Hill & Smith Holdings PLC

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2020

Robust performance; strong cash generation; positive long term prospects

Hill & Smith Holdings PLC ("Hill & Smith" or "the Group"), the international group creating sustainable infrastructure and safe transport solutions, announces its preliminary results for the year ended 31 December 2020.

Financial results

Key points:

·      Health, safety and wellbeing of all employees remain our top priority and we have measures in place in all our sites to ensure the safe working of all employees during the COVID-19 pandemic

·      Robust performance with good recovery in H2, approaching H2 2019 trading levels

o  US businesses performed well throughout the year

o  COVID-19 resulted in Q2 2020 closure of France, India and certain UK operations with businesses reopening and trading recovering strongly in H2

o  Security businesses continue to face challenges due to restrictions on public gatherings

·      Strong cash generation supported by cash preservation actions, resulting in a £69.1m reduction in net debt

·      Repayment of all monies received under the UK Coronavirus Job Retention Scheme (£3.6m)

·      FY20 final dividend of 17.5p recommended, taking total dividend for the year to 26.7p

·      Long term outlook for infrastructure spend remains positive

Paul Simmons, Chief Executive, said:

"The robust 2020 trading performance clearly demonstrates the strengths of the Group's business model including the quality of our local teams and I would like to thank all of our employees for their continued commitment.  We are particularly pleased with the strong recovery in the second half of 2020, with trading approaching prior year levels. This provides a solid platform to build from as we enhance our organic growth plans and realign our portfolio to drive even better returns.

Our organic and acquisitive growth plans are underpinned by a strong balance sheet as well as positive dynamics in our key end markets given the long term requirement to upgrade infrastructure in a sustainable way. We expect to see a good recovery in trading in 2021."

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* All underlying measures exclude certain non-underlying items, which are as detailed in note 4 to the Financial Statements and described in the Financial Review. References to an underlying profit measure throughout this announcement are made on this basis. Non-underlying items are presented separately in the Consolidated Income Statement where, in the Directors' judgement, the quantum, nature or volatility of such items gives further information to obtain a proper understanding of the underlying performance of the business. Underlying measures are deemed alternative performance measures ("APMs") under the European Securities and Markets Authority guidelines and a reconciliation to the closest IFRS equivalent measure is detailed in note 3 to the financial statements. They are presented on a consistent basis over time to assist in comparison of performance, with the exception of changes to the presentation of net financing costs on defined benefit pension obligations and costs incurred as part of significant refinancing activities, which were presented as non-underlying items in 2019 but included in the underlying results in 2020.  This change had no material impact on the results for either period.

** 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 creates sustainable infrastructure and safe transport through innovation. The Group employs c. 4400 people worldwide with the majority working within its autonomous, agile, customer focussed operating businesses based in the UK, USA, France, Sweden, India and Australia. It has a head office in the UK and is quoted on the London Stock Exchange (LSE: HILS.L).

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

Roads & Security: supplying products and services such as permanent and temporary road safety barriers, street lighting columns, Intelligent Traffic Solutions, variable road messaging solutions, bridge parapets, renewable energy lighting & power solutions, temporary car parks, high security fencing, hostile vehicle mitigation and access covers.

Utilities: supplying products and services such as engineered composite solutions with low embedded energy, assemblies for the distribution of electricity, building products including fire doors, pipe supports for the water, power and liquid natural gas markets, industrial flooring and seismic protection solutions.

Galvanizing Services: dramatically increasing the sustainability and maintenance free life of steel products including structural steel work, lighting, bridges, agricultural and other products for the industrial and infrastructure markets.

Chief Executive's Review

Review of 2020

2020 was a challenging year with the COVID-19 pandemic creating unprecedented economic conditions for businesses globally. On behalf of the Board, I would like to thank all of our employees for their significant contribution and determination during these testing times.

The health, safety and wellbeing of our employees remains our key priority and we continue to follow local public health guidelines across all Group operations with enhanced protocols in place to ensure our facilities are COVID-19 secure. Actions taken include introducing enhanced cleaning and hygiene procedures, implementing social distancing and track and trace procedures, provision of face masks and taking all reasonable steps to help people work from home where appropriate to do so. In addition, we are mindful of the mental wellbeing of our employees during this difficult time and have offered appropriate support and assistance.

Given the extent of disruption around the world as a result of the COVID-19 pandemic, Hill & Smith delivered a robust performance in 2020 with year end results ahead of the current analyst forecast range. The 2020 trading performance and ongoing recovery as we enter 2021 demonstrates the strengths of the Group's business model, our choice of resilient end markets, the international mix of businesses and the decentralised operating model with high quality teams who were able to respond quickly to local market conditions as they unfolded during the year.

The Group made a good start to the year, delivering organic revenue and profit growth in the first quarter. Trading performance from the middle of March was impacted by COVID-19 related business closures in France, India and certain UK businesses and reduced levels of demand elsewhere in the Group. All our businesses had reopened by the middle of May and we experienced a strong recovery in trading in the second half of the year. Despite the disruption caused by the pandemic, the Group remained profitable throughout the year and our US businesses, which represented 41% of Group revenues, have proved particularly resilient, delivering similar levels of revenue and profit to the prior year.

As previously announced, the only area of the Group which has not seen a strong recovery is our Security sub-division, which continues to face challenges due to COVID-19 related restrictions on public gatherings and delayed customer projects.

During the year we took swift actions to manage costs and conserve operational cashflows without limiting our longer term growth prospects. Our businesses acted quickly to limit discretionary spend and have continued to drive local efficiency plans. Cash preservation measures included the withdrawal of the final 2019 dividend and focused management of working capital across the Group. We also carried out a detailed review of capital expenditure to limit non-essential spend, while still maintaining investment in organic growth opportunities.

Given the improved trading performance in the second half and the solid levels of cash generation, the Board made the decision in December 2020 to repay all monies received earlier in the year from the UK Coronavirus Job Retention Scheme (£3.6m) and to settle UK VAT liabilities deferred from the second quarter (£6.5m). We are pleased to report that we end the year with a robust balance sheet and net debt of £146.2m, 1.3x EBITDA on a covenant basis and a reduction of £69.1m from the end of 2019. We continue to maintain strong headroom against our committed borrowing facilities which have medium to long maturities, the earliest expiring in December 2023. This provides the Group with a solid platform to take advantage of future growth opportunities.

Acquisitions in high growth, high return markets remain a key component of our future growth strategy and, after the year end, in March 2021, we acquired Prolectric Services Ltd ("Prolectric") for an initial cash consideration of £12.5m, on a debt and cash free basis. Prolectric is a UK market leader in temporary solar lighting and operates in a market with excellent long term growth potential, driven by the transition from fossil fuels towards renewable energies.

In November 2020, Derek Muir stepped down from the Board and his role as Chief Executive, having announced his intention to retire earlier in the year. Derek has been instrumental in shaping Hill & Smith's strategy and has delivered significant returns to shareholders during his 14 year tenure. I would like to thank Derek for all his support during the well run handover process.

