Financial Results
In spite of the challenging economic conditions we have been able to produce a reassuring set of results for the first half of 2009, with overall trading in line with our expectations. The swift and decisive action taken in the second half of 2008 to reduce manning levels and control costs, in anticipation of reduced volumes in certain sectors, has, along with currency benefits, mitigated the impact of lower demand in the Galvanizing Services and Building and Construction Products divisions. The Infrastructure Products group performed particularly well as demand in its main markets remained resilient. In addition, the international scale and diversity of the Group, with 58% of operating profits being generated from our operations in the USA, France, Thailand and China, provides us with a degree of resilience against downturns in any particular market.
Revenue from continuing businesses decreased 7.0% to £196.8m (2008: £211.7m) including a £14.0m currency translation benefit in the period and £7.4m from the 2008 acquisition of Creative Pultrusions, Inc. Underlying operating profit decreased by 5.7% to £23.1m (2008: £24.5m) despite a currency benefit of £2.4m and a contribution of £0.5m from the prior year acquisition. Underlying operating margin improved by 0.1% to 11.7% (2008: 11.6%).
For the six months to 30 June 2009, Infrastructure Products generated 51.9% of the Group’s underlying operating profit; Galvanizing Services 44.2% and Building and Construction Products the remaining 3.9%.
The performance to date has been achieved as a result of our strong positions in markets driven by legislation, the strength of our relationships throughout the supply chain in those markets and continued strategic focus on developing new markets and products.
Operational Review
Infrastructure Products
Overall revenues increased by 8.1% to £99.7m (2008: £92.2m) including the benefit of £4.4m from exchange movements. Underlying operating profit was up 8.1% to £12.0m (2008: £11.1m) after incorporating £0.6m benefit of currency translation. The 2008 acquisition of Creative Pultrusions, Inc. contributed £7.4m and £0.5m of revenue and operating profit respectively in the half year. Continual review of the operational cost base protected operating margins which were maintained
at 12.0% despite reduced volumes in some of the operations. This division has focused on the key markets of road, rail, utilities and security, where overall, customer demand has been maintained.
HS Roads
A strong performance was achieved across a number of the business units supplying the UK road sector. Both our permanent (Flexbeam) and temporary (Varioguard) vehicle restraint systems were involved in supplying materials for contracts on the M1, M42 and M25 motorways. To satisfy this increased demand we enlarged our Varioguard rental pool by a further 25 km, having during the first half of 2009 placed 32 km on the M25 Design Build Finance and Operate project. This was further increased to 46 km in July and will remain in place until the 2012 Olympics.
The Highways Agency accelerated its managed motorway programme, to provide hard shoulder running at peak times on congested motorways, resulting in our variable electronic message signage business having an excellent first half of 2009. We have a robust order book in place for this product for 2009 and 2010 and the Highways Agency programme has visible potential through to 2014. This programme will also promote volume for our vehicle restraint systems business, our lighting columns business and our new lightweight steel motorway gantry developed in 2008.
Zoneguard, our vehicle restraint system developed for the USA market, is currently in use on five projects across four American States. A number of States have started to release infrastructure scheme funding as the impact of the US economic stimulus begins to filter through, albeit at a slower rate than anticipated.
Bridge parapets were in demand in the UK, Eire and especially in the Middle East, where our operations continue to grow their export activities and markets.
TopDeck, our innovative demountable car park, which made its debut in 2008, had a slow start to 2009 primarily through delays in funding large capital projects, coupled with a reduction in air travel and overcapacity of parking at airports. However, the recent level of enquiries for TopDeck has been more encouraging and we continue to view the market with confidence for the future.
The UK lighting column operation suffered from a delay in the financing of PFI’s for street lighting. Closure of financing arrangements is now being achieved on a number of projects but the supply of columns for these projects is unlikely to occur until 2010. Our lighting column operation in France also suffered during the period, primarily from the political and financial impact of local elections, although order intake improved in June with signs of funds being released for infrastructure expenditure.
“In addition, the international scale and diversity of the Group, with 58% of profits being generated from our operations in the USA, France, Thailand and China, provides us with a degree of resilience against downturns in any particular market.”
