Final Results - Hill & Smith PLC

RNS Number : 9569R

Hill & Smith Hldgs PLC

06 March 2019

Hill & Smith Holdings PLC

AUDITED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2018

Returned to growth in second half

Continued strategic investment

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 2018.

Financial results

			Change
	31 December 2018	31 December 2017	Reported %	Constant ** currency %

Revenue	£637.9m	£585.1m	9	10
Underlying^*:
Operating profit	£80.1m	£81.3m	-1	-
Operating margin	12.6%	13.9%	-130bps	-120bps
Profit before taxation	£76.3m	£78.5m	-3	-1
Earnings per share	77.8p	75.9p	3	4
Reported:
Operating profit	£65.2m	£74.1m	-12
Profit before taxation	£59.8m	£70.2m	-15
Basic earnings per share	59.9p	68.6p	-13

Dividend per share	31.8p	30.0p	6
Net debt	£132.9m	£99.0m

Key points:

Returned to growth in H2 after disappointing H1
Robust performance from US and other international businesses, driven by significant investment in new and replacement infrastructure
Improved second half performance in UK despite a cautious investment environment
Seven acquisitions completed in 2018 and early 2019, extending the Group's infrastructure product range and addressable markets
Underlying EPS growth of 3%, benefitting from lower tax rate of 19.6% (2017: 24.0%)
Strong operating cash flow: net debt £132.9m, 1.3x underlying EBITDA, despite significant acquisition spend (£45.8m) and capital investment (£32.8m) in the year
Proposed 6% increase in final dividend to 21.8p giving a full year dividend up 6% to 31.8p, the sixteenth successive year of increases

Derek Muir, Chief Executive, said:

"We returned to growth in the second half, a testament to our resilient business model, our leading positions in markets with clear long-term growth dynamics, and our ability to create our own growth opportunities by broadening and enhancing the range of products that we can offer. We do this both through internal product development and by targeting complementary acquisitions, and 2018 has been a busy and successful year in this regard.

"Our UK and US businesses, which represent the bulk of our activities, will continue to benefit from the significant ongoing investment in replacement and new infrastructure in those countries. In particular, the UK Government's confirmed long-term commitment to increased investment in the roads network is very encouraging for our UK roads business, and our US businesses will benefit from the US Administration's 'Buy American' policy for federally funded infrastructure projects.

"Despite all the current well-documented political and macro-economic uncertainty, we are confident that our leading market positions, business model and financial strength put us in a strong position to take advantage of market opportunities as they present themselves. Whilst we continue to experience some short term uncertainty in the UK, we have reasonable expectations that 2019 will be a year of progress for the Group."

As announced today, Mark Pegler, Group Finance Director, will step down from the Board and leave the Group at the end of April 2019. This move reflects the outcome of the Board's long term succession planning alongside Mark's personal plans for the future. A search for his successor is underway.

For further information, please contact:

Hill & Smith Holdings PLC

Derek Muir, Group Chief Executive Tel: 44 (0)121 704 7430

Mark Pegler, Group Finance Director

MHP Communications

Andrew Jaques / Ollie Hoare Tel: 44 (0)20 3128 8100

* All underlying measures exclude certain non-underlying items, which are as detailed in note 3 and described in the Operational and Financial Review. References to an underlying profit measure throughout this announcement are made on this basis and, in the opinion of the Directors, aid the understanding of the underlying business performance as they exclude items whose quantum, nature or volatility would otherwise distort the underlying performance of the business. Underlying measures are presented on a consistent basis over time to assist in comparison of performance.

** Where we make reference to constant currency amounts, these are prepared using exchange rates which prevailed in the current year rather than the actual exchange rates that applied in the prior year. Where we make reference to organic measures we exclude the impact of currency translation movements, acquisitions, disposals and closures of subsidiary businesses. In respect of acquisitions, the amounts referred to represent the amounts for the period in the current year that the business was not held in the prior year. In respect of disposals and closures of subsidiary businesses, the amounts referred to represent the amounts for the period in the prior year that the business was not held in the current year.

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, Sweden, Norway, India and Australia.

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

Infrastructure Products - Roads, supplying products and services such as permanent and temporary road safety barriers, hostile vehicle mitigation products, street lighting columns, bridge parapets, temporary car parks and variable road messaging solutions.

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

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 4,400 staff, principally in 7 countries.

Operational and Financial Review

2018 overview

After a difficult start to the year, Hill & Smith returned to growth in the second half and delivered underlying profitability for 2018 only marginally below the record prior year. Our US and other international businesses performed strongly, driven by the significant investment going into the replacement of ageing infrastructure and new infrastructure projects. Our UK business experienced certain headwinds earlier in the year, with adverse weather in Q1 and delays to some key roads projects, but delivered a strong second half trading performance.

Our UK and US operations, which generated 81% of revenue and 88% of underlying operating profit, operate principally in niche infrastructure markets where the overall outlook remains positive. The Group benefits from the industrial and geographical spread of its markets and businesses, which not only create a resilient business model but also opportunities for profitable growth. Overall, we are confident that our focused strategy of developing and investing in businesses with market leading positions in growth infrastructure markets, combined with our active and decisive approach to portfolio management, including bolt-on acquisitions, will provide continued growth and drive attractive returns for shareholders.

During the year, in line with our growth strategy, we:

· completed six acquisitions in the UK, USA and Scandinavia for our Roads and Utilities divisions, for total cash consideration in the period of £45.2m, with further consideration of up to £2.6m dependent on future financial performance;

· committed to a new-build galvanizing facility in northern USA, expected to be operational fourth quarter 2019;

· completed the investment in a further 30km of concrete, and committed to an additional 38km of steel, temporary safety barrier in the UK with a combined investment of £10.4m.

After the year end, on 22 February 2019, we completed the acquisition of ATG Access Limited, a UK-based supplier of hostile vehicle mitigation perimeter security solutions, for a cash consideration of £22.5m. In addition, on 10 January 2019, the Group completed an amendment to its principal debt facility, extending the term to January 2024 and increasing the size by £50m to c.£280m. The increase in headroom will allow the Group greater flexibility to pursue further growth opportunities.

			Change %
	2018	2017	Reported	Constant currency
Revenue	£637.9m	£585.1m	9	10
Underlying⁽¹⁾:
Operating profit	£80.1m	£81.3m	- 1	-
Profit before tax	£76.3m	£78.5m	- 3	-1
Earnings per share	77.8p	75.9p	3	4
Reported:
Operating profit	£65.2m	£74.1m	-12
Profit before tax	£59.8m	£70.2m	-15
Basic earnings per share	59.9p	68.6p	-13

⁽¹⁾ Underlying measures exclude certain non-underlying items, which are detailed in note 3 to the Financial Statements.

Annual revenue increased by 9% to £637.9m (2017: £585.1m), despite a translational currency headwind of £7.1m or 1%. After adjusting for net additional revenue of £40.5m from acquisitions/disposals, organic revenue growth was 3%. Underlying operating profit declined by 1% to £80.1m (2017: £81.3m), which included a headwind from currency translation of £1.4m. The net operating profit contribution from acquisitions/disposals was £3.0m. Underlying operating margin reduced by 130bps to 12.6% (2017: 13.9%) while underlying profit before taxation was 3% lower at £76.3m (2017: £78.5m). Reported operating profit was £65.2m (2017: £74.1m), a decrease of 12% on the prior year. Reported profit before tax was £59.8m (2017: £70.2m). The principal reconciling items between underlying and reported operating profit are a goodwill impairment charge of £6.0m, amortisation of acquisition intangibles of £4.8m and acquisition related expenses of £2.2m.

£m	Revenue	Underlying operating profit
2017	585.1	81.3
Acquisitions & disposals	40.5	3.0
Currency	(7.1)	(1.4)
Organic growth/decline	19.4	(2.8)
2018	637.9	80.1

The phasing of revenue and to a greater extent underlying operating profit was again second half weighted in 2018, principally reflecting improvements in the Group's UK operations after some challenges in the first half, the impact of acquisitions and a normal degree of seasonality across the Group's portfolio of businesses.

	First half	Second half	Full year
2018
Revenue £m	295.4	342.5	637.9
Underlying operating profit £m	34.6	45.5	80.1
Underlying operating margin %	11.7	13.3	12.6
Reported operating profit £m	31.0	34.2	65.2
2017
Revenue £m	291.8	293.3	585.1
Underlying operating profit £m	38.8	42.5	81.3
Underlying operating margin %	13.3	14.5	13.9
Reported operating profit £m	35.4	38.7	74.1

Dividend

The Group continues to generate good levels of profitability and benefits from a cash generative business model. The Board is recommending an increase of 6% in the final dividend to 21.8p per share (2017: 20.6p per share) making a total dividend for the year of 31.8p per share (2017: 30.0p per share), an increase of 6% on the prior year. Underlying dividend cover remains a conservative 2.4 times (2017: 2.5 times). Reported dividend cover is 1.9 times (2017: 2.3 times).

Our long-term performance and outlook gives us the confidence to maintain a progressive dividend policy which has resulted in sixteen years of uninterrupted dividend growth. The final dividend, if approved, will be paid on 1 July 2019 to those shareholders on the register at the close of business on 24 May 2019.

Brexit

Hill & Smith is an international business, operating in seven countries and selling into numerous others. The Group has continued to monitor closely, and on a business-by-business basis, the identified operational and financial risks arising from the UK's expected exit from the EU on 29 March 2019.

In Europe we have operations located in the UK, France, Sweden and Norway. Although the UK businesses do produce goods for export, the overall percentage is relatively small and the proportion destined for the EU is less than 1% of Group revenues. Whilst some of the supply chain inputs for the UK emanate from the EU, again the proportion is not significant. The operations located in France, Sweden and Norway do not have any significant transactions with the UK.

A small number of businesses use supply chains from both the Far East and the USA and there remains a possibility of potential disruption at UK sea ports in the period following exit. Contingency plans are in place within the relevant businesses and throughout the supply chain to mitigate these risks, such as purchasing additional stock of key raw materials and securing additional supply chain capacity.

Approximately 6% of our UK employees are EU Nationals and we are communicating with them using the latest information from the UK Government. They will also be receiving our support, to the extent necessary, to obtain 'settled status' if and when needed.

