lighting column business in the UK achieved record profitability as the five previously won PFI projects entered their main construction phases. Whilst the local authority market remained challenging, the housing market is showing signs of recovery.
In France, market conditions remained challenging throughout the year but we saw an improvement in the second half from higher value specification work. We also completed the investment in a new automated press and from Q2 2014 we will be seeing the benefits of lower manufacturing costs.
Techspan, our electronic signage business, won a £7.4m four year agreement for the supply of ancillary equipment for roadside furniture to the Highways Agency. We continued to win contracts for the supply of signs to the Highways Agency in England and Northern Ireland, which led to a reasonable performance in the year. We anticipate there will be increased requirements for signs for the next phase of managed motorway schemes in the second half of 2014. We secured a large contract from Transport for Wales to provide journey time and data collection using both our EVO8 ANPR (automatic number plate recognition) camera and our Black CAT classifier, further demonstrating the compatibility of our product range to collect and combine vital information for management of the road networks. We are continuing our investment in next generation cameras to be used in road tolling and data collection.
Galvanizing Services
The Galvanizing Services division offers corrosion protection services to the steel fabrication industry with multi-plant facilities in the UK, France and USA. The division accounts for 29% (2012: 27%) of the group's revenue and 57% (2012: 57%) of the group's underlying operating profit.
At constant currency, revenues increased 3% to £127.6m (2012: £120.9m) whilst operating profit was marginally higher at £25.4m (2012: £25.3m) resulting in an overall margin of 19.8% (2012: 20.9%).
Overall galvanizing volumes were 4% ahead of 2012 due to the acquisition of Medway Galvanising and an improvement in the UK structural steel market.
USA
Located in the North East of the country, Voigt & Schweitzer 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. In 2013 they were presented with the Hot Dip Galvanizing Excellence Award along with three project Excellence awards by the American Galvanizers Association.
Volumes fell 3% year on year, primarily due to lower volumes of power transmission poles and temporary bridges through one of our plants. This changed the mix towards smaller, higher margin projects and together with operational efficiencies and a stable zinc price we were able to maintain our profitability, despite the reduction in volume.
The construction of our new plant in Columbus, Ohio was completed on time, within budget and was fully operational in the second quarter for 2013. The additional capacity and increased kettle dimensions allowed us to attract a number of new customers throughout the second half of 2013. This led to a return on our investment ahead of our expectations and the efficient layout and operation of the plant results in a 50% increase in annual capacity compared with the 40% previously estimated.
Construction of an identical plant at a new site is now underway and is on track for completion in 2014. The new location will provide local fabricators with galvanizing services on their doorstep and encourage engineers and architects to move from painting to galvanizing. This is part of the organic growth strategy for the USA and will be complemented with selective acquisitions.
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.
The business experienced a slow start to the year and by the end of the first quarter volumes were down 14% on the same period in 2012. Since then we have been encouraged by volumes despite the completion of a large one off contract for galvanizing transmission and lighting poles which ended in June 2013. In the second half volumes were assisted by the structural steel for the new Bordeaux Stadium. The market remains challenging due to the economic and political climate.
On 17 September 2013, Yves Delot, the President of France Galva, was awarded the medal of a Knight in the National Order of Merit, for 40 years of service to the galvanizing industry in France.
UK
Our galvanizing businesses are located on nine sites, four of which are strategically adjacent to our Infrastructure Products manufacturing facilities.
On 30 April 2013 the group acquired Medway Galvanising Company Limited, which operates a large plant in Kent, for an enterprise value of £6.4m representing an EBITDA multiple of 4.4 times. Medway has a strong tradition in service for galvanizing, powder coating and shotblasting. As part of our ongoing strategy to optimise our UK network we closed and sold our east London site located near the Olympic Park in July for a cash consideration of £2.5m. This acquisition and restructuring allows us to offer our existing customers an enhanced service throughout the south east of England and to date we have seen Medway performing above our expectations.
On 17 December 2013 we purchased certain assets from Arkinstall Galvanizers for £0.4m, resulting in the closure of their Tividale plant in the West Midlands. Production has been transferred to our nearby Walsall plant and we will continue to build on their well-established collection and delivery service similar to Medway, allowing us to service geographies outside our existing network.
UK volumes improved by 18%, compared to 2012, with Medway contributing 6% of the volume increase. The rest of the UK saw volumes increase by 12% due to stronger demand from infrastructure projects and an improvement in our own internal volumes.
In December 2013 we upgraded our largest plant in Chesterfield, replacing the existing galvanizing bath with a longer, more efficient bath for structural projects such as multi-storey car parks and power stations.
Financial Review
Income statement phasing
| | First half | Second half | Full year |
| 2013 | | | |
| Revenue £m | 221.6 | 222.9 | 444.5 |
| Underlying operating profit £m | 20.2 | 24.3 | 44.5 |
| Margin % | 9.1 | 10.9 | 10.0 |
| 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 |
Revenue of £444.5m was £3.8m or 1% ahead of the prior year with acquisitions completed during both 2012 and 2013 contributing £12.6m additional revenue and £1.1m underlying operating profit. The translation impact arising from changes in exchange rates, principally the US Dollar and Euro, increased total revenue by £6.1m and underlying operating profit by £1.0m. Organically, revenue and operating profit declined by £14.9m and £1.6m respectively. Further details of the performance of the group are provided in the operational review.
