Final Results

RNS Number : 9141E

Hill & Smith Hldgs PLC

04 March 2020

 

Hill & Smith Holdings PLC

AUDITED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2019

Group strategy continues to deliver

Hill & Smith Holdings PLC ('Hill & Smith or 'the Group'), 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 2019.

Financial results

			Change
	31 December 2019	31 December 2018	Reported %	Constant ** currency %
Revenue	£694.7m	£637.9m	+9	+8
Underlying*:
Operating profit	£86.3m	£80.1m	+8	+6
Operating margin	12.4%	12.6%	-20bps	-20bps
Profit before taxation	£79.4m	£76.3m	+4	+2
Earnings per share	80.7p	77.8p	+4	+2
Reported:
Operating profit	£69.2m	£65.2m	+6
Profit before taxation	£61.8m	£59.8m	+3
Basic earnings per share	61.1p	59.9p	+2
Dividend per share	33.6p	31.8p	+6
Net debt	£215.3m	£132.9m

Key points:

· Overall performance in line with the Board's expectations

· Strong US performance driven by investment in ageing infrastructure and new construction projects

· Infrastructure spend underpinning demand in UK markets, despite cautious investment environment

· Actions taken to restructure smaller Scandinavian roads business, which faced challenges during the year

· Continuation of portfolio management strategy:

-  Three UK acquisitions completed at a cost of £43.9m, primarily in the growing security market

-  Capital investment of £23.8m in higher return UK temporary road safety barrier and US Galvanizing businesses

· Strong operating cash flow: net debt £215.3m (inc. £40.0m IFRS 16), 1.6x EBITDA; borrowing facilities expanded and extended

· Proposed full year dividend up 6% to 33.6p, 17th successive year of growth

Derek Muir, Chief Executive, said:

"We are pleased with the Group's overall performance in 2019. We have seen strong progress in our UK and US markets, which represent the majority of our activities, where the Group continues to benefit from its leading positions in niche infrastructure markets, its clear business model and financial strength.  Together these create the platform from which the Group is capable of delivering long term and sustainable growth. 

Our outlook for 2020 remains unchanged and, whilst we may see some short-term delays in the commencement of UK roads projects across the transition from RIS 1 to RIS 2, we expect another year of good progress for the Group."

For further information, please contact:

Hill & Smith Holdings PLC Derek Muir, Group Chief Executive Hannah Nichols, Group Chief Financial Officer	Tel:  [phone]
MHP Communications Andrew Jaques / Ollie Hoare / Catherine Chapman	Tel:  [phone]   [phone]

* 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, India and Australia.

In 2019, the Group's operations were 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 products, 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 4,600 staff, principally in six countries.

Operational and Financial Review

2019 overview

Hill & Smith has delivered a performance in 2019 in line with Board expectations. Our strategy of developing businesses with market leading positions in niche infrastructure markets, combined with active management of our portfolio and a focused capital investment approach, has again delivered a year of revenue and profit growth.

The Group's UK and US operations generated 83% of our revenue and 96% of our underlying operating profit and principally operate in niche infrastructure markets where the overall market outlook remains positive.  Revenues in these two core geographies grew by 12% (2% organic) with underlying operating profit increasing by 18% (9% organic), primarily due to strong year-on-year growth in our US businesses driven by investment in both ageing infrastructure and the construction of new infrastructure projects. Results from our UK businesses were ahead of the prior year, despite the cautious investment environment, with infrastructure spend continuing to underpin demand in our chosen markets.

As previously reported, our smaller international operations experienced more mixed outcomes in 2019. Our Scandinavian roads business, which for context represents around 5% of Group revenue, experienced difficult market conditions and operational challenges resulting in the business reporting operating losses in the year. We have taken a number of actions to restructure the Scandinavian business including strengthening the management team, closing underperforming depots and exiting the smaller Norway operation.  Whilst we believe that the business is now better aligned to its core markets we remain cautious over its short term outlook.

Our acquisition strategy continues to focus on key growth markets and, during the year, we completed three acquisitions, all in the UK.  The largest of these was ATG Access Limited, which provides a platform for the Group to expand its presence in the growing perimeter security market, increasing our range of solutions and services and enhancing our global distribution network.  Having also disposed of one UK business in the year, the total net cash outlay across the portfolio was £42.6m.

We continue to invest capital in organic growth opportunities in our higher return markets.  During the year we further expanded our temporary road safety barrier rental fleet in the UK, adding 72km of steel barrier and 10km of concrete barrier with a combined investment of £15.2m.  In addition, we have now completed the build of a new galvanizing facility in New York State with an outlay of £8.6m in 2019, and an expected total cost of £11.7m.  The facility became fully operational in January 2020 and we are pleased with progress to date.

During 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.  In addition, we signed an agreement with an institutional investor for a private placement of $70m new senior unsecured notes.  These changes provide us with extended certainty of funding and increase the headroom available for the Group to pursue further growth opportunities.  Group net debt at 31 December 2019 was £215.3m, including £40.0m relating to the adoption of IFRS 16 Leases.

			Change %
	2019	2018	Reported	Constant currency
Revenue	£694.7m	£637.9m	+9	+8
Underlying(1):
Operating profit	£86.3m	£80.1m	+8	+6
Profit before tax	£79.4m	£76.3m	+4	+2
Earnings per share	80.7p	77.8p	+4	+2
Reported:
Operating profit	£69.2m	£65.2m	+6
Profit before tax	£61.8m	£59.8m	+3
Basic earnings per share	61.1p	59.9p	+2

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

Annual revenue increased by 9% to £694.7m (2018: £637.9m) including a translational currency benefit of £6.7m or 1%. After adjusting for net additional revenue of £41.6m from acquisitions/disposals, organic revenue growth was 1%. Underlying operating profit increased by 8% to £86.3m (2018: £80.1m), which included a currency translation benefit of £1.4m. The net underlying operating profit contribution from acquisitions/disposals was £4.8m.  Underlying operating margin was 12.4% (2018: 12.6%), while underlying profit before taxation was 4% higher at £79.4m (2018: £76.3m). Reported operating profit was £69.2m (2018: £65.2m), an increase of 6% on the prior year. Reported profit before tax was £61.8m (2018: £59.8m). The principal reconciling items between underlying and reported operating profit are an impairment charge of £7.0m, and restructuring costs of £1.9m, both relating to the Scandinavian operations, the amortisation of acquisition intangibles of £6.2m and acquisition related expenses of £1.8m.

£m	Revenue	Underlying operating profit
2018	637.9	80.1
Acquisitions & disposals	41.6	4.8
Currency	6.7	1.4
Organic growth	8.5	-
2019	694.7	86.3

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 23.0p per share (2018: 21.8p per share) making a total dividend for the year of 33.6p per share (2018: 31.8p per share), an increase of 6% on the prior year. Underlying dividend cover remains a conservative 2.4 times (2018: 2.4 times). Reported dividend cover is 1.8 times (2018: 1.9 times).

Our long-term performance and outlook give us the confidence to maintain a progressive dividend policy which has resulted in 17 years of uninterrupted dividend growth. The final dividend, if approved, will be paid on 7 July 2020 to those shareholders on the register at the close of business on 29 May 2020.

Corporate Responsibility

We have for many years recognised that in combination with a robust financial performance we have a responsibility to our employees, our supply chain, our customers, the environment and wider stakeholders, and we take these responsibilities seriously. The Group continues to take specific actions to improve its Environmental, Social and Governance ('ESG') credentials, many of which are detailed in our Annual Report.

Brexit

The United Kingdom left the European Union on 31 January 2020 with a planned transition period running until 31 December 2020.  We have plans in place to ensure that we are prepared for the final outcome of the negotiations and the Group continues to closely monitor and mitigate the related operational and financial risks, which include possible supply chain disruption to UK imports and translation exposure arising from currency fluctuations.  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. 

COVID-19

The global outbreak of the COVID-19 virus is a developing situation, and at this stage we are not in a position to speculate on the duration nor its future impact on the Group. Presently we have seen no material impact on our business, however we continue to monitor the situation closely and will update the market if appropriate.

Outlook 

Our outlook for 2020 remains unchanged and whilst we may see some short-term delays in the commencement of UK roads projects under the Road Investment Strategy programme ('RIS 2'), we expect a year of good progress for the Group. The Group continues to benefit from its leading positions in niche infrastructure markets, predominantly in the UK and the US, its clear business model and financial strength.  Together these create the platform from which the Group is capable of delivering long term and sustainable growth. 