Like other UK based international businesses, we remain exposed to any impact Brexit may have on currency. Any transactional exposure is hedged in accordance with existing treasury policies, and the short term impact should therefore not be material. As is common, any translational exposure is unhedged and the translation of the Group's overseas earnings, net assets and net debt could therefore be impacted by any sudden and prolonged movement in Sterling.

The impact of any significant macro-economic disruption to wider demand patterns is difficult to predict but our experience is that our exposure to longer term infrastructure investment programmes, in many cases Government-funded, will mitigate the impact on the Group. As always, we remain vigilant and will react with our customary speed as necessary.

Outlook

The industrial and geographical spread of the Group's markets and businesses not only provide a resilient base, but also opportunities for growth. Notwithstanding the current cautious investment environment in the UK, the fundamentals of our niche infrastructure markets remain encouraging.

In Utilities, our UK and US activities continue to benefit from the significant investment in replacing ageing infrastructure and new infrastructure projects in those countries. In Galvanizing, wider market conditions, supported by infrastructure activity, remain favourable and we expect our businesses to consolidate their strong market positions and continue to take advantage of opportunities.

In the UK, we have confidence that the Group's road product portfolio will continue to benefit from increased investment in the UK's road infrastructure. Implementation of the Department for Transport's Road Investment Strategy is entering the final year of the initial five year plan, providing certainty of funding through to 2019/20. Recent UK Government announcements have confirmed its commitment to a second phase of road investment across 2020 to 2025, increasing funding by some 66% to £25.3 billion compared to the prior five year period.

In the US, the Administration has implemented its 'Buy American' policy through the imposition of tariffs and requirements to source locally for federally funded infrastructure projects. Our US businesses remain well positioned to benefit from any such on-shoring trends.

Overall, despite all the current well-documented political and macro-economic uncertainty, we are confident that our leading market positions, business model and financial strength put us in a strong position to take advantage of market opportunities as they present themselves. Whilst we continue to experience some short term uncertainty in the UK, we have reasonable expectations that 2019 will be a year of progress for the Group.

Infrastructure Products

	£m		/- %	Constant Currency %
	2018	2017	/- %	Constant Currency %
Revenue	447.5	402.8	11	13
Underlying operating profit	42.5	40.4	5	7
Underlying operating margin %	9.5	10.0
Reported operating profit	29.3	34.4

The Infrastructure Products division supplies engineered products to the roads and utilities markets in geographies where there is sustained long term investment in infrastructure. In 2018 the division accounted for 70% (2017: 69%) of the Group's revenue and 53% (2017: 50%) of underlying operating profit. Revenues increased 11% to £447.5m (2017: £402.8m) which included a £5.4m headwind from exchange rate movements. Acquisitions and disposals contributed a net £40.5m of revenue. Organic revenue growth was £9.6m, or 2%. Underlying operating profit was £42.5m (2017: £40.4m), an increase of £2.1m or 5%, with currency translation headwinds of £0.7m. Acquisitions/disposals contributed a net £3.0m. Underlying operating margin was 9.5% (2017: 10.0%). Reported operating profit was £29.3m (2017: £34.4m) and included intangible asset impairment charges of £6.0m relating to the Group's acquisition of Technocover Limited in 2016, and costs of £0.7m (2017: £2.8m) relating to restructuring actions taken during the year.

Roads

	£m		/- %	Constant Currency %
	2018	2017	/- %	Constant Currency %
Revenue	208.5	187.1	11	13
Underlying operating profit	24.2	23.6	3	4
Underlying operating margin %	11.6	12.6
Reported operating profit	20.3	20.9

Our Roads business designs, manufactures and installs temporary and permanent safety products for the roads market. We principally serve the UK market, but with an increasing international presence in selected geographies - Scandinavia, USA, France and Australia - where there is a growing demand for innovative tested safety products. Roads represented 33% (2017: 32%) of the Group's revenue in 2018, and 30% (2017: 29%) of underlying operating profit. Revenues increased 11% to £208.5m (2017: £187.1m). After currency headwind of £2.0m and net contribution from acquisitions/disposals of £28.3m, the organic decline was 3%. Underlying operating profit of £24.2m was £0.6m higher than the prior year (2017: £23.6m), including a £0.3m headwind from currency translation and £2.1m from acquisitions/disposals.

Reconciliation of Reported to Underlying operating profit	£m
Reconciliation of Reported to Underlying operating profit	2018	2017
Reported operating profit	20.3	20.9
Restructuring actions	-	1.8
Past service pension costs	0.3	-
Profit on disposal of subsidiary	-	(0.6)
Acquisition costs and amortisation	3.6	1.5
Underlying operating profit	24.2	23.6

The UK Government's Road Investment Strategy ('RIS') is entering its final year of an initial five-year plan. The RIS aims to provide certainty of investment funding for the period 2015/16 to 2019/20, to improve the connectivity and condition of the existing road network and, importantly, to increase capacity, with delivery of 1,300 additional lane miles. In October 2018, the Group was encouraged to hear the Government commit to further significant investment in the UK roads network. Confirming funding for its Road Investment Strategy 2 ("RIS2") programme, the UK Government increased investment across 2020 to 2025 to £25.3 billion, an increase of some 66% compared with the initial RIS programme spanning 2015 to 2020. The delivery of Smart Motorways, in which the Group has an active and significant presence, continues to lie at the core of the Government's investment in the strategic road network.

In the first half of the year we experienced some delays in the commencement of new projects, principally Smart Motorways, as Highways England completed detailed planning to ensure efficient execution. Demand for our rental temporary safety barrier was therefore below our expectations in the first half, although completion delays on existing projects helped to mitigate the impact. New Smart Motorway projects were progressively commissioned throughout the year and second half utilisation rates were significantly higher and in line with expectations. As the significant investment programme ramps up we continue to expect high demand for both our steel and concrete temporary safety barriers. In anticipation of the programme ahead, we completed the investment in a further 30km of concrete and committed to an additional 38km of steel temporary safety barrier, with a combined investment of £10.4m. The outlook for the remainder of RIS1 and for RIS2, the details of which are due to be published later in 2019, remains strong.

Demand for permanent safety barrier, bridge parapet and lighting columns was adversely impacted by UK weather conditions in the first quarter with limited end of financial year spend by local councils as funds were diverted elsewhere to keep the transport network operational. The market for permanent safety barrier subsequently improved and was in line with our expectations. Our bridge parapet business was also adversely impacted by preparations to relocate to a new, larger facility expected to be completed in the first quarter of 2019. Our lighting column and signage business continues to deliver a strong performance in a competitive market. An enhanced product portfolio and inclusion in a number of supply chain framework agreements will provide a platform for further development. On 1 January 2018, we acquired D Gibson Road & Quarry Services Limited for a cash consideration of £0.3m. Supplying road signs and ancillary products to UK contractors, the business has been absorbed into our existing lighting column and signage business.

The delays in the commencement of new Smart Motorway projects adversely impacted our Variable Message Signs ('VMS') business and volumes and profitability were materially below the prior year. The impact of the lower volumes has been partly mitigated as we completed the previously announced restructuring involving the closure of two UK sites and consolidation into our existing facility in the north east of England. Our Remotely Operated Temporary Traffic Management ('ROTTM') signs, which are safety-led permanent applications on motorways where no hard shoulder exists, continue to be deployed across the network. Development of a new, full colour LED variable message sign for use on the next phase of the Smart Motorway roll-out was completed and the first project for the new technology was won for delivery in the first half of 2019.

With the continuing high threat of terrorism, demand for our range of hostile vehicle mitigation products, including temporary and permanent, steel and concrete applications, remains strong. We continue to develop new products and applications to protect key locations and events across the country, including Hinkley Point, the US Ambassador's residence in London on the visit of the US President, royal weddings and the Commonwealth Heads of Government meeting. As previously reported, we are experiencing growing interest from UK and international third parties in purchasing our proven safety product for road and hostile vehicle mitigation applications. During the year we sold both new and existing rental fleet temporary safety barrier for applications in Denmark, Norway and the UK including 24km for use on 'Project Brock' on the M20 in Kent which will be used to control traffic on the motorway to Dover in the post-Brexit interim.

Exports of Brifen, our wire rope safety barrier system, and Bristorm, our high containment anti-terrorist perimeter barrier, experienced a slow start to the year but finished strongly as projects and credit financing were released. After the year end, on 22 February 2019, the Group announced the acquisition of ATG Access Limited ("ATG") for a cash consideration of £22.5m. Based in the UK and exporting to over 30 countries, ATG specialises in the development, manufacture and installation of hostile vehicle mitigation perimeter security solutions including bollards, road blockers, barriers and gates. The combination of our existing security products with those of ATG provides a strong platform to accelerate the expansion of both our existing UK and international roads businesses.

Non-UK

Our Scandinavian businesses performed well and profitability was ahead of the prior year. Further investment in the temporary steel and concrete safety barrier rental fleet continues to be made to support significant upgrades to the wider road networks, including the E4 Stockholm bypass. On 28 March 2018, we acquired Signalvakter Syd for an initial cash consideration of £0.4m. A further £0.5m consideration is potentially due dependent on financial performance over the next five years. A traffic management business, Signalvakter has been integrated into our existing Scandinavian operations and will serve to extend our product offering. In January 2019, we recruited sixteen people from an existing road traffic safety management business to complement and accelerate our traffic management and safety products operation.

In France, our lighting column business has started to experience higher demand from local councils across the country as additional budgets are allocated to urban design work ahead of municipal elections in 2020. Recent work to develop export markets was also successful with market share gained in northern Europe. Despite a competitive market, results were materially ahead of the prior year.

Employing both a rental and direct sales approach, exciting progress continues to be made in promoting our temporary safety barrier in both the USA and Australia. In the USA, acceptance of our temporary steel barrier, Zoneguard, as an alternative to concrete is now well established in a number of states. In May 2018 we signed a major new distribution agreement with a nationwide US roads traffic management business and this is a major step forward for the business, expanding the number of states which the product can reach. Overall, despite a slower first half of the year, volumes sold were similar to the prior year. In Australia, road infrastructure investment remains buoyant. In addition to delivering a 12km Zoneguard project into New Zealand along with a significant project in Queensland, the business also invested in the further expansion of its rental fleet and utilisation was high.