As expected, in contrast with the first half weighted results in 2012, the phasing of revenue and to a greater extent underlying operating profit was more second half biased in 2013, principally reflecting the impact of the London Olympic Games on the group's Roads activity in H2 2012 and generally improving economic conditions across the geographies in which the group operates.
Cash generation and financing
The group again demonstrated its cash generating abilities with strong operating cash flow of £54.2m (2012: £58.4m), including a reduction in working capital of £1.9m (2012: £3.7m reduction). 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 13.9% from 14.7% at December 2012, reflecting a further underlying reduction of c.£3.5m (2012: £3.5m) taking into account the higher revenues. Debtor days were unchanged from the prior year at 61 days.
Capital expenditure at £22.1m (2012: £18.3m) represents a multiple of depreciation and amortisation of 1.5 times (2012: 1.3 times). During the year the group completed the construction of the new build galvanizing facility in Columbus, Ohio, with cash spend in the period of £3.5m, and expended £1.7m on construction of Zoneguard to increase its UK temporary barrier rental fleet. Other significant items of expenditure included £1.0m on the development of the Industrial Flooring manufacturing facility in Middlesbrough and £1.4m of site expansion and equipment upgrades for the French galvanizing and lighting column operations, 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 2013 the group achieved an underlying cash conversion rate of 93% (2012: 101%) and over the past five years has achieved an average rate of 98% despite a number of major capital projects being undertaken during that time.
The group's strong underlying operating cash flow provides the funds to invest in growth, both organic and acquisitive, to service debt, pension and tax obligations and to maintain a growing dividend stream, whilst a sound balance sheet provides a platform to take advantage of future growth opportunities.
Group net debt at 31 December 2013 was £87.2m, representing a year on year improvement of £0.2m before adverse exchange rate movements of £0.6m. 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.
Change in net debt
| | 2013 £m | 2012 £m |
| Operating profit | 34.5 | 39.2 |
| Depreciation and amortisation* | 16.9 | 16.4 |
| Working capital movement | 1.9 | 3.7 |
| Pensions and provisions | 0.4 | (2.0) |
| Other items | 0.5 | 1.1 |
| Operating cash flow | 54.2 | 58.4 |
| Tax paid | (15.3) | (11.6) |
| Interest paid (net) | (3.4) | (4.3) |
| Capital expenditure | (22.1) | (18.3) |
| Sale of fixed assets | 3.0 | 0.5 |
| Free cash flow | 16.4 | 24.7 |
| Dividends | (11.6) | (10.2) |
| Acquisitions | (6.6) | (0.5) |
| Net issue of shares | 2.0 | 0.5 |
| Change in net debt | 0.2 | 14.5 |
| Opening net debt | (86.8) | (103.8) |
| Exchange | (0.6) | 2.5 |
| Closing net debt | (87.2) | (86.8) |
* includes £2.2m (2012: £2.4m) in respect of acquisition intangibles.
The group's principal debt facility consists of a headline £210m five year multicurrency revolving credit agreement. The facility, provided on competitive terms, is funded by a syndicate of five leading banks and expires in April 2016.
Maturity profile of debt facilities
| | 2013 | | | 2012 |
| On demand | £16.4m | | On demand | £15.7m |
| 2014-2015 | £1.3m | | 2013-2015 | £3.1m |
| 2016 | £210.9m | | 2016 | £211.5m |
Current debt facilities afford 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 £212.2m and a further £16.4m 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 2013 were:
Actual Covenant
Interest Cover 17.7 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.
Net finance costs
| | | 2013 £m | | 2012 £m |
| Underlying net cash interest: | | | | |
| Bank loans / overdrafts | 3.2 | | 3.4 | |
| Finance leases / other | 0.1 | 3.3 | 0.2 | 3.6 |
| Non cash: | | | | |
| Net pension interest | | 0.6 | | 0.4 |
| | | 3.9 | | 4.0 |
Net financing costs were broadly in line with prior year at £3.9m (2012: £4.0m). The net cost from pension fund financing under IAS19 was £0.6m (2012: £0.4m), the increase of £0.2m reflecting the impact of the revisions to IAS19 adopted during the year which require a net interest cost to be calculated on the net defined benefit liability. Given its non-cash nature the pension interest charge continues to be treated as 'non-underlying' in the consolidated income statement and, given the immateriality of the impact of the changes to IAS 19 on the group's results, the group has not restated the prior year comparatives. The underlying cash element of net financing costs decreased by £0.3m to £3.3m (2012: £3.6m), as a result of lower levels of average net debt during the year and marginal reductions in bank interest rates. Underlying operating profit covered net cash interest 13.5 times (2012: 12.2 times).