In Roads, we have confidence that the Group's road product portfolio is well placed to continue to benefit from increased investment in road infrastructure in both the UK and the US. In October 2018, the UK Government confirmed funding for RIS 2 which follows on from the completion of RIS 1 in April 2020 and runs for five years.  Overall investment is planned to increase to £25.3bn under RIS 2, a 66% increase compared with RIS 1. Following a short delay due to the General Election in December 2019, we expect details of the RIS 2 schemes to be released by Highways England in March 2020.  Whilst this delay has created some short-term uncertainty over the timing of scheme commencements in 2020, we remain confident that we are well placed to benefit from the additional investment that RIS 2 will deliver.  Recently we have seen positive signals that the UK Government will continue to support spending on infrastructure overall, which is encouraging. In the US, spend on road infrastructure continues to be robust with increased transportation investment from all levels of Government.

In Security, we are seeing growth in both the UK and international markets for perimeter security and Hostile Vehicle Mitigation ('HVM') solutions.  In response to this growing demand, at the end of 2019 we realigned our Group structure to form the Roads & Security division, effective from 1 January 2020. This brings together our strong portfolio of security products and will allow the Group to further benefit from security market growth opportunities.

In Utilities, our US activities continue to benefit from the significant investment in replacing ageing infrastructure and new infrastructure projects. In addition, we are seeing a growing interest in the use of composite materials, supported by global trends such as sustainability and total life cycle cost management.  In UK utilities, the investment environment has been more cautious, however we are starting to see signs of recovery. 

In Galvanizing, wider market conditions, supported by healthy levels of infrastructure activity, remain favourable and we expect our businesses to continue to consolidate their strong market positions and to take advantage of opportunities, with performance being supported by our strategy of focussing on lower volume, higher margin work .

Infrastructure Products - Roads

	£m		+/- %	Constant Currency %
	2019	2018
Revenue	246.3	208.5	+18	+18
Underlying operating profit	22.3	24.2	-8	-8
Underlying operating margin %	9.1	11.6
Reported operating profit	7.7	20.3

Our Roads business designs, manufactures and installs temporary and permanent safety products for the roads market. We principally serve the UK with a growing presence in the US and smaller operations in other selected geographies that have a demand for innovative tested safety products. Roads represented 35% (2018: 33%) of the Group's revenue in 2019, and 26% (2018: 30%) of underlying operating profit. Revenues increased by 18% to £246.3m (2018: £208.5m).  Organic revenue growth was 1%, after a £0.3m negative currency impact and £35.4m contribution from acquisitions.  Underlying operating profit of £22.3m was £1.9m lower than the prior year (2018: £24.2m), including a £3.1m contribution from acquisitions, with the reduction reflecting the challenges in our Scandinavian operations and a lower year-on-year outturn in our Australian business.

Reconciliation of Reported to Underlying Operating Profit	£m
	2019	2018
Reported operating profit	7.7	20.3
Restructuring actions	1.9	-
Profit on disposal of asset held for sale	(0.5)	-
Past service pension costs	-	0.3
Impairment of assets	7.0	-
Acquisition costs and amortisation	6.2	3.6
Underlying operating profit	22.3	24.2

UK

During the period we saw high levels of demand for our temporary safety barrier rental products, largely driven by the high volume of RIS 1 Smart Motorway scheme activity, particularly in the second half of the year.  In order to meet the additional demand, we added a further 72km of steel barrier and 10km of concrete barrier to our existing fleet for a total investment of £15.2m.  2019 was a record year for the UK temporary barrier business and, whilst utilisation levels in the early part of the year have continued to be strong, we are awaiting clarity on the timing of the RIS 2 scheme commencements in 2020.

Our portfolio of permanent road products includes vehicle restraint systems, bridge parapets, variable message signs, lighting columns and street furniture.  Sales of vehicle restraint systems and bridge parapets were lower than previous years, mainly due to local and national authorities placing less emphasis on maintenance spend and more focus on capital projects.  However, we have recently seen a number of maintenance upgrade schemes being released and as a result, we enter 2020 with an improved order book.  As detailed in the Group's interim results in August 2019, our variable message signs business faced lower demand levels due to the phasing of large motorway schemes and, whilst activity improved in the second half, the outturn for the year was below 2018.  In the early part of 2020 we have taken action to restructure the cost base in this business and we expect an improved performance in the coming year.  Demand for our lighting columns and street furniture has been more robust, and to further our presence in this market, we acquired Signpost Solutions Limited on 3 December 2019 for a net cash consideration of £6.4m.  The business is a distributor and manufacturer of products for the highway industry and is being integrated into our existing signage business.  Trading to date has been encouraging. 

We continue to see strong demand for our range of HVM products, which include temporary and permanent solutions in both steel and concrete. Significant projects serviced during the year include the NATO Summit, the State Opening of Parliament and the US Presidential visit.  Security at high profile events is becoming an increasing priority globally and our products and expertise have also seen strong demand internationally, for example we have supplied products for Expo Dubai 2020. 

In recognition of the growth potential of the HVM and perimeter security market, we made two acquisitions during the year to further strengthen our security capability.  In February 2019 we completed the acquisition of ATG Access Limited ('ATG') for a net consideration of £23.5m.  ATG specialises in the development, manufacture and installation of HVM perimeter security solutions including bollards, blockers, barriers and gates and has a global distribution network that provides a platform for further expansion in both UK and international markets.  In September 2019, we acquired Parking Facilities Limited for a net cash consideration of £14.0m. The business specialises in the design, manufacture and supply of a market-leading range of parking and access control products that complement our existing HVM and related security product offering.  Both businesses traded in line with expectations in 2019. 

Following these acquisitions and in response to the growing international and UK demand for solutions to combat some of today's hostile threats, in particular those posed by the use of vehicles as weapons, in December 2019 the Group realigned its operating structure to form a Roads & Security division, effective from 1 January 2020. Within this, HS Security brings together our group of companies which provide products to protect people, buildings and infrastructure from attack and includes our fencing and security access cover businesses that were previously part of the Utilities division.  HS Security sits alongside and is closely aligned with our Roads business.  The formation of the new division allows our management teams to increase sales activity through greater product innovation, co-ordinated marketing and access to a global distribution network and to benefit from shared manufacturing cost efficiencies. 

USA

Demand for our range of work zone safety solutions, which includes temporary safety barriers, crash attenuators, temporary variable message signs and traditional traffic control products, has been strong and has benefitted from the broadened product range and wider distribution network acquired with the Work Area Protection Corp. ('WAPCO') business in May 2018.  We have successfully integrated WAPCO with our existing temporary safety barrier business and are now realising the benefits of the expected synergies, enabling us to increase our market share and drive operational efficiencies across the combined businesses.  Overall we are excited by the future growth potential in the US roads market and continue to invest in products and service offerings to strengthen our portfolio further. 

Other International

Our smaller international roads businesses have experienced mixed results during the year.  Demand for our lighting columns in France has been good with revenue and margins ahead of the prior year, as local authorities across the country develop urban areas ahead of municipal council elections in 2020. In contrast, conditions in our Scandinavian business, which for context represents around 5% of Group revenues, have been challenging, with price competition eroding margins, project delays impacting the early part of the year and the business experiencing some operational challenges.  Consequently, the business reported operating losses in the year.  To date, we have taken a number of actions to address the situation, including strengthening the local management team, closing underperforming depots in Sweden and exiting the smaller Norwegian operation, and whilst we believe these actions better position the business to focus on its core markets in Sweden, we remain cautious over the short-term outlook. In Australia, despite ongoing investment in the country's road infrastructure, sales of our temporary safety barrier were lower than in the prior year, as local contractors focused on utilisation of their existing product fleet before committing to new investment.

Infrastructure Products - Utilities

	£m		+/- %	Constant Currency %
	2019	2018
Revenue	251.3	239.0	+5	+3
Underlying operating profit	22.2	18.3	+21	+18
Underlying operating margin %	8.8	7.7
Reported operating profit	20.9	9.0

Our Utilities segment provides industrial flooring, security fencing, steel and composite products for a wide range of infrastructure markets including energy creation and distribution, rail, water and housing. 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 5% to £251.3m (2018: £239.0m) including a currency translation benefit of £4.5m and a £6.2m net contribution from recent acquisitions and disposals.  Organic revenue growth was 1%. Underlying operating profit was £22.2m (2018: £18.3m), including a positive currency impact of £0.5m and a net contribution from acquisitions and disposals of £1.7m.  The organic underlying operating profit growth was 9%.

Reconciliation of Reported to Underlying Operating Profit	£m
	2019	2018
Reported operating profit	20.9	9.0
Restructuring actions	-	0.7
Impairment charges	-	6.1
Past service pension costs	-	0.4
Loss on disposal of subsidiary	0.7	-
Acquisition costs and amortisation	0.6	2.1
Underlying operating profit	22.2	18.3

UK

The performance of our UK utilities businesses in the year was mixed, in part due to the cautious UK investment environment, with overall profitability at similar levels to the prior year. 