On 9 May 2018, the Group announced the acquisition of the trade and assets of Work Area Protection Corp. ("WAPCO") for a cash consideration of £31.2m. Based in the USA, WAPCO specialises in the development, manufacture and distribution of a wide range of road workzone safety products including crash attenuators, temporary variable message signs, smart work zone systems and traffic control products such as drums, channelizers and cones. The combination of WAPCO's business with our existing US and international roads businesses will increase the scale and range of road safety products we can sell into key geographies where the infrastructure investment outlook is strong. WAPCO has been fully integrated into our existing US operation and trading since acquisition has been in line with expectations.

Utilities

	£m		/- %	Constant Currency %
	2018	2017	/- %	Constant Currency %
Revenue	239.0	215.7	11	13
Underlying operating profit	18.3	16.8	9	12
Underlying operating margin %	7.7	7.8
Reported operating profit	9.0	13.5

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 housebuilding. The requirements for new power generation in emerging economies and replacement of ageing infrastructure in developed countries provide excellent opportunities for the Group's businesses. Revenues increased by 11% to £239.0m (2017: £215.7m) including a £12.2m contribution from acquisitions and despite a headwind from currency translation of £3.4m. Organically, revenue was £14.5m or 7% higher than the prior year. Underlying operating profit was £18.3m (2017: £16.8m) including a negative currency impact of £0.4m and a contribution from acquisitions of £0.9m.

Reconciliation of Reported to Underlying operating profit	£m
Reconciliation of Reported to Underlying operating profit	2018	2017
Reported operating profit	9.0	13.5
Restructuring actions	0.7	1.0
Impairment charges	6.1	0.4
Past service pension costs	0.4	-
Acquisition costs and amortisation	2.1	1.9
Underlying operating profit	18.3	16.8

Non-UK

In the US, investment across key utilities infrastructure continues and our power transmission substation business grew strongly. Significant steel and zinc price increases were managed effectively through the supply chain and profitability was ahead of the prior year. On 17 August 2018, we acquired the business assets of Engineered Endeavours Inc. from Chapter 11 proceedings in Ohio, USA for a cash consideration of £4.8m. The business designs and manufactures utility poles for the power distribution and wireless cellular markets and gives us 52,000 sq. ft. of additional manufacturing capacity. Already integrated into our existing US utility business, performance has been ahead of plan and the positive reaction from the enlarged customer base bodes well for the future. Investment in US electricity distribution is forecast to continue over the medium term and we are excited about the opportunities for the combined business.

With a growing acceptance of its expanding product offering, our composite materials group delivered record results, growing both revenue and profitability by delivering wide ranging projects for cooling towers, bridge structures, fender piles, seawall, rail protective cover boards and harbour camels. Kenway and TowerTech, acquired in 2017, have been seamlessly integrated into the Group and the benefits of a wider product offering are evident. Facilities at our Pennsylvania base have been expanded and the TowerTech operation will relocate in the first quarter of 2019. The business and assets of Composite Advantage Inc. ("CA") were acquired on 5 October 2018 for an initial cash consideration of £8.0m (net of expected working capital adjustments on completion of £1.0m). A further £1.2m is due on the expiry of certain warranties and indemnities. Based in Ohio, USA, CA provides fibre reinforced polymer products for infrastructure markets including waterfront, rail, bridge decks and oil & gas. CA is being integrated into the existing composite products business and will expand the range of technical solutions into ever wider infrastructure markets. Trading since acquisition has been encouraging and we remain excited by the opportunities for growth.

In the UK, all of our utilities businesses were impacted by the poor weather in the first quarter and, whilst trading subsequently improved, overall results were mixed. Our plastic pipe business experienced the expected up-turn in orders from Asset Management Period 6 ("AMP6") and continued to enjoy good volumes from new housing developments. However, private investment projects were below expectations, in part due to a more cautious investment environment in the UK. The performance of Technocover Limited, our security access cover operation, was below expectation as key water utilities deferred or diverted funds away from security investment plans and profitability was impacted by operational gearing and inefficiencies.

The industrial flooring business used the slower start to the year to restructure its operations, enabling it to improve operational efficiency as the year progressed. Performance in the second half of the year was strong as we designed, supplied and installed flooring, walkways and handrails for rail maintenance depots, energy from waste plants and rail platform extensions in both steel and composite material. New products have been readily accepted by the customer base and will assist in increasing market share. On 27 April 2018, we acquired the business and certain assets of The Grating Company Limited and Pro Composites Limited for an initial cash consideration of £0.5m. A further £0.9m consideration is potentially due dependant on financial performance over the next five years. The businesses specialise in the supply and installation of glass reinforced plastic composite products for the construction and rail markets in the south east of the UK, and have been integrated into our existing UK composites operation within the industrial flooring business.

Our security fencing operation continues to develop its range of tested options for the protection of critical infrastructure sites, which have been deployed at large data centres in both Ireland and Continental Europe for the first time. The introduction of more specialist products has helped to offset the decline in spend from electrification projects on the UK rail network. Exciting opportunities exist in both local and export markets that require high security protection and the recent acquisition of ATG will help widen our product offering and geographical reach.

Our building products business, supplying composite residential doors, steel lintels and builders' metalwork, was impacted by the poor weather in the first quarter but recovered strongly, benefitting from growth in the new build housing market and growing its share of the residential door market. The business also embarked on a major capital investment programme to increase capacity and improve efficiency to enable it to take advantage of medium term growth opportunities.

Pipe Supports

In our US pipe supports business the requirement for engineered pipe supports in the power sector has continued, albeit at lower levels versus the prior year, with the focus around combined cycle gas power, chemical and waste water plants. Strong demand from a robust US economy, including a growing commercial construction market in the north east of the country, resulted in our industrial hangers business improving revenue and profitability. Rising input prices, principally resulting from the implementation of tariffs, were managed through the supply chain.

In India, both the local and the international power market for our engineered pipe supports remains encouraging and we have supplied coal and gas projects in India, Japan and Indonesia in addition to our first cryogenics project in the Middle East. Whilst results were below the exceptional prior year, the introduction of new products developed by our Indian team will continue to expand the customer base and our market reach.

Galvanizing Services

	£m		/- %	Constant Currency %
	2018	2017	/- %	Constant Currency %
Revenue	190.4	182.3	4	5
Underlying operating profit	37.6	40.9	- 8	- 6
Underlying operating margin %	19.7	22.4
Reported operating profit	35.9	39.7

The Galvanizing Services division offers corrosion protection services to the steel fabrication industry with multi-plant facilities in the USA, France and the UK. The division accounts for 30% (2017: 31%) of the Group's revenue and 47% (2017: 50%) of underlying operating profit. Revenue increased by 4% to £190.4m (2017: £182.3m) which included an adverse currency translation of £1.7m. Organic revenue growth was 5%. Underlying operating profit of £37.6m (2017: £40.9m) included a £0.7m currency headwind. The organic decline in profitability was £2.6m. Underlying operating margin was 19.7% (2017: 22.4%).

Reconciliation of Reported to Underlying operating profit	£m
Reconciliation of Reported to Underlying operating profit	2018	2017
Reported operating profit	35.9	39.7
Acquisition amortisation	1.3	1.2
Past service pension costs	0.4	-
Underlying operating profit	37.6	40.9

USA

Located in the north east of the USA, 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.

Day-to-day infrastructure investment remains strong with growth across a wide range of market sectors, particularly OEM and Bridge & Highway with new and replacement bridges, overhead sign structures, sound walls and highway fencing all performing well. Overall, despite the absence of large one-off projects, volumes were 7% ahead of the prior year which once again resulted in record profitability. Operating margins were marginally lower than the prior year as higher zinc input costs were managed through the supply chain. Bridge & Highway demand in particular is expected to continue into 2019 at significant levels, supplemented by the return of alternative energy infrastructure products as investment re-commences. Recent moves by the US Administration to implement tariffs on imported fabricated steel products, along with an Executive Order to 'Buy American' on all infrastructure projects with federal financial assistance, is expected to benefit the US galvanizing industry.

During the period, the Group committed the capital to invest in the greenfield development of a new plant which further fills out our geographical footprint. The plant is expected to be operational in the fourth quarter of 2019.

France

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

Volumes were 1% above the prior year, and the business improved market share. Competition remains strong and the pass-through of higher zinc costs in particular in the second half of the year was difficult. Peak zinc prices have now worked their way through the supply chain. Growth in the smaller jobbing market continues but structural volumes remain subdued. Overall, profitability and operating margin were below the same period prior year principally due to the higher zinc input costs.

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

Overall, volumes were down 5% compared to the prior year with the first quarter particularly weak due to the adverse weather before recovering as the year progressed. The volume reduction was also, in part, a function of our successful strategic decision to focus on lower volume but higher margin work from smaller jobbing customers as opposed to lower priced structural steel work. Day to day demand from the agricultural, housing and trailers markets was strong, offsetting weaker rail and construction sectors. Zinc price increases were successfully managed through the supply chain albeit resulting in a lower operating margin than in the prior year. Significant investment to expand capacity and improve efficiency was made in our Hull and Medway facilities, the benefits from which are expected to accrue in 2019.

Financial review

Cash generation and financing

The Group again demonstrated its cash generating abilities with strong operating cash flow of £87.7m (2017: £76.5m).

The increase in working capital in the year was £6.3m (2017: increase of £19.1m), the prior year increase reflecting significant rises in commodity prices, particularly zinc. The current year movement includes a working capital inflow of £16.0m in the second half, partly reflecting the liquidation of inventory built in the first half ahead of the anticipated stronger trading period. Working capital as a percentage of annualised sales was 17.0% at 31 December 2018 (2017: 17.4%). Debtor days were in line with the prior year at 61 days.