The group has approximately 38% (2012: 39%) of its gross debt of £97.2m at fixed interest rates, either through interest rate swaps or finance leases. Interest rate swaps 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 17.5%. In 2013, ROIC was maintained at 15% (2012: 15%). 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 2012 revenue and underlying operating profit using 2013 average exchange rates would have increased the prior year revenue and underlying operating profit by £6.1m and £1.0m respectively. The continued strength of Sterling experienced since the end of 2013 will continue to have an impact on the translation of overseas earnings in 2014. Retranslating 2013 revenue and underlying operating profit using exchange rates at 3 March 2013 (inter alia £1 = US$1.67 and £1 = €1.21) would decrease the prior year revenue and underlying operating profit by £12.7m and £1.7m respectively. For US Dollar, a 1 cent movement results in a £135,000 adjustment to underlying operating profit and for the Euro, an £80,000 adjustment.
Non-underlying items
The total non-underlying items charged to operating profit in the consolidated income statement amounted to £10.0m (2012: £4.8m) and were made up of the following:
- Business reorganisation costs of £9.2m (2012: £0.8m) - principally relating to redundancies and other costs associated with site restructuring, of which £2.7m were cash costs in the year and a further £4.5m are expected to be spent in 2014. The charge also includes asset impairments of £1.8m;
- Non-cash amortisation of acquired intangible fixed assets of £2.2m (2012: £2.4m);
- Acquisition related expenses of £0.4m (2012: £0.8m) - costs associated with acquisitions expensed to the consolidated income statement in accordance with IFRS3 (Revised); and
- Profits on sale of properties of £1.8m (2012: £nil).
Non-underlying items in 2012 included:
- A curtailment loss of £0.4m arising from the UK defined benefit pension scheme ceasing future accruals in November 2012; and
- Losses of £0.4m in respect of the fair value of forward foreign currency contracts.
The cash impact of the above items was an outflow of £3.1m (2012: £0.9m) with a further £4.5m expected to be spent in 2014. The non-cash element therefore amounted to £2.4m. The directors continue to believe that the classification of these items as "non-underlying" aids the understanding of the underlying business performance.
Tax
The group's tax charge for the year was £7.6m (2012: £9.1m). The underlying effective tax rate for the group was 24% (2012: 26%), the decrease reflecting reductions in the UK corporation tax rate, changes in geographical profit mix and the beneficial impact of prior year credit following the satisfactory resolution with local taxation authorities of certain historical tax matters. 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. Cash tax paid of £15.3m (2012: £11.6m) is higher than the income statement charge due to the resolution of the historical matters and the cash settlement of certain one-off deferred tax liabilities in France during the year. Tax paid is expected to revert to more normal levels in 2014.
The group's net deferred tax liability is £9.5m (2012: £11.2m). An £8.7m (2012: £9.2m) deferred tax liability is provided in respect of brand names and customer relationships acquired. A further £1.9m (2012: £2.0m) is provided on the fair value revaluation of French properties acquired as part of the Zinkinvent acquisition in 2007. These liabilities do not represent future cash tax payments 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 4% to 40.4p (2012: 38.8p), reflecting growth in underlying operating profit and the reduction in the effective tax rate. The diluted UEPS was 39.8p (2012: 38.5p). Basic earnings per share was 29.6p (2012: 33.9p). The weighted average number of shares in issue was 77.6m (2012: 77.0m) with the diluted number of shares at 78.6m (2012: 77.8m) 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 2013 was £20.2m compared with £16.3m at 31 December 2012. The impact of increases in future inflation assumptions outweighed a marginal increase in the discount rate resulting in an increase in scheme liabilities of £5.1m, offset by improvement of £1.2m in underlying asset values.
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 2013 was £17.6m (2012: £13.8m). 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 agreed deficit recovery plans in place 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, with future accruals ceasing in the Executive Scheme in December 2011 and in the Main Scheme in November 2012. The group is actively engaged in dialogue with the Trustees with respect to management, funding and investment strategy.
Acquisitions
On 30 April 2013 the group acquired the share capital of Medway Galvanising Company Limited, a single site galvanizing and powder coating business operating in Kent, UK for consideration of £6.4m in cash. As part of the group's ongoing strategy of optimising its UK network, our galvanizing plant in East London was closed in July 2013 and the site sold for cash consideration of £2.5m.
In December 2013 the group acquired the trade and certain assets of Arkinstall Galvanizing Limited for cash consideration of £0.4m. This small bolt-on acquisition will complement the group's existing UK galvanizing activities.
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.
