Operational and Financial Review

 

2016 overview

Hill & Smith delivered its best ever trading performance in the twelve months to 31 December 2016. Against a backdrop of uncertain political and macro-economic environments, infrastructure investment in our key UK and US markets remained strong which, combined with our focused active portfolio management strategy, resulted in record revenue, profitability and operating margin.

 

Our performance continues to be underpinned by our tried and tested strategy of international diversity together with the leading positions our businesses hold in their respective markets. Our US and UK operations benefitted from rising spending on infrastructure in our chosen end markets, and together the US and UK operations represented over 80% of revenue and 90% of underlying operating profit. Organic profit growth has been supported by targeted bolt-on acquisitions and the restructuring of underperforming assets to improve overall returns and shareholder value. The prospects for both the US and UK economies as well as the markets in which we operate continue to be positive for 2017 and beyond.

 

Revenue for the year increased by 16% to £540.1m (2015: £467.5m), of which translational currency benefits contributed £27.9m or 6%. After adjusting for additional revenue of £25.4m from acquisitions and reduced revenue from restructuring of the non-US Pipe Supports businesses of £3.4m, organic revenue growth was £22.7m or 5%. Underlying operating profit improved by 26% to £70.6m (2015: £56.0m), including a positive currency translation of £4.4m. Acquisitions contributed £3.4m and the benefit of the non-US Pipe Supports restructuring actions a further £1.9m. The organic improvement in underlying operating profit was 8%. Underlying operating margin improved by 110bps to 13.1% (2015: 12.0%). Underlying profit before taxation was 28% higher at £68.0m (2015: £53.0m). Reported operating profit was £51.8m (2015: £37.3m), an increase of 39% on the prior year.  Reported profit before tax was £48.3m (2015: £33.2m).

 

Infrastructure Products

 

	£m		/- %	Constant Currency %
	2016	2015
Revenue	375.7	325.5	15	11
Underlying operating profit	32.6	26.5	23	18
Underlying operating margin %	8.7	8.1
Reported operating profit	14.9	8.5

 

The division supplies engineered products to the roads and utilities markets in geographies where there is sustained long term investment in infrastructure. In 2016 the division accounted for 70% (2015: 70%) of the Group's revenue and 46% (2015: 47%) of the Group's underlying operating profit. Revenues increased 15% to £375.7m (2015: £325.5m) including a £14.5m positive impact from exchange rate movements. Acquisitions contributed £16.8m and there was £3.4m of lower revenue from the restructured non-US Pipe Supports operations. Organic revenue growth was £22.3m, or 7%. Underlying operating profit was £32.6m (2015: £26.5m), an increase of £6.1m, with a positive currency translation benefit of £1.1m. Acquisitions contributed £0.8m and the non-US Pipe Supports restructuring an additional £1.9m. Underlying operating margin improved to 8.7% (2015: 8.1%). Reported operating profit was £14.9m (2015: £8.5m) and included charges of £10.5m relating to restructuring actions taken during the year and goodwill impairment charges of £4.1m relating to CA Traffic Limited, our traffic data collection business.

 

Roads

 

	£m		/- %	Constant Currency %
	2016	2015
Revenue	168.1	131.6	28	24
Underlying operating profit	19.6	16.0	23	21
Underlying operating margin %	11.7	12.2
Reported operating profit	10.9	15.6

 

Our Roads segment designs, manufactures and installs temporary and permanent safety products for the roads market together with intelligent transport systems which collect data and provide information to road users. We principally serve the UK market, with an international presence in selected geographies with a growing demand for innovative tested safety products. Roads represented 28% (2015: 29%) of the Group's underlying operating profit, and 31% (2015: 28%) of revenue in 2016. Revenues increased by 28% to £168.1m (2015: £131.6m), an organic increase of 17% after a currency benefit of £4.0m and contribution from acquisitions of £10.1m. Underlying operating profit of £19.6m was £3.6m higher than the prior year (2015: £16.0m) including £0.2m from positive currency translations.