HS Rail
We have continued to focus on extending our offering in the rail sector and further developed, through Creative Pultrusions, Inc., the concept of a quick build GRP (Glass Reinforced Plastic) rail platform. This concept has already been proven with platforms installed at the East Midlands Parkway in the UK and we have seen encouraging levels of enquiry for supply in the last quarter of 2009 and throughout 2010.
HS Utilities
Our activities in the growing utilities market continue to develop opportunities. Energy expenditure, mainly in the Liquefied Natural Gas market, is driving demand for our products, particularly pipe supports.
Our Pipe Supports operation in Thailand had a record performance with the order book remaining strong. In June it opened its new facility in China to enter the growing power generation market supplied by nuclear, gas and coal fired power stations.
In the USA the V&S Utilities business improved its profitability over the same period of the prior year.
HS Security
To satisfy increased demand for security we have developed new anti-personnel security systems for perimeter fencing. These high security perimeter fencing systems have been tested by the Home Office and have been approved for use on strategic homeland security sites, such as power stations, airports and military bases. They are also suitable for high value security facilities, as evidenced by our supply contract for the largest ever perimeter security fencing for a gold mine in the Asia Pacific region. Supplies under this contract commenced during the half year.
Further evidence of our growing reputation in the security market was the choice of Bristorm, our anti-terrorist security product, for use during the G20 Summit to protect the US Ambassador’s residence in London at the time of President Obama’s visit.
Galvanizing Services
Revenues declined by 11.5% to £58.5m (2008: £66.1m) despite currency translation benefits of £9.6m. Underlying operating profit of £10.2m including currency translation benefits of £1.8m was broadly in line with 2008 (£10.4m). Encouragingly, operating margin improved to 17.4% (2008: 15.7%). Galvanizing volumes declined by 25.0% as a result of the difficult economic environment but the swift and decisive action taken on costs at the end of 2008 enabled us to maintain our operating profit on the lower trading volumes. The new V&S galvanizing plant in Delaware, USA contributed ahead of expectations and we are confident of a return of volumes in the US following the full impact of the economic stimulus spend. France and the UK are likely to continue through 2009 with 20% volume reductions, compared to 2008.
Building and Construction Products
Revenues at £38.6m were substantially down from £53.4m in 2008 emphasising the severe downturn in activity in the UK construction market. Consequently, despite decisive action to reduce the cost base, underlying operating profit fell by £2.1m to £0.9m (2008: £3.0m). Volumes in our steel lintel and residential door operation have recently started to increase, from a very low base, although our roofing division, which is late in the construction cycle, continued to experience low demand. The industrial flooring business performed well in challenging circumstances as increased activity in power generation and sewage treatment plants delivered good order intake. Order flow however, for the smaller higher margin projects, has reduced.
Financial Review
Finance Costs
Net financing costs decreased by £1.6m to £2.7m principally reflecting lower base interest rates across all our financing currencies. The cash element of net financing costs is £2.6m (2008: £4.0m). Underlying operating profit covered net cash interest 8.9 times (2008: 6.1 times). The Group benefitted substantially during the period from its previous policy of utilising floating interest rates as base rates fell. Given the low interest rate environment, the Group decided during the period to fix approximately fifty per cent of its committed term debt to three year fixed interest rate derivatives.
Tax
The tax charge for the period was £6.5m (2008: £7.5m). The underlying effective tax rate for the period was 33.5% (2008: 37.5%) which is our estimated effective rate for the full year.
Cash Generation and Financing
Cash generated from operations was again strong at £35.2m (2008: £32.9m) emphasising the Group’s continued focus on cash management. Lower commodity prices and a co-ordinated stock management programme assisted in driving down working capital by £5.3m during the period. Selective capital expenditure amounted to £4.7m (2008: £10.1m) which, as a multiple of depreciation and amortisation, was 0.7 times (2008: 1.8 times). Full year capital expenditure is still expected to be c.£13.0m just below one times depreciation and amortisation. The Group generated £5.6m from non-core business disposals; £4.9m from the sale of a minority investment in Neholl BV and a £0.7m receipt of deferred consideration from prior year disposals.