Derek Muir Mark Pegler
Group Chief Executive Group Finance Director
11 March 2014
Year ended 31 December 2013
Consolidated Income Statement
| | | | 2013 | | | 2012 | |
| | Notes | Underlying £m | Non- | Total £m | Underlying £m | Non- underlying* £m | Total £m |
| Revenue | 2 | 444.5 | - | 444.5 | 440.7 | - | 440.7 |
| | | | | | | | |
| Trading profit | | 44.5 | - | 44.5 | 44.0 | (0.8) | 43.2 |
| Amortisation of acquisition intangibles | 3 | - | (2.2) | (2.2) | - | (2.4) | (2.4) |
| Business reorganisation costs | 3 | - | (9.2) | (9.2) | - | (0.8) | (0.8) |
| Acquisition costs | 3 | - | (0.4) | (0.4) | - | (0.8) | (0.8) |
| Profit on sale of properties | 3 | - | 1.8 | 1.8 | - | - | - |
| Operating profit | 2 | 44.5 | (10.0) | 34.5 | 44.0 | (4.8) | 39.2 |
| Financial income | 4 | 0.7 | - | 0.7 | 0.8 | 3.1 | 3.9 |
| Financial expense | 4 | (4.0) | (0.6) | (4.6) | (4.4) | (3.5) | (7.9) |
| Profit before taxation | | 41.2 | (10.6) | 30.6 | 40.4 | (5.2) | 35.2 |
| Taxation | 5 | (9.9) | 2.3 | (7.6) | (10.5) | 1.4 | (9.1) |
| Profit for the year attributable to owners of the parent | | 31.3 | (8.3) | 23.0 | 29.9 | (3.8) | 26.1 |
| | | | | | | | |
| Basic earnings per share | 6 | 40.4p | | 29.6p | 38.8p | | 33.9p |
| Diluted earnings per share | 6 | 39.8p | | 29.2p | 38.5p | | 33.6p |
| Dividend per share - Interim | 7 | | | 6.0p | | | 5.8p |
| Dividend per share - Final proposed | 7 | | | 10.0p | | | 9.2p |
| Total | 7 | | | 16.0p | | | 15.0p |
* The group's definition of non-underlying items is included in note 1 "Basis of preparation".
Year ended 31 December 2013
Consolidated Statement of Comprehensive Income
| | Notes | 2013 £m | 2012 £m |
| Profit for the year | | 23.0 | 26.1 |
| Items that may be reclassified subsequently to profit or loss | | | |
| Exchange differences on translation of overseas operations | | (1.6) | (6.4) |
| Exchange differences on foreign currency borrowings denominated as net investment hedges | | (0.7) | 2.8 |
| Effective portion of changes in fair value of cash flow hedges | | - | (0.8) |
| Transfers to the income statement on cash flow hedges | | 0.4 | 0.3 |
| Taxation on items that may be reclassified to profit or loss | | (0.1) | 0.1 |
| Items that will not be reclassified subsequently to profit or loss | | | |
| Actuarial loss on defined benefit pension schemes | | (5.8) | (0.9) |
| Taxation on items that will not be reclassified to profit or loss | 5 | 0.4 | (0.2) |
| Other comprehensive income for the year | | (7.4) | (5.1) |
| Total comprehensive income for the year attributable to owners of the parent | | 15.6 | 21.0 |
Year ended 31 December 2013
Consolidated Balance Sheet
| | Notes | 2013 £m | 2012 £m |
| Non-current assets | | | |
| Intangible assets | | 126.7 | 124.8 |
| Property, plant and equipment | | 111.9 | 106.8 |
| | | 238.6 | 231.6 |
| Current assets | | | |
| Inventories | | 55.1 | 57.8 |
| Trade and other receivables | | 91.2 | 88.7 |
| Cash and cash equivalents | 8 | 10.0 | 8.9 |
| | | 156.3 | 155.4 |
| Total assets | 2 | 394.9 | 387.0 |
| Current liabilities | | | |
| Trade and other liabilities | | (85.0) | (84.2) |
| Current tax liabilities | | (7.5) | (13.7) |
| Provisions for liabilities and charges | | (3.5) | (0.5) |
| Interest bearing borrowings | | (0.8) | (2.0) |
| | | (96.8) | (100.4) |
| Net current assets | | 59.5 | 55.0 |
| Non-current liabilities | | | |
| Other liabilities | | (0.1) | (0.2) |
| Provisions for liabilities and charges | | (2.8) | (2.8) |
| Deferred tax liability | | (9.5) | (11.2) |
| Retirement benefit obligation | | (20.2) | (16.3) |
| Interest bearing borrowings | | (96.4) | (93.7) |
| | | (129.0) | (124.2) |
| Total liabilities | | (225.8) | (224.6) |
| Net assets | | 169.1 | 162.4 |
| | | | |
| Equity | | | |
| Share capital | | 19.4 | 19.3 |
| Share premium | | 31.5 | 29.6 |
| Other reserves | | 4.5 | 4.5 |
| Translation reserve | | (0.2) | 2.1 |
| Hedge reserve | | (0.6) | (0.9) |
| Retained earnings | | 114.5 | 107.8 |
| Total equity | | 169.1 | 162.4 |
Approved by the board of directors on 11 March 2014 and signed on its behalf by:
D W Muir
Director
M Pegler
Director
Year ended 31 December 2013
Consolidated Statement of Changes in Equity
| | Notes | Share capital £m | Share premium £m | Other reserves† £m | Translation reserves £m | Hedge reserves £m | Retained earnings £m | Total equity £m |
| At 1 January 2012 | | 19.2 | 29.2 | 4.5 | 5.7 | (0.5) | 92.5 | 150.6 |
| Comprehensive income | | | | | | | | |
| Profit for the year | | - | - | - | - | - | 26.1 | 26.1 |
| Other comprehensive income for the year | | - | - | - | (3.6) | (0.4) | (1.1) | (5.1) |
| Transactions with owners recognised directly in equity | | | | | | | | |
| Dividends | 7 | - | - | - | - | - | (10.2) | (10.2) |
| Credit to equity of share-based payments | | - | - | - | - | - | 0.3 | 0.3 |
| Tax taken directly to the consolidated statement of changes in equity | 5 | - | - | - | - | - | 0.2 | 0.2 |
| Shares issued | | 0.1 | 0.4 | - | - | - | - | 0.5 |
| At 31 December 2012 | | 19.3 | 29.6 | 4.5 | 2.1 | (0.9) | 107.8 | 162.4 |
| Comprehensive income | | | | | | | | |
| Profit for the year | | - | - | - | - | - | 23.0 | 23.0 |
| Other comprehensive income for the year | | - | - | - | (2.3) | 0.3 | (5.4) | (7.4) |
| Transactions with owners recognised directly in equity | | | | | | | | |
| Dividends | 7 | - | - | - | - | - | (11.6) | (11.6) |
| Credit to equity of share-based payments | | - | - | - | - | - | 0.4 | 0.4 |
| Tax taken directly to the consolidated statement of changes in equity | 5 | - | - | - | - | - | 0.3 | 0.3 |
| Shares issued | | 0.1 | 1.9 | - | - | - | - | 2.0 |
| At 31 December 2013 | | 19.4 | 31.5 | 4.5 | (0.2) | (0.6) | 114.5 | 169.1 |
† Other reserves represent the premium on shares issued in exchange for shares of subsidiaries acquired and £0.2m (2012: £0.2m) capital redemption reserve.
Year ended 31 December 2013
Consolidated Statement of Cash Flows
| | | 2013 | 2012 | ||
| | Notes | £m | £m | £m | £m |
| Profit before tax | | | 30.6 | | 35.2 |
| Add back net financing costs | 4 | | 3.9 | | 4.0 |
| Operating profit | | | 34.5 | | 39.2 |
| Adjusted for non-cash items: | | | | | |
| Share-based payments | | 0.5 | | 0.3 | |
| Movement in fair value of forward currency contracts | | - | | 0.4 | |
| (Gain)/loss on disposal of non-current assets | 3 | (1.8) | | 0.1 | |
| Depreciation | | 13.6 | | 12.8 | |
| Amortisation of intangible assets | | 3.3 | | 3.6 | |
| Impairment of non-current assets | 3 | 1.8 | | 0.3 | |
| | | | 17.4 | | 17.5 |
| Operating cash flow before movement in working capital | | | 51.9 | | 56.7 |
| Decrease/(increase) in inventories | | 2.7 | | (0.6) | |
| (Increase)/decrease in receivables | | (1.3) | | 0.6 | |
| Increase in payables | | 0.5 | | 3.7 | |
| Increase/(decrease) in provisions and employee benefits | | 0.4 | | (2.0) | |
| Net movement in working capital | | | 2.3 | | 1.7 |
| Cash generated by operations | | | 54.2 | | 58.4 |
| Income taxes paid | | | (15.3) | | (11.6) |
| Interest paid | | | (4.1) | | (5.1) |
| Net cash from operating activities | | | 34.8 | | 41.7 |
| Interest received | | 0.7 | | 0.8 | |
| Proceeds on disposal of non-current assets | | 3.0 | | 0.5 | |
| Purchase of property, plant and equipment | | (21.0) | | (17.5) | |
| Purchase of intangible assets | | (1.1) | | (0.8) | |
| Acquisitions of subsidiaries | | (6.6) | | (0.5) | |
| Net cash used in investing activities | | | (25.0) | | (17.5) |
| Issue of new shares | | 2.0 | | 0.5 | |
| Dividends paid | 7 | (11.6) | | (10.2) | |
| New loans and borrowings | | 34.2 | | 19.1 | |
| Repayment of loans and borrowings | | (31.7) | | (33.4) | |
| Repayment of obligations under finance leases | | (1.5) | | (3.6) | |
| Net cash used in financing activities | | | (8.6) | | (27.6) |
| Net increase/(decrease) in cash | | | 1.2 | | (3.4) |
| Cash at the beginning of the year | | | 8.9 | | 12.7 |
| Effect of exchange rate fluctuations | | | (0.1) | | (0.4) |
| Cash at the end of the year | 8 | | 10.0 | | 8.9 |
Notes of the Condensed Consolidated Annual Financial Statements
1. Basis of preparation
Hill & Smith Holdings PLC is a company incorporated in the UK.
