8 August 2024

Hill & Smith PLC

Half Year Results (unaudited) for the six months ended 30 June 2024

Strong H1 results: Further margin expansion, positive M&A momentum

Hill & Smith PLC ("Hill & Smith" or "the Group"), the international provider of sustainable infrastructure products and services, announces its unaudited results for the six months ended 30 June 2024 ("the period").

Financial Results

Key Highlights:

·   Strong H1 trading performance

o Revenue up 2% and underlying operating profit up 12% on a constant currency basis against strong 2023 comparators, driven by strong performance in Engineered Solutions and Galvanizing Services

o Further expansion in operating margin to 16.2%, an increase of 130 basis points, reflecting the benefits of improved portfolio mix and US volume growth

o Continuing strong infrastructure demand in the US offsetting more challenging UK market backdrop

·   Positive momentum on M&A

o Three complementary acquisitions completed year to date for a total initial consideration of £22.3m

o Includes acquisition of Trident Industries since period end for £10.6m

o H1 acquisitions of Capital Steel and FM Stainless successfully onboarded and trading ahead of expectations

o Continue to see a strong M&A pipeline

·   Good cash generation and ROIC

o Cash conversion 83% (H1 2023: 87%)

o ROIC 22.5% (H1 2023: 21.3%), an increase of 120 bps, as a result of strong growth in our larger, less capital intensive US businesses

o Covenant leverage at 0.4 times (31 December 2023: 0.4 times), providing significant capacity for investment in organic and inorganic growth

·   EPS up 9% to 58.3p, interim dividend up 10% at 16.5p

·   Positive FY24 outlook, operating profit expected to be in line with the recently upgraded market expectations^† excluding any adjustments for the benefits of the acquisition announced today

·   Group is well-positioned in structurally growing infrastructure markets, providing confidence for medium term growth outlook

Alan Giddins, Executive Chair, said:

"Hill & Smith has delivered another good first half performance, underpinned by continuing strong demand for our products and services in the US and the strong performance from our most recent acquisitions. We expect this momentum to continue into the second half in line with our recently upgraded expectations.

"In the medium to longer term, the Group is well positioned in infrastructure markets with attractive structural growth drivers. This strong position, together with our ability to use M&A to access new customers, markets and adjacent technologies, and the benefits of our agile operating model, underpins our confidence in the Group's positive trading outlook."

^† The current company compiled analyst consensus expectation for FY24 is for underlying operating profit of £137.4m with a range of £135.9m-£145.1m.

For further information, please contact:

Hill & Smith PLC

Alan Giddins, Executive Chair                                                             Tel: +44 (0)121 704 7434

Hannah Nichols, Chief Financial Officer

MHP

Reg Hoare/Rachel Farrington/Catherine Chapman                                Tel: +44 (0)7801 894577

                                                                                                                   Email: [email protected] 

There will be an in-person presentation for analysts and institutional investors this morning at 10.15am, hosted at MHP Group, 60 Great Portland Street, London, W1W 7RT, as well as a webcast and conference call with a facility for Q&A.

To register for the webcast, please use this link. For conference call dial in details, please contact [email protected]. 

A copy of the presentation will be made available at https://hsgroup.com/investors/reports-and-presentations/.

* All underlying measures exclude certain non-underlying items, which are as detailed in note 6 to the Financial Statements and described in the Financial Review. References to an underlying profit measure throughout this announcement are made on this basis. Non-underlying items are presented separately in the Consolidated Income Statement where, in the Directors' judgement, the quantum, nature or volatility of such items gives further information to obtain a proper understanding of the underlying performance of the business. Underlying measures are deemed alternative performance measures ("APMs") under the European Securities and Markets Authority guidelines and a reconciliation to the closest IFRS equivalent measure is detailed in note 5 to the financial statements. They are presented on a consistent basis over time to assist in comparison of performance.

^ Where we refer to organic constant currency (OCC) movements, these exclude the impact of currency translation effects and 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. Constant currency amounts are prepared using exchange rates which prevailed in the current year.