After the year end, in February 2021, we were pleased to announce the appointment of Leigh-Ann Russell as a Non-executive Director with effect from 1 April 2021. Leigh-Ann's appointment is part of the Group's careful succession planning to recruit Non-executive Directors with the necessary skills, experience and diversity required to support the Group's future development.

Initial Observations

On joining Hill & Smith in September last year, my first priority was to meet as many colleagues and visit as many Group businesses as possible. Ideally these meetings would have been face to face but, due to COVID-19 related restrictions, a number, particularly with overseas sites, inevitably had to be conducted virtually. From these, it is clear to me that our businesses employ extremely committed people with excellent market and domain knowledge, and that we operate in resilient end markets with strong structural growth drivers.

I am a strong believer in our decentralised autonomous operating model and the benefits it brings, including highly accountable management, agility and customer intimacy, and the ability to attract talented people who want to make a difference. This model operates within a disciplined financial framework with strong levels of cash generation and a robust balance sheet. This is all underpinned by strong governance and an ambitious and supportive Board.

In the coming year, we will refine our strategy to build on the opportunities across the Group to further enhance our growth potential. First and foremost, we will continue to focus on accelerating organic growth by increasing the rate of innovation and identifying new niche markets. Second, we will place greater emphasis on higher margins and long term growth, and we have already fine tuned our portfolio management criteria to that effect. The US and UK will remain our key areas of geographic focus, both for organic growth and targeted acquisitions.

We have recently taken steps to organise for growth and scalability. At the beginning of 2021, we formed a new Executive Board and have introduced Group Presidents who will be responsible for accelerating growth within their market portfolio and supporting the business overall. Talented people are fundamental to the success of our decentralised model, and with this in mind we have recruited a Chief People Officer who will be leading on career and talent development across the Group. We intend to recalibrate the incentive schemes for our people to align with our enhanced growth ambitions.

As well as the way we operate internally, our success relies on us focusing on markets with long term growth drivers, at both a macro and market specific level. Those macro drivers include climate change, health and safety regulation, population growth and increasing urbanisation. Market specific drivers include enabling technology, sustainable materials, decarbonisation, infrastructure safety and Vision Zero, a programme to eliminate road deaths. Combined, these feed into the need for infrastructure to be upgraded in a sustainable way, and for governments to increase regulation in the area of health and safety. All this is reflected in our purpose of 'creating sustainable infrastructure and safe transport through innovation'. I have already seen first hand some of our products that are a benefit to society, from flood defence products, fire resilient electricity transmission poles and solar powered signs, to pedestrian protection bollards. In turn, this purpose makes us very conscious of the impact of our production processes on climate change, and of the opportunities and risks that climate change introduces to our strategy.

We will be further developing our environmental, social and governance (ESG) strategy in 2021, including reviewing our commitments to managing our water and energy consumption, improving diversity and inclusion, and continuing to enhance our health and safety performance. Reinforcing the culture of responsibility and accountability across our Group and in each individual business is an absolute priority for the Board, and for me personally.

I am delighted to have joined Hill & Smith as Chief Executive, and I am excited about the future of the Group. With our renewed purpose and refined focus, I believe that we are well positioned for further growth.

Our Strategy

While many key elements of our strategy remain unchanged, we have redefined our purpose to "creating sustainable infrastructure and safe transport through innovation". Our purpose, in combination with the consideration of long term macro growth and market drivers, will determine our choice of markets and applications.

We continue to be attracted to fast growing niche opportunities that provide significant value to our customers in their critical applications, preferably in markets with high barriers to entry such as regulation. Our products and services help transport become safer and infrastructure become more sustainable, with both the environment and our customers benefitting through the value that our diverse offerings provide. Our decentralised model allows our businesses to care about small, high growth, high margin applications in a way that more centralised, volume driven organisations cannot. We take a long term view in the assessment of and investment in our current markets and potential applications.

We look to capitalise on the extensive domain knowledge we hold within our current markets, to minimise risk as we continue to evolve our portfolio through organic developments, thoughtful acquisitions, and targeted disposals. We will aim to improve the quality of our portfolio with each iteration.

Our organisation consists of a small, highly capable central function allowing us to over invest in the talent within our operating companies. We only have around 20 people (out of c. 4,400 global employees) in our head office. We deliberately place most of our talent close to our customers because we believe that this increases market intimacy, agility, and delivers accountability. Our decentralised model is also a powerful factor in the attraction of high calibre people who want to make a difference. Within the Group we have the potential to offer incredibly varied career paths to our employees.

The decentralised model, which we have adopted for many years, is scalable through the addition of the recently introduced Group President roles. These end market focussed, senior leaders run their own portfolio of operating companies, partnering with the operating companies on organic growth and the Corporate Development team to add high quality businesses to their portfolios.

Alongside our decentralised operating model our financial model has been the foundation of our long term success. This model is based on delivering greater than 3% organic revenue growth through the cycle and achieving Group operating margins in the range of 12-15%. This leads to businesses which are highly cash generative, with a target of 90% underlying cash conversion and we reinvest this cash to grow our existing businesses and to fund carefully considered acquisitions. We also maintain a strong and flexible balance sheet with a conservative approach to borrowing and a target net debt to underlying EBITDA ratio of 1.5 to 2.0 times. This approach sustains growth over the longer term and enables us to pursue a progressive dividend policy and deliver superior returns to shareholders.

We aim to provide safe, high quality jobs for our employees worldwide providing the potential for career development and socio-economic mobility. We are committed, wherever possible, to ensuring that we provide stable, inclusive employment for all members of the community in successful and sustainable businesses. We ensure that we meet all environmental regulations and work towards carbon neutrality.

Our focus is on geographies where there are historically high levels of investment in infrastructure for upgrades and replacements. We currently operate from 76 sites in 6 countries.

The successful execution of our strategy drives exceptional shareholder returns, provides high quality jobs for our employees, benefits local communities and gives long term opportunities to our supply chain partners.

2020 Headline Results

⁽¹⁾ Underlying measures are set out in note 3 to the Financial Statements and exclude certain non-underlying items, which are detailed in note 4 to the Financial Statements.

Revenue for the year of £660.5m (2019: £694.7m) was 7% lower on an organic basis. Despite the challenges arising from the COVID-19 pandemic, the Group remained profitable throughout the year with a strong recovery in the second half. Underlying operating profit for the year was £69.9m (2019: £86.3m), while underlying operating margin reduced to 10.6% (2019: 12.4%) as a result of operational leverage on lower revenues. Underlying profit before taxation was 21% lower at £62.6m (2019: £79.4m). Reported operating profit was £42.8m (2019: £69.2m) and reported profit before tax was £35.5m (2019: £61.8m). The principal reconciling items between underlying and reported operating profit are the amortisation of acquisition intangibles of £6.1m and the write down of goodwill relating to our French galvanising business of £17.5m. Both of these are non-cash items.