New IFRS standards and interpretations adopted during 2013
In 2013 the following amendments had been endorsed by the EU, became effective and therefore were adopted by the group:
- Amendments to IAS 1 Presentation of items of Other Comprehensive Income
- Amendments to IAS 19 Employee Benefits
- Amendments to IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities
- IFRS 13 Fair Value Measurement
The amendment to IAS 19 'Employee benefits' makes changes to the recognition and measurement of the defined benefit pension expense and termination benefits and disclosures relating to all employee benefits. The interest cost and expected return on scheme liabilities and assets used in the previous version of IAS 19 have been replaced with a 'net interest' amount which is calculated by applying a discount rate to the net defined benefit obligation. This amendment has a corresponding impact on actuarial gains and losses recognised in the statement of comprehensive income, with no overall change to the net retirement benefit liability in the balance sheet. Comparative information has not been restated for the effect of the retrospective application of the amendment to IAS 19 since the impact on the group's results is not material.
The adoption of the other standards and amendments has not had a material impact on the group's financial statements.
New IFRS standards, amendments and interpretations not adopted
The IASB and IFRIC have issued additional standards and amendments which are effective for periods starting after the date of these financial statements. The following standards and amendments have not yet been adopted by the group:
- IAS 27 (2011) Separate Financial Statements (effective for annual periods beginning on or after 1 January 2014)
- IAS 28 (2011) Investments in Associates and Joint Ventures (effective for annual periods beginning on or after 1 January 2014)
- Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2014)
- Amendments to IAS 36 Impairment of Assets - Recoverable amount disclosures for non-financial assets (effective for annual periods beginning on or after 1 January 2014)
- IFRS 10 Consolidated Financial Statements (effective for annual periods beginning on or after 1 January 2014)
- IFRS 11 Joint Arrangements (effective for annual periods beginning on or after 1 January 2014)
- IFRS 12 Disclosure of Interests in Other Entities (effective for annual periods beginning on or after 1 January 2014)
None of the standards above are expected to have a material impact on the group.
The principal exchange rates used were as follows:
| | 2013 | 2012 | ||
| | Average | Closing | Average | Closing |
| Sterling to Euro (£1 = EUR) | 1.18 | 1.20 | 1.23 | 1.23 |
| Sterling to US Dollar (£1 = USD) | 1.56 | 1.65 | 1.59 | 1.62 |
| Sterling to Thai Bhat (£1 = THB) | 48.09 | 54.13 | 49.25 | 49.46 |
| Sterling to Swedish Krona (£1 = SEK) | 10.19 | 10.59 | 10.73 | 10.52 |
Non-underlying items
Non-underlying items are non-trading items disclosed separately in the consolidated income statement where the quantum, nature or volatility of such items would otherwise distort the underlying trading performance of the group. The following are included by the group in its assessment of non-underlying items:
- Gains or losses arising on disposal, closure, restructuring or reorganisation of businesses that do not meet the definition of discontinued operations
- Amortisation of intangible fixed assets arising on acquisitions
- Expenses associated with acquisitions
- Impairment charges in respect of tangible or intangible fixed assets
- Changes in the fair value of derivative financial instruments
- Significant past service items or curtailments and settlements relating to defined benefit pension obligations resulting from material changes in the terms of the schemes
- Net financing costs or returns on defined benefit pension obligations
- Costs incurred as part of significant refinancing activities.
The tax effect of the above is also included.
Details in respect of the non-underlying items recognised in the current and prior year are set out in note 3.
2. Segmental information
Business segment analysis
The group has three reportable segments which are Infrastructure Products - Roads, Infrastructure Products - Utilities and Galvanizing Services. Several operating segments that have similar economic characteristics have been aggregated into these reporting segments. A description of the activities of each of these segments is included in the operational review.
Income Statement
| | 2013 | 2012 | ||||
| Revenue £m | Result £m | Underlying result* £m | Revenue £m | Result £m | Underlying result* £m | |
| Infrastructure Products - Utilities | 202.9 | (2.0) | 7.4 | 205.7 | 10.2 | 13.4 |
| Infrastructure Products - Roads | 114.0 | 11.2 | 11.7 | 114.1 | 4.3 | 5.3 |
| Infrastructure Products - Total | 316.9 | 9.2 | 19.1 | 319.8 | 14.5 | 18.7 |
| Galvanizing Services | 127.6 | 25.3 | 25.4 | 120.9 | 24.7 | 25.3 |
| Total group | 444.5 | 34.5 | 44.5 | 440.7 | 39.2 | 44.0 |
| Net financing costs | | (3.9) | (3.3) | | (4.0) | (3.6) |
| Profit before taxation | | 30.6 | 41.2 | | 35.2 | 40.4 |
| Taxation | | (7.6) | (9.9) | | (9.1) | (10.5) |
| Profit after taxation | | 23.0 | 31.3 | | 26.1 | 29.9 |
* Underlying result is stated before non-underlying items as defined in note 1 "Basis of preparation", and is the measure of segment profit used by the chief operating decision maker, who is the chief executive. The Result columns are included as additional information.
Galvanizing Services provided £5.0m (2012: £4.1m) revenues to Infrastructure Products - Roads and £1.6m (2012: £1.8m) revenues to Infrastructure Products - Utilities. Infrastructure Products - Utilities provided £2.2m (2012: £1.9m) revenues to Infrastructure Products - Roads. These internal revenues, along with revenues generated from within their own segments, have been eliminated on consolidation.