	£m
	2016	2015
Reported operating profit	10.9	15.6
Restructuring actions	2.7	-
Impairment charges	4.1	-
Acquisition costs and amortisation	1.9	0.4
Underlying operating profit	19.6	16.0

 

UK

The Government's Road Investment Strategy ('RIS') is entering its third year of an initial five-year plan. The RIS aims to provide certainty of investment funding for the period 2015/16 to 2020/21, improve the connectivity and condition of the existing road network and, importantly, increase capacity, with projects that will deliver 1,300 additional lane miles. Core to the drive to add capacity will be additional 'Smart', or managed motorways, which are at the heart of the Group's product offering in the UK. Overall, the implementation of the Government's RIS continues to develop in line with our expectations. Three Smart Motorway programmes are progressing well, supported by early stage engineering for the next phase of investment. Additional Smart Motorways are due to commence later in 2017. As expected, demand for our temporary safety barrier has been strong and utilisation of this rental product has been high. In September 2016 we committed to expanding our temporary safety barrier rental fleet by a further 10,000m to 280,000m to support expected demand levels later in 2017/2018.

 

To expand our product and market offering, on 13 May 2016 we completed the acquisition of Safety and Security Barrier Holdings Limited ('Hardstaff Barriers'). Hardstaff Barriers specialises in the sale and rental of fully tested temporary and permanent pre-cast concrete barriers for site and vehicle protection, and complements our existing range of vehicle restraint systems. It has also developed a quick-deploy, high security perimeter system for the protection of critical infrastructure in vulnerable locations. The business, which supplies products across the UK and Europe, complements and further enhances our existing range of hostile vehicle mitigation products. Trading since acquisition has been in line with expectations with clear benefits from integration with our existing temporary safety barrier business.

 

Demand for our permanent safety barrier application was lower than in the previous year. This was unsurprising, as it is naturally required towards the end of projects, and demand is expected to increase as the current Smart Motorway and other programmes approach finalisation later in 2017 and beyond.  Higher demand in the UK for our BEBO concrete structures and our bridge parapet products resulted in improved profitability. Order books remain encouraging and further progress is expected. Exports of our Brifen wire rope safety fence and Bristorm, our newly certified high containment anti-terrorist perimeter barrier, to the Middle East were strong with projects completed for power, desalination and chemical plants.

 

Our Variable Message Sign business produced an excellent improved result for the year and was the leading provider of signs to Highways England, Transport Scotland and Transport Wales, supplying all major UK motorway schemes. The business was particularly successful in winning orders for the new Remote Operated Temporary Traffic Management ('ROTTM') variable message signs which are being deployed by Highways England to improve road worker safety where no hard shoulders exist on the Smart Motorways. Investment in product development has widened our product offering which will deliver future benefits.

 

Our traffic data collection business, CA Traffic Limited, experienced difficult conditions throughout the year as a result of reduced local governmental spending in its core markets. Following a deterioration in performance in the second half of the year, the Board revised its expectations for the future performance of the business resulting in a goodwill impairment charge of £4.1m.

 

Continued diversification of our lighting column business away from the diminishing PFI market and into the local authority and contractor markets has been highly successful and improved volumes and margins contributed to an excellent year. On 3 August 2016 we completed the acquisition of Signature Limited ('Signature'), a UK based business which specialises in the development, manufacture, installation and maintenance of street lighting columns, road sign and traffic management systems. The business complements and expands our product offering into the UK roads market. Post-acquisition, and as planned, we rationalised the cost base of the combined operation with the closure of the Signature lighting column facility and one sales office at a cost of £0.8m. With an enhanced product offering and reduced cost base we are excited about the opportunities for growth in this market.

 

Non-UK

Our Scandinavian business delivered a solid first half, but performed below expectations in the second half of the year and the overall result was disappointing. Poor weather conditions in the final quarter were a contributing factor. On 1 April 2016 we acquired FMK Trafikprodukter AB ('FMK'), a business based in Sweden, that designs and manufactures safety barriers, noise reduction screens and bridge parapets for the Scandinavian roads market. The acquisition of FMK and its suite of products will accelerate the growth plans of our existing Scandinavian roads business. Although the slow integration of FMK into our existing business impacted overall profitability, the integration is now complete and we look forward to an improved performance in 2017. Sterling's weakness will assist the export of Group products into this market.

 

In France, our lighting column business operated in a difficult market, but increased volumes and profitability. Recent investment in automation continues to reduce costs and enhance service capability and enabled us to secure a number of export opportunities in the second half of the year.

 

In India, despite repeated assurances from the national government that funding would be released for new road schemes, we continued to be frustrated by the level of delays and bureaucracy. Conditions therefore remained difficult and we incurred a small operating loss. Having reassessed the outlook, and the returns available, we took the decision to withdraw from the market and the process to close the business commenced in December 2016. Closure of the business is expected to be completed by the end of the first quarter at a cost of £1.9m, of which cash costs are expected to be £0.5m.