Capital expenditure at £32.8m (2017: £20.7m) represents a multiple of depreciation and amortisation of 1.7 times (2017: 1.1 times). The Group invested £12.6m in its fleet of temporary road safety rental barriers during the year, including £9.7m in the UK in anticipation of strong future demand from the Government's Road Investment Strategy. Other significant items of expenditure in the year included £4.5m on new facilities to support the expansion of certain of our businesses in the UK roads and US composite products markets, £2.1m of equipment upgrades that will improve efficiency and productivity in a number of our operations, and £0.9m of product development spend reflecting the continued innovation within the Group's suite of products, particularly for the 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 2018 the Group achieved an underlying cash conversion rate of 78% (2017: 78%), or 93% excluding the impact of the £12.6m investment in the temporary barrier rental fleet that will support future growth. Over the past ten years the Group has achieved an average cash conversion rate of 88%.

		Non-
		Underlying
	Reported £m	Items £m	Underlying £m
Operating profit	65.2	14.9	80.1
Non-cash items	31.2	(11.3)	19.9
Net movement in working capital	(6.3)	-	(6.3)
Cash generated by operations	90.1	3.6	93.7
Capital expenditure (net)	(31.6)	-	(31.6)
Adjusted operating cash flow*	58.5	3.6	62.1
Operating profit	65.2		80.1
Cash conversion %	90%		78%

^*Adjusted to include net capital expenditure and to exclude movements in provisions/pensions.

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 2018 was £132.9m, representing a year on year increase of £33.9m including adverse exchange rate movements of £3.3m principally reflecting the overall weakening in Sterling against the US Dollar compared with the end of the prior year. The Group's net debt includes 41% denominated in US Dollars and 10% denominated in Euros, which act as a hedge against the net asset investments in overseas businesses.

Change in net debt

	2018 £m	2017 £m
Operating profit	65.2	74.1
Depreciation and amortisation*	24.3	23.2
Working capital movement	(6.3)	(19.1)
Pensions and provisions	(2.4)	(3.2)
Other items	6.9	1.5
Operating cash flow	87.7	76.5
Tax paid	(13.3)	(16.7)
Net financing costs paid	(3.9)	(2.8)
Capital expenditure	(32.8)	(20.7)
Sale of fixed assets	1.2	2.3
Free cash flow	38.9	38.6
Dividends	(23.6)	(20.7)
Acquisitions & disposals	(45.8)	(5.8)
Amortisation of refinancing costs	(1.0)	(0.4)
Net issue of shares	(1.2)	(2.0)
Change in net debt	(32.7)	9.7
Opening net debt**	(96.9)	(112.0)
Exchange	(3.3)	3.3
Closing net debt	(132.9)	(99.0)

* includes £4.8m (2017: £4.0m) in respect of acquisition intangibles.

**2018 opening net debt restated for the adoption of IFRS 9 Financial Instruments, reducing net debt by £2.1m.

On 31 December 2018 the Group's principal debt facility consisted of a £230m multicurrency revolving credit agreement maturing in April 2021. At the year end the Group had committed debt facilities available of £232.7m and a further £11.3m in overdrafts and other on-demand facilities.

Maturity profile of debt facilities

	2018		2017
On demand	£11.3m	On demand	£9.5m
2019-2020	£0.8m	2018-2020	£0.7m
2021	£231.9m	2021	£227.1m

Subsequent to the year end, on 10 January 2019 the Group completed an amendment of its principal debt facility, extending the term to January 2024 and increasing the size by £50m to c.£280m, with no significant impact on costs and no changes to financial covenants. This amendment provides the Group with extended certainty of funding through an uncertain economic period and further increases the headroom available to the Group in order to pursue growth opportunities.

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 2018 were:

Actual Covenant

Interest Cover 26.5 times > 4.0 times

Net debt to EBITDA 1.3 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

		2018 £m		2017 £m
Underlying net cash interest:
Bank loans/overdrafts		3.8		2.8
Non underlying:
Net pension interest	0.6		0.7
Costs of refinancing	1.0	1.6	0.4	1.1
		5.4		3.9

Net financing costs in the year were £5.4m (2017: £3.9m). The net cost from pension fund financing under IAS 19 was £0.6m (2017: £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 £1.0m 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 and of modification gains arising in accordance with IFRS 9. The underlying cash element of net financing costs increased by £1.0m to £3.8m (2017: £2.8m), the change reflecting interest rate rises in the US during 2018 and higher levels of average net debt resulting from acquisitions and capital investment programmes. Underlying operating profit covered net cash interest 21.1 times (2017: 29.0 times). Reported operating profit covered total reported interest 12.1 times (2017: 19.0 times).

Return on invested capital ('ROIC')

The Group aims to maintain ROIC above its pre-tax weighted average cost of capital (currently c.9%), with a target return of 20%. In 2018, ROIC was 17.9% (2017: 20.2%), the reduction largely reflecting the significant capital investments undertaken during the year and reductions in underlying operating margins. 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 14.6% (2017: 18.4%).

	Group ROIC	Reported ROIC
Operating profit (£m)	80.1	65.2
Average invested capital (£m)	446.6	446.6
ROIC %	17.9%	14.6%

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 2017 revenue and underlying operating profit using 2018 average exchange rates would have reduced the prior year revenue by £7.1m and reduced underlying operating profit by £1.4m, the movements primarily reflecting the impact of Sterling's appreciation against the US Dollar compared with the prior 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 2019. Retranslating 2018 revenue and underlying operating profit using exchange rates at 26 February 2019 (inter alia £1 = $1.30 and £1 = €1.13) would increase the revenue and underlying operating profit by £5.3m (1%) and £1.0m (1%) respectively. For the US Dollar, a 1 cent movement results in a £1.7m adjustment to revenue and a £0.3m adjustment to underlying operating profit, while the equivalent impacts for a 1 cent movement in the Euro are £0.7m and £0.1m respectively.

Non-underlying items

The total non-underlying items charged to operating profit in the Consolidated Income Statement amounted to £14.9m (2017: £7.2m) 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	(0.7)	(0.5)	(0.2)	-
Impairment charges	(6.1)	-	-	(6.1)
Amortisation of acquisition intangibles	(4.8)	-	-	(4.8)
Acquisition expenses	(2.2)	(1.8)	(0.4)	-
Pension past service costs	(1.1)	-	(1.1)	-
	(14.9)	(2.3)	(1.7)	(10.9)

· Business reorganisation costs of £0.7m include:

- A charge of £0.5m relating to the restructuring of the Group's UK Industrial Flooring business, part of the Infrastructure Products - Utilities segment, a decision taken in light of weaker market conditions in the first half of the year. The restructuring has improved the efficiency and productivity of the business.

- A further charge of £0.2m in respect of the relocation of the Oklahoma-based Tower Tech business, which the Group acquired in 2017, to our existing composite products facility in Pennsylvania.

· The impairment charge of £6.1m includes a full impairment of the goodwill and intangible assets relating to the Group's acquisition of Technocover Limited in July 2016, amounting to £6.0m. Despite a reasonable performance in 2017, albeit marginally below expectations, in 2018 the business has experienced a further deterioration in its results due principally to a lack of activity in the niche areas of the water industry market that the business services. As a result, an impairment review was performed at 31 December 2018 resulting in a full impairment of the goodwill and remaining book value of acquired intangible assets, reflecting a short/medium-term outlook for the business that is below that anticipated at the time of the acquisition.

· Non-cash amortisation of acquired intangible fixed assets was £4.8m (2017: £4.0m), the increase reflecting the acquisitions made by the Group during the current and prior year.

· Acquisition related expenses of £2.2m (2017: £0.6m) reflect costs associated with acquisitions and include £0.4m relating to future consideration payments to previous owners of the acquired businesses, the terms of which require those costs to be treated as a post-acquisition employment expense in accordance with IFRS 3 (Revised).

· In October 2018 the High Court handed down a judgement requiring businesses with defined benefit pension schemes to equalise historical Guaranteed Minimum Pensions (GMPs) between male and female members. The Group has taken professional advice as to the impact of this judgement and concluded that a cost of £1.0m is likely to be incurred in equalising GMPs arising in prior years. The charge has been treated as a non-underlying item in accordance with the Group's definitions of such items. A further charge of £0.1m was incurred in respect of changes to the terms of the Group's pension schemes in France.

The net cash impact of the above items was an inflow of £2.3m in the year, a £1.7m outflow expected in 2019 and a non-cash element therefore amounting to £10.9m. 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 £12.6m (2017: £16.3m). The underlying effective tax rate for the Group was 19.6% (2017: 24.0%), 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 of reductions in headline corporate tax rates in the UK, USA and France. Cash tax paid was £13.3m (2017: £16.7m), with the reduction in spend also reflecting the falls in national corporate tax rates. Tax paid was broadly in line with the current tax charge for the year of £13.6m.

The Group's net deferred tax liability is £6.3m (2017: £5.6m). An £8.6m (2017: £6.7m) deferred tax liability is provided in respect of brand names, customer relationships and other contractual arrangements acquired, while a further £0.6m (2017: £0.9m) 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 3% to 77.8p (2017: 75.9p). The diluted UEPS was 77.2p (2017: 74.8p). Basic earnings per share was 59.9p (2017: 68.6p). The weighted average number of shares in issue was 78.8m (2017: 78.6m) with the diluted number of shares at 79.5m (2017: 79.6m) adjusted for the outstanding number of dilutive share options.

Pensions

The Group operates a number of defined contribution and defined benefit pension plans both in the UK and overseas. The IAS19 deficit of the defined benefit plans as at 31 December 2018 was £23.0m, a reduction of £2.6m compared to 31 December 2017 (£25.6m). The reduction in the overall deficit relates principally to the UK scheme and was largely driven by a 40 basis point increase in the discount rate, in line with movements in corporate bond yields, and deficit recovery payments made during the year.

The Group's UK defined benefit pension scheme, The Hill & Smith 2016 Pension Scheme (the 'Scheme'), remains the largest employee benefit obligation within the Group. 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 IAS 19 deficit of the Scheme as at 31 December 2018 was £17.6m (2017: £20.8m). The gross assets and liabilities of the Scheme were each reduced by £7.9m during the year as a result of transfer values taken by members.

The Group remains actively engaged in dialogue with the Scheme's Trustees with regard to management, funding and investment strategy. A formal actuarial valuation of the Scheme as at April 2016 was finalised in 2017, alongside an update to the investment strategy, resulting in the Group agreeing a deficit recovery plan with the Trustees that requires cash contributions amounting to £2.5m per annum until September 2027. The next triennial valuation is April 2019.