Notes to Editors

Hill & Smith PLC is a leading provider of sustainable infrastructure products and services. The Group employs c.4,500 people worldwide with the majority employed by its autonomous, agile, customer focussed operating businesses based in the UK, USA, Australia and India. The Group office is in the UK and Hill & Smith PLC is quoted on the London Stock Exchange (LSE: HILS.L).

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

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

Engineered Solutions: supplying engineered steel and composite solutions for a wide range of infrastructure markets including power generation and distribution, marine, rail and housing. The division also supplies engineered pipe supports for the water, power and liquid natural gas markets and seismic protection solutions.

Roads & Security: supplying products and services to support road and highway infrastructure including temporary and permanent road safety barriers, intelligent traffic solutions, street lighting columns and bridge parapets. In addition, the division includes two businesses which are market leaders in the provision of off-grid solar lighting and power solutions. The security portfolio includes hostile vehicle mitigation solutions, high security fencing and automated gate solutions.

H1 2024 Review

The Group has delivered a strong first half performance, underpinned by continuing buoyant demand for infrastructure products and services in the US and enhanced by the strong performance of our most recent acquisitions. As expected, our UK businesses experienced a more challenging market backdrop, with reduced demand across certain public sector customers.

Revenue in the first half was up 2% and underlying operating profit was up 12% on a constant currency basis against a strong prior period comparator. Group underlying operating margin increased by 130 basis points to 16.2%, driven by an improved portfolio mix with good volume growth seen in our higher margin US businesses within Engineered Solutions and Galvanizing Services. Acquisitions contributed c.£22m revenue and c.£5m underlying operating profit in the period.

Engineered Solutions delivered strong revenue, profit growth and margin expansion against a record H1 2023. Demand for our products and services remained buoyant across our US businesses, which face into a range of attractive structural growth markets including electricity transmission and distribution and infrastructure construction.

Galvanizing Services delivered a record first half performance reflecting strong momentum in our higher margin US business, which delivered an 8% increase in volumes. Volumes in the UK were slightly lower than the same period last year, due to the more subdued market backdrop.

As expected, first half results in Roads & Security were lower than 2023, mainly attributable to an anticipated softening in Q1 demand within our US off grid solar lighting business. We also experienced a challenging UK market backdrop in a number of our businesses.

The Group continues to be highly cash generative and deliver strong returns, with cash conversion in the first half of 83% and return on invested capital (ROIC) of 22.5%. The Group balance sheet remains robust at 0.4 times covenant leverage with significant capacity to support future organic and inorganic growth opportunities.

Strategic progress update

Continued progress against our financial framework

In March 2023, we set out a recalibrated medium term financial framework with annual performance targets:

·   organic revenue growth: 5% -7%

·   total revenue growth including acquisitions: 10%+

·   underlying operating profit margin (by end 2024): 15%

·   return on invested capital: 18%+

·   underlying cash conversion: 80%+

·   covenant leverage: 1 to 2 times

In the first half, the Group continued to deliver against this framework with further operating margin expansion, strong cash conversion, expanded return on invested capital and leverage below our target range. The softer organic revenue growth in the first half was due to the anticipated slowdown in our US off grid solar lighting business, and a challenging UK market backdrop, where we have also seen lower prices for certain products given input cost reductions. We expect to see improved organic revenue growth in the second half.

Portfolio Management

We are continuing to successfully execute against our M&A strategy and have developed an active pipeline of future opportunities. All potential acquisitions are tightly evaluated to ensure they fit with our strategic and financial criteria and once acquired, we implement a rigorous and detailed integration plan.

In the year to date we have made three complementary acquisitions for a total initial consideration of £22.3m. All businesses fit well into our existing US Engineered Solutions portfolio and were acquired outside a competitive process:

In January, we acquired Capital Steel for £5.0m. Located in Trenton, New Jersey, the business supplies structural steel products and services into the high growth electricity transmission and distribution market. Capital Steel is being integrated into our existing structural steel utilities business and trading since acquisition has been ahead of expectations.