 

In the USA and Australia we continue to work hard to introduce our tried and tested products into new markets by promoting their benefits through lower cost and efficient installation. Excellent progress was made in both countries in the distribution of Zoneguard, our steel temporary safety barrier, as an alternative to incumbent concrete/plastic products and revenue and profitability were ahead year on year. In the USA, we expanded our coverage across various states and delivered a record number of barriers. In Australia, we have continued to develop our presence in the direct sale and rental market and, in the first half, we invested £1.1m in 5.5km of Zoneguard rental pool which will be utilised fully through 2017. We also secured a supply contract for 19.8km of Zoneguard for the New South Wales government for an upgrade to the M1 motorway in the Hunter Valley region. For the first time, our Australian business returned a positive result and we are optimistic for the future.

 

Utilities

 

	£m		/- %	Constant Currency %
	2016	2015
Revenue	207.6	193.9	7	2
Underlying operating profit	13.0	10.5	24	14
Underlying operating margin %	6.3	5.4
Reported operating profit	4.0	(7.1)

 

Our Utilities segment provides industrial flooring, plastic drainage pipes, security fencing, steel and composite products for a wide range of infrastructure markets including energy creation and distribution, rail, water and house building. 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 increased by 7% to £207.6m (2015: £193.9m). Benefits from currency translation of £10.5m and a £6.7m contribution from recent acquisitions were partly offset by the restructuring and closure programme of our non-US Pipe Supports business (£3.4m lower revenue year on year). Organically, revenue was similar to the prior year. Underlying operating profit was £13.0m (2015: £10.5m) including a positive currency impact of £0.9m, first time contribution from acquisitions of £0.8m and a £1.9m benefit from the non-US Pipe Supports restructuring.

 

	£m
	2016	2015
Reported operating profit	4.0	(7.1)
Restructuring actions	7.8	0.7
Impairment charges	-	15.7
Acquisition costs and amortisation	1.2	1.2
Underlying operating profit	13.0	10.5

 

In the US, our power transmission substation operation performed strongly, delivering record revenue and operating profit. The strategy of supplying complete packaging work, structural steel and electrical components, under framework agreements with key US utilities continues to work well. Investment in the US electricity distribution network looks set for continued growth and that, together with our relationships with key market players, is encouraging.

 

Our composite material business experienced a disappointing year with the absence of large one-off contracts impacting performance. On 20 January 2016 we completed the acquisition of the trade and assets of E.T. Techtonics, Inc. ('ETT'), a leading designer of composite bridges for pedestrian, equestrian and light vehicle applications. Trading ahead of expectations, ETT has been integrated into our existing composites business and enhances our product offering to end users within infrastructure markets.

Encouragingly, overall results in our US Pipe Supports business were ahead of last year. We experienced higher demand for our engineered pipe supports in both the petrochemical and power markets and we completed three projects under a master supply agreement with Bechtel Power. Demand for our industrial hangers also increased as construction activity in our key north east markets improved. To provide new impetus, a new leadership team was installed mid-year. Following a strategic review, a cost reduction programme was implemented in the fourth quarter resulting in the closure of three of the seven existing branches and the consolidation of their operations into one strategically located service centre between New York and Philadelphia to serve the eastern region. The rationalisation was completed in February 2017 and we expect to see the benefits of a lower cost base and more efficient operation in an improved performance in 2017.

 

In March 2016, following a strategic review of our non-US Pipe Supports business, we announced a plan to close and exit our manufacturing sites in the UK and Thailand, and also our sales office in China. To the extent possible, work was to be transferred to our Indian manufacturing facility. A non-underlying charge of approximately £10m was expected to be booked in the 2016 results of which net cash costs were expected to be £4m. The restructuring project was completed in late 2016, ahead of plan in terms of both timing and costs. A one-off non-underlying charge of £7.8m has been incurred with a net cash cost in the year of £0.9m. The total cash cost of the restructuring, including future spend, is expected to be £2.5m. We have invested further in our Indian facility, both in terms of transferring existing equipment from the UK and Thailand and also the construction of new facilities to increase capacity and expand the product offering. The Indian business coped well with the disruption caused by the additional investment and the transfer of existing customers into India has been better than expected. We entered into a strategic partnership covering the Middle East with a local Saudi Arabian manufacturer, which will allow us to have local manufactured content when supplying pipe supports in the region. The market outlook in India and the Far East remains strong with a large programme to build both coal and gas fired power plants together with LNG receiving terminals.