Acquisitions

In May 2018 the Group acquired the business and assets of WAPCO for a consideration of £31.2m. Intangible assets arising on the acquisition amounted to £18.0m, comprising customer lists of £4.5m, patents of £4.0m, brands of £0.8m and residual goodwill of £8.7m.

In August 2018 the Group acquired the business and assets of Engineered Endeavors, Inc. for a consideration of £4.8m. Intangible assets arising on the acquisition amounted to £1.7m, comprising customer lists of £0.5m and residual goodwill of £1.2m.

In October 2018 the Group acquired the business and assets of Composite Advantage for a consideration of £10.2m. Intangible assets arising on the acquisition amounted to £5.5m, comprising customer lists of £1.5m, patents of £0.5m, brands of £0.3m and residual goodwill of £3.2m.

The Group also completed three smaller acquisitions during the period:

· In January we acquired D Gibson Road & Quarry Services Limited for a cash consideration of £0.3m;

· In March we acquired Signalvakter Syd for an initial cash consideration of £0.4m, with future deferred consideration of up to £0.5m contingent on financial performance over the next five years;

· In May we acquired the business and assets of The Grating Company Limited for initial cash consideration of £0.5m and deferred consideration of up to £0.9m dependent on performance over the next three years.

Intangible assets arising on these smaller acquisitions comprised customer lists of £0.4m and residual goodwill of £0.9m.

On 22 February 2019 the Group acquired ATG Access Limited and its related entities for a cash consideration of £22.5m on a debt free, cash free basis.

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.

New International Financial Reporting Standards

IFRS 15 'Revenue from Contracts with Customers' and IFRS 9 'Financial Instruments' are applicable to reporting periods beginning on or after 1 January 2018, and have therefore been adopted by the Group.

IFRS 15 provides a principles-based approach to the recognition of revenue from contracts with customers, focussing on the identification of performance obligations in a contract and requiring revenue to be recognised when or as those performance obligations are satisfied. The new standard affects certain revenue streams in the Group's Utilities segment where revenue that was previously recognised at the point of delivery of products to customers is now recognised over the period of manufacture of those products. Further details of the impact are set out in note 1 to the financial statements.

The implementation of IFRS 9, which replaces IAS 39, has resulted in the Group adjusting the treatment of debt modifications in prior years as explained in note 1 to the financial statements. The standard has not had any other material impact on the Group.

IFRS 16 'Leases' will be applicable to the Group in the year ending 31 December 2019. The Group's preparations for the introduction of IFRS 16 are at an advanced stage and a summary of the expected impacts is set out in note 1 to the financial statements.

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

6 March 2019

Consolidated Income Statement

Year ended 31 December 2018

			2018			2017
	Notes	Underlying £m	Non- underlying^* £m	Total £m	Underlying £m	Non- underlying^* £m	Total £m
Revenue	2	637.9	-	637.9	585.1	-	585.1
Underlying operating profit		80.1	-	80.1	81.3	-	81.3
Amortisation of acquisition intangibles	3	-	(4.8)	(4.8)	-	(4.0)	(4.0)
Business reorganisation costs	3	-	(0.7)	(0.7)	-	(2.8)	(2.8)
Pension past service expense	3	-	(1.1)	(1.1)	-	-	-
Impairment of assets	3	-	(6.1)	(6.1)	-	(0.4)	(0.4)
Acquisition costs	3	-	(2.2)	(2.2)	-	(0.6)	(0.6)
Profit on disposal of subsidiary	3	-	-	-	-	0.6	0.6
Operating profit	2	80.1	(14.9)	65.2	81.3	(7.2)	74.1
Financial income	4	0.6	-	0.6	0.6	-	0.6
Financial expense	4	(4.4)	(1.6)	(6.0)	(3.4)	(1.1)	(4.5)
Profit before taxation		76.3	(16.5)	59.8	78.5	(8.3)	70.2
Taxation	5	(14.9)	2.3	(12.6)	(18.9)	2.6	(16.3)
Profit for the year attributable to owners of the parent		61.4	(14.2)	47.2	59.6	(5.7)	53.9

Basic earnings per share	6	77.8p		59.9p	75.9p		68.6p
Diluted earnings per share	6	77.2p		59.3p	74.8p		67.7p
Dividend per share - Interim	7			10.0p			9.4p
Dividend per share - Final proposed	7			21.8p			20.6p
Total				31.8p			30.0p

* The Group's definition of non-underlying items is included in note 1 to the financial statements.

Consolidated Statement of Comprehensive Income

Year ended 31 December 2018

	Notes	2018 £m	2017 £m
Profit for the year		47.2	53.9
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations		11.7	(11.3)
Exchange differences on foreign currency borrowings denominated as net investment hedges		(4.7)	4.9
Taxation on items that may be reclassified to profit or loss		-	-
Items that will not be reclassified subsequently to profit or loss
Actuarial gain on defined benefit pension schemes		1.7	-
Taxation on items that will not be reclassified to profit or loss	5	(0.3)	(0.2)
Other comprehensive income/(expense) for the year		8.4	(6.6)
Total comprehensive income for the year attributable to owners of the parent		55.6	47.3

Consolidated Statement of Financial Position

Year ended 31 December 2018

	Notes	2018 £m	2017 £m
Non-current assets
Intangible assets		183.8	163.9
Property, plant and equipment		170.2	145.1
Deferred tax assets		0.5	-
		354.5	309.0
Current assets
Assets held for sale		0.8	0.7
Inventories		96.6	84.6
Trade and other receivables		142.0	116.5
Cash and cash equivalents	9	36.9	16.4
		276.3	218.2
Total assets	2	630.8	527.2
Current liabilities
Trade and other liabilities		(120.9)	(104.8)
Current tax liabilities		(10.4)	(11.7)
Provisions for liabilities and charges		(1.3)	(2.1)
Interest bearing borrowings	9	(0.4)	(0.3)
		(133.0)	(118.9)
Net current assets		143.3	99.3
Non-current liabilities
Other liabilities		(2.7)	(0.5)
Provisions for liabilities and charges		(2.7)	(2.9)
Deferred tax liabilities		(6.8)	(5.6)
Retirement benefit obligation		(23.0)	(25.6)
Interest bearing borrowings	9	(169.4)	(115.1)
		(204.6)	(149.7)
Total liabilities		(337.6)	(268.6)
Net assets		293.2	258.6

Equity
Share capital		19.8	19.7
Share premium		35.5	34.1
Other reserves		4.9	4.9
Translation reserve		29.9	22.9
Retained earnings		203.1	177.0
Total equity		293.2	258.6

Consolidated Statement of Changes in Equity

Year ended 31 December 2018

	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 2017		19.7	33.5	4.8	29.3	-	144.9	232.2
Comprehensive income
Profit for the year		-	-	-	-	-	53.9	53.9
Other comprehensive income for the year		-	-	-	(6.4)	-	(0.2)	(6.6)
Transactions with owners recognised directly in equity
Dividends	7	-	-	-	-	-	(20.7)	(20.7)
Credit to equity of share-based payments		-	-	-	-	-	1.3	1.3
Satisfaction of long term incentive awards		-	-	-	-	-	(2.5)	(2.5)
Own shares held by employee benefit trust		-	-	-	-	-	(0.1)	(0.1)
Transfers between reserves		-	-	0.1	-	-	(0.1)	-
Tax taken directly to the Consolidated
Statement of Changes in Equity	5	-	-	-	-	-	0.5	0.5
Shares issued		-	0.6	-	-	-	-	0.6
At 31 December 2017		19.7	34.1	4.9	22.9	-	177.0	258.6
Adoption of new accounting standards		-	-	-	-	-	2.7	2.7
At 1 January 2018 (restated)		19.7	34.1	4.9	22.9	-	179.7	261.3
Comprehensive income
Profit for the year		-	-	-	-	-	47.2	47.2
Other comprehensive income for the year		-	-	-	7.0	-	1.4	8.4
Transactions with owners recognised directly in equity
Dividends	7	-	-	-	-	-	(23.6)	(23.6)
Credit to equity of share-based payments		-	-	-	-	-	1.1	1.1
Satisfaction of long term incentive awards		-	-	-	-	-	(2.9)	(2.9)
Own shares held by employee benefit trust		-	-	-	-	-	0.2	0.2
Transfers between reserves		-	-	-	-	-	-	-
Tax taken directly to the Consolidated
Statement of Changes in Equity	5	-	-	-	-	-	-	-
Shares issued		0.1	1.4	-	-	-	-	1.5
At 31 December 2018		19.8	35.5	4.9	29.9	-	203.1	293.2

†Other reserves represent the premium on shares issued in exchange for shares of subsidiaries acquired and £0.2m (2017: £0.2m) capital redemption reserve.

At 31 December 2017 the Group had purchased 89,970 of its own shares, which were held in an employee benefit trust for the purpose of settling awards granted to employees under equity-settled share based payment plans. The cost of these shares, amounting to £1.2m, was included within retained earnings at that date. In March 2018, 87,017 of these shares were issued in settlement of awards to employees. A further 87,500 shares were purchased in 2018 at a cost of £1.0m. At 31 December 2018 a total of 90,453 shares are therefore held, at a cost of £1.0m.