Dividend

In March 2020, the Board made the decision to cancel the 2019 final dividend as a prudent measure to preserve £18m of cash given the COVID-19 related business closures and high levels of uncertainty. Given the improving trading performance and more positive outlook going into the third quarter, we announced the resumption of dividend payments with the declaration of an interim dividend for 2020 of 9.2p per share in August 2020. Based on the strong trading performance and cash generation in the second half, the Board is recommending a final dividend of 17.5p per share, making a total dividend for the year of 26.7p per share. Underlying dividend cover remains a conservative 2.4 times.

The Board understands the importance of dividends to our shareholders and our approach remains on maintaining dividends that are both sustainable and progressive. The final dividend, if approved, will be paid on 9 July 2021 to those shareholders on the register at the close of business on 4 June 2021.

Outlook

We expect to see a good recovery in trading in 2021, albeit we remain mindful of the potential ongoing disruption of COVID-19, higher raw material prices and foreign exchange fluctuations on our financial performance for the full year.

In the medium to longer term, we are encouraged by the potential for a significant infrastructure bill to be passed in the US under the new Biden Administration. While details and spend levels are still to be confirmed, we believe our US businesses are well placed to take advantage of the opportunities arising from the increased investment. In the UK, the Government's commitment to increased levels of funding for Road Investment Strategy 2 (RIS 2) is also encouraging, with major Smart Motorway schemes expected to commence in the second half of 2021.

Brexit

The Group has limited cross border trade activity and to date we have seen minimal disruption following the end of the transition period on 31 December 2020, however we continue to closely monitor and mitigate the related operational and financial risks. In the longer term, we continue to believe that our strategy of international diversification, along with our exposure to longer term Government funded infrastructure investment programmes, will help limit any potential negative impact on the Group resulting from Brexit.

Operating Review

Roads & Security

⁽¹⁾ Underlying measures are set out in note 3 to the Financial Statements and exclude certain non-underlying items, which are detailed in note 4 to the Financial Statements.

⁽²⁾ 2019 restated as explained in note 2 to the Financial Statements.

The expanded Roads & Security division was formed on 1 January 2020. The division includes international companies which design, manufacture and install temporary and permanent safety products for the roads market, alongside UK based businesses which provide a range of security products to protect people, buildings and infrastructure from attack, including hostile vehicle mitigation solutions, perimeter fencing and access covers.

The division had a strong first quarter, with revenue and underlying operating profit both growing organically year on year, however trading in the second quarter was impacted by COVID-19 related disruption. While trading recovered in the second half, we continue to face significant challenges in our security businesses due to global restrictions on public gatherings and customers delaying security projects. As a result, revenue for the period declined organically by 10% to £263.4m after a currency benefit of £0.6m and contribution from acquisitions of £16.0m. The division remained profitable throughout the year with underlying operating profit of £13.2m (2019 (restated): £23.2m), however the underlying operating margin fell to 5.0% (2019 (restated): 8.4%). The reduction is mainly attributable to the COVID-19 related disruption to our Security businesses where, despite the additional revenue from prior year acquisitions, underlying operating profits were substantially lower than the prior period. The reduction in reported operating profit of £3.0m was lower than the reduction in underlying operating profit mainly due to non-underlying restructuring and impairment charges of £8.9m in 2019 relating to the Group's Scandinavian roads business.

UK Roads

In March 2020, the UK Government confirmed its commitment to investment in UK road infrastructure with the announcement of £27.4bn spend for Road Investment Strategy ("RIS2") for the five years to 2025, an 80% increase compared with RIS1.The Department of Transport also concluded their review of the safety concerns on Britain's Smart Motorways in March 2020 and are committed to continue construction, with enhancements, as part of the RIS2 programme. In February 2021, the parliamentary Transport Committee launched a new inquiry into the benefits and safety of Smart Motorways and we await the outcome of this.  Our current expectation is that new RIS2 Smart Motorways schemes will commence in H2 2021. 

During the year, our temporary road safety barrier business was able to operate with minimal disruption. As expected, steel temporary barrier utilisation levels reduced in the second quarter as RIS1 schemes started to come to an end and continued at a steady level for the second half. We have seen growing demand for Rebloc concrete barrier, which complements our Zoneguard steel barrier offering and can be used on projects where space is restricted, and during the period we invested £2m in expansion of the concrete barrier fleet. We continue to expect the lower levels of steel barrier utilisation to continue into the first half of 2021, with new RIS2 Smart Motorways projects expected to start in H2 2021.

Our permanent safety barrier business also proved to be resilient. During the year we won a number of RIS2 replacement barrier schemes including some which were released early to take advantage of the quieter roads. The outlook for 2021 is promising, as we expect more new UK replacement barrier schemes to be released and continued demand from our international markets.

The variable message sign business experienced various headwinds during the year including the delay of new RIS2 Smart Motorway projects into the second half of 2021. Consequently, we are currently taking a number of actions to restructure the business and its cost base which, alongside a more cautious assessment of its future outlook, led to asset impairment charges at 31 December 2020 of £2.8m.

Our remaining UK roads portfolio consists of street furniture and lighting columns, bridge parapets, temporary car parks and concrete arches. While all these businesses remained open to meet essential customer demand, trading in the second quarter was adversely impacted by customer delays and deferrals caused by COVID-19 related disruption. These businesses saw a gradual recovery in the second half with customer orders increasing as the restrictions of the first lockdown eased. The businesses enter 2021 with an encouraging orderbook and are working hard to minimise the impact of steel cost increases.

US Roads

Our US roads business was considered "essential" and remained open throughout the year. As a result, the pandemic had minimal impact on operations and the team were able to successfully service customers who worked continuously throughout the year. Demand for roadside safety products, including crash attenuators and temporary safety barriers, was particularly strong and as a result revenue and operating margins increased year on year. We continued to invest in growth opportunities in US roads including £3.1m in the expansion of our Zoneguard steel temporary safety barrier fleet and £0.9m on the acquisition of Morgan Valley Manufacturing, Inc.. Based in Utah, US, the acquisition will enable the inhouse fabrication of crash attenuators and support the US roads growth strategy.

In September 2020, we were encouraged by the extension of the Federal road funding bill (FAST Act) for an additional year. We expect demand for our products to remain stable due to the stimulus bill passed in December 2020, which will provide the additional state funding required to ensure project continuity. In 2021, we will also continue to invest in barrier fleet expansion, product innovation and operational improvements to support future growth opportunities.

Other International Roads

The restructuring of our roads business in Sweden progressed well in the first half, with the new management team focusing on cost reductions and improved pricing. The business faced challenges in the second half as COVID-19 uncertainty increased in Sweden and projects were postponed. While revenues were lower year on year, operating losses were significantly reduced and the team will continue to take action to right size and further improve the business in 2021.

Our lighting column business in France performed well despite the COVID-19 related closure of the factory from the end of March to early May. While volumes were lower than prior year, the business benefited from operational efficiencies and improvements to the product range. In Australia, we saw an increase in sales of temporary safety barrier compared to the low sales levels in the previous year. Looking forward, we are encouraged by the ongoing investment in Australia's road infrastructure and the growth opportunities this may present.

Security

Our security businesses are based in the UK and provide a range of perimeter security solutions including hostile vehicle mitigation to both UK and international markets. During the year, the business experienced a number of headwinds which had a significant adverse impact on trading.