 

UK

In the UK the performance of our utilities businesses was mixed and, as expected, results were lower than the strong performance in the prior year. Our plastic pipe business fell below expectations as anticipated orders from Asset Management Period 6 ('AMP6') for the water industry failed to materialise despite numerous projects in design phase. As the programme enters year three of the five-year investment cycle we do expect a significant upturn in the number of projects being released. Demand for storm attenuation tanks for flood alleviation in the UK housing market was strong and is expected to continue in 2017.

 

The industrial flooring business completed two major new rail maintenance depots for Crossrail and Eurostar supplying galvanized open grid flooring, stairs and handrails along with GRP driver access platforms. Oil and gas refurbishment projects remain low despite the recent increase in oil prices. We developed new GRP composite products for London Underground and began supplying them at the end of the year. The business should experience higher demand from AMP6 as years three to five are traditionally strong periods for flooring and walkway bridges.

 

On 13 July 2016 we completed the acquisition of Technocover Limited ('Technocover'), which specialises in the development, manufacture, installation and maintenance of high security access products for the utilities markets. Technocover's suite of products is complementary to our existing market offering, particularly plastic pipes, industrial flooring and security fencing, and will therefore benefit from being part of the UK Utilities division. The slow release of projects from AMP6 meant that the results since acquisition have been marginally lower than expected. However, strong order intake experienced in the final quarter resulted in a solid order book for the new year. The number of new orders released from AMP6 is also encouraging for our other UK Utilities businesses.

 

Ongoing investment in the UK rail network and the protection of critical infrastructure sites continues to provide good volumes for our security fencing operation. The innovative product development of high security fencing over the past few years is now leading to our systems being specified by a number of utilities, who are reviewing their perimeter security in light of the increased threat of terrorism both in the UK and overseas.

 

Unexpectedly, despite the abandonment of the UK Renewable Obligation scheme for solar projects over 5MW in March 2015, our solar frame business had a record year. Investment in UK solar parks continues and, whilst we do not anticipate a repeat of the record performance, prospects are already encouraging for the current year.

 

A strong UK housing market aided our building products business and demand for composite residential doors, steel lintels and builders' metalwork reached record levels. Supplying national and independent housebuilders, in addition to national merchants, minimises geographical risks in demand patterns whilst maximising our exposure to both retail and social housing sectors.

 

 

 

Galvanizing Services

 

	£m		/- %	Constant Currency %
	2016	2015
Revenue	164.4	142.0	16	6
Underlying operating profit	38.0	29.5	29	16
Underlying operating margin %	23.1	20.8
Reported operating profit	36.9	28.8

 

The Galvanizing Services division offers corrosion protection services to the steel fabrication industry with multi-plant facilities in the UK, France and the USA. The division accounts for 30% (2015: 30%) of the Group's revenue and 54% (2015: 53%) of the Group's underlying operating profit. Revenue increased by 16% to £164.4m (2015: £142.0m) including positive currency translation of £13.4m and £8.6m from acquisitions. Organic revenue growth was marginally positive. Underlying operating profit of £38.0m (2015: £29.5m) included a £3.3m currency benefit and a £2.6m contribution from acquisitions. The organic improvement in profitability was £2.6m. Underlying operating margin was a record 23.1% (2015: 20.8%).

 

	£m
	2016	2015
Reported operating profit	36.9	28.8
Acquisition amortisation	1.3	1.0
Other items	(0.2)	(0.3)
Underlying operating profit	38.0	29.5

 

USA

Located in the north east of the country, Voigt & Schweitzer is the market leader with seven plants offering local services and extensive support to fabricators and product manufacturers involved in highways, construction, utilities and transportation.

 

Following a strong first half where volumes were 15% ahead of the prior year, the second half faced stronger comparatives and, as expected, volumes were down 11% year on year. Overall, volumes for the year were 1% higher year on year. A focus on smaller, higher margin infrastructure jobs, operational excellence and customer service resulted in record revenue and profitability. Strong volumes were seen from the alternative energy market, particularly solar where recent medium term legislation to extend tax credits has supported demand. A large LNG project, running throughout the last two years, was completed in the third quarter. Despite the approval of a $305bn five-year highway bill in December 2015, bridge and highway work remained lower than expected and volumes were down year on year. As various states are awarded their allocation of funds we expect projects to be released and volumes to increase in 2017. Recent US administration pronouncements on the strategic importance of additional investment in US infrastructure, including building and repairing roads and bridges, are supportive to the galvanizing industry and we are well positioned to benefit should this increased spend materialise.