In our utility security businesses, the access cover operation saw an improved performance with results ahead of the prior year. Activity levels in the water market have increased as key water utility customers endeavour to meet security spend requirements ahead of the completion of the current Asset Management Period ('AMP6'), which ends in March 2020. Demand for our security enclosures across non-water markets has been lower, but we are developing relationships with new customers across various sectors in the transport and energy industries. Our fencing operation continues to focus on engineering higher-security solutions for the protection of critical infrastructure sites including large data centres, military facilities and airfields and, although we have seen fewer large projects in 2019, we remain encouraged by the opportunities for our growing range of tested products, both in the UK and overseas.

Our building products business, supplying composite residential doors, steel lintels and builders' metalwork, saw a slowdown in regional house building activity and consumer confidence in the second half of the year and overall, results were similar year-on-year.  Growth in residential door sales was encouraging and we expect our investment in the automation of steel lintel production to deliver future efficiencies.  The industrial flooring business continued its restructuring actions during the course of the year and is focusing on its core manufacturing activities, with significant projects in 2019 including the regeneration of the Battersea Power Station in London, where we are designing and supplying riser products in composite materials.

Having undertaken a strategic assessment of the outlook for Weholite Limited, our non-core plastic drainage pipe operation, we concluded that divestment was appropriate and on 5 August 2019 completed its disposal to SDS Limited for a net consideration after costs of £2.0m.  In the period prior to disposal the business reported revenues of £5.4m and an underlying operating loss of £0.4m.

USA

Our US utilities businesses have continued their momentum from 2018 and delivered strong organic improvements in both revenues and profitability.

Activity levels in our composite products markets are high and we have seen good demand for our wide range of composite solutions including marine protection, bridge structures, walkways and protective cover boards. We have seen a growing acceptance of composite systems for infrastructure applications and significant projects in 2019 included the provision of protective covers for the Canarsie Tunnel repair project in New York and the construction of new fibreglass walkways in California to allow access to the electricity power lines.  The three acquisitions made in the composites market in recent years provide further breadth to the product portfolio and we have successfully realised the planned operational synergies.

The power transmission substation business delivered another impressive performance, growing strongly against challenging prior year comparatives.  During 2019 we saw growth in projects for the upgrade of old infrastructure, particularly centred around the north eastern corridor of the USA and we are carrying a strong order book into 2020.  With investment programmes across key US utility markets remaining positive and forecast to grow in the medium term, the prospects for further progress are encouraging. 

Pipe Supports

Whilst demand levels across our pipe supports operations were lower than the prior year, our focus on operational efficiencies and management of the cost base led to increased profitability and further improvements in operating margins.

In our US business, the requirement for engineered pipe supports in the power sector has been subdued due to a lack of sustained activity in the construction of larger industrial power facilities. In contrast, our industrial hangers business delivered a strong performance, benefitting from a robust commercial construction market, particularly in the north east of the country, and from the realisation of operational efficiencies arising from cost base restructuring and rationalisation of the facility footprint over the last two years.

In India, both the local and international power markets for our engineered pipe supports remain encouraging and we have supplied a number of coal and gas projects across India, the Middle East and Asia during the period.  The new cryogenic products that we developed in 2018 have also now started to gain traction and we have delivered projects for both domestic and international customers, with the order book showing encouraging signs for the coming year.

Galvanizing Services

	£m		+/- %	Constant Currency %
	2019	2018
Revenue	197.1	190.4	+4	+2
Underlying operating profit	41.8	37.6	+11	+9
Underlying operating margin %	21.2	19.7
Reported operating profit	40.6	35.9

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 28% (2018: 30%) of the Group's revenue and 48% (2018: 47%) of underlying operating profit. Revenue increased by 4% to £197.1m (2018: £190.4m) which included a currency translation benefit of £2.5m. Organic revenue growth was 2%. Underlying operating profit of £41.8m (2018: £37.6m) included a £0.9m currency benefit. The organic profit growth was £3.3m or 9%. Underlying operating margin was 21.2% (2018: 19.7%), the improvement reflecting an increase in average selling prices and the benefit of lower zinc input costs during the year. 

Reconciliation of Reported to Underlying Operating Profit	£m
	2019	2018
Reported operating profit	40.6	35.9
Acquisition amortisation	1.2	1.3
Past service pension costs	-	0.4
Underlying operating profit	41.8	37.6

UK

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

Whilst overall volumes galvanized in the year were 2% lower than prior year, our strategy of focussing on higher margin work from smaller customers continues to be successful and, alongside an improvement in average selling prices and lower zinc input costs, we delivered both profit and margins ahead of prior year.

USA

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

Infrastructure investment across a wide range of sectors is robust, with a growing exposure to commercial construction supporting demand in the business's more traditional Original Equipment Manufacturer ('OEM') and Bridge & Highway markets. Although volumes were 3% below the same period in 2018, generally reflecting the sectoral spread of projects, the trend away from large structural work has resulted in an increase in average selling prices which, together with further improvements in plant efficiency, delivered growth in profit and margins during the year.

Construction of our new facility in Owego, New York State was completed at the end of 2019 and the plant became operational in January 2020.  The facility is strategically adjacent to a number of key existing customers, which has provided a baseload of activity on commencement of production and we are pleased with progress to date.  We are now actively assessing sites for further greenfield 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.

After a weaker first half, volumes recovered strongly in the second half of the year and overall were 3% above the prior year.  Competition remains strong in many sectors and regions and, although the smaller customer market continues to be healthy, there remains a lack of larger construction activity across the country. Despite these factors, we have been successful in maintaining selling prices and the continued focus on the cost base has helped to maintain operating margins.

Financial review

Cash generation and financing

The Group again demonstrated its cash generating abilities with strong cash generated by operations of £98.9m (2018: £87.7m). 

The increase in working capital in the year was £12.9m (2018: £6.3m), with the ratio of working capital to annualised sales at 31 December 2019 remaining similar to the prior year at 17.4% (2018: 17.0%).  The increase in inventories was £2.4m and predominantly reflects investment in the inventories of recently-acquired businesses.  The increase in receivables was minimal at £0.4m, with debtor days remaining in line with the prior year at 61 days.  The outflow from movements in payables was £10.1m, generally reflective of variances in the timing of payments to key suppliers compared with the prior year.

Capital expenditure at £47.9m (2018: £32.8m) represents a multiple of depreciation and amortisation of 2.3 times (2018: 1.7 times).  The Group invested a total of £16.3m in its fleet of steel and concrete temporary road safety rental barriers during the year, including £15.2m in the UK to meet strong demand from the Government's Road Investment Strategy, and spent £8.6m on construction of the new US galvanizing plant in New York State. Other significant items of expenditure in the year included £2.1m of equipment upgrades that will improve efficiency and productivity in a number of our operations. The Group continues to invest in organic growth opportunities where returns exceed internal benchmarks and our 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 2019 the Group achieved an underlying cash conversion rate of 67% (2018: 78%), or 95% excluding the impact of the £23.8m investments in the UK temporary barrier rental fleet and US galvanizing plant, which will support future growth. Over the past 10 years the Group has achieved an average cash conversion rate of 82%.

	Reported £m	Non-underlying Items £m	Underlying £m
Operating profit	69.2	17.1	86.3
Non-cash items	45.8	(13.4)	32.4
Net movement in working capital	(12.9)	(1.0)	(13.9)
	102.1	2.7	104.8
Capital expenditure (net)	(45.6)	(1.3)	(46.9)
Adjusted operating cash flow *	56.5	1.4	57.9
Operating profit	69.2		86.3
Cash conversion %	82%		67%

^* 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 2019 was £215.3m, representing a year-on-year increase of £46.4m including favourable exchange rate movements of £2.9m and after adjusting for the impact of IFRS 16 'Leases', which increased reported net debt at the beginning of the year by £36.0m.  The Group's net debt (excluding lease liabilities under IFRS 16) includes 27% 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

	2019 £m	2018 £m
Operating profit	69.2	65.2
Depreciation and amortisation*	37.5	24.3
Working capital movement	(12.9)	(6.3)
Pensions and provisions	(3.2)	(2.4)
Other items	8.3	6.9
Operating cash flow	98.9	87.7
Tax paid	(14.4)	(13.3)
Net financing costs paid	(5.9)	(3.9)
Capital expenditure	(47.9)	(32.8)
Sale of fixed assets	2.3	1.2
Free cash flow	33.0	38.9
Dividends	(25.1)	(23.6)
Acquisitions & disposals	(46.5)	(45.8)
Refinancing costs	-	(1.0)
New leases and lease remeasurements	(11.1)	-
Interest on lease liabilities	(0.9)	-
Net issue of shares	1.3	(1.2)
Change in net debt	(49.3)	(32.7)
Exchange	2.9	(3.3)
Opening net debt	(132.9)	(96.9)
Effect of adopting IFRS 16	(36.0)	-
Closing net debt	(215.3)	(132.9)

* Includes £6.2m (2018: £4.8m) in respect of acquisition intangibles and £10.2m (2018: £nil) in respect of right-of-use assets.