Consolidated Statement of Cash Flows

Year ended 31 December 2018

	2018		2017
	£m	£m	£m	£m
Profit before tax		59.8		70.2
Add back net financing costs		5.4		3.9
Operating profit		65.2		74.1
Adjusted for non-cash items:
Share-based payments	1.1		1.8
Gain on disposal of subsidiary	-		(0.6)
Gain on disposal of non-current assets	(0.3)		(0.1)
Depreciation	18.6		18.2
Amortisation of intangible assets	5.7		5.0
Impairment of assets held for sale	0.1		0.4
Impairment of non-current assets	6.0		-
		31.2		24.7
Operating cash flow before movement in working capital		96.4		98.8
Increase in inventories	(3.4)		(13.8)
Increase in receivables	(9.8)		(5.3)
Increase in payables	6.9		-
Decrease in provisions and employee benefits	(2.4)		(3.2)
Net movement in working capital		(8.7)		(22.3)
Cash generated by operations		87.7		76.5
Purchase of assets for rental to customers		(14.5)		-
Income taxes paid		(13.3)		(16.7)
Interest paid		(4.4)		(3.4)
Net cash from operating activities		55.5		56.4
Interest received	0.5		0.6
Proceeds on disposal of non-current assets	0.6		2.3
Proceeds on disposal of assets held for sale	0.6		-
Purchase of property, plant and equipment	(17.4)		(19.4)
Purchase of intangible assets	(0.9)		(1.3)
Acquisitions of businesses	(45.2)		(7.9)
Deferred consideration in respect of prior year acquisitions	(0.6)		(0.4)
Disposal of subsidiary	-		2.5
Net cash used in investing activities		(62.4)		(23.6)
Issue of new shares	1.5		0.6
Purchase of shares for employee benefit trust	(2.7)		(2.6)
Dividends paid	(23.6)		(20.7)
Costs associated with refinancing of revolving credit facility	-		-
New loans and borrowings	78.3		32.9
Repayment of loans and borrowings	(26.8)		(41.3)
Net cash from/(used in) financing activities		26.7		(31.1)
Net increase in cash		19.8		1.7
Cash at the beginning of the year		16.4		15.6
Effect of exchange rate fluctuations		0.7		(0.9)
Cash at the end of the year		36.9		16.4

Notes to the Consolidated Financial Statements

1. Basis of preparation

Hill & Smith Holdings PLC is a company incorporated in the UK.

New IFRS standards and interpretations adopted during 2018

In 2018 the following amendments had been endorsed by the EU, became effective and therefore were adopted by the Group:

· IFRS 15 'Revenue from Contracts with Customers'

· IFRS 9 'Financial Instruments'

· Amendments to IFRS 2 Share Based Payments

· Annual Improvements to IFRSs - 2014-2016 Cycle

· IFRIC 22 Foreign Currency Transactions and Advance Consideration

IFRS 15 'Revenue from contracts with customers'

On 1 January 2018 the Group adopted IFRS 15, applying the modified retrospective approach. IFRS 15 provides a principles-based approach to the recognition of revenue from contracts with customers, focussing on the identification of performance obligations in a contract and requiring revenue to be recognised when those performance obligations are satisfied. The Group has chosen to apply the modified retrospective approach and so comparative information throughout these financial statements has not been restated i.e. it is presented as previously reported, under IAS 18 and related interpretations. Additionally, the disclosure requirements in IFRS 15 have not generally been applied to comparative information.

The effect of initial application of IFRS 15 is mainly attributable to earlier revenue recognition from certain contracts entered into by businesses in the Infrastructure Products - Utilities segment. Under IAS 18, which was superseded by IFRS 15, revenue for certain products manufactured by these businesses was recognised when the customer accepted the goods and the related risks and rewards of ownership transferred, usually on delivery depending on the Incoterms defined in the contract. Under IFRS 15, revenue from products that are produced for specific customer requirements and therefore require a high degree of customisation is required to be recognised over the period of manufacture of those products i.e. before delivery to the customer. Consequently the revenue for these products is recognised sooner under IFRS 15 than under IAS 18. The impact on retained earnings at 1 January 2018, net of tax, on transition to IFRS 15 was an increase of £0.9m. There was no material impact on the results for the year of the adoption of IFRS 15.

IFRS 9 'Financial instruments'

IFRS 9 Financial Instruments is the standard that replaces IAS 39 Financial Instruments: Recognition and Measurement. The new standard addresses the classification, measurement and derecognition of financial assets and liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The Group has adopted IFRS 9 from 1 January 2018 and has used the exemption not to restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January 2018. Accordingly, the information presented for 2017 does not generally reflect the requirements of IFRS 9, but rather those of IAS 39.

In respect of refinancing items, IFRS 9 requires that when a financial liability measured at amortised cost is modified without being derecognised, a modification gain or loss should be recognised in the income statement. This represents a change from IAS 39, under which no gain or loss was recognised. The Group's principal funding facility, which is a financial liability, is a multicurrency revolving credit agreement that was originally established in 2011, but subsequently 'amended and extended' in 2014 and 2016, each of which was accounted for as a modification without derecognition under IAS 39. On transition to IFRS 9, the modification gain that would have arisen on each of those modifications, when treated in accordance with IFRS 9, has been calculated and applied retrospectively resulting in a credit to equity at 1 January 2018 of £1.8m comprising a reduction of £2.1m in the carrying value of the financial instrument, which is included in the Group's definition of net debt, and recognition of a deferred tax liability of £0.3m. There was no material impact on the results for the year of the adoption of IFRS 9.

The other amendments have not had a material impact on the financial statements.

New IFRS standards and interpretations to be adopted in the future

The following standards and interpretations which are not yet effective or endorsed by the EU and have not been early adopted by the Group will be adopted in future accounting periods:

· IFRS 16 'Leases' (effective 1 January 2019)

· IFRIC 23 'Uncertainty over Income Tax Treatments' (effective 1 January 2019)

· Amendments to IFRS 9 'Financial Instruments' (effective 1 January 2019)

· Annual Improvements to IFRSs - 2015-2017 cycle

· Amendments to IAS 19 Employee Benefits

· Amendments to References to the Conceptual Framework in IFRS Standards

· Amendments to IFRS 3 Business Combinations

· Amendments to IAS 1 and IAS 8

With the exception of IFRS 16, the above changes are not expected to have a material impact on the Group.

IFRS 16 'Leases'

IFRS 16 was issued by the IASB in January 2016 and replaces IAS 17 and its related interpretations. The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both the lessee and the lessor. For lessees, IFRS 16 eliminates the classification of leases as either operating or finance leases and introduces a single lessee accounting model with some exemptions for short term and low value leases. The lessee recognises a right-of-use asset, representing its right to use the underlying asset, and a lease liability representing its obligation to make lease payments. It also includes an election which permits a lessee not to separate non-lease components (e.g. maintenance) from lease components and instead to capitalise both the lease cost and associated non-lease cost. For lessors, IFRS 16 substantially carries forward the accounting treatment under IAS 17 and is not therefore expected to have a material impact on the Group's contracts in which it is a lessor.

The standard will primarily affect the accounting for the Group's operating leases. The application of IFRS 16 will result in the recognition of additional assets and liabilities in the statement of financial position, while in the income statement it will replace the operating lease expense with a depreciation charge on the right-of-use asset and an interest expense on the lease liabilities. In addition, the Group will no longer recognise provisions for operating leases that it considers are onerous and will instead perform impairment testing on the right-of-use asset.

The Group's non-cancellable operating lease commitments on an undiscounted basis at 31 December 2018 are £38.5m, which provides an indication of the scale of leases held by the Group. Within this amount, £26.9m relates to approximately 50 properties that the Group leases for its manufacturing and distribution activities, with the balance of £11.6m relating to other items, the majority of which are plant and machinery and vehicle leases. The actual impact of applying IFRS 16 will depend on a number of factors including the discount rates for each lease calculated as at 1 January 2019, the expected lease term (including renewal options) and any exemptions for short-term and low-value leases. IFRS 16 requires future lease liabilities to be discounted and therefore the amount that the Group will recognise as a right-of-use asset at 1 January 2019 will be lower than the undiscounted commitment of £38.5m at 31 December 2018.

The Group has implemented a new accounting process and an accounting software solution to manage the transition to IFRS 16.

Based on the information currently available for the operating leases that will be recognised in the statement of financial position at 1 January 2019, the estimated impact on the key amounts in the Group's financial statements that will be affected is as follows:

Property, plant and equipment Increase c.20%

Net debt Increase c.25%

EBITDA Increase c.10%

Operating profit Increase c.1%

Profit before tax and EPS Increase Marginal

Transition

The Group will apply IFRS 16 from its effective date using the modified retrospective approach, under which the cumulative effect of adoption will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information. The Group will apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and related interpretations.

Exchange rates

The principal exchange rates used were as follows:

	2018		2017
	Average	Closing	Average	Closing
Sterling to Euro (£1 = EUR)	1.13	1.11	1.14	1.13
Sterling to US Dollar (£1 = USD)	1.33	1.28	1.29	1.35
Sterling to Swedish Krona (£1 = SEK)	11.60	11.43	11.00	11.08
Sterling to Indian Rupee (£1 = INR)	91.25	89.10	83.90	86.30
Sterling to Australian Dollar (£1 = AUD)	1.79	1.81	1.68	1.73

Non-underlying items

Non-underlying items are 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, which can vary depending on the nature, size and frequency of acquisitions in each financial year.

• Expenses associated with acquisitions, comprising professional fees incurred and any consideration, which, under IFRS 3 (Revised), is required to be treated as a post-acquisition employment expense.

• 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 non-underlying tax charge or credit comprises the tax effect of the above non-underlying items.

Details in respect of the non-underlying items recognised in the current and prior year are set out in note 3 to the Financial Statements.

2. Segmental information

Business segment analysis

The Group has three reportable segments which are Infrastructure Products - Utilities, Infrastructure Products - Roads and Galvanizing Services. Several operating segments that have similar economic characteristics have been aggregated into these reporting segments. The Group's internal management structure and financial reporting systems differentiate between these segments, and, in reporting, management have taken the view that they comprise a segment on the basis of the following economic characteristics:

· The Infrastructure Products - Utilities segment contains a group of businesses supplying products characterised by a degree of engineering expertise, to public and private customers involved in the construction of facilities serving the Utilities markets or in the maintenance of such facilities;

· The Infrastructure Products - Roads segment contains a group of companies supplying permanent and temporary safety products to customers involved in the construction or maintenance of national roads infrastructure; and

· The Galvanizing Services segment contains a group of companies supplying galvanizing and related materials coating services to companies in a wide range of markets including construction, agriculture and infrastructure.

Income Statement

	2018			2017
	Revenue £m	Reported operating profit £m	Underlying operating profit* £m	Revenue £m	Reported operating profit £m	Underlying operating profit* £m
Infrastructure Products - Utilities	239.0	9.0	18.3	215.7	13.5	16.8
Infrastructure Products - Roads	208.5	20.3	24.2	187.1	20.9	23.6
Infrastructure Products - Total	447.5	29.3	42.5	402.8	34.4	40.4
Galvanizing Services	190.4	35.9	37.6	182.3	39.7	40.9
Total Group	637.9	65.2	80.1	585.1	74.1	81.3
Net financing costs		(5.4)	(3.8)		(3.9)	(2.8)
Profit before taxation		59.8	76.3		70.2	78.5
Taxation		(12.6)	(14.9)		(16.3)	(18.9)
Profit after taxation		47.2	61.4		53.9	59.6

* Underlying operating profit is stated before non-underlying items as defined in note 3, and is the measure of segment profit used by the Chief Operating Decision Maker, who is the Chief Executive. The reported operating profit columns are included as additional information.