In March, we acquired FM Stainless, based in Ellijay, Georgia, for £6.7m. The business manufactures stainless steel pipe supports and fasteners, serving a range of growth end markets including water and wastewater treatment and is highly complementary to our existing engineered supports business. The integration of the business is going well and the first few months of trading are very encouraging

In July, we acquired Trident Industries ('Trident') for an initial consideration of £10.6m and further cash consideration of up to £25.6m, payable based on future revenues over the five years post-acquisition. Located in Greater St Louis, Illinois, Trident is a designer and supplier of highly resilient, single and multi-layer composite utility poles, serving utility company needs across North America and the Caribbean. The business has a long-term outsourced manufacturing relationship with Enduro Composites, and will become part of the Creative Composites Group, within the Engineered Solutions division.

Sustainability

Sustainability underpins the Group's growth strategy.  As part of this, talented people are critical to our success - the record first half performance is a testament to our excellent local teams and the agility of our autonomous operating model. During the first half, we strengthened our Executive Board through the introduction of a regional Group President structure to enable a closer focus on geographic end markets and growth opportunities. We also launched a high potential programme, a first for the Group, with the aim of developing and nurturing individuals who we have identified as prospective future leaders.

Our focus on carbon reduction continues, with our SBTi targets being validated in December last year. In the first half, our US companies started the transition to renewable electricity contracts, with our UK companies already fully transitioned.  In the second half, we will be engaging with decarbonisation consultancies to help identify additional energy efficiency and carbon reduction opportunities.

Alongside this, the health and safety of our people remains a key priority. During the period, we successfully implemented a new Group health & safety management system to make incident and near miss reporting easier for our people and to improve root cause analysis. We have also launched targeted safety campaigns around certain activities which have been identified as higher risk.

Recent board update

In May 2024, Mark Reckitt stepped down from the Board as Non-executive Director after a tenure of nine years and we thank him for his significant contribution during this time. Carol Chesney has now taken over from Mark as Chair of the Audit Committee.

Results

The Group has delivered a strong set of results for the first half of 2024. Revenue was £422.7m (2023: £420.8m), flat on a reported basis. Revenue was 3% lower on an OCC basis but 2% higher on a constant currency basis, the organic revenue decline mainly attributable to expected lower demand in our US solar lighting business, and a slowdown in demand in certain UK end markets, where we have also seen lower prices for certain products given input cost reductions. Underlying operating profit was £68.4m (2023: £62.5m), an increase of 9% on a reported basis. OCC operating profit growth was 4% and constant currency growth was 12%. Operating margins improved to 16.2% (2023: 14.9%) reflecting the benefits of an improved portfolio mix and the volume growth in our higher margin US businesses. Underlying profit before taxation was £63.2m (2023: £57.2m). Reported operating profit was £63.0m (2023: £53.5m) and reported profit before tax was £57.8m (2023: £48.2m). Underlying earnings per share increased to 58.3p (2023: 53.6p) and reported earnings per share was 53.2p (2023: 43.5p).

The principal reconciling item between underlying and reported operating profit is the amortisation of acquisition intangibles of £4.3m. Note 6 to the financial statements provides further details on the Group's non-underlying items.

Dividend

Our aim is to provide sustainable and progressive dividend growth. Given the strong H1 performance and our confidence in the Group's prospects, we have declared an interim dividend for FY24 of 16.5p per share, an increase of 10% (2023: 15.0p). The interim dividend will be paid on 7 January 2025 to shareholders on the register on 29 November 2024.

Outlook

The Group has exposure to a range of structurally growing US infrastructure markets, with the US representing 77% of Group profit in the first half. We expect trading in our US businesses to remain strong throughout the second half, underpinned by bipartisan government support and private investment to upgrade infrastructure, accelerate onshoring and support technology change.

The second half outlook for our UK businesses is likely to remain challenging given budgetary pressures in the public sector, however we are cautiously optimistic for some level of recovery in 2025. We continue to see attractive growth opportunities in our Indian business.

We expect that the Group's good trading momentum will continue and that FY24 underlying operating profit will be in line with the recently upgraded market expectations, with an even weighting to the year's performance, excluding any adjustment for the benefits of the Trident acquisition announced today.