 

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.

 

In a challenging economic climate the business performed well, improving volumes year on year by 1% and increasing market share. Competition remains strong, but actions to reduce the cost base and focus on operational effectiveness resulted in profitability ahead of prior year. The resizing of one of our structural steel plants to a jobbing plant with a smaller bath was completed in July 2016.

 

UK

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

 

Overall volumes were 12% higher year on year. Excluding Premier Galvanizing, acquired in November 2015, underlying volumes were similar to the prior year. Internal or 'own work' volumes from our UK utilities business and permanent road safety barrier were lower year on year but external volumes improved, increasing market share. Our strategy of focusing on lower volume, higher margin work continues to pay off, resulting in record profitability and operating margins.

 

Premier Galvanizing has been integrated into our UK galvanizing business and performed ahead of expectations. Significant investment in our Chesterfield, Walsall and Medway plants has increased capacity and improved their operational efficiencies.

 

Financial review

 

Income statement phasing

	First half	Second half	Full year
2016
Revenue £m	259.3	280.8	540.1
Underlying operating profit £m	32.0	38.6	70.6
Underlying operating margin %	12.3	13.7	13.1
Reported operating profit £m	21.2	30.6	51.8
2015
Revenue £m	233.0	234.5	467.5
Underlying operating profit £m	26.3	29.7	56.0
Underlying operating margin %	11.3	12.7	12.0
Reported operating profit £m	9.1	28.2	37.3

 

The phasing of revenue and to a greater extent underlying operating profit was again second half weighted in 2016, principally reflecting the impact of acquisitions and currency translation benefits together with a normal degree of seasonality across the Group's portfolio of businesses.

                                                                  

Reported revenue of £540.1m was 16% ahead of the prior year. The acquisitions completed during both the current and prior year resulted in a net revenue increase of £25.4m and a £3.4m benefit to underlying operating profit, while the restructuring of the Group's non-US Pipe Supports businesses reduced revenues by £3.4m but delivered an improvement in underlying operating profit of £1.9m. The translation impact arising from changes in exchange rates, principally the US Dollar and Euro, increased revenue by £27.9m and underlying operating profit by £4.4m. Organic revenue growth was £22.7m and underlying operating profit growth was £4.9m, or 5% and 8% respectively. Further details of the performance of the Group are provided in the Operational Review.

 

£m	Revenue	Underlying operating profit
2015	467.5	56.0
Acquisitions	25.4	3.4
Restructuring actions	(3.4)	1.9
Currency	27.9	4.4
Organic growth	22.7	4.9
2016	540.1	70.6

 

Cash generation and financing

The Group again demonstrated its cash generating abilities with strong operating cash flow of £78.2m (2015: £66.1m). 

 

Working capital was similar to the prior year (2015: increase of £2.5m), with the effect of rising zinc and steel prices on inventory values being offset by a realisation and write off of working capital due to the restructuring actions taken during the year. Working capital as a percentage of annualised sales fell to 14.2% at 31 December 2016 (2015: 14.3%), while debtor days improved to 61 days (2015: 62 days).

 

Capital expenditure at £21.7m (2015: £16.0m) represents a multiple of depreciation and amortisation of 1.2 times (2015: 1.0 times). Significant items of expenditure in the current year included £2.0m of Zoneguard temporary safety barrier investment to meet demand in our US, Australian and Scandinavian operations, and £1.8m of product development spend reflecting the continued innovation within the Group's suite of products, particularly for the UK roads markets. The Group continues to invest in organic growth opportunities where returns exceed internal benchmarks and its cost of capital.

                                                

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 2016 the Group achieved an underlying cash conversion rate of 93% (2015: 100%). Over the past eight years the Group has achieved an average rate of over 90%.

 

 

 

 

		Non-
		Underlying
	Reported £m	Items £m	Underlying £m
Operating profit	51.8	18.8	70.6
Non-cash items	26.5	(6.7)	19.8
Net movement in working capital	(0.1)	(3.9)	(4.0)
Cash generated by operations	78.2	8.2	86.4
Capital expenditure (net)	(18.1)	(2.8)	(20.9)
Operating cash flow	60.1	5.4	65.5
Operating profit	51.8		70.6
Cash conversion %	116%		93%

 

The Group's strong operating cash flow provides the funds to invest in growth, both organic and acquisitive, to restructure underperforming businesses where appropriate, to service debt, pension and tax obligations and to maintain a growing dividend stream, while a sound balance sheet provides a platform to take advantage of future growth opportunities.