The Group made two changes to its principal debt facilities during the period:

· On 10 January 2019 we amended our syndicated revolving credit facility, extending the maturity date from April 2021 to January 2024 and increasing the size by £50m to c.£280m, with no significant impact on costs and no changes to financial covenants. 

· On 25 June 2019 we signed an agreement with an institutional investor for a private placement of $70m new senior unsecured notes.  The issue consists of two equal tranches with maturities of seven and 10 years respectively.  Key covenants are consistent with those in the existing syndicated credit facility. 

These changes provide us with extended certainty of funding and further increase the headroom available to the Group in order to pursue growth opportunities. Following the changes, at the year end the Group had committed debt facilities available of £330.9m and a further £13.7m in overdrafts and other on-demand facilities.

Maturity profile of debt facilities

	2019			2018
On demand	£13.7m		On demand	£11.3m
2020-2023	£1.6m		2019-2020	£0.8m
2024	£276.3m		2021	£231.9m
2026	£26.5m
2029	£26.5m

Both the syndicated revolving credit facility and the senior unsecured notes are 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 2019 were:

  Actual  Covenant

Interest Cover  17.9 times  > 4.0 times

Net debt to EBITDA  1.6 times  < 3.0 times

Appropriate monitoring procedures are in place to ensure continuing compliance with borrowing covenants and, based on our current estimates, we expect to comply with the covenants for the foreseeable future.

Net finance costs

		2019 £m		2018 £m
Underlying:
Loans/overdrafts	6.0		3.8
Lease liability unwind	0.9	6.9	-	3.8
Non underlying:
Net pension interest	0.5		0.6
Refinancing items	-	0.5	1.0	1.6
		7.4		5.4

Net financing costs in the year were £7.4m (2018: £5.4m). The net cost from pension fund financing under IAS 19 was £0.5m (2018: £0.6m) which, given its non-cash nature, continues to be treated as 'non-underlying' in the Consolidated Income Statement. Non-underlying financing costs also include items relating to refinancing activities, comprising £0.9m amortisation of costs capitalised against the relevant borrowings and a £0.9m modification gain arising in accordance with IFRS 9. The underlying cash element of net financing costs increased by £2.2m to £6.0m (2018: £3.8m), the change reflecting higher average interest rates in the US compared with 2018, higher levels of average net debt resulting from acquisitions and capital investment programmes, and higher borrowing rates on the senior unsecured notes entered into during the year.  The adoption of IFRS 16 results in a non-cash financial expense of £0.9m, representing the unwind of the discount of the Group's future lease liabilities.  Underlying operating profit covered underlying cash interest 14.4 times (2018: 21.1 times). Reported operating profit covered total reported interest 9.4 times (2018: 12.1 times).

Return on invested capital ('ROIC')

The Group aims to maintain ROIC above its pre-tax weighted average cost of capital with a long term target return of 20%. In 2019, Group ROIC was 15.9% (2018: 17.9%), the reduction largely reflecting the impact of acquisitions, which are generally dilutive in the year of purchase, significant capital investment projects undertaken during the year, and the impact of adopting IFRS 16, which reduces ROIC by 90 basis points as a result of the addition of right-of-use assets to the asset base.  The Group measures ROIC as the ratio of underlying operating profit to average invested capital. Invested capital is defined as net assets excluding current and deferred tax, net debt, provisions, retirement benefit obligations and derivative financial instruments, and therefore includes goodwill and other acquired intangible assets. On a reported basis, ROIC was 12.8% (2018: 14.6%).

	Group ROIC	Reported ROIC
Operating profit (£m)	86.3	69.2
Average invested capital (£m)	541.7	541.7
ROIC %	15.9%	12.8%

Exchange rates

Given its geographical spread, the Group is exposed to movements in exchange rates when translating the results of overseas operations into Sterling. Retranslating 2018 revenue and underlying operating profit using 2019 average exchange rates would have increased the prior year revenue by £6.7m and increased underlying operating profit by £1.4m, the movements primarily reflecting the impact of Sterling's depreciation 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 2020. Retranslating 2019 revenue and underlying operating profit using exchange rates at 25 February 2020 (inter alia £1 = $1.30 and £1 = €1.20) would reduce the revenue and underlying operating profit by £9.8m (1%) and £0.9m (1%) respectively. For the US Dollar, a 1 cent movement results in a £2.2m 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 £0.6m and £0.1m respectively.

Non-underlying items

The total non-underlying items charged to operating profit in the Consolidated Income Statement amounted to £17.1m (2018: £14.9m) 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	(1.9)	(0.1)	(0.6)	(1.2)
Impairment charges	(7.0)	-	-	(7.0)
Amortisation of acquisition intangibles	(6.2)	-	-	(6.2)
Acquisition-related expenses	(1.8)	(2.0)	-	0.2
Gain on disposal of property held for sale	0.5	1.3	-	(0.8)
Loss on disposal of subsidiary	(0.7)	2.0	-	(2.7)
	(17.1)	1.2	(0.6)	(17.7)

· Business reorganisation costs of £1.9m and impairment charges of £0.2m in respect of right-of-use assets relate to actions taken in Scandinavia following the disappointing performance in 2019.  In Sweden we have announced the closure of underperforming depots and restructured the management team, while in Norway we have announced the closure of the business and our exit from that geography.  The total costs of £2.1m include £0.1m of cash spend in the year, £0.6m of cash costs that will be incurred in 2020 and £1.4m of non-cash asset write-downs.  

· The remaining impairment charge of £6.8m includes a full impairment of the goodwill and intangible assets relating to the Group's acquisitions in Sweden, which comprise the acquisition of ATA Bygg-Och Markprodukter AB in 2011 and the smaller bolt-on acquisitions of FMK Trafikprodukter AB and Signalvakter Syd, in 2016 and 2018 respectively, all of which were integrated into a single business unit.  Despite reasonable outturns in recent years, albeit marginally below expectations, in 2019 the combined business has experienced a significant deterioration in its results due principally to changes in market conditions, notably price erosion as a result of strong competition. Consequently, an impairment review was performed at 31 December 2019 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 materially below that anticipated at the time of the acquisitions.

· Non-cash amortisation of acquired intangible fixed assets was £6.2m (2018: £4.8m), the increase reflecting the acquisitions made by the Group during the current and prior year.

· Acquisition-related expenses of £1.8m (2018: £2.2m) reflect costs associated with acquisitions, including a net 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).

· During the period the Group completed the disposal of a property that had been held for sale at 31 December 2018, for consideration of £1.3m resulting in a gain of £0.5m.

· In August 2019, following a strategic review the Group completed the disposal of Weholite Limited, a non-core plastic drainage pipe operation, for a net consideration (after costs) of £2.2m.  Net assets disposed were £2.9m resulting in a loss on disposal of £0.7m. 

The net cash impact of the above items was an inflow of £1.2m in the year, a £0.6m outflow expected in 2020 and a non-cash element therefore amounting to £17.7m. 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 £13.4m (2018: £12.6m). The underlying effective tax rate for the Group was 19.5% (2018: 19.6%), 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 adjustments to anticipated withholding tax charges relating to the unremitted earnings of operations in France. Cash tax paid was £14.4m (2018: £13.3m), broadly in line with the Group's current tax charge for the year of £15.1m (2018: £13.6m).

The Group's net deferred tax liability is £7.7m (2018: £6.3m).  A £7.9m (2018: £8.6m) deferred tax liability is provided in respect of brand names, customer relationships and other contractual arrangements acquired, while a further £0.3m (2018: £0.6m) 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 takes out the impact of non-underlying items (as described in note 3). UEPS for the period under review increased by 4% to 80.7p (2018: 77.8p).  The diluted UEPS was 80.3p (2018: 77.2p).  Basic earnings per share was 61.1p (2018: 59.9p).  The weighted average number of shares in issue was 79.2m (2018: 78.8m) with the diluted number of shares at 79.6m (2018: 79.5m) 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 IAS 19 deficit of the defined benefit plans as at 31 December 2019 was £19.9m, a reduction of £3.1m compared to 31 December 2018 (£23.0m). The reduction in the overall deficit relates principally to the UK scheme and was largely 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'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 2019 was £14.8m (2018: £17.6m).  The gross assets and liabilities of the Scheme were each reduced by £1.4m 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 2019 was finalised early in 2020, alongside an update to the investment strategy, resulting in the Group agreeing a deficit recovery plan with the Trustees 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.