Geographical analysis
Revenue (irrespective of origin)
| | 2013 £m | 2012 £m |
| UK | 205.9 | 197.6 |
| Rest of Europe | 101.2 | 101.5 |
| North America | 113.2 | 114.4 |
| The Middle East | 8.2 | 9.3 |
| Asia | 12.7 | 10.3 |
| Rest of World | 3.3 | 7.6 |
| Total | 444.5 | 440.7 |
Total assets
| | 2013 £m | 2012 £m |
| UK | 146.1 | 138.1 |
| Rest of Europe | 102.5 | 98.7 |
| North America | 131.3 | 134.5 |
| Asia | 13.5 | 15.0 |
| Rest of World | 1.5 | 0.7 |
| Total group | 394.9 | 387.0 |
3. Non-underlying items
Non-underlying items included in operating profit comprise the following:
- Business reorganisation costs of £9.2m (2012: £0.8m) - principally relating to redundancies and other costs associated with site closures, including the Access Design site at Telford and the Pipe Supports facility in China. The net costs include asset impairment charges of £1.8m (2012: £0.3m).
- Amortisation of acquired intangible fixed assets of £2.2m (2012: £2.4m).
- Acquisition expenses of £0.4m (2012: £0.8m) relating to acquisitions made by the group during the year.
- Profits on disposal of properties of £1.8m (2012: £nil).
The net costs in 2012 also included a loss of £0.4m in respect of the group's UK defined benefit pension obligations following changes to the terms of the scheme, and a loss of £0.4m in respect of movements in the fair value of forward foreign currency contracts.
Non-underlying items included in financial income and expense represent the net financing cost on pension obligations of £0.6m (2012: £0.4m).
4. Net financing costs
| | Underlying £m | Non- underlying £m | 2013 £m | Underlying £m | Non- underlying £m | 2012 £m |
| Interest on bank deposits | 0.7 | - | 0.7 | 0.8 | - | 0.8 |
| Change in fair value of financial assets and liabilities | - | - | - | - | - | - |
| Expected return on pension scheme assets | - | - | - | - | 3.1 | 3.1 |
| Total other income | - | - | - | - | 3.1 | 3.1 |
| Financial income | 0.7 | - | 0.7 | 0.8 | 3.1 | 3.9 |
| Interest on bank loans and overdrafts | 3.9 | - | 3.9 | 4.2 | - | 4.2 |
| Interest on finance leases and hire purchase contracts | 0.1 | - | 0.1 | 0.2 | - | 0.2 |
| Total interest expense | 4.0 | - | 4.0 | 4.4 | - | 4.4 |
| Expected interest cost on pension scheme obligations | - | - | - | - | 3.5 | 3.5 |
| Interest cost on net pension scheme deficit | - | 0.6 | 0.6 | - | - | - |
| Financial expense | 4.0 | 0.6 | 4.6 | 4.4 | 3.5 | 7.9 |
| Net financing costs | 3.3 | 0.6 | 3.9 | 3.6 | 0.4 | 4.0 |
Following the adoption of the amendments to IAS19 during the year (see note 1), the net interest cost in respect of defined benefit pension obligations is shown separately for the year ended 31 December 2013. The comparatives have not been restated.
5. Taxation
| | 2013 £m | 2012 £m |
| Current tax | | |
| UK corporation tax | 2.0 | 1.8 |
| Adjustments in respect of prior periods | (2.7) | (0.8) |
| Overseas tax at prevailing local rates | 9.8 | 13.4 |
| | 9.1 | 14.4 |
| Deferred tax | | |
| Current year | 0.1 | (0.4) |
| Adjustments in respect of prior periods | - | (1.1) |
| Overseas tax at prevailing local rates | (1.0) | (3.3) |
| Effect of change in tax rate | (0.6) | (0.5) |
| Tax on profit in the consolidated income statement | 7.6 | 9.1 |
| | | |
| Deferred tax | | |
| Relating to defined benefit pension schemes | (0.4) | 0.2 |
| Relating to financial instruments | 0.1 | (0.1) |
| Tax on items taken directly to other comprehensive income | (0.3) | 0.1 |
| | | |
| Current tax | | |
| Relating to share-based payments | (0.2) | - |
| Deferred tax | | |
| Relating to share-based payments | (0.1) | (0.2) |
| Tax taken directly to the consolidated statement of changes in equity | (0.3) | (0.2) |
The tax charge in the consolidated income statement for the period is higher (2012: higher) than the standard rate of corporation tax in the UK. The differences are explained below:
| | 2013 £m | 2012 £m |
| Profit before taxation | 30.6 | 35.2 |
| Profit before taxation multiplied by the effective rate of corporation tax in the UK of 23.25% (2012: 24.5%) | 7.1 | 8.6 |
| Expenses not deductible for tax purposes | 1.8 | 0.1 |
| Capital profits less losses and write downs not subject to tax | (0.8) | (1.3) |
| Utilisation of brought forward tax losses not recognised | (0.7) | - |
| Overseas profits taxed at higher/(lower) rates | 3.1 | 3.6 |
| Overseas losses not relieved | 0.2 | 0.3 |
| Withholding taxes | 0.2 | 0.2 |
| Deferred tax benefit of future reductions in UK corporation tax rates | (0.6) | (0.5) |
| Adjustments in respect of prior periods | (2.7) | (1.9) |
| Tax charge | 7.6 | 9.1 |
6. Earnings per share
The weighted average number of ordinary shares in issue during the year was 77.6m (2012: 77.0m), diluted for the effects of the outstanding dilutive share options 78.6m (2012: 77.8m). Underlying earnings per share have been shown because the directors consider that this provides valuable additional information about the underlying performance of the group.