 

Group net debt at 31 December 2016 was £112.0m, representing a year on year increase of £20.5m driven by acquisition spend of £37.4m and adverse exchange rate movements of £6.9m reflecting the weakening in Sterling against the US Dollar and Euro. The Group's net debt includes 36% denominated in US Dollars and 7% denominated in Euros which act as a hedge against the net asset investments in overseas businesses.

 

Change in net debt

	2016 £m	2015 £m
Operating profit	51.8	37.3
Depreciation and amortisation*	21.0	18.0
Working capital movement	(0.1)	(2.5)
Pensions and provisions	-	(3.3)
Other items	5.5	16.6
Operating cash flow	78.2	66.1
Tax paid	(15.7)	(12.6)
Interest paid (net)	(2.8)	(3.0)
Capital expenditure	(21.7)	(16.0)
Sale of fixed assets	3.6	1.2
Free cash flow	41.6	35.7
Dividends	(16.2)	(14.1)
Acquisitions	(37.4)	(16.6)
Amortisation of refinancing costs	(0.4)	(0.4)
Net issue of shares	(1.2)	0.3
Change in net debt	(13.6)	4.9
Opening net debt	(91.5)	(96.0)
Exchange	(6.9)	(0.4)
Closing net debt	(112.0)	(91.5)

 

* includes £2.6m (2015: £1.6m) in respect of acquisition intangibles.

 

The Group's principal debt facility consists of a headline £210m multicurrency revolving credit agreement.  In May 2016 the Group extended the term of the existing facility from April 2019 to April 2021, providing the Group with significant headroom against its expected future funding requirements for a further two years whilst also taking advantage of favourable market conditions to reduce costs and amend key terms.  Costs associated with the amendment of £1.0m were deducted from the carrying value of the loans and will be amortised over the life of the facility, as required by accounting standards.

 

Maturity profile of debt facilities

	2016			2015
On demand	£12.2m		On demand	£10.2m
2017-2020	£0.6m		2015-2016	£0.6m
2021	£234.3m		2017-2019	£214.8m

 

At the year end the Group had committed debt facilities available of £234.9m and a further £12.2m in overdrafts and other on-demand facilities.

The principal debt facility is subject to covenants which are tested biannually 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 2016 were:

 

                                                Actual                    Covenant

Interest Cover                       33.2 times              > 4.0 times

Net debt to EBITDA               1.2 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 for the foreseeable future.

 

Net finance costs

		2016 £m		2015 £m
Underlying net cash interest:
Bank loans/overdrafts	2.6		3.0
Finance leases/other	-	2.6	-	3.0
Non underlying:
Net pension interest	0.5		0.7
Costs of refinancing	0.4	0.9	0.4	1.1
		3.5		4.1

 

Net financing costs were lower than prior year at £3.5m (2015: £4.1m). The net cost from pension fund financing under IAS19 was £0.5m (2015: £0.7m) which, given its non-cash nature, continues to be treated as 'non-underlying' in the Consolidated Income Statement. Non-underlying financing costs also include £0.4m relating to the Group's amendments of the terms of its principal banking facilities in 2014 and 2016, reflecting the amortisation of the costs capitalised against the loans in accordance with IAS39. The underlying cash element of net financing costs decreased by £0.4m to £2.6m (2015: £3.0m), as a result of the improved terms achieved on the refinancing of debt facilities in May and the maturity of certain higher cost fixed rate interest swap agreements earlier in the year. Underlying operating profit covered net cash interest 27.2 times (2015: 18.7 times). Reported operating profit covered total reported interest 14.8 times (2015: 9.1 times).

 

Return on invested capital ('ROIC')

The Group aims to maintain ROIC above its pre-tax weighted average cost of capital (currently c.10%), with a target return of 20%. In 2016, ROIC increased to 19.4% (2015: 17.8%) largely as a result of improvements in underlying operating margins, tight control over working capital and capital investment outflows, and active management of the portfolio. 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, provisions, retirement benefit obligations and derivative financial instruments, and therefore includes goodwill and other acquired intangible assets. On a reported basis, ROIC was 14.3% (2015: 11.8%).