In the medium to longer term, the Group is well-positioned in infrastructure markets with attractive structural growth drivers. This strong position, together with our proven M&A strategy and the benefits of our agile operating model, provides confidence that the Group will continue to make good progress, in line with our strategic and financial framework.

Operational Review

⁽¹⁾        Underlying measures are set out in note 5 to the Financial Statements and exclude certain non-underlying items, which are detailed in note 6 to the Financial Statements.

Our Engineered Solutions division provides a range of composite and steel solutions for infrastructure construction including energy transmission and distribution, marine, rail and housing. The division also supplies engineered supports for the water, power and liquid natural gas markets and seismic protection solutions for commercial construction.

The division delivered a strong performance, with 15% revenue and 25% profit growth on a constant currency basis, reflecting strong volume growth across our US businesses and the positive contribution from recent acquisitions. As a result, underlying operating margin increased by 130 bps to 18.3% (2023: 17.0%).

US

The US portfolio delivered 5% OCC revenue growth and record operating margin in the first half against a strong prior period comparator.

Our composites business continued to see strong demand for innovative composite solutions across a range of infrastructure end markets including electrical grid infrastructure, industrial construction, water and mass transit infrastructure.  As a result, revenue and operating profit were ahead of H1 2023, with margins benefiting from product mix and volume growth. United Fiberglass, acquired in November 2023, has been successfully integrated into the existing business and prospects for future growth are encouraging.

At the end of July, we completed the acquisition of Trident for an initial consideration of £10.6m with further consideration of up to £25.6m payable based on future revenues over the five years post-acquisition. Located in Greater St Louis, Illinois, Trident is a designer and supplier of highly resilient single and multi-layer composite utility poles, serving utility company needs across North America and the Caribbean. The business has a long-term outsourced manufacturing relationship with Enduro Composites, which we acquired in February 2023, and will be integrated into our existing business. The acquisition is highly complementary to our existing composite utility pole offering and will further accelerate our strategy in the attractive US electricity transmission and distribution market.

Our business supplying structural steel products for electrical grid infrastructure delivered an excellent performance and enters the second half with a record order book. We view the US electrical transmission and distribution market as very attractive in the medium term with growth driven by the need to upgrade ageing infrastructure, supported by government investment, and increasing demands on the electric grid driving capacity expansion.

Given this, we have made focused investments to help realise the growth potential. In January 2024 we acquired Capital Steel, based in Trenton, New Jersey for consideration of £5.0m. The business serves the buoyant electrical transmission and distribution market and is being integrated into our existing business, providing access to new geographies and customers and significant cross selling opportunities.  Capital Steel's trading since acquisition has been ahead of our expectations.  We have also completed the expansion of our existing facility at Burton, Ohio which provides additional manufacturing capacity.

Our engineered supports business delivered a record performance, driven by robust demand from industrial and infrastructure projects including clean water, battery plant and semiconductor construction. This more than offset some softness in the commercial construction sector and the business enters the second half with a record order book. The integration of FM Stainless, acquired in March 2024, is progressing well with trading benefiting from strong water treatment and infrastructure project demand.

Overall prospects for future growth in all our US Engineered Solutions businesses remain very positive. We expect market growth to be supported by investment to modernise the ageing electric grid and multi-year government funding to upgrade infrastructure alongside private investment from US manufacturers and producers to onshore vital components.

UK and India

As expected, our UK businesses, which represented 19% of the divisional revenue, saw revenue decline by 13%, partly due to pricing reflecting lower steel input costs, and as a result profit was lower than H1 2023. The industrial flooring business continued to see buoyant demand for data centre projects, however demand from smaller order customers has been more subdued. The business enters the second half with a healthy project orderbook and is cautiously optimistic. Our building products business experienced a continuation of lower demand levels, reflecting the slowdown in housing construction. The business expects the second half to remain challenging with a return to growth in 2025 in line with a recovery in residential construction.