Our security fencing and access cover businesses closed when the first COVID-19 lockdown was announced at the end of March 2020. Both businesses re-opened in May, and while our security fencing business has seen a gradual recovery in the second half, driven by demand for data centre security, our access cover business has experienced challenges due to customers delaying orders and restricting site access.

Our business which sells security bollards and hostile vehicle mitigation solutions remained operational throughout the year, but was significantly impacted by project delays, postponements and cancellations both in the UK and the Middle East, where the lower oil price created further uncertainty. COVID-19 has also materially impacted demand for the operation of the UK Security barrier fleet, with the cancellation of public gatherings and high profile events, however we were able to re-deploy our multiskilled team to support other barrier activity.

Looking forward into 2021, we are continuing to see good demand for perimeter security solutions in data centres and opportunities arising from the pedestrianisation of shopping areas in UK city centres. In the medium term we believe that the demand for our products to protect people, buildings and infrastructure will return.

Utilities

 ⁽¹⁾ Underlying measures are set out in note 3 to the Financial Statements and exclude certain non-underlying items, which are detailed in note 4 to the Financial Statements.

⁽²⁾ 2019 restated as explained in note 2 to the Financial Statements.

Our Utilities segment provides steel and composite products for a wide range of infrastructure markets including energy generation and distribution, marine, rail and housing. The division had a strong start to the year with revenue and profit both growing organically in the first quarter, however trading in the second quarter was impacted by COVID-19 related business closures in the UK and India. We have seen a good recovery in the second half, particularly in our UK building products business. The US businesses remained operational and performed well throughout the year, with strong levels of demand in our composites and electricity distribution businesses.

Revenue declined by 5% to £211.2m (2019 (restated): £222.3m), including a currency translation headwind of £0.4m and a £5.4m reduction from prior year disposals. The organic revenue decline was 2%. Underlying operating profit was £20.9m (2019 (restated): £21.3m), including a £0.4m benefit from prior year disposals. Underlying operating margin was ahead of prior year levels at 9.9% (2019 (restated): 9.6%), reflecting the strong performance in our higher margin US businesses. Reported operating profit was £20.1m (2019 (restated): £20.0m).

UK

The performance of our two UK utilities businesses was impacted by COVID-19 related disruption in the second quarter, however both businesses recovered well in the second half of the year.

Our building products business, supplying composite residential doors, steel lintels and builders' metalwork, closed at the end of March but reopened in a phased manner during April as customers reopened and was at full capacity from June onwards. In the second half, the business benefited from a strong recovery in demand and lower raw material costs. The outlook for 2021 is encouraging with housebuilders reporting strong demand and although the business is currently experiencing challenges relating to global increases in steel costs, we are managing availability issues and are well placed to pass on increases to customers.

The industrial flooring business remained open throughout the period to support essential projects, albeit at reduced activity levels in the second quarter given the restricted access to customer sites. The business made a good recovery in the second half, with previous restructuring actions supporting margins and good levels of demand, particularly from data centre and distribution centre markets.

USA

Our US utilities businesses were deemed "essential" and remained open throughout 2020, quickly adapting to run COVID secure operations. Despite the pandemic, they have continued their momentum from 2019 and delivered strong organic year on year revenue and profit growth.

We are continuing to see a growing acceptance of composite components and systems for use in niche infrastructure applications, and our team worked hard during the year to develop and market innovative designs that meet customer needs. In 2020, demand was strong for our wide range of composite solutions including waterfront protection, transmission access platforms, rail car flooring, and heating, ventilation and air conditioning (HVAC) cooling applications. With some significant projects coming to an end in 2020, we expect 2021 performance to be flatter, albeit with further opportunities in mass transit, utility poles and waterfront protection projects being pursued.

The US electricity distribution substation business delivered another impressive performance, growing strongly against challenging prior year comparatives. During 2020 we continued to see growth in projects for the upgrade of old infrastructure, particularly centred around the north eastern corridor of the USA. Despite some headwinds associated with steel price increases, the outlook for 2021 is encouraging given continued upgrades and new installations and we have taken steps to expand our fabrication facility to support future growth.

Pipe Supports

In the US, the engineered pipe support and industrial hanger business was considered "essential" and remained open throughout the pandemic. While the business experienced a slowdown in demand in the second quarter, recovery in the second half was strong, supported by winning several major projects in water treatment, clean energy and infrastructure. The focus on efficiencies and providing superior quality and customer service resulted in improved margins and year on year profit growth. During the year we invested £1.6m in the expansion of our seismic restraint device manufacturing capability and the business enters 2021 with a good backlog and continues to focus on further growth opportunities.

In India, our industrial pipe business entered the year with a strong order book, particularly for the cryogenic product range, however a forced shutdown of operations in March 2020 materially impacted the first half trading. Operations reopened in May and the team worked hard to manufacture and deliver products to customers while operating a COVID secure facility and managing local restrictions. We enter 2021 with a good order book and are seeing a growing demand to supply products and engineering services to support key liquified natural gas developments across the globe. This demonstrates the growing confidence of customers in our expertise in this area and the role the Group has to play in supporting the transition towards cleaner energy.

Galvanizing Services

⁽¹⁾ Underlying measures are set out in note 3 to the Financial Statements and exclude certain non-underlying items, which are detailed in note 4 to the Financial Statements.

The Galvanizing Services division offers corrosion protection services to the steel fabrication industry with multi-plant facilities in the USA, France and the UK. Trading in the second quarter was impacted by COVID-19, with the complete closure of our French operations for a month and a slowdown in volumes across all geographies due to customer closures. Trading gradually recovered in the second half as customer activity returned. As a result, volumes were 8% lower than prior year and revenue reduced by 6% to £185.9m (2019: £197.1m) which included a currency translation benefit of £0.5m. Organic revenue decline was 6%. Underlying operating profit declined by 14% to £35.8m (2019: £41.8m). Underlying operating margin was 19.3% (2019: 21.2%), with operating margins supported by pricing, efficiency improvements and lower zinc input costs. Reported operating profit was £17.1m (2019: £40.6m) and included goodwill impairment charges of £17.5m (2019: £nil) relating to the Group's French galvanizing operations.

UK

Our galvanizing businesses are located on 10 sites, four of which are strategically adjacent to our infrastructure products manufacturing facilities.

Trading in March 2020 was impacted by COVID-19. Measures were swiftly deployed to keep employees COVID safe while continuing to offer a full service to customers to support critical projects. Demand recovered in the second half, with strong demand in the fourth quarter. Total volumes galvanized for the year were 7% lower than 2019 levels.

While we enter 2021 with continued uncertainty around the pandemic, the UK business benefits from a wide sectoral spread of customers including those who operate in resilient markets such as infrastructure, construction and agriculture. In addition, the team are continuing their strategy of focusing on higher margin work which should position the business well for the year ahead.

USA

Predominantly located in the north east of the country, we are a market leader with eight strategically located plants offering local services and extensive support to fabricators and product manufacturers involved in highways, construction, utilities and transportation.