 

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 2015 revenue and underlying operating profit using 2016 average exchange rates would have increased the prior year revenue by £27.9m and increased underlying operating profit by £4.4m, the movements reflecting the impact of Sterling's depreciation against both the Euro and US Dollar during the year. Exchange rates continue to move in line with worldwide events and currency flows and hence are inherently difficult to predict, but will continue to have an impact on the translation of overseas earnings in 2017. Retranslating 2016 revenue and underlying operating profit using exchange rates at 3 March 2017 (inter alia £1 = $1.22 and £1 = €1.16) would increase the revenue and underlying operating profit by £21.7m (4%) and £4.1m (6%) respectively. For the US Dollar, a 1 cent movement results in a £1.4m and £0.3m adjustment to revenue and underlying operating profit respectively, while for the Euro, a 1 cent movement results in a £0.5m and £0.1m adjustment to revenue and underlying operating profit respectively.

 

Non-underlying items

The total non-underlying items charged to operating profit in the Consolidated Income Statement amounted to £18.8m (2015: £18.7m) and were made up of the following:

 

 

 

 

		Income statement charge £m	Cash in the year £m	Future cash £m	Non-cash £m
Business reorganisation costs	(10.5)		(1.5)	(2.1)	(6.9)
Impairment of goodwill	(4.1)		-	-	(4.1)
Amortisation of acquisition intangibles	(2.6)		-	-	(2.6)
Acquisition expenses	(1.8)		(1.8)	-	-
Pension settlement gains	0.2		-	-	0.2
	(18.8)		(3.3)	(2.1)	(13.4)

 

·      Business reorganisation costs relate to three restructuring actions taken by the Group during the year.

 

In March, the Group announced the proposed restructuring of its non-US Pipe Supports operations, resulting in the cessation of manufacturing in the UK and Thailand, the closure of a sales office in China and the transfer of work to our Indian plant. The programme, which has been delivered ahead of target timeframe and cost, resulted in a net charge to the income statement of £7.8m. The net cash cost in the year was £0.9m, which includes property and other fixed asset disposal proceeds of £2.8m arising from the disposal of the manufacturing facilities in the UK and Thailand. Further cash costs of £1.6m are expected in 2017. In the period between the announcement of the restructuring actions on 9 March 2016 and 31 December 2016, the trading results of the non-US Pipe Supports operations included revenue of £10.6m and an operating loss of £0.6m and are included in the Group's underlying trading results for the year. In the Group's half year results to 30 June 2016 the post-announcement trading results of the non-US Pipe Supports operations (revenue of £5.3m and an operating loss of £1.0m) were disclosed separately as non-underlying items given their quantum relative to the overall result for that period.

 

In September, following the acquisition of Signature Limited, the Group initiated a rationalisation of the Signature business as part of its integration with our existing lighting column operation. The charge to the income statement was £0.8m of which £0.6m were cash costs in the year.

 

In December, the Group committed to the closure of its Indian roads business following a period of disappointing performance and a lack of clear opportunities in that market. The total closure cost is expected to be £1.9m, of which £0.5m are cash costs that will be incurred in 2017.

                                                    

·      The impairment charge of £4.1m represents a full impairment of the goodwill relating to the Group's acquisition of CA Traffic Limited, our transport data collection business, in 2006. In recent years the business has generated levels of profitability that are below those anticipated at acquisition, largely driven by a contraction of available markets in the UK partly resulting from reduced government and local authority spending. Performance in the second half of 2016 was substantially below that anticipated at the end of the prior year and, as a result, an impairment review was performed during the year resulting in a full impairment of the acquisition goodwill.

                                            

·      Non-cash amortisation of acquired intangible fixed assets was £2.6m (2015: £1.6m), the increase reflecting the acquisitions made by the Group during the year.

 

·      Acquisition related expenses of £1.8m (2015: £1.0m) reflect costs associated with acquisitions expensed to the Consolidated Income Statement in accordance with IFRS3 (Revised).

 

·      Pension settlement gains of £0.2m (2015: nil) arose on the settlement of outstanding defined benefit liabilities with certain pension scheme members as part of the merger of the Group's two UK defined benefit pension schemes during the year.

 

The net cash impact of the above items was an outflow of £3.3m in the year, a further £2.1m outflow expected in 2017 and a non-cash element therefore amounting to £13.4m. 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 £14.5m (2015: £9.1m). The underlying effective tax rate for the Group was 24.0% (2015: 23.8%), which is lower than the weighted average mix of tax rates in the jurisdictions in which the Group operates as a result of the benefit of tax efficient financing arrangements, the successful conclusion of tax uncertainties related to prior years and the impact on the Group's deferred tax liabilities of forthcoming reductions in tax rates in France. Cash tax paid was £15.7m (2015: £12.6m), with the increased spend reflecting the growth in the Group's profits. Tax paid was broadly in line with the current tax charge for the year of £16.7m.