Our engineered supports business in India saw good growth in the period, underpinned by international demand for LNG projects. The business enters the second half with a robust order book and good medium term growth prospects.

Galvanizing Services

⁽¹⁾        Underlying measures are set out in note 5 to the Financial Statements and exclude certain non-underlying items, which are detailed in note 6 to the Financial Statements.

The Galvanizing Services division offers hot-dip galvanizing and powder coating services with multi-plant facilities in the US and the UK. Hot-dip galvanizing is a proven steel corrosion protection solution which significantly extends the service life of steel structures and products. The division benefits from a wide sectoral spread of customers who operate in a range of infrastructure end markets including industrial construction, road and bridges and transportation.

The division delivered a strong performance in the first half. While revenue was flat, underlying operating profit was up 11% on a constant currency basis, which reflects the strong volume growth in our US business, partly offset by the expected volume decline in the more challenging UK market.  The operating margin increased by 220 bps to 24.9% due to the favourable geographical mix given the superior margins generated by our US business.

US

Our US galvanizing business delivered an excellent first half performance, with 5% OCC revenue growth and record operating profit. The strong growth is attributable to an 8% organic increase in production volumes, partly offset by pricing to reflect lower input costs, with buoyant demand from a range of projects including data centre and battery plant construction, airport expansion and bridge construction. As a result, the business saw margin expansion in the period and continues to deliver superior operating margins, with customers valuing the excellent quality of service provided by our local teams.

In the medium to longer term, the outlook for US galvanizing remains positive. The business is well placed to benefit from multi-year, bipartisan government investment to support industrial expansion and technology change, as well as a more general move to the onshoring of certain activities.

UK

In the UK, galvanizing revenue was 7% below the same period last year, impacted by a weaker market for certain infrastructure related customers in transport, street furniture and structural steel. Volumes were in line with H2 2023 run rates and were 3% lower than the same period last year. While end markets remain price sensitive, the outlook for the second half and into 2025 is more positive as we see the benefits of the management changes made at the start of the year, with a focus on customer service and cost control.

Roads & Security

⁽¹⁾        Underlying measures are set out in note 5 to the Financial Statements and exclude certain non-underlying items, which are detailed in note 6 to the Financial Statements.

The Roads & Security division supplies products and services to support the delivery of safe road and highway infrastructure, alongside a range of security products to protect people, buildings and infrastructure from attack. In addition, the division includes two businesses which are market leaders in the provision of off-grid solar lighting and power solutions.

Results for the first half were lower than the same period last year with revenue 14% lower and operating profit 32% lower on a constant currency basis. The decline was mainly attributable to an expected softness in our US off grid solar lighting business, coupled with an uncertain UK market backdrop. As a result, the first half operating margin was below 2023 however we are forecasting some improvement in the second half.

UK Roads

As expected, both revenue and underlying operating profit were lower than the same period last year.  Revenue and profit in our rental barrier business were ahead of H1 2023, underpinned by high levels of operations activity and favourable performance on scheme completions. Visibility of the rental scheme pipeline is much diminished compared to previous years, partly driven by the UK general election and ongoing delays to the release of Road Investment Strategy 3. The performance of the wider UK roads portfolio was impacted by reduced demand and inactivity seen in certain central and local government customers. We expect the project outlook for the second half to remain challenging given budgetary pressures, however we are cautiously optimistic for some level of recovery in 2025.

As expected, our off-grid solar energy business had a challenging start to the year with a reduced opening order book and significantly lower revenue, however the opportunity pipeline is showing some signs of improvement across key end markets of facilities management, defence and construction.

US Roads 

Our US Roads portfolio comprises two businesses: our off-grid solar lighting solutions business and our roadside safety products business.

As previously highlighted, revenue and profit in our off grid solar lighting business were significantly below H1 2023, a strong comparator, with an anticipated softening in demand from our largest customer as they realigned inventory levels. The medium term outlook for the business remains positive, underpinned by a drive toward sustainable solutions. The planned move to a larger leased facility successfully took place in June and positions the business well to deliver against its medium term growth strategy. We expect to see an improved performance in H2.