All our plants were considered "essential" and continued to operate, with teams following local state guidelines to ensure facilities were COVID secure. Trading was impacted by temporary customer shutdowns and our top two customers, who manufacture temporary bridges and trailers, were impacted by the COVID-19 slowdown and project delays. As a result, volumes were 7% lower than prior year. The team worked hard to maintain average selling prices, which together with further improvements in plant efficiency and lower zinc input costs, supported operating margins.

Our new facility in New York State became operational in January 2020. We were successful in winning new customers to create a good baseload of activity and the plant was profitable for the full year.

Looking forward, in the short term we remain generally cautious due to the market uncertainty around raw material prices in the US. In the medium to longer term, the outlook for US galvanizing is positive with US infrastructure spend levels likely to remain robust across a wide range of our customer market sectors. As a result, we are actively assessing industrial locations, often in need of regeneration, for further expansion.

France

France Galva has 10 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.

Trading was impacted from the middle of March due to the COVID-19 related forced closure of all 10 plants across the country. The plants were able to re-open in April and while volumes have recovered gradually, overall volumes were 11% below last year. Operating profits were also impacted by the plant closures and slowdown in demand. Although the French economy is expected to recover somewhat in 2021, the outlook for many of the markets served by our galvanizing business remains challenging and it is likely to take some time for activity to return to pre-pandemic levels. As a consequence of this deterioration in the outlook, the Group reassessed the value of the acquisition goodwill relating to the French galvanizing business and concluded that an impairment charge of £17.5m was required, further details of which are set out in note 4 to the Financial Statements.

Financial review

Cash generation and financing

Despite the impact on trading of COVID-19, the Group continued to be highly cash generative throughout the year, demonstrating the resilience of its underlying business model and market choices and also reflecting the measures taken to conserve operational cash flows without impacting the Group's longer term growth prospects.

Cash generated by operations was £118.3m (2019: £98.9m), including an inflow from working capital movements (before changes in provisions) of £18.2m (2019: outflow of £12.9m). The Group delivered a substantial improvement in trade receivable collections during the year, with debtor days falling to 54 at the year end (2019: 61) resulting in a cash inflow from receivables of £21.6m (2019: outflow of £0.4m). Alongside enhancements to our cash collection processes, the improvement is partly a consequence of fluctuations in customer mix. Whilst we have not seen any significant changes in collection profiles in the early part of 2021, we remain mindful of the possible impacts that unwinding COVID support measures could have as the year progresses. The decrease in inventories was minimal at £1.0m (2019: increase of £2.4m), while the outflow from movements in payables was £4.4m (2019: £10.1m). Working capital cash flows for the year have not benefitted directly from any UK Government COVID support measures, the Group having settled VAT payables of £6.5m in December 2020 that had been deferred from Q2.

Capital expenditure in the year was £20.4m (2019: £47.9m), representing a multiple of depreciation and amortisation (excluding amortisation from acquisition intangibles and right of use asset depreciation) of 0.9 times (2019: 2.3 times) as detailed in note 3 to the Financial Statements. While a period of lower capital investment was anticipated in 2020 following significant strategic spend in 2019, a rigorous review of capital expenditure was carried out through the year to limit non-essential spend during the COVID-19 pandemic while still maintaining investment in key organic growth opportunities. Significant items of expenditure in 2020 included £3.2m in completion of the New York galvanizing plant, £3.1m of new products for the UK temporary safety barrier rental markets and £1.6m on expansion of the Group's pipe support manufacturing facilities in the US.

Net financing costs were similar to the prior year at £7.3m (2019: £7.4m), however the cash element of financing costs was lower at £6.2m (2019: £6.9m). The Group has benefitted from reduced levels of average net debt during the year, particularly in the second half, with lower UK and US base rates largely offsetting the higher borrowing cost on the Group's senior unsecured notes issued in June 2019. The net cost of pension fund financing under IAS 19 was £0.3m (2019: £0.5m) and the amortisation of costs relating to refinancing activities was £0.8m (2019: £nil, reflecting amortisation of £0.9m offset by a gain of £0.9m following refinancing actions undertaken during that period).

The Group measures its overall cash generation performance based on its underlying cash conversion ratio. In 2020 the Group delivered an underlying cash conversion ratio of 139% (2019: 54%), well in excess of our 90% target, with the significant improvement over 2019 reflecting the strong working capital performance and our focussed approach to capital investment. The calculation of our underlying cash conversation ratio is set out in note 3 to the Financial Statements.

Net debt and facilities

Group net debt at 31 December 2020 was £146.2m (2019: £215.3m), representing a year on year reduction of £69.1m. Since the onset of the pandemic the Group has taken several measures to conserve operational cash flows, including curtailing non-essential capital expenditure, tightly managing working capital and reducing discretionary spend. The Group also withdrew the 2019 final dividend, which would have required a cash outlay of c.£18m in July 2020. Net debt at the year end includes lease liabilities under IFRS 16 of £32.4m (2019: £40.0m), the reduction being primarily due to lease payments during the year.

The Group's principal financing facilities are a headline £280m multi-currency revolving credit agreement, which expires in December 2023, and $70m senior unsecured notes with maturities in June 2026 and June 2029, together with a further £13.8m of on-demand local overdraft arrangements. Throughout the year the Group has operated well within these facilities.

Maturity profile of debt facilities

The amount drawn down under these facilities at 31 December 2020 was £139.0m, which together with cash of £22.0m, gave total headroom of £225.1m.

The principal borrowing facilities are subject to covenants that are measured biannually in June and December, being net debt to underlying EBITDA of a maximum of 3.0x and interest cover of a minimum of 4.0x, based on measures as defined in the facilities agreements which are adjusted from the equivalent IFRS amounts. The ratio of net debt to underlying EBITDA at 31 December 2020 was 1.3 times (31 December 2019: 1.6 times) and interest cover was 17.0 times (31 December 2019: 15.7 times), providing the Group with substantial headroom to enable it to invest in future organic and acquisitive growth opportunities. 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.

Treasury

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 minimum cost. The treasury function 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.

Exchange rates

The Group is exposed to movements in exchange rates when translating the results of its overseas operations into Sterling, however the effects in 2020 were minimal as average rates were similar to 2019, notably the US Dollar. Retranslating 2019 revenue using 2020 average exchange rates would have increased revenue by only £0.7m with no impact on underlying operating profit.

Whilst future movements are inherently difficult to predict, based on current US Dollar rates we expect a headwind to the results in 2021. Retranslating 2020 revenue and underlying operating profit using average exchange rates for January 2021 (principally £1 = $1.36 and £1 = €1.12) would reduce revenue by £14.4m (2%) and underlying operating profit by £3.2m (5%). For the US Dollar, a 1 cent movement results in a £2.1m adjustment to revenue and a £0.4m adjustment to underlying operating profit, while the equivalent impacts for a 1 cent movement in the Euro are £0.7m and £0.1m respectively.