Galvanizing Services provided £6.4m (2017: £6.6m) revenues to Infrastructure Products - Roads and £1.6m (2017: £1.9m) revenues to Infrastructure Products - Utilities. Infrastructure Products - Utilities provided £5.2m (2017: £5.6m) revenues to Infrastructure Products - Roads. Infrastructure Products - Roads provided £0.2m (2017: nil) revenues to Infrastructure Products - Utilities. These internal revenues, along with revenues generated from within their own segments, have been eliminated on consolidation.

As explained in note 1, the Group has adopted IFRS 15 from 1 January 2018. Due to the transition method chosen, comparative information has not been restated. In the following tables, revenue from contracts with customers is disaggregated by primary geographical market, major product/service lines and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the Group's reportable segments.

	Utilities		Roads		Galvanizing		Total
	2018	2017	2018	2017	2018	2017	2018	2017
Primary geographical markets	£m	£m	£m	£m	£m	£m	£m	£m
UK	113.3	112.7	104.7	115.5	60.5	60.4	278.5	288.6
Rest of Europe	5.4	4.7	56.2	44.8	53.2	50.4	114.8	99.9
North America	112.0	86.8	35.9	9.7	76.7	71.5	224.6	168.0
The Middle East	2.5	1.7	2.1	4.5	-	-	4.6	6.2
Rest of Asia	5.4	8.3	0.2	-	-	-	5.6	8.3
Rest of the world	0.4	1.5	9.4	12.6	-	-	9.8	14.1
	239.0	215.7	208.5	187.1	190.4	182.3	637.9	585.1
Major product/service lines
Manufacture, supply and installation of products	239.0	215.7	186.5	169.2	-	-	425.5	384.9
Galvanizing services	-	-	-	-	190.4	182.3	190.4	182.3
Rental income	-	-	22.0	17.9	-	-	22.0	17.9
	239.0	215.7	208.5	187.1	190.4	182.3	637.9	585.1
Timing of revenue recognition
Products and services transferred at a point in time	151.9	204.3	152.1	131.5	190.4	182.3	494.4	518.1
Products and services transferred over time	87.1	11.4	56.4	55.6	-	-	143.5	67.0
	239.0	215.7	208.5	187.1	190.4	182.3	637.9	585.1

Additional segmental analysis

Total assets by geography	2018 £m	2017 £m
UK	236.1	217.6
Rest of Europe	124.2	119.4
North America	255.1	173.4
Asia	12.0	14.3
Rest of World	3.4	2.5
Total Group	630.8	527.2

3. Non-underlying items

Non-underlying items included in operating profit comprise the following:

· Business reorganisation costs of £0.7m (2017: £2.8m) relating to two restructuring actions taken by the Group:

- During the year the Group undertook a restructuring of its UK Industrial Flooring business, part of the Infrastructure Products - Utilities segment, a decision taken in light of weaker market conditions in the first half of the year. The restructuring has improved the efficiency and productivity of the business and supported an improved performance in the second half of the year. The cost in the year was £0.5m.

- Following the acquisition of Tower Tech in August 2017, the Group commenced a programme to close Tower Tech's facility in Oklahoma City and relocate the business to the existing Creative Pultrusions site in Pennsylvania, resulting in a prior year charge of £0.4m. A further charge of £0.2m has been recognised in 2018 representing additional closure costs that will be incurred.

· Amortisation of acquired intangible fixed assets of £4.8m (2017: £4.0m).

· Acquisition expenses of £2.2m (2017: £0.6m) relating to acquisitions completed during the period. The costs include £0.4m (2017: £nil) relating to future consideration payments to previous owners of the acquired businesses, the terms of which require those costs to be treated as a post-acquisition employment expense in accordance with IFRS 3 (Revised).

· An impairment charge of £6.0m in respect of goodwill and acquired intangible assets relating to the Group's acquisition of Technocover Limited in July 2016. As set out in the Operational and Financial Review, despite a reasonable performance in 2017, albeit marginally below expectations, in 2018 the business has experienced a further deterioration in its results due principally to a lack of activity in the niche areas of the water industry market that the business services. As a result, an impairment review was performed at 31 December 2018 resulting in a full impairment of the goodwill and remaining book value of acquired intangible assets, reflecting a short/medium term outlook for the business that is below that anticipated at the time of the acquisition.

· A past service cost of £1.1m in respect of defined benefit pension schemes. In October 2018 the High Court handed down a judgement requiring businesses with defined benefit pension schemes to equalise historical Guaranteed Minimum Pensions (GMPs) between male and female members. The Group has taken professional advice as to the impact of this judgement and concluded that a cost of £1.0m is likely to be incurred in equalising GMPs arising in prior years. In drawing this conclusion the Group has taken into account the four potential approaches that the judgement ruled to be suitable for calculating the equalisation cost, and has calculated that the range of outcomes under each of these approaches is likely to be between £0.9m and £1.2m. The charge has been treated as a non-underlying item in accordance with the Group's definitions of such items. A further charge of £0.1m was incurred in respect of changes to the terms of the Group's pension schemes in France.

· An impairment charge of £0.1m in respect of assets held for sale, reflecting a loss on the disposal of that property during the year.

Non-underlying items included in financial expense represent the net financing cost on pension obligations of £0.6m (2017: £0.7m) and a £1.0m (2017: £0.4m) charge in respect of amortisation of costs associated with refinancing.

4. Net financing costs

	Underlying £m	Non- underlying £m	2018 £m	Underlying £m	Non- underlying £m	2017 £m
Interest on bank deposits	0.6	-	0.6	0.6	-	0.6
Financial income	0.6	-	0.6	0.6	-	0.6
Interest on bank loans and overdrafts	4.4	-	4.4	3.4	-	3.4
Total interest expense	4.4	-	4.4	3.4	-	3.4
Financial expenses related to refinancing	-	1.0	1.0	-	0.4	0.4
Interest cost on net pension scheme deficit	-	0.6	0.6	-	0.7	0.7
Financial expense	4.4	1.6	6.0	3.4	1.1	4.5
Net financing costs	3.8	1.6	5.4	2.8	1.1	3.9

5. Taxation

	2018 £m	2017 £m
Current tax
UK corporation tax	5.3	7.6
Overseas tax at prevailing local rates	9.5	11.7
Adjustments in respect of prior years	(1.2)	(1.1)
	13.6	18.2
Deferred tax
UK deferred tax	(0.8)	(0.7)
Overseas tax at prevailing local rates	0.4	0.7
Adjustments in respect of prior year	(0.1)	-
Effects of changes in tax rates and laws	(0.5)	(1.9)
Tax on profit in the Consolidated Income Statement	12.6	16.3

Deferred tax
Relating to defined benefit pension schemes	0.3	0.2
Effect of change in tax rate	-	-
Tax on items taken directly to Other Comprehensive Income	0.3	0.2

Current tax
Relating to share-based payments	(0.6)	(0.3)
Deferred tax
Relating to share-based payments	0.6	(0.2)
Tax taken directly to the Consolidated Statement of Changes in Equity	-	(0.5)

The tax charge in the Consolidated Income Statement for the period is higher (2017: higher) than the standard rate of corporation tax in the UK. The differences are explained below:

	2018 £m	2017 £m
Profit before taxation	59.8	70.2
Profit before taxation multiplied by the effective rate of corporation tax in the UK of 19% (2017: 19.25%)	11.4	13.5
Expenses not deductible/income not chargeable for tax purposes	0.7	1.0
Non-deductible goodwill impairment	0.4	-
Non-taxable profit on disposal of UK subsidiary	-	(0.1)
Benefits from international financing arrangements	(0.8)	(0.8)
Local tax incentives	(0.3)	(0.9)
Overseas profits taxed at higher rates	3.0	6.9
Overseas losses not relieved	-	0.3
Withholding taxes	-	0.1
Impacts of rate and law changes	(0.5)	(1.9)
Successful claim following EU challenge regarding tax on French dividends	-	(0.7)
Adjustments in respect of prior periods	(1.3)	(1.1)
Tax charge	12.6	16.3

6. Earnings per share

The weighted average number of ordinary shares in issue during the year was 78.8m (2017: 78.6m), diluted for the effects of the outstanding dilutive share options 79.5m (2017: 79.6m). Underlying earnings per share have been shown because the Directors consider that this provides valuable additional information about the underlying performance of the Group.

	2018		2017
	Pence per share	£m	Pence per share	£m
Basic earnings	59.9	47.2	68.6	53.9
Non-underlying items^*	17.9	14.2	7.3	5.7
Underlying earnings	77.8	61.4	75.9	59.6

Diluted earnings	59.3	47.2	67.7	53.9
Non-underlying items^*	17.9	14.2	7.1	5.7
Underlying diluted earnings	77.2	61.4	74.8	59.6

* Non-underlying items as detailed in note 3.