| | 2013 | 2012 | ||
| Pence per share | £m | Pence per share | £m | |
| Basic earnings | 29.6 | 23.0 | 33.9 | 26.1 |
| Non-underlying items* | 10.8 | 8.3 | 4.9 | 3.8 |
| Underlying earnings | 40.4 | 31.3 | 38.8 | 29.9 |
| | | | | |
| Diluted earnings | 29.2 | 23.0 | 33.6 | 26.1 |
| Non-underlying items* | 10.6 | 8.3 | 4.9 | 3.8 |
| Underlying diluted earnings | 39.8 | 31.3 | 38.5 | 29.9 |
* Non-underlying items as detailed in note 1 "Basis of preparation".
7. Dividends
Dividends paid in the year were the prior year's interim dividend of £4.5m (2012: £4.2m) and the final dividend of £7.1m (2012: £6.0m). Dividends declared after the balance sheet date are not recognised as a liability, in accordance with IAS10. The directors have proposed the following interim dividend and final dividend for the current year, subject to shareholder approval:
| | 2013 | 2012 | ||
| Pence per share | £m | Pence per share | £m | |
| Equity shares | | | | |
| Interim | 6.0 | 4.7 | 5.8 | 4.5 |
| Final | 10.0 | 7.8 | 9.2 | 7.1 |
| Total | 16.0 | 12.5 | 15.0 | 11.6 |
8. Cash and borrowings
| | 2013 £m | 2012 £m |
| Cash and cash equivalents in the balance sheet | | |
| Cash and bank balances | 10.0 | 8.8 |
| Call deposits | - | 0.1 |
| Cash | 10.0 | 8.9 |
| Interest bearing loans and borrowings | | |
| Amounts due within one year | (0.8) | (2.0) |
| Amounts due after more than one year | (96.4) | (93.7) |
| Net debt | (87.2) | (86.8) |
| | | |
| Change in net debt | | |
| Operating profit | 34.5 | 39.2 |
| Non-cash items | 17.4 | 17.5 |
| Operating cash flow before movement in working capital | 51.9 | 56.7 |
| Net movement in working capital | 1.9 | 3.7 |
| Changes in provisions and employee benefits | 0.4 | (2.0) |
| Operating cash flow | 54.2 | 58.4 |
| Tax paid | (15.3) | (11.6) |
| Net financing costs paid | (3.4) | (4.3) |
| Capital expenditure | (22.1) | (18.3) |
| Proceeds on disposal of non-current assets | 3.0 | 0.5 |
| Free cash flow | 16.4 | 24.7 |
| Dividends paid | (11.6) | (10.2) |
| Acquisitions | (6.6) | (0.5) |
| Issue of new shares | 2.0 | 0.5 |
| Net debt decrease | 0.2 | 14.5 |
| Effect of exchange rate fluctuations | (0.6) | 2.5 |
| Net debt at the beginning of the year | (86.8) | (103.8) |
| Net debt at the end of the year | (87.2) | (86.8) |
Notes:
1. The financial information previously set out does not constitute the company's statutory accounts for the years ended 31 December 2013 or 2012 but is derived from those accounts. Statutory accounts for 2012 have been delivered to the registrar of companies, and those for 2013 will be delivered in due course. The auditors have reported on those accounts; their report was:
i. unqualified;
ii. did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and
iii. did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.
2. The annual report will be posted to shareholders on or before 3 April 2014 and will be displayed on the company's website at www.hsholdings.com. Copies of the annual report will also be available from the registered office at Westhaven House, Arleston Way, Shirley, Solihull, B90 4LH.
3. Events calendar:
i. The annual general meeting will be held on Wednesday 14 May 2014 at 11.00 a.m. at The Village Hotel,
The Green Business Park, Shirley, Solihull, B90 4GW.
ii. The proposed final dividend for 2013 will be paid on 4 July 2014 to shareholders on the register on 30 May 2014 (ex-dividend date 28 May 2014).
iii. The last date for receipt of Dividend Reinvestment Plan elections is 13 June 2014.
iv. Interim results announcement for the period to 30 June 2014 due August 2014.
v. Payment of the 2014 interim dividend due January 2015.
4. This preliminary announcement of results for the year ended 31 December 2013 was approved by the directors on 11 March 2014.
Cautionary statement
This announcement contains forward looking statements which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ from those currently anticipated.
This information is provided by RNS
The company news service from the London Stock Exchange