Acquisitions

The Group completed three acquisitions in 2019:

· In February 2019 we acquired ATG Access Limited for a net cash consideration of £23.5m.  Intangible assets arising on the acquisition amounted to £28.5m, comprising customer relationships of £5.2m, patents and intellectual property of £4.2m, brands of £3.6m and residual goodwill of £15.5m.

· In September 2019 we acquired Parking Facilities Limited for a net consideration of £14.0m.  Intangible assets arising on the acquisition amounted to £ 11.8 m, comprising customer relationships of £ 9.1 m, brands of £0.9m and residual goodwill of £ 1.8 m.

· In December 2019 we acquired Signpost Solutions Limited for a net consideration of £6.4m.  Intangible assets arising on the acquisition amounted to £5.1m, comprising customer relationships of £1.2m and residual goodwill of £3.9m.

The level of headroom that the Group maintains in its principal borrowing 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 Standard

IFRS 16 'Leases' is applicable to reporting periods beginning on or after 1 January 2019, and has therefore been adopted by the Group. The standard, which replaces IAS 17, requires lessees to recognise a lease liability reflecting the discounted value of future lease payments and a right-of-use asset, for all applicable lease contracts.  The Group has a portfolio of leases that are affected by this change, predominantly relating to properties that are leased for manufacturing and distribution activities together with items of plant, machinery and vehicles.  The introduction of the new standard has resulted in an increase in the Group's underlying operating profit in 2019 of £1.2m and an increase in financial expense of £0.9m, with no material impact on underlying earnings per share.  The Group's net debt at 31 December 2019 also increased by £40.0m. The Group has chosen to adopt the modified retrospective approach on transition, meaning that comparative information for prior periods has not been restated.  Further information explaining the impact of the new standard on the Group's results for the period is set out in note 1.

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.

Derek Muir  Hannah Nichols

Group Chief Executive  Group Chief Financial Officer

4 March 2020

Consolidated Income Statement

			2019			2018
	Notes	Underlying £m	Non- underlying * £m	Total £m	Underlying £m	Non- underlying * £m	Total £m
Revenue	2	694.7	-	694.7	637.9	-	637.9
Underlying operating profit		86.3	-	86.3	80.1	-	80.1
Amortisation of acquisition intangibles	3	-	(6.2)	(6.2)	-	(4.8)	(4.8)
Business reorganisation costs	3	-	(1.9)	(1.9)	-	(0.7)	(0.7)
Pension past service expense	3	-	-	-	-	(1.1)	(1.1)
Impairment of assets	3	-	(7.0)	(7.0)	-	(6.1)	(6.1)
Acquisition costs	3	-	(1.8)	(1.8)	-	(2.2)	(2.2)
Profit on disposal of assets held for sale		-	0.5	0.5	-	-	-
Loss on disposal of subsidiary	3	-	(0.7)	(0.7)	-	-	-
Operating profit	2	86.3	(17.1)	69.2	80.1	(14.9)	65.2
Financial income	4	0.5	0.9	1.4	0.6	-	0.6
Financial expense	4	(7.4)	(1.4)	(8.8)	(4.4)	(1.6)	(6.0)
Profit before taxation		79.4	(17.6)	61.8	76.3	(16.5)	59.8
Taxation	5	(15.5)	2.1	(13.4)	(14.9)	2.3	(12.6)
Profit for the year attributable to   own ers of the parent		63.9	(15.5)	48.4	61.4	(14.2)	47.2
Basic earnings per share	6	80.7p		61.1p	77.8p		59.9p
Diluted earnings per share	6	80.3p		60.8p	77.2p		59.3p
Dividend per share - Interim	7			10.6p			10.0p
Dividend per share - Final proposed	7			23.0p			21.8p
Total				33.6p			31.8p

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

Consolidated Statement of Comprehensive Income

 

	Notes	2019 £m	2018 £m
Profit for the year		48.4	47.2
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations		(13.1)	11.7
Exchange differences on foreign currency borrowings designated as net  investment hedges		2.9	(4.7)
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		1.0	1.7
Taxation on items that will not be reclassified to profit or loss	5	(0.2)	(0.3)
Other comprehensive (expense)/income for the year		(9.4)	8.4
Total comprehensive income for the year attributable to owners of the parent		39.0	55.6

Consolidated Statement of Financial Position

	Notes	2019 £m	2018 £m
Non-current assets
Intangible assets		212.8	183.8
Property, plant and equipment		190.0	170.2
Right-of-use assets		37.9	-
Deferred tax assets		1.0	0.5
		441.7	354.5
Current assets
Assets held for sale		-	0.8
Inventories		100.7	96.6
Trade and other receivables		144.1	142.0
Cash and cash equivalents	9	26.0	36.9
		270.8	276.3
Total assets	2	712.5	630.8
Current liabilities
Trade and other liabilities		(120.3)	(120.9)
Current tax liabilities		(10.7)	(10.4)
Provisions for liabilities and charges		(0.8)	(1.3)
Lease liabilities		(10.6)	-
Loans and borrowings	9	(0.4)	(0.4)
		(142.8)	(133.0)
Net current assets		128.0	143.3
Non-current liabilities
Other liabilities		(1.3)	(2.7)
Provisions for liabilities and charges		(2.5)	(2.7)
Deferred tax liabilities		(8.7)	(6.8)
Retirement benefit obligations		(19.9)	(23.0)
Lease liabilities		(29.4)	-
Loans and borrowings	9	(200.9)	(169.4)
		(262.7)	(204.6)
Total liabilities		(405.5)	(337.6)
Net assets		307.0	293.2
Equity
Share capital		19.9	19.8
Share premium		37.4	35.5
Other reserves		4.9	4.9
Translation reserve		19.7	29.9
Retained earnings		225.1	203.1
Total equity		307.0	293.2

Consolidated Statement of Changes in Equity

	Notes	Share capital £m	Share premium £m	Other reserves † £m	Translation reserves £m	Hedge reserves £m	Retained earnings £m	Total equity £m
At 1 January 2018		19.7	34.1	4.9	22.9	-	177.0	258.6
Adoption of IFRS 15 and IFRS 9		-	-	-	-	-	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
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
Adoption of IFRS 16		-	-	-	-	-	(2.7)	(2.7)
At 1 January 2019 (restated)		19.8	35.5	4.9	29.9	-	200.4	290.5
Comprehensive income
Profit for the year		-	-	-	-	-	48.4	48.4
Other comprehensive income for the year		-	-	-	(10.2)	-	0.8	(9.4)
Transactions with owners recognised directly in equity
Dividends	7	-	-	-	-	-	(25.1)	(25.1)
Credit to equity of share-based payments		-	-	-	-	-	0.9	0.9
Satisfaction of long term incentive awards		-	-	-	-	-	(1.4)	(1.4)
Own shares held by employee benefit trust		-	-	-	-	-	0.7	0.7
Tax taken directly to the Consolidated Statement of Changes in Equity	5	-	-	-	-	-	0.4	0.4
Shares issued		0.1	1.9	-	-	-	-	2.0
At 31 December 2019		19.9	37.4	4.9	19.7	-	225.1	307.0

† Other reserves represent the premium on shares issued in exchange for shares of subsidiaries acquired and £0.2m (2018: £0.2m) capital redemption reserve.

At 31 December 2018 a total of 90,453 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 £1.0m, was included within retained earnings at that date. During 2019, the Group has transferred 35,000 shares from Treasury shares bringing the total number of own shares in the employee benefit trust to 125,453. Subsequently, 101,694 of these shares were issued in settlement of awards to employees leaving 23,759 shares held at 31 December 2019, at a cost of £0.3m.

Consolidated Statement of Cash Flows

 

		2019		2018
		£m	£m	£m	£m
Profit before tax			61.8		59.8
Add back net financing costs			7.4		5.4
Operating profit			69.2		65.2
Adjusted for non-cash items:
Share-based payments		1.2		1.1
Loss on disposal of subsidiary		0.7		-
Gain on disposal of non-current assets		(0.1)		(0.3)
Gain on disposal of assets held for sale		(0.5)		-
Depreciation of owned assets		19.9		18.6
Amortisation of intangible assets		7.4		5.7
Right-of-use asset depreciation		10.2		-
Impairment of assets held for sale		-		0.1
Impairment of non-current assets		7.0	6.0
			45.8		31.2
Operating cash flow before movement in working capital			115.0		96.4
Increase in inventories		(2.4)		(3.4)
Increase in receivables		(0.4)		(9.8)
(Decrease)/increase in payables		(10.1)		6.9
Decrease in provisions and employee benefits		(3.2)	(2.4)
Net movement in working capital			(16.1)		(8.7)
Cash generated by operations			98.9		87.7
Purchase of assets for rental to customers			(16.3)		(14.5)
Income taxes paid			(14.4)		(13.3)
Interest paid			(6.4)		(4.4)
Interest paid on lease liabilities			(0.9)		-
Net cash from operating activities			60.9		55.5
Interest received		0.5		0.5
Proceeds on disposal of non-current assets		1.0		0.6
Proceeds on disposal of assets held for sale		1.3		0.6
Purchase of property, plant and equipment		(29.7)		(17.4)
Purchase of intangible assets		(1.9)		(0.9)
Acquisitions of businesses		(43.9)		(45.2)
Deferred consideration in respect of prior year acquisitions		(0.7)		(0.6)
Disposal of subsidiary		2.0	-
Net cash used in investing activities			(71.4)		(62.4)
Issue of new shares		2.0		1.5
Purchase of shares for employee benefit trust		(0.7)		(2.7)
Dividends paid		(25.1)		(23.6)
Costs associated with refinancing		(2.1)		-
Repayments of lease liabilities		(10.5)		-
New loans and borrowings		119.9		78.3
Repayment of loans and borrowings		(83.2)	(26.8)
Net cash from financing activities			0.3		26.7
Net (decrease)/increase in cash			(10.2)		19.8
Cash at the beginning of the year			36.9		16.4
Effect of exchange rate fluctuations			(0.7)		0.7
Cash at the end of the year			26.0		36.9

Notes to the Consolidated Financial Statements

1.  Basis of preparation

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

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. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. 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.