Return on invested capital ('ROIC')

The Group's ROIC in 2020 was 12.6% (2019: 15.9%), below our target of greater than 17% due to the impact on trading of COVID-19. We expect ROIC to improve in 2021 as trading activity continues to return to more normalised levels, supported by the Group's strategy of investing in its higher return markets.

Non-underlying items

The total non-underlying items charged to operating profit in the Consolidated Income Statement amounted to £27.1m (2019: £17.1m) and were made up of the following:

·      An impairment charge of £17.5m in respect of goodwill relating to France Galva SA, which the Group acquired in 2007. Whilst the business continues to be a significant contributor to the Group's results, in recent years its profitability has gradually declined from that anticipated at acquisition and the impact of the COVID-19 pandemic on the global and French economic outlook has resulted in us further reducing our expectations for its future outturn. Consequently, the impairment review performed at 31 December 2020 concluded that France Galva SA's expected future cash flows were not sufficient to support its carrying value at that date, resulting in an impairment of the acquisition goodwill.

·      An impairment charge of £2.8m in respect of assets in the variable message signs business. Following a period of weak trading and a more cautious assessment of the future outlook for that business, the Group is currently taking several actions to restructure the operations and the cost base, leading to a reassessment of asset carrying values at 31 December 2020. This reassessment resulted in impairment charges of £2.8m relating to goodwill and intangible assets of £1.1m, tangible fixed assets of £0.5m, inventories of £0.8m and right-of-use lease assets of £0.4m.

·      Amortisation of acquired intangible fixed assets of £6.1m (2019: £6.2m).

·      Acquisition related expenses of £0.3m (2019: £1.8m) including £0.2m (2019: net credit of £0.2m) relating to future consideration payments to previous owners of acquired businesses, the terms of which require those costs to be treated as a post acquisition employment expense in accordance with IFRS 3 (Revised).

·      Past service pension costs of £0.4m. In November 2020 the High Court handed down a further judgement relating to equalisation of Guaranteed Minimum Pensions (GMPs) between male and female members, following the initial judgement in October 2018. The latest judgement requires businesses with defined benefit pension schemes to equalise historical GMPs for members that have transferred out of schemes. The Group has taken professional advice as to the impact of this judgement and concluded that a cost of £0.4m could be incurred.

The net cash impact of the above items was an outflow of £0.1m in the year, a future cash outflow of £0.6m and a non-cash element of £26.4m.

During the period the Group amended its accounting policy in respect of non-underlying items, to exclude net financing costs on defined benefit pension obligations and costs incurred as part of significant refinancing activities. These items were presented as non-underlying items in the prior year. The changes did not have a material impact on the underlying result for either the current or prior year and the comparatives have therefore not been restated. Further details are set out in note 4 to the Financial Statements.

Tax

The Group's reported tax charge for the year was £11.5m (2019: £13.4m), including an underlying charge of £12.4m (2019: £15.5m). The underlying effective tax rate for the Group was 19.8% (2019: 19.5%), 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 and the successful conclusion of tax uncertainties related to prior years. Assuming no changes to headline corporate tax rates in the UK or US, we expect the Group's underlying effective rate to increase by 1-2 percentage points in 2021.

Cash tax paid was £16.5m (2019: £14.4m), higher than the Group's current tax charge for the year of £10.3m (2019: £15.1m) due to the change in the quarterly payment regime in the UK meaning that tax payments are substantially made in the year to which the tax relates. Previously such payments were spread over the current and following financial years. The Group remains committed to the timely and correct payment of taxes to authorities in all jurisdictions in which we operate.

The Group's net deferred tax liability is £7.6m (2019: £7.7m), which includes £8.4m (2019: £7.9m) of liabilities in respect of brand names, customer relationships and other contractual arrangements arising on acquisitions. These liabilities do not represent future cash tax payments and will unwind as the brand names, customer relationships and contractual arrangements 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 adjusts for the impact of non-underlying items (as described in note 4). UEPS for the period under review reduced to 63.2p (2019: 80.7p), reflecting the impact of COVID-19 on trading, particularly in the second quarter. The diluted UEPS was 62.9p (2019: 80.3p). Basic earnings per share was 30.2p (2019: 61.1p). The weighted average number of shares in issue was 79.5m (2019: 79.2m) with the diluted number of shares at 79.9m (2019: 79.6m) adjusted for the outstanding number of dilutive share options.

Pensions

The Group operates several 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 2020 was £19.6m, a reduction of £0.3m compared to 31 December 2019 (£19.9m).

The Group's UK defined benefit pension scheme remains the largest employee benefit obligation within the Group. In common with many other UK companies, this scheme is mature having significantly more pensioners and deferred pensioners than participating members and is closed to new members. The IAS19 deficit of the scheme as at 31 December 2020 was £14.0m (2019: £14.8m), the reduction being driven by investment outperformance and deficit recovery payments during the year, which more than offset the effect of an 80 basis point reduction in the discount rate, in line with movements in bond yields. The Group remains actively engaged in dialogue with the Scheme's Trustees regarding management, funding and investment strategy, and a formal actuarial valuation of the Scheme as at April 2019 was finalised early in 2020, resulting in the Group agreeing a deficit recovery plan that requires an increase in cash contributions to £3.7m per annum (previously £2.5m per annum) until September 2027. The next triennial valuation will be as at April 2022.

Paul Simmons                                       Hannah Nichols

Group Chief Executive                        Group Chief Financial Officer

10 March 2021

Consolidated Income Statement

* The Group's definition of non-underlying items is included in note 1 and further details on non-underlying items are included in note 4.

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

Consolidated Statement of Changes in Equity

† Other reserves represent the premium on shares issued in exchange for shares of subsidiaries acquired and £0.2m (2019: £0.2m) capital redemption reserve.

At 31 December 2019 a total of 23,759 shares 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 £0.3m, was included within retained earnings at that date. During 2020, 3,831 shares have been issued in settlement of awards to employees, leaving 19,928 shares held at 31 December 2020, at a cost of £0.3m included within retained earnings.

Consolidated Statement of Cashflows

Notes to the Consolidated Financial Statements

1.    Basis of preparation

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

Basis of Consolidation

The consolidated financial statements comprise the financial statements of the Company, Hill & Smith Holdings PLC, and its subsidiaries as at 31 December 2020. Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the Group Financial Statements from the date that control commences until the date that control ceases.

Measurement convention

The Group Financial Statements are prepared on the historical cost basis except where the measurement of balances at fair value is required as explained below. The Group's Financial Statements are presented in Sterling and all values are stated in million (£m) rounded to one decimal place, except where otherwise indicated.

Impact of COVID-19 on the consolidated financial statements

As outlined in the Operating and Financial Review, the COVID-19 pandemic has materially affected the Group's trading performance in 2020 with the temporary closure of some of its operations and reduced activity levels from the middle of March 2020. Revenue in the second quarter was 22% below the same period last year. All our businesses had reopened by the middle of May and despite the challenges arising from the COVID-19 pandemic, the Group remained profitable throughout the year with a strong recovery in the second half. The Group does not consider it possible to reliably determine the level of trading impact arising specifically from COVID-19, as opposed to other market factors, and has therefore not attempted to make any such disclosure in these consolidated financial statements.