Performance in the road traffic safety product business was ahead of the same period last year, with focused pricing and cost transformation actions being taken in line with the business improvement plan.  While improvement actions continue into the second half, the outlook for the core business is moderately positive, with demand supported by increased levels of state and federal investment to upgrade US road infrastructure and the introduction of new safety standards.

UK Security

Our UK security businesses provide a range of perimeter security solutions including hostile vehicle mitigation (HVM) to both UK and international markets and represented 6% of Group revenue in the first half. While revenue declined by 5%, underlying operating profit was ahead of H1 2023. This reflects a good performance in our HVM business and robust demand for security barrier operations, partly offset by continuing challenges seen in our perimeter access security business. The outlook for our security portfolio remains mixed with a current focus on the higher quality growth opportunities including security barrier operations and data centre perimeter security.  

Financial Review

Cash generation

The Group continues to be highly cash generative and delivered 83% cash conversion in the first half. We expect the Group to deliver strong cash conversion in 2024, in line with our target level of 80%+ and consistent with historic levels. The calculation of our underlying cash conversion ratio can be found in note 5 to the financial statements.

Operating cash flow before movement in working capital was £83.6m (2023: £77.4m). The working capital outflow in the period was £13.1m (2023: £7.2m outflow) with a continued focus on working capital efficiency. Working capital as a percentage of annualised sales was 16.4% (2023: 17.5%) and debtor days were 58 days (2023: 55 days).

Capital expenditure of £9.8m (2023: £12.7m) represents a multiple of depreciation and amortisation of 0.9 times (2023: 1.2 times).

Net financing costs for the period were £5.2m (2023: £5.3m). The net cost of pension fund financing under IAS 19 was £0.1m (2023: £0.2m), and the amortisation of costs relating to refinancing activities was £0.3m (2023: £0.3m).

The Group generated £43.5m of free cash flow in the period (2023: £38.7m), providing funds to support our acquisition strategy and dividend policy.

Net debt and financing

Net debt at the end of the period amounted to £101.6m (31 December 2023: £108.4m). Outflows in the period included £12.0m for the 2023 interim dividend and £13.8m on M&A activity, principally the acquisitions of Capital Steel and FM Stainless. Net debt at the period end includes lease liabilities under IFRS 16 of £50.2m (31 December 2023: £43.7m).

The Group's principal financing facilities comprise a £250m revolving credit facility, which expires in November 2027 and $70m senior unsecured notes with maturities in June 2026 and June 2029, together with a further £6.7m of on-demand local overdraft arrangements. Throughout the year the Group has operated well within these facilities and at 30 June 2024, the Group had £261.2m of headroom (£254.5m committed, £6.7m on demand). Approximately 50% of the Group's drawn debt at 30 June 2024 is subject to fixed interest rates, providing a hedge against recent market movements.

The principal borrowing facilities are subject to covenants that are measured biannually in June and December, being net debt to EBITDA of a maximum of 3.0 times and interest cover of a minimum of 4.0 times. The ratio of covenant net debt to EBITDA at 30 June 2024 was 0.4 times (31 December 2023: 0.4 times) and interest cover was 18.7 times (31 December 2023: 17.3 times).

Return on Invested Capital

We use return on invested capital (ROIC) to measure our overall capital efficiency, with a target of achieving returns in excess of 18%, above the Group's cost of capital, through the cycle. The Group continued to deliver strong returns achieving a ROIC of 22.5% for the period to 30 June 2024 (2023: 21.3%), the increase reflecting the faster growth in our larger US businesses which are typically lower in capital intensity.

Tax

The underlying effective tax rate for the period for continuing operations was 25.8% (FY 2023: 24.6%). The tax charge for the period was £15.0m (2023: £13.4m) and includes a £1.3m credit (2023: £0.9m credit) in respect of non-underlying items, principally relating to the amortisation of acquisition intangibles. Cash tax paid in the period was £10.6m (2023: £14.9m).