New IFRS standards and interpretations adopted during 2019

In 2019 the following amendments had been endorsed by the EU, became effective and therefore were adopted by the Group:

• IFRS 16 'Leases'

• IFRIC 23 'Uncertainty over Income Tax treatments'

• Amendments to IFRS 9 'Financial Instruments'

• Amendments to IAS 28 'Long-term Interests in Associates and Joint Ventures'

• Annual Improvements to IFRSs - 2015-2017 Cycle

• Amendments to IAS 19 'Employee Benefits'

The impact of IFRS 16 on the Group's results for the year is set out below. IFRIC 23 and the other amendments have not had a material impact on the financial statements.

IFRS 16 Leases

IFRS 16 replaces IAS 17 'Leases' and has been adopted by the Group from 1 January 2019. The new standard requires lessees to recognise a lease liability reflecting the discounted future lease payments and a right-of-use asset for all applicable lease contracts. The present value of the Group's operating lease liabilities is now presented as a liability in the statement of financial position, together with a right-of-use asset, and is unwound and amortised to the income statement over the life of the lease.

Transition option adopted

The Group has applied the modified retrospective method, therefore comparative figures are not restated and the cumulative effect of initially applying the standard is recognised as an adjustment to the opening balance of retained earnings at 1 January 2019. In applying this method, the Group used historical payment data as if IFRS 16 had always existed but with the benefit of hindsight for actual changes in the leases.

The Group also applied the available practical expedients wherein it:

· Grandfathered the definition of a lease on transition. The Group has applied IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and related interpretations in IFRS 16;

·     Used a single discount rate for a portfolio of leases with reasonably similar characteristics;

· Relied on its assessment of whether leases are onerous immediately before the date of initial application;

· Applied the short-term leases exemption to leases with lease terms that end within 12 months of the date of initial application;

· Applied the lease of low-value assets recognition exemption to leases of assets that are considered of low value; and

· Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application.

The impact on retained earnings at 1 January 2019, net of tax, was a reduction of £2.7m.

Change to accounting policies

The Group has lease contracts for various items of land, buildings, plant, machinery, vehicles and other equipment.

Prior to 1 January 2019 and before the adoption of IFRS 16, the Group classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. A lease was classified as a finance lease if it transferred substantially all of the risks and rewards incidental to ownership of the leased asset to the Group; otherwise it was classified as an operating lease. Finance leases were capitalised at the commencement of the lease at the inception date fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments were apportioned between interest (recognised as finance costs) and principal (reduction of the lease liability). In an operating lease, the leased assets were not capitalised and the lease payments were recognised as rental expense in profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognised under Prepayments and Accrued expenses respectively.

From 1 January 2019, the Group's accounting policy for leasing arrangements is as follows:

To the extent that a right-of-control exists over an asset subject to a lease and with a lease term exceeding one year, the Group recognises: a right-of-use asset, representing the underlying lease asset, and a lease liability, representing the Group's obligation to make lease payments. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, any initial direct costs incurred and an estimate of the dismantling, removal and restoration costs as required by the terms of the lease contract.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term.

The lease liability is measured at the present value of the future lease payments discounted using the Group's incremental borrowing rate, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Future lease payments include: fixed payments, variable lease payments that depend on an index or a rate (initially measured using the index or rate as at the commencement date), amounts expected to be payable under a residual guarantee and the exercise price of purchased options where it is reasonably certain that the option will be exercised. Finance charges, representing the unwinding of the discount rate, are recognised in the Consolidated Income Statement over the period of the lease.

Lease payments for low value assets and short term leases (less than 12 months) are recognised as an expense on a straight line basis over the lease term.

Impact of adoption

The table below reconciles the Group's operating lease commitments as at 31 December 2018 to the opening lease liability as at 1 January 2019:

	£m
Operating lease commitments as at 31December2018*	38.5
Effect of discounting at the incremental borrowing rate at the date of initial application	(2.2)
Leases covered by recognition exemptions	(0.3)
Lease liabilities as at 1 January 2019*	36.0

* prepared using foreign exchange rates at 31 December 2018.

The weighted average incremental borrowing rate for lease liabilities recognised on 1 January 2019 was 2.50%.

The following tables summarise the impacts on the Group's income statement and statement of financial position for the current period.

Impact on the Consolidated Income Statement

	AsReported £m	Adjustments £m	Amountswithout adoption ofIFRS 16 £m
Revenue	694.7	-	694.7
Underlying operating profit	86.3	(1.2)	85.1
Underlying net finance costs	(6.9)	0.9	(6.0)
Underlying income tax expense	(15.5)	-	(15.5)
Underlying profit for the period	63.9	(0.3)	63.6

Impact on the Consolidated Statement of Financial Position

	As Reported	Adjustments	Amounts without adoption of IFRS 16
Assets	£m	£m	£m
Right-of-use assets	37.9	(37.9)	-
Deferred tax asset	1.0	-	1.0
Other assets*	673.6	1.0	674.6
Total assets	712.5	(36.9)	675.6
Liabilities Lease liabilities	(40.0)	40.0	-
Deferred tax liability	(8.7)	(0.3)	(9.0)
Others	(356.8)	-	(356.8)
Total liabilities	(405.5)	39.7	(365.8)
* Movement is in respect of prepaid leases

The only impact to the Group's cash flow statement is in presentation. Previously payments on leases were presented in operating activities. From 1 January 2019, cash payments for the principal portion of the lease liability are presented as cash flows used in financing activities and cash payments for the interest portion of the lease liability are presented in operating activities. Short-term lease payments and payments for leases of low-value assets not included in the measurement of the lease liability are presented within operating activities.

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 be adopted in future accounting periods:

• Amendments to References to the Conceptual Framework in IFRS Standards. Endorsed by the EU.

• Amendment to IFRS 3 'Business Combinations'. Not yet endorsed by the EU.

• Amendments to IAS 1 and IAS 8. Endorsed by the EU.

• Amendments to IFRS 7, IFRS 9 and IAS 39. Endorsed by the EU.

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

The principal exchange rates used were as follows:

	2019		2018
	Average	Closing	Average	Closing
Sterling to Euro (£1 = EUR)	1.14	1.18	1.13	1.11
Sterling to US Dollar (£1 = USD)	1.28	1.32	1.33	1.28
Sterling to Swedish Krona (£1 = SEK)	12.07	12.29	11.60	11.43
Sterling to Indian Rupee (£1 = INR)	89.89	94.30	91.25	89.10
Sterling to Australian Dollar (£1 = AUD)	1.84	1.88	1.79	1.81

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.

 

2.  Segmental information

 

Business segment analysis

In 2019, the Group had 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;
• 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.

The changes to the Group's structure explained in the Operational and Financial Review did not become effective until 1 January 2020. In 2019, information was reported to the Chief Operating Decision Maker based on the operating segments set out above.

Segmental Income Statement

	2019			2018
	Revenue	Reported operating profit	Underlying operating profit*	Revenue	Reported operating profit	Underlying operating profit*
	£m	£m	£m	£m	£m	£m
Infrastructure Products - Utilities	251.3	20.9	22.2	239.0	9.0	18.3
Infrastructure Products - Roads	246.3	7.7	22.3	208.5	20.3	24.2
Infrastructure Products - Total	497.6	28.6	44.5	447.5	29.3	42.5
Galvanizing Services	197.1	40.6	41.8	190.4	35.9	37.6
Total Group	694.7	69.2	86.3	637.9	65.2	80.1
Net financing costs		(7.4)	(6.9)		(5.4)	(3.8)
Profit before taxation		61.8	79.4		59.8	76.3
Taxation		(13.4)	(15.5)		(12.6)	(14.9)
Profit after taxation		48.4	63.9		47.2	61.4

*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 £5.5m (2018: £6.4m) revenues to Infrastructure Products - Roads and £1.6m (2018: £1.6m) revenues to Infrastructure Products - Utilities. Infrastructure Products - Utilities provided £5.7m (2018: £5.2m) revenues to Infrastructure Products - Roads. Infrastructure Products - Roads provided £0.2m (2018: £0.2m) revenues to Infrastructure Products - 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. The table also includes a reconciliation of the disaggregated revenue with the Group's reportable segments.