Given the improved trading performance in the second half and the solid levels of cash generation, the Board made the decision in December 2020 to repay all monies received earlier in the year from the UK Coronavirus Job Retention Scheme (£3.6m) and to settle UK VAT liabilities deferred from the second quarter (£6.5m).

Going concern and liquidity risk

In determining the appropriate basis of preparation of its financial statements, the Directors are required to assess whether the Group can continue in operational existence for the foreseeable future. When making this assessment, the Group considers whether it will be able to maintain adequate liquidity headroom above the level of its borrowing facilities and to operate within the financial covenants on those facilities.

At 31 December 2020, the Group had £328.3m of committed borrowing facilities, of which only £1.2m matures before December 2023 at the earliest, and a further £13.8m of on-demand facilities.  The amount drawn down under these facilities at 31 December 2020 was £139.0m, which together with cash of £22.0m, gave total headroom of £225.1m. The Group has not made any changes to its principal borrowing facilities between 31 December 2020 and the date of approval of these financial statements, and there have been no significant changes to liquidity headroom during that period. The principal borrowing facilities are subject to covenants that are measured biannually in June and December, being net debt to EBITDA of a maximum of 3.0x and interest cover of a minimum of 4.0x, based on measures as defined in the facilities agreements which are adjusted from the equivalent IFRS amounts. The ratio of net debt to EBITDA at 31 December 2020 was 1.3 times and interest cover was 17.0 times.

The Group has carefully modelled its cash flow outlook for the period to 31 March 2022, taking account of the current uncertainties created by COVID-19 and its impact on global economic conditions. In this 'base case' scenario, the forecasts indicate significant liquidity headroom will be maintained above the Group's borrowing facilities and financial covenants will be met throughout the period, including the covenant tests at 30 June 2021 and 31 December 2021.

The Group has carried out stress tests against the base case to determine the performance levels that would result in a breach of covenants or a reduction of headroom against its borrowing facilities to nil. For a breach of covenants to occur during the relevant period, the Group would need to experience a sustained revenue reduction of 30% compared with current expectations throughout the period from May to December 2021, while a reduction in headroom against borrowing facilities to nil would occur if the Group generated no revenue between May 2021 and March 2022. The Directors do not consider either of these scenarios to be plausible given the ability of the Group to continue its operations throughout the COVID-19 pandemic (noting that revenues fell by only 22% in the second quarter of 2020, the worst-affected period), its ability to return to more normalised activity levels during the second half of 2020 and early part of 2021, and the positive future outlook across the infrastructure markets in which it operates. The Group also has several mitigating actions under its control including minimising capital expenditure to critical requirements, reducing levels of discretionary spend, rationalising its overhead base and curtailing future dividend payments which, although not forecast to be required, could be implemented in order to be able to meet the covenant tests and to continue to operate within borrowing facility limits.

After making these assessments, the Directors have reasonable expectation that the Company and its subsidiaries have adequate resources to continue in operational existence for the foreseeable future and for a period of at least 12 months following the approval of these financial statements. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Financial Statements.

New IFRS standards and interpretations adopted during 2020

In 2020 the following amendments had been endorsed by the EU, became effective and therefore were adopted by the Group:

•     Amendments to IFRS 3: Definition of a Business

•     Amendments to IFRS 7, IFRS 9 and IAS 39: Interest Rate Benchmark Reform

•     Amendments to IAS 1 and IAS 8: Definition of Material

•     Conceptual Framework for Financial Reporting issued on 29 March 2018

The amendments noted above 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 and have not been early adopted by the Group, will, where relevant, be adopted in future accounting periods:

To be adopted for year-ending 31 December 2021:

•     Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 - Interest Rate Benchmark Reform Phase 2

To be adopted for year-ending 31 December 2022:

•     Amendments to IFRS 3 - Reference to Conceptual Framework

•     Amendments to IAS 16 - Proceeds before intended use

•     Amendments to IAS 37 - Onerous contracts - costs of fulfilling a contract

To be adopted for year-ending 31 December 2023:

•     Amendments to IAS 1 - Classification of liabilities as current or non-current

The above changes are not expected to have a material impact on the Group.

The principal exchange rates used were as follows:

Non-underlying items

During the year, the Group amended its accounting policy in respect of non-underlying items to exclude net financing costs on defined benefit pension obligations and costs incurred as part of significant refinancing activities. Such items were included in non-underlying in the prior year. The changes did not have a material impact on the underlying result for either the current or prior year and the comparatives have not been restated. The Group's revised accounting policy for non-underlying items is as follows:

Non-underlying items are presented separately in the Consolidated Income Statement where, in the Directors' judgement, the quantum, nature or volatility of such items gives further information to obtain a fuller understanding of the underlying performance of the business. 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 period.

•       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, or right-of-use 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.

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 4 to the Financial Statements.

2.   Segmental information

Business segment analysis

Following the acquisitions of ATG Access Limited and Parking Facilities Limited in 2019, both of which have a broad portfolio of security and perimeter protection products, in December 2019 the Board considered the other companies in the Group that also have security products in their portfolio and determined that their operations, markets and strategies were closely aligned with those of the existing businesses in the Group's Roads segment. Consequently, the Group formed a new Roads & Security division at the end of 2019. This includes the businesses previously reported in the Roads segment, the acquisitions noted above and the businesses of Barkers Engineering Limited and Technocover Limited, which were previously part of the Utilities segment but whose product portfolios contain a range of security access and perimeter protection solutions.

As a result, the Group has reassessed its reportable segments under IFRS 8 Operating Segments and has determined that these are now Roads & Security, Utilities, and Galvanizing Services. As was the case prior to the change, 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 reporting segment on the basis of the following economic characteristics:

·    The Roads & Security segment contains a group of businesses supplying products designed to ensure the safety and security of roads and other national infrastructure, many of which have been developed to address national and international safety standards, to customers involved in the construction of that infrastructure;

·    The 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; 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.

Corporate costs are allocated to reportable segments in proportion to the revenue of each of those segments.

The revised segmental structure was effective from 1 January 2020, from which date information was reported to the Chief Operating Decision Maker, who is the Chief Executive, under the new segments.  As required by IFRS 8, comparative information has been restated as indicated by "restated" throughout these Consolidated Financial Statements. The revision does not result in any change to the consolidated Group results.

Segmental Income Statement

*   Underlying operating profit is stated before non-underlying items as defined in note 1 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.

Transactions between operating segments are on an arm's length basis similar to transactions with third parties. Galvanizing Services sold £5.2m (2019 (restated): £5.6m) of products and services to Roads & Security and £1.7m (2019 (restated): £1.6m) of products and services to Utilities. Utilities sold £2.2m (2019 (restated): £2.6m) of products and services to Roads & Security. Roads & Security sold £0.2m (2019 (restated): £0.1m) of products and services to Utilities. These internal revenues, along with revenues generated from within their own segments, have been eliminated on consolidation.