Exchange rates

The Group is exposed to movements in exchange rates when translating the results of its overseas operations into Sterling. Retranslating 2023 half year revenue and underlying operating profit using average exchange rates for 2024 would have reduced revenue by £6m and underlying operating profit by £1.3m, mainly due to Sterling's depreciation against the US Dollar. A one cent movement in the average US Dollar rate currently results in an adjustment of approximately £4.0m to the Group's annual revenues and £1.0m to annual underlying operating profit.

Non-underlying items

The total non-underlying items charged to operating profit from continuing operations in the Consolidated Income Statement amounted to £5.4m (2023: £9.0m). The items were mainly non-cash related and included the following:

·   Amortisation of acquired intangible assets of £4.3m

·   Expenses related to acquisitions and disposals of £1.1m, including £0.5m accrued deferred consideration relating to the National Signal acquisition.

Further details are set out in note 6 to the Financial Statements.

Pensions

The Group operates defined benefit pension plans in the UK and the USA. The IAS 19 deficit of these plans at 30 June 2024 was £3.1m, a reduction of £1.0m from 31 December 2023 (£4.1m). The deficit of the UK scheme, the largest employee benefit obligation in the Group, was £2.3m (31 December 2023: £3.4m), the reduction mainly due to the Group's deficit recovery payments in the period.

The Group continues to be actively engaged in dialogue with the UK schemes' Trustees with regards to management, funding and investment strategies.

Going concern

After making enquiries, the Directors have reasonable expectations that the Company and its subsidiaries have adequate resources to continue in operational existence for the foreseeable future and for the period to 31 December 2025. Accordingly, they continue to adopt the going concern principle.

When making this assessment, the Group considers whether it will be able to maintain adequate liquidity headroom above the level of its borrowing facilities and to operate within the financial covenants on those facilities. The Group has carefully modelled its cash flow outlook for the period to December 2025, considering the ongoing uncertainties in global economic conditions. In this "base case" scenario, the forecasts indicate significant liquidity headroom will be maintained above the Group's borrowing facilities and financial covenants will be met throughout the period, including the covenant tests at 31 December 2024, 30 June 2025 and 31 December 2025.

The Group has also carried out "reverse stress tests" to assess the performance levels at which either liquidity headroom would fall below zero or covenants would be breached in the period to 31 December 2025. The Directors do not consider the resulting performance levels to be plausible given the Group's strong trading performance in the period and the resilience of the end markets in which we operate.

Principal risks and uncertainties

The Group has a process for identifying, evaluating and managing the principal risks and uncertainties that it faces, and the Directors have reviewed these principal risks and uncertainties during the period. It is the Directors' opinion that the principal risks set out on pages 60 to 65 of the Group's Annual Report for the year ended 31 December 2023, remain applicable to the current financial year.

The key consideration relating to the review of principal risks and uncertainties during the period is set out below:

Directors' Responsibility Statement

We confirm that to the best of our knowledge:

·      The condensed set of Financial Statements has been prepared in accordance with IAS 34: Interim Financial Reporting as contained in UK-adopted IFRS;

·      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 including 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 8 August 2024 and is available on the Company's website (www.hsgroup.com).

Alan Giddins                                                                            Hannah Nichols

Executive Chair                                                           Group Chief Financial Officer

Financial Statements

Condensed Consolidated Income Statement

Six months ended 30 June 2024

* The Group's definition of non-underlying items and further details of the amounts included are set out in note 6.

Condensed Consolidated Statement of Comprehensive Income

Six months ended 30 June 2024

Condensed Consolidated Statement of Financial Position

Six months ended 30 June 2024

Condensed Consolidated Statement of Changes in Equity

Six months ended 30 June 2024

Six months ended 30 June 2023

Year ended 31 December 2023

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

Condensed Consolidated Statement of Cash Flows

Six months ended 30 June 2024

Notes to the Financial Statements

1.   Basis of preparation

Hill & Smith PLC is incorporated in the UK. The Condensed Consolidated Interim Financial Statements of the Company have been prepared on the basis of the UK-adopted International Financial Reporting Standards ('IFRSs') and in accordance with IAS 34: Interim Financial Reporting, comprising the Company, its subsidiaries and its interests in jointly controlled entities (together referred to as the 'Group').