Utilities			Roads		Galvanizing		Total
	2019	2018	2019	2018	2019	2018	2019	2018
Primary geographical markets	£m	£m	£m	£m	£m	£m	£m	£m
UK	105.4	113.3	117.5	104.7	62.2	60.5	285.1	278.5
Rest of Europe	6.3	5.4	62.3	56.2	54.6	53.2	123.2	114.8
North America	131.4	112.0	54.2	35.9	80.3	76.7	265.9	224.6
The Middle East	0.9	2.5	8.2	2.1	-	-	9.1	4.6
Rest of Asia	5.4	5.4	1.4	0.2	-	-	6.8	5.6
Rest of the world	1.9	0.4	2.7	9.4	-	-	4.6	9.8
	251.3	239.0	246.3	208.5	197.1	190.4	694.7	637.9
Major product/service lines
Manufacture, supply and installation of products	251.3	239.0	222.4	186.5	-	-	473.7	425.5
Galvanizing services	-	-	-	-	197.1	190.4	197.1	190.4
Rental income	-	-	23.9	22.0	-	-	23.9	22.0
	251.3	239.0	246.3	208.5	197.1	190.4	694.7	637.9
Timing of revenue recognition
Products and services transferred at a point in time	140.3	151.9	191.7	152.1	197.1	190.4	529.1	494.4
Products and services transferred over time	111.0	87.1	54.6	56.4	-	-	165.6	143.5
	251.3	239.0	246.3	208.5	197.1	190.4	694.7	637.9

 

Additional segmental analysis

 

Total assets by geography
	2019 £m	2018 £m
UK	321.5	236.1
Rest of Europe	118.1	124.2
North America	258.0	255.1
Asia	11.5	12.0
Rest of World	3.4	3.4
Total Group	712.5	630.8

3.  Non-underlying items

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

• Business reorganisation costs of £1.9m (2018: £0.7m) and an impairment charge of right-of-use lease assets of £0.2m (2018: £nil), which relate to actions taken in Scandinavia following the disappointing performance in 2019. In Sweden we have announced the closure of underperforming depots and restructured the management team, while in Norway we have announced the closure of the business and our exit from that geography.
•   An impairment charge of £6.8m (2018: £6.0m in relation to Technocover Limited), reflecting a full impairment of the goodwill and intangible assets relating to the Group's acquisitions in Sweden, which comprise the acquisition of ATA Bygg- Och Markprodukter AB in 2011 and the smaller acquisitions of FMK Trafikprodukter AB and Signalvakter Syd, in 2016 and 2018 respectively, all of which were integrated into a single business unit. Despite reasonable outturns in recent years, albeit marginally below expectations, in 2019 the combined business has experienced a significant deterioration in its results due principally to changes in market conditions, notably price erosion as a result of strong competition. Consequently, an impairment review was performed at 31 December 2019 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 materially below that anticipated at the time of the acquisitions.
• Amortisation of acquired intangible fixed assets of £6.2m (2018: £4.8m).
• Acquisition expenses of £1.8m (2018: £2.2m) relating to acquisitions during the period. The costs include a net credit of £0.2m (2018: cost of £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).
• A gain of £0.5m (2018: impairment charge of £0.1m) in respect of assets held for sale, reflecting a profit on the disposal of that property during the year.
• A loss of £0.7m on the Group's disposal of Weholite Limited, its plastic drainage pipe business, on 5 August 2019, further details of which are as follows:

	£m
Tangible fixed assets	1.8
Right-of-use assets	0.4
Inventories	1.7
Current assets	1.7
Cash and cash equivalents	0.2
Current liabilities	(2.5)
Lease liabilities	(0.4)
Deferred tax	-
Net assets	2.9
Consideration	2.7
Less costs of disposal	(0.5)
Loss on disposal	(0.7)
Cash flow effect
Consideration less costs of disposal	2.2
Cash and cash equivalents disposed of	(0.2)
Net cash received shown in the Consolidated Statement of Cash Flows	2.0

· In 2018, non-underlying items also included 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 took 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. A further charge of £0.1m was also incurred in respect of changes to the terms of the Group's pension schemes in France.

Non-underlying items included in financial income represent a gain on refinancing of £0.9m under IFRS 9, and included in financial expense represent the net financing cost on pension obligations of £0.5m (2018: £0.6m) and a £0.9m (2018: £1.0m) charge in respect of amortisation of costs associated with refinancing.

4.  Net financing costs

	Underlying £m	Non- underlying £m	2019 £m	Underlying £m	Non- underlying £m	2018 £m
Interest on bank deposits	0.5	-	0.5	0.6	-	0.6
Total interest income	0.5	-	0.5	0.6	-	0.6
Financial gain relating to refinancing	-	0.9	0.9	-	-	-
Financial income	0.5	0.9	1.4	0.6	-	0.6
Interest on loans and borrowings	6.5	-	6.5	4.4	-	4.4
Interest on lease liabilities	0.9	-	0.9	-	-	-
Total interest expense	7.4	-	7.4	4.4	-	4.4
Financial expenses related to refinancing Interest cost on net pension scheme deficit	- -	0.9 0.5	0.9 0.5	- -	1.0 0.6	1.0 0.6
Financial expense	7.4	1.4	8.8	4.4	1.6	6.0
Net financing costs	6.9	0.5	7.4	3.8	1.6	5.4

5.  Taxation

	2019 £m	2018 £m
Current tax
UK corporation tax	6.3	5.3
Overseas tax at prevailing local rates	10.8	9.5
Adjustments in respect of prior years	(2.0)	(1.2)
	15.1	13.6
Deferred tax
UK deferred tax	0.3	(0.8)
Overseas tax at prevailing local rates	(2.2)	0.4
Adjustments in respect of prior year	0.2	(0.1)
Effects of changes in tax rates and laws	-	(0.5)
Tax on profit in the Consolidated Income Statement	13.4	12.6
Deferred tax
Relating to defined benefit pension schemes	0.2	0.3
Effect of change in tax rate	-	-
Tax on items taken directly to Other Comprehensive Income	0.2	0.3
Current tax
Relating to share-based payments	(0.5)	(0.6)
Deferred tax
Relating to share-based payments	0.1	0.6
Tax taken directly to the Consolidated Statement of Changes in Equity	(0.4)	-

The tax charge in the Consolidated Income Statement for the period is higher (2018: higher) than the standard rate of corporation tax in the UK. The differences are explained below:

	2019 £m	2018 £m
Profit before taxation	61.8	59.8
Profit before taxation multiplied by the effective rate of corporation tax in the UK of 19.0% (2018: 19.0%)	11.7	11.4
Expenses not deductible/income not chargeable for tax purposes	0.8	0.7
Non-deductible goodwill impairment	1.2	0.4
Non-taxable loss on disposal of UK subsidiary	0.1	-
Benefits from international financing arrangements	(0.6)	(0.8)
Local tax incentives	(0.2)	(0.3)
Overseas profits taxed at higher rates	2.7	3.0
Overseas losses not relieved	0.3	-
Withholding taxes	-	-
Impacts of rate and law changes	-	(0.5)
Release of liability for unremitted earnings in France	(0.8)	-
Adjustments in respect of prior periods	(1.8)	(1.3)
Tax charge	13.4	12.6

6.  Earnings per share

The weighted average number of ordinary shares in issue during the year was 79.2m (2018: 78.8m), diluted for the effects of the outstanding dilutive share options 79.6m (2018: 79.5m). Underlying earnings per share have been shown because the Directors consider that this provides valuable additional information about the underlying performance of the Group.

	2019		2018
	Pence per share	£m	Pence per share	£m
Basic earnings	61.1	48.4	59.9	47.2
Non-underlying items *	19.6	15.5	17.9	14.2
Underlying earnings	80.7	63.9	77.8	61.4
Diluted earnings	60.8	48.4	59.3	47.2
Non-underlying items *	19.5	15.5	17.9	14.2
Underlying diluted earnings	80.3	63.9	77.2	61.4

* Non-underlying items as detailed in note 3.