In the following tables, revenue from contracts with customers is disaggregated by primary geographical market, major product/service lines and timing of revenue recognition. Revenue by primary geographical market is defined as the end location of the Group's product or service. The table also includes a reconciliation of the disaggregated revenue with the Group's reportable segments.

The Group has no material unsatisfied or partially satisfied performance obligations at the balance sheet date that have an expected duration of more than one year and therefore has taken the practical expedient under IFRS 15 not to disclose such details.

Total assets by geography

3.   Alternative Performance Measures

The Group presents Alternative Performance Measures ("APMs") in addition to its statutory results. These are presented in accordance with the Guidelines on APMs issued by the European Securities and Markets Authority. The principal APMs are:

·      Underlying profit before taxation;

·      Underlying operating profit;

·      Underlying operating profit margin;

·      Organic measure of change in revenue and underlying operating profit;

·      Underlying cash conversion ratio;

·      Capital expenditure to depreciation and amortisation ratio; and

·      Underlying earnings per share. A reconciliation of statutory earnings per share to underlying earnings per share is provided in note 7.

All underlying measures exclude certain non-underlying items, which are detailed in note 4. References to an underlying profit measure 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 gives further information to obtain a fuller understanding of the underlying performance of the business. Other than for the change in presentation of certain financing items as detailed in note 1, APMs are presented on a consistent basis over time to assist in comparison of performance.

Reconciliation of underlying to reported profit before tax

Reconciliation of underlying to reported operating profit

Calculation of underlying operating profit margin

Organic measure of change in revenue and underlying operating profit

Organic measures 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.

Calculation of underlying cash conversion ratio

Calculation of capital expenditure to depreciation and amortisation ratio

4.   Non-underlying items

Included in operating profit

Notes:

a)      In 2019, business reorganisation costs of £1.9m related to actions taken in Scandinavia following the disappointing performance in 2019. In Sweden we closed underperforming depots and restructured the management team, while in Norway we closed the business and exited that geography.

b)     In 2020, an impairment charge of £17.5m in respect of goodwill relating to France Galva SA, which the Group acquired in 2007.  Whilst the business continues to be a significant contributor to the Group's results, in recent years its profitability has gradually declined from that anticipated at acquisition and the impact of the COVID-19 pandemic on the global and French economic outlook has resulted in us further reducing our expectations for its future outturn.  Consequently, the impairment review performed at 31 December 2020 concluded that France Galva SA's expected future cash flows were not sufficient to support its carrying value at that date, resulting in an impairment of the acquisition goodwill. In addition, an impairment charge of £2.8m in respect of assets in the variable message signs business.  Following a period of weak trading and a more cautious assessment of the future outlook for that business, the Group is currently taking several actions to restructure the operations and the cost base, leading to a reassessment of asset carrying values at 31 December 2020.  This reassessment resulted in a write down of the asset base to the expected recoverable amount, comprising of goodwill and intangible assets of £1.1m, tangible fixed assets of £0.5m, inventories of £0.8m and right-of-use lease assets of £0.4m.

In 2019, an impairment charge of £7.0m reflected a full impairment of the goodwill and intangible assets of £6.8m, and £0.2m impairment in the right-of-use lease assets relating to the Group's acquisitions in Sweden, which comprised the acquisition of ATA Bygg-Och Markprodukter AB in 2011 and the smaller acquisitions of FMK Traffikprodukter AB and Signalvakter Syd, in 2016 and 2018 respectively, all of which were integrated into a single business unit. 

c)      Acquisition related expenses of £0.3m (2019: £1.8m), which include £0.2m (2019: credit of £0.2m) 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).

d)     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's results in 2018 included a non-underlying charge of £1.0m in respect of the likely cost to be incurred in equalising GMPs arising in prior years. During 2020, there has been a further hearing in relation to members who have transferred out of schemes, which concluded that schemes do need to revisit historical transfers for GMP equalisation. The Group took professional advice as to the impact of this judgement and has recognised a further cost of £0.4m during the year.

Included in financial income and expense

There are no non-underlying items included in financial income or expense in the current year.

In 2019, non-underlying items included in financial income represented a gain on refinancing of £0.9m under IFRS 9, and included in financial expense represented the net financing cost on pension obligations of £0.5m and a £0.9m charge in respect of amortisation of costs associated with refinancing.

5.   Net financing costs

6.   Taxation

The tax charge in the Consolidated Income Statement for the period is higher (2019: higher) than the standard rate of corporation tax in the UK. The differences are explained below:

7.   Earnings per share

The weighted average number of ordinary shares in issue during the year was 79.5m (2019: 79.2m), diluted for the effects of the outstanding dilutive share options 79.9m (2019: 79.6m). Diluted earnings per share takes account of the dilutive effect of all outstanding share options, calculated using the treasury share method. Underlying earnings per share have been shown because the Directors consider that this provides valuable additional information about the underlying performance of the Group.

*                       Non-underlying items as detailed in note 4.

8.   Dividends

Dividends paid during the year

Dividends declared in respect of the year

The final dividend for the year was proposed after the year end date and was not recognised as a liability at 31 December 2020, in accordance with IAS 10.

* The proposed final dividend for 2019 of 23.0p per share was withdrawn and will not be paid.

9.   Acquisitions in 2020

Morgan Valley

On 28 September 2020 the Group acquired the trade and assets of Morgan Valley Manufacturing, Inc. and Morgan Valley Metals, LLC ("Morgan Valley"). Based in Utah, US, the acquisition will enable the inhouse fabrication of crash attenuators and support the US roads growth strategy. Details of the acquisition are set out below:

Post acquisition the acquired business has contributed £0.9m revenue and £0.2m underlying operating profit, which are included in the Group's Consolidated Income Statement. If the acquisition had been made on 1 January 2020, the Group's results for the year would have shown revenue of £661.8m and underlying operating profit of £70.0m.

10.  Cash and borrowings

11.          Subsequent events

After the year end, in March 2021, we acquired Prolectric Services Ltd ("Prolectric") for an initial cash consideration of £12.5m, on a debt and cash free basis.  Prolectric is a UK market leader in temporary solar lighting and operates in a market with excellent long term growth potential, driven by the transition from fossil fuels towards renewable energies.

Notes

1.  The financial information previously set out does not constitute the Company's statutory accounts for the years ended 31 December 2020 or 2019 but is derived from those accounts. Statutory accounts for 2019 have been delivered to the registrar of companies, and those for 2020 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 16 April 2021 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, Solihull, B90 4LH.

3.  Events Calendar:

i.      The Annual General Meeting will be held virtually on Thursday 25 May 2021.

ii.     The proposed final dividend for 2020 will be paid on 9 July 2021 to shareholders on the register on 4 June 2021 (ex-dividend date 3 June 2021).

iii.    The last date for receipt of Dividend Reinvestment Plan elections is 18 June 2021.

iv.    Interim results announcement for the period to 30 June 2021 due 11 August 2021.

v.     Payment of the 2021 interim dividend due 7 January 2022.

4.  This preliminary announcement of results for the year ended 31 December 2020 was approved by the Directors on 9 March 2021.

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.