7. Dividends

Dividends paid in the year were the prior year's interim dividend of £7.4m (2017: £6.7m) and the final dividend of £16.2m (2017: £14.0m). Dividends declared after the year end date are not recognised as a liability, in accordance with IAS 10. The Directors have proposed the following interim dividend and final dividend for the current year, subject to shareholder approval:

	2018		2017
	Pence per share	£m	Pence per share	£m
Equity shares
Interim	10.0	7.9	9.4	7.4
Final	21.8	17.2	20.6	16.4
Total	31.8	25.1	30.0	23.8

8. Acquisitions

Work Area Protection Corp

On 8 May 2018 the Group acquired the trade and assets of Work Area Protection Corp ("WAPCO") to expand the Group's presence in the US road safety market. WAPCO specialises in the development, manufacture and distribution of a range of road work safety zone products. Details of the acquisition are set out below:

Work Area Protection Corp	Pre acquisition carrying amount £m	Policy alignment and fair value adjustments £m	Total £m
Intangible assets
Brands	-	0.8	0.8
Customer lists	-	4.5	4.5
Contracts, licenses and other assets	-	4.0	4.0
Property, plant and equipment	3.4	(0.1)	3.3
Inventories	7.5	(0.5)	7.0
Current assets	7.5	-	7.5
Total assets	18.4	8.7	27.1
Current liabilities	(4.3)	(0.1)	(4.4)
Deferred tax	-	(0.2)	(0.2)
Total liabilities	(4.3)	(0.3)	(4.6)
Net assets	14.1	8.4	22.5
Consideration
Consideration in the year			31.2
Goodwill			8.7
Cash flow effect
Consideration			31.2
Net cash consideration shown in the Consolidated Statement of Cash Flows			31.2

Brands, contractual arrangements and customer lists have been recognised as specific intangible assets as a result of the acquisition. The residual goodwill arising primarily represents the assembled workforce, market share and geographical advantages afforded to the Group. Fair value adjustments have been made to better align the accounting policies of the acquired businesses with the Group's accounting policies and to reflect the fair value of assets and liabilities acquired. There is no difference between the gross value and fair value of acquired receivables.

Post acquisition the acquired business has contributed £25.0m revenue and £1.8m underlying operating profit, which are included in the Group's Consolidated Income Statement. If the acquisition had been made on 1 January 2018, the Group's results for the year would have shown revenue of £650.7m and underlying operating profit of £81.7m.

Composite Advantage Inc.

On 5 October 2018, the Group acquired the trade and assets of Composite Advantage Inc. ("CA") to expand the Group's offering in the US composites market. CA is a leading pultrusions manufacturer specialising in the production of fiber reinforced polymer products for infrastructure markets, including waterfront, rail, bridge decks and oil & gas. Details of the acquisition are set out below:

Composite Advantage	Pre acquisition carrying amount £m	Policy alignment and fair value adjustments £m	Total £m
Intangible assets
Brands	-	0.3	0.3
Customer lists	-	1.5	1.5
Contracts, licenses and other assets	-	0.5	0.5
Property, plant and equipment	2.1	-	2.1
Inventories	1.0	-	1.0
Current assets	3.2	-	3.2
Total assets	6.3	2.3	8.6
Current liabilities	(1.6)	-	(1.6)
Total liabilities	(1.6)	-	(1.6)
Net assets	4.7	2.3	7.0
Consideration
Consideration in the year			10.2
Goodwill			3.2
Cash flow effect
Consideration			10.2
Deferred Consideration			(2.2)
Net cash consideration shown in the Consolidated Statement of Cash Flows			8.0

Post acquisition the acquired business has contributed £3.8m revenue and £0.6m underlying operating profit, which are included in the Group's consolidated income statement. If the acquisition had been made on 1 January 2018, the Group's results for the year would have shown revenue of £645.4m and underlying operating profit of £80.3m.

Engineered Endeavors Inc.

On 17 August 2018, the Group acquired from Chapter 11 proceedings certain of the business, trade, assets and workforce of Engineered Endeavors Inc. ("EEI"). Based in Ohio, USA, the business designs and manufactures utility poles for the power distribution and wireless cellular markets. Details of the acquisition are set out below:

Engineered Endeavors	Pre acquisition carrying amount £m	Policy alignment and fair value adjustments £m	Total £m
Intangible assets
Customer lists	-	0.5	0.5
Property, plant and equipment	3.8	(0.9)	2.9
Inventories	0.1	-	0.1
Deferred tax	-	0.1	0.1
Total assets	3.9	(0.3)	3.6
Current liabilities	-	-	-
Total liabilities	-	-	-
Net assets	3.9	(0.3)	3.6
Consideration
Consideration in the year			4.8
Goodwill			1.2
Cash flow effect
Consideration			4.8
Net cash consideration shown in the Consolidated Statement of Cash Flows			4.8

Customer lists have been recognised as specific intangible assets as a result of the acquisition. The residual goodwill arising primarily represents the assembled workforce, market share and geographical advantages afforded to the Group. Fair value adjustments have been made to better align the accounting policies of the acquired businesses with the Group's accounting policies and to reflect the fair value of assets and liabilities acquired. There is no difference between the gross value and fair value of acquired receivables.

Post acquisition the acquired business has contributed £1.4m revenue and £0.3m underlying operating profit, which are included in the Group's Consolidated Income Statement. If the acquisition had been made on 1 January 2018, the Group's results for the year would have shown revenue of £641.1m and underlying operating profit of £79.8m.

The Group also made three other smaller acquisitions during the year:

· The trade and certain assets of D Gibson Road and Quarry Services Limited, based in the UK, acquired on 1 January 2018;

· The trade and certain assets of Signalvakter Syd, based in Sweden, acquired on 28 March 2018; and

· The trade and assets of The Grating Company Limited and Pro Composites Limited, based in the UK, acquired on 27 April 2018.

Details of these acquisitions are set out below:

	D Gibson - Pre acquisition carrying amount £m	Signalvakter - Pre acquisition carrying amount £m	The Grating Company - Pre acquisition carrying amount £m	Policy alignment and provisional fair value adjustments £m	Total £m
Intangible assets
Customer list	-	-	-	0.4	0.4
Property, plant and equipment	-	0.3	-	-	0.3
Inventories	0.1	-	-	-	0.1
Current assets	-	-	0.5	(0.5)	-
Total assets	0.1	0.3	0.5	(0.1)	0.8
Current liabilities	-	(0.2)	(0.2)	-	(0.4)
Deferred tax	-	-	-	(0.1)	(0.1)
Total liabilities	-	(0.2)	(0.2)	(0.1)	(0.5)
Net assets	0.1	0.1	0.3	(0.2)	0.3
Consideration
Consideration in the year					1.2
Goodwill					0.9
Cash flow effect
Cash consideration					1.2
Net cash consideration shown in the Consolidated Statement of Cash Flows					1.2

Customer lists have been recognised as specific intangible assets as a result of these acquisitions. The residual goodwill arising primarily represents the assembled workforce, market share and geographical advantages afforded to the Group. Fair value adjustments have been made to better align the accounting policies of the acquired businesses with the Group's accounting policies and to reflect the fair value of assets and liabilities acquired. There is no difference between the gross value and fair value of acquired receivables.

Post acquisition the acquired businesses have contributed £5.8m revenue and £0.2m underlying operating profit, which are included in the Group's Consolidated Income Statement. If the acquisitions had been made on 1 January 2018, the Group's results for the year would have shown revenue of £639.8m and underlying operating profit of £80.3m.

In addition to the above acquisitions, the Group paid a further amount of £0.6m in deferred consideration in respect of acquisitions made in the prior year. 

After the year end, on 22 February 2019, the Group announced the acquisition of 100% of the share capital of Cobaco Holdings Limited, the parent company of ATG Access Limited ("ATG") for a cash consideration of £22.5m. Based in the UK and exporting to over 30 countries, ATG specialises in the development, manufacture and installation of hostile vehicle mitigation perimeter security solutions including bollards, road blockers, barriers and gates. The combination of our existing security products with those of ATG provides a strong platform to accelerate the expansion of both our existing UK and international roads businesses. Under IAS 10 'Events After the Reporting Period', this has been treated as a non-adjusting event as no conditions existed at the end of the reporting period. There is no impact to the going concern basis of accounting due to this event. This transaction will be treated as a business combination under IFRS 3 and full details of the financial effects will be included in the Group's next set of financial statements, as the Group have yet to finalise the initial accounting and to agree this with the vendors.

9. Cash and borrowings

	2018 £m	2017 £m
Cash and cash equivalents in the Consolidated Statement of Financial Position
Cash and bank balances	36.9	16.4
Cash	36.9	16.4
Interest bearing loans and borrowings
Amounts due within one year	(0.4)	(0.3)
Amounts due after more than one year	(169.4)	(115.1)
Net debt	(132.9)	(99.0)

Change in net debt
Operating profit	65.2	74.1
Non-cash items	31.2	24.7
Operating cash flow before movement in working capital	96.4	98.8
Net movement in working capital	(6.3)	(19.1)
Changes in provisions and employee benefits	(2.4)	(3.2)
Operating cash flow	87.7	76.5
Tax paid	(13.3)	(16.7)
Net financing costs paid	(3.9)	(2.8)
Capital expenditure	(32.8)	(20.7)
Proceeds on disposal of non-current assets and assets held for sale	1.2	2.3
Free cash flow	38.9	38.6
Dividends paid (note 7)	(23.6)	(20.7)
Acquisitions (note 8)	(45.8)	(8.3)
Disposals	-	2.5
Amortisation of costs associated with refinancing revolving credit facilities (note 5)	(1.0)	(0.4)
Purchase of shares for employee benefit trust	(2.7)	(2.6)
Issue of new shares	1.5	0.6
Net debt (increase)/decrease	(32.7)	9.7
Effect of exchange rate fluctuations	(3.3)	3.3
Net debt at the beginning of the year	(99.0)	(112.0)
Adoption of new accounting standards	2.1	-
Net debt at the beginning of the year (restated)	(96.9)	(112.0)
Net debt at the end of the year	(132.9)	(99.0)

Notes:

1. The financial information previously set out does not constitute the Company's statutory accounts for the years ended 31 December 2018 or 2017 but is derived from those accounts. Statutory accounts for 2017 have been delivered to the registrar of companies, and those for 2018 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 around 15 April 2019 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 Thursday 16 May 2019 at 11.00 a.m. at The Village Hotel, The Green Business Park, Shirley, Solihull, B90 4GW.

ii. The proposed final dividend for 2018 will be paid on 1 July 2019 to shareholders on the register on 24 May 2019 (ex-dividend date 23 May 2019).

iii. The last date for receipt of Dividend Reinvestment Plan elections is 10 June 2019.

iv. Interim results announcement for the period to 30 June 2019 due 7 August 2019.

v. Payment of the 2019 interim dividend due 3 January 2020.

4. This preliminary announcement of results for the year ended 31 December 2018 was approved by the Directors on 6 March 2019.

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 materially from those currently anticipated. Nothing in this document should be regarded as a profits forecast.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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