Group net debt at 30 June 2009 was £106.1m (2008: £110.3m), a significant £40.1m reduction from the 31 December 2008 position of £146.2m driven by net cash flow of £25.8m and a favourable movement on exchange of £14.3m. The Group’s net debt to EBITDA* ratio improved to 1.8 times compared with 2.4 times at 31 December 2008. The Group remains comfortably within its banking covenants. At 30 June 2009 the Group had committed facilities available of £176m and a further £27m in overdrafts and other on demand facilities. The principal debt facility is an amortising £150m multicurrency facility which runs to June 2012. The combined facilities of £203m provide significant headroom against the expected requirements.
| |
6 months
ended
30th June
2009
£m |
6 months
ended
30th June
2008
Restated)
£m |
Year
ended
31 December
2008
£m |
| Change in net debt |
|
|
|
| Operating profit |
22.9 |
24.3 |
43.4 |
| Non-cash items |
7.0 |
6.1 |
14.8 |
| Operating cash flow before movement in working capital |
29.9 |
30.4 |
58.2 |
| Net movement in working capital |
5.3 |
2.5 |
(4.0) |
| Operating cash flow |
35.2 |
32.9 |
54.2 |
| Tax paid |
(5.3) |
(7.3) |
(16.0) |
| Net financing costs paid |
(1.9) |
(4.2) |
(7.0) |
| Capital expenditure |
(4.7) |
(10.1) |
(22.5) |
| Sale of fixed assets |
0.1 |
— |
0.7 |
| |
23.4 |
11.3 |
9.4 |
| Dividends paid |
(3.3) |
(2.7) |
(6.6) |
| Disposals |
5.6 |
0.3 |
29.5 |
| Acquisitions |
— |
(2.2) |
(33.8) |
| Issue of new shares |
0.1 |
0.1 |
0.1 |
| Net debt decrease/(increase) from continuing operations |
25.8 |
6.8 |
(1.4) |
| Net cash inflow from discontinued operations |
— |
5.8 |
5.6 |
| Net debt decrease |
25.8 |
12.6 |
4.2 |
| Effect of exchange rate fluctuations |
14.3 |
(5.1) |
(32.6) |
| Net debt at the beginning of the period |
(146.2) |
(117.8) |
(117.8) |
| Net debt at the end of the period |
(106.1) |
(110.3) |
(146.2) |
*Rolling 12 Months
Principal Risks and Uncertainties
The Group has a process for identifying, evaluating and managing the principal risks it faces. Details of these risks are contained on pages 21 and 22 of the Group’s Annual Report & Accounts for the year ended 31 December 2008. It is the Directors’ opinion that these are the risks that could impact on the performance of the Group and that they are also applicable to the current financial year.
For the six months ended 30 June 2009 there has been no significant change in the overall scope of the principal risks referred to above. As in previous years such risks are being managed and their anticipated impact mitigated. The Directors do not therefore, envisage any significant effect of these changes upon the expected performance of the Group for the remainder of 2009, notwithstanding the continued uncertainty in the general economic environment.
Going Concern
The Group meets its day to day working capital and other funding requirements through a combination of long term funding and short term overdraft borrowings. The Group’s principal financing facility is an amortising £150m multi currency facility which expires in June 2012.
The Group actively manages its strategic, commercial and day to day operational risks and through its Treasury function operates Board approved financial policies, including hedging policies that are designed to ensure the Group maintains an adequate level of funding headroom and effectively mitigates foreign exchange and other financial risks. During the first half of 2009, the Group remained strongly cash generative in spite of challenging market conditions.
After making enquiries, the Directors have a reasonable expectation that the Company and its subsidiaries have adequate resources to continue in operational existence for the foreseeable future and therefore adopt a going concern principle.
Directors’ Responsibility Statement
We confirm that to the best of our knowledge:
- The condensed set of financial statements has been prepared in accordance with IAS34: Interim Financial Reporting as adopted by the EU;
- The interim management report includes a fair review of the information required by:
- a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
- b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period (see note 12); and any changes in the related party transactions described in the last Annual Report that could do so.
This report was approved by the Board of Directors on 17 August 2009 and is available on the Company’s website (www.hsholdings.com).
By order of the Board