7.  Dividends

Dividends paid in the year were the prior year's interim dividend of £7.9m (2018: £7.4m) and the final dividend of £17.2m (2018:£16.2m). 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:

	2019		2018
	Pence per share	£m	Pence per share	£m
Equity shares
Interim	10.6	8.4	10.0	7.9
Final	23.0	18.3	21.8	17.2
Total	33.6	26.7	31.8	25.1

8.  Acquisitions in 2019

 

ATG Access

On 22 February 2019 the Group acquired 100% of the share capital of Cobaco Holdings Limited and its subsidiaries, including ATG Access Limited ("ATG"). 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 (automated, static, impact and non- impact tested), road blockers, barriers and gates. Details of the acquisition are set out below:

ATG Access	Pre acquisition carryingamount £m	Policy alignment and provisional fair value adjustments £m	Total £m
Intangible assets
Brands	-	3.6	3.6
Customer lists	-	5.2	5.2
Contracts, licenses and other assets	-	4.2	4.2
Property, plant and equipment	0.5	-	0.5
Right-of-use assets	-	0.6	0.6
Inventories	3.9	(1.0)	2.9
Current assets	5.7	(4.4)	1.3
Cash	0.2	-	0.2
Total assets	10.3	8.2	18.5
Lease liabilities	-	(0.6)	(0.6)
Current liabilities	(9.0)	0.8	(8.2)
Deferred tax	(0.1)	(1.4)	(1.5)
Total liabilities	(9.1)	(1.2)	(10.3)
Net assets	1.2	7.0	8.2
Consideration
Consideration in the year			23.7
Goodwill			15.5
Cash flow effect
Consideration			23.7
Cash acquired with the business			(0.2)
Net cash consideration shown in the Consolidated Statement of Cash Flows			23.5

Brands, patents and associated intellectual property, 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. The fair value of the current assets acquired includes £1.9m of trade receivables which have a gross value of £2.1m. The policy alignment adjustments include adjustments to align ATG's accounting methodology with International Financial Reporting Standards.  Prior to acquisition, ATG adopted FRS 102. The main changes relate to IFRS 15 'Revenue from Contracts with Customers' and IFRS 16 'Leases'.

Post acquisition the acquired business has contributed £17.3m revenue and £1.7m underlying operating profit, which are included in the Group's Consolidated Income Statement. If the acquisition had been made on 1 January 2019, the Group's results for the year would have shown revenue of £698.3m and underlying operating profit of £86.8m .

 

Parking Facilities

On 27 September 2019 the Group acquired 100% of the share capital of AAJG Holdings Limited and its subsidiaries, including Parking Facilities Limited ("PF"). Based in the UK, PF specialises in the design, manufacture and supply of a market-leading range of parking and access control products including cantilever, bi-fold and swing gates, automatic and manual barriers, automatic bollards, rising kerbs, speed ramps and access control equipment. PF also offers a bespoke service from design to manufacture, supplying custom-built products to match existing surroundings. Details of the acquisition are set out below:

Parking Facilities	Pre acquisition carryingamount £m	Policy alignment and provisional fair value adjustments £m	Total £m
Intangible assets
Brands	-	0.9	0.9
Customer lists	-	9.1	9.1
Property, plant and equipment	0.5	(0.1)	0.4
Right-of-use assets	-	2.8	2.8
Inventories	2.1	(0.5)	1.6
Current assets	4.6	(0.2)	4.4
Cash	0.2	-	0.2
Total assets	7.4	12.0	19.4
Lease liabilities	-	(2.8)	(2.8)
Current liabilities	(2.4)	(0.1)	(2.5)
Deferred tax	(0.2)	(1.5)	(1.7)
Total liabilities	(2.6)	(4.4)	(7.0)
Net assets	4.8	7.6	12.4
Consideration
Consideration in the year			14.2
Goodwill			1.8
Cash flow effect
Consideration			14.2
Cash acquired with the business			(0.2)
Net cash consideration shown in the Consolidated Statement of Cash Flows			14.0

Brands 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. The fair value of the current assets acquired includes £2.8m of trade receivables which have a gross value of £2.9m.

Post acquisition the acquired business has contributed £3.0m 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 2019, the Group's results for the year would have shown revenue of £703.6m and underlying operating profit of £87.8m.

Signpost Solutions

On 3 December 2019 the Group acquired 100% of the share capital of Signpost Solutions Limited ("SPS"). Based in the UK, SPS is a leading distributor and manufacturer of products for the highways industry, including sign supports and signal poles, sign fixings, bollards, chevrons and passive safety solutions. Details of the acquisition are set out below:

Signpost Solutions	Pre acquisition carryingamount £m	Policy alignment and provisional fair value adjustments £m	Total £m
Intangible assets
Customer lists	-	1.2	1.2
Property, plant and equipment	0.6	-	0.6
Right-of-use assets	0.1	0.8	0.9
Inventories	0.9	-	0.9
Current assets	1.9	(0.1)	1.8
Cash	0.6	-	0.6
Total assets	4.1	1.9	6.0
Lease liabilities	(0.1)	(0.8)	(0.9)
Current liabilities	(1.7)	0.1	(1.6)
Deferred tax	-	(0.2)	(0.2)
Provisions	-	(0.2)	(0.2)
Total liabilities	(1.8)	(1.1)	(2.9)
Net assets	2.3	0.8	3.1
Consideration
Consideration in the year			7.0
Goodwill			3.9
Cash flow effect
Consideration			7.0
Cash acquired with the business			(0.6)
Net cash consideration shown in the Consolidated Statement of Cash Flows			6.4

Customer lists have been recognised as a specific intangible asset 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. The fair value of the current assets acquired includes £1.8m of trade receivables which have a gross value of £1.9m.

Post acquisition the acquired business has contributed £0.3m revenue and £nil underlying operating profit, which are included in the Group's Consolidated Income Statement. If the acquisition had been made on 1 January 2019, the Group's results for the year would have shown revenue of £703.0m and underlying operating profit of £87.3m.

In addition to the above acquisitions, the Group paid a further amount of £0.7m in deferred consideration in respect of acquisitions made in 2018. A further £0.4m of goodwill was also recognised in relation to the finalisation of fair value adjustments on acquisitions made in 2018.

9.  Cash and borrowings

	2019 £m	2018 £m
Cash and cash equivalents in the Consolidated Statement of Financial Position
Cash and bank balances	26.0	36.9
Cash	26.0	36.9
Interest bearing loans and borrowings
Amounts due within one year	(0.4)	(0.4)
Amounts due after more than one year	(200.9)	(169.4)
Lease liabilities due within one year	(10.6)	-
Lease liabilities due after more than one year	(29.4)	-
Net debt	(215.3)	(132.9)
Change in net debt
Operating profit	69.2	65.2
Non-cash items	45.8	31.2
Operating cash flow before movement in working capital	115.0	96.4
Net movement in working capital	(12.9)	(6.3)
Changes in provisions and employee benefits	(3.2)	(2.4)
Operating cash flow	98.9	87.7
Tax paid	(14.4)	(13.3)
Net financing costs paid	(5.9)	(3.9)
Capital expenditure	(47.9)	(32.8)
Proceeds on disposal of non-current assets and assets held for sale	2.3	1.2
Free cash flow	33.0	38.9
Dividends paid (note 7)	(25.1)	(23.6)
Acquisitions (note 8)	(48.9)	(45.8)
Disposals	2.4	-
Amortisation of costs associated with refinancing activities	-	(1.0)
Purchase of shares for employee benefit trust	(0.7)	(2.7)
Issue of new shares	2.0	1.5
New leases and lease remeasurements	(11.1)	-
Interest on lease liabilities	(0.9)	-
Net debt increase	(49.3)	(32.7)
Effect of exchange rate fluctuations	2.9	(3.3)
Net debt at the beginning of the year	(132.9)	(99.0)
Adoption of IFRS 16 (2018: IFRS 9)	(36.0)	2.1
Net debt at the beginning of the year (restated)	(168.9)	(96.9)
Net debt at the end of the year	(215.3)	(132.9)

Notes

1.  The financial information previously set out does not constitute the Company's statutory accounts for the years ended 31 December 2019 or 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the registrar of companies, and those for 2019 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 17 April 2020 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 21 May 2020 at 11.00am at The Village Hotel, The Green Business Park, Shirley, Solihull, B90 4JG.

ii.  The proposed final dividend for 2019 will be paid on 7 July 2020 to shareholders on the register on 29 May 2020 (ex-dividend date 28 May 2020).

iii.  The last date for receipt of Dividend Reinvestment Plan elections is 16 June 2020.

iv.  Interim results announcement for the period to 30 June 2020 due 5 August 2020.

v.  Payment of the 2020 interim dividend due 7 January 2021.

4.  This preliminary announcement of results for the year ended 31 December 2019 was approved by the Directors on 4 March 2020.

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.

 

END

 

 

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