 

 

 

The Group's net deferred tax liability is £7.8m (2015: £7.9m). An £8.9m (2015: £7.0m) deferred tax liability is provided in respect of brand names, customer relationships and other contractual arrangements acquired, while a further £1.1m (2015: £1.2m) 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, contractual arrangements 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 (as described in note 3). UEPS for the period under review increased by 27% to 65.9p (2015: 51.7p), driven by organic revenue growth in the Group's core markets, continuing improvements in underlying operating margins, currency translation benefits and the impact of active management of the Group's portfolio. The diluted UEPS was 65.1p (2015: 51.3p). Basic earnings per share was 43.0p (2015: 30.9p). The weighted average number of shares in issue was 78.5m (2015: 78.1m) with the diluted number of shares at 79.3m (2015: 78.8m) 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 2016 was £27.3m, significantly higher than the £14.6m reported at 31 December 2015. The deterioration in the deficit relates principally to the UK scheme and was largely driven by a reduction in the discount rate, in line with substantial falls in UK corporate bond yields particularly towards the end of the year, and was exacerbated by an increase in future inflation assumptions reflecting current expectations of higher UK inflation in the medium term. 

 

At 31 December 2015 the Group operated two UK defined benefit pension schemes, The Hill & Smith Executive Pension Scheme and the Hill & Smith Pension Scheme. In March 2016 the Group completed a merger of these two schemes into one new scheme, The Hill & Smith 2016 Pension Scheme (the 'Scheme'), which remains the largest employee benefit obligation within the Group. As part of this merger, certain members of the Scheme accepted the Group's offer to crystallise their pension entitlement by payment of a winding up lump sum, which resulted in a settlement gain of £0.2m.

 

In common with many other UK companies, the Scheme is mature having significantly more pensioners and deferred pensioners than active participating members and is closed to new members. The IAS19 deficit of the Scheme as at 31 December 2016 was £22.4m (2015: £11.1m). The Group is actively engaged in dialogue with the Scheme's Trustees with regard to management, funding and investment strategy, and has an agreed deficit recovery plan that requires cash contributions amounting to £2.3m per annum until 5 April 2020. A formal valuation of the newly merged scheme, dated 5 April 2016, is currently underway.

              

Acquisitions                                 

In May 2016 the Group completed the acquisition of Safety and Security Barrier Holdings Limited, the parent company of Hardstaff Barriers Limited, for a net cash consideration of £10.4m. Intangible assets arising on the acquisition comprise goodwill of £6.8m, customer relationships of £3.0m and contractual arrangements of £1.4m. The acquired business, based in Nottingham, UK, will complement the Group's existing UK temporary road safety barrier business.

 

In July 2016 we completed the acquisition of Technocover Limited for a net cash consideration of £9.2m. Intangible assets arising on the acquisition comprise goodwill of £1.8m, the brand name of £0.3m, customer relationships of £3.9m and contractual arrangements of £1.8m. The acquired business, based in Welshpool, will complement and enhance the Group's existing product offering into its UK utilities markets.

 

In August 2016 we acquired Signature Limited, a UK business specialising in the development and manufacture of street lighting columns, road signage and traffic management systems, for a net cash consideration of £12.6m. Intangible assets arising on the acquisition comprise goodwill of £3.0m, brand names of £0.5m, customer relationships of £4.4m and contractual arrangements of £1.7m. The acquired business will complement and has been integrated with the Group's existing UK lighting column business.

 

The Group also completed two smaller acquisitions during the year:

 

·      In January we acquired E.T. Techtonics, Inc., a US-based designer of composite bridge products that complements our existing US composites business, Creative Pultrusions. Consideration for the acquisition was £1.5m. 

 

·      In April we acquired FMK Trafikprodukter AB, a Swedish producer of equipment for the Scandinavian roads markets. FMK has been integrated with our existing ATA business, providing an expanded suite of traffic management products. Consideration for the acquisition was £4.0m, of which £0.8m is deferred and contingent on future performance and product development targets.

 

The level of headroom that the Group maintains in its principal banking facilities enables us to continue to seek opportunities for acquisitive growth where potential returns exceed the Group's benchmark performance targets.

 

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 Group Finance Director.

 

 

Derek Muir                                           Mark Pegler

Group Chief Executive                        Group Finance Director

 

8 March 2017