As required by the Disclosure and Transparency Rules of the Financial Services Authority, the Condensed Consolidated Interim Financial Statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published Consolidated Financial Statements for the year ended 31 December 2023 (these statements do not include all of the information required for full Annual Financial Statements and should be read in conjunction with the full Annual Report for the year ended 31 December 2023).

New IFRS standards, interpretations and amendments adopted during 2024

The following amendments apply for the first time in 2024, but do not have an impact on the Condensed Consolidated Interim Financial Statements of the Group.

·      Amendments to IAS 1 - Classification of Liabilities as Current or Non-current and Non-current Liabilities with Covenants

·      Amendments to IFRS 16 - Lease liability in a Sale and Leaseback

·      Amendments to IAS 7 and IFRS 7 - Supplier Finance Arrangements

The Condensed Consolidated Interim Financial Statements do not constitute statutory financial statements as defined in section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 December 2023 are derived from the Group's statutory accounts for that year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor (i) was unqualified, (ii) did not include a reference to any matters to which the auditor 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.

These Condensed Consolidated Interim Financial Statements have not been audited or reviewed by an auditor pursuant to the Auditing Practices Board's Guidance on Financial Information.

The Condensed Consolidated Interim Financial Statements are prepared on the going concern basis, as explained in the Financial Review.

2.   Financial risks, estimates, assumptions and judgements

The preparation of the Condensed Consolidated Interim Financial Statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from estimates.

In preparing these Condensed Consolidated Interim Financial Statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the Consolidated Financial Statements as at and for the year ended 31 December 2023, relating to actuarial assumptions on pension obligations, impairment of goodwill and other indefinite life intangible assets, and liabilities for uncertain tax positions.

3.   Exchange rates

The principal exchange rates used were as follows:

4.   Segmental information

The Group has three reportable segments which are Engineered Solutions, Galvanizing Services and Roads & Security. The Group's internal management structure and financial reporting systems differentiate between these segments, and, in reporting, management have taken the view that they comprise a reporting segment on the basis of the following economic characteristics:

• The Engineered Solutions 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 and other infrastructure markets;

• 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; and

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

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

Segmental Income Statement

^*Underlying operating profit is an alternative performance measure which is stated before non-underlying items as defined in note 6 and is the measure of segment profit used by the Chief Operating Decision Maker, who is currently the Executive Chair. The reported operating profit columns are included as additional information.

Transactions between operating segments are on an arm's length basis similar to transactions with third parties. The only significant transactions during the period related to Galvanizing Services, which sold £1.6m of products and services to Engineered Solutions (six months ended 30 June 2023: £1.2m, year ended 31 December 2023: £2.5m) and £2.7m of products and services to Roads & Security (six months ended 30 June 2023: £2.7m, year ended 31 December 2023: £5.2m). These internal revenues, along with revenues generated within each segment, have been eliminated on consolidation.

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

5.   Alternative Performance Measures

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

·    Underlying profit before tax

·    Underlying operating profit

·    Underlying operating profit margin

·    Organic and constant currency measures of change in revenue and underlying operating profit

·    Underlying cash conversion ratio

·    Capital expenditure to depreciation and amortisation ratio

·    Covenant net debt to EBITDA ratio

·    Underlying earnings per share. A reconciliation of statutory earnings per share to underlying earnings per share is provided in note 9.

All underlying measures exclude certain non-underlying items, which are detailed in note 6. References to an underlying profit measure are made on this basis and, in the opinion of the Directors, aid the understanding of the underlying business performance as they exclude items whose quantum, nature or volatility gives further information to obtain a fuller understanding of the underlying performance of the business. APMs are presented on a consistent basis over time to assist in comparison of performance.

Reconciliation of underlying to reported profit before tax

Reconciliation of underlying to reported operating profit by segment

Calculation of underlying operating profit margin

Measures of organic and constant currency change in revenue and underlying operating profit from continuing operations

Calculation of underlying cash